OPINION:What really did for us was the official reaction, or lack thereof, to the bank crisis as it emerged in 2007 and subsequent creation of Nama
SO HOW did we come from being the brightest and best in Europe to being the “weakest link”? It takes some doing but we – or, more accurately, our masters – did it.
Whatever they may say, it was mainly self-inflicted.
But we still have one growth industry – the endless radio discussions, television debates and newspaper coverage about the mess we are in by economists (mostly formerly unknown), former bankers (not all spectacularly successful), politicians and media personages. It may be great entertainment engaging in self-flagellation, but it might not be so pleasant when potential sadists arrive on the scene to give us a few painful lashes.
Throughout the crises with which I was familiar from the late 1970s onwards – even at times when our debt/GDP ratio was much higher than now – the one thing we avoided like the plague was calling in the IMF. It was always regarded as the ultimate dishonour and failure. Unfortunately it is now to be welcomed, given what we have done to ourselves.
Even amid the gloom there are positives:
* Our net national debt after deduction of the pension fund has been at a very low level until recently – €55 billion at the end of 2009 or about 30 per cent of GNP. Others are at more than 100 per cent;
* We do not have a balance of payments deficit; in fact we are reported to be moving into surplus so we are paying our way with the rest of the world;
The exchequer is funded into the middle of next year (€5 billion has been brought into this year, almost €20 billion was raised on the markets and the savings schemes have provided €2.8 billion – a total of almost €28 billion, of which €18 billion is probably needed in 2010);
* The State pensions fund has €20 billion (€24 billion if you toss in some university and other funds). Of that about €10 billion goes to AIB and Bank of Ireland, but it is not to meet losses (they have been largely met by the virtual wipe-out of shareholders) and should be recoverable over time;
* Our infrastructure is immeasurably better than it was 20 or even 10 years ago;
So what went wrong? When we joined the single currency we seemed to forget that we had joined a German club that did not do large pay rises and large cost rises. We were accustomed to these and had previously pressed the button to reset the counter to zero by regular devaluations. This was no longer possible in Euroland so we lost competitiveness.
However cynical it might be, governments usually pushed up spending before a general election and then pulled it back once the election was over. This contraction didn’t happen after recent elections and the extra spending was funded by the fools’ gold of tax from VAT and stamp duty on property. When housing collapsed so did receipts, leaving us with a massive budget deficit.
The idea that we could absorb 90,000 new dwellings a year, as happened in 2006, was absurd. The UK, with 14 times our population, produced about twice our output. The United States, with about 70 times our population, would have been producing more than six million dwellings based on our output; in practice they produced 1½ to 2 million at most and it fell as low as 500,000.
We are now back to not much more than 10,000 this year, with all the consequences of that cutback in terms of loss of employment, loss of tax and extra social welfare cost.
The biggest problem is, of course, the banks. It amazed me that we could have credit growing at 20, 25 or even 30 per cent a year when nominal GNP was growing in single digits. What basic monetary economics I could recall (leaving aside academic complications) indicated that the monetary aggregates should grow more or less in line with nominal GNP, not by a multiple of them.
I got out several Central Bank reports one day to try to understand how this credit was being created. Finding what you want in these reports is, at least for me, quite difficult but I finally came to the conclusion that the Irish banks borrowed from abroad between €100 billion and €200 billion in respect of their Irish business. I was so astonished that I asked one of my colleagues to check this figure and he agreed that it appeared to be correct.
My successor at the National Treasury Management Agency (NTMA), when appearing before the Dáil Public Accounts Committee last April and discussing this issue, recalled my saying that “the text books would need to be rewritten or we could have a problem”.
I do not recall many of the learned pundits who now know it all with the benefit of hindsight making much of an issue of this credit growth at that time.
Banks are supposed to fund their lending from deposits, with recourse to the interbank markets to even out the peaks and troughs. What happened here was that when we joined the euro, Irish banks found themselves with access to unlimited credit on the interbank market at low rates and with no exchange risk.
They were like children let loose in a sweet shop. The banks’ “mother” was down in Dame Street and did not seem to do much, if anything, to stop them gorging. Indeed, its own “head mother” in Frankfurt, the ECB, which seemed to have had access to an enormous amount of data, either did not spot what was happening or did nothing about it.
I recall having been flabbergasted when I saw the first reports of the combined lending by the Irish banks to builders/developers; not tens of millions or hundreds of millions but billions! And there we were in the NTMA borrowing as little as €100 million sometimes for the Irish State. Not only that, the Irish bankers would not even support the NTMA bond auctions – one of them pulled out at a particularly awkward time some years ago.
Some questions need to be asked about the official response to the crisis, which in fact really started in August 2007. I recall it well because I was on holidays when I received a phone call about liquidity problems in the banks. That’s more than three years ago and we have been going from bad to worse in the meantime. It makes no sense to blame the Lehman collapse for our problems. In fact, if Lehman had not happened our banks might have continued to borrow from abroad, creating (if that were possible) an even bigger problem. Some things have never been convincingly explained. Why was Anglo not immediately nationalised when its unsustainable situation became apparent?
It was a flaky model in good times and it was absurd to think there would not be problems with an institution growing at more than 30 per cent annually and with no national deposit funding base. So who made that decision and on what advice?
A guarantee on deposits was probably essential given that a run on the banks was unthinkable. But why was it let get to that state, with the gun put to the Government’s head late one night? Moreover, who decided that the bondholders should be guaranteed and why?
The shareholders were wiped out but the bondholders were protected.
Are we missing something here? These were not Government bonds or Government guaranteed bonds, at least before that fateful night of guarantees. Bank bondholders get paid a lot more than depositors precisely because they are taking a risk on their money.
What has really brought us to our knees as a country is the inevitable but calamitous consequences of working the Nama project. No other country in the world ever engaged in Namaism in the way we did.
We were told that Sweden and Finland did something on these lines, but it was on a tiny scale compared to what we did and in completely different circumstances. Were we smarter than all the other countries that ran into banking problems in the recession or were we so inept that we were incapable of recognising our own ineptitude? Why did we not look to see what our neighbours were doing or was that beneath us?
Namaism was supposed to take toxic loans off the banks’ balance sheets to free them up and it would be funded with cheap money from the ECB. So what actually happened? Namaism has created a monster that has done the opposite to what was intended. With its haircuts and discounts and its immediate crystallisation of losses, it has wrecked the balance sheets of the banks and has ensured that there will be no net new lending by them.
The effect of Namaism has been to destroy confidence in the banks, leading to massive outflows of deposits to non-Irish institutions and increasing reliance on the ECB and the Irish Central Bank. An obsession with process has certainly guaranteed jobs for Namaists and lucrative incomes for lawyers, accountants, property developers and consultants.
All this activity will not produce a single extra widget, but it has led to the IMF, ECB and the European Commission coming in to run our affairs. We should probably be out in the streets welcoming them. What an irony, what a mess!
Michael Somers is former head of the National Treasury Management Agency, the umbrella body under which Nama operates.