OPINION:Brian Lenihan will have to address damaging perceptions about the extent of our recession
THE MINISTER for Finance will shortly embark on a tour of European and other financial capitals with the intention of meeting Government bond holders and addressing some of the damaging perceptions that have taken hold in international markets about the extent of our economic problems and our ability to deal with them.
It follows on from a relatively successful foray to London on St Patrick’s Day.
The size of the challenge he faces was underlined last week both by the comments from economist Paul Krugman and also the Global Stability Report from the International Monetary Fund (IMF).
While both Krugman and the IMF are fundamentally correct when they say Ireland is in very serious trouble, their analysis of the true extent and nature of the problems is relatively superficial and heavily influenced by the perceptions that are abroad.
While on the one hand we should be flattered in a perverse sort of way that someone of Krugman’s stature has taken the time to look at Ireland, it’s unlikely that his column was based on exhaustive perusal of Economic and Social Research Institute (ESRI) reports, Central Bank bulletins and CSO data. Equally, and far more worryingly, the IMF does not appear to have been all that thorough in its analysis.
While the IMF may have stood by its view that the Irish bank bailout will be the most expensive in the developed world, the decision to remove from its published report a table containing figures for Ireland because of errors in figures relating to the UK rather undermines its case.
One thing seems to loom large in the background of both Krugman and the IMF’s analysis of Ireland – a presumption of the worst with respect to the guarantee extended last September by the Government to the banks. What seemed for a brief while to be a tactical masterstroke has now become a millstone.
The perception that the State is on the hook for €440 billion worth of bank debt is in danger of a becoming a reality. The more that external commentators focus on the potential maximum liability under the guarantee, the wider the spreads on Irish bonds, the greater the concerns about the banks and so on. It is potentially a self-fulfilling prophecy.
Various efforts by more considered analysts to put a figure on the probable cost of sorting out the banks – which would beggar the country – are simply being drowned out, to the cursory ear of the international bond market, by the theoretical consequences of the guarantee, which would bankrupt the country.
It’s vital that the Minister gets out and about and makes a couple of things clear. The first is that the guarantee in its current, allenveloping form will not be extended past its two-year deadline. He should indicate it will be replaced by a slimmed-down version similar to those extended elsewhere.
To be able to do this, the Minister is going to have to be able to say with some credibility that by that stage the banks will have been cleaned up. This means their property losses will have been identified and dealt with and the cost to the State quantified.
The good news is that the structure by which this will be brought about has already been determined through the creation of the National Asset Management Agency (Nama). The bad news is that how it will work has not been determined and there is no real clarity as to whether the banks should be nationalised as part of the process.
Hopefully, the complexity of this issue will not be lost on rational observers and they may not seek an answer at this stage.
Indeed, the answer will probably present itself as long as Nama is ruthless in ensuring that loans transferred to it from the banks are properly written down. Either the State will be able to put more money into the banks to help them meet their Nama-related losses, or it won’t. If it can’t, it will have to take them over.
But one question bond holders should be asking at this stage is whether the Government has the will and ability to deliver on Nama.
You would not have to have followed Irish affairs that closely to realise that a very unhealthy set of relationships permeates politics, property and banking here. The bulk of the bad loans at the heart of the Nama project relate to less than 30 very powerful, politically connected and, by any normal standard, still very rich people.
Mr Lenihan, whose party’s track record in this regard leaves something to be desired, had better think through his answer to that one before he hits the road, for his sake and the country’s sake.
