Author: paleoutlaw

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.

WHERE ARE WE AT, WHERE ARE WE GOING?

At least we
had a fine early summer. In July, however, the rains returned and combined with
doom and gloom in the media about our current travails to dampen the most
optimistic spirit. It is now apparent to all that there will be no quick
economic fix. The sands are running out for the Government and Fianna Fail
continues to languish at unprecedented lows in the polls.  The focus is now on
the next dose of pain – the December budget – with around $2 and a half billion
to be found from extra taxes or cuts in spending. It could be the Government’s
last.

Several recent economic reports, even those positive in tone, have
underlined just how fragile our economy remains and how much pain we have still
to endure. One or two outside commentators have been scathing about what has
been done and sceptical about any chance of a quick recovery. An exasperated
Taoiseach has complained about too much negative reporting which does no good
and could harm the recovery.

Certainly there are positive signs,
particularly regarding exports and in terms of a pick up in foreign direct
investment. The Government has bravely committed itself to a future capital
programme, which, even scaled down, contains the promise of future jobs.  Jobs
are being created, but jobs are being lost. Unemployment has begun to lurch
upwards again.

Fresh revelations about the misdeeds of the banks (and
bankers) continue, serving to drive home the  feeling that too much has been
done for them. All the signs, moreover, are that the banks, far from being
grateful, are, rather, turning the screw on customers whenever the opportunity
is presented. The end September sees the current state guarantee to the banks
expire; will there be a rethink for guarantee mark two?

There is a
reluctant general  acceptance among  all but the most obtuse that we cannot
continue to borrow at the current levels. It has dawned on the public that the
core issue is not to win an internal argument among ourselves about appropriate
welfare and tax levels but rather to convince outside lenders to continue to
advance us the money to fund our current living standards. No amount of outrage
over the huge sums sunk into the banks – particularly Anglo Irish – can obscure
the reality that we are borrowing a similar amount every 18 months or so just to
keep afloat.

The budget will not be easy politically; the Government,
relying on independents and some worried schismatic supporters,  may fall over
it. The result would be an election but out of that would have to come a
successor obliged, however reluctantly, to meet the same targets. Whenever the
next election occurs the new government will have its hands tied.There are
echoes of 1987 in all of this, but though  much groundwork has been done over
the past two years recovery still seems a distant prospect.

A number of
budget trial balloons have already been launched covering welfare cuts
(including one of the last sacred cows, the old age pension), extending income
tax to the lower paid (half of all workers pay no tax) and the modalities of
interim property and water taxes (the definitive versions will take longer to
formulate). In a sense this is the Government version of negative spin – a
softening up process to make the final package more palatable. The first result
has been to alert the lobbies.

So what will the budget
contain? Much of last year’s McCarthy Report remains to be implemented.
However,the Government, through the Croke Park Agreement with the public sector
unions, has tied its hands regarding further cuts in public sector pay or
levies. Some big spending Departments will be targeted. Mary Harney has already
signalled a draconian cut in the Health budget. This has been received
relatively quietly, though this will probably change as the details emerge. The
public is weary of a system  whose strengths and weaknesses are well known; any
cuts aimed at the top heavy bureaucracy will be welcomed; any cuts in services
will draw fire.

Education seems destined for further cuts but here most
of the soft options have already been targeted. One issue remains – that of the
reintroduction of third level fees at the state’s universities and colleges.
When the emotive smokescreens are stripped aside, the simple reality is that the
main beneficiaries of the abolition of fees have been the middle classes. Some
others have benefitted but not to the same extent. In practice, access is
limited overwhelmingly to the well off or those accepted by a third level
institution close to home. Whether this nettle will be grasped may ultimately be
decided on political grounds.

Small savings can be effected in most
other departments. To meet the target, however, will require additionally a
combination of revisiting the social welfare budget and extra taxation. Last
year’s cuts breached the taboo except for the old age pension. A change here was
floated some weeks ago, specifically in the context of “better-off” pensioners,
but given that these are taxed in any event, it is difficult to see where this
one is going. The emotive argument that the pension was earned through
contributions when working remains particularly potent.

