The budget strategy of our country is now more than ever dependent on what happens next to our banking system. As has been apparent to anyone who cared to look over the past 10 years, the buoyancy of our tax revenues was uniquely related to the deluge of cheap credit; money flowed in, banks lent recklessly, tax revenues rose, the government budget went effortlessly into surplus, spending increased opportunistically to catch up with this abundance of funds in the State’s coffers and, not surprisingly, the national debt went down.
But that was then and this is now. Today, the deterioration of the government’s accounts is — conversely — driven by the collapse in credit and lending in the economy. You can’t fix the economy without fixing the banks. As a consequence, if you want to analyse the Budget you have to start with the banking system and the way credit is spread around the country.
On Sunday, the minister said that “we have nothing to fear but fear itself”. Whether this is true depends on his next move in the banking system more than anything he announced yesterday. Roosevelt saw the banks as part of the solution. Let’s hope Franklin D Lenihan sees things the same way.
The unprecedented banking packages announced by the EU in the past few days have put it up to the minister to inject huge amounts of cash into the Irish banks in return for equity.
At this stage, buying straight equity with taxpayers’ money would be the wrong thing to do. There are also calls for the Irish banks to merge as soon as possible; this too would be wrong.
Nationalising banks, despite the spin from London that everyone seems to have swallowed, is not smart.
There are many more creative ways of recapitalising banks and getting the best deal for taxpayers. Again, like the bank guarantee, Mr Lenihan, should look for an Irish solution to an Irish problem, rather than a cheap import from abroad.
It would be far smarter to lend money to the banks and charge them for it.
Most analysts say that Irish banks will probably need somewhere in the region of €10bn in new capital to cover the bad loans on their books and to begin to be able to lend again.
We could use the pension reserve fund for this. There is around €18bn in the fund and if this isn’t a rainy day, I don’t know what is. But most importantly, we could get the economy moving again, recapitalise the banks and make money out of such a move.
The State could inject €10bn into the banking system and charge the banks 9pc for the cash for a five year period. They are not going to get cash anywhere else at the moment so they would go for this option. This would imply the State would get €900m every year in interest income from the banks to pay for future pensions.
In addition, the State could negotiate a preferred share deal of 25pc of total bank equity, giving us, the taxpayers, huge upside.
The repayment schedule for the banks would be strict, so that if any bank failed to meet its payments to the Government, the State would take 70pc of the shares at a deeply discounted price.
In addition, the Government — as the most secure creditor of the banking system — could lay down terms, such as debarring Irish banks from lending abroad, limiting their exposure to property, forcing them to maintain a higher ratio of tier one capital and — most crucially in terms of democratic fairness — forcing the resignation of all the boards and senior management who got us into this mess in the first place.
The reason these individuals have to go is simple: to do otherwise would mean rewarding the guilty and by extension, punishing the innocent.
More significantly, capitalism works on rewards for a job well done and sanctions for messing up. To protect the reckless would signal to the world that Ireland is not a serious country. It would imply that Ireland is a crony backwater that got lucky and that the State is characterised by gombeenism at the highest level.
Foreign investors who will need to finance us in the future will just not find it credible. Investors will run a mile if they see that the same incompetents who waltzed us into this cul de sac and lined their pockets in the process, are still in power. In addition, for the morale of those working in the banks and for the sake of the next generation’s ambition, they too will have to see that there are opportunities at the top for those who do a good job, rather than for those who simply hang out at the right golf club.
In the same spirit of competition, we need to avoid too many hasty mergers in the banking system. The upshot of this recovery programme needs to be a decent banking system with as many players as possible, not a duopoly where the two big banks swallow up all the small ones.
At the moment, the Government, working on the advice of Merrill Lynch, appears to think that we can avoid recapitalisation by forcing mergers between the two big banks and the rest. This is atrocious advice. At the moment all Irish banks are operating below the critical tier one ratio of 8.5-9pc — which the European banks have achieved as a result of yesterday’s bailout.
