27 November 2010
You know that things must be getting desperate in Ireland when the Irish want to draft in Ryanair chief executive, Michael O’Leary to help run the country.
According to a Reuters report, the no-nonsense Cork-born airline chief executive, whose opinion of the country’s politicians is regularly expressed in expletives, is a popular choice as the country seeks to extricate itself from the mire. But O’Leary has ruled out entering politics.
The crisis in Ireland continues to unfold as I write this blog post. Yesterday’s developments included the European Commission seeking to double the size of the European financial rescue fund (it was knocked back by German chancellor Angela Merkel, according to the Wall Street Journal), and investors being so underwhelmed by the proposed bailout and government austerity plan that yields on 10-year Irish government bonds surged above 900 basis points, the highest level since the euro.
One reason for market sniffiness was the skepticism that any Irish government, of whatever stripe, would be able to deliver the required €15bn of austerity cuts over the next four years without civil unrest.
Investors are also concerned about the heroic assumptions made by the government of Taoiseach Brian Cowen about future growth, as outlined in Ireland’s National Recovery Plan 2011-2014. The government said growth will be 1.75% next year, 3.25% in 2012, 3% in 2013 and 2.75% in 2014. To some observers these numbers lack credibility given the depressed state of export markets like the UK and the widespread unemployment Ireland’s doubling-up of austerity measures will bring. There are also fears that rising unemployment coupled with falling house prices will cause thousands of homeowners to default on their mortgages, enlarging the black holes in the nation’s banks.
Investors are also concerned about the lack of any reference made in the “recovery plan” to the restructuring of the banks – which in Ireland include Bank of Ireland, Allied Irish Banks and Anglo Irish. To add to investor unease, the EFSF is now perceived as being too feeble for the task that awaits it, in view of the likely domino effect on other PIIGS countries should Ireland go bust.
In febrile markets not dissimilar to those seen in September to October 2008, some commentators, including Ambrose Evans-Pritchard, now believe the disintegration of the euro is only a matter of time. The Economist believes the proposed Irish bailout failed to calm markets because “Rescues need a bit of “shock and awe” to convince investors. The bond markets must be startled by the size of the package, persuaded that the authorities will do whatever is needed—and not be invited to doubt it by talk of making investors foot part of the bill in future. They also have to believe that a country’s difficulties concern liquidity (ie, they can repay debt eventually) not solvency (ie, they can’t).”
Even though Ireland’s “real” economy is described as sound by some economists, it’s clear that former Taoiseach, Bertie Ahern, who was in power from June 1997 to May 2008, has much to answer for. His government continued to offer tax breaks to Irish property developers and the construction sector even after the Emerald Isle’s property bubble had burst in early 2008, giving further impetus to the country’s unsustainable construction boom. Financial regulation was so weak that, back in 2005, the New York Times described Ireland as the “Wild West” of global finance. In a regulatory near-vacuum, there was little to stop banks and insurance companies from behaving with the utmost recklessness – or fraudulently.
Writing on Benzinga Professor William K. Black suggests it was just as well Lehman Brothers collapsed when it did: “Ireland’s largest banks hyper-inflated twin bubbles in commercial and residential real estate. They grew massively. Fortunately, Lehman failed and the Irish banks’ ability to grow collapsed – which meant that the bubbles imploded in late 2008. Had it not done so, the Irish banks would have continued their staggering growth and caused almost incomprehensible losses (relative to the size of the Irish economy) when the (vastly larger) bubbles finally collapsed.”
But what was the root cause of this shameful debacle? Some blame the whole thing on Ireland’s abandonment of the punt in favour of the euro in January 1999. This arguably enabled the monetary regime to get out of kilter with the real needs of the economy. Others argue the real reason for Ireland’s economic catastrophe was “market failure”.
Still further commentators suggest this disaster was the result of a peculiarly Irish failure, caused by crony-ism between the governing Fianna Fail party and a reprehensible bunch of property developers and bankers. Others contend that what really crippled Ireland was its government’s decision to provide a blanket guarantee to all depositors in the country’s banks in October 2008. I am sure there are degrees of truth in all these suppositions.
But I think the Reuters finance blogger Felix Salmon hit the nail on the head in a recent post – it really boils down to a form of collective insanity or self-delusion.
In the same way that everyone in 17th century Holland deluded themselves about the value of tulip bulbs, everyone in Ireland – including supposed astute firms of accountants like PriceWaterhouseCoopers – in 2000-08 started deluding themselves about property values. (I remember visiting Co. Galway in August 2006 and Dublin in May 2008 and thinking the country must have been living in some sort of parallel universe where property values were concerned with tiny houses being sold for €3 million or so).
Salmon wrote: “Bankers, auditors, regulators, politicians—all of them made the same mistake, in Ireland, which was to believe the numbers they were being shown. Numbers are like that: once they’re printed and ratified, they become perceived as hard facts, in the way that merely verbal statements never are. If a politician says “our banks are solvent,” that’s a contentious statement; if PwC comes out with a massively overoptimistic take on the strength of Anglo’s loan book, backing up an official-looking report with lots of numbers and institutional authority, people simply believe them implicitly.”
This article was first published in QFINANCE on Friday November 26th, 2010