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Brendan Keenan: We have one throw of the dice left to finally sort out Ireland's banks

WHAT a year, eh? No, not last year -- this one. I'm afraid that, dramatic as 2010 was, 2011 may prove just as wearing on the nerves.

There is, first of all, the prospect of a general election. The Green Party, upon mature reflection, has decided that a January election is not such a good idea after all. They now think March would be a more suitable time to abandon the Coalition. There is to be no panicky leaping over the side. An orderly queue will form for the lifeboats.

The Green leadership may be a bit too young to remember the advice of the great political commentator John Healy, that if you find your behind on the seat of a ministerial Mercedes, never remove it voluntarily.

Of course, Greens and Mercedes do not sit together well -- even if the engine sizes are to get smaller -- but the advice has general merit. Bertie Ahern certainly took it to heart and changed the convention that governments should not go close to full term.

Electorate

There is considerable evidence that the electorate does not like being asked to go to the polls before it has to. This time, however, it may be different. There is a widespread view that an enraged public is itching to get out and deliver its verdict on the Government.

Even if that is the motivation and the result is as expected, Election 2011 would appear to be yet another example of early polls being bad for governments -- as well as offering a reminder of how one has to be careful of raw data.

The timing of this election, early or late, is unlikely to make much difference to the Government's fate. However, there is the possibility that it could make some difference to the outlook for the economy -- for good or ill.

The fear that a general election has the potential to do further damage in an already perilous situation stems from the nature of election campaigns.

At one stage it seemed that, provided the Budget was approved and the emergency funding from the EU-IMF was already in place, the nonsense which is bound to accompany the campaign could soon be forgotten.

The new government could then get down to considering how to handle the worst situation in at least 60 years -- and there would at least be the hope that it might make a decent fist of it.

That was before the latest eruption of the banking crisis. Confidence in the Irish banks has all but evaporated, along with much of their deposits.

The current Government will have to act fast -- certainly before March -- against the background of an undeclared election campaign which has already begun.

Extraordinary measure

The Government's response has been the extraordinary banking legislation, which gives it what can only be called dictatorial powers in deciding what to do about the banks. The word 'dictator', after all, comes from the Roman practice of suspending normal procedures in times of danger.

The nature of this particular danger was made all too clear this week, with the figures showing that the Irish banks lost €70bn in deposits last year. One can imagine the kind of panic that this level of outflows engendered in the Department of Finance and the Central Bank.

There is evidence for that panic in the fact that the European Central Bank was not fully onside in the drawing up of the legislation and is unhappy that the law could allow the seizure of Irish bank assets which it holds as security for loans.

One is prepared to believe government assurances that they would not do that to the ECB, but one can also imagine how other lenders feel.

ECB unhappy

The Act expires automatically in 2012, but whatever is going to be done will have to be done long before then. Deposits will not return and lending will not resume until the resolution of this crisis is clear. Much of it needs to happen before March if the banking system is not to be crippled for much of 2011.

Unless there is a remarkable political change of heart, we can expect the proposals -- whatever they are -- to be the subject of fierce opposition.

Some of that opposition may well be justified, but in current circumstances it would raise an urgent question. What will the new government do?

The degree of certainty provided by the Budget and the IMF deal has gone. It is still the case that the funds required to run the country are available through the rescue package and that the associated budgetary measure can go through.

But the government-in-waiting must recognise that while the latest -- and surely the last -- attempt at bank rescue may begin without them, the politicians will have to finish the job.

Paradoxically, what emerges may not be that far from the original Fine Gael-Labour proposals on the banks. Not only will the banks be all but nationalised, the new structure may well involve their division into a 'good bank, bad bank' regime.

The beginning of a new year is a time for renewed hope, and there are many exhortations to be positive.

Nevertheless, the unpalatable fact is that the consensus forecast of economists, far from being a positive one, is for yet another year of contraction. That will be the third in a row.

The only hope of avoiding such an outcome is improved consumer confidence, leading to a rise in personal spending -- despite the fact that personal disposable income will decline.

One can see, therefore, why the consensus forecast is gloomy. Yet, if the new government managed to instil some sense of a new beginning, it might just be possible that some pent-up demand for goods and services could emerge in the form of higher consumer spending.

Even that slim possibility will disappear if the banking crisis continues to fester into the second half of 2011.

Precisely because the new law allows the Government do more or less what it wants with the banks, Fine Gael and Labour must decide how they want to use it -- and judge Mr Lenihan's actions, not on the basis of formal opposition, but according to how much those actions conform to their own intentions.

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