OPINION:The bad IMF deal adds weight to the likelihood that mergers and acquisitions will soon put all of our surviving banks in foreign hands. This has a real upside
AFTER THE seismic events in Merrion Street over the past couple of weeks, it is reasonable to ask where we are now. What will be the legacy of the combined efforts of the International Monetary Fund, European Union, European Central Bank and Irish Government?
It does not seem as if Ireland negotiated a very good deal. Yes, we secured additional funding of €67.5 billion, allowing for the fact that €17.5 billion is our own money. But the average interest rate, 5.83 per cent, is high, even with an upward-sloping yield curve. This interest rate will exceed the nominal growth in gross national product and hence will have serious, adverse effects on the public finances.
Being such good Europeans, we were easy meat. We had been cajoled to vote for the Lisbon Treaty; we had promised faithfully to deliver on the fiscal targets laid down by Brussels; we had never massaged our borrowing numbers. Of more immediate importance, our banks had already paid out something like €55 billion to senior bondholders at the urging of the ECB.
The recent negotiations gave no easement regarding future payments to senior bondholders because the ECB is clearly trying to protect French and German banks and prevent contagion. One might have expected that, in return for this, the ECB might have written off some of its own extensive lending to Irish banks or even taken over part of the Irish Government guarantee of €440 billion. Nothing of this nature was forthcoming. Whether it was even discussed, we will never know.
Irish taxpayers (and consumers, always ignored by governments and central banks) remain a soft touch. They will bear the debt burden for decades ahead.
We did get an extra year, thanks to the IMF, to achieve the Brussels fiscal deficit target of 3 per cent of gross domestic product (GDP). This would probably not have been needed were it not for the burden of the high interest rate.
The promise to downsize and restructure our banks is, of course, desirable in its own right, but it will also be of major benefit to the ECB. The more assets our institutions can sell off, the less borrowing (from the ECB) will be needed. That also explains why the National Asset Management Agency (Nama) will have to take another €16 billion of property-related assets from the major banks. This is part of the plan even though Michael Somers and others claim that Nama has so undermined the balance sheets of banks that they are still unable to lend to small- and medium-sized businesses. Nama in short has become part of the problem, not the solution. Not even the law of unintended consequences can explain this mutation.
The ECB and EU clearly got what they wanted from these negotiations but it may not be enough to deflect the markets from attacking the euro zone. It is fairly clear by now that the markets have the euro in their sights and will continue to pick off the so-called peripheral countries one by one.
The markets are well aware of the deep structural flaws in the euro system – lack of fiscal federalism and the risk of asymmetric shocks – and are not going to be appeased by the half-hearted “rescue” package for Ireland. The real problem is that the markets have such vast funds at their disposal they can easily turn speculation into a self-fulfilling prophecy.
Meanwhile the economic adjustment for this country remains severe and runs the risk of continuing deflation. There is no comparison between our present high debt/GDP ratio and that of the mid-1980s –when the high rate of inflation eroded the real burden of debt. We have no such mitigation on this occasion. It is likely that real living standards will not rise significantly over the next five years or so unless direct investment from the US picks up.
If our preferential tax regime comes under threat, all bets are off.
What of the Irish banks? The upfront fund of €10 billion will be used up fairly soon and it is likely that most of the contingency fund of €25 billion will also be used. (This would bring the total bailout of the banks to €85 billion.)
Bank of Ireland might be able to raise some additional capital itself but AIB, which needs about €10 billion extra (partly to meet the higher capital requirements), will probably have to call on Government funds and thus become nationalised.
No injections of capital will be required for Anglo or Irish Nationwide since these nationalised institutions will be wound down.
It is hoped that the “rescue” package and the higher capital requirements (the so-called “stuffing of the banks with money”) will enable the surviving banks to access international finance in the normal way. This may take some time, however, because of the credibility factor and the possibility that mortgage problems might emerge. The fact that banks have been lying to Nama about the value of property-related loans does not enhance their credibility.
The restructuring of banks will involve selling off non-core assets and other portfolios, but it will also mean mergers and acquisitions. The governor of the Central Bank has stated that all of the banks are for sale and that it would be good for Ireland if the risks could be moved to other countries.
It is rumoured that approaches have been made to potential buyers in different parts of the world, including China. It is noteworthy that all of the banks in New Zealand are foreign-owned. Some commentators believe that Ireland is already well along the path towards complete foreign ownership.
This would probably mean substantial redundancies but it would also reduce to zero the cost of financial regulation. Because of the principle of home country control, financial regulation within Ireland would no longer be needed.
It is to be hoped that the new owners of the banks will be more responsible than their predecessors. It is likely that they will be better able to provide credit for start-up companies in the high-tech sector and be less fixated on bricks and mortar.
At this point, something like 80 per cent of corporate Ireland will be foreign-owned. The reasons why we are relatively poor at business are discussed elsewhere.
Michael Casey is former chief economist at the Central Bank and member of the executive board of the International Monetary Fund. His book, Ireland's Malaise: The Troubled Personality of the Irish Economy, was published by the Liffey Press in October