Month: September 2012

REALITY CHECKS

The government must feel empathy with the tourist in the old joke whose request for directions from a yokel produced the response “If I were you I wouldn’t be starting from here.” No indeed. The economic straight jacket is bad enough – and looks set to get worse. The mortgage crisis is pending. Crunch time for dealing with the public sector approaches. The first Hundred Days are passing – and let’s not forget how the original Hundred days ended!

However, as days pass there are some signs of a growing sense of public realism. While distractions continue, such as demands for public enquiries, not only on the bank bailout (2008) but now the ECB/IMF bailout (late 2010), the hard edge of our situation is now penetrating. The election may prove to have been cathartic, in that, having got rid of Fianna Fail, the public is now stuck with its choice.

Here the signs are encouraging. The job of the government is to govern, and, at this time the general mood is to look to the government for solutions. The government, and in particular the Labour ministers, have been quite unequivocal in their statements about the tough road ahead and the lack of soft options. There are also promises of real reform and there is some hope that the era of hand wringing (“we can do nothing because…”) may now be over. The medicine may be unpalatable but at least it will be administered.

One illusion has suffered a stake through its heart – the fairy tale from the left (and, indeed, the ultranationalist right) that Ireland had a metaphorical pot of gold waiting in the form of offshore oil and gas reserves. Figures of $ 100 billion and up have been bandied about in recent months by Sinn Fein and the rest of the left as waiting to be harvested as soon as we got tough with the oil companies. Never mind that the one proven and commercially viable gas field, the Corrib field, has been on hold for a number of years over local and environmental protests; the offshore reserves have been touted as the magic bullet for Ireland’s budgetary and debt problems. The myth was forensically demolished in a speech by Energy Minister Pat Rabbitte in the Dail on April 16.

The speech, which can be googled easily, merits a closer look, if only to drive the message home. The seas round Ireland are not another North Sea. There are no 10 billion barrels of oil equivalent awaiting exploitation. The figure is an estimate of what might be present and what might be found, based on geological criteria and regional comparisons. It would take hundreds or thousands of exploration wells, at $125 million a time, to discover if the estimate is accurate. The process alone would take 10 or 20 years to yield any financial benefits. In the North Sea, 1200 exploration and appraisal wells have been drilled in the Norwegian sector, and over 4000 in the British sector; 156 in total have been drilled in Irish waters. There are 300 plus producing fields in Britain, three in Ireland; the Norwegian Troll field is 50 times bigger than Corrib.

There is no conspiracy not to drill in Irish waters. The oil industry is a global one which bases decisions on exploration primarily on geology and economics. To date there is no evidence to suggest that, where the prospects are high, the multinationals will walk away. Indeed Norway and Britain both have higher rates of taxation on oil and gas revenues than Ireland. There is an element of Catch – 22 involved at present; without more exploration the petroleum potential of the Irish offshore cannot be proven, but until more commercial discoveries are made, it will continue to prove difficult to attract new exploration.

Reality checks of a different kind have come with revelations about some of the salary levels, and not just at the top, in the state-owned commercial bodies, the third part of the Irish public sector. The civil service and bodies including the police, teachers and health workers form the other parts; crucially their pay and conditions are monitored or controlled by the Department of Finance. Not so a number of the commercial bodies. The argument is that, since they are out in the big bad commercial world, and are making profits, their staff should benefit, as staff in a private company would.

Fair enough, but some of the companies are monopolies or quasi – monopolies, which certainly do not operate in a free market situation. Take the energy sector. It is dominated by two state owned enterprises, the ESB and Bord Gais; the electricity grid is run by another state company, Eirgrid. The 2009 average salary of their employees – including cleaners and bottle washers –and including also pension payments made by the employers (i.e. the taxpayer) were, respectively, $125,000 (ESB), $100,000 (Bord Gais) and $129,000(Eirgrid). Prices for Irish domestic electricity are among the highest in Europe and the companies were criticised last year for not being slow cutting off those who couldn’t pay.

Elsewhere there are considerable variations in salaries paid, ranging from an average of $170,000 in the case of the Irish Aviation Authority (which includes air traffic controllers) to around $65,000 in the case of the transport company CIE.  For those at the top the news is even better. Chief Executives in the state bodies had salary packages in 2009, including pension contributions, ranging from $450,000 (Dublin Port) to $1 million (ESB). This despite an attempt to cap or cut these salaries; in a number of cases, while salaries have held steady, other elements in the package, such as pensions, have been hiked.

The government is now to review salary scales across the whole semi-state sector, many of which have so far avoided the cuts and pension levies imposed on the rest of the public sector. Indeed ESB workers actually received pay increases under a fanciful “national pay agreement”, now moribund, in 2008, even as the country slid towards crisis. There was at least a suspicion that the last government at the time ducked a confrontation with the powerful ESB unions lest power cuts and disruption to industrial production be added to the developing economic woe. It will be interesting to see how this one develops. One thing is for sure; there will be little sympathy for ESB employees in any future clash.

Meanwhile new figures from the banking sector show that bank executives continue to receive large salaries even though the banks are on life support from the taxpayer and the ECB. At its crudest, cuts in the numbers of special needs teachers are paying for six and seven figure salaries for bankers. If there is a lesson from these and other revelations, including special pleading, it is that no one is going to yield what they have willingly. This could make the government’s job on the fiscal issue actually easier. When only belt-tightening all round will restore balance to the public finances, the more groups seek to protect their privileges at a time when others are hurting, the more support there will be for resolute action by the government.

NURTURING THE ELEPHANT

Of all the misleading balderdash written about the European Union, pride of place must go to the claim that the Union brought peace to the European continent for fifty plus years after World War Two. It did NOT. After 1945 and until 1989 the military borders in Europe calcified into political borders separating the two competing superpowers and their allies. The leading Western Europe states were very much second division and would not have been permitted to fight each other, even had the desire or the means been there.  As time passed economic reconstruction and cooperation ushered in an era of prosperity out of which the European Union developed.

This is not to deny the many achievements in Europe since 1945. The European Union and its earlier versions have contributed a great deal to the peaceful and prosperous Europe we have today. Ireland has benefitted enormously from membership and continues to do so; indeed the EU is currently supplying us with economic life support. But now, as the EU faces perhaps its greatest challenge there is a need for cold dispassionate analysis of where we are at and where we are going. Any “Post hoc ergo propter hoc” line of reasoning and the mind-set that encourages it should be avoided.

I wrote last July, in the context of the developing crisis in the Eurozone, of the gradual emergence of a European super state built around Germany. This entity was still in embryonic form, its institutions and even its borders were evolving; it had taken a particularly significant leap forward in 2001 with the launch of a common currency – the Euro. All this happened over time and on an ad hoc basis rather than as part of a master plan. Certainly people from Schuman on down had had dreams of a united Europe but no one had any idea how it would pan out in reality. What we have now is a peculiar institution. And, as the Eurozone crisis has deepened, this institution is entering uncharted territory.

