Month: September 2013

ON THE CLIFF EDGE ?

My local village pub has just closed its restaurant “until further notice” after two years of losses. It offered good value, unpretentious, food. It closed because of lack of custom, its fate in some ways a metaphor for what’s been happening in the real Irish economy. Elsewhere one of my favourite Dublin bookshops now closes every Monday and has reduced hours during the rest of the week.

Ordinary punters, assailed by a flood tide of direct, indirect and stealth taxes, have hunkered down. In a society where government taxes on a standard bottle of wine are $5, 20 cigarettes cost over $12, and gas and electricity prices are among the highest in Europe, dining out has become a luxury. The anecdotal evidence for this has now been backed up by the just released latest Quarterly National Household Survey – for the third quarter of 2012. Things have certainly not improved since.

The Survey paints a stark picture. 82% of those surveyed have cut back on some spending, 25% have cut in multiple categories. 66% have cut back on outings to pubs and restaurants, 65% on clothing and footwear and 51% on groceries. 60% have cut back on foreign holidays and over a third their spending on automobiles. A quarter of those surveyed have dipped into savings to pay everyday bills.

2014 promises little solace. The property tax will apply for twelve months instead of six, already overpriced public utilities are pitching for price increases from later this year, while health insurance premiums – for those who can afford them – are set for another substantial rise. The full impact of the solid fuel carbon tax, introduced last May, will be felt as soon as the home heating season begins. Public sector workers are now beginning to experience salary cuts imposed from July 1st. Hikes in many other basics and services like public transport will further squeeze what’s left of disposable incomes.

So much for the micro level.

On the macro level things seem to be panning out well with most of the heavy lifting on the economy done. The Troika targets have largely been met and the end of their stewardship seems in sight, leaving Ireland free reassert to its sovereignty by borrowing afresh on world financial markets, probably towards the end of next year.

Reducing borrowing to the recommended 5.1 % of GDP next year looks easily achievable despite the projected need of the government to continue to borrow well in excess of $ 1 billion monthly just to keep going. Some pundits are already arguing that we are so far ahead of schedule that some easing of austerity should be attempted in October’s budget, where the tug-of-war is already under way.
“Normal” politics has begun to re-emerge. The usual opposition voices calling for a reversal of policy are now being joined by significant sections of the Labour Party. With the government’s term well past half way and European and local elections due next year this is hardly surprising.

Labour has taken a hammering and is desperate for anything to restore its fortunes . While the party leader continues to speak bravely about its role in saving the economy, on current polls at least half of its deputies will lose their seats. The forthcoming budget represents perhaps a final chance for the junior government party to salvage something.

Support for Fine Gael, by contrast, is holding up well. This despite the decision to legislate on the thorny issue of abortion. The resulting law, while very limited in scope, criticised from all sides, and subject to a possible constitutional challenge, has been a watershed. Not just socially, but politically. It has established Taoiseach Enda Kenny, as a formidable political leader and Fine Gael, finally, as a tough professional political party. On his hind legs Enda is not a man to be trifled with; nor, increasingly his party.

This year’s budget is yet to be decided. As I write we are stuck at the skirmishing stage, with the actual amount of the savings required –roughly $4 billion – still in dispute. Labour wants less – given the perceived wiggle room now appearing; Fine Gael wants to keep to the pre-set target. The wrangling over cuts versus taxes has yet to hot up.

What IS clear is the message coming from the real economy that consumers have little if anything more to give. Domestic demand is in crisis; people have had to adapt, but at a price – considerable collateral damage to the retail economy. The argument advanced in favour of not slashing welfare payments because they tended to be spent, thus supporting economic activity, has now acquired relevance also for the spending power of the slightly-more-affluent.

Up to now there has been widespread stoical acceptance of what needed to be done to repair the economy, and, in the main, this has been achieved without wholesale dismantling of the welfare state and social safety net. Few would dispute that some of the spending cuts imposed at the margins, especially those affecting disparate small groups at particular disadvantage, have been ham fisted at best, incomprehensible at worst, and require redress as a priority, but by and large the system remains intact. Hence the absence of the type of public and street protest seen in Greece.

However, with different signals now coming from Europe about the efficacy of austerity policy as a panacea for the Eurozone’s economic woes, opinion is shifting here. The argument is that if some of those in Frankfurt are now having a rethink on austerity why the hell is the government here persisting with it. This argument is, of course, too simplistic. Relevant is Keynes’ comment that “When the facts change, I change my mind.” The economic situation, in Europe and worldwide, is evolving, and, with policy input feeding into and affecting economic developments, it behoves those in the ECB to take stock and amend their thinking accordingly.

There are additional flies in the Irish ointment. The target of bridging the budget deficit, so that eventually at least we can pay for our services and welfare without borrowing, continues to restrict the government’s freedom of manoeuvre and means that in practice there will be little relief for the populace next year no matter what.

Additionally our economy is heavily dependent on exports and our recovery hopes ( and plans, and strategies) are pinned on expanding those exports. There has been a double hitch. Firstly the world economy is showing at best only sluggish growth, retarding our export drive. This partly contributed to a fall of $4 billion or 6.4% in manufacturing exports this year to end June.

Pharmaceutical exports, however, which represent over half of total manufacturing exports, fell by around 10%. Much of this was the consequence of the so-called “ patent cliff “ when some extremely lucrative drugs – like Viagra(!) and Lipitor – came off patent. New drugs are being developed, so the fall has not been as precipitous as feared. Nevertheless the combined effect is to depress GDP this year, with negative implications for the budget arithmetic.

When will the hard-pressed taxpayer get some relief?

