Morgan's native genius spoke truth to power
Published 16/03/2014 | 02:30
ENDA Kenny is basking in an economic lap of honour. Ten days ago Angela Merkel travelled to Dublin to give the Taoiseach Germany's blessing for the Irish recovery.
She was lavish in her praise, pronouncing the bailout a "tremendous success story". Last Tuesday Enda entered Downing Street to receive similar plaudits from David Cameron, when the British Prime Minister prematurely declared that both their economies were now "returning to growth". On Friday, US President Barack Obama heaped cliches on Enda's miraculous powers.
Not a bad catch for Enda: Angela, David and Barak. All three in the bag in a week. The creator of the Irish economy's second coming will soon believe he can walk on water.
Back home the Taoiseach totally neutered the Dail, organising two weeks of dull statements on the Government's economic achievements.
His backbenchers enjoyed a field day, reading endless scripts in praise of Enda. The debates were anaesthetic for the natives. But they were designed to vacate enough media space to allow journalists to highlight Enda being love-bombed by overseas leaders, the demand for Irish bonds in global markets and the growth figures.
Enda and Finance Minister Michael Noonan were soaking up the applause. Until last Sunday.
Suddenly a ghost of hubris past surfaced. Morgan Kelly , the economics guru from University College Dublin, rose from the ashes. A nemesis returned.
Official Ireland had hoped it had heard the last of Morgan. He had haunted the last government. He had made a monkey of nearly all of Ireland's "well-respected" economists when he foresaw the last property crash. He had caused panic in the Department of Finance. Official Ireland had rubbished Morgan back in 2006 when he predicted a housing crisis and a banking collapse. He was deeply unpopular at the time – but he emerged a hero. Morgan got it right.
Happily for the haunted, Morgan had been quiet for a couple of years. No one in the Department of Finance, the Central Bank or the Government wanted to disturb the prophet of doom.
Happily for the rest of us, Morgan has stirred in his slumbers. A single lecture that he gave at UCD has caused consternation.
Morgan Kelly opened a second front. The loner who previously identified property, mortgage arrears and consequent banking bankruptcies was now fingering another potential disaster. A shiver crept up the spine of the establishment.
This time Morgan was warning of property lending to small businesses. The backbone of the Irish economy, our biggest employers were in horrible hock to the banks. Some of the debt would never be repaid. Once again, the banks were not properly recognising the loans in their balance sheets. Another field day for the ostriches.
Worse still, according to the UCD professor, we are about to be rumbled. The European Central Bank will soon make an example of Ireland with its stress tests. While we believed that mortgage arrears were our only "extend and pretend" fudge on the balance sheets of the banks, loans to the small business sector are equally threatening to both the banks and the economy.
Bank forbearance is the order of the day in a second sector. If the ECB imposes serious stress tests this year, small businesses will go under; unemployment will spike – or in Morgan's colourful language "a big chunk of the Irish economy will be wiped out".
Michael Noonan reacted calmly, but carefully. Although Kelly had dismissed his policies as having "raised purposelessness to a high art", the Minister for Finance did not respond in kind.
Knowing that Morgan had been on the button before the last crash, he suggested that the seer's words should be taken seriously. He rather condescendingly proposed that Morgan should open a "conversation" with the Central Bank. Morgan will be waiting by the telephone for a long time before he receives a call from the Dame Street fortress. Nor will the Merrion Street mandarins invite the maverick in for muffins.
If Michael takes Morgan's views on bank lending as seriously as he pretends, there is an immediate solution: he should appoint him a director of the biggest lender in the SME sector – AIB. Morgan would make a magnificent "public interest" director of AIB. His track record is slightly better than incumbent Dick Spring's. He will be waiting even longer for this call. Independent bank directors are fine, in theory, but...
Apart from a sharp response from Alan Ahearne of the Central Bank, there was a deafening silence from economists after Morgan's bombshell. Many are lying low, still blushing after their bizarre predictions of a soft landing in 2008. A public spat with Morgan now would remind their employers of past embarrassments.
Patricia Callan, director of the Small Firms Association, came out to bat on RTE's Morning Ireland, claiming unconvincingly that she was "delighted that he's raised the issue". She suggested that the banks were further ahead on restructuring their debts than Morgan seemed to believe and put forward the ghastly sounding "SME Credit Consultation Group" as a path to salvation. She admitted that some of her members badly needed new investors "depending on the sector".
Mark Fielding of the dynamic small business group, ISME, is more realistic. He acknowledged that there were a fair number of no-hopers in the sector. He boldly suggested that "debt forgiveness" cannot be restricted to mortgage arrears settlements. Write-offs of the property debts of some small businesses are now essential to prevent basically sound companies from closing. Another indicator that recapitalisation will be needed.
Patrick Honohan, Governor of the Central Bank – the man whom Noonan would like to open a "conversation" with Morgan – was in no mood for small talk following the UCD academic's outburst. He dismissed his fellow professor's views out-of-hand.
"I don't see this as a threat at all," he said, insisting that for the last three to four years the banks had been "working through SME loans on their books in a systematic way".
Presumably Patrick receives such reassuring data from the bankers themselves. Hopefully he will remember that truth was never their strongest suit.
Of course, nobody is certain of the truth, because no one knows whether the stress tests on the banks will be serious or "soft" – as Morgan rightly described the last versions. Kelly says the ECB has an option "to chicken out" and set a low bar – as they have done in the past – or to tackle the SMEs loans head-on. Neither option will be pleasant.
If the ECB tackles the loans to SMEs head-on, small businesses in Ireland could go to the wall in their thousands. If it allows them further leeway, the loans will be even more lethal when interest rates inevitably rise.
Kelly rightly points out that evidence from throughout the world shows that the only permanent solution is capital reduction. The Irish banks are baulking at this.
Experienced observers are betting that we are heading for one final fudge; that the stress tests will be tailored to give a clean bill of health to the vast majority of European banks. A few of the unhealthy will be weeded out, sacrificed to the merciless markets as evidence that the newly resolute ECB will not allow any more weak passengers. AIB and Bank of Ireland could be among them. It must be tempting for the ECB to make an example of the Irish banks to show the others that, this time, they mean business. The fallout elsewhere would be minimal.
Morgan Kelly remains a hero. He torpedoed the myth about the last boom. Today, once again alone, he is exposing the dangers threatening our fragile recovery. Enda and Michael would do well to listen to a native genius and ignore their fair-weather friends from overseas.
Sunday Indo Business