November 1, 2009
Over the past few days, we have been exposed to the thinking of the Department of Finance. It is quite a scary world, but one worth delving into. This crisis has exposed – no matter who is the sitting Minister for Finance – the strange and convoluted logic of the mandarins, the permanent government, who run the country. In truth, any sitting minister has only a four-year lease on power; the ‘mandarins of Merrion Street’ own the freehold.
In an effort to see how their thought process functions, let’s start with the new U-turn on the National Asset Management Agency (Nama),which was announced recently. The levy the Green Party made great noise about has been dropped. It was supposed to be imposed on the banks for Nama losses – but now it’s gone.
Another piece of jiggery-pokery was announced last week: the potential liabilities of Nama are to be held by a ‘special purpose vehicle’ (SPV) and, therefore, will not be calculated as part of our national debt. Taking these two announcements together, we can try to decipher the thinking of the department, and understand how it sees the world.
Finance minister Brian Lenihan announced last Friday that, in order to pay losses associated with Nama, he had switched from imposing a levy on the banks to a tax on future bank profits, because it was ‘‘necessary to ensure the balance sheets of the banks are not infected with a contingency that’ll devalue them’’.
This thinking, one can assume, comes straight from the finance mandarins, few – if any – of whom have worked in the financial markets. So in their world, it is bad to leave the banks with what is called a contingent liability (ie a possible future debt that may become due because of agreements entered into in the present) because it will devalue their shares and probably increase the cost of their borrowings.
Now, we can all see that this might make sense if you are a bank shareholder or bondholder. If you are board director or senior manager, it makes eminent sense, too. You and your investment are protected. God forbid you might ever have to pay for your mistakes. That would be unthinkable in Ireland.
Equally, if you are a stockbroker or investment bank thinking of either selling shares or raising large amounts of capital for these banks in the near future, the department’s latest move is terrific news.
Imagine how difficult a sell it would be if a bank’s balance sheet suffered after it did something wrong, and cost money to the people who injected capital into it? Surely – if you are about to get a big fee for raising this new capital – it would be great if someone could take this contingent liability off your hands?
Well that’s where we – you and me – come in because now we have taken the hit. The mandarins are not happy for the banks to carry the can for their own mess, but are quite happy for Ireland – you and me, the taxpayers – to carry it.
But applying the same logic, is it possible that this huge contingent liability – which, according to Lenihan, would infect ‘‘the balance sheets of the banks [and would] devalue them’’ – could infect the balance sheet of the nation and, thus, devalue the nation?
But you might ask, how could you ‘devalue’ the nation?
This is where the next piece of mandarin thinking comes in. Through some financial shenanigans, and with the full connivance of other mandarins in Eurostat in Luxembourg, they have managed to put the Nama liabilities on an off-balance sheet: the SPV.
But who do they think they are fooling? Just because you pretend Nama’s â‚¬50 billion-plus borrowings are not in the national debt figures doesn’t mean they have disappeared. Do the mandarins think that their clumsy little plan will pull the wool over the eyes of the international bond traders on whom we rely to buy our debt?
The mandarins are prepared to believe they can fool the people into a scam like Nama and, emboldened, they now think that they can fool the financial markets, too.
The international financial community can see though this; they also realise that coming down the track is yet more borrowing to maintain the Irish standard of living. For example, the bill we are clocking up in public service pensions is not on the national balance sheet either – but bond investors know it is there. Last week, the Comptroller and Auditor General published details on the public service pension bill which we are facing.
The black hole is now â‚¬101 billion over the next 50 years.
That’s a big number. Just to put that in perspective, â‚¬101 billion is â‚¬230,593 for every hour of every day for the next 50 years just to pay our public sector pensions. So the rest of the workforce has to generate a surplus of â‚¬230,593 every hour for the next 50 years, just to pay the pension commitments we have already entered into. The â‚¬230,593 figure is interesting, because it is almost the same as the current average house price in Ireland – which has fallen to â‚¬232,584 and is still falling.
But let’s come back to the mandarins, and how they believe they can pull the wool over our eyes. You might remember that the National Pension Reserve Fund (NPRF)was set up to address this pension problem. We’d invest all over the place and make money to fund the pensions. It’s ironic that the NPRF is now being used to capitalise the banks and increase our contingent liabilities, rather than decrease them – as was originally intended.
When we look at this carry-on from abroad, the issues crystallise. If I’m an international bond guru and I look at Ireland, I see a country that had a contingency for its future liabilities (the NPRF)which it then turned into a liability (by investing it in the banks) and a possible huge other future liability in Nama.
I see a government which is prepared to pass a huge contingent liability onto an already shell-shocked population, a potential debt which undermines the ability of the population to pay all their existing debts. I see a country suffering from deflation of 6 per cent, yet paying 5.1 per cent for ten-year borrowing. This is a real interest rate of 11 per cent at a time when the economy is contracting.
Is it any wonder that we are paying more to borrow money than any other eurozone country? Our ten-year bond rate is 5.17 per cent, while Germany’s is 3.17 per cent – we are paying 65 per cent more than Germany to borrow the same money.
The mandarins hiding and massaging our debts with SPVs and postponed levies is fooling no one. Maybe it’s time to come clean, because the more honest we are with our neighbours – and ourselves – the better it will be for everyone.