Clear signals
have been given about “widening the tax net” to bring in some of the 50% not
paying any tax. This mainly means the lower paid and can be done easily by
lowering tax thresholds. This will also increase the amount paid by those
currently paying tax, which may forestall or postpone any property tax right
away. The glib alternative solution for raising revenue by a tax on property, or
assets, conveniently ignores the fact that those obliged to pay are likely to be
mainly those currently paying income tax – ie the middle classes – who can only
be squeezed so far.

While some form of property tax, which would broaden
and make more sustainable the tax base, seems bound to come, when and in what
form is another matter. There remains in Ireland, almost uniquely in the first
world, a general reluctance to take on board the principle that ownership or
beneficial use of a piece of property should carry with it a cost. The
Government has hinted at the need for further study, and, fearful of a further
political backlash, may settle for the moment for a low uniform levy, with
another one on water.

Any taxation of the lower paid runs the risk of
adding to the existing poverty traps which can make it more advantageous to
remain on welfare rather than work. To maintain relativities and avoid a
worsening of the situation the Government may be tempted to cut unemployment
assistance again in a package that in equity should also include a hefty cut in
child benefit, currently paid indiscriminately to all. There is surely fat in
the latter and this could give scope for some rowback on cuts already made for
certain particularly vulnerable groups like carers, special needs assistants and
the blind. Even lacking money, the Government could and should do something to
protect those most vulnerable.

THE HOME FRONT

Ireland is now well on the way towards the next general
election. Many observers doubt the ability of the coalition to last beyond this
year, let alone run to full term in mid 2012. Even though it could be argued
that the economy is now in a state of fragile equilibrium (revenue more or less
on target, unemployment more or less static) there is a weary public acceptance
that things will not get easier, that several tough budgets lie ahead and that
the Celtic Tiger chickens are coming home with a vengeance.

Opinion
polls indicate that, whatever about  recognizing that any alternative government
would have to pursue fiscal policies and tough measures broadly similar to those
the government has taken since2008, the electorate seems determined to hold
Fianna Fail in particular (in power since 1997) responsible for bringing the
crash about. Public ire has been compounded in recent weeks by growing awareness
of the human cost of the crash and the necessary remedies, set against the
amounts committed to bailing out the banks. Stealth cuts affecting carers for
the mentally and physically disabled have brought people onto the streets while
public attention has now also begun to focus on the housing and mortgage time
bomb.

For better or worse the government has pursued a particular policy
towards the banks and the developers, including a wide ranging guarantee
covering the banks and their investors.  No one has answered satisfactorily what
the immediate consequences for the economy of not issuing the guarantee in September 2008 would have been.  Yet the issue has
clearly left a sour taste when combined with the money sunk into buying the
banks’ doubtful loans, leaving only a bare cupboard for everyone else. There is
no money to stimulate the economy and little beyond words to offer succour to
those in financial straits, including, for the first time, significant numbers
from the politically important middle class.

Given the Irish attitude to
property ownership, the housing and mortgage situation may prove perhaps the
bitterest legacy of the Celtic Tiger. The economy going belly-up is seen as a
problem for society, or the EU. The debt of the individual is very much a
personal problem. Factor in property and many raw nerves are exposed. The
spending spree on property during the boom touched a great many people.
Properties were remortgaged; equity was drawn down, often for frivolous consumer
spending. But most went into the property boom, fuelling it. Credit, cheaper
than ever before, was widely available. Nearly everyone who could, borrowed.
Young people, first time buyers, scrambled to get on the property ladder while
they still could. And now …the party feeling has been replaced by a
hangover.

Currently the housing market is stagnant. Property prices have
crashed, by between 33% and 50% depending on location. Virtually all new units
bought since 2003 or 2004 (the level to which prices have now fallen) are in
negative equity, and prices have yet to bottom out definitively. Demand has all
but disappeared. Compounding this, the banks, so recently profligate with
lending, have now rediscovered prudence, prompted by a new and tough financial
regulator, and will only lend small multiples of income and no more than 80% of
the cost, further discouraging new and first time buyers. There is no trading up
as those already in at the bottom are crippled by negative equity. Very few new
houses are being built and much of visible construction consists of project
completion on behalf of creditors.  There is no prospect of improvement in the
short term.

