Spare a thought and a billion for Ireland

In a small corner of the Financial Times on Wednesday, 14 July 2010, Eamon Quinn reported that the Economic and Social Research Institute (ESRI), Ireland's leading economics think-tank, was urging the Irish Government to pursue a firm austerity budget. In order to maintain the confidence of the sovereign debt markets, the Government needed to cut the deficits "rather than loosening spending to boost economic growth". At about the same time in July, Dan Boyle, Chairman of the Green Party, the junior coalition partners of Fianna Fail, was thinking aloud to the Irish media about whether the people of Ireland could take any more financial austerity and reduce the public deficit to three per cent of GDP by 2014.

Battered by a recession far worse than anything experienced in the UK, the Irish could be forgiven for enquiring whether any ESRI member had actually lived in the Emerald Isle since the collapse of the country's property market, construction industry and the catastrophic failure of its banks, for them to wish upon them even more financial pain.

A couple of days later on 16 July, the Financial Times' Nikki Tait and Sharlene Goff reported that the Bank of Ireland (BoI) had received approval from Brussels for a major restructuring programme. Brussels' agreement was required due to the amount of assistance BoI had been given by the EU (€1 billion) and the Irish Government (€3.5 billion) as well as receiving various guarantees made by the Irish Government and the transfer of billions in toxic property loans to Ireland's National Asset Management Agency (NAMA). Supposedly, no further state aid should have been necessary from this date.

Ordered by Brussels to divest itself of assets so as to free up competition - though willing buyers in the current market may be difficult to find - BoI agreed to cut back its UK corporate lending, sell its New Ireland Assurance, ICS Building Society, its stake in Irish Credit Bureau as well as its brokering businesses. The Bank is further committed to helping new entrants into the Irish banking market - an invite to compete against it! Little wonder that banks throughout the EU are loathed to take this route to salvation. The Irish banks, unfortunately, have no other choice, all are either nationalised, like the now infamous Anglo Irish Bank, or heavily indebted to the Irish Government, with much of their loan book transferred to NAMA.

Saving another of its banks was just one matter that the Irish Government was having to contend with. The money markets and sovereign credit ratings agencies were not convinced that the country could cope with the financial tsunami drowning it. The country is suffering a severe depression verging on recession with a drop in GDP exceeding 15 per cent from its peak, unemployment at 13 per cent, a Budget deficit of 14.3 per cent of GDP in 2009 and expected to be about 11 per cent this year. Add to this a cut in public sector pay averaging 13 per cent, cuts to child and other benefits, and the alarming fall in tax receipts largely caused by the property market crash - is this what is meant by the term "siege economy"?

NAMA, the Government's toxic waste depository, is currently holding €40 billion in dodgy property assets (about half the banks' nominal total). Add to this a bank system bail out requiring several revisions to estimated final total costs and with Anglo Irish Bank announcing on 31 August 2010 a first half loss of €8.2 billion - are there any four-leaf clovers left in Ireland?

Ireland is so near and yet often feels so far and one has to remember that these catastrophic sums of money are hitting a population of only 4.5 million (2010 estimate). It is one of the UK's most important export markets with a share of 7.5 per cent or some $27 billion in 2009, well over twice as much as our exports to India and China combined. The UK really wants a fiscally secure, prosperous Ireland.

Money markets and ratings agencies are quite merciless however and every utterance by any senior Irish politician can alter that all important 10 Year Bond Rate which at one point in the last week of September touched 6.9 per cent before settling down to 6.55 per cent at week's close. It doesn't help any that the ratings agencies take account of the costs of all NAMA's bad loans plus the possibility of having to recapitalise the Irish banking system - maybe as high as €50 billion - when assessing the country's creditworthiness.

This accounts for reports in the papers of Ireland's 2010 deficit being 25 or more per cent of GDP, though the Irish Finance Ministry is calculating all necessary re-financing amounts on a 10 year basis, so things are still bad but not as startling as the ratings agencies purport. Mr Lenihan is also at pains to point out that the country is fully financed until the end of June 2011 with a positive cash balance of €17.7 billion and others have suggested it could be closer to €20 billion.

The trigger for the latest unease may have been articles in the media, in both the UK and Ireland, again questioning the Irish Finance Minister, Mr Brian Lenihan's ability to push through a further spending cut of €3 billion in his December Budget. This followed very disappointing news that the economy dropped by 1.2 per cent in the second quarter of this year when it was widely predicted that it would rise by 0.4 per cent. On Friday 24 September, The Times' Sam Fleming ran a business section article titled "Irish economy may face 'long, slow death' as analysts urge EU bailout".

Mr Lenihan had already made his position clear the day before saying that the economy had "stabilised" and was not heading for a double-dip recession. He accepted the danger of things getting much worse before getting better, saying: "...that's always the danger...confidence building does require the Government to put the public finances is order..." and repeating Dublin's financing until end Q2, 2011.

Giving Mr Lenihan his strong backing is Oliver Whelan, Director of Funding and Debt Management at Ireland's National Treasury Management Agency (NTMA) who told The Times: "The EFSF - European Financial Stability Fund - is there for countries that don't have access to the capital markets. We Do. And we would rather voluntarily take the domestic measures required to cut the deficit than be subject to the IMF conditionality which would accompany the borrowing."

Those "domestic measures" will undoubtedly spread misery throughout Ireland for some years to come. Enhanced largely by a housing and commercial property boom, the Irish Government tax-take rose 160 per cent between 1997 and 2007 to reach €47 billion. This year it is expected to be a mere €31 billion, "still well short of expenditure"

The property crash, both commercial and domestic, is the main though not sole cause, of Ireland's banking collapse and Government fix. Loans for property and backed by property simply got out of hand with too little control and too few questions asked. House prices are about 38-40 per cent lower than they were in 2007 when the market was at its peak. An idea of the scale of the problem can be measured by the fact that the average house in Ireland sold for £65,000 in 1996-97. This average had soared to £245,000 by 2007, on similar terms to those available in the UK, 100 per cent loans, self-certifying etc.

Writing in the Irish Times on Thursday, 30 September 2010, Isabel Morton explains: "...Another, somewhat less high profile, example of a Dublin 4 trophy home is the Moorings...originally...in February this year, asking €4.25 million.

"It's launch on the sales market was unusual...no attempt to hide the fact that the property was being sold by Bank of Ireland. Indeed...the likelihood that it would be the first of many 'forced sales'.

"...despite its prime location, the Moorings...recently had its asking price reduced to €2.95 million.

"If the value of these properties continues to drop, the value of lesser properties will follow suit in a downward spiral.

"This is bad enough for individual property owners, whose homes are plummeting in value. However, the bigger picture is infinitely worse as our banks' - and indeed our entire country's - wealth is so tied into peak property values."

Welcome to Ireland 2010.