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 Anglos 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 Anglos 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 Irishs 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 Irishs 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.