The country is sprinkled with “ghost estates”, located mainly
(but by no means entirely) in rural areas. These date from just before the crash
and include partially completed houses, as well as estates and apartment
complexes all but finished but with few or no buyers or occupants. Estimates of
the numbers of unoccupied or unfinished dwellings vary widely but the number is
considerably in excess of 100,000. Many, particularly in the west, are unlikely
ever to be viable. Some form of triage approach appears most likely with some
estates destined to be abandoned or demolished, others earmarked for fire sales
(any fire sales in desirable areas are likely to depress the market
further).

Mortgaged properties in negative equity can be broadly divided
into two – those where the owner is coping and those where the owner is under
pressure on the mortgage (job gone or income reduced or with a short term loan
falling due). The first group face no immediate problem and collectively will
aim to hunker down in the expectation that prices will rise again in the medium
term as the economy recovers.

The pressing problem lies with the second
group and this is now fast becoming a political issue. Many are young or first
time buyers who got mortgages of up to 100%, sometimes more, for amounts of
$250,000 or up. Many are currently in negative equity of at least a third. Where
jobs have been lost there is simply no way the mortgage can be met. The bald
figures are that, at the beginning of July, one in twenty five residential
mortgages (32,321) were three months or more in arrears, a figure expected to
increase rapidly as temporary moratoriums on repayments expire and as interest
rates inevitably rise above the current historic lows. There is no risk sharing
with Irish mortgages. The keys cannot be handed back. The borrower remains
liable for the full amount of the loan – a financial albatross which threatens
to retard the pace and strength of any economic recovery.

The government
has, up to now, approached the issue warily. The lending institutions were
prevailed upon initially to delay taking action over arrears and so far this has
worked in most cases. This is probably due as much to the weakness of the
institutions (what would they do with a surfeit of repossessed properties in a
falling market in any event?) as to the government’s entreaties. In early July a
government-sponsored expert group suggested a negotiating process for borrowers
in difficulties but left open the option for the banks to repossess failing all
else. Time will tell how successful this approach will be. The last thing the
government wants is a flood of repossessions and /or bankruptcies affecting
ordinary people.

The group’s next report, due in September, is to deal
with the elephant in the room – negative equity – and is expected also to
consider the hot potato of possible debt forgiveness. The debate on this has
already begun, focussing on possible percentage write downs by the lenders, and
/or the state assuming part of the loans. Among the arguments against are that
writing down would further weaken the banks and that the state has no money to
intervene. A further point has been made that to bail out those in trouble
would invite “moral hazard”, i.e. the delinquents – or others – would do it all
again given the chance. I cannot recall morality being invoked when the banks
and developers were being rescued! And if the banks merited help for the benefit
of society, who is to say that people do not? This one will run.

“BIG BOYS GAMES, BIG
BOYS RULES”

A process of change has begun which seems destined to alter
fundamentally the Eurozone. Precisely where this will end is not clear, but
there have been  mutterings from the German Chancellor that the entire European
project could be at risk unless firm remedial action is taken. The cumbersome EU
decision making machinery is now beginning to grapple with the
task.

Recent weeks have not been good. The sticking plaster solution
designed to bail out Greece and forestall bankruptcy failed from the off to
inspire international confidence. With fears growing of  potential threats to
Portugal and Spain it became necessary to revisit the situation . A much larger
rescue plan was hammered out involving agreement on a bailout fund of a trillion
dollars to be financed  partly by the IMF and reluctant agreement by the
European Central Bank to buy government bonds from the weaker Eurozone
economies.

The brave face  put on the plan was that it would forestall
speculation and thus might never have to be activated. The omens are not good.
Overall deficits (i.e. more borrowing) continue to mount, there is evident
resistance in the weaker economies to the spending cutbacks and extra taxation
being demanded and clear differences between and within countries on the best
approach to follow. The plan’s call for increased monitoring from the centre on
individual annual budgets of member states has had a mixed reception.

