Irish economy

[DJLJ]

There is a piece in today's Irish Times, about the Irish economy, by MORGAN KELLY. He has been seen as very negative, but seems he is quite accurate on the whole and most of the others has been too optimistic.

 

Makes for sobering reading.

Brought to our knees by bankers and developers - The Irish Times - Fri, Jul 03, 2009.

 

Brought to our knees by bankers and developers

In this section »

 

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OPINION: Nama is in effect Fianna Fáil’s shrine to the property bubble for which the party still yearns. Prepare to pay 10 per cent more in income tax for the next 10 years to pay for it all . . . we are headed for national bankruptcy, argues MORGAN KELLY

 

WRITING HERE two years ago, I pointed out that the exuberant lending of Irish banks to builders and property developers would sink them if the property bubble burst. Since then, the bubble has burst, the banks have sunk, and we are all left wondering how to salvage them.

 

Two ideas for fixing the banks have been suggested: a bad bank or National Asset Management Agency (Nama) and nationalisation. While these proposals differ in detail, their impact will be identical. Irish taxpayers will be stuck with a large bill, and in return will get an undercapitalised and politically controlled banking system.

 

A far more efficient and cheaper alternative to Nama is to copy what Barack Obama did with General Motors, and transfer ownership of Irish banks to their bond holders. In this way we can achieve well capitalised banks, run without political interference, at minimal cost to taxpayers.

 

By converting a portion of Allies Irish Banks’ approximately €40 billion of bonds, and Bank of Ireland’s €50 billion, into shares, each institution can be recapitalised. Transferring ownership to bond holders will not cost the taxpayer a cent and will avoid interminable legal battles over the transfer of assets to Nama.

 

While the shaky state of Irish banks had been worrying investors since early 2007, when the crisis finally broke in late September the Government was taken completely by surprise and reacted with blind panic. Faced with a run on Anglo Irish Bank by institutional depositors on September 29th, the Government was stampeded into guaranteeing virtually all liabilities, except shares, of the six Irish banks.

 

This guarantee contained two obvious but fundamental flaws. Everything that has happened since – the proposed recapitalisation of Anglo, the nationalisation of Anglo, the establishment of Nama – can be understood as the Government scrambling to catch up with the consequences of these two errors.

 

The first mistake was to guarantee not only deposits – which had to be guaranteed – but also most of the existing bonds issued by banks to other financial institutions. Bond holders receive higher returns in the knowledge that they are accepting the risk of losses on their investment. In addition, unlike depositors who can scarper, existing bond holders are effectively stuck.

 

It made no sense for the Government to insist that taxpayers would take the hit on any bank losses instead of the financial institutions that had already entered legal contracts to do so.

 

The second mistake was to extend the guarantee to Anglo Irish and Irish Nationwide. As specialised property development lenders with incompetent management, they were at risk of heavy losses as their market collapsed, and fulfilled no role in the wider economy.

 

In making the guarantee on September 29th, I do not doubt that the Government believed that the difficulties of Irish banks ran no deeper than temporary liquidity problems stemming from the international crisis. However, as it has become apparent that Anglo was a mismanaged wreck, with AIB and Bank of Ireland scarcely better, the Government has stuck with the mantra that all banks are equally important and equally worth saving at any cost to the taxpayer.

 

Brian Lenihan and Brian Cowen are happier to dice with national bankruptcy than lose face by admitting that they were misled about the state of Irish banks last September.

 

Nama, then, is the latest twist in the Government’s increasingly bizarre efforts to save the Irish banking system while claiming that it does not really need to be saved.

 

Underlying Nama is the delusion that the collapse of our property bubble is a temporary downturn. In a few years time when the global economy recovers we will be back building houses like it was 2006. All the ghost estates, empty office blocks, guest-less hotels and weed choked fields that Nama has bought on our behalf will once again be worth a fortune.

 

The reality is that, because of our surfeit of empty housing, there will be almost no construction activity for the next decade. Empty apartment blocks in Dublin will eventually be rented, albeit at rates so low that many will decay into slums. However, most of the unfinished estates that litter rural Ireland – where the only economic activity was building houses – will never be occupied.

 

Nama is a variant on the “Cash for Trash” scheme briefly floated in the United States last year where the government would recapitalise banks by overpaying for their bad loans. Our Government is proposing to buy €90 billion of loans and will reportedly pay €75 billion for them.

 

The International Monetary Fund (IMF) guesses that Nama will cost us €35 billion, and this is probably optimistic. The narrowness of the Irish property market meant that banks effectively operated a pyramid scheme, bidding up prices against each other. Now that banks cannot lend, development assets are effectively worthless.

