EARLY in 2009, in a debate with Alan Ahearne -- the Minister for Finance's economic adviser -- I described Ireland as "sleepwalking into financial Armageddon", and in late 2010 it is sad to say there is no change in that assessment. While we content ourselves with the laughable "we've turned the corner" and "the worst is over" issued by our politicians and our ever bullish stockbroking community, the pressures on Ireland are intensifying.
hat is clear is that the Irish people are in an abusive relationship with their political and protected elite of kingmakers. They can't worry about the nation when they spend all their time worrying about self-preservation. So many people rely on the current corrupt system staying in place that they refuse to see what is happening, as they have their vested interests to protect. Ireland needs to put itself on emergency footing, but those in positions to influence the future of the nation have gone missing in action -- not only our politicians but the entire media seems to have taken the summer off.
While the suicide numbers hit record levels, parents weep at airports, waving goodbye to another generation off to far-flung places to start a new life. Around 460,000 people are looking for work, doctors' surgeries are inundated with over-stressed customers, and we have not had one credible policy idea or plan to get us out of this mess. There is a vacuum and paralysis at the heart of the leadership of this country, in the place it is needed most. The hidden misery behind every statistic is a shameful indictment of how recklessly the economy has been managed.
We have wasted two years on the slowest and most costly bank bailout in history and promoting the myth that we have made the "hard decisions", while we are still borrowing money to pay for goods and services that we can't afford by pledging future tax revenues. The situation cannot last.
The unsustainability of the debt burden is becoming increasingly apparent, and the ludicrous and reckless "no creditor left behind" policy pursued by Brian Lenihan with the banks is being found out for what it is: a millstone that is threatening to pull us deep underwater. By borrowing money to pay our public servants, for example, we must tax the private sector more, sucking the productivity from it, to feed the waste and excess we refuse to deal with and piling up debt as we go.
But why is nothing being done?
The answer is simple: it is the Delay and Pray strategy.
First: they believe that house prices will go back up.
Second: they believe recessions finish of their own accord, so if they wait long enough with their heads down it will all be different in a few years.
Third: emigration will get the Live Register numbers down.
But mostly the country is in denial. The harsh truth is we are over-optimistic and overpaid. That is why there has been no marching on the streets. The entrenched belief is that this will pass soon, so there is no need to act. Unfortunately, our failure to fix our banks will ensure that their same instincts for survival and self-preservation will mean they will succumb to the same deflationary traits and squeeze the lifeblood out of the productive sector. In an economic sense, the productive sector is being starved to death -- another Irish famine -- and lack of credit is the killer. And the housing market cannot bounce as it's caught in the vice of contracting asset values, which squeeze liquidity and lead to further price declines. Everybody planned to be rich when the bills came due, but unfortunately most people never heard the bell.
To break the spiral, there has to be wrenching and radical change. No half measures will do. A total overhaul of our competitiveness and the structure of our decision- making processes is required.
In this article there is no time to delve into particular policies, as to do them justice each one would need to be fleshed out. But, to give a flavour: we would need to cut the minimum wage; radically reform the benefits system; slash wages in the higher echelons of public and semi-state bodies by capping salaries; widen the tax base; lower taxes on small business; abolish numerous quangos; incentivise our non-domiciled citizens to bring their money back onshore; and cut utility prices (the current Green Party plan to raise electricity prices is a great example of how it believes in the humane treatment of animals but not the humane treatment of the taxpayer).
Reform is needed in RTE. Why RTE? The failure of our national broadcaster to hold our politicians to account over this crisis is a scandal in itself, and sums up the cosy relationships at the heart of our problems. The inability to ask even the most basic economic questions to our ministers is at the heart of our chronic failure to understand the true state of the crisis. Again, salaries should be slashed.
We also need to abolish the HSE and break the cosy cartels and fee structures across all sectors of the sheltered domestic economy.
Finally, we need to rip up the Croke Park Agreement. This pact is an example of our blind ability to self-delude. The public servants agree to deliver efficiencies that they will not deliver and our Government agrees to pay for them with money we don't have.
Ultimately we need to stop rewarding failure at all top levels of our public services and reward those in the trenches of those services which are delivering on the ground.
Without trying to sound too alarmist, we must rationally discuss the chances and consequences of a restructure of debts by our nation, and plan for all eventualities now. To even mention this incurs the wrath of those who accuse us of scaremongering. They are the same people who say, "If we could only be a bit more positive." The credibility of the nation is slipping and we must countenance all possibilities.
This is not just an Irish problem. From the Baltics to the Mediterranean, the bills for the unprecedented borrowing binge are falling due and it is clear that not everybody will be able to pay. The endgame of this whole crisis will be debt restructuring and debt forgiveness. Like all financial crises, what seems far-fetched now will be normal soon. This is a European problem -- and it's up to the EU to help.
Take Greece, for example; the best option for Greece would be an orderly default on its debts. It will eventually happen -- but, instead of facing up to the problem, European politicians have tried to hide it and continue the illusion that the banks that lent Greece money are sound. Hence the stress tests, which didn't verify the theory that Greece will default. It is not a bailout for Greece; it is a bailout for French and German banks.
But it is this fact that will eventually help Ireland. We are in a stronger position than we think, because the EU is petrified of contagion. Our strength for negotiation lies in this simple fact. Instead of being victims, we need to stand up truthfully and admit the situation we are in and take the best course of action for the Irish people. If that involves renegotiating with bondholders, so be it; if that involves tapping the EU stability fund, so be it.
Our latest Anglo solution is the same exercise in futility and sums up the lack of political will for radical change. It is similar to the situation I witnessed in Japan in the Nineties. We have actually forgotten why we made the bank guarantee: it was so that, two years after, we would have a restructured and functioning banking system -- this has yet to be delivered.
On reading this article you may despair, but don't. The nature of financial crises is that they force change that otherwise would take longer to occur. We are in the eye of the storm, but it gives us the opportunity to build a bright, better, more equal Ireland. The next phase will be difficult, but the prize is a country worth living in and a country to be proud of. But no half measures will do.
Paul Sommerville is head of private clients at Delta Index. He has over 21 years' experience in financial markets. He was a senior adviser on derivatives in the UK and worked in Japan as head of interest rate futures for Tulletts in Tokyo during Japan's "lost decade" of the Nineties. paul.sommerville@ deltaindex.com