Economic comment has been that Europe has bought time – the suggestion
being three years – but in a globalised economy this may prove over optimistic.
Market reaction has seen the value of the Euro drift down against the Dollar and
Sterling, shares fall and worry that the international economy may be
precipitated into the much feared “double dip” recession. This last would, of
course, cancel all bets for the short term, but assuming it does not there is
little doubt that the Euro saga has some way to run.
.
The nuclear
reform option would be full or decisive fiscal control from the centre over
individual countries’ budgets. This is feared, particularly in Ireland, as
opening the door for eventual central control over national taxation,
threatening our advantageous – and vital – rate of company taxation and with it
our attractiveness to foreign investors. The anti-Lisbon lobby has now
re-emerged to shout “hands off”, citing threats to our sovereignty. The
government has uttered reassurances that no change to our fiscal independence
within the EU is on the cards and pointed to our continued power of veto over
taxation issues.

This is true in respect of the EU. Whether and for how
long it will apply within the context of membership of the Eurozone is another
matter. Ireland continues to borrow $450 million per week just to run the state
– including  generous provisions for unemployment benefits and (untaxed)
children’s allowances. Our continued ability to borrow rests ultimately on the
confidence of lenders. If there is no confidence there will be no money. This
was about to happen with Greece. Hence the rescues. Hence also the need to
address the emerging weaknesses in the Euro.

Crucial to this confidence
is the attitude of Germany and what happens to the Euro. There is a big picture
here, one that is not immediately apparent and is often overlooked. The last 40
years have seen the slow emergence of a European superpower built primarily
around Germany and her economy. This emerging power is within but not synonymous
with either the European Union or NATO. At times its progress has been slow or
stagnant. At times it has made quantum leaps, which have then had to be digested
and accommodated. Its institutions and borders are incomplete or ill defined yet
their general shape is emerging.

Veteran observers of the Brussels scene
will be familiar with the landmarks in this process. In the 1970s the
transformation institutionally of the EC with the creation of the European
Council structure and the groundwork for a common EU foreign policy (now  a
common foreign and security policy). Next the establishment of regional and
cohesion funds to assist poorer areas, the first groping towards a system of
economic and monetary union and the launch of the Single European Market in
1992, aimed at eliminating internal national  barriers to trade.

In
foreign relations there was the opening of serious dialogue with the communist
bloc, through the CSCE, which, at a non-military level acted as a stimulus to
dissent and fragmentation of the bloc. When communism collapsed there came
German reunification.
The EU then moved swiftly to begin a process which
led, in just over a decade (2004) to a major expansion incorporating most of the
former communist states of Central Europe, with the promise of more to follow.
Under the Schengen Agreement most continental EU members, including the
newcomers, as well as Iceland and Switzerland, have relaxed or eliminated border
controls (one visa fits all). Britain and Ireland have remained outside.

There was also, most importantly, the launch of the Euro, with Euro
currency circulating from 2002 in (now)16 of the 27 EU states. One major player,
Britain, has stayed outside, and most of the 2004 accession states are not yet
ready to join. Here’s the rub. The original rules for the Euro, including fiscal
prudence, have proved inadequate, hence the current crisis. Germany, which gave
up its beloved Deutschemark for the Euro, and prompted by an increasingly
impatient electorate, is pressing for greater controls over national budgets
with enforceable sanctions for laggards.

There is a clear division
within the Eurozone, with the PIGS plus Italy, the major offenders, with yawning
budget deficits and heavy national debt. In recent negotiations the carrot
option seems to be out; the stick remains, with modalities to be worked on in
the coming months. There are emerging public differences between the German
Chancellor and the President of the EU Commission on the need and desirability
of revising the Lisbon Treaty. Given the way Europe normally disposes of
problems, in the short run a compromise solution seems likely. It may prove
unpalatable, but one that can be lived with, for now.

But if the Euro is
to survive, more radical measures will eventually be called for. At a certain
point in this process, possibly sooner rather than later, all cards are likely
to be on the table. The Eurozone is a major plank in the world’s financial
structure with four of the world’s ten largest economies in it. Ireland is a
minnow. The German and French economies are  roughly 15 and 11 times the size of
Ireland’s. It would be naïve to assume that our sensitivities will count for
much if the very future of the common currency, fundamental to the European
project, is at stake.