The crisis has exposed a weakness at the heart of the European project. You can have a customs union. You can have a free trade area. You can have a common travel area.  You can even legislate Europe- wide across a broad range of social and environmental issues under powers delegated by the member states. But you cannot have genuine economic and monetary union, embracing a common currency, without a supranational  political and fiscal authority with comprehensive powers to discipline and override individual member states. To date member states have been loath to give up this fundamental facet of sovereignty. There is, frankly, little sign of this situation changing.

The immediate major practical issue is whether the bailouts provided to date to Greece, Ireland and Portugal will enable the three countries concerned to meet their financial obligations without wrecking their economies in the process. The ECB and the heavy hitters of Germany and France remain firmly opposed to any restructuring of debt through altering the calendar or through writing off some of the amount owing. Whether that resolve will survive for much longer is for debate. Last year’s sticking plaster solution for Greece has proved inadequate and the Greek situation needs to be addressed urgently and definitively. This may not be possible without a fundamental restructuring of the Euro project.

The Euro was launched in 2002 on a wing and a prayer, with much pious waffle and fiscal and administrative controls that proved to be aspirational rather than binding when the going got tough. The first countries to breach the 3% deficit guidelines (albeit mildly) were Germany and France; they got away with it, something which did not go unnoticed. And, (shades of Ireland’s situation writ large) as long as the world economy was doing well, the growing imbalances and contradictions in the system could be glossed over. With recession all this changed and the weaker economies found themselves beached and exposed with large borrowings and rising debt.

Whither now? The usual European muddle through may not work this time. Policy is in flux and is being  made largely on the hoof. The European banks which provided the easy credit are exposed and would lose out in any debt restructuring or write-off. However, default by one or more countries could collapse the whole house of cards with consequences even more dire. Europe has a habit of doing too little too late when faced with a problem until at the eleventh hour some solution, usually temporary, is found and the system staggers on. What will emerge and will it work this time?

Ireland waits with interest. Emotions are rising here as the message sinks in that even a change of government has not altered the fundamental economic reality. The gathering head of steam in Ireland is focussed firmly on the ECB and (largely) Germany as being to blame for not reining us in during the Years of the Tiger, with our own tiger excesses being ignored or dismissed. There is talk of restructuring or even reneging on some of our debt though there is enough cautionary evidence and opinion around to counsel against this. Our immediate concern is to secure some relief on the interest rate we are paying on our bailout..

Some have suggested even deeper budgetary cuts here, to bridge the fiscal gap at one or two fell swoops. (This would be the de facto consequence of any reneging on debt, since we would immediately have to live within our fiscal means.) Yes,  an immediate 25% cut in government spending, including all public sector wages and welfare payments, combined with some sharp increases in taxes, could, by eliminating our current budget deficit more rapidly, give us the leeway to thumb our nose at the ECB, the IMF et al. Given that politics in a democracy is very much the art of the possible, the chances of this happening must be remote.  The government has little option but to soldier on and see what Europe can do.

In fairness, the task facing Europe’s leaders is colossal. Consider the much less complicated situation in the United States in 1790. The new country had no money and faced a huge debt from the revolutionary war. Some of the states had paid off their debt, others had not. Alexander Hamilton, First Secretary of the Treasury, proposed that the new nation assume all state debts and fund them by issuing new bonds. There was a North – South division, with up to 80% of the debt owed to Northern bondholders, many of whom had bought the debt at 10 or 15 cents to the dollar. Congress was deadlocked for six months with sectional animosities mounting. Eventually a compromise was hammered out with Hamilton’s plan being adopted at the behest of Jefferson and Madison.  To put it mildly, the plan worked.

The question is not whether Europe today needs a Hamilton but whether there is a spirit of compromise and statesmanship around sufficient to enable Europe’s leaders to agree on a fair and equitable solution for all its citizens. Without such a solution the EU’S future does not look great.

PLUS CA CHANGE

The new government needs some luck, and, frankly, much of what is on the horizon appears bad. I have just returned from the south of Spain, where one could almost hear the shouts of outrage from Ireland over its announcement on recapitalising the banks. After reflection, best judgement was that, rather than “burn the bondholders”, another $30billion would be thrown at the banks. A Labour Minister promised that the government would act in the best interests of the country, echoing words of the former government. Déjà vu, anyone?

The howls came loudest from those who had switched to vote Labour, now swearing never again. In truth the government had little choice, just as it faces the fiscal future with very little room for manoeuvre. The honeymoon period, such as it was, is now over. The sniping from the left is likely to intensify, to the growing discomfiture of Labour. Fianna Fail remains, defeated but still dangerous; however, it is unlikely to recover until there is either a major government faux-pas or a further significant worsening in the economy brought about by some external force-majeure.

The public’s anger has now focussed on “Europe”, a term encompassing Germany, France, the ECB and the European Commission. All are deemed culpable in varying degrees, by: a) not controlling Ireland’s financial regulator and institutions, b) allowing their national banks to invest in the Celtic Tiger bonanza, c) refusing to countenance making the bondholders pay lest their banks suffer losses, d) refusing to cut a deal on our repayment terms, lest their electorates object to paying for us, and e) a general refusal to accept Ireland’s special case.

We have not yet reached the stage of calls that our involvement with Europe should be seen as some form of Faustian pact, i.e. we got all the goodies early on, but now Europe is costing us, is harming us and is inhibiting  our manifest destiny (whatever that may be). Yet there are already disturbing suggestions from the opposition and the public that we use our veto or threat of default to get our way (1% of the population of the European Union to determine what the other 99% does).

The phrase “eaten bread is soon forgotten” comes to mind. Ireland has benefitted enormously from Europe in terms of market access, huge financial transfers (the CAP, Regional and Structural Funds), a benign approach to our corporate tax regime, and much else. European social, environmental and human rights legislation has had a defining role in shaping contemporary Irish society. Furthermore, rightly or wrongly, Ireland chose a particular path in abandoning sterling 30 years ago and, later, in choosing to join the Euro, which we did with our eyes open, though much of our trade was outside the Eurozone.

There is some, but not much, justification for blaming “Europe” for not overseeing sufficiently closely Irish banks’ reckless lending (and borrowing!). The EU is not after all a fully integrated entity like the USA and the centre relies on national governments to micromanage policy. If there is a criticism to be levelled it is that, in instituting something as major as a new currency, there should have been greater care and attention to detail in advance as well as a stronger and more intrusive regulatory regime. Yet this is not the way the EU has worked to date.  And had Europe intervened, during the Years of the Tiger, there would have been a chorus of “hands off” and shouts about attacks on our sovereignty.

The two major quantum leaps taken by the EU this century, Enlargement and the Euro, were, above all, political, and were taken after some but not necessarily sufficient preparation. EU practice has been that institutions are tasked or shaped to give effect to political decisions made. If tweaking is needed there is tweaking. If heavy lifting is required there will be heavy lifting; but this takes time. Up to now the system has worked and Europe has muddled through various difficulties.

