Irish banks tottering

With US banking giant Citygroup on the brink while publicly protesting it has sufficient assets, the same applies writ small to Irish-owned banks. The Sunday Times, with its greater distance from the Irish fray accuses them of covering up the worst, but they’re not alone. The whole Dublin establishment, politicians, business and media are trying to contain a crisis which as elsewhere has exposed the fact that with world bank lending in freeze, state guarantees to banks are not enough. The choice, debated in Irish Times correspondence seems to lie between the disappearance of independent Irish banks altogether and state recapitalisation and mergers. The banks’ vulnerablity can’t be doubted.

Note that the banks’ assets are highly concentrated in “fast-fading” UK and Irish property, said Lex in the FT. At Anglo-Irish Bank, the exposure to these two sectors is 80% and at Bank of Ireland and Allied Irish it is 71% and 60% respectively. And if markets keep withholding wholesale funds from “property plays”, then the government “may have to reconsider that guarantee”.

But if the UK and even the US states are finding state recapitalisation difficult to swallow, what are the prospects for a small state like Ireland taking the burden on? While Bertie acts as go-between , the Republic is bracing itself for a “new economic plan.” But room for manoeuvre looks very tight. With Budget rows still smouldering, by how much can they lower taxes to attract fresh foreign direct investment without causing social upheaval, on top of the existing political turmoil?

  • Cap’n Bob
  • It was Sammy Mc Nally what done it

    One silver lining for the useless feckers is that no one wants to buy them as they would inherit their debts.

    What seems ridiculous about the situation in both UK and Ireland is that no clear mechanism/policy has been worked out to guarantee the banks the money they need to lend to small businesses with cash flow problems and for non-speculative property purchase.

  • Mack

    Public debt as a percentage of GDP is low in Ireland (unlike the UK I think). So the government’s theoritical scope for borrowing may actually be proportionally larger than the UKs.

    However, Ireland is in the Euro and constrained by the stability and growth pact, that prevents the government growing large deficits. (So Ireland is constrained to the same degree in it’s annual borrowing as countries like Italy which already have large government borrowings). Although, if needs be I’m sure they could just borrow what is needed and to hell with the consequences. (It might be worth borrowing to save the banks, but I doubt that it is just to pay civil servants higher salaries).

    There are also significant funds in the national pension reserve fund that could be raided to recapitalise the banks.

    A big danger,of course, would be if the recapitalisation fails – then the whole country is fecked. But that applies to the UK too, no?

    Other problems include, the keynesian response by our main trading partner that is causing the markets to devalue their currency (although I am glad my money is in Euros not pounds).

    Ireland’s taxes are low enough to attract FDI. I don’t think corporation tax needs to be reduced. The government needs to roll back on spending (hopefully not important infrastructure projects, and vital spending around education, health etc) because the ramped it up too much during the property boom on the back on unsustainable rises in Stamp Duty and property related VAT. The effect may be slightly deflationary, but the fact that the ECB controlls monetary policy and that we are merely a state in the Eurozone coupled with a successful bank recapitalisation will hopefully prevent a japan style collapse in the money supply.

  • edward

    Have we maybe reached the point where we are talking ourselves deeper into trouble?

    Not that things arent bad but maybe we have reached the tipping point into mass hysteria

  • Greagoir O’ Frainclin

    Downfall….of the property market!

  • The Raven

    Greagoir…now THAT’S funny!!

  • Comrade Stalin

    Mack,

    I think the jury’s still out on the weakening of sterling. It improves the competitiveness of UK exports and services. On the other hand, it makes imports more expensive, and this effects the gas and oil which is a major problem in a country whose own supplies of those commodities is dwindling.

    One way to sidestep this is to proceed with the construction of new nuclear power plants. I also think the government needs to do more to encourage cars which are more fuel efficient. At present there appears to be more tax on diesel than there is on petrol, which is perverse.

  • As I noted, elsewhere, if off-topic, in the hope one of your Head Lamas would note it, the Economist Intelligence Unit has already had a go at this one. And, no, edward @ 11:24 AM we’re not being hysterical, merely taking sharp intakes of breath each time we contemplate the crumbling legacy of the Teflon Taoiseach and his minions. It’s not that they were not told, repeatedly. But it kept the balubas of Fianna Fáil and the free-market PDs happy; it neatly finessed the electors; it brought in all those “safe as houses” [ahem!] international corporations — so what did everyone else and those pointy-headed economists know? My Bannside connection would be muttering, “So Hell rub it up them”.

    To refresh memories: the EIU:

    expects real [RoI] GDP to decline by a substantial 2.5% over the year [2008] as whole. In 2009 and 2010 we forecast further contractions of 2.3% and 0.5%, respectively…

    A fiscal surplus of 3% of GDP in 2006 has turned into an estimated deficit of 6.5% of GDP in 2008, which on a comparative basis is by far the most rapid two-year decline of any euro area country since the single currency was launched. Ireland is now set to breach the EU’s general budget deficit ceiling (3% of GDP) by an even wider margin in 2009, when we expect a deficit of 8.9%. However, even these forecasts are subject to numerous downside risks.

