Fianna Fail’s painful and very personal dilemma over Anglo…

It’s very hard these days to hear the word ‘plasterer’ and not put the words ‘Paddy’ and ‘the’ in front of them. Of course Paddy Reilly was so much more than a plasterer. Not one was he one of the Manchester lads who provided the then Minister of Finance a dig out, but he also became Director of Elections for Ahern’s Dublin Central constituency. Morgan Kelly, whose gloomy presentation recently wowed economists today spells out in no uncertain terms what lay behind the collapse in confidence in Anglo Irish and, consequently, in the Irish Government’s capacity to back its huge liabilities was something very personal to the Fianna Fail party and its very personal concern for the property development engine of the latter days of the Tiger economy:

What began as farce has turned swiftly to catastrophe. Last September the Government casually decided to give a small dig-out to some developer pals by guaranteeing the liabilities of Anglo Irish Bank. This spiralled into a proposed nationalisation that would saddle Irish taxpayers with Anglo’s bad debts, which could easily exceed €20,000 per household, and starve the other, worthwhile, banks of the capital they need to survive.

At the original crisis meeting on September 29th, Brian Cowen claimed that the blanket guarantee to all six banks was given “on the basis of the advice from those who are competent to so advise the Government”.

That does not appear to have been the case.

According to Morgan:

…extending the liability guarantee to Anglo Irish and Irish Nationwide was strongly opposed by representatives of the Central Bank and the Department of Finance (who reportedly came into the meeting with a draft Bill to rescue only four institutions). However, I am told they were overruled by the Taoiseach and the Minister for Finance, who were supported by the Financial Regulator and the Governor of the Central Bank on the grounds that a sudden liquidation of Anglo’s assets would not be in the national interest.

So what would have happened if the bank had been allowed to sink?

Developers would have gone bust and commercial property would have become more or less worthless, but that is going to happen anyway, with or without Anglo Irish. Depositors of Anglo Irish would have been paid off in full, and the hit would have been taken by the international financial institutions that hold around €22 billion of its bonds.

These bondholders are professional institutional investors who signed up for higher returns on Anglo debt in the knowledge that they were facing higher risks. They are, moreover, insured against their losses through insurance contracts called Credit Default Swaps.

This is the central point about the bailout of Anglo Irish, and one that has not received any attention: the only effect of a bailout is that the Irish taxpayer will make up the losses of Anglo Irish’s bondholders instead of the insurers who had already been paid to underwrite the risk. [emphasis added]

So why did they do it?

…what has been disturbing about the entire Anglo affair is that at no stage has the Government felt it necessary to explain why any bailout was needed, beyond inchoate mutterings about the “systemic importance” of Anglo Irish.

The reality is that Anglo has no importance in the Irish financial system. It existed purely as a vehicle for a few politically connected individuals to place reckless bets on the commercial property market. These property speculators may be of systemic importance to the finances of Fianna Fáil, but their significance ends there. [Emphasis added]

Now here’s the really bad news:

The only industrialised economy that has endured a property and banking crash remotely comparable to what we are beginning to experience was Finland in 1991, where national income fell in total by 15 per cent and unemployment rose by 12 percentage points. As the private sector haemorrhages jobs it is hard to see how Irish national income will fall by less than 20 to 25 per cent in the next few years. Unemployment will easily reach 15 per cent by the end of the summer, and 20 per cent by next year, and will not start to fall until recovery in Britain and elsewhere permits mass emigration to resume. The economy will not begin to grow until real wages fall to competitive international levels, a process that will probably take a decade.

In other words, the Irish economy is facing a decade of stagnation and mass unemployment of the same magnitude as the 1980s, with the difference that the unemployed now have mortgages, car loans and maxed-out credit cards. Faced with an irreversible contraction on this scale, the Government will have grave difficulty borrowing to fund its ordinary expenditure, even after draconian cuts in spending and increases in taxation. In the view of international investors, piling Anglo Irish’s gambling losses on top of a spiralling national debt could easily suffice to sink the Irish State into bankruptcy.

And the sign off line (an apparently deliberate inversion of the Minister of Finance’s call to ‘patriotic action’):

It is to be hoped that the collapse of other bank shares will serve as a warning to deter the Government from this catastrophic course. I would therefore urge any TDs and Senators who still believe that the Irish State exists to act in the interests of its people to vote against the nationalisation of Anglo Irish and do everything to protect the other banks.

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  • It probably is to little to late. In a news paper that is by and large not read by Fianna Fail Supporters

  • picador

    It is surely time that people take to the streets to protest against this.

  • Jean Baudrillard

    This is a devastating piece of journalism.

    It’s as if we’ve just woken up from a long and pleasant dream to discover that the bed is on fire.

    The global meltdown has revealed fatal national flaws:

    – in Iceland it has been the naivety of the government in the face of high finance;

    – in the UK, where naivety cannot be an excuse, it has been Labour’s wrong-headed belief in the wonders of the City.

    – But in the Republic… the revealed flaw is the rotten greed and corruption that lies at the heart of public life. The next few years wo’t be pretty.

    Call me cynical but I’m not even sure that this crisis will force things to change.

  • Grassy Noel

    Another economist desperate for the Dr Doom monicker. They all want to be Nouriel Roubini – this guy, Vince Cable, and any other newspaper business corr interested in making hay while the storm clouds gather. This is like a sermon rather than an analysis: there is no way Ireland will go back to the stagnation of the 1980s – to indulge in this kind of scare-mongering and concurrent self-aggrandisment is becoming tiresome.

    Let’s look again at the stock in this type of silly, apocalyptic soothsaying and voodoo in the coming year – let’s see how accurate it is – and if the army aren’t on the streets and the sky hasn’t fallen, let’s call these horrific individuals for what they are: opportunists and fantasists.