It is evident that the Eurozone is currently in a deep crisis and that Ireland is a component in that crisis. The scale and depth of the crisis were not anticipated with some commentators suggesting there is more and worse to come. Right now Europe is struggling to find a solution, for both the short and the long term. This is a process and could last for some time. Irish politicians, commentators and the public have been less than enthused about progress to date. But there is still some way to go. In the meantime the European Central Bank is keeping our economy afloat. We would do well to keep this in mind.

Domestically there are some indications that economic growth is back, with exports rising and surveys among business showing more optimism than pessimism. Indeed there is a functioning economy out there, with hundreds of thousands more employed than ten or fifteen years ago. Anyone who doubts this should compare the traffic flows now with the late 90s, and, despite all the doomsayers, consumer spending is around 2003 levels – which were far from bad.

However, little impact has been made on unemployment levels, the banking system is moribund (apart from bullying small and medium debtors), interest rates and energy prices are rising – inhibiting the rate of economic growth – and the sands of reckoning for personal and mortgage debt are fast running out. Throw in the rising cost of servicing our debts just to keep the country running and it is clear that the target of cutting the budget deficit to 3% in any reasonable timeframe is achievable only by drastic cuts in spending or increases in taxation or some combination of both. The dynamics of a left/right coalition suggest that anything too radical will fail.

And that is not the worst of it. The mortgage crisis is moving inexorably towards centre stage and seems set to concentrate the governments mind later in the year, particularly given that those affected are middle class, and thus more likely to create a fuss. The situation has worsened since I wrote several months ago about the prospect of 25,000 plus mortgage defaults and repossessions (i.e. evictions), with scheduled interest rises over the next year set to compound matters. Up to 10% of mortgages are reportedly either in arrears or the subject of temporary special arrangements. The last government sought to postpone the issue by kicking it down the road through palliatives (a moratorium on repossessions) or a sticking plaster solution (a code of conduct, etc.).  The problem cannot be ducked for much longer, with voices already querying how the banks, which “we” own, can be allowed to pursue mortgage holders.

May promises some relief, with visits by the Queen and Barrack Obama, both offering potential spin off in terms of publicity and tourism. The government is also scheduled to launch its job creation programme, though how exactly this is to be financed is not clear. That, plus some confidence building measures, is about all the government has in its locker. A move from Europe, however small, would be very welcome and would underline who our friends really are.

BE CAREFUL WHAT YOU WISH FOR

A rare near-consensus was achieved in the February General Election. It was not about how to solve our economic problems. It was about punishing the outgoing Fianna Fail government; and it did just that. Fianna Fail got a severe kicking, losing three quarters of its seats and more than half its support (and colour the Greens gone). In terms of the stages of bereavement a sizeable portion of the Irish public is still at the anger stage.

Whether the results overall represent a watershed, as some have trumpeted, remains to be seen. The Fianna Fail vote which went walkabout seems to have split along class lines with Fine Gael picking up the middle class element, Labour the working class portion and Sinn Fein the republican vote; independents picked up the rest. More people voted than ever before, some colourful independents secured election and Sinn Fein and left wing elements claimed major advances. Yet Sinn Fein only increased its share of the vote from 6.9% to 9.9%, while the United Left Alliance polled 2.6%; hardly ringing endorsements. More people actually voted for the large and heterogeneous number of independents than for both these combined. And almost three quarters of the electorate voted for the three mainstream parties.

The new government, a Fine Gael – Labour coalition, faces formidable economic challenges. What price the possibility that, in taking the hard measures necessary to rescue the economy, it will so alienate public opinion that it will in its turn become unelectable? When the dust has settled the grim reality of how to bridge the yawning budget deficit – still running at $500 million per week – will remain. Indeed, between the dissolution of the last Dail and the convening of the new one, over $2 billion had to be borrowed just to keep the country running. You would never have thought so to listen to the election chatter.

The election campaign was dominated, not by the critical issue of the budget deficit, but by the important but secondary issues of the blame game, the deal with the IMF and the ramifications of the bank bailout. The major parties recognised how little room for manoeuvre the next government would have (“we’re snookered”, as one Fine Gael T.D. remarked to me). Their election manifestos fudged on the economic issues while focussing on proposals for political and constitutional reform – hardly national priorities at present.  Some of the electorate seemed to think that the problems would be solved merely by electing a new government (with one bound our hero was free!).

The maximum to be hoped for in negotiating on the interest rate on the IMF loan would, while welcome, only run the country for two weeks, $ one billion or so. Any early favourable outcome of the current negotiations in the EU aimed at restructuring the finances of the Euro, (i.e. some debt relief for Ireland), again, will not alter the underlying reality.  Ireland’s expenditure exceeds her income; until that is put right we must continue to borrow and we can hardly expect to be loaned the money interest free. This is the stark fact.

The new government programme at least recognises there is no quick fix. However it is short on the specifics of how to tackle the deficit, and in particular seems to give hostages with regard to maintaining many current levels of welfare payments and ruling out tax hikes. The impression given is that, to secure agreement, most of the compromises were made by Fine Gael. How the programme will pan out remains to be seen. The toxic nettle of pumping more money into the banks – part of the agreement with the IMF but not acted upon by Fianna Fail – has to be grasped urgently. For this and other unpalatables the ultimate fall-back position may well be to rely on the EU/ IMF to hold the government to the letter of the existing agreement.

The benign scenario in the short term is that there will be tangible early success in terms of results achieved in renegotiating the interest portion of the IMF deal, which, however slight, can be presented as a victory. This to be accompanied by some interim fig leaf formula concocted out of the negotiating work- in- progress in Europe, sufficient to give the government a breathing space.  Again, plausible; our European partners have little to gain in pushing us to breaking point. Then, in the course of the “Hundred Days”, rapid enactment of some of the eminently sensible suggestions on the table such as reducing VAT, giving PRSI reductions for new employees, binning the travel tax and others. Such measures would have minimum impact on government revenue and could stimulate the economy and begin to restore confidence.

The recovery after 1987 is sometimes cited as an example, if not a blueprint. Yet it was based in part on agreement among the social partners on what needed to be done. The ruinous cycle of high taxes, high wage demands and high inflation was successfully reversed. The then government also struck it lucky, with Irish industry particularly well placed to take advantage of a global economic boom, and with success beyond expectation of the Financial Services Sector. Moreover, while public debt was proportionately higher than the current levels, private household debt was much lower and there was no banking or mortgage crisis.

The positive factors of 1987 are not present now. While more necessary than a generation ago, it will be much harder to generate any social partnership with nothing in the cupboard to offer, incomes pared back, a zero sum mentality, and inflation on the march. Interest hikes threaten in the Eurozone. Any growth in the world economy is likely to be modest, with clear and present threats of steep rises in energy costs against an uncertain political background in the Arab world. Ireland’s comparative advantages of a generation ago are no longer present and we face new and formidable competition for investment from rivals in the EU and elsewhere. Our competitiveness and cost base were seriously eroded during the tiger years and will not be easily restored.