This means that even merging them all together into a large super bank would still mean that the balance sheet is weak. Five poor balance sheets don’t make one good one! This would lead to big fees for the adviser and a Japanese-style depression for Ireland.
One has to also question the advice and objectivity of an investment bank, Merrill Lynch, which was bust three weeks ago, is AIB’s corporate broker and has also raised money for Anglo Irish Bank. In my opinion, it simply is too close to the discredited players to give clear counsel. The best way for the present management to survive this catastrophe is not to look for fresh capital and this might be why some of the main players do not want recapitalisation. In the interests of self-preservation, they are instead vouching for forced mergers, nationalisation and state protection for banks!
Mr Lenihan has been brave before; he should be brave again. If he injects money into the banks using a loan from the pension fund he will strike the deal of the century for the taxpayer. If he goes down the route of forced mergers, he’ll ensure his place in the pantheon of politicians who made a bad situation worse.
Ire_in_exile – I understand your dismay. It is not that Irish people are all stupid. Some people are waking up to what is going on. Some have already woken up. Some have woken up long ago, fought to fix it, been outmanouvred, and left in dispair.
There are legions of Irish people who exactly fit your description. Sheepish, obeident, lazy and prepared to take what ever eminates from ‘authority’. Bear in mind the motto of Dublin is “Obedience makes the citizens happy”. And just as you would expect it comes from the Middle Ages, and the Fuedal order of things. (I am sure other counties are the same – emphasing obedience, acceptance, and self-disrespect as virtues. Today it is obedience to the Economic Rent Infrastructure ERI. IRE in reverse. In other words we are being driven in reverse in this country by the ERI. This is a collection of systems, deals, oligopilies that favour the gombeen element of Irish society. And about half the population accepts it as ‘normal’, ‘Irish’, or ‘better’ than in foreign countries. The real problem is that large numbers of people are just muddling along between the sofa and the pub with the a spell in the workplace where they are constantly conniving to avoid doing real work.
I have found that you can discuss what is going on in Irish society with some people. And others will just brush off your remarks. They will tell you to deal with by drinking, spending, behaving selfishly, and laughing at nothing. It is exactly as James Joyce described – “in a continual state of paralysis”. Joyce said this 100 years ago and used it as the basis of his work “The Dead”. Basically anybody who tries to be alive is repressed and turned into an alcoholic. Basically mediocrity is the backbone of the Irish culture which never riots like the Latins, or seizes the system like the Germans and the English. We don’t even debate the thing like the Yanks. Instead we just repress each other, lie to each other. It is no wonder you left for the Continent. I often thought of the same option myself. And I insist on spending one month in each year at work in the Continent to get away from Irish mediocrity, obedience and slyness. I am lucky that in my work I can organize this. I have learned to be completely sceptical of all Irish people who put down continental cultures. Such Irish people all have one thing in common – they are lazy.
I am really surprised that AIB or BOI would be in trouble before any of the other four. I mean assuming that they all made the same level of stupidity, and attained equal level of risk, then the banks with the fast growth rates would have gone first. We do not any evidence that the Big two took riskier decisions – if anything the evidence suggests that they were less liberal in their lending policies than the other four. The Big two made massive profits for the last ten years. Where is all that money ? This is the basis of my Middle Two Theory. I think they made a dash for growth and were the most stretched. This is exactly what destroyed Northern Rock, Washington Mutual, and Bradford and Bingley. Those that have accelerated the fastest into the boom, are those that decelerate the fastest going out. This has been the international experience. We are now learning, despite all that Celtic Tiger BS, that Ireland is not somehow or other removed from the same economic rules that apply everwhere.
The thing is – if the Big two are in trouble, we are all in serious trouble. The others could go and we would survive. But the big two would be a crisis of Icelandic proportions. But in Ireland it would be different with riots in Dublin, Cork, Limerick, Dundalk, Athlone, Drogheda, Clonmel, and other centres of working class discontent. It would end in the invasion by the Revenue Commisioners of that tax hideaway in Portugal full of Irish wheeler dealers.
