Friday 6 December 2019

Emmet Oliver: Let's be grateful that Ireland doesn't have US-style politicians

In a parliament populated by ex-arms smugglers, indebted builders and pot smokers, one could be forgiven for thinking that the colourful, but chaotic, Irish political system is among the reasons the country won't escape from its current crisis.

How does one build a political consensus to cut €18bn out of an economy on a political culture that thrives on parochialism, posturing and short-term hysteria?

As countries like Ireland, Greece, Portugal and Italy are forensically assessed by outside investors, an increasingly important factor is the political culture and political risks present in each of these debtor countries. And on this score, Ireland continues to do better, despite the rancour in the Dail every day, than all the other countries mentioned above.

Equally, an alarmingly dysfunctional political system is what is bringing the United States to the brink of default this week, with politicians like Michele Bachmann refusing to allow the US to do what every other OECD country is doing -- reducing its deficit by cutting spending and raising taxes.

Despite huge opposition, street marches, electoral drubbings and an international bail-out, Ireland made the following adjustments in the past two budgets: €6bn in Budget 2011 and €4bn in Budget 2010. This represented collective cuts and tax rises amounting to 6.5pc of GDP. When calculated on the more reliable benchmark of GNP, these adjustments represented 7.5pc of everything the country produces. When one factors in the two Budgets of 2009, the scale of the austerity grows even further.

The economy is facing another punch to the gut this December with the adjustment likely to top out at €4bn, depending on tax receipts.


Yet there is little prospect, though it cannot be dismissed entirely, of any political move to stop this package going through the Oireachtas. The Government can afford to have a handful of disaffected backbenchers and still get the measures through, with numbers to spare. For many this is, of course, regrettable. But what it does mean is that there is at least a political consensus here to make the changes and attempt to shift Ireland away from a damaging default event.

The roots of this week's US debt crisis reside in the actual political system set up by the founding fathers. With the house of representatives and the US senate both needed to pass a budget package, the result is gridlock and a growing fear of default. Essentially, the US needs to get a budget reform package over three hurdles; the house, the senate and of course the White House.

When you add in one final toxic element -- the Tea Party's ridiculous opposition to any tax-raising initiatives -- you get a system that is not nimble enough to cope with a make-or-break moment like the $14.3 trillion (€9.94trn) debt-ceiling issue.

Staring a default in the face from next week may yet change rigid positions and, thankfully, polling evidence is now firmly coming to the aid of US President Barack Obama. Even those who believe the US debt position is out of control do not favour the Tea Party's brinkmanship tactics.

Unfortunately, having a political system to get required work done is only worth so much. This week the bond market showed the US still able to borrow for 10 years at 3.1pc, while Ireland was looking at 12pc.

Shareholders at IL&P should lose their victim status

In this or any other financial crisis it is presumed that nobody has a monopoly on suffering. But some shareholders in Irish Life & Permanent (IL&P) appear to believe otherwise.

While many of them have no quibble with the mountains of capital being forced into AIB and Bank of Ireland (€18.5bn), they appear to believe their company should be treated differently, even though it underwent the same stress tests as those two larger lenders.

While senior bondholders are rightly excoriated for not supervising the balance sheets of heavily leveraged Irish banks, nobody appears to believe this was something shareholders should have done too, including at IL&P.

If they had done some basic monitoring and supervision coming into the financial crisis, they would have realised that IL&P in particular was likely to need a wheelbarrow of capital once its leveraged balance sheet was subjected to any kind of worst-case-scenario stress test.


For example, IL&P was lending almost three euros for every one on deposit as it sailed into the crisis. ECB funding had already begun and short-term funding sources were rising. In fact IL&P, even at that point, strongly hinted about what was lying ahead when it said it would not be renewing many loans -- that is, shrinking itself in size.

It had spent several years giving out tracker mortgages and 100pc mortgages with what now appears to be wild abandon. At some point a severe stress test was going to require the lender to put additional capital against these loans. Blackrock, the US number cruncher used by the Central Bank, believed almost 8pc of its residential mortgage book would be wiped out by losses in a worst-case scenario.

Yet shareholders in the company are feeling sorry for themselves. Smaller shareholders -- without the research resources of the big institutions -- probably have reason for feeling bruised. But shareholders, far more than bondholders, take all sorts of risks.

Unfortunately one of those risks is that the government of the day decides you don't have enough capital and, come what may, you're going to get some. Unfortunately IL&P shareholders prepared for all eventualities, except that one.

Dunne gets contrasting treatment from banks

If there is one man who wishes the banks never lost the right to manage their own loans, rather than NAMA, it must be Sean Dunne.

Dunne has already effectively lost control of his Ballsbridge hotel empire, but Ulster Bank and other lenders have allowed him rent and operate the property, with D4 Hotels doing a reasonable job, according to the last set of accounts.

Dunne's original Ballsbridge loan is reported to have gone into a charmingly titled 'quarantine' unit within Ulster Bank. From there it either gets restructured, sold off or most likely written off.

The end result for Dunne is hardly optimum, but bearable.

Now look at how NAMA will handle his other Irish loans.

With the banks taken out of the picture, Dunne is far less secure than otherwise might have been the case. Banks tend to like to keep customers long term, even those in trouble.

But NAMA receivership removes any Dunne role in the future of the assets, like Hume House. Even the plush Merrion Square offices of Dunne are taken out.

Personal guarantees, of €150m according to one estimate, can be enforced leaving Dunne facing a serious threat to his financial future, to put it at its mildest.

This may have a look of inevitability about it. But on the contrary, over three years ago many were calling for the Irish banks to retain all their property loans.

There was talk of non-core divisions to manage them, even so called quarantine units and local delinquent asset vehicles.

In a delicious irony, the man who wanted to set up this type of unit was one Dermot Desmond, Dunne's fiercest critic. The Kaiser was a ferocious opponent of NAMA, but now that the agency is moving against Mr Dunne, his fellow Ballsbridge resident, he may take a fresh look at the State agency.

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