It should not be forgotten that  our existing
favourable company tax rate itself has evolved from zero, under pressure and
after negotiation. Europe has been good to Ireland, and we have been lucky,
partly because we are small. At present our budgetary strategy has found favour.
We cannot go it alone. We should be wary of declaring  anything unacceptable
from the outset.”

THE PIGS WON’T LIKE IT
Several
years ago a story briefly did the rounds of the European media. It  was to the
effect that  concerns in Germany  regarding  the stability of the EURO were
prompting some customers to  demand “German” Euros from their banks while
rejecting Euros from other EU states, particularly those from southern Europe.
Euro notes and coins have identifiable national markings which made such an
exercise possible. The inference was that, in the event of a meltdown in the
Euro, Germany could withdraw from it and recognise only its “own” currency. The
story was quickly rubbished as totally unfounded and far-fetched.
The Euro,
in circulation since 2002, is now in use in 16 of the 27 EU members including
four of the world’s ten largest national economies. More importantly, it
replaced one of the four major world currencies, and the pivotal European one,
the German Deutschmark. German participation was an act of faith in the new
currency. This core reality is often overlooked. The Euro, from the beginning,
was invested with the strength, stability and reputation of the Deutschmark.

Anyone familiar with the development and launch of the US Dollar two
centuries ago will know how difficult it was to merge and replace the currencies
of thirteen disparate pre-industrial economies. How much greater the challenge,
then, of attempting the integration of most of the major currencies of Europe
(Britain remained outside), bearing with them their fiscal and budgetary
baggage. There were reservations at the time about the adequacy of the Euro’s
control mechanisms, including the 3% ceiling on budget deficits. These were
brushed aside in the euphoria of the occasion.
It has since become apparent
in the Euro era that, without political union, the scope for imposing budgetary
discipline among errant Euro members is limited. This is hardly surprising,
given that the countries concerned are functioning parliamentary democracies,
with regular elections and electorates increasingly impatient with politicians.
The path to re-election is one of making promises; keeping them costs money. The
path to defeat is to seek to raise that money by higher taxes. The end result,
across Europe, has been steady increases in borrowing by governments over
decades to pay for promises made. In an era of growth and low interest rates,
debt could be handled, or fudged.
Who, after all, would lie awake worrying
that the national debt was 50, 70 or even 100% of GDP? And who took seriously
complaints and warnings from the European Central Bank if a country’s borrowing
exceeded slightly the permitted annual ceiling? The excess could be corrected in
the next year, or be postponed further if an election loomed. 3% became
aspirational rather than mandatory. The Germans might grumble, some fines might
be imposed, but, as long as the Euro prospered, problems could be seen off.
Sticking plasters rather than radical treatment became the order of the
day.
The last year has seen reality dawn and the flaws and fault lines in the
Euro zone exposed. First came Ireland, as the air escaped at pace from the
Celtic Tiger. A country running substantial budget surpluses collapsed into
deficit – and how! It will take four years to sweat down Ireland’s current
double digit borrowing requirement to 3%. Ireland was lucky; overall government
debt had been low after the good years, so some massive borrowing was possible.
Ireland was also amenable to good advice once its leaders grasped how serious
the situation was; spending, including public sector pay, was slashed. Ireland,
so far, has taken her medicine.
Greece came next, and, on a Richter scale of
calamity, the Greek situation scored higher than the Irish one. A small economy,
with almost $400 billion in debts, no tax base to speak of and a feather-bedded
public sector and welfare state, held its hand up late last year and revealed
that the last government had lied about the extent of its economic mess. As the
weeks went by it became clear that Greece had no hope of tackling its debt
crisis unaided, and, critically, was unlikely to be able even to roll over the
portion of the debt due in 2010. Moreover, any default by Greece would expose
two other dominoes, the remaining PIGS, Portugal and Spain, both with serious
financial and fiscal problems. Were Spain, the ninth economic power in the
world, to go belly-up, the results would be catastrophic, certainly for the
Eurozone, possibly for the global economy
Saving Greece, therefore, has
become a combination of damage limitation and self preservation for the rest of
the Eurozone. A three year rescue plan was agreed in early May under which
Greece will be loaned up to $150 billion by other Eurozone countries and the
IMF. Inter alia, Ireland, currently borrowing $500 million per week just to keep
going, will borrow $1.7 billion more to lend to Greece, as her share! It remains
to be seen whether this plan will work, how the markets will react in the coming
months and in particular whether the Greek public will accept the severe
measures imposed as Greece’s part of the bargain.
Politicians and Eurocrats
are currently scrabbling to find more lasting solutions within the existing
rules. However, it is difficult to see the Euro survive unless the current
arrangements are overhauled. At the very least a new system of control over
national budget deficits will have to be worked out. The stakes are high.
Individual national sovereignties are at stake. A special Intergovernmental
Conference would be necessary, with treaty revisions to follow. Given how
jealously countries such as Ireland have defended their control over national
taxation there must be considerable doubt that this method of reform would
succeed, hence the sticking plaster approach. The issue is further complicated
by the fact that one major EU country and currency remains outside the Euro –
Britain and Sterling. All in all, an appalling vista.

