Business Irish

Wednesday 17 January 2018

Emmet Oliver: Noonan is up to the task, but will take time to show results

With most of the key economic choices the preserve of others (step forward the IMF, EU, ECB and the bond market) does incoming finance minister Michael Noonan stand a chance of helping Ireland turn the corner?

On paper maybe not. Firstly Noonan has never done the job before.

Secondly, he is going to be missing half his ministry as Labour hives off the entire public expenditure and public sector area for itself.

Thirdly he doesn't have an identifiable economic ideology, which is often necessary to guide ministers through the key decisions that crop up during their period in office.

Fourthly Noonan will also have to work with a demotivated and exhausted department, led at the top by officials who implemented many of the policies Noonan himself described as being the product of "hubris''.

Real impact

But for all of these handicaps Noonan still stands a good chance of making a real impact at the Department. His political experience, which ranges from halting riots in prisons to revealing explosive revelations about phone tapping in the Department of Justice, is on a grander scale than even his predecessor Brian Lenihan.

Noonan also understood in his Budget speech in December the key point about his job at this point in time -- it is to save the State from total financial implosion. Already Noonan and his colleagues are using a phrase that never passed the lips of his predecessors, "debt sustainability''.

During the Lenihan era there was too much argument over whether the State should or should not rescue the banks and not enough conversation about whether it could afford to rescue all the banks or not.

Noonan in his speech in December seemed to understand that the latter is now what matters, particularly as the national debt could be soaking up almost 20pc of all tax revenues within a few years.

Opposition in Europe

Of course Noonan could find opposition in Europe blocks all attempts to reduce Ireland's debt burden, but Noonan appears to understand that the fight is worth having. Even after a long career the energy levels appear to be there for that kind of slog.

The other key benefit for Noonan is that he appears to be more open in terms of information than previous ministers and that is now vital if outside investors are ever to return to Ireland as participants in the economy. When you are funding yourself through an IMF/EU programme, obscuring financial information, particularly in the banking arena, serves little purpose.

For example Noonan is likely to preside over the publication of financial information -- via the Central Bank -- in March that will be more detailed than anything we have seen before about the banks. That is how it should be.

On the fiscal front the picture is grim, but Noonan is already an avowed disciple of front- loading and ultimately that is the only route out of this crisis. One hopes he will resist the urge, forced upon him by others, to try and tax the country out of this recession.

Five years is a long time to make a difference, but it will take at least that for Noonan to make any progress.

ECB could have stepped in earlier but what exactly would they have done?

IT says a lot about the currently acrimonious state of Irish-EU relations that a europhile like John Bruton finds it necessary to pin some of the blame for the financial crisis on the ECB.

Bruton -- now the IFSC czar -- claims that Europe's central bank failed to supervise and police all corners of the European banking system, allowing carefree bond investors to scatter their money around, knowing they would be protected if the investments failed to perform.

On that narrow definition the ECB is guilty. But joining them in the dock would be the Federal Reserve, the UK financial regulator and of course our own Central Bank.

But did Europe and the ECB heat up Ireland's property bubble more directly by setting interest rates too low with the advent of the euro? This has been the more persistent charge against Europe in relation to Ireland's banking crisis.Yes rates were too low and, yes, higher rates would have cooled off the market. But would anyone have thanked the ECB for being ultra hawkish and implementing the kind of increases necessary to burst a bubble as gargantuan as Ireland's housing market.

The ESRI estimated a few years ago that to fully choke off the bubble and kill off runaway inflation here would have required nosebleed rates of 9.2pc -- a level of interest rate no central banker, located in Germany or anywhere else, was going to countenance.

Equally, what was the ECB to do about bond investors who made genuine investments in what were then respectable banks producing conveyor-belt type earnings? Apart from demanding the odd dollop of extra capital from the banks, probably not a whole lot. Everyone is now agreed the ECB should have done something, but nobody really knows what.

FBD shows the way to determine where the bottom is

As bank results' season approaches, accountants are getting twitchy. Once again the question of writing down property-related assets will crop up and once again it's time for shareholders (and yes, bondholders) to take a deep breath.

After three years there is, at best, only patchy evidence that assets on bank balance sheets have hit the bottom. More impairments are on the way at AIB and Bank of Ireland and the financial pain has yet to run its full course.

But the lesson from non-banks on property assets is marginally more encouraging. FBD Insurance, led by Andrew Langford, this week clipped the value of its property assets once again, but it may not need to do any more pruning as a result.

There has been some pruning to reach this point. The value of its hotels has dropped by 45pc for instance (based on December 2007 values), with investment properties dropping by 48pc over the same period.

The FBD directors now believe the provisions put aside over three long years mean any further pain is likely to be "limited''. There is, after all, a bottom.

But bank directors looking to emulate FBD's blunt approach should exercise caution. FBD has been prepared to write down assets to levels most bank directors would baulk at. For example, FBD has accepted that some of its assets are worth no more than agricultural land.

While NAMA has subjected bank assets to that type of unforgiving write-down, banks are still unlikely to be quite as severe with their remaining non-NAMA assets.

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