Echoes of another Keynes bon mot: “ In the long run we’re all dead.”

THE GOOD THE BANKS AND THE UGLY

Contestants on a recent RTE Radio competition were required to mimic a well-known Clint Eastwood quote: “ In this world there’s two kinds of people, my friend: those with loaded guns…. And those who dig…..You dig!” A pithy summation of the state of the nation.

Equally apposite, if less dramatic, would be the observation that there are the banks and their (few) supporters – and there are the mugs. Public anger with the banks has flared again with the recent publication of transcripts of phone conversations at Anglo Irish Bank in the run up to the fateful “ bank guarantee” night of 29 September 2008. The brazen hubris of the Anglo executives, their contempt for the outside world at the time, has shocked even the most stoical and apathetic.

But will it matter? The hand wringing will go on, politicians will point to the thorough – if glacial -pace of the criminal investigations ( perhaps a trial or two in 2014) and to the new and improved regime at the Central Bank and the Financial Regulator. And there’s the rub. The banks will not be reformed, or purged, or transformed into socially responsible institutions. They will be dusted down, and pushed and prodded to get going again – to act like…. banks.

One of the mantras of current official thinking is that a major key to kick-starting the economy is to “get the banks working again.” (This phrase was actually said to me by one of the key official players soon after the bank bailout.) That pious statement is surely open to question – and, indeed, critical analysis. Do we really want the banks resuscitated to function as they did in 2006 or 2007, or should we seek something better ? However a government trying to cope simultaneously with a bust economy and a chronic fiscal crisis does not seem inclined to take initiatives. The minimum possible has been done, coated in rhetoric.

The result has seen the banks get most of what they want, particularly in the detail. An example is in the small but significant area of state savings and investment schemes. These have traditionally offered reasonable and guaranteed returns to small savers. However the interest and prizes on offer have now been drastically reduced, apparently in response to whining from the banks about unfair competition. This has gone hand in hand with the banks ratcheting up their everyday charges to ordinary customers and reducing interest paid on deposits to derisory levels.

The current glib phrase is that banks are acting “to repair their balance sheets” with the hint that, when this is done, it will be back to “normal” and the banks will start lending again. But how much and to whom and under what conditions? Meanwhile the mortgage crisis remains unresolved, though we are now in a period akin to a phoney war. The rules against bullying those in mortgage difficulties have been relaxed, under what has been euphemistically entitled a revised code of conduct – revised, yes, but with nothing in it for the punter in difficulties. The effects of the new regime will take several months to trickle down.

This at a time when the numbers in arrears have reached 12% of residential mortgages and 20% of buys to let. The latest proclamation from the Central Bank has been a wholly unachievable timetable for the banks to “sort out” the mortgage issue, including reaching “sustainable solutions” for 50% by the end of the year. The first target, to end June, was considerably undershot. The long threatened sharp increase in repossessions and/or evictions is now much closer, with Ulster, the major bank not shored up by the taxpayer, first to up the ante. The process is just beginning; the
next six months should see all the banks begin to circle their prey. The elaborate structures enacted in recent months have yet to be tested, but one thing is certain: the individual, rather than the bank, will be left with the short straw.

The basic underlying reality is that the banks’ balance sheets are askew by billions in terms of overvalued private mortgages and that until this reality is faced up to there will be no solution. The balance sheets will continue to paint a false picture. Palliatives will not work. The government has no more cash to inject into the banks ( on this at least there is unanimous agreement) and therefore are loath to sanction or endorse individual mortgage write downs, which would contract the banks’ assets further with a knock on effect on credit. The net effect seems to be to allow the banks to wring every last cent out of debtors, an approach overwhelmingly borne out by the available anecdotal evidence.

“Moral hazard” is quoted at the debtors, with no sanction for the institutions which blithely financed them. The straw figure in this is the “can pay, won’t pay” bête noire for whom there are no figures, but who, Orwellian-style, has been caricatured in the abstract as some evil Emmanuel Goldstein, brazenly refusing to pay his lawful debts. There is no NAMA in prospect for the distressed mortgage holder.

However, the solutions on offer, including the laughably inadequate personal insolvency legislation, as well as the hair shirt suggestions for family lifestyles for up to five years to qualify for even partial debt relief, are so patently inadequate that it is inevitable that this issue will have to be revisited. In this regard, what happens on the macro (I.e. Troika and ECB) level over the next year or so could offer the Government – and the distressed – a lifeline.

The ECB is lurching towards a system under which bond holders and large depositors rather than the taxpayer will be burned if a bank goes under. Currently under consideration is a proposal for retroactive recapitalisation of already bailed out banks by the European Stability Mechanism , one of the new instruments under establishment by the ECB. In layman’s terms Ireland may get back some of the money the Irish taxpayer ploughed into the banks.

It is likely to be at least a year before any of this comes to fruition , and there are issues still to be resolved, including some opposition from more fiscally conservative member states. Nevertheless Ireland has earned considerable brownie points for sticking to the Troika bailout programme and outperforming the other PIGS in this and other regards, so some political quid pro quo may well be forthcoming as a reward. Michael Noonan, broadly supportive, is officially maintaining a poker face.
Any refund will not, of course be anything like the amounts the taxpayer put in, but some commentators have speculated that it could be up to € 8 billion – a sizeable sum for the government to play around with. Much will depend on whatever strings may be attached, but there could be scope for earmarking some of any monies received to help with the mortgage mess. Expect, however, a feeding frenzy around that particular trough, which, should it come to pass, will represent the first and only bonanza for this government.

All this, of course, is speculative.

In the meantime: “ You dig!”