The economic and fiscal straightjacket has left the government with little wiggle room. While much has been made of its large majority, this positive is very much double edged. What it needs above all is to be lucky, or at any rate to avoid bad luck. Any slight economic upturn will ease the pressure on the public finances; fifty jobs equate to €1 million, plus the multiplier effect; but this cuts both ways. There is fudge on how the fiscal gap is to be narrowed. There is an obvious hope that enough can be done to stimulate the economy to postpone the need for a showdown on raising taxes or cutting benefits.

The first hundred days should be manageable. The next less so. The cracks are likely to show in the one after that. The first budget will be a watershed. Will it see a Benjamin Franklin approach that we hang together lest we hang separately?  Or will it be “sauve qui peut”? For Ireland’s sake let us hope the former.

PARALLEL WORLDS

By the time you read this Ireland will have a new government. Given the anger and volatility in the electorate, the only two things one can confidently predict are that it will be a new Taoiseach who will present the shamrock to President Obama on St. Patrick’s Day and that the huge financial challenge Ireland faces will still be there.

In the end it was the little things (Albert Reynolds’s rueful words) which determined when Brian Cowen fell. However blame may eventually be apportioned for Ireland’s current woes, arguably, when the chips were seen to be down, Cowen did not shirk difficult decisions. Unless you walk the walk, can you talk the talk? Brian Cowen successfully put through two savage budgets essential to the country’s economic survival. He also carried the Lisbon Referendum, facing down the neanderthals of the left and right. He might have carried on for a while as Taoiseach had he been luckier in his golf partners. Should the plug have been pulled (or tweaked) on the bank guarantee when it became clear that the information on which it was based was culpably inaccurate? Brian Cowen did not and the rest is history.

Early reports from the election campaign show a widespread public sense of alienation and hostility to politicians generally, springing from the belief that politicians have been living in a cocoon, well paid and with lavish expenses and pension entitlements, and, in short, living in a world parallel to the real world. The attempts by politicians to self-regulate in reining in on expenses and cutting pay and entitlements are generally regarded as derisory. This is an issue that it behoves politicians to heed and address if our very democratic institutions are not to fall into disrepute.

There are other obvious parallel worlds in Ireland today. There are those with jobs and those without; those with mortgage issues and those with none (a moveable feast!), those high profile figures constantly here but “not resident for tax purposes” and those who pay tax here. There are others. Some recent, some around for some time, reflecting the ad hoc approach to problem solving when Ireland was a less complicated and more homogenous society than now. Bringing these parallel entities closer together would seem desirable from the viewpoint of fostering social harmony at a difficult time.

In the health area there are clearly the parallel worlds of those with and without private health insurance. The situation is not as critical as in the USA though it is far inferior to other advanced EU countries which have single tier health systems. In Ireland all are entitled to public health care in hospitals which, once in the system, is extremely good. The rub is getting in – with long delays for public patients to see specialist consultants contrasted with fast tracking for those with private insurance. A roughly 50-50 split up to recently enabled the underfunded public system to stagger on. The rising population, the economic crisis and the rapidly rising premiums for private health insurance have pushed significant extra numbers onto the public system with no extra resources provided.

There is more. Possession of a medical card confers entitlement to free medical treatment, including prescription drugs and doctors’ visits.  Currently roughly one third of the population have such cards. In the main they are issued to those on lowest incomes, though there is discretion regarding some medical and other circumstances; until two years ago everyone over 70 qualified for one; now all are means tested. It is not clear that the most deserving are necessarily catered for by the current arrangements. What is clear is that, for a family of modest means, the card can become a vital element in the household budget. This has created poverty traps on both sides, with an obvious disincentive to the unemployed to seek or get work if the price is loss of the card. The recent budget has made matters worse by reducing considerably the new “universal social charge” levy charged to medical card holders.

The health area is not alone. Elsewhere, through state intervention, two tier systems have evolved. Some seemed to have merit. Thus the abolition of third level tuition fees, progressive on the face of it, and touted as opening academia to all, including the poor. In practice the result has been a significant subsidy to the middle classes, with little prospect for the children of those on lower incomes to get to third level unless they are fortunate enough to live close to (and gain a place in) a college or university. Similarly, access to the law and the legal system, one of the crowning achievements of our civilisation and its core values, is in practice out of reach of the average citizen because of the punitive costs involved in having recourse to law and the limitations of free legal aid.

There is also a new subset within Irish society, that of the violent criminal class. There was always crime of course but nothing on the scale of what Ireland has experienced in recent years. The country is a liberal, tolerant and progressive democracy where a beginning (at least) has been made to addressing inherited societal injustices. Yet side by side with this has grown up a gangland culture, based on drugs and characterised by relatively high levels of gun murders ( Dublin has one of the highest rates in European cities). It is mostly inter – gang feuding, though in Limerick whole communities are intimidated by gun wielding gangs. Gang members, moreover, are often free on bail (and in receipt of free legal aid provided by the taxpayer) when committing new offences, thanks to a legal system struggling to cope and which can best be described as plodding.

Quangos. At times it appears that some of the recently established state regulatory agencies exist in a parallel world where their writ runs with impunity and beyond both common sense and the power of the Minister. Some are undoubtedly necessary but many boast burgeoning bureaucracies and running costs to do what was done formerly by a handful of civil servants. Furthermore there appears to be no happy medium of communication to head off economically damaging actions such as last year’s carbon tax and the upholding of archaic rules on Sunday wages in the catering sector. Ministers wring their hands at these and other activities, pleading their impotence and the independence of the agencies. Really? Who established them? Who governs the country?  Who is tasked with safeguarding the national interest? Will the new government become more pro-active?

One other parallel world which should not be overlooked is that between Irish citizens and the rest. Currently only Irish citizens and British subjects resident here can vote in Irish general elections. Before the Celtic Tiger this did not present a problem, as the numbers disenfranchised were negligible. The arrival of several hundred thousand here to work and live since 2004 has created a new situation. Two years ago immigrants made up ten per cent of the workforce. Many have left with the recession, but many remain. The issue of taxation without representation arises and may yet have to be addressed.

A DOSE OF REALITY

  Estonia joined the Euro on January  1^st 2011. It was the latest step by this small Baltic state to distance itself from its grim recent past.  At a time when there is so much doom and gloom and whinging about loss of sovereignty in Ireland it is worth reflecting briefly on this past. Talk to the Estonians about loss of sovereignty. Ireland survived the Second World War unscathed and, whatever else we can say, we have been the authors of our own destiny since 1922.

Estonia was not so fortunate. In 1939 it enjoyed a standard of living roughly on a par with other Nordic countries. It was then occupied by a Soviet army of 100,000. In 1940 its status as an independent country was abolished. Over the next year 7,500 Estonians were murdered, at least 11,000 more deported. By 1943 half of the country’s M.P.s had been murdered by the Soviets – you can see their names and dates of death on a plaque outside Ireland’s Embassy in Tallinn. Their President died in a KGB prison “hospital” after 16 years; his chain of office has yet to be returned.

