WHEN the tide goes out, you find out who's been swimming naked, the legendary investor Warren Buffet remarked. Right now, much of the Irish financial scene resembles a nudist colony.

Last week's report on the state of the hotel sector can only be described as indecent exposure. It concluded that the hotel industry is essentially insolvent, as it has 15,000 more rooms (a quarter of the total) than there are guests to occupy them.

The reason there are so many surplus hotel rooms is that they were built, not to accommodate guests, but to avail of generous tax breaks for the provision of hotel rooms. They thus join the houses and flats which were not built to provide homes, and the office blocks which were not built to house businesses. All were built to give the investors, developers and builders smaller tax bills.

There appear to be at least eight books on the causes and consequences of the crash hitting the shelves for the Christmas season. Very good a lot of it is, too, but I am not sure that the various analyses of reckless lending and mad borrowing have given quite enough weight to the hallucinatory powers of tax breaks.

I recall a firm of accountants helpfully showing how, with a few targeted investments, the tax bill on a €500,000 income could be reduced to nothing. A big round zero. While only a saint or a fool would pay their entire theoretical tax bill on those kind of earnings, the saving is still over €200,000.

Criticism of bankers, developers and investors seems to be based on the premise that they should have been saints or fools -- either too good to take what looked like free money, or too silly to recognise it.

Most people are neither. Whatever our jobs, if we were offered free money, we would take it. It was the job of others to see that no such offers were made.

That was the job of politicians -- but then it was free money for them too, much of it used to pay for more tax relief.

It all goes to show how difficult it is to stop a runaway gravy train.

As the hotels report shows, it is just as difficult to know what to do once it has hit the buffers and been derailed. It says that the total owed to banks by hotels averages €118,000 per room. The current value of a hotel room is €101,000. Of course, the debt is concentrated in the new hotels, so the actual gap between borrowing and value for the borrowers is much higher than that average €17,000 per room.

What is happening, says the report, is that banks are declining to seize the properties, and close down the hotels in question, so as to avoid transferring those losses to their balance sheet. So hotels everywhere -- even those which did not join in the madness -- are losing money because of the surplus of rooms.

By a delicious irony, the consultant who produced the report is Dr Peter Bacon -- the man who (publicly at least) invented Nama. Without any trace of irony, Dr Bacon writes that "zombie banks" may be creating a zombie hotel sector, and could do the same to other sectors.

The infant Nama could be partly to blame. Banks may want to get rid of their development loans to Nama, and get taxpayer capital to cover their €23bn loss on the transfer, before they start dealing with bad loans on hotels, or indeed, houses and other businesses.

But even after Nama, they may be in no hurry. Writing off too much too soon could trigger another banking crisis. So bad money may drive out good -- the good in this case being the professional hoteliers, as distinct from property speculators.

Dr Bacon's solution will no doubt find support from the Hotels Federation, which commissioned the report. It proposes what is, in effect, another tax break. A condition of the original one was that any hotels which ceased to trade inside seven years would have the relief clawed back.

The unfortunate taxpayer is trapped again. The zombie hoteliers have an incentive to keep their unwanted premises operating for seven years after which they close them down and keep the tax relief. Letting them close down now while keeping the reliefs might assist the hotel industry, but it sticks in the craw to the point of choking.

It would help if the Government showed a real desire to end the addiction to tax reliefs of Irish politics and business with a real dose of cold turkey, combined with firm promise and good intent never to touch the things again. But they don't. Like the Bourbons of old, they seem to have learnt nothing and forgotten nothing.

- Brendan Keenan

Sunday Independent