    This is the same guy who couldn’t even stand by his recent doom-laden speech when called by a journalist to go over the finer points of it. THAT is what you’re dealing with.

  • Mack

    The much derided Morgan Kelly has been bang on the money for some time.

    I really can’t understand why the worst banks weren’t let go bankrupt, before the guarantee was put in place. (Well, apart from Cronyism). If our banking system were to become foreign owned – what harm, could the foreigners really be any worse?

    We owe these people nothing. They have saddled a generation with a tightening noose chained to the leaden weight of jumbo mortgages.
    They have forced a booming economy and a great country to it’s knees with their stupidity and greed. Celtic Tiger to basket case in less than 10 short years. Let’s hope there is a way out…

  • Mack

    Grassy Noel
    there is no way Ireland will go back to the stagnation of the 1980s – to indulge in this kind of scare-mongering and concurrent self-aggrandisment is becoming tiresome

    Personally I don’t think it is likely (yet) – but it is definetely within the realm of possibilities.

    The Irish public are the most indebted (relative to incomes) in the world.

    The Irish government are now on the hook for 420 billion Euros of bank liabilities (have you seen AIBs share price? Hit a low of 40c yesterday – the market has a very clear opinion on where we are headed).

    The Irish government can’t afford to pay it’s workers the high salaries they expect. The unions show no willingness to compromise.

    The private sector is culling large numbers of workers everyday.

    Give it 12 months, maybe 24 – and pray to God it doesn’t happen.

  • Dave

    “I would therefore urge any TDs and Senators who still believe that the Irish State exists to act in the interests of its people to vote against the nationalisation of Anglo Irish and do everything to protect the other banks.”

    The problem is that they don’t believe that the “Irish State exists.” What we have is unmitigated quislings who have given most of the sovereignty of the Irish state away to third parties, and 160 out of 166 TDs want to give most of what little remains away in the form of the Lisbon Treaty.

    “The proposed Anglo nationalisation marks a decisive watershed in Irish democracy. With it, an Irish government has coolly looked its citizens in the eye and said: ‘Sorry, but your priorities are not ours.’”

    Didn’t they say the same thing when they rejected the sovereign right of the Irish people to determine their own affairs by ignoring the outcome of a referendum that rejected the Lisbon Treaty, declaring that result null and void and compelling the surfs to vote again?

    “Ireland’s growth during the last decade was largely illusory, generated by a property bubble fuelled by reckless bank lending.”

    Exactly, the last decade was the ECB’s Phantom Tiger created by expansionist monetary policy which held that supplying credit cheaply would stimulate economic growth on the demand-side and thereby create wealth instead of simply creating debt, whereas the first decade (1990-1999) was the actual Celtic Tiger.

    While it may suit his purposes to narrow the debate, – focusing on those who loaned money rather than on those whose policy it was to stimulate economic activity by loaning money cheaply to encourage consumer spending – that focus misses the bigger picture. It also serves to exclude the cheerleading of the government who promoted all of this spending of borrowed rather than earned wealth as real economic growth rather than properly condemning it as an utterly demented monetary policy of the ECB and the other parties to the translation (who weren’t simply convenient hate figures such as property developers) but who are the Irish public, i.e. those who took out mortgages and borrowed money for cars, sofas, kitchens and bathrooms, and ran up huge debts on their credit cards, etc.

    [i]Monetary policy is the process by which the government, central bank, or monetary authority of a country controls (i) the supply of money, (ii) availability of money, and (iii) cost of money or rate of interest, in order to attain a set of objectives oriented towards the growth and stability of the economy.

    Monetary policy is referred to as either being an expansionary policy, or a contractionary policy, where an expansionary policy increases the total supply of money in the economy, and a contractionary policy decreases the total money supply.[/i]

    That is what went tits-up, and that is what is controlled by the ECB. The Irish government delegated control of its economy to the ECB when it delegated control of its monetary policy to it. In addition, a government must avoid a conflict wherein the agency that controls its monetary policy is using it to influence its economy in one direction (e.g. expansionary) and the government is trying to influence it in another direction (e.g. contractionary). There is no mechanism under Ireland’s membership of the eurozone wherein such a conflict can be avoided. Ergo, the Irish government must simply follow the monetary policy of the ECB and hope for the best. One size, however, doesn’t fit all, as not all economies need a dose of steriods at the same time and not all cultures are the same (e.g. some cultures that value home ownership will borrow more than other economies for that purpose if the mortgage rate is set low to promote such borrowing).

    If, on the other hand, the Irish Central Bank had retained sovereignty over monetary policy, it could have set interest rates at a higher level to properly regulate the supply of meny in the economy, ensuring that borrowing did not get out of control. As this sovereignty over interest rates was transferred to the ECB, borrowing was out of control by default and by design, since the Irish Central Bank could not regulate it.

    At any rate, you’re all fucked now. 😉

  • Harry Flashman

    “the only effect of a bailout is that the Irish taxpayer will make up the losses of Anglo Irish’s bondholders instead of the insurers who had already been paid to underwrite the risk.”

    That indeed is the crux of the matter, the Irish taxpayer has become the default insurer even though the bondholders already were insured and if as he alleges this was some sort of sweetheart deal to give FF’s property developer buddies a “dig-out” then there needs to be a revolution tomorrow morning with summary executions by mid afternoon.

  • borderline

    There was no ‘dig-out’ in Manchester or anywhere else.

    Ahern accepted money from O’Callaghan the developer.

    It went into his bank account.

    The tribunal asked him where it came from.

  • It would be helpful if Prof Kelly could list the other financial institutions that are (a) disposable, (b) unworthy or both. Other than that it’s an intriguing piece.