After 1945 thousands more were imprisoned (where 6,000 died) or were deported to Siberia.  25,000 people, mainly farmers and their families, were deported in 1949, to facilitate collectivisation of agriculture and to break a rural guerrilla resistance movement. All this out of a population of little over a million. Over the next 40 years several hundred thousand Russians and other non-Estonians were settled in the country, a move seen by Estonians as a long term project to destroy Estonian nationalism. Even today Russians constitute 25% of Estonia’s population. Yes, talk to the Estonians about  loss of sovereignty.

Estonia did not regain independence until 1991 and the Russian armies did not withdraw until August 1994. Estonia quite literally dragged itself up by the bootstraps. It dramatically restructured and privatised its economy.  It abolished virtually all its tariffs. It successfully launched its own currency, tied to the Deutschemark. It joined NATO and then the EU. Estonia still has some way to go, with incomes and living standards still well below most of the EU, including Ireland. Its economy has had ups and downs in this period.   It faces a demographic crisis. It faces the challenge of the Russian minority. Its politics is volatile. Yet there is acknowledgement of what has been achieved and consensus that there can be no going back.

By contrast, to listen to the chat shows and some commentators, one would think that Ireland has fallen back to historic levels of hardship and poverty. There has been anger at every cut in welfare and increase in taxation. Yet  the existing unsustainable welfare  levels are of recent origin and well ahead of inflation while the tax increases likewise have merely rolled back some of the cuts of the Tiger era. And very few of the punters who benefitted on either front complained at the time about the government’s largesse. The public search for scapegoats has now shifted. First were the bankers the speculators and Fianna Fail. Now our EU partners, the European Central Bank and Germany are in the frame, as is our membership of the Euro.

It is surely time for a reality check. We were not invaded seventy years ago; we did not endure a subsequent 50 years of occupation, dictatorship and murder.  Now is a far cry from the 1950s, popularly regarded as the nadir of independent Ireland, when the last great wave of emigration (over 1% of the population annually, including my own family) took place. Older readers will remember the tremendous sense of hopelessness then prevailing.  There was no inward investment. There were no jobs.They will also remember – I do – the very real rural and urban poverty of the time. Welfare payments were derisory then and for long afterwards.

The country was socially backward, Church dominated and, as we now know, at least complicit and tolerant of a brutal sub-culture involving physical and sexual abuse of children in state supported institutions and of vulnerable women in set-ups such as the Magdalen laundries. Censorship was rife (almost exclusively preoccupied with sexual references). Contraception was illegal. Married women were excluded from most state occupations and women generally were paid far less than their male counterparts in similar jobs. State jobs and, indeed, school graduation, were contingent on graduating in Irish, a neat way of excluding both Northern Protestants and any emigrants with families contemplating a return (it certainly deterred relatives of mine).

Fast forward to the 1980s. The parallels with the current fiscal situation are close. Indeed the borrowing levels in the late 80s, as percentages of GDP, were worse than those projected in the current four year plan. Yet there the resemblance ends. There had been no boom. Inflation and interest rates were through the roof.  Official unemployment was 20%, the real figure much higher. Emigration was heading for the 50s level. Taxation rates (for those who paid – evasion had become a way of life for many) were punitive. There was little disposable income; it was the era of home- made beer. Welfare payments, though improved, were still miserable.  There was no agreement on a solution; the most popular T.V. talk show actually featured a debate on Ireland defaulting on her national debt, with the case for doing so being put by a schoolboy!

Ireland has made a quantum leap in the last two decades, economically, socially and culturally. Ceteris paribus, like Estonia, there is no going back. Yet unlike Estonia, this does not seem to be acknowledged.  2010 saw the end of a lot of illusions, and perhaps the dawn of reality has made the sudden stall in prosperity that much more difficult to accept. There are tough times ahead, certainly, but the plateau we are now on is significantly higher than 20 years ago. There may be no return to the Tiger levels of growth but our recent experiences will surely equip us better for a more structured future.” Sadder but wiser” may be the new appellation. We will still be a far cry from the 80s or the 50s.

The Borrowing Elephant which now preoccupies us has two elements. The first, the fiscal gap, has to be bridged, as in the 80s, like it or not, and this should not be shirked.  The banking element on top threatens to overwhelm the country. There are divided counsels on this, but there is alsoa bigger picture – the European one. The future of the Euro will be determined over the next year or so. Finding a solution presents an enormous political challenge to all EU states. The seriousness of the problem, and the threat to the whole European Project – from which Ireland has benefitted so much – has become more apparent in recent months. Any solution will have to grasp several nettles, including that of the date for burden sharing by bondholders, as well as refining the relationship between weak and strong Eurozone states Who can foresee the outcome? It may well be that time, and events, will solve the banking debt issue for Ireland. “Hard pounding, gentlemen.”

 

“WATCHING A CRASH IN SLOW MOTION

Several months ago I
wrote about the big picture in Europe in the context of the survival of the
Euro. This issue has now moved centre-stage at disconcerting speed.  If the Euro
is to survive a major shake-up will be necessary – soon. Whether this is the
beginning of the end of the Euro, or whether it is (taking an optimistic view)
merely the end of the beginning, remains to be seen. Ireland, a minor player,
has been caught up in a maelstrom involving our partners in the Eurozone, with
unfortunate results for the economy and the people.

Ireland has now
joined Greece in requiring outside assistance with its budget; for different
reasons but the end result is similar – the IMF and the ECB are now calling the
shots. Ireland’s fiscal and banking crises have become intertwined. The net
result is that Ireland has been unable to borrow the funds to keep the economy
going (roughly $23 billion per annum) on the open market and hence has had to
seek outside help. The fiscal crisis on its own could have been managed. The
cost of the bank rescue proved the tipping point.

Ireland’s blanket
guarantee to the banks – given in September 2008 on the basis of
information now seen to be horribly inadequate and inaccurate – included the
bond holders, (mainly) international institutions which had loaned money to the
banks. The initial estimates of the losses of the Irish banks were around $6
billion. The latest official estimates are around $110 billion; some
commentators put the figure higher. The international markets doubted the
ability of Ireland to combine its national sovereign borrowings with covering
the banking losses. Credit began to dry up.

Cue our European partners.
When Greece suffered a financial crisis early in 2010, there were fears of a
domino effect among the weaker members of the Eurozone. Lying at the heart of
the problem was an inherent instability in the mechanisms initially devised for
operating the Euro. These included inadequate sanctions against Eurozone
countries breaching the limits for government deficits (3%). The limitations of
these have now been exposed with a vengeance. Prior to the Lehmann collapse, and
its worldwide effects, any minor transgressions on deficits could be and were
sorted out.