Furrylugs – I have a theory. Authority is mostly concerned with preserving it’s own privileges despite it’s increasing obsolecence. Authority destroyed the Soviet Union. It is destroying the United States. It will destroy Europe, and is responsible for much of it’s malaise. The Chinese and the Indians are loosening up authority, and their entire societies are surging forward.
That is without even talking about the mediocrity of Irish authority compared to authority in the Netherlands, Sweden, etc.. So the country would be better if the entire cabinet went to Inishvickilaun for the next twelve months and let us on with our own affairs. Less mistakes would be made. There would be less government ‘initiatives’ to encourage house buyers to bid up property prices again, and bail out the builders.
Deco,
Thats extremely unfair…………………….
to Inishvicillaun.
The only real flaw in that otherwise appealing theory is that the Dail rose for the Summer and everything fell apart. Not that things got any better when they came back.
It has been proven that a majority government in power for too long loses the run of itself. Look at Thatcher and Blair( or even Bertie).
It’s a simple flaw to rectify.
We should have a President with more defined executive powers (peoples Champion)
The Taoiseach and Tanaiste should be elected by the people.
Party politics should not come above the State
Chief Whips and Whips should be abolished to allow free voting.
An independent Ceann Comhairle should be from a senior legal field.
A party in power should not be able to change constituency boundaries.
Abolish Proportional Representation.
Thats enough to chew on over the weekend methinks.
I’m off fishing.
Before people get too carried away by some of the more extreme views on this blog, it’s worth pointing to the credit rating quoted for Irish banks in last Thursday’s Irish Independent. http://www.independent.ie/business/irish/bank-of-ireland-1499579.html
On that basis it would seem unlikely that they will be bust when we wake up on Monday.
Likewise in my opinion, some of the views expressed about those on the political stage are too extreme. Let’s all calm down, we are going to need cool heads in the days ahead if we are to discuss the real issues:
I think we can rule out V and W shaped recessions. The question is whether it will be a U or and L shaped depression lasting a decade or more.
What is the worst thing that could happen and what do we do then? If there were a sovereign credit default, like in Iceland or Argentina how can we devalue when we don’t even have a sovereign currency?
How many Irish banks and people are exposed to Merrion Landsbanki?
# Staff of 101 in Ireland
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Attempted sale to Straumur, (another Icelandic outfit) earlier this month collapsed when Landsbanki was declared insolvent.
Inconclusive but interesting Malcolm, but I must regrettably add that now is very much the time for extremism if only as a much needed counterbalance to the abject complacency that has brought about the current dilemma in the first place.
I do not believe Boi will fail as is rumored, but it is in the best interests of everybody at the moment to be prepared for the worst….However, I agree cool heads are the answer to any crisis…sharp, clear minded, ruthless and cool…
Saipan defined us as a nation. Roy Keane loves his country and is a proud corkman. he demanded the best cos he got the best at mufc. when he complained about the fai setup, he was ignored. Roy continued to play for Ireland’s important matches even though he was booed (by dublin ireland fans) for missing a meaningless friendly.
Roy played a few blinders against opposing teams and basically got us to the world cup. all he wanted was a proper fai setup to properly look after the players. he was ignored again. mick mccarthy got on well with the blazers in the fai (they gave mccarthy the lucrative contracts) so mick didn’t want to rock the boat.
Remember when things came to a head in Saipan, McCarthy called a meeting and engineered a setup for Keane. Keane spoke out. now, all the other players (22 others in the squad who play professional football and know good standards from bad ones) knew the facilities were bad, knew they weren’t treated right, and so on, but when it came to the crunch, they didn’t back up Keane. Even mother theresa Quinn ignored his conscience.
Keane was left hanging. and then the media say Keane left the squad by his own accord. Why couldn’t they tell the truth that McCarthy told Keane to go?
So boys and girls, what we are seeing now, with the government/banks/developers mirrors the way the fai viewed the world.
