Irish people still mad as hell over fat cats

A worker removes the Anglo Irish Bank sign from a location in Dublin last week. Anglo Irish was the worst offender in the Irish property crash

There was a very minor, very brief, but also very interesting court case here last week.  It involved a journalist I happen to know, a work colleague of mine for many years. 

My friend, the former Irish Press reporter Des Nix, had been caught by the Gardai (police) in Dublin driving at a little above the speed limit, and he had been issued with the usual €80 automatic fine. 

Dozens of these fines are issued every month for parking violations and minor speeding offenses.  You get the penalty notice in the post and if you pay on time you don't have to go to court.  That's what most people do. 

But Des, a law abiding, solid citizen in every way like the vast majority of people here, decided that he was not paying.  Instead he wrote back to the Garda office and said that he was returning the speeding ticket and that he was refusing to pay the fine.