Ireland: A recession of the banks, by the banks, and for the banks

Some stories heard in rural Ireland this summer.  A farmer  goes into an embattled tractor dealer and reaches an understanding on the purchase of an expensive tractor.  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.  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.  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.  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.  How did this happen?  The banks took them over and will do anything to attract a bit of business, even if it means putting in some additional money.  Then there’s the miseries of the hotel business, which have featured in the national newspapers.  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.  And finally, one of the big fish: the well-known department store Arnott’s, now being run by Ulster Bank (RBS subsidiary) and Anglo Irish  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.  With the result that significant sectors of the Irish domestic economy are now being run by them.  But there is a strange flip side to this situation.  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.  And so it is that unlimited public funds are available to keep solvent what would otherwise be insolvent banks, the €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.  Why did the government’s favourite bedtime scary monster, “the markets”, react so badly to the European Commission approving the €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 €24 billion and not another eurocent more into a dead bank?

Anyway, another day brings another bit of dysfunction.  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.  Not necessarily.  Restructuring typically means new equity and all the existing stakeholders — including creditors — taking a loss.  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.   Maybe NAMA can do it a year from now.  Is it worth letting such decisions fester for another year?  The government seems to think so.

A few more conversations seek to establish whether anyone in Ireland is feeling optimistic, besides the golf players.  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.  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.  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.  Apparently Middle East oil money is creating good work for people willing to travel.  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.  Go abroad, get the training, come back when things are a bit better.

And yet it’s not clear that the worst is over.  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.  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.  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?  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.  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).  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.  But that’s for another post.

30 thoughts on “Ireland: A recession of the banks, by the banks, and for the banks

  1. 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.

    Were I a cynic, I might suspect that the public sector deal had a side-effect of setting up a convenient scapegoat for the next round of welfare and public service cuts.

    After all, the largely tame domestic media can then tell an angry public that the reason for their suffering is the existence of inefficient, lazy, overpaid (insert further adjectives) public servants devouring scarce resources.

    Divide et impera seemed to work before, after all.

    If this government was as good at economic management as it was at base political cunning, we might not be in the mess we’re in.

  2. I know it’s an overwrought historical analogy but I think the Croke Park deal has an element of Molotov-Ribbentrop to it; a fair element of cynicism on both sides with each suspecting that they’ll turn on the other sometime down the road, but needing to ensure the other is on the sidelines for a while.

  3. Some perspective. 24bn euros for a country of around 4mn… USA population is closing on 400mn so that would be around 3 trn dollars if adjusted per capita and for currency. Now recall the fuss Obama had blowing a paltry 800bn on the entire stimulus programme. Can anyone imagine what the noise would have been like if he’d decided to put 3 trillion into, say, Citi?
    We are in a hole deeper than we are able to extricate ourselves from. Debt restructuring is the only sensible way but I fear it will be forced on us when the markets attention gets bored elsewhere.

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  5. “Are there any tricks left in the bag ?”

    For now Ireland is independently trying to resolve its finances, by Government subsidy to the financial sector and austerity measures. Its banks have at their disposition the ECB stimulus counter, which is gradually reducing the length of its lending windows (and apparently concentrating timewise the funding requirements of the Eurozones 27 trillion in liabilities). The ECB is intervening gently in the bond markets of various countries too.

    Are we concerning ourselves with public debt or with banking and private debt?

    The next trick in the bag for public debt is to turn to the 750 billion EFSF , which simply put levels the interest costs of public debt across member states, hence easing financing of public debt for countries in the tighter spot. This may keep various countries debt rolling , but I imagine there will be harsh demands that come with that help, and a keen oversight to ensure where the money is spent (i.e. in rolling other member state involvement in that countries public debt etc.) It is unlikely to be spent supporting/boosting the economy, or bailing out banking/private finance.

    As now, apart from any further government subsidy and low interest short term ECB loans on equity,the financial sector does not have anywhere in particular to turn to. The markets will remain suspicious for a long time I think, particularly regarding any lending backed by or related to real estate, or to any financial entity which may be involved in related investment (most if not all are). The same goes for interbank lending, and unguaranteed deposits by citizens. If what is happening there is anything like here in Spain, banks are using every available source to hold property out of the market (or release it at reasonable prices) , and out of their non performing portfolios, simply to keep the value of their equity elevated and their obligatory related necessary reserves low. ECB extra funding and some smaller arrangements with governments are keeping this afloat, so it is the decisions the ECB makes that will decide how this plays out to a great extent. A rise in rates might throw borderline mortgage debt into trouble and bring down the arrangement, the ECB is however mandated to maintain price stability too, which means controlling inflation by rate rises – it may not be able to balance the conflicting needs, nor between countries – though the world surrounding the ESFS hints at a gradual move towards greater fiscal integration . Probably the ECB will act by reducing its extra lending facility and slowly force banks into fusions and takeovers while allowing the property bubble to deflate fully in the process.

    Personally I would be very surprised if the ECB and individual countries can pull such off smoothly over the next few years, while maintaining acceptable economic and social criteria. For example we have prominent economics professors here warning of a 9% reduction in Spanish GDP for 2011 and 30% unemployment in 2012 – such figures would throw all calculations into disarray.

