Monday 24 October 2016

Richard Curran: FF's mortgage cap is smart politics but bad economics

Published 22/05/2016 | 02:30

Sean Quinn may in the future bid to buy back his former business from its new owners. Photo: Gerry Mooney
Sean Quinn may in the future bid to buy back his former business from its new owners. Photo: Gerry Mooney

The only way Fianna Fail's new Bill on capping mortgage rates will lower rates is as a deterrent, and will probably never actually be used by the Central Bank. But it isn't even clear at all if it will serve as a deterrent.

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The Central Bank doesn't want new powers to cap standard variable mortgage rates.

Under the legislation, the Central Bank would have to conduct an assessment of variable rate pricing over a certain period of time and then conclude there had been a "market failure".

Rates look excessive and undoubtedly banks have been using standard variable customers as whipping boys and girls to re-build their balance sheets.

But would the Central Bank conclude there has been market failure? AIB, under state control, has now cut its rates four times. PTSB, also under state control, will come under renewed pressure to cut its rates again.

Bank of Ireland is highly unlikely to cut its rates. But the spread of variable rates above the ECB base rate charged by AIB right now is no greater than banks are charging in Australia, according to banking consultant Peter Oakes.

An Australian himself, and a former senior executive at the Central Bank, he said during the week that the rate charged by Australian banks, in excess of the central bank rate down there, is similar to AIB here.

Michael Noonan is dead set against the Bill because he believes it is not the best way to encourage competition into the Irish market. He is right about that, but the problem is the current status quo isn't working either.

The theory is to let the banks carry on with excessive rates and it will become more attractive to new entrants. This in turn should see them trying to undercut each other. Unfortunately, that just hasn't happened.

Fianna Fail has latched on to a popular issue aimed at putting manners on the banks, while winning the hearts (and votes) of 300,000 standard variable mortgage customers. But this is not the solution either.

The Central Bank will work the legislation but could find it difficult to conclude there has been market failure, even it if wanted to. The consequences of the new legislation will mean two things. The Central Bank governor will be kicked around the place at Oireachtas committee hearings by publicity-seeking backbenchers, if he doesn't use the new powers.

Suddenly, politicians will have somebody new to blame for expensive interest rates and the chance to do it on national television.

If the Central Bank does actually introduce a cap and forces rates down, banks will simply recoup the money elsewhere - from other kinds of customers.

One easy target is SMEs. A National Competitiveness Council report found that in November 2015, the interest rate charged by banks in Ireland on loans of up to €250,000 was more than 80pc above the euro area average rate for new business. The rate on loans of up to €1m was more than 60pc more expensive in Ireland.

The situation had actually got worse. Back in 2013, the report found that new business interest rates for non-financial corporations were 31pc higher here than in the euro area for loans up to €1m and 27pc higher for loans above €1m.

The squeeze would be applied elsewhere in the banking system. Excessive rates on SMEs would further stifle corporate borrowing, which in turn would undermine job creation and the economy's performance.

Fianna Fail is set to discover that what sometimes looks like an easy, popular solution, isn't in fact one at all.

Public sector pay debate still lacks any realism

Realism is not something you could associate with some of the comments made by senior trade unionists last week. Jerry King, president of Impact, the public sector trade union, said talks on restoration of public sector pay needed to begin within a year. He called for accelerated pay restoration for all public servants.

The Impact trade union also wants to pursue a 30-hour week for those working in the public service as a "medium-term aspiration". More holidays would also be nice.

When the trade union talks about pay restoration, they mean unpicking all of the cuts that were introduced in 2009 to bring pay levels back to where they were.

The country could not afford those pay levels then and it certainly can't afford them now. Take a simple figure like our national debt.

In 2008, the last year in which benchmarking payments to public servants were awarded, our national debt was a meagre €50bn. Today it is four times that level at €200bn.

Put another way, every working person is carrying a share of the national debt of €100,000. Back in 2008 it was just €23,800, as we have fewer people working now but shouldering four times the debt.

Last year, we spent around €8bn just servicing that debt. The servicing cost is set to drop, but it will still be greater than the entire Corporation Tax paid by every single company in the country.

Central to public sector union grievances is a fast-track of the repeal of the special emergency or Fempi legislation under which pay cuts were introduced.

Our public service employee numbers are not that far off the EU average, but our public sector pay bill is a different story.

Jerry King also said the public sector needs "repopulating and needs it now". He may well have a solid case to argue there following the hiring freeze and population growth of recent years.

The problem with the old public sector benchmarking process was that it treated public sector pay as a category. The public sector covers a huge range of employees, from those on €22,000 per year to senior civil servants on more than €120,000 a year. Lumping them all together is as meaningless as treating a company receptionist in the same pay discussion as a chief executive.

Impact general secretary Shay Cody even alluded to this disparity/reality when he warned that an immediate removal of the Fempi legislation could lead to "skewed and unfair" results with higher earners benefiting most.

"The immediate repeal of Fempi would give nothing to those on €22,000 because they are already ahead of where they were when Fempi came in.

"Someone on €30,000 would see a total gain of less than €450 per year while someone earning €125,000 - rare as they are in the public service - would stand to gain almost €20,000," he said.

There are many specific cases of low public sector pay where people deserve to be better paid. But discussions about across the board public sector pay are meaningless and even reckless.

The public sector pay commission, included in the Programme for Government, shows we have learned nothing - not because it wants to examine public sector pay, but because it is dealing with everybody's public sector pay.

Sean Quinn is not going to quietly go away

Sean Quinn Snr parting company with the new owners of his former businesses is not the end of the Quinn saga by a long shot.

Quinn made a triumphant return in 2014 as an advisor to his former business, but tensions over his role - and any future ownership prospects - emerged from early on.

US hedge funds control that business. Its profits are growing and Quinn will have to make a full bid to buy them out at some point: the longer he leaves it, the more expensive that will be.

Whether he makes a bid to buy out the funds in the future depends on the outcome of his family's multibillion euro litigation against the State and the State's legal actions against them. Quinn has no money but the extent of his children's assets is unknown. Their assets are frozen until the outcome of litigation. If the State settles, will the terms of the settlement leave enough for the family to bid for the businesses? If the cases go ahead and they lose, they will be broke. If they win, they will be billionaires again.

It seems highly unlikely the Quinns will just quietly fade into the background.

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