 

The taxpayer is likely to lose well over €25 billion on Anglo alone. Among its “assets” are €4 billion lent for Irish hotels, and almost €20 billion for empty fields and building sites. In fact, I suspect that the €20 billion already repaid to the casino that was Anglo represents winners cashing in their chips, while the outstanding €70 billion of loans will turn out to be worthless. And it is well to remember, as the architects of Nama have not, that although the problems of Irish banks begin with developers, they do not end there.

 

The same recklessness that impelled banks to lend hundreds of millions to builders to whom most of us would hesitate to lend a bucket; also led them to fling tens of billions in mortgages, car loans, and credit cards at people with little ability to repay. Even without the bad debts of developers, the losses on these household loans over the next few years will probably be sufficient to drain most of the capital out of AIB and Bank of Ireland.

 

Brian Lenihan’s largesse to bond holders could cost you and me €50 to €70 billion. What do numbers like these mean?

 

The easiest way to put numbers of this magnitude into perspective is to remember that in 2008 the Government generated €13 billion in income tax. Every time you hear €10 billion, then, think of paying 10 per cent more income tax annually for the next decade.

 

In other words, the fiscal capacity of a state with only two million taxpayers, and falling fast, is frighteningly thin. Ten billion here, and ten billion there and, before you know it, you are talking national bankrutcy. Even without bankrupty, Nama will ensure a crushing tax burden for everyone in Ireland for decades.

 

The tragedy is that, were it not for the Government’s botched efforts to save financiers from the predictable consequences of their own greed, the Irish economy would have recovered far more quickly than most people, including the IMF, expect.

 

Recovery for the Irish economy will not be easy – there is no painless way for an economy to move from getting about 20 per cent of its national income from construction to getting about zero – but the flexibility of the Irish labour market would have ensured that our incomes and share of global trade would have rapidly recovered. Now, however, any fruits of recovery will be squandered on Nama.

 

Aside from the fact that Nama will spend huge sums to achieve little, its governance is problematic. Here, the fog of secrecy that has quietly settled over Anglo Irish since nationalisation sets an unsettling precedent.

 

After revelations of financial irregularities forced the resignation of three executive directors, Anglo moved decisively to replace them with . . . Anglo insiders. Most astonishing, in the light of the scandal over Irish Nationwide deposits, was the decision to replace Anglo’s disgraced financial director with his immediate subordinate, Anglo’s chief financial officer.

 

It is hard not to conclude that a deliberate decision has been made at the highest level of Government that what happened in Anglo, stays in Anglo. And we can expect Nama to be run in the same tight manner.

 

While there has been considerable speculation about dark motives for bailing out developers and banks, I do not believe that the Government’s behaviour has been corrupt: it has been far worse. At least corruption implies a sense that you are doing wrong, and need to be paid in return. Our Government actually thought it was doing the right thing in risking everything to safeguard the interests of developers who had given us an economy that was the envy of Europe.

 

Instead of recognising bankers and developers as parasites on our national prosperity, the Government came to see them as its source. While everyone else in Ireland has come to see the past decade as an embarrassing episode of collective insanity to be put behind us as soon as possible, the Government still sees it as the high point of our nation’s history. Nama is effectively Fianna Fáil’s shrine to the bubble, and likely to be an expensive and enduring one.

 

What should be done instead of Nama? First, we need to understand how the idea of Nama follows from a mistaken analogy with the Swedish banking crisis and bad bank of the early 1990s. The Swedish banks differed in one fundamental way from ours: they only had deposits as liabilities. If their government had not taken over their bad debts, ordinary depositors would have suffered. By contrast, Irish banks had borrowed heavily from other financial institutions through bonds, and these bondholders originally agreed to take losses if Irish banks got into difficulties.

 

By placing the costs of the banking collapse primarily on existing holders of bank bonds, the State can improve its credit rating and pull back from the edge of bankruptcy. Knowing that taxpayers are not liable for the losses of AIB and Bank of Ireland will make capital markets more willing to lend to the Irish State.

 

Instead, like a corpulent Tooth Fairy gently slipping billions under the pillows of sleeping bond holders, Brian Lenihan has chosen to extend the liability guarantee and further weaken the bargaining position of the State.

 

The drift into national bankruptcy looks increasingly unstoppable.

 

Morgan Kelly is professor of economics at University College Dublin

[milky]

Depressing and very very long. A horrible combination.

[chris71]

So basically, we are fucked.

[Mel Wood]

Sad to hear that the economy's struggling over there.

 

It doesn't seem so long ago that Dolly Parton and Kenny Rogers sang that upbeat duet celebrating 'Ireland's Industry'.

[The Dude Abides]

The guys always have the answers don't they. Pity they all seem to be in the wrong job.

