Friday 19 January 2018

Politicians treat us like idiots when it comes to bank crisis

Brendan Keenan

Brendan Keenan

THE fifth anniversary of the infamous bank guarantee looms, yet it remains at the political vortex of the economic crisis.

This is not just because new bits keep emerging; most notably the Anglo tapes. Were the guarantee history, even these would have limited political impact. But it is not history. The Coalition wrestles with exactly the same dilemma as the two Brians and their advisors did on that fateful weekend.

The dilemma is simply put: how to balance saving the banks against the wider interests of the economy and the citizens. Then, as now, there are no good outcomes which unambiguously suit both.

The present process is much more drawn out than five years ago – interminably drawn out, some would say. The banks will not close their doors next week, as they would have done in 2008. But neither would they survive, without the implicit support of the Government and the explicit support of the ECB.

That, at any rate, is the view of the ratings agencies. In non-technical language, their assessment of the Irish banks has improved from "appalling" to "pretty grim," but without the belief in ultimate support, they would be written off altogether.

The immense difficulties in keeping the banking system alive while trying to improve the supply of credit and disposable household income can be seen in the wrestling over the pilot programme to deal with personal debt and divide up losses on secured debt – where the lender has a claim on assets if payments are not made – and unsecured debt.

The purpose of a pilot programme is to see if something works. If the pilot programme itself fails to work, clearly there's a big problem. This one (the details are obscure), has certainly run into trouble.

Many, if not most, heavily indebted households have both secured and unsecured debt. Mortgages are the main kind of secured loan, as well as by far the biggest kind of debt. Much of the unsecured debt is loans from credit unions.

The complications are political as well as technical. Credit unions are enmeshed in local society and, therefore, in local politics.

With credit unions, as with so much of the debt problem, the Government is playing both ends against the middle. Credit unions have been both a threat to financial stability and an invaluable source of credit to individuals. Reducing the threat, while preserving the benefits, is the same Hobson's choice as September 2008 (or perhaps Hobbesian choice, for the philosophers among us).

It does not help that the long drawn-out process is surrounded by the same secrecy and obscurantism as the short one of five years ago. The latest revelations about a meeting between Enda Kenny and Anglo executives do not show wrongdoing. Quite the opposite: they show a leader of the opposition behaving responsibly.

In private. That is not how he, or his colleagues and partners, behaved in public.

The revelations do show the unshakeable belief of Irish politicians that the best way to deal with one of the most sophisticated electorates in the world is to treat them like idiots.

In opposition, such attitudes are driven by irresponsible vote-seeking. It has to be said that, despite the sophistication of Irish voters, such tactics seem to work. I fear this is not because they know no better, but because they do not believe there can be anything better.

That pessimism is reinforced by the deviousness and secrecy of Irish governments. Whether in government or opposition, politicians succumb readily to the argument that public knowledge is dangerous.

The attitude seems to be, not so much irresponsibility, as a belief in the line from the film, 'A Few Good Men'; "You can't handle the truth."

This is especially true of banking, where the "say nothing" argument does at least have a bit more force than in many other areas of concealment. Yet the disasters which have befallen this country from poor governance over the past 40 years are surely grim proof that the secrecy beloved of politicians and officials is not in fact the best option.

Yet here we are, with no proper information or debate on the fundamental choices facing the country, and the credibility of the Government oozing away as a result of its dissimulations in opposition and its inability in government to be open about those choices.

They certainly are fundamental. As well as unsecured debt, we have the problem of tracker mortgages, which are estimated to cost the Irish banks €700m a year. That is apart from the arrears on €18bn of mortgages where, as well as lost income, the banks will eventually lose capital because the mortgages are not worth the original value in the banks' accounts.

Then there are the smaller companies. Around three-quarters of loans to SMEs are estimated to be in arrears. Most of this is explained by loans connected to property, and there is no trading their way out of those.

Wherever one looks, from the personal insolvency regime to the revised bankruptcy procedures, one can see the attempt to minimise bank losses – not just to avoid collapse but to avoid the need for large amounts of new capital.

That is understandable. A failed banking system cannot be countenanced, any more than it could in 2008. Unlike then, the country's capital is exhausted, although it might perhaps scrape together another €10bn in borrowings and bits of public assets.

The attempt to hold potential losses below that level, while understandable, may result in the failure of the whole project. The housing market will not recover; household income will remain under pressure; the supply of credit to firms will be insufficient to finance a recovery when external conditions improve.

The opprobrium heaped on banks, rather than on bankers and bank regulators, obscures the fact that healthy banks are essential to a healthy economy. The pervasive secrecy, alongside their inbred populism, prevents politicians arguing the case for further transfers of income to loosen the logjam.

Transfers to date have been from Irish citizens to foreigners (in the form of bondholders), and from the private to the public sector in the case of almost everything else – even after the pay and job cuts.

The next transfers would be from the solvent to the indebted – via the banks, but not to them. Done right, some of it could yet come from the EU, but the bulk would be between Irish citizens.

It would also be inter-generational. That would not suit me, but the logic is inescapable. Even so, it would still require an awful lot of clever persuasion.

That means being open about the costs, the benefits and the processes. The idea that it can all be achieved behind closed doors, while saying one thing and doing another, is as ludicrous now as it was five years ago.

Irish Independent

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