Wednesday 29 March 2017

Ireland must not welch on its debts but can bear the heavy cost

Bank and budget plans are foundations for growth

Brendan Keenan

Brendan Keenan

'I promised we would have lunch not long after I was appointed Finance Minister," says Brian Lenihan. "And I still haven't found the time!"

As excuses go, it is one of the best. For more than 18 months, it has been wall-to-wall crises for the minister and his officials.

So much so, that he has to stop and think what it was like, two years ago next month, when Brian Cowen appointed him.

"I felt a very lonely man," he recalls. "I could see the stresses building in the banking sector. I felt I had information that the general public did not know.

"Then we were hit by the dramatic declines in tax revenue that summer. I thought the most important thing was to bring the budgetary situation to the attention of the public. That's why I recommended an early Budget (in October).

"I took the view that, to establish credibility, you had to keep coming back and taking the necessary decision until you got some stability. It seems to me that very few other countries with similar problems have managed to do that yet."

Approach

This step-by-step approach can be seen in Mr Lenihan's handling of the banking crisis, which erupted alongside the fiscal crisis within four months of his taking office. It has taken nearly two years for the public to get any clear idea of the true depth of that crisis, with Tuesday's revelations that the banks will need €32bn in fresh capital.

Well, one bank in particular. Over half the losses are in Anglo-Irish. It is clear this has spooked the Government as much as anyone. Perhaps it justifies that strategy of taking action only as the facts become known.

The finance minister seems as astounded as everyone. "Those who brought us to this position have a lot to answer for," Mr Lenihan says. "I see the 'Star' newspaper wants some of the bankers responsible shot. I can understand that kind of anger."

But didn't the previous government also bring us to this position? "Bank regulation is a matter for the regulator. Matthew Elderfield has shown that he can do the job and is not afraid to do it," Mr Lenihan observes.

"But people have to take responsibility for issues of corporate morality. We seem sometimes to admire those who play fast and loose with the rules. That's not acceptable.

"The fact that someone creates jobs doesn't absolve them from running their business in a responsible way," Mr Lenihan says. He has no one particular in mind, he says.

Denial

Did the bankers lead him up the garden path, then, on that long night in September 2008?

"They led everyone up the garden path. I think it's fair to say there was an element of denial on their part. It did require the State to establish NAMA to get to the bottom of it. The banks were playing for time because of their huge problems.

"With the banks playing for time, and the regulatory system discredited, we needed to establish an asset-relief programme like NAMA. That takes time to put into practice. It can't be done overnight."

He makes a point that tends to be overlooked in discussions of whether more should have been done sooner. It could not have been done 12 months ago, with the financial markets fretting over the scale of the budget deficit.

The country came close to not being able to borrow the money to keep it running. Attempting to cover the bank losses as well might have made that danger a reality. For Mr Lenihan, the priority over all else is that Ireland will not default.

Economists may ask why not, but governments think differently. "I am firmly of the view that Ireland cannot contemplate a default. The priority in all of this is to protect the 'sovereign' (market jargon for government debt).

"I say that because half the funding for Irish business comes from foreign loans, and 80pc of government debt. I don't believe you can default on bank debt and not affect the sovereign."

He sees this as the difference with Iceland, where nearly all the debt was owed to foreigners. "If we defaulted, half of the default would be on ourselves, with incalculable effects on jobs and credit."

Besides, if Anglo were to default, the €24bn it has borrowed from the European Central Bank would be at risk. Embarrassing, to say the least.

"We have to give Mr Trichet his money back," Mr Lenihan grins.

But closing Anglo without defaulting would cost €70bn, he says -- that figure being the difference between the cost of paying back Mr Trichet, other depositors and secured creditors, and the pitiful amounts the bank could raise by selling its loans and assets.

People may argue about the figures, but even the concept is difficult to explain. As a result, Anglo will hang around the Government's political neck like the dead albatross on the Ancient Mariner.

It is a sobering thought that, without the nightmare on St Stephen's Green, the bank rescue could have been announced without any significant additional call on the taxpayer. The Pension Reserve Fund could cover AIB's capital requirements, Bank of Ireland may be able to raise the extra capital itself and EBS is small.

The €2.6bn for Irish Nationwide will have to be spent to cover its savers' deposits, before that sorry mess disappears from the high streets. But, hey, aren't we borrowing €19bn a year anyway?

The scale of the Anglo losses makes it necessary to devise ways to keep costs off the Exchequer while Mr Lenihan wrestles with the budget deficit itself.

The "promissory notes" mean the bank may call on the taxpayer for its losses over 10-15 years. In that period, the loans may recover some value and be sold. More to the point, economic growth may reduce the burden.

"We've looked at every option since 2008," Mr Lenihan says. "Even the EU Commission's first reaction was: 'Can't we just close it down?' But they saw that the costs could be reduced by not closing it.

"There is the option of splitting off a 'good' bank and leaving the rest to be worked out over time. Although the search for a 'good' Anglo will not be easy."

He does not accept the charge that all of this will be a crippling burden for a generation to come. "It is not as bad as some people have made out. The interest rates on government bonds did not move after the announcement, and I don't think they will.

"Nearly every government in Europe, as well as the USA, is burdening the next generation with their borrowings. It is not true that we have just socialised the losses; we have socialised future gains as well."

The harsh view of loans taken by NAMA boss Brendan McDonagh, and the EU commission, mean there will be lower losses, and perhaps eventual gains, there. But the final verdict on all of this, some day in the future, will depend more on economic growth than valuations and recapitalisations.

"We have laid the foundations -- and more than that -- which will allow the economy return to sustainable growth," he says.

"We have the new agreement with the unions and made gains in competitiveness. Exports have been remarkably resilient. That's a viable economic base on which to build."

Irish Independent

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