  6. Sounds like Paddy Matthews is getting his retaliation in first ! Even when I was in employment, I didnt have access to the ‘ job for life’, ‘paid annual sick days’, annual increments’, ‘guaranteed defined pension scheme’ etc that is available to the public sector worker. So even before the recession, I was not part of any ‘ united front of workers’, the one that Paddy is now suggesting is being divided prior to being ruled. If I had any doubts about my place in the scheme of things, this was eradicated when on my first visit to sign on in my local SW Office; I rather naively asked where the ‘ public toilets’ were. Answer the newish modern SW office does not have toilet facilities for the unemployed – we are not seen as being entitled to the same hygiene and toilet facilities as PS workers !

  7. Joyce,

    I don’t have a problem to public sector wage cuts – wages at the upper echelons went way too high during the good times and a flattening of the payscales are in order. I have no problem with benchmarking against comparable jobs in the private sector if it involves resultant pay reductions.

    I’m merely pointing out that uproar over public sector wages, pensions, etc. provided a convenient diversion for the government’s management of the economy last year. There was the occasional feint earlier this year by Éamon Ó Cuív at old age pensioners not being asked to take cuts when everyone else was, but it didn’t seem fruitful and seems to have been dropped.

    We’ve made no progress economically during the last two years – unemployment is rising, the budget deficit and national debt are rising, the domestic economy continues to decline, and our bond spreads – the ones which represent the verdict of “the markets” – are the highest of any Eurozone country except Greece. The notion that we’re an economic model for the rest of Europe is no truer now than it was during the bubble.

    The policies aren’t doing what the publicity promised. I’m genuinely sorry that you’re out of a job. But while taking it out on the people behind the counter of your local SW office may make you feel better, it’s not going to improve things for everyone else, or make a blind bit of difference to the future of this country.

    If I could – I have a health condition which makes me an unattractive immigration candidate – I’d be doing my level best to get out of this country, public service job or no.

    Given the policies being pursued and the constraints internationally, I see no future for Ireland except a continuous decline in living standards, in public services like health and education, and in infrastructure over the next fifteen years. The future isn’t a choice between Boston or Berlin; it’s Bucharest.

  8. @Sandymount

    Some more perspective. The €24bn is only for 1 bank, albeit the most banjaxed of them all. The likely bill for the total cleanup of the banking & property speculation sectors (not that they are two separate things, mind you) will almost certainly be at least twice that. That would amount to $6tn in US terms.

    Default is unavoidable at this point unless those lovely Germans are going to finance our zombie hotels, golf courses and banks indefinitely.

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  12. Paddy, there wasn’t anything in my post to suggest I was rude to SW staff – I wasn’t, unless my mere asking where the public loos are is now deemed to be an impertinence. This brings to mind the scene from Oliver Twist where the young orphan creates mayhem by having the temerity to ask for more !
    Do you think that the public is unable to focus on more than one economic issue at a time ? We can and this idea of the gullible public being ‘ diverted’ by concerns about the level of PS salaries and conditions is not credible. As I am sure you must be aware, many commentators, including the ESRI, had expressed concern about the burden that PS salary/wage commitments on the economy even before the recession had begun. It was always an issue and the recession has just made it more urgent.
    If we are heading towards Bucharest rather than Boston or Berlin, then ‘ Benchmarking’ was one of the important stages that helped to divert this country from the pathway to Boston/Berlin and down the cul de sac to Bucharest. However this trip features different class carriages and it is only the ordinary private sector workers who are lumped into steerage.There is no room on the life boats for us – only the wealthy and the public sector workers are given guaranteed tickets to the lifeboats. So don’t expect us to stand by cheering as we see you all clambering safely into the lifeboats. And don’t expect us to be fooled by talk of ‘ diversions’.

  13. Banking, by its nature, destroys the host. When everyone has been given a loan, what does the economy looklike?

    Take a look around you!

    Surely, if credit is so good, the answer is to borrow more…… Ooops we are borrowing more but just to bury the banks!!!!!

    Yikes. What a hoot! To see people whining that they did not have a job in the public sector is really funny! You will throw it away soon enough, when a better one comes along. Short sighted? Mind whom you vote for!

  14. So…instead of letting the market sink the bankers and transferring their role to a regulated credit union structure for redevelopment, we decided to let international finance banknap the nation into totalitarian command?
    We have no shortage of houses, food, trained medical staff, teachers, etc.
    I’d start by ploughing the golf courses and planting food for the Pakistanis.
    Time to get global, they’ve eaten the nation.And sent us the bill.

  15. Opus diablo
    You are correct! The heist is still underway. We are giving away our future earnings via government levy, to those who include those whohave destroyed the country.
    Iceland has chosen to reject this by popular action. But Ireland has been pacified. Opting out of Ireland is possible but getting in elsewhere is not easy. Staying means paying much of everyone’s income to these lenders. Unless the Irish find their spine ….. So much for sovereignty! Sold for dreams of wealth! Victory by fifth column!

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