The Greek crisis, with potentially alarming situations
developing elsewhere, including Ireland, was of a new order of magnitude.  The
rescue plan ultimately cobbled together in the wake of the Greek crisis ( the
European Financial Stability Facility) had been pitched large enough to cover
any problems Ireland and Portugal might have and beyond. However, it was ad hoc
and not covered by the European Treaties.  Germany, with its conservative public
opinion resolutely opposed to bailing out more profligate countries, touted at
the autumn European Council the idea of a permanent, treaty – backed mechanism
after 2013.

This might have held but the German Chancellor, Angela
Merkel, then suggested, logically, that, after 2013, bond holders in the new
situation would be expected to take a risk on new investments after that date.
Factoring this into the growing concern over Ireland’s capacity to handle its
combined debt was bound to precipitate a crisis – and so it proved. Ireland was
forced to withdraw temporarily from the bond markets as the interest demanded
soared. Within weeks the pressure on Ireland to accept a rescue plan which would
salvage the economy and protect the bondholders became irresistible.

A
loan facility of roughly $90 billion was negotiated with the IMF and the ECB in
late November with stringent conditions attached. These included linking
quarterly advances to regular satisfactory reports on progress achieved. Taken
in tandem with the separate four year plan to reduce the deficit required by the
European Commission, the detailed Memorandum of Understanding signed with the
IMF constitutes in effect the road map for Ireland’s economy for the next four
years. Both Right and Left have had a field day with allegations that Ireland
has lost her sovereignty. The ghosts of 1916 have been invoked. Our European
partners (particularly Germany) and the IMF have been attacked.

However
no credible alternative plan has been suggested to raise the money to keep the
country going and to lay foundations for recovery. The waters were muddied
somewhat by critics on the left claiming that the harsh budgetary measures
required were related to the bank bailout and specifically to guaranteeing the
bond holders in full. This was simply not true. Certainly the implications of
upholding the bank guarantee affected Ireland’s ability to borrow, and down the
road the bondholder issue will have to be faced. However, the yawning fiscal gap
is separate from, and a present as well as a clear danger if the country is not
to grind to a halt.

The first step towards fiscal recovery has been one
of the harshest budgets in the country’s history, outdoing that of 2009.Three
more severe budgets are in prospect. Every remaining welfare state sacred cow
except one – the state old age pension –was tackled and cut. There was only
muted criticism from the main stream political opposition, who have gloomily
accepted that there is no alternative to the overall policy framework. Vocal
opposition has come from a motley collection of Sinn Fein and miscellaneous
groups and individuals on the left whose predictable alternatives smack of
unreality. Nevertheless, with an election pending in or around St. Patrick’s
Day, and Fianna Fail languishing terribly in the polls, these others see the
prospect of an electoral breakthrough. We shall see. A lot can happen in three
months – particularly if the bigger picture of developments in the Eurozone
intrudes.

Quite what will happen regarding Ireland’s bank debt as opposed
to her sovereign, i.e. fiscal, debt is a matter for conjecture. A condition of
the IMF/ECB deal was that bond holders would be fully protected. This is the
current position. Yet an increasing number of commentators, both domestic and
international, doubt Ireland’s ability to cope with both debts, particularly
since devaluation is impossible within the Euro. The interest costs alone
threaten to swamp and cripple the economy.

The position may clarify in
the coming months, particularly having regard to developments in Europe. The
Euro is at a crossroads.  A post-2013 scenario in which bondholders would be
required to take risks sits badly with the current situation of 100% guarantee,
particularly when the short term result could see a default by Ireland,
threatening a domino effect among the other PIGS. The Eurozone major players are
currently trying to find a workable solution.  Whatever comes out, and it may
take some time, should the Euro survive there will be a different relationship
among and between participating countries and the European Central Bank (ECB).
The pace and complexity of events is such that it is impossible to predict where
we will end up. Indeed, Ireland may well escape the banking quagmire.

A
final comment on 2010. It was the year when the new young British Prime
Minister, David Cameron, only a small boy when it happened, apologised, on
behalf of Britain, for the unjustified and unjustifiable killings on Bloody
Sunday. Looking back, this will probably rate as one
of the high spots of the year just gone.”

“CYBERSPACE AND CERTIFICATES

Hurley, Dorsey,
Zennstrom and Birch. The names may not have the resonance of Notre Dame’s fabled
backfield immortalised by Grantland Rice, but all four were in Dublin at the end
of October. The founders of You Tube, Twitter, Skype and Bebo came for the
Digital Web Summit. The presence of the heavy hitters of cyberspace, social
networking and the Internet is a mark of Ireland’s standing in this world, in
many ways the cutting edge of social economic and cultural change. The event,
characterised as a “Davos for geeks” was attended by around 100 of the leading
founders and HEOs of technology companies worldwide.

Their presence did
not just happen. It reflects the growing importance of the cyberspace sector in
Ireland, the latest successful initiative of Ireland’s Industrial Development
Authority in attracting important and seminal investment into Ireland. Ireland
already has 9 of the world’s 10 top pharmaceutical companies, 15 of the top 25
medical technology companies included in her portfolio of Foreign Direct
Investment Companies (currently 966, almost half from the USA).

The
Internet and Cyberspace sector is a roll call of the world’s major players.
Facebook has recently established its European hub in Dublin, following in the
footsteps of Google which now employs 1600 people in Ireland; LinkedIn, E-bay
and PayPal have major operations here. And, in another area of growing
importance – On Line Gaming – Ireland is also fast attracting international
leaders in the field including Gala (of Japan), Popcap, Riot, Electronic Arts
and Blizzard (of World of Warcraft fame).

Such has been the preoccupation
with our current economic woes that it can be difficult to achieve some
perspective on developments in the economy as a whole. At the moment Ireland is
in a fiscal bind, with the bank bailout compounding the problem of a major
budgetary shortfall after the worst recession in the OECD. There is currently a
crisis of public confidence, with general acceptance of what needs to be done
but dismay at the harsh measures required. The short term will be very tough on
people’s pockets with substantial hikes in taxes for several years to come
already announced. There are dire warnings of the IMF coming in should there be
any backtracking from the programme of austerity. A general election seems
likely sooner rather than later, in particular should the December budget not
pass.

Yet, as the Digital Web Summit demonstrates, there is a parallel
economic world out there, where most people have jobs, albeit in many cases with
less money.  Unemployment appears to have peaked at below 14%; though emigration
is clearly a factor, any fall in numbers is welcome. Our exports, which held up
well in the face of a global downturn in 2009, have surged ahead in 2010, with
the figures for the third quarter showing a 12.8% year on year increase. And we
are continuing to attract very significant top-end foreign direct
investment.

The last two years, moreover, have seen a significant shift
in the economy’s cost base. Wage cuts and increased productivity have done much
to restore competitiveness, though the albatross of the high minimum wage still
has to be tackled, together with the bloated public sector. There have been
notable cost reductions in hotel prices, which should stimulate growth in
tourism, where recent innovations have included free train travel for tourists
over 66 (announced, appropriately, on St. Patrick’s Day). Provided we can
successfully navigate the next six months or so economically politically and
socially, the medium term holds promise, with most economic experts forecasting
an early return to (modest) economic growth.

