Business Irish

Saturday 24 June 2017

Emmet Oliver: Noonan right to reject simplistic kindergarten economic solutions

Last May the new Chief Secretary to the UK Treasury, David Laws, revealed that when he started his new job he discovered a handover note from his Labour predecessor Liam Byrne.

It simply read: 'Dear Chief Secretary, I'm afraid to tell you there is no money. Kind regards and good luck!'

We have no idea what handover notes Michael Noonan received on March 9 when he took over at Ireland's finance ministry. In fact his officials decided to heavily censor the ministerial brief he received before it was released to the rest of us.

However if he had received a note, it would have read eerily similar to the one left behind in the UK.

In fact, it could be argued that Noonan has inherited the worst set of cards passed on to an Irish Finance Minister since the State was set up.

When he took over in March, a massive recapitalisation of the banks was already in train, the policy of keeping Anglo Irish alive was already set in stone, and the budgetary parameters as set down with the IMF/EU had already been signed off in December.

Essentially, the big decisions facing Noonan had already been taken for him. It was very much a case of what colour would you like your straitjacket in minister?

But slowly and methodically Noonan is managing to loosen the straitjacket a little.

The EU has agreed to slash the interest on bailout loans, higher than expected losses have been imposed on subordinated debt holders, promissory notes for the banks are now being looked at afresh, EBS and Irish Nationwide are effectively no more, and despite much gnashing of teeth the leverage problem at Irish Life & Permanent is finally being tackled.

Meanwhile, according to the ESRI's John FitzGerald at least, the national debt is certainly odious, but still "manageable'' on present economic growth projections.

All of this adds up to a type of financial road map, but it is apparently not enough or fast enough for some people. Last week, the Minister, echoing a phrase first used here, said some people were still proposing kindergarten economic solutions.

One of those he accused was Dublin South TD Peter Mathews.

Mathews, who some television programmes modestly describe as Ireland's foremost banking expert, believes the current approach is not sufficient.

Instead the ECB should be forced to take a €50bn write-down on the liquidity the Frankfurt-based bank has provided to the Irish banking system.

This €50bn can then be used to recapitalise the system, Mathews suggests. In addition another €25bn could be generated by hitting senior bondholders, he suggests for good measure.

Noonan rightfully shrugged off these suggestions, making the not unreasonable point that just because you demand something from giant trans-national organisations, like the ECB, doesn't mean they accede to your demands.

Ireland's banks are in the process of being recapitalised domestically and via burden sharing with some classes of debt holders.

That decision was taken -- for good or ill -- in March. It will not be reversed and the ECB will not be signing up to taking equity stakes directly in banks (this is against its mandate) and certainly not at the behest of a country which represents less than 2pc of eurozone output.

While clearly Ireland has a crippling debt problem, reducing this burden will not come through child-like solutions where an Irish government stamps its feet and lectures a whole continent on its responsibilities.

It will come, like the July 21 deal, through careful alliance building and long negotiations as the eurozone gradually faces up to its own system wide debt problem.

Like his predecessors, Noonan is rapidly finding out that his success or failure in the Department of Finance may hinge on what ideas he rejects, rather than on what ideas he accepts.

Banks have other reasons for avoiding repossessions

As US banks reel from a battery of fresh law suits over sub-prime mortgages, lenders here will be nervous.

Court decisions on loan agreements often come down to the quality of the paperwork and security underlying the original advances and based on what the NAMA process threw up, Irish banks have plenty of reasons to stay out of the courts.

Transfers of commercial property loans to NAMA disclosed that Irish banks have a major problem with imperfect security, mainly because of the sheer scale of loan volumes they were dealing with at the height of the boom.

Does anyone believe similar problems are not present in at least a portion of Irish bank mortgage portfolios?

Clues that this is the case were buried in the mortgage stress test results carried out by US firm Blackrock in March, which remarked on some problems in this area.

Either way, one reason the Irish banks are not rushing to repossess residential properties in big numbers, is the resolution of such cases would in many cases turn on the quality of loan documentation and that may not be the safest ground to fight on for certain lenders.

ESB and Bord Gais are the big semi-state targets

The old political adage that you can't make an omelette without breaking a few eggs is a favourite of governments making unpopular decisions.

The phrase is used to sum up the idea that any brave political move will always be accompanied by some level of unpopularity from the parties impacted.

But when you are knee deep in debts of €173bn, it is probably best to make sure the omelette being made actually has some scale to it.

This is relevant in the context of selling off state assets, a process likely to prove unpopular with semi-state workers, the companies being sold, sections of the media and in time, the public.

A list of semi-states to be sold has been drawn up and is believed to include the National Lottery and a stake in Aer Lingus for starters (Leo Varadkar told 'NewsTalk' yesterday he was looking at selling the government stake).

All well and good, but these comparatively small assets are worth so little they barely register as a way of reducing the national debt -- the ostensible reason for selling them off.

Bigger game resides elsewhere. Taking just their net asset values, ESB and Bord Gais combined offer the government the chance to pull in proceeds of €5.4bn and this figure is likely to be a gross underestimate.

Clearly there remains great squeamishness about selling off the network parts of these businesses, but if the government wants to be taken seriously as an administration trying to reduce its debts, it is wasting valuable time and energy selling off small assets like the lottery and even Aer Lingus.

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