Saturday 23 March 2019

David McWilliams: Next stage for economy isn't recovery -- it's mass default

On the dot of 11, Mr Justice Peter Kelly swooped up to his stoop, horn rims on the tip of his nose, the wig symmetrically aligned on his head.

He was the first one I saw yesterday morning at the Four Courts whose wig wasn't slightly askew. Maybe the askew wig is an affectation, a sign to others that while you might look a bit dishevelled, you possess a razor-sharp mind.

The reason I say "sign" is because unless you do this every day, trying to get to the bottom of what is actually happening in the courts is like reading hieroglyphics. Unless you can break the code, the language and the strange ceremony, you feel very much on the outside.

To the uninitiated, all the formality -- the bowing, the upping and downing -- feels as if you've stumbled into an odd other-worldly sect, who are bonded together by rituals, habits and uniforms that are alien to the big living city outside.

It seems all a bit high-church religious. With so many players up there, you're not quite sure who is going to speak next, who is the bishop, who are novices and who are the altar boys.

Under the harp of our Republic, Mr Justice Kelly called things to order. The court was up on its feet and the proceedings began.

It's easy to feel like a Protestant undercover at a First Holy Communion, distracted by others who know exactly what's coming next, destined to be rumbled by adding the "Kingdom, Power and Glory" bit at the end of the Our Father.

The Boss meant business, he was straight into the first case. This one involved a solicitor who, how do I put this politely, "is residing in another jurisdiction". He owes a few quid, well €80m odd to be imprecise. His lawyers were there but, surprise surprise, he himself didn't show.

Next up was a case of Dunnes versus a developer that is now in NAMA. According to a previous arbitration decision, Dunnes has to pay Holtglen, the developer, €20m and the supermarket giant is appealing it. So in effect Dunnes is paying NAMA. Mr Justice Kelly -- the Boss -- was having none of it and he decreed briskly that Dunnes will have to cough up. Even by Dunnes' standards, €20m is more than a few value clubcard points.

In the middle of this, the phone of one of the "swanky silks" -- as the top bruisers are known down here -- rang. It was nice to see an element of humanity amidst all the robotics. The fact that the ring tone was a track from The Script suggests that the barrister's kids have been messing with dad's phone. The Boss was forgiving but unimpressed.

The case I was waiting to hear concerned a man from Monaghan who was lent more than €34m by Zurich Bank to build what must rank as one of the great follies of the tail end of the boom, a Dundrum-style shopping centre in Castleblaney.

Apparently CBRE came up with the valuation, which legitimises the deal. Just for your information, CBRE was recently being paid by NAMA to value land at today's price, which it valued at stratospheric prices in the boom, which inadvertently led to the creation of NAMA in the process. Nice work if you can get it.

Surely a bank that lends that type of cash to a man who wants to build a field of dreams on the stony grey soil must constitute reckless lending at least? Unfortunately, my man had gastroenteritis, so we never got to hear.

Promptly, like a priest known for a mercifully quick Mass, the be-wigged boss Mr Justice Kelly wrapped up an expensive morning for the Heffernan family.

But the thing about the Heffernans, they run a good shop. The same couldn't be said of the bout in the court down the corridor, which pitted the bizarrely named Irish Bank Resolution Corporation, better known as Anglo, against Sean Quinn. So this case is a sideline to the main spectacle of a bankrupt bank trying to get money out of a bankrupt billionaire.

And this is the point of it all, down at the courts we see a huge amount of effort and huff and puff much of which is pointless because so many people and companies are bust.

And it is only the tip of the iceberg. The next phase of the Irish economy's story won't be the recovery but the mass default phase and it will imply the banks will need yet more capital. When that capital is unforthcoming, we will have another bank crisis.

The banks don't have the capital necessary to foreclose on thousands of defaulters. If they foreclosed now, they'd simply go bust. However, by not actively foreclosing they will just go bust passively, slowly, zombie-like.

The charade replayed every day at the Four Courts is the canary in Ireland's default coalmine. The people yesterday in the courts are those who can still afford the theatre of defence. For most debtors, this is a luxury that only the "soon-to-be-poor" can still indulge.

This is only the beginning.

Far from the majesty of the Four Courts, lies the County Registrar's Court. Here we see what's going on further down the food chain. This is where the small fry -- those thousands who borrowed too much to finance the first-time houses -- are being pursued by banks.

The banks, which have been bailed out by the State, are not down here yet because of the implicit "moratorium" against foreclosing given in exchange for state money. But this won't go on indefinitely because the longer the banks remain zombies, the more the real productive part of the economy grinds to a halt for the want of credit.

It might have escaped you with all the talk of China and referendums and promissory notes, but Ireland slumped back into recession last week. House prices fell more in February than ever before and unemployment and emigration continue to rise. As basic economics suggests, too much debt combined with asset price deflation and an overvalued currency without the ability to print our own currency tend to strangle the economy.

What is on display in the courts is a jamboree for the protected, professional classes who have no idea just how fragile the entire edifice actually is. It's a great spectacle, all the pomp and ceremony but with the pressure from mass default building, it is difficult to see how the lid can be kept on.

www.davidmcwilliams.ie

Irish Independent

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