In the short term the
Euro will probably stagger on. Critical is the attitude of Germany. German
public opinion is already seething at bailing out the Greeks ( the arguments are
along the lines of why should hard working thrifty Germans bail out a country
where people can retire on pension in their mid-50s) but the German government
is seized by the argument that it’s better to hang together than separately.
They may also calculate that a weak Euro will give a much needed boost to
Eurozone (and German, and indeed Irish) exports, aiding overall economic
recovery. They probably also shrink from the formidable task of reforming the
Euro.
What else could happen? Orthodoxy asserts that no country can be
expelled from the Euro, that no country could leave the Euro and that a two-tier
Euro (the Northern states and the PIGS, with Ireland and Italy disputing the
“I”) is unworkable. In short, there is a fixation with the status quo, if only
because of the appalling vista scenario and an unwillingness to think the
unthinkable. If the Euro goes down in flames there will be massive direct and
collateral damage. The coming months could be interesting times. Some at least
will start checking their Euro notes for the serial letter X – the code for
Germany.

LIES, DAMN
LIES….
…AND STATISTICS.
.

Here are a few to reflect on:

YEAR                      GDP                       GDP per HEAD                   NATIONAL DEBT                    DEBT AS % TAGE

1987               €25,724 billion                 €7213                              €30,085 billion                            115%

2000                 €104,553 billion           €23,503                               €39,490 billion                                 38%

2007                €189,751billion         €45,000                           €38,000 billion                                        25%

2009                 €171,000(est)           €42,000                            €75,000 billion                             64% est.

The Economy returned to centre
stage with a bang in the run up to Easter, with the launching of NAMA and the
revelations of the cost of bailing out the Irish banks. The fallout continues as
I write, with public outrage and shock at the amounts involved and media
commentators and politicians shouting about fiscal and financial Armageddon and
a debt burden that will continue for several generations.

The facts seem
stark. The building and developing boom collapsed in 2008, throwing the banks
which had financed it into financial crisis. These included the two major
systemically important Irish banks, Allied Irish and the Bank of Ireland, which
cater mainly for the retail market, but also Anglo Irish Bank, a non retail bank
which had specialised in loaning to developers, and a savings and loan type
institution, Irish Nationwide Building Society. With the spectre of a major bank
default looming (just weeks after Lehman Brothers) the Government, at the end of
September 2008, issued a blanket guarantee for bank
loans, deposits and bonds. The last 18 months have seen the Government grappling
to come to terms with the banking crisis as its extent has slowly become clear.
This has included taking over Anglo Irish Bank, which has effectively ceased to
function.  During this period bank credit has virtually dried up, with serious
knock on effects for the economy.

