OPINION:Lack of regulation has put a stop to Ireland's swagger and ruined its international reputation, writes JUSTIN O'BRIEN.
IRELAND IS coming to terms with a changed global landscape in which the traditional safety valves of easy emigration and international goodwill have been closed.
In part, this reflects the global dimensions of the financial crisis. No part of the globe has emerged unscathed. In part, it derives from schadenfreude across the world at the demise of a freewheeling and misgoverned market, where hubris trumped prudence and the country’s reputation with the new United States administration has descended to that of an offshore tax haven that facilitates deception.
The scale of the calamity far exceeds that facing any of our European partners. In a rare admission of failure Brian Cowen accepted “arrogance” played a role in transforming the country from “unknown prosperity to suddenly [facing] survival stakes”.
The swagger of the Celtic Tiger has wilted in the face of staggering regulatory, corporate and political incompetence.
Throughout the boom the population was encouraged to engage in a collective act of self-deception. Unsustainable property valuations created a speculative economy. The International Financial Services Centre became the symbol for some of the worst excesses of financialisation, a process that refers to the transformation of industrial managerial capitalism to speculative gambling.
As the crisis intensified last September, the Government took the unprecedented decision to provide an unlimited guarantee of all banking deposits. The move was designed to protect an increasingly strained domestic banking sector whose reckless lending has been instrumental in intensifying the scale of the crisis.
The country degenerated into something resembling a dodgy casino. Industry players set the rules of the game, liberated by a political and regulatory elite mesmerised by financial alchemy. The staggering losses made by Seán Quinn on the esoteric contract for difference (CFD) market encapsulate just why confidence in the probity of the Irish market is so low and the cost of serving external debt so high.
While Quinn can afford to admit he was “too greedy” it is questionable that the country as a whole can. Here responsibility must lie with the Taoiseach.
As minister of finance, Brian Cowen amended the Finance Act to provide tax-free status to CFDs. It reflects the power of interest groups to dictate policy and comes after similar scandals involving lax oversight of international banks and the reinsurance industry.
The former chairman of the Dublin International Insurance Management Association, John Houldsworth, awaits sentencing in a financial manipulation scandal involving AIG, the insurance firm now under US control because of its own bad bets on the credit default swaps.
Houldsworth boasted that Ireland would displace the Bahamas as the pre-eminent centre for the reinsurance industry. His questionable activities were well known internationally. He was banned from the Australian marketplace following a Royal Commission of Inquiry in 2002. Remarkably, the Financial Regulator did not send staff to the hearings.
The situation has became even more critical for the Government because of An Bord Pleanála’s decision to revoke partial planning permission for Seán Dunne’s multi-billion-euro office, retail and residential development in Ballsbridge. The decision calls into question the lack of due diligence within the banks in extending the loans to Dunne in the first place and the commitment of the Government to ensuring transparency and accountability within the political and corporate sector.
The planning authority condemned the “gross overdevelopment and over-intensification of the site”. Crucially, the authority found that the entire development conflicted with the city council’s own development plan. It is not to be expected that bankers should have a detailed knowledge of planning law, but the grandiose ambitions of the project and its variance with the architecture of a suburb that houses some of the most influential citizens in the State made it far-fetched that approval would be given.
The decision to reject this kind of development is likely to have a sharp impact on commercial land values in the capital, adding further to the liabilities faced by the banking sector. The guarantee seriously exposes the Irish exchequer to catastrophic losses.
Blanket guarantees merely mask the problems associated with irresponsible lending. They also undermine EU competition law. Following the Irish move, Greece, Denmark, Sweden, Austria and Spain adopted similar strategies. Germany – which had objected – provided a political pledge to secure banking deposits.
The political decisions to place national banking security over European solidarity provided the most telling indications that contagion had become a pandemic. These initiatives made a mockery of attempts to generate a co-ordinated response. Yet the Taoiseach, in his speech to the Dublin Chamber last Thursday, could only reflect that “our future is in Europe, for all its faults”.
Without irony he calls on the Irish people not to “wallow in self-doubt” but reignite a “can-do spirit that has brought us to where we are today”. Where we are is with unemployment standing at 9.1 per cent, declining living standards and the real risk of bankruptcy. The credit default swap market is now betting that Irish bonds will default. The cost of Irish debt is spiralling. The differential between 10-year Irish and German bonds now stands at 2.08 per cent, six times that recorded in May.
The rash of banking failures reflects the deleterious combination of boardroom hubris, defective operational risk management systems and uninformed regulatory confidence. It could not have happened but for the inculcation of an ideological worldview that privileged innovation over security. It retained cogency despite increasing evidence that undermined the practical and normative value of such an approach. This generated in turn a new (but defective) risk paradigm informed by naivety and ignorance. While this model was most extreme in the US, its rationale was inculcated across the globe, particularly in Ireland.
The crisis has already cost $1 trillion dollars and is estimated to cost a further $1 trillion by the end of 2010. Market capitalisation of financial stock across the world has dropped dramatically. The short-term consequences are severe and getting worse.
The crisis has now produced a tipping point. The critical policy challenge is to fashion an alternative framework that safeguards security without compromising innovation. Given the reality of globalisation, it is not plausible to retreat to national-based approaches to regulation. Sustainable reform necessitates fundamental changes to both the structure and purpose of global financial architecture.
While it may be inopportune to engage in structural reform in the midst of a crisis, the advantages of ceding control to a self-serving, self-policing marketplace model have been falsified. Ireland has gone from poster child of globalisation to the symbol of corporate, regulatory and political failure. It is a fitting epitaph for the Celtic Tiger.
Justin O'Brien is professor of corporate governance at the Centre for Applied Philosophy and Public Ethics in Canberra and author of Engineering a Financial Bloodbath, to be published in April by Imperial College Press