The recession has also
stimulated domestic interest in the potential of one of Ireland’s most valuable
but least utilised assets – the Irish Diaspora. The strengthening of links
between Ireland and the Irish family worldwide was given added impetus over the
last decade with the establishing of a dedicated section within the Department
of Foreign Affairs (DFA) in 2004 and the provision of greatly increased funding
for emigrant support in succeeding years. An important step in this process was
the holding of the Global Irish Economic Forum in September
2009 which sought to explore the potential for a more strategic
partnership between Ireland and the Irish overseas, inter alia to contribute to
the efforts at economic recovery. It brought together many of the great and the
good among the Irish worldwide and explored a wide range of issues and potential
initiatives.

One year on a progress report has issued setting out what
has been done. It can be read at the DFA website and makes interesting reading.
A first step has been the establishment of a permanent Global Irish Network
with 300 participants from 37 countries. Initial regional meetings have taken
place. The potential value of institutionalised direct access to and interaction
with and between key successful business figures of Irish extraction throughout
the world is self-evident. It should surely have been done before. Other steps
have included the establishment of an Irish Technology Leadership Group in
Silicon Valley, chaired by Craig Barrett (ex-CEO of Intel), an Overseas Graduate
Programme, and several youth fora linked to a Young Leaders Programme in
Ireland.

Initiatives have been taken also in the Cultural area,
beginning with the appointment of actor Gabriel Byrne as Ireland’s first
Cultural Ambassador. Next year Culture Ireland is to develop a special programme
showcasing Irish arts and culture in the US in partnership with leading US
festivals, and there will be an enhanced emphasis by Tourism Ireland on Diaspora
Tourism in coming years (the 1901 Census website –an invaluable heritage source-
was launched in London and New York). Plans are now at an advanced stage for a
permanent Irish Arts Centre in New York, jointly funded with the City of New
York.

Most interestingly are the proposals for the launching of a
Certificate of Irish Heritage. While not conferring citizenship or any legal
rights or entitlements, the certificate would “give official recognition to the
many people worldwide who are conscious of their Irish heritage and feel a
strong affinity for Ireland, but who are not eligible for Irish citizenship”.
The modalities are still being worked on (what proof of Irish ancestry is
required, etc.). Nevertheless, even as it stands, the proposal is a major
advance in giving recognition to our kith and kin worldwide.

The problem
with positive developments such as the above is that they are rarely headline
making. It is easy to focus in on bad news, like factory closures or the monthly
unemployment figures. It is far more difficult to generate interest in a
conference, or the report of an expert or study group, or on a process which may
take years to achieve results. The achievements of the Irish economy after 1987
were built on the foundations of strategic decisions taken over previous decades
on taxation policy and the targeting of specific industries for inward
investment. Now that the tsunami of the collapse of the building boom of the
last years of the Celtic Tiger has ebbed, the durable elements of previous
policy, amended, updated and re-focussed, are seen to be still in place, and
still delivering. It is important, always, to see the whole picture.”

CONFIDENCE BUILDING MEASURES

“Two aspects of our
ongoing problems with the banks merit attention. The first is the painfully slow
process of determination of what went wrong and whether, and to what extent, any
criminal act was committed. The reasons for caution are clear, i.e. the need to
ensure that individual rights are not trampled on, verification that laws have
been broken, and that any case that might be brought should be as watertight as
possible. Unsurprisingly the slow pace has been much criticised and contrasted
unfavourably with the speed with which the US authorities are perceived to have
acted when confronted with white collar crime. The wheels of Justice, Irish
style, are seen to move at their own slow pace.

The second aspect is more
worrying. It is now over two years since the banking collapse, a period which
has seen a stream of revelations regarding the behaviour of certain banks and
bankers, as well as spiralling costs to the taxpayer of sorting things out. Some
types of behaviour may eventually be determined to have been illegal, others to
have been merely unethical. Yet there is no sign of any legislation being
prepared or introduced to tighten up the law or to criminalise and/or establish
penalties for doing the same things again. There is a strong case for
introducing new or amending legislation now to remove any doubt about the
permissibility of similar actions in the future rather than awaiting the outcome
of the ongoing slow investigations.

There is a particular additional need
for some action now. This is to give reassurance to the public that the
government is in charge and that, whatever about the past, any future wrongdoing
will be transparent and will not go unpunished. This would represent not some
populist gesture to appease public opinion, but rather a confidence building
measure at a time when much is being demanded of the public to help put the
economy to right.

For there is anger out there, and not just among those
who have lost their jobs or who could lose their homes. There is anger at the
realisation that our recent prosperity was temporary, is now gone and a feeling
that the public were deceived about this.  We were never one of the richest
countries in Europe, as some politicians had us believe. Fianna Fail is the
target for not shouting “stop” as the property frenzy unfolded and as having
exaggerated our economic wellbeing (but in truth what government would have
cried wolf?). There is anger also, separately at the banking fiasco and the
government’s perceived mishandling of it. Declaring “never again” and backing
this up with appropriate legislation would help.

There are times when
this government seems loath to take any action whatsoever on particular issues
where there is an obvious case in common (and political) sense for doing
something, however small. One such issue concerns energy prices, where our
electricity costs are already among the highest in Europe. In the current
economic climate, where businesses and the public are pressed for cash, the case
for not allowing things to get worse is overwhelming. Yet this year a “carbon
tax” was introduced several months ago, impacting on all fuels, to be followed
from October 1st by a 5% increase in electricity charges – to help subsidize the
development of non-carbon based energy! Surely in the current climate this could
have been phased in over several years. Again, in the hospitality area,
officials are forcing compliance with legislation dating from the 1940s (i.e.
before the flood) requiring restaurants to pay employees double for Sunday work at a time when our wage costs are
seriously out of kilter with competitors. Some restaurants have simply shut on
what was one of their busiest days.

In recent years much regulation has
been hived off to various quangos, euphemistically entitled regulatory agencies
(the energy regulator, the financial regulator, the aviation regulator, etc.)
and separated off from the relevant government department. Given the particular
clouds over the financial regulator’s office in the wake of the banking fiasco,
it is understandable that the government will tread warily where others are
concerned, particularly where the agency is seen to be pursuing its duties with
zeal. Nevertheless there is surely need for some mechanism for interaction
between a minister and a particular quango when the public interest is involved,
rather than just a hand wringing declaration that nothing can be done. After all
the government has been elected to govern and this includes taking decisive
action where necessary or desirable. There are precedents (dismissal of the RTE
authority comes to mind). Even an informal communication system would be better
than nothing provided the public were made aware of it.

This is all the
more necessary for the government – any government – to help enlist public
support and acceptance for the harsh economic measures in prospect. The past
weeks have seen clarification of where Ireland stands economically. It is not a
pleasant picture. Firstly, it has emerged that we have given promissory notes of
up to $65 billion, to be paid over 10 years, to pay for the banks (much more
than earlier estimates  though it could be less if the commercial  property
market recovers). Secondly, thanks to the collapse in tax revenues, our income
is currently two thirds of our expenditure. While this has been apparent for
some time, and has nothing to do with the banks, the unpleasant facts have now
been spelled out by our friends and creditors in terms that even the most
dim-witted can grasp.

