Wednesday 21 August 2019

We're a global laughing stock -- and we fully deserve to be

Brian Lenihan's humiliation last Friday shows the difficulty we face in avoiding IMF intervention, write Daniel McConnell and Roisin Burke

After a day of robust performances in defence of his "horrendous" banking and fiscal policies on Thursday, including a career-best performance on Prime Time, Brian Lenihan was brought down to earth with a bang on Friday.

We were told yesterday the finance minister was publicly ridiculed and humiliated in a botched conference call with international investors that was intended to calm fear over the country's economic woes. According to a Daily Telegraph report, Mr Lenihan had been speaking for less than two minutes on Friday before a mistake by Citigroup meant the bank's clients could all be heard on the line.

As the 200-plus investors realised their lines were not muted many began to heckle Mr Lenihan ferociously. As he did his best to deliver his pitch, some traders began making what one banker described as "chimp sounds", while another cried out "dive, dive".

A third man said "short Ireland" before adding "why not short Citi too?" As the call descended into chaos, with one participant heard to say "this is the worst conference call ever", Citigroup officials shut down the line. Twenty minutes later the call restarted and Mr Lenihan tried to regroup, but the cock-up meant he was on a hiding to nothing.

Yesterday, Mr Lenihan denied he was heckled. "The story is pathetic and inaccurate, the Telegraph clearly did not listen to the call. A number of media organisations were on the call. None offered a similar analysis to the Telegraph which was not on the call," his spokesman said.

Whether you believe the Telegraph story or not, it was another unwanted distraction for Ireland and it heaps even more focus on us at this turbulent time.

The Telegraph's running of such a story shows we are now clearly the laughing stock of Europe and possibly the world. The treatment of the minister, which comes as Ireland faces a stand-off with a group of hedge funds over its rescue plan for Anglo Irish Bank, will certainly increase tensions between the country and the debt markets.

Two years ago, the morning the guarantee was announced, Lenihan stood up in the Dail and boomed: "We are having to go deep into our banking system, very deep, because of the risk they now pose."

Last Thursday's announcements on Anglo Irish Bank (which will get at least €29bn but more likely €35bn), Irish Nationwide (now getting €5.4bn) and AIB (nationalised in all but name and could need more than €11bn) reveal how deep we are now in.

When you add in Bank of Ireland (which has received €3.5bn) and EBS (€350m), the cost of capitalising the banks is €45.7bn at least, but could hit €55bn. When you add the €45bn odd that Nama has used to buy the discounted loans, the total cost to the taxpayer for his systemic bailout is €90bn-€100bn. That equates to three times the annual amount we raise in taxes and more than half of GDP. The decision to pull back from the markets and cancel two bond auctions was seen initially as a waving of the white flag, an admission of defeat that the plan is not working.

However, given that we are funded through the middle of next year, it is the smart thing. Ireland has been punished through ridiculously high interest rates in recent months and stepping back until after the Budget means things should settle down.

There was a collective sigh of relief in Merrion Street that the pull-back hadn't led to the roof caving in. They have bought themselves time, but not a lot.

The danger here is that Ireland has enough money to get us through the next 270 days -- that's nine months before the coffers run out. Now more than ever, we are living on borrowed time.

"In our view, unless Ireland significantly accelerates its fiscal consolidation, its debt dynamics will ultimately become unsustainable. Any slippage from its current fiscal targets is likely to be punished by a further increase in funding costs," the latest economic note from Societe Generale said.

The true significance of Black Thursday, however, is that Ireland is edging ever closer to a bailout either from the EU or the IMF. Any intervention will come at a heavy cost in terms of loss of sovereignty and an insistence of a far harsher programme of cuts than any government would seek.

Our debt ratio will spike at 32 per cent this year and makes the job of getting back under 3 per cent by 2014 virtually impossible. It is clear now what Mr Lenihan was playing at when he bounced into the FF think-in in Galway saying the €3bn will be the minimum level of cuts needed. He knew this was coming.

On Thursday, he went further again. "It is important to note that the Exchequer is fully funded through to the middle of next year. However, in order to fully underline the strength of our resolve and to ensure the necessary fiscal adjustment we will make an additional significant consolidation effort in 2011 over and above the already announced target."