    Prime among those risks are precisely that foreshadowed in this thread:

    First, economic growth may prove to be even weaker than we anticipate given high uncertainty both domestically and internationally. Second, the chances of a government injection of capital into the banking system is rising. This would involve large upfront costs adding significantly to the stock of public debt. Third, yield spreads on Irish 10-year government bonds reached 100 basis points by the first half of November, and are now second only to Greece within the euro area. This will raise debt-servicing costs—should the yield spread continue to widen, this effect will be magnified.

    If that were not gloom and despondency enough:

    In early November the European Commission launched the excessive-deficit procedure against Ireland for its breaches of the Stability and Growth Pact (SGP) governing euro area members. It has previously found the management of Ireland’s public finances to be the weakest of some 18 EU member states and is thus likely to be critical when it reports to the Council of Ministers in February 2009. Given this and the magnitude of the deficits (the largest imbalance in the history of the bloc thus far was 7.8% of GDP in Greece in 2004), Ireland may become the first country to be threatened with the imposition of fines, as set out in the SGP.

    Compared to all that, the problems facing Darling and Brown seem manageable. Since the RoI budget has already been cut to the bone, up to and including cancer care and prevention (a mini-massacre of the innocent), what’s the next “saving”?

  • joeCanuck

    We’re ging to have to change some our old sayings:
    – Money in the bank
    – Safe as houses

  • Nomad

    Malcolm Redfellow for official S’OT blogger? I thoroughly enjoy his thoughts, style and priorities.

  • Ann

    If this thing gets worse we could end up with mass hysteria…

    Malcolm, at such a time, do you think its better being inside or outside the EU tent?

  • Mack

    ‘Compared to all that, the problems facing Darling and Brown seem manageable. Since the RoI budget has already been cut to the bone, up to and including cancer care and prevention (a mini-massacre of the innocent), what’s the next “saving”? ‘

    If only that were true. Public sector salaries average something like €48k per year when the average industrial wage is €34k. This is before considering the generous & expensive public sector pensions & the government have agreed further pay rises for workers in that sector. Most public employees are on payscales, the rises are in addition to any annual increase they may get as the move up the payscale.

    The core problem is the government thought that windfall property bubble tax revenues were sustainable and implemented large scale public sector hiring & the ludricous benchmarking scheme – which resulted in protected-job-for-lifers earning more than private sector workers (with pensions worth another 30% of salary per anum minimum).

    They haven’t displayed any political will to tackle this issue yet. John Hurley, the head of the Irish Central Bank – earns MORE than Jean Claude Trichet head of the ECB (who has much more responsibility). Bertie Ahern’s attempted self-payrise (that they were force to backtrack on) would have seen our then esteemed leader earn more than the president of the USA!

    There is plenty of fat to cull, if hard political decisions can be taken. Unfortunately the last budget mostly went for soft targets! Worse, tight bang in the middle of a cut back budget they tried to sneak in a multi-billion euro bailout scheme for developers called the Home Choice Loan Scheme (google it or visit thepropertypin.com). That money could be better spent elsewhere.

    If the hard decisions can be taken, I suspect Ireland will be in a better position (certainly not worse) than Britain to whether the storm. We have a lower personal tax rates, lower government debt, higher GDP and GNP per capita, a better education system, and an FDI friendly tax system.
    There are plenty of informed commentators in the Irish media (David McWilliams, Morgan Kelly, Alan Ahearne, Brendan Keenan) who are gaining in credibility by the day, and in the end I hope the government will rise to this challenge.

    Euro membership will allow us to borrow what we need to get through the crises without experiencing an Iceland style currency meltdown.

  • frustrated democrat

    Having had a look at the UK’s finances it seems the real debt including contingencies will be about £3 trillion after Monday or to put it in simple terms about £100,000 for each person currently in employment.

    This is not sustainable and is a legacy of 11 years of fiscal mismanagement by a government who though they had got rid of boom and bust.

    The young amongst us should look for a country with a better financial outlook or accept they will be paying off these debts for years to come,

  • Mack

    David McWilliams compares the performance of the British and Irish governments thus far –

    “The first part of Brian Lenihan’s plan seemed to be beginning to work. The Minister for Finance gambled that if he waited long enough, some buyer would emerge because bank share prices would fall to such a low level.

    Realising that he would have to write a cheque at some stage, Lenihan, by playing awaiting game, could at least avoid making the same mistake as Gordon Brown, who obviously bought stakes in the British banks too early and has lost a fortune of taxpayers’ money as a result”

    http://www.sbpost.ie/post/pages/p/wholestory.aspx-qqqt=DAVID MACWILLAMS-qqqs=commentandanalysis-qqqsectionid=3-qqqc=5.2.0.0-qqqn=1-qqqx=1.asp

  • Cap’n Bob