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Archive for December 19th, 2010

During the week I revisited the Anglo-Irish Treaty debate in the Dail in 1921/2. The Treaty set out the choreography and conditions with which Ireland would secure freedom from Britain, having endured occupation since the 12th century. The Treaty document was divisive with the most contentious component dealing with the six counties that comprise modern day Northern Ireland (part of the UK), the people of which, the Treaty said, would have the right to vote to remain  part of the UK (which they overwhelmingly did eventually). The Treaty was negotiated in London and brought back to Ireland for ratification. The newly functional Dail held a debate over 19 days between 14th December 1921 and 7th January 1922 – a tumultuous debate that at times saw deputies walking out en masse. In the end, of the 125 deputies in the Dail (remember that was at a time when the State had a population of around 2,972,000) 64 voted for, 57 against and three abstained (the Ceann Comhairle didn’t participate in the vote). The Treaty led to the split of the main party Sinn Fein into Fianna Fail and Fine Gael and a bloody, though thankfully short-lived with relatively few casualties, civil war.

Having partially unburdened ourselves from the yoke of Britain, we then had a shaky couple of decades as we developed from dominion status to full republic. Post World War II as the world strove for more co-operation we did join most of the world’s great co-operative organizations including the UN and IMF. And later we joined the EU and EMU. We pointedly didn’t join NATO. By being bound by the rules of these great organizations, like other members we ceded a piece of national sovereignty. But last Wednesday in the Dail we ceded a very big chunk of sovereignty as we accepted the IMF/EU bailout by 81 votes to 75 (of the 166 constituency seats, 3 are vacant and seven deputies did not take part in the vote – the Ceann Comhairle Seamus Kirk (FF), Olwyn Enright (FG), Noel Grealish (PD), Dinny McGinley (FG), Liz McManus (Labour), Willie O’Dea (FF), Alan Shatter (FG)). The previous week there had been a two-day debate of the bailout deal though it was not until the debate had been more or less concluded when the Memorandum of Understanding and NTMA note on the interest rates were published. This week there was a 70-minute debate – as SF pointed out, with 158 deputies that left a theoretical 35 seconds each for each deputy to contribute (not sure about the arithmetic but the principle was sound). It was of course a rubber-stamping exercise and the greatest surprise for me was that deputies did not walk out en masse – it wouldn’t have changed the immediate result but it would have placed others on notice that the agreement was likely to be set aside or at least revisited in a few short weeks.

The problem with the IMF/EU bailout is that it is a package that has been put to the nation without full disclosure of plans for the banking sector and without accepted estimates of losses in the banks. Yes parts of the deal could be theoretically re-examined : the EU interest rate, the scheduling of the spending of the national reserve could be re-arranged so that we didn’t spend our strategic reserves first, we might have been able to bargain something further from the EU in the shape of a stimulus package plus we might have sought funds from the IMF over a shorter period which would have had a lower interest rate. But perhaps the negotiators got the best deal – who knows, we weren’t there but personally I think they could have done better. That’s not the issue though. Nor is it in question that Ireland might have needed funds from the middle of next year – though I would still maintain that after the NTMA money ran out, we would have had €15bn unencumbered in the NPRF and we still have a large number of state companies to privatize which might have gotten us to 2013 by which time you might have expected lenders to have a more favourable stance towards our prospects (indeed if we had a cleverer administration that would have taken a more proactive part in rebasing costs like food, energy etc we might have been able to balance our books by 2013).  No, what remains at issue is the cost of rescuing the banks (and you can probably now start to add credit unions to that problem). The government is claiming the bailout deal is about paying the wages of nurses and Gardai. It’s not – the bailout is first and last about the banks.

The IMF Staff Report reminds us that we have not had a bottom-up review of non-NAMA loans and “off-balance” sheet exposures (eg derivatives) at the State-guaranteed banks by an independent third party. NAMA is doing a decent job of valuing about one quarter of the domestic banks’ loan books. But that will still leave commercial property (that is, not land and development which is what NAMA is for), commercial lending, mortgage lending and personal lending. There’s about €250bn of that overall. And in addition, the banks have substantial derivative positions (simplistically insurance policies where they are the insurer and many people believe there is the equivalent of an avalanche of claims waiting to be uncovered). Some people like Anglo’s chairman Alan Dukes and its CFO Maarten Van Eden believe that the cost of bailing out the banks will be €70-90bn and that the €35bn component of the bailout earmarked for the banks will be needed in its entirety. Others like Minister for Finance Brian Lenihan and Central Bank Governor, Patrick Honohan believe that most of the €35bn will not be needed. Absent a bottom-up review by an independent third party and against the background of the past two years where the costs have grown at each turn (and that includes Patrick Honohan’s own estimates – remember he was at €2.5bn in May 2010, €3.2bn in August 2010 and €5.4bn in September 2010 as the bailout cost for INBS), people are right to be at least skeptical about the final costs of bailing out the banks. Statements by two non-State-guaranteed banks at the end of last week, National Irish Bank (Danske) and Bank of Scotland Ireland (Lloyds), suggest that the Irish banking sector has not seen the worst of the property downturn.

