Irish Emergency Budget: On Tuesday, Finance Minister Brian Lenihan presented a rake of tax hikes in his latest budget; committed to doubling the national debt by moving toxic property loans from banks but no significant reforms were announced. The question has to be asked again, why does it take so long to bring about change in a country with a population of just over 4 million?
Lenihan said in his speech: "Many of the factors that made us an economic success story in recent years are still with us: social cohesion, political stability, a young, well educated, flexible workforce, a pro-enterprise, export oriented economy. All of this remains intact. What is wrong in our economy, we can fix if we take the right course of action now and if each one of us signs up for that course of action.
The economic boom this country has enjoyed in recent decades brought a remarkable rise in our living standards. Rapid growth in the early years was driven by exports. As in many other countries, the later stages were accompanied by a property bubble, fuelled in part by very low interest rates and the ready availability of credit. Some did warn that the housing market was unsustainable. Plenty did not. The consensus view suggested a soft landing. That prediction proved wrong. With the benefit of hindsight, it is clear that more should have been done to contain the housing market. We became too reliant on the construction sector for growth and tax receipts."
The benefit of hindsight indeed!
Recall that it's less than two years ago, when then Taoiseach Bertie Ahern wondered why "cribbers" on the sidelines didn't commit suicide.
The cabal of ignorant politicians, who put their own interests first, and the vested interests, simply had no tolerance of dissent.
As for the "young, well educated, flexible workforce," the Financial Times Lex columnist writes today: "After the party, the bill. Ireland’s second emergency budget in six months will have the country’s “young, well-educated, flexible workforce” making a bee-line for the exit. Its construction-led recession – the economy could contract by 8 per cent this year and unemployment hit 12 per cent – has left consumers under severe strain...Mr Lenihan sees the future of the Irish economy in exports. They will be no panacea, at least in the short term: Ireland can hardly devalue its currency to stimulate demand. By pulling this hard on the tax lever, Mr Lenihan may cause Irish history to repeat itself. Ireland may only succeed in exporting its best hope of recovery: its talent."
Rossa White and Stephen Lyons in a report from Davy say:"the disappointing aspect of the Budget was that it did not have any real vision for the future. Ireland has to return to the late-1990s model, which was based on exports. To do that, reducing the cost base of the state is imperative. This Budget focused far too much on tax hikes and cuts in capital spending and not enough on reducing the public cost base, especially pay and pensions. Moreover, the tax increases were skewed almost exclusively towards labour.
We have stressed repeatedly that successful fiscal consolidations weight the adjustment towards current (not capital) expenditure rather than tax.
That was the lesson from Ireland's 1980s experience and results mainly from the second-round boost to competitiveness – this is especially important in an economy like ours that is so reliant on trade. Note, too, that Ireland's greatest advantage is its demographics: it has the highest proportion of graduates in the 25- to 34-year age cohort in the EU (with the exception of Cyprus). These graduates will be hit by significant hikes, averaging at least 3.5% of disposable income."
A new agency, the National Asset Management Agency (NAMA) will be established to buy the loans and the properties securing them at a discount. The loans amount to a fifth of all loans in the six State guaranteed Irish financial institutions. The agency will be operated by the National Treasury Management Agency (NTMA). The assets will be purchased at a discount “to reflect the loss in the value of the properties”, Lenihan said but he did not reveal the so-called "haircut" or discount.
Lenihan said this would “result in a very significant increase in gross national debt,” but the cost would be offset over time from the sale of the assets.
He said that, if the debts were not recovered, a levy would be applied to the banks to recoup any shortfall.
If the NAMA forces say a 40% discount to buy bank loans of €90 billion, it would purchase the assets for €54 billion. This would double the national debt to €108 billion.
Fine Gael finance spokesman Richard Bruton said: “Fianna Fáil has taken a massive €90 billion gamble on behalf of the taxpayer in bailing out the very property speculators and banks that dragged our economy over a cliff in the last few years.”
He said that the cruel choices that had to be faced were not the product of bad luck but the product of bad government.
“What people see, as they look at this Budget, and the history of the last number of months, is that the banks bailed out the developers and the Government bailed out the banks.
“Today, the taxpayer is being asked to bail out the Government, once again. The question I ask is: who is going to bail out the taxpayer?”
Loans provided by Irish banks for foreign commercial properties in London, Paris, New York, Boston and many other foreign locations, will be included in the new scheme.
Months after developer Seán Dunne had paid € 54 million per acre for the site of Jurys Hotel and more than € 57 million per acre for the site of the Berkeley Court Hotel - - a total of € 379 million - - he bought a half-share in a number of blocks at AIB Bankcentre for € 200 million.
In 2006, Ireland's biggest banks were selling off their properties to feed the boom, at its height!
On the NAMA, the Davy report says write-downs on transferred loans will be offset by a reduction in risk-weighted assets.
It is acknowledged that the transfer of loans at a discount to book value will see the banks incur a loss. However, the hit to capital will be offset by a reduction in risk-weighted assets. The commercial loans will be replaced by government bonds with a zero risk weighting, which will be used by the agency to acquire the loans. Rossa White and Stephen Lyons say they understand that these bonds will not require funding from debt markets but will take the form of an IOU with the participating banks. In the event that the crystallisation of losses leaves a participating institution with a capital shortfall, the State will insist on participation by way of ordinary shares in the relevant institution. It is expected that banks will be willing participants in the scheme, but legislation will be forthcoming that will give the agency mandatory power to acquire bank assets if necessary.
The Davy report says the announcement of the new agency is a clear positive in the sense that it indicates that the Government has little appetite for nationalisation of the banks and that the NAMA structure should now ensure the banks' survival.
"In addition, in the event of a future levy from the government, we take comfort from the 20-year time-frame put in place following the failure of the Insurance Corporation of Ireland (ICI) in the 1980s. These banks are looking investable again as they should return to profitability and hopefully sustain the recent share price rally," the report says.
