Patrick Honohan became governor of Ireland’s Central Bank in September 2009 at age 59 with a lifetime of bluechip academic experience and a professional career that included terms at the World Bank, IMF and Ireland’s ESRI (economic/social think tank) and as economic adviser to Irish Taoiseach (Prime Minister) Garret Fitzgerald in the 1980s. Widely admired as capable and plain-speaking he became governor at a time of national banking catastrophe. His appointment was welcomed across the entire political spectrum. Amazingly (and I have looked) there does not appear to be any major criticism of the man or of his past career – a rare thing indeed. In the next fortnight his reputation will indeed to put to the test as he is tasked with producing a credible estimate of the final costs of Anglo Irish Bank (not to be confused with AIB – Allied Irish Banks plc). This entry looks at the task facing the man.
It can be extremely difficult to judge a person’s performance in the aftermath of a catastrophe and there is always the temptation towards sympathy when their tenure is separated from the catastrophic events themselves. And in Ireland we have a whole raft of post catastrophe personalities – the boards of most of the banks, a new central bank governor, a new financial regulator – though more or less the same personnel at the Department of Finance and the professional advisers are most definitely the same faces. And we seem to have shied away from being harsh or critical of the performance of the new blood – “ah, sure they’re dealing with someone else’s mess” is the usual refrain if any criticism raises its head. In normal times we expect a mixture of good and bad performance, why do such judgements go out the window in a catastrophe? Expediency and all hands to the pump might be adequate responses in the immediate aftermath but we are now a year (plus) on from the catastrophe and also a year on since much of the new blood was recruited.
How so is Patrick Honohan getting on?
(1) His proposal to get NAMA to pay banks for loans in a phased manner was substantially rejected (though the 5% subordinated debt payment and a bank levy might be nods to his proposals)
(2) Control over monetary policy – interest rates and money supply. The ECB of course has appropriated much of our national decision-making but interest rates on government debt have now reached record rates (in terms of the period since our euro membership) and the supply of credit to the economy has reduced significantly – partly due to the economic decline but there are complaints from small and medium businesses that they cannot access credit.
(3) Finance sector stability – the past year has seen the announcement of departures from the Irish market of Fortis (partner with An Post), Halifax and Bank of Scotland. No new banks have opened operations here. No banks have gone bust though plainly there has been an enormous cost to the State with supporting AIB, Anglo, BoI, EBS and INBS and indeed ILP is still benefiting from the blanket guarantee.
(4) Financial Market operations – God alone knows how safe the bank’s reserves are as they are in part loaned to basket case banks like Anglo.
Whilst dealing with a very difficult environment, and accepting that we still have a basically functioning banking system, it is difficult to see where there have been major successes created by the Governor in the past year.
And looking forward to the task of estimating Anglo’s final costs, how good are Patrick’s forecasting skills anyway? Take the forecasting of economic performance in 2010. This is what the Central Bank quarterly forecasts have projected:
The last forecast from the Central Bank showed quite a turnaround in GDP from 0.5% to +0.8% though it should be said that the Central Statistics Office (CSO) reported that GDP rose by 2.7% (now revised down to 2.2%) from quarter 4, 2009 to quarter 1, 2010 so perhaps the Central Bank had cause for optimism. However as the figures below demonstrate given the shock performance of the economy in Q2, 2010 as reported by the CSO this week, we need quite an improvement in quarters 3 and 4 to meet the last Central Bank forecast, in fact we need a 2.9% in GDP and 2.5% in GNP (both comparing with Q3,4 of 2009) to meet the latest Central Bank forecast. It should be said that Irish GDP and GNP can be erratic due to the multi national export sector but it would have to be said that the last Central Bank forecast looks very doubtful.
Patrick Honohan also involved himself in forecasting the bailout needs of INBS and that forecast has increased from €2.5-2.7bn in May 2010 to €3.2-4bn in August 2010.
As regards the competence of the Central Bank, it is widely assumed that the bank has benefited from recent recruitment and a general strengthening of the bolts on the stable door. However the fact that they got their reporting twisted of NAMA loans in their last quarterly update was embarrassing.
Next week however might see the greatest test of Governor Honohan since he took up his appointment. He has been tasked with estimating the final costs to the State of bailing out Anglo under the new proposed split of that basket case bank. The continuing uncertainty over the bank bailouts generally and in particular of Anglo is being blamed for the recent spiking in the prices demanded by investors for Irish government debt.
What will Patrick’s assessment of Anglo’s costs look like? It’s difficult to say but it is quite feasible that his assessment might resemble the controversial EU bank stress tests in July 2010 in which the Committee of European Banking Supervisors (CEBS) modeled the viability of banks based on a base and an adverse scenario. So Patrick might look at risks and prospects for growth in the various property markets in which Anglo has non-NAMA loans. He may look to overall economic indicators like GNP/GDP. He may have projections for unemployment, inflation, interest rates. The bottom line though is that he is going to have to come up with a tangible number or a fairly narrow range (€25-45bn won’t cut it!). To add credibility to the estimate he is going to need to reveal his assumptions. And frankly that’s where Patrick Honohan’s own credibility is likely to be exposed to attack. In addition if he reveals projections of unemployment, economic growth or residential property prices then will Patrick contradict the Department of Finance? On Friday last Minister for Finance confirmed what most responsible people already knew – that “anger [in respect of the economic crisis] has been well articulated by commentators who genuinely and rightly believe they have a role in giving voice to the frustrations of the citizens. But those of us in positions of leadership have a duty to give people hope”. Will Patrick’s supporting detail and projections dash that hope?
So will Patrick Honohan’s reputation be shredded by either the reaction to the detail supporting the Anglo estimate or subsequent events invalidating the estimate (including events that should have been assessed)? And even if the Anglo estimate is well received, won’t the focus move from Anglo to the other bailouts (INBS and EBS and possibly AIB) and more generally to the continuing deficit between State income and expenditure? Regardless, the events of the next two weeks are likely to test the mettle of Patrick Honohan.
Read Full Post »
NAMA Wine Lake 