[Catch22]

There was never a reason to guarantee the bond holders.

 

They knew what they were doing when they bought the bonds.

 

He is right about that.

[Soleilrouge]

this has runied my weekend - by the way for the past six days i have had a weak end

[DJLJ]

The Bord Snip recommendations for further cuts in the Irish economy:

 

RTÉ News: 'Bord Snip' recommends €5.3bn in savings

 

'Bord Snip' recommends €5.3bn in savings

watch listen Thursday, 16 July 2009 14:17

 

'An Bord Snip Nua' has recommended €5.3bn in potential savings, including 17,300 public service job cuts and a 5% drop in social welfare.

 

The 'Special Group on Public Service Numbers and Expenditure Programmes' was chaired by UCD economist Colm McCarthy and runs to some 80 pages with over 200 pages of appendices.

 

Among the report's recommendations are cuts to more than 17,300 jobs in the public service and a 5% reduction in social welfare payments, resulting in a saving of €850m a year.

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It says social welfare recipients and Community Employment participants should receive only one payment, saving €200m a year.

 

'An Bord Snip Nua' also recommends reducing child benefit payments and simplifying them, to save €513m a year and revising and simplifying the qualification criteria for the medical card to save €100m a year.

 

The group, chaired by economist Colm McCarthy, says the Department of Community, Rural & Gaeltacht Affairs should be closed and its functions redistributed.

 

It says the need for the Department of Arts, Sports & Tourism should be critically examined and the programme expenditure of both departments should be significantly scaled back.

 

Transfer payments and expenditure programmes across the agricultural area should be scaled back, according to the report.

 

The report recommends reducing the number of Special Needs Assistants and English Language Support Teachers and introducing charges and co-payment mechanisms for services including, school transport, medicines and home help.

 

The report also says there should be a further reduction in allowances for TDs and Senators.

 

It recommends reducing the number of Local Authorities from 34 to 22.

 

OUTLINE OF PROPOSALS

 

Social and Family Affairs

 

* Cuts to all social welfare payments by 5% - €850m

 

* Reduction and changes to child benefit - €513m

 

* An end to receiving two welfare payments - €100m

 

* An end to payments for Community Employment Schemes for those already on benefit - €100m

 

* Cutting benefits for dental, optical and hearing services - €92m

 

* Grading of jobseekers allowance by age - €70m

 

* Cutting the Family Support Agency - €30m

 

* Changing eligibility for Family Income Supplement - €20m

 

* Taxing household benefits package - €11.6m

 

Staff cuts - None

 

Total cut €1.8bn

 

Health and Children

 

* Reduce the size of the Department by 10% a year over the next three years - €11m

 

* Reduce HSE staff - €391.3m

 

* Revise the income guidelines for the Medical Card to the basic rate of social welfare, the jobseekers allowance - €100m

 

* Increase the threshold for the Drugs Payment Scheme from 4100 to €125 a month - €37m

 

* Those previously receiving free prescriptions must now pay €5 for each prescription - €70m

 

* Hold an open competition to provide services under the General Medical Services scheme - €370m

 

* Increase Hospital Charges - €6m

 

* Increase charges for private facilities in public hospitals by 20% - €50m

 

* Hospitals and clinicians must provide generic medicines, off-patent drugs and value-for-money treatments - €30m

 

* Changes to agencies and organisations in the disability and mental health area which receive State funding - €50m

 

* Changes to the Fair Deal scheme with the individual to contribute more to nursing home care from their own residence - €50m

 

* Means test for Homecare packages - €24m

 

Total cuts: €1.2bn

 

Staff cuts: 540

 

Education and Science

 

* Staff and pay cuts in primary and post primary schools - €150m

 

* Staff cuts at third level - €140m

 

* Cuts to number of special needs assistants and English language support teachers - €81m

 

* Increased pupil teacher ratio at primary and post primary - €80m

 

* Change to student support grant - €70m

 

* Cuts to capitation grants for primary and post primary schools - €25m

 

* Cuts to research and development - €27.5m

 

* Cuts to grants for private schools - €25m

 

* Merging of smaller primary schools - €25m

 

* Cuts to school transport - €25m

 

* Integration of senior travelling training - €25m

 

* Cuts to third level structures - €23.7m

 

Staff cuts 6,390

 

Total cut €746m

 

Agriculture

 

* Reduce expenditure on the Disadvantaged Area Compensatory Allowance Scheme by 30% - €66m

 

* Terminate the Suckler Cow Scheme - €44m

 

* Close REPS 4 and no rollover from REPS 2 and 3 into REPS 4 - €80m

 

* Reduce Teagasc staff numbers, rationalise Teagasc and Dept offices - €37m

 

