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Archive for October 10th, 2011

Tomorrow sees the start of our now routine quarterly review “mission” by our Troika of creditors from the IMF, EU and ECB. We learned last week that we now have permanent representatives of the Troika on the ground in the Central Bank ofIreland and at the European Commission’s own offices in Dublin. And of course, we have had the voivod fromHungary, Istvan Szekely in situ at the Department of Finance since November 2010 – nothing xenophobic intended, and if the tables were turned and we were installed in government buildings inBudapest, you could be sure the notoriously sarcastic Hungarians would have some choice words about us. It’s been just under a year sinceIreland sought and received approval for the €68bn bailout from the Troika, but somehow it seems like forever since we were a producer country for missionaries.

The Troika review mission is scheduled to last until 21st October, 2011 and we look set to get another pat on the back, much as we did in May 2011 (publication of staff report on first and second reviews) and August 2011 (publication of staff report on third review). Not only are our national finances more or less on target but a briefing prepared by the Department of Finance last week portrays us as making good progress with rebuilding our banking system; it even claimed that in September 2011, retail deposits in the covered banks (AIB, Bank of Ireland and Permanent TSB, effectively) increased which, if confirmed later this month by the central bank, will be first increase since March/April 2011. But how well are we doing with the other tasks set for us by our benefactors? This was our list of chores as detailed in the third review staff report.

(Click to Enlarge)

Beyond the meeting of banking and budgetary targets, the review missionaries should start to expose the lethargy with implementing other aspects of the programme. If you cast your mind back to the last review, there was quite a flurry of activity at the last minute, in June and early July; the Fiscal Advisory Council, for example, seemed to mushroom up overnight on 7th July, 2011 and I’m willing to bet that three months on, the Council is still unsure about what it’s supposed to be doing – after all the Fiscal Responsibility Bill which puts the Council on a legal footing still hasn’t been published. There was a sense back in July that superficial action was being taken at the last minute, so as to approximate some degree of accomplishment of a bailout requirement.

What about progress in the last quarter beyond the banking sector?
Where is the Legal Services Bill which was apparently “pushed through Cabinet” just last week? The Bill will reportedly deal with some aspects of cost transparency in the legal profession, but is seems weak in the extreme as a means to drive down costs – the 260-page Bill may be published today but press reporting suggests its focus is on the creation of an independent costs adjudicator to deal with costs disputes and an independent complaints body to deal with all complaints; just imagine if the Government and state agencies which apparently account for 50% of all cases before the courts, were to signal a new benchmark in pricing and possibly engage solicitors and barristers from smaller, more cost effective practices, then that might tangibly reduce rates but the advertised reforms seem to be minimal. Despite that, we hear that not surprisingly, the legal profession is lobbying to water down whatever reforms are in fact proposed. So on the face of it, the Government has failed to introduce “legislative changes” by the end of September 2011, and we wait to see what reforms the Bill actually contains.

And where is the reform to the medical profession? Where is the abolition of restrictions on the number of GPs qualifying, and GP advertising? Shouldn’t health minister, James Reilly have spent his August overseeing the drafting of a new bill, rather than building sandcastles on the beach? Indeed, rather than distract the good minister from his holliers, he might have delegated the drafting of a bill; God knows his department pays enough for consultants.

And where are the reforms to strengthen labour market participation, particularly those aimed at weaning the long-term unemployed – latest figures released by the CSO last week showed that 42% of claimants on the Live Register, which includes part-time workers and others in receipt of benefits, were claiming for more than 12 months, up from 33% a year ago in September 2010 – off social welfare and helping them back to work?

Where are the recommendations from the Department of Finance which were due to be delivered by 30th September 2011 to the Minister for Finance, Michael Noonan on “the quality and availability of credit information available to credit providers”? Maybe something was delivered but it hasn’t made it into the public domain. This recommendation was aimed at improving the quality of credit scoring information so that our lending market could operate more efficiently, both for lenders to be able to assess credit risk and to prevent borrowers becoming over-extended.

The Comprehensive Spending Review was to have been completed in September 2011, yet Deputy Micheal Martin was told during Leader’s Questions last week that it wasn’t yet complete. Government was also supposed to have put in place effective measures “to cap the contribution of the local government sector to general government borrowing at an acceptable level”. Again, nothing.

So I’m expecting a little more criticism from the Troika when they hold their departing press conference, probably on 21st October, 2011. And although there will be some back-patting for the not insignificant feat of keeping the finances on track and delivering the required actions in the banking sector, there should also be more than a hint of criticism at the foot-dragging elsewhere.