The main instrument for cutting what
has become in effect a financial Gordian knot has been the setting up of NAMA –
the National Asset Management Agency – to relieve the banks of their major
development loans (bad, doubtful or otherwise). NAMA has begun “buying” the
loans by issuing, in effect, IOUs which the banks can redeem from the European
Central Bank, and thus start lending again. NAMA’s notes are issued at a
discount on the banks’ valuations of the loans (euphemistically referred to as a
“haircut”) and, in theory, when the property market recovers (in say, 8-10
years), the properties can be sold by NAMA to recoup some or all of the state’s
investment (a similar smaller-scale scheme in Sweden in the 90s actually netted
a profit for the state).

While the cost will be spread over a number of
years and there is the prospect of getting at least some of it back as assets
are sold, what has outraged public opinion has been the scale of the rescue
required, with a figure of roughly $45 billion being bandied about, and the
distribution of the potential losses between the institutions concerned.
Anglo-Irish Bank alone is set to cost roughly $30 billion, with the threat of
another $14 billion to come; the Irish Nationwide a further $4 billion. The two
main banks – used by most of the public – account for $11 billion. As if this
were not enough, the discounts extracted by NAMA will have the effect of
reducing the capital bases of both the Bank of Ireland and Allied Irish Banks,
thus reducing their lending capacity and ensuring that credit will continue to
be in short supply for some time, unless fresh capital is injected by the
taxpayer.

While all this is painful, it could have been borne with
public resignation, like the other economic steps the government has taken.
However, the realisation that Anglo Irish Bank is in effect a zombie bank,
casting doubt on whether there will be any return for the $30 billion, could
prove the last straw.  A debate on whether it would be cheaper to close the bank
forthwith is underway with the government saying it would cost much more and
that the state cannot default on its debts but being tight-lipped about giving
details. Opposition politicians and some commentators are demanding
clarification and more information. The public mood has not been helped by the
spectacle of the principal architects behind the Anglo fiasco walking around
with impunity.

Current projections for government borrowing – which,
remember, continues at $400 million plus per week just to keep the country
running – envisage it peaking at 85-90% of GDP in 2014.  These are admittedly
before factoring in the cost of funding the bank bailouts and are based on
continued adherence to the strict programme of control and fiscal rectitude on
which the government embarked in 2009 and on a sustained global economic
recovery. Granting these two conditions Ireland’s peak borrowing would have been
no worse than many other Euro zone countries, as well as Britain. Adding on the
additional burden of bank debt, whatever that proves to be over the next four
years, will obviously affect these calculations, for even if the debt itself can
be rolled over (the way all Western style governments deal with debt), the
annual cost of servicing the total debt will have to be met through further cuts
or higher taxes.

There is no doubt therefore that the bank bailout will
add considerably to the government’s woes and also to Ireland’s national debt!
However, as can be seen from the rough figures at the top of this article we
have a long way to fall to reach the depths (and debts) of 1987. Back then the
country really was broke, with a generalised recession, double digit inflation,
unemployment at record levels (17% at a very conservative estimate), a
spiralling national debt almost one fifth greater than GDP, together with
historically high interest rates (I unearthed recently a letter of that era from
my bank manager giving me the good news that my mortgage interest rate was being
cut to 16 %!).  In the 20 years that followed, GDP grew by almost 700%, the
workforce doubled and the whole (rising) population benefitted from higher
incomes, better benefits, services and infrastructure, as well as lower taxes.
Even with the “hits” we have taken in the last two years, comparisons with 1987
are risible. It is worth noting that the story that dominated the media in March
before the bank bailout related to queues at the Passport Office and the backlog
of 40,000 applications (1% of the population). Those waiting were overwhelmingly
heading for Spring holidays. Recession? What recession?

This is not to
deny there are huge problems with the Irish economy. There are, and one is
coming steadily down the rails, for the most part ignored, as public attention
focuses on the latest high visibility story. For while states can roll over
debt, individuals cannot. The level of private debt is awesome, much of it in
the form of mortgages (over $200 billion), many in respect of properties in
negative equity, others to finance the autos and second homes that marked the
Tiger years. This was certainly not the case in 1987. With interest rates set to
rise over the next year this slow squeeze may well prove more damaging than
anything a bank rescue can inflict. There is no sign of a NAMA Mark
Two.

—
6ytyt