It was on a miserably wet night in February this year when I went along to the inaugural meeting of the London Irish Business Society in the BT headquarters next door to St Paul’s in London. The format for the evening was a series of speeches on the subject of NAMA given by, amongst others, Enda Kenny leader of the main Opposition party Fine Gael, followed by a brief Q&A session. The event was held in the bowels of the BT building and there was no mobile phone reception. It was around 8.45pm and I was seated two rows behind where Enda was sitting on the front row (the idea being that once you gave your speech the speaker sat back down in the front row). An aide to Enda rushed in with a Blackberry and showed the party leader a message. I couldn’t make it all out but there was something about Willie O’Dea who we later found out had resigned that evening. A couple of moments after this, Enda had to get back up on the stage along with the other speakers to take some questions. To say the least he was a very distracted man. And you can understand why – it’s a cold, fruitless place in Opposition in Irish politics. Practically every week you are faced across the Chamber with people who are in power, who create laws, who make decisions and enjoy the perks – it’s a difficult station being in Opposition. And here was Enda being presented with a high profile ministerial resignation that could lead to the downfall of the government and which would probably have seen Enda taking the top job. So as distracted as the man was with fielding questions (at least as it seemed to me) on NAMA in the Q&A session, it was understandable and would probably be no different to the reaction of politicians from Washington to Brussels – politics can be a cynical game played for personal gain. And the same instincts apply on the Government seats to those for whom political self-preservation is paramount.
But sometimes politicians need put their differences aside in times of national emergency. Although they no doubt regret it today, Fine Gael sided with the Government in the debate and vote on the banking guarantee two years ago – they may well say today that they acted on the best advice available and could never have foreseen the losses ballooning to the extent they have, but the fact remains they joined with the Government to enact a piece of legislation in what they saw as the common good.
On Wednesday this week, the Government has decided to allow a 120-minute debate and vote on the IMF/EU bailout. And the IMF has postponed until Thursday this week its meeting to rubberstamp the agreement, “in deference to Ireland’s parliamentary democracy”. A 120-minute debate is very short and may only allow for positional statements from the five party leaders. And then there will be a vote and already the media is trying to ferret out the likely voting intentions of independents and is concluding the Government will just about scrape home. Given our whip system, it is unlikely that a single deputy will vote out of line with their party.
There seems to be two major camps in Irish politics and indeed economics at present, the “bailoutists” and the “defaultists” – the former want to accept the bailout deal and repay the bank debts, which is seen as politically and economically preferable to the position of the defaultists who want to see some measure of default on bank debt. Whether you are a defaultist or bailoutist isn’t a completely fixed allegiance however – it is mostly about your view on the ultimate cost of rescuing the banks. A defaultist might become a bailoutist if they felt the cost of the banks was manageable because they recognise default will be costly and is something to be avoided if our finances allow it. And the same with the bailoutists – if the costs of rescuing the banks balloon to a certain level then the bailoutists will become defaultists.
So what are the deputies voting for on Wednesday? The fiscal problem – that our day-to-day spending has gotten out of equilibrium with our tax revenues – is well defined and although challenging, I would say that most, if not all, of the deputies understand the scale of the challenge and agree in principle that the gap must be narrowed and eliminated. Although the collapse in revenues has been spectacular and the growth in social security payments (particularly unemployment) on the other side equally remarkable, getting your country’s income and expenditure to balance is understood and accepted by practically all. And the Four Year Plan and Memorandum of Understanding are pretty clear on the direction to be followed and indeed they both allow political and national discretion about the ways and means even if the final result is set in stone. If the Government has been truthful about NTMA funding (funded to middle of 2011) and the NPRF has €15bn unencumbered and Irish banks can swap foreign sovereign debt for domestic debt and we can sell off State companies and assets then I don’t see how we don’t get to 2013 or indeed 2014 by which time our deficit:GDP is down to 5%.
The problem is with the banks. And that is what this deal is principally about. And I cannot see how the parties can meaningfully debate this deal in 120 minutes or indeed 1200 minutes because the information needed to form a considered view is simply not available. In practical terms the default-vs-bailout debate is about the final cost of rescuing our banks. This final cost estimate is a moveable feast because if the economy improves then certain loans that are impaired today might become good again and also some loans that are good today won’t become impaired. So to an extent there must be some level of forecasting and prediction.
What seems inexcusable though at this advanced stage is that we do not know with any confidence the losses that remain to be uncovered with non-NAMA lending. For all of NAMA’s controversy, the agency has valued €27bn of land and development (and associated) lending to a standard which has received the EU’s seal of approval. And these valuations have uncovered atrocious lending practices : non-existent or poor loan documentation, imperfections in security and reckless Loan to Value ratio %s of close to 100%. Although the remaining €63bn-odd loans that are transferring to NAMA will only have estimated valuations pending final valuations in 2011, it must be said that NAMA is bringing certainty to the level of losses in that part of the banks’ loan books. But after NAMA has finished its work, there will still be €250bn+ of residual non-NAMA lending on the five PIs books (very roughly €100bn of mortgages, €70bn of commercial non-land and development property, €70bn of other commercial lending and €10bn of other personal lending).
