THE GOOD, THE BANKS AND THE UGLY 1308 LIV

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!”

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