Thursday 18 July 2019

Raid may be interesting but it's not that important

Brendan Keenan

Brendan Keenan

MY first desk editor used to stress the importance of distinguishing between the important and the interesting.

Newspapers have a legitimate interest in both, but they are often not the same.

There is no doubt about the levels of interest in the shenanigans at Anglo Irish Bank. The arrival of the gardai on the premises looks set to raise the media interest to something approaching hysteria.

But -- whisper it quietly -- it is not really all that important.

We are, after all, talking about alleged breaches of company law; normally a subject on which it would be impossible to excite any public interest at all. In normal circumstances, only shareholders need worry about such arcane matters as directors' loans, "concert parties" buying shares and the allocation of funds in a company's accounts.

These are not normal times, of course. The public interest is legitimate in that these events tell us something about the underlying operations of Anglo Irish Bank. One cannot help notice though, that PricewaterhouseCooper's report -- which told us a lot more -- did not sustain the same level of excitement. Yet that is where the important stuff lies. It is a simple question to ask, but a fiendishly difficult one to answer. How much money will Anglo and the other banks lose, and will it be so much as to impose a heavy burden on the taxpayer? The answer depends on how far one thinks property prices will fall, which is why there is no definite answer.

A more productive question may be whether the Irish banks are in any worse shape than those of other countries -- especially Britain and the USA. Increasingly, the answer seems to be "probably not".

Anglo's model of lending just about anything to any property developer who asked was followed in the end by all the banks -- some more aggressively than even Sean FitzPatrick would have countenanced. So the bust is severe by any standards. But it looks as if the bust caused by billions of euro of debt products which banks cannot sell, or even value, is going to be worse. That is no consolation, since it threatens the whole world economy. It also raises the disturbing question as to why Irish banks appear to be suffering a bigger loss of confidence than those of the UK or US.

This is where the relatively unimportant investigations become important. They add to the general impression that things in Ireland are largely out of control. They make it look -- probably unfairly -- that Ireland has problems which others do not. In finance, how things look is what matters.

At home, they may also be contributing to the manifest failure of the public to grasp what is happening, and what we will have to endure to come through it. Quite reasonably, people do not want to endure hardship to rescue villains. Less reasonably, they may come to believe that if the villains are dealt with the hardship will be avoided.

It won't. Ireland does have a major problem which the other EU-15 countries do not. (The other EU-12 are a different matter. Latvia's credit rating was reduced to "junk" status yesterday and the economic collapse in some of them is of tragic proportions).

Our banking crisis is probably of the same magnitude as some others. The response of the economy to the global recession is also in the general league. Germany, for instance, is threatened with a 5pc shrinkage -- the worst since the post-war "Wirtschaftwunder" economic miracle. What we have is a huge budget hole.

We know who dug it, too. They broke no laws and the gardai will not come calling. In fact, they were re-elected last year. Yes, it was Fianna Fail, ably assisted by the public sector trade unions; and criticised on woefully wrong grounds by the opposition, which wanted lower taxes instead of more spending.

The source of this was the construction bubble which accompanied the price bubble. Only Spain had a similar, deadly combination and there were some depressingly good figures from Spain yesterday. Depressing for us, that is. Even after a budget stimulus, Spain's deficit is less than 4pc of output (GDP). Ireland's is likely to be 12pc. The difference is that the Spaniards piled up budget surpluses from their windfall property taxes, and we did not. (They also made the banks behave sensibly). Spain has big problems, too, stemming mainly from an alarming lack of competitiveness. It is a sobering thought, though, that had Ireland pursued cautious fiscal policies it would not look particularly out of place on the current global scene. Its small debt might even have given it a reasonably good credit reading.

More importantly, foreigners might have concluded that Ireland could manage the costs of its twin fiscal and banking crisis. Instead, because of the huge shortfall in tax receipts, there is a widespread view that we cannot. That view can only be strengthened by TV images of police searches of banks and protests on the streets.

Put crudely; had the €6bn of property taxes not been spent, Ireland's budget deficit might be 6-7pc of GDP and we would look relatively normal. Which raises the heretical thought: should the Government cut to the chase, and raise taxes by €6bn -- in a fair way of course.

Desperately bad economics for sure, but these are desperate times.

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

Don't Miss