Michael O’Leary is the Roy Keane of the business world. we badly need him
I’m not clear. Why would the bank take expensive money at 9pc you say from the Irish Gov. When it should have now have no problem getting money on international markets due to the terms of the recent Bank Guarantee scheme?
Furrylugs – “Abolish proportional representation”
That’s a coincidence as the same thought occurred to me out of the blue only yesterday: when I vote for an independent why should my vote be transferred to the other parties when the independent fails to make the count?
Under PR, your vote is only transferred down through your preferences. If the independent you want to vote for is your only preference, your vote will not be transferred if they don’t make the quota.
Hi again David,
Not sure if you or others will get chance to read this reply as I am only getting around to it now. (apologies to others, I just didnt have the time to fully read or respond to your inputs).
> the buoyancy of our tax revenues was uniquely related to the deluge of cheap credit; money flowed in, banks lent recklessly, tax revenues rose, the government budget went effortlessly into surplus, spending increased opportunistically to catch up with this abundance of funds in the State’s coffers and, not surprisingly, the national debt went down.
Agreed. But one key aspect of this that should not be overlooked is that the taxes on credit-based expenditure on property were paid for in the current gov financial year and mainly with credit. eg: VAT on houses, and some stamp duties, etc. So we were paying for current taxes out of long-term loans. A 4-year-old has the basic math to understand that this model is untenable long-term and is a clear case of living beyond our means.
> But that was then and this is now. Today, the deterioration of the government’s accounts is – conversely – driven by the collapse in credit and lending in the economy. You can’t fix the economy without fixing the banks.
Its not that black and white, you are looking at symptoms and not the problem. Its because there was too much credit given out, and as I’ve just outlined, the credit was paying for taxes today, and our public system became bloated and based on that credit-supply of tax. The only solution is to re-base our taxes and public expenditure to a more appropriate leve. That means cuts, and should mean improvements in efficiency per person, etc. It will be like squeezing water out of a stone.
> At this stage, buying straight equity with taxpayers’ money would be the wrong thing to do.
Why, BOI is about 1.9 billion in share value now? The government could easly make an equity offer for capital.
> calls for the Irish banks to merge as soon as possible; this too would be wrong.
I agree. Mixing up errors is not going to make the picture clearer and could make things worse.
> It would be far smarter to lend money to the banks and charge them for it. The State could inject 10bn into the banking system and charge the banks 9pc for the cash for a five year period. the State could negotiate a preferred share deal of 25pc of total bank equity
Why would the banks do that when they can go to the ECB window, get money there at much cheaper rate and not have to give away any equity! In lending money to the banks, we are effectively becoming a bank, so its a national bank service in another name, and at a different layer in the financial fabric. Wy therefore not just nationalise a couple of the banks. At least in that way you can affect the ‘real’ economy if the government runs the banks differently and provids credit to the real cogs in the economy, if they an find them that is!
> the Government could lay down terms,
Onerous terms is akin to nationalizing banks and changing its culture. I agree that the latter aspect has to be done no matter what solutions are offered.
> forcing the resignation of all the boards and senior management who got us into this mess in the first place.
This is not going to happen, as much as you and I would like it. The government is likely just to let the people involved leave the institutions quiety and on their own terms, not government forced. Whether things will be ‘whispered’ to them and they leave earlier than they had originally panned remains to be seen. They wont go short of money.
> Ireland is a crony backwater
Yes, Ireland is a crony backwater.
> Five poor balance sheets don’t make one good one!
Exactly. I’ve been saying this for months now.
> One has to also question the advice and objectivity of an investment bank, Merrill Lynch,
agree, the problem we have is that many of the participants in the system, in this systemic problem, are part of it yet are still their proferring solutions. This is hard ro work around. For example, is the ECB strong enough and does it have the teeth to radically change our financial regulator system? Probably not.
MK
ps: Quote of the Day: Gov Patterson, of NY – “I couldnt see this credit crisis coming, No-one could” (he’s blind).