Our Financial Regulator reminded us three weeks ago that there still hasn’t been a granular examination of non-NAMA loans and the assumptions as regards losses on mortgages (5-6.5%) look low compared with some commentators. On Friday last the Irish Examiner reported that Anglo’s CFO Maarten Van Eden had said “the banks operating in Ireland have a long-term capital need of €75 billion and require €70bn in the medium term to cover bad assets”. Now the context of his estimates was unclear – was he talking about all banks in Ireland or just the six State-guaranteed banks? Were these figures additional to the funding announced on 30th September 2010 plus the €35bn earmarked for the banks in the recently announced EU/IMF bailout? Would the capital have to come entirely from the State or would some be privately provided? But given that the Government had indicated on 30th September 2010 that the cost of rescuing the banking system would be €46-52bn and that up to another €35bn would be channelled to the banks from the IMF/EU, that is €81-87bn in total, this estimate was worrying because at the very least it would mean most of the banking contingency in the IMF/EU bailout would be needed. And yesterday the Chairman of Anglo, Alan Dukes claimed that the €35bn from the EU/IMF would not be enough to absorb losses in the banks. Both Anglo men may be wrong of course and as Alan Dukes says, Anglo didn’t really do mortgages so its expertise with forecasting losses there will be limited. So what is a reliable estimate of the final costs? Independent banking consultant Peter Mathews says €91bn, Professor Constantin Gurdgiev says c€70bn, Professor Morgan Kelly says €70bn for Anglo and INBS alone. And none of these independent professionals is including any allowance for derivative losses. The Financial Regulator and the Central Bank Governor seem to be saying that either the 30th September, 2010 estimates should be adequate (€46-52bn) or that only another €10bn will be needed. You would expect the official estimates to be more reliable but that has not been the experience to date (and Patrick Honohan is now in the job 15 months and has revised his estimates several times, Matthew Elderfield has been in post since 4th January but has revised his Prudential Capital Assessment Review at least once)
There will also be derivative assets and liabilities that have prompted concern and suspicion that there are vast hidden losses in this area still waiting to be uncovered.
So at what point would the bailoutists say the likely cost of rescuing the banks is such that they move into the defaultist camp? Although we may not be at that level yet, what questions can be asked to give the deputies voting on the bailout some reassurance that the costs will be manageable?
The reason all of this is relevant is that the political parties seem to be setting their positions in stone before ascertaining some relevant facts. The FG attitude of being against the deal because they weren’t involved in its negotiation, if correct, seems petty. On the other hand, the position of those in government voting for the deal because of the party whip, without understanding the terms or consequences of the deal, seems equally unattractive. We are back to personal party politics and let the facts go hang. I hoped the debate on Wednesday would have been informed by the following:
(1) At the very least there is still significant disagreement about the level of losses in our banks. Deputies have a right to know the present estimates for rescuing the banks, the margins of error and the underpinning research and intelligence.
(2) The secret side letter to the IMF/EU agreement which apparently deals with plans for the banks
(3) The identities and sums owing to owners of debt by the State-guaranteed banks. Senator David Norris began naming names in a Seanad Committee last week : he only got as far as Aberdeen Asset Management (London Ltd), AGICAM, Aktia Asset Management, Aletti Gestielle SGR and Alliance Bernstein (UK) Ltd before the chairman stopped his revelations. The great suspicion here is that the banks are being bailed out so that foreign financiers can be repaid loans they injudiciously provided during the boom years.
(4) The workings and research used to examine the effects of deleveraging Irish banks of perhaps €90bn of lending in the next three years, in particular the effects on the national economy. A separate issue is ensuring the banks have adequate controls in place to ensure deleveraging doesn’t take place in such a manner that seems to be attracting those to our shores today who expect to “make out like bandits”.
(5) The workings and research used to examine alternatives to the bailout and in particularly default options.
(6) The position of the ECB with respect to short term liquidity assistance.
(7) A business plan for the banks including estimates of losses from existing loans and future operating profits. The current plan might see Ireland having a viable banking sector but banks might need to lend at ECB base rate plus 7% to be profitable. What sort of economy will we have with banks operating thus?
(8) The Bank of Ireland restructuring plan which was approved by the EU on 15th July, 2010 – yes nearly five months ago – which has still not been published.
(9) Any agreement between the ECB and the Central Bank of Ireland with respect to emergency funding.
And without the above, those in favour of the bailout agreement will be voting for a pig in a poke (they will know it’s a pig though, in the same way they know that the State’s NTMA reserves will run out in the middle of next year and other funding will then be required for the day-to-day running of the State, though (a) the €15bn unencumbered in NPRF (b) getting Irish banks to exchange non-Irish sovereign bonds for Irish bonds and (c) the sale of State assets could defer the need for fiscal funding until 2013/4). In a proper democracy the deputies would know the detail of what they were debating and voting for with reliable research detailing the effect of the deal and the alternatives. Absent such basics, will the IMF be surprised if a new administration tears up the deal in 2011 claiming it was accepted under false pretences or at the very least without full disclosure. That won’t be good for the IMF who has potentially created a hostage to destiny by markedly recognising Ireland’s democratic processes. If the good people at the IMF watch the 120-minute debate on Wednesday knowing that significant facts are not available to the Opposition (and indeed many on the Government seats) will the IMF be surprised if the deal is messily unravelled in 2011 when it is likely there will be a new administration?
NAMA Wine Lake 