He didn't stop there. At the press conference, he conceded that at last this government recognises the need for wholesale public sector reform. "We know now a fundamental reappraisal of the public sector will have to take place."

All the soundings this weekend are that Mr Lenihan considers the Croke Park deal to be dead. He has never hidden his contempt for the document that effectively tied his hands to such an extent.

While his Taoiseach Brian Cowen has continuously sought consensus through farcical social partnership and now Croke Park, Mr Lenihan has no such qualms.

He, not the Taoiseach, was the one who sent the unions packing out of government buildings last December.

The talk this weekend from within the department is that it will seek to purge as many public servants out of the system as it can to reduce the wage bill. The mechanisms haven't yet been worked out but Mr Lenihan is determined to see it through.

However, given that he is already fighting fires in terms of the banking crisis, the economic crisis and his health, does he have it in him to take on the unions again?

All of this is set in the context of November's make-or-break four-year plan and the Budget. Insisting that the four-year outlook is not a diktat from Brussels but his own initiative, Mr Lenihan does agree that everything is riding on it.

This time last year, the EU granted Ireland an extra year to get below 3 per cent. The plan was to take €4bn out in 2010, €4bn in 2011, €4bn in 2012 and €3bn in 2013. Then on budget day, the cuts figure for this year was reduced to €3bn, but given his comments on Thursday and since, a €4bn reduction seems far more likely.

"The markets, the EU, investors are all looking to next month and the Budget to see if Ireland can achieve the needed austerity adjustments. If they can't, then the IMF will be at the door," said one investor.

"The logic of Ireland's debt dynamics probably dictates that ultimately, however reluctantly, Ireland will be forced to seek additional funding from the ESRF. It will all depend on whether Ireland can deliver on fiscal consolidation," James Nixon of Societe Generale said this weekend.

However, there are mounting numbers of people saying that Ireland cannot cut its way out of this crisis, and that continuing this course of action will only result in a bailout.

Ray Kinsella, the mild-mannered UCD Business School professor, has been a leading voice in diagnosing Ireland's condition in recent days, and it's not good.

"The IMF could be in by May, and all because we have continually pursued the wrong policies. I believe it is within ourselves to get out of this, but not the way we are going. We are leading ourselves straight into the arms of the IMF."

Mr Kinsella also fears that the decisions taken by Brian Lenihan have caused permanent damage to the country.

"It gives me no pleasure in saying this, I'm not a crank or a loony academic. We can't continue as we are. The Government had indicated that the forthcoming budget will take another €3-4bn out of the economy. This is utterly wrong.

"We now have had four such budgets and all of them against the background of businesses and families that were already deleveraging and adapting; the last thing they needed was such a budgetary strategy unsupported by any supply-side policy to rebuild the economy."

"This road is not a long one -- it is leading straight down a cul-de-sac to IMF intervention," he said.

For the IMF to come into Ireland, it needs to be asked. The thinking is that by April or May of next year, the Irish Government will have run out of road and have no option but to cry for help.

A request would "trigger a process whereby the Eurogroup would ask the IMF and the ECB to visit the country to analyse the situation. This is expected to take two weeks, then these bodies would report back and a decision on funding could be made within three to four weeks of the original request. As seen in Greece, any funding would bring with it a tough IMF-sponsored austerity programme with funding released quarterly on strict conditionality," according to Societe Generale.

In an Irish context, such austerity measures would mean 100,000 public sector job cuts, pay reductions, the ending of Ireland's 12.5 per cent corporation tax and a whole host of additional taxes all introduced overnight.

Worse still, it would mean hospitals and schools would be closed and services slashed.

Now, some people have begun saying that's the kind of reform we need to see here, and maybe it wouldn't be so bad to have the IMF come in.

Any intervention is an admission of total defeat that we cannot sort out our own affairs and aren't to be trusted.

We know what needs to be done, so why not do it on our terms? This will be Mr Lenihan's ace card when he does face Jack O'Connor and David Begg.

The finance minister must be courageous if he is to succeed in his greatest challenge to date -- restoring Ireland's credibility.

He is up against it but the message to us all is clear -- reform or die.

Sunday Independent

Today's news headlines, directly to your inbox every morning.

Don't Miss