Five seismic events occurred in Ireland yesterday which will have a profound effect on the Irish economy for generations to come.
- NAMA, the National Assets Management Agency (or “bad bank”) announced a “haircut” of 47% on the first tranche of 1,200 toxic loans to be transferred from Irish banks by agreeing to pay €8.5 Billion for loans with a book value of €16 Billion.
- The Financial Regulator announced that the Core Tier 1 Capital Requirement for Irish banks is to be doubled from 4% to 8% of loans.
- Arising from the NAMA haircut and the increase in Tier 1 Capital requirements, the Government estimated that the Irish banks will require an additional €22 billion in capital. €8.3 Billion of this is for Anglo Irish Bank alone, and it may require a further €10 billion when the full extent of its losses are known. Most of this additional capital will have to be provided by taxpayers.
- The Financial regulator also applied to the High Court to appoint a Provisional Administrator to Ireland’s largest insurance Company, Quinn Direct, after a €400 Million hole in its assets was revealed.
- The Government and Unions agreed what amounts to a new “National Agreement” which would guarantee no further pay reductions until 2014 in return for ongoing cooperation with public service reforms to improve efficiency and reduce costs.
The 47% NAMA haircut compares to the initial Government estimate of a c. 30% haircut for the total of c. €81 Billion of toxic loans to be transferred to NAMA. The first tranche of toxic loans was always going to be the most toxic however, and so the average figure for all the toxic loans is likely to be much lower than 47% – although most commentators appear to expect that the final figure will now end up north of 30%. Thus the taxpayer will end up paying c. €50 Billion for toxic loans with a book value of c. €81 Billion.
The property market has continued to implode since that 30% estimate was made however, and there is no doubt that that €50 Billion is way over the current market value of the properties on which those loans were secured. It will be a very long time, if ever, before those properties are worth €50 Billion again.
However the most shocking aspect of today’s announcements is that over half the capital requirements are for the Anglo-Irish Bank – basically the Fianna Fail house business bank which was primarily responsible for creating the Irish property bubble in the first place. The Government made a huge mistake in including Anglo-Irish in the loan guarantee scheme in the first place, and then in nationalising the bank when it was never going to be solvent or strategic for the future of the Irish economy.
The Government is arguing that it could never have let Anglo-Irish go bust a la Lehman without endangering the Irish banking system as a whole, and jeopardising Ireland’s ability to fund its National Debt on foreign debt markets. The contrary argument is that investors received a risk premium for investing in Anglo-Irish and should now bear the costs of its insolvency. Why should the Irish taxpayer take on the cost of liabilities of a private company when it was never a shareholder in the first place?
Ireland’s National debt has been effectively doubled overnight, and 70% of that additional debt is being paid to the creditors and bondholders of one private company which will not create one job or increase the flow of credit to Irish business by one cent.
The Financial Regulators decision to increase the Tier 1 Core capital requirement of Irish banks will also massively increase the capital funding requirements of all banks – an increased funding requirement which will also have to be largely borne by the taxpayer. However at least in this case the taxpayer is receiving a much larger stake in those banks in return, with only the Bank of Ireland likely to retain a majority private shareholding.
The Financial Regulators belated abandonment of “light touch regulation” has also resulted in Ireland’s largest insurance company being placed in Administration. Obviously tougher regulation is to be welcomed, but this decision could also result in their being even less price competition in the relatively small Irish insurance market. Quinn Insurance was the “Ryanair” of Irish insurance companies breaking up a cosy cartel of established insurers and proving more affordable insurance to many consumers.
The main points of the public sector deal between the Government and Unions to end the campaign of low level (but highly visible) industrial action following Government cutbacks and tax increase in the last Budget are as follows:
* No further pay cuts until at least 2014
* There is to be significant cost-saving reform measures across all parts of the public service
* Review of extent of savings generate to be held in Spring 2011 to determine if scope for any reimbursement of pay cuts
* Similar reviews to be carried out in subsequent years
* Substantial reduction in public service numbers in year ahead
* No compulsory redundancies but flexible re-deployment arrangements necessary
* Unified public service labour market to be created
* Merit-based promotion to be the norm
* Promotion and incremental progression based on performance
* Industrial peace clause to be put in place
Basically the deal (which is subject to a ballot of Union members) recognises and consolidates the current status quo where the Government had put in place swingeing cutbacks with more threatened for the next budget. The Unions have now agreed to quite a radical set of change proposals in the hope that the savings achieved will obviate the need for further cutbacks in due course.
Many of the proposed changes had already been bought and paid for under previously national agreements but were never implemented largely because of a lack of leadership at senior civil service management levels. The new Cabinet (of 15 Ministers) appointed after a minor re-shuffle recently contains no less than 6 teachers and virtually no one with experience of running a large business or organisation.
The big question now is whether this latest agreement will actually lead to some much needed changes in how the public service is managed and run. The fact that all sides now appear to have a vested interest in making efficiency savings to avert further pay reductions and fund future pay increases may mean that greater progress is achieved this time around. The culture of senior civil servants actively opposing efficiency improvements as it might reduce the size of their personal fiefdoms has to be challenged and changed.
So what will be the combined impact of the five major announcements today? On a positive note they may herald a much more assertive approach to financial regulation and an end to the low level industrial action in the public service which was creating much public resentment without creating tangible benefits for the Unions or their members themselves.
However the negatives probably far outweigh the positives: Ireland’s National debt is being doubled on the altar of keeping foreign creditors sweet. The combined deflationary effects of these measures mean that Ireland is almost certainly going to have a “lost decade” of high unemployment and slow economic growth despite the continued resilience of our export industry which is leading to a rapidly expanding surplus of exports over imports in stark contrast to the other PIGS countries.
The EU and ECB will undoubtedly be pleased that Ireland is putting its own house in order on terms pleasing to “international markets” and thus reducing the sense of crisis in the Eurozone as a whole. The Commission could do Ireland a big favour by rejecting the terms of the Anglo-Irish bail-out, but that would probably be hoping for far too much. All serious people seem to be terrified of another Lehman and the disruption this could cause despite the fact that in EU terms Anglo-Irish is a very small and non-strategic bank indeed. Better to put Ireland into penury for the foreseeable future. That should teach the Irish a lesson for getting ahead of themselves.
At one level the decisions made today are deeply impressive: they show a Government, the Irish Congress of Trade Unions and the Financial Regulator all taking decisive action and making major decisions that would destabilise many less cohesive polities and societies. However there is little virtue in making such wrong headed decisions. It all has the feel of the band playing bravely on as the Titanic gradually sinks beneath the waves.