And these figures above assume NAMA is going to break even (and as an aside just where NAMA is going to get the €5bn of development funding anticipated in the NAMA Act is unclear). With two thirds of NAMA’s assets located in Ireland where the short-term outlook is challenging to say the least, where developers are finding it nigh impossible to obtain finance on Irish property (and indeed there are credible rumours that Irish developers with overseas assets are being affected by association) and where NAMA’s hard-line strategy towards developers is having a mutinous effect in some instances, it remains far from certain that NAMA will turn a profit. In their downgrade of Ireland’s credit rating on Friday, Moody’s predicted debt:GDP to rise to 140% including the State’s exposure through guaranteeing NAMA’s bonds. So whether Alan Dukes or Patrick Honohan is right about the non-NAMA loan losses, there separately remains the potential for losses in NAMA’s operation.

The IMF postponed their final agreement to the bailout with Ireland to last Thursday, one day after the “debate” and vote in the national parliament, saying their decision was “in deference to Ireland’s parliamentary process”. As the hitherto unpublished plan for the banks is enacted in coming months and as the review of non-NAMA loans and off-balance sheet exposures in the banks takes place in Q1, 2011, this nation will not thank the IMF for the suppression of information or plans which would have led to a more informed debate in the national parliament.

And separately, for those of you that were waiting for a national House Price Register which has been called for since at least the Kenny Report in 1973, and for which legislation was promised by Minister for Justice, Dermot Ahern in August 2010 (by which he meant an amendment was to be put before the Oireachtas before Christmas to give effect to the Register in the Property Services (Regulation) Bill. That still hasn’t happened though theoretically the Minister has another five days) it may have raised eyebrows to see what is one of the most draconian pieces of legislation since the Emergency Powers Act in 1939 debated and sent to the President for signature in a matter of hours.

And for only the eighth time since the start of the new century, our €300k-a-year mostly-ceremonial President has decided to refer the Credit Institutions (Stabilisation) Bill to the nation’s brain trust, the 22-person Council of State (22 is the theoretical maximum, in practice I would be surprised if former Taoiseach, the 90-year old Liam Cosgrave turned up). The Council’s mandate is to examine the compatibility of the bill with the Constitution and if it decides it is questionable then it refers the bill to the Supreme Court to determine the matter. In the past decade, seven bills have been examined by the Council with four being accepted (without referral to the Supreme Court) and three others were referred to the Supreme Court and of those three, only one, the Health (Amendment) (No 2) Bill 2004, was struck down by the Supreme Court – that was the amendment that sought to retrospectively take charges from those in long-term care. So based on past form you would have to say the chances are that the Bill will either be approved by the Council or accepted by the Supreme Court – however the process could defer the signing into law of the new act until well into the New Year (and remember the Opposition disapproves of many parts of the Bill and a general election is expected early in the New Year).

The Credit Institutions (Stabilisation) Bill is needed so that the State can effect rapid changes to the banking sector as envisaged in the IMF/EU bailout plan. It is draconian in the extreme and could theoretically apply to all financial institutions including those in the sheltered Irish Financial Services Centre – just think what a Sinn Fein/Labour coalition government could do with those powers in a couple of months (that’s not a dig at either of these parties, it’s just that the Bill gives such widespread powers that it may have unintended consequences in a politically unstable environment).

So the IMF may indeed have been impressed at the government’s resolve during the past week to put in place the mechanics for delivering Ireland’s side of the bargain in the bailout agreement but the organization can hardly feel confident that the bargain will hold or that the Bill needed to effect the critical changes to the banking sector will be enacted in the short term. And the IMF may be uneasy at the absence of detail on the banking sector which might see an unforgiving nation examining the bailout agreement and the IMF’s bona fides in the months to come.

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