Some stories heard in rural Ireland this summer.Â A farmerÂ goes into an embattled tractor dealer and reaches an understanding on the purchase of an expensive tractor.Â The farmer then goes to his local bank manager to get financing to purchase the tractor; as agriculture is not doing too badly despite the recession, there is some hope.Â But the bank has an unexpected response: we can’t give you a loan to buy that tractor, but we can finance one very like it — that we recently reposessed.Â So banks are in the farm machinery business, at the expense of actual farm machinery businesses.
A recreational golf player reports that it’s a good time to play golf in Ireland.Â Some local courses that had gotten shabby and run-down are finally having some needed working capital put into them, and now they look good.Â How did this happen?Â The banks took them over and will do anything to attract a bit of business, even if it means putting in some additional money.Â Then there’s the miseries of the hotel business, which have featured in the national newspapers.Â Apparently the hotels being run by banks have gotten hold of the forthcoming wedding parties at neighbouring hotels, and are calling the couples directly with offers of a better deal — enough of a better deal to cover the lost deposit at their original booking.Â And finally, one of the big fish: the well-known department store Arnott’s, now being run by Ulster Bank (RBS subsidiary) and Anglo IrishÂ Bank (of which more in a moment).
The big picture is that the Irish debt crisis has put the banks into lines of business that they never planned to be in.Â With the result that significant sectors of the Irish domestic economy are now being run by them.Â But there is a strange flip side to this situation.Â There is exactly one sector of the economy that the government has declared off-limits from the process of debt distress, restructuring, and external management — the banking sector.Â And so it is that unlimited public funds are available to keep solvent what would otherwise be insolvent banks, the â‚¬24 billion or so directed to Anglo Irish Bank being the epitome of this problem.
And sometimes we wonder if the external prognosticators looking at Ireland have fully grasped the role of the banks in the Irish economic shambles.Â Why did the government’s favourite bedtime scary monster, “the markets”, react so badly to the European Commission approving the â‚¬24 billion for Anglo, a figure that has been known in general terms for months and was, within a couple of billion, confirmed by the Minister of Finance to the Dail a few months ago? Was it the first time that the headline number crossed the Reuters screen, or was it the government’s inability to say that it’s this â‚¬24 billion and not another eurocent more into a dead bank?
Anyway, another day brings another bit of dysfunction.Â Recognizing the scale of the restructuring that needs to be done, you’d think there would be a rush to get it done as quickly as possible and reduce some of the debt overhang.Â Not necessarily.Â Restructuring typically means new equity and all the existing stakeholders — including creditors — taking a loss.Â But the Central Bank of Ireland has blocked any loan writedowns for assets headed to the National Asset Management Agency (NAMA), meaning that even banks that see the value in taking a steep haircut and letting new equity come in to a troubled client can’t do it.Â Â Maybe NAMA can do it a year from now.Â Is it worth letting such decisions fester for another year?Â The government seems to think so.
A few more conversations seek to establish whether anyone in Ireland is feeling optimistic, besides the golf players.Â Well, the boats are still out in West Cork and an enquiry as to the occupation of the owners returns the answer — doctors and lawyers.Â The Electricity Supply Board had a great year for profits and a new electricity levy — which despite its green labelling, will mainly finance carbon-dioxide emitting peat power plants — will be on everyone’s bills just in time for winter.Â A friend at an architecture firm explains that after slashing employment 75 percent, overseas business is now back up and some laid off people might get their jobs back.Â Apparently Middle East oil money is creating good work for people willing to travel.Â And as the next wave of emigration gets started, 20 years after the last one was ending, it’s currently viewed as an experience that is important when you live in a small country rather than as an indication of long-term gloom.Â Go abroad, get the training, come back when things are a bit better.
And yet it’s not clear that the worst is over.Â The banks haven’t yet made a big move on distressed home mortgages and no one is clear what will happen when forebearance is no longer a viable strategy.Â Notwithstanding the government’s attempts to compare tax revenue to “profile” (i.e. a very recent projection), the fact is that tax revenue is stagnant at last year’s depression-like levels despite an apparent recovery in economic statistics.Â And while there are those desperate hotels, the tourists (or at least those who stray from the cautiously priced package tours) will still find fussy and expensive restaurants (plus VAT).
Are there any tricks left in the bag?Â The government is looking at privatization, most likely as a way to realize a large amount of cash at fairly short notice — essentially a portfolio switch of state-owned companies for all the bank liabilities it has taken on.Â And there are some bizarre Thatcherite echoes in the possible appearance of a poll tax by the end of the year (dressed up as a “flat rate” water charge or property tax).Â The public sector unions are back onside for now with a deal guaranteeing no further pay cuts and postponed pension reform for incumbents, so some semblance of the “social harmony” (i.e. lack of riots) that has so impressed international commentators is still there.
But, if you don’t work for the government directly or indirectly (as with the doctors and lawyers) or for some type of export operation, do you have any firm idea what you’ll be doing 3 years from now? For a country facing such inponderables, the statis in its politics is remarkable.Â But that’s for another post.