This review mission would also seem to be the last opportunity to broach the burning of senior bondholders in Anglo and Irish Nationwide Building Society. There is a USD $1bn (€737m) senior unsecured unguaranteed bond payable by Anglo on 2nd November 2011. Anglo is no longer a bank, though it curiously retains a banking licence, it sold its deposits, it doesn’t engage in original lending, it has closed its branches, it is in run-off mode. The ECB has steadfastly held to its position that all senior bondholders be repaid lest there be contagion to other EuroZone banks which might lead to immediate losses in the EZ banking system as well as a general increase in interest rates demanded by senior bondholders to compensate them for perceived higher risks. The IMF on the other hand seems to have gone as far as it can in its diplomatic language to promote burden-sharing of senior bondholder debt. The EU has a schizophrenic position. The matter of “burning” bondholders was raised by Minister Noonan during the third review in July 2011 as a “discussion matter”. Tomorrow’s review gives Minister Noonan to raise it as a “negotiation matter”.

And finally in terms of the business of the review, Taoiseach Kenny has said that in order to meet his promise of no income tax or social welfare cuts in 2012, he will need get agreement from the Troika. Get ready for what’s likely to be one of the more memorable U-turns from this Governnment.

Beyond the bailout programme, it’s worth saying that former USpresident Bill Clinton told the diaspora gathering in DublinCastlelast week that the number one financial challenge facing Irelandwas its mortgage crisis. Taoiseach Enda Kenny who shared the platform with Bill seemed to elevate the mortgage expert group which was cobbled together in late August following a Professor Morgan Kelly broadside, to the status of “special commission”. Taoiseach Kenny promised changes in the “next two weeks” to address the mortgage crisis. Again, it had the feel of last minute scrambling, and I will be (pleasantly) shocked if changes are announced by 22nd October 2011 to help deal with the mortgage crisis. It is disappointing in the extreme that the legislative programme recently published for this current Dail session which ends at Christmas does not commit to new legislation for personal insolvency (bankruptcy) reform.

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Housing minister and Longford-Westmeath TD, Willie Penrose may be set to follow in the footsteps of Denis Naughten as he sets his face in stiff opposition to party plans to close Columb Barracks in Mullingar. The sole artillery training facility for the Irish army, the complex covers 26-acres and its buildings are listed. The barracks is presently home or workplace to 200 military and 20 civilian personnel. Over the weekend at a rally to protest against the barracks’ closure, Minister Penrose claimed that the annual cost of securing an empty barracks would be €150-200,000, that the 26 acres were designated for leisure or recreational use, the building is listed “so nothing can be done” and as for the disposal of an empty facility, you couldn’t sell “a bag of sticks today”.

However, according to defence minister, Alan Shatter speaking on RTE Radio’s This Week programme yesterday at lunchtime, there was a major “international education company” looking for a site in Ireland to deliver degree-level courses aimed at international students, and that this organisation had been speaking with NAMA. The suggestion was that the barracks might find a future use as a third level education establishment.

However it is the intervention by Minister Penrose reported in today’s Irish Times that is more worrying for NAMA. The minister has reportedly written to the Attorney General, Maire Whelan “seeking clarity on how NAMA’s terms of reference could be changed to give it a broader remit that goes beyond securing the best achievable financial return for the State”. Of course NAMA’s primary purpose is to maximize returns on the loans it has bought, and although there is a reference to a NAMA objective (the eighth of eight objectives listed in section 2 of the NAMA Act) “to contribute to the social and economic development of the State”, there is no detail in the Act as to how NAMA should deliver on this objective which seems to have been included in the legislation as an after-thought.

The compromising of NAMA’s operations by narrow political interests has been dealt with before on here. It has also been dealt with in a paper by NAMA board member and former IMFer Steven Seelig in a paper on asset management companies. In short, it is a bad idea to give a state-run asset management company two conflicting objectives, because you might end up with a mess where neither is met and NAMA excuses its performance by saying it was being torn ‘twixt pillar and post.

On the other hand there is a dire shortage of social housing in this country as reported on here recently, and NAMA has reportedly 10,000 homes under its control inIreland. But allowing individual ministers and ministries to pick off NAMA will be counter-productive. If the Government decides that NAMA is to use property under its control for social purposes, there is nothing to stop NAMA selling the property at market prices to the relevant department (Education, Health, Housing etc) and then making a dividend payment from its profits to central Government which can then prioritise a use for the dividend. This would preserve NAMA’s objective of maximizing profit whilst also delivering a social benefit in a controlled manner, not to any one ministry’s advantage.

Last Thursday, Minister Noonan who is the senior minister as regards the operation of NAMA said that he didn’t see a need to change the NAMA legislation, at least not yet.

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