We simply cannot afford our current standard of
living. The cost of borrowing to keep afloat has risen to dangerous levels.
There must be cuts in services and welfare payments or tax increases or both.
The government has been told by Brussels, which is now propping the economy up,
to produce detailed plans for cuts and taxes for the next four years, in advance
of the December budget. Even with an election in the offing, the opposition
parties are snookered; if elected sooner rather than later, any alternative
government will have its fiscal hands tied.  The days of campaign promises, of
buying support through the promise of largesse, is over.

Separating out
the hysteria, what lie ahead are probably four years of increased and new taxes,
combined with significant reductions in social welfare payments. The situation
is serious, particularly as we face a short term liquidity problem, but not as
serious as in the 1980s. So, though there will be much pain, it should be
possible to keep real hardship to a minimum (and even a modest easing of the
fiscal situation should permit the government to assist those in clear need).
Barring a worldwide recession, when the dust has settled, around 2015, we will,
as a nation, be considerably better off than we were even 10 years ago, though
disposable income will probably be below the heady levels of five years ago.
There are still numbers in denial but by and large the public now accepts this
as the reality. Some simple steps to build public confidence could boost morale
and greatly enhance the prospects for, and the speed of, recovery.”

THE BANKS AND THE PUBLIC

By the time you read this,
several issues should be clear. Apart from knowing who won the All Ireland, we
should know the terms and extent of the government’s renewed guarantee to the
Irish banks and we should have some idea of the government’s attitude to the
potential social time bombs of mortgage arrears and negative equity.

In
September 2008, with a metaphorical gun to the head,
the government moved to guarantee the assets and liabilities of the major Irish
financial institutions. The alternative was a financial meltdown, or, at any
rate, such a threat of one as to leave little option. The guarantee was total,
with a two year duration. And it worked, after a fashion. The economy has
tottered on, without the (feared) Iceland effect, and, despite several scares,
without also falling to the depths of Greece. The government’s strategy since,
whatever you think of it, has been clear– to prop up the banks and aim to
restore a viable banking system, and subsequent measures  have been to that
end.

However, just when the issue of bank bail-out had been thought
sorted it resurfaced. The latest disturbing revelations were half year losses of
around $10 billion posted by Anglo Irish Bank, the now nationalised bank which
many consider the Celtic Tiger’s nemesis.  To date around $30 billion of
taxpayers’ money has been committed to help write off Anglo’s bad loans, more
than the other banks put together.  With the latest losses the revelation that
more money will be required for Anglo at a time when the country is on its
uppers and as a direct consequence of a guarantee shortly set to expire has
prompted a heated debate on what to do next about the bank.

This could
be a psychological tipping point.  The Irish public is heartily sick of the
banks.  It was all very well to commit funds to rescue the two main high street
banks, if this was what it took to get them (and the country) going again. But
this has not happened. The cost of rescue proved many times the original
estimates. The resuscitated banks have reverted to type and are turning the
screw on small businesses and other debtors. They would be acting similarly
towards mortgage holders in difficulties if they were let or thought it
worthwhile. Anglo Irish was not a high street bank and bailing it out has always
sat unhappily with the public.

The
relationship between the banks and the public has become an uneasy one as the
recession has taken hold. There are no friendly bank managers where money is
tight. An expert group on mortgage arrears and personal debt is set to deliver
its second report. Its earlier one, on measures to help those with mortgage
arrears, appeared in July.  It in effect threw those in difficulties a temporary
lifeline by suggesting a moratorium on repossessions pending a negotiating
process but   left the banks the final option of repossession. The second report
will concentrate on negative equity and could touch on the ticklish issue of
debt forgiveness.

The latest figures on mortgage arrears emphasize the
growing extent of the problem. The number in arrears of 90 days or more is now
36,438, or roughly 5% of all residential mortgages. Much more worryingly the
number in arrears for 6 months or more is now 24,797, a figure which looks set
to rise. There is no chance that any economic recovery will come in time, or be
extensive enough, to help those in this group. The issue looks set to come to a
head before the end of 2011 as the moratorium expires.

The worst case
scenario – the government doing nothing – is not one to be relished. The current
trickle of repossessions will become a flood.  Selling off the repossessed
properties will depress property prices even further. The banks will seek to
chase up borrowers for the balance owing; many if not most will face bankruptcy.
Guarantees given by parents will be called in, widening the circle of those
affected. There will be no winners, only losers.  Even the banks themselves
don’t appear to relish this prospect; but banks are banks and on past form we
should not expect any favours from them.

Could Irish society deal with
a crisis of this dimension – 25,000 repossessions, thousands of bankruptcies?
These are uncharted waters. But so was the situation re the banks two years ago.
There are no easy options. Any official action to assist those in mortgage
trouble would represent a radical new departure and would, like the bank
bailout, require new legislation. And there are inhibiting factors. Public
opinion on the property situation remains ambivalent. Many of those affected
were first time buyers with no other option; others were would be investors
(seen now as get rich quick merchants).

Some of those who did not
venture  are now taking the moral high ground and suggesting that those in
financial difficulties have only themselves to blame. The phrase “moral hazard”
is being heard .A popular line is that mortgages are another form of credit,
representing future consumption brought into the present, and therefore cannot
be written off.  There is clearly also a difficulty with those locked in
negative equity with large mortgages but who are managing to pay up.  If some
are to be helped, where is the line to be drawn? And why should the prudent pay
for the others? (This last was not heard when bailing out the banks!) It is
worth pointing out here that the cost of bailing out 25,000 mortgages at
$300,000 or so (something no one is suggesting) would come to under $10 billion,
much less than the monies thrown at Anglo.

We are in an unprecedented
situation.  The government may have to be proactive and even radical. Ireland
has come to earth with a bang. Who would have thought even two years ago that
the taxpayer would have had to rescue the banks, and at what cost?  The
residential loan books of the banks are just as compromised (i.e. overvalued) as
were their toxic commercial loans – now largely going or gone to NAMA. Can a
situation be permitted where nothing is done to relieve personal debt while the
other side of the balance sheet is cleared up by the taxpayer? It is all very
well to strike a moral tone re debt, but the primary task of government is to
look after its citizens – not its banks.

As well as considering what the
state could do, there could and should be a dialogue with the banks to explore
options such as, among others, shared equity (and shared equity loss), more
flexible mortgage terms (this for all in negative equity) and even the notion of
some debt forgiveness. There could even be a fit-for -purpose second NAMA to
deal with those in hock to the banks. There is still time to look further into
this.  Ultimately there may be a requirement for some tough talking to the
banks. They owe us!  And one thing is certain. This would be one move by the
government guaranteed to have strong popular support.