Total cuts €305m

 

Staff cuts 1,140 staff

 

Enterprise, Trade and Employment

 

* Merge the regional offices and shared services of Enterprise Ireland, IDA and FÁS - €87m

 

* A single reduced funding stream for all science, technology and innovation activities across all departments - €53m

 

* Streamline all support of Irish enterprises and marketing functions in Enterprise Ireland - €10m

 

* Stop funding the FÁS Services to Business and Skillnets programmes - €27m

 

* Cuts to training allowances for the unemployed - €24.5m

 

Total cuts €237.7m

 

Staff cuts 594

 

Community Rural and Gaeltacht Affairs

 

* Cuts to Community Services Programmes - €64m

 

* Cuts to Gaeltacht Schemes - €20.8m

 

* Cuts to islands infrastructure - €20m

 

Staff cuts 196

 

Total cut €151m

 

Environment, Heritage and Local Government

 

* Cuts to local government including an end to 12 county or town councils - €100m

 

* Further efficiencies - €30m

 

Staff cuts 30

 

Total cut €130m

 

Department of Transport

 

* Efficiencies among CIE companies - €55m

 

* Cuts to road maintenance - €20m

 

* Cuts to regional air services - €15m

 

* Axing the Rural Transport Scheme - €11m

 

* Outsourcing of driver and vehicle testing - €10m

 

* Cuts to the Road Saferty Authority - €4.2m

 

* Merging the National Roads Authority and the Railway Procurement Agency - €3m

 

* Merging the National Vehicle and Driver File into the Road Safety Authority - €2m

 

Staff cuts 80

 

Total cut €127.1m

 

Arts, Sports and Tourism

 

* Cuts in allocation to tourism and marketing - €27m

 

* Cut in grant to Sports Council - €17.7m

 

* Cut allocation to Horse and Greyhound Fund - €16.4m

 

Staff cuts 170

 

Total cut €104.8m

 

Department of Justice

 

* Cuts to pay and allowances for justice sector staff - including gardai - €65m

 

* Cuts to the courts service - €13.5m

 

* Cuts in immigration staff - €10m

 

* Transfer disability functions of department to Department of Health - €2.6m

 

* Cuts to Youth Detention Centres - €2.5m

 

Staff cuts 540

 

Total cut €136.4m

 

Communications, Energy and Natural Resources

 

* Cuts to energy efficiency schemes run by Sustainable Energy Ireland - €40m

 

* Cuts to direct funding to TG4 - to be partially funded from licence fee - €10m

 

Staff cuts 106

 

Total cuts €65.6m

 

Defence

 

* Measures including a reduction in Defence Forces personnel by more than 500

 

Total cuts €53m

 

Staff cuts 520

 

Finance

 

* Cuts to the Office of Public Works - reducing spare capacity and rental costs - €21m

Staff cuts 660

 

Total cuts €82.8m

 

Department of Foreign Affairs

 

* Cuts to overseas missions - €15m

 

* Cuts to overseas aid - €14.8m

 

* Cuts to Support for Irish Emigrants - €1m

 

Staff cuts 65

 

Total cut €41.7m

 

Houses of the Oireachtas Commission

 

* Changes to some operations - €6m

 

* Cuts to Oireachtas Allowances and Benefits - €1.5m

 

Total cuts €7.8m

 

Staff cuts 42

 

National Treasury Management Agency

 

* Reduce staff and other administrative costs - €5.3m

 

* Changes at the State Claims Agency including payment schemes, legal fees and risk management services

 

Total cuts €5.3m

 

Staff cuts 40

 

Department of the Taoiseach

 

* An end to the National Economic and Social Development Organisation - except for the National Economic and Social Council - €4m

 

* Axing the Law Reform Commission - €2.8m

 

* Cuts to the cost of Census 2011 - €2.2m

 

Staff cuts 77

 

Total Cut €17.5m

[airbags]

Im going to be gone by Septembe anyhow and I doubt Im ever going to return truth be told. I won't be the only one either. I wonder what the governtment is going to claim when the rest of the world starts showing shoots of recovery (arguably, this has already begun in the UK) while we will still be fucked for the next few years.

 

The collosal size and inherent ineffiencies in the public sector are masking the true unempoyment figures anyhow which are optimistically projected to reach 15% next year.

[Section_31]

Interesting comment on the news last night, that the EU are going to come back with a constitution for the Irish to vote on again, but that this time they're likely to vote for it because they need the EU's support more than ever. If I was a conspiracy theorist...

[Nunavut Patrick]

Great, another wave of Irish immigration to Canada.

 

(Actually, my mother's side was the first wave and I just thank God they made it to Northern Ontario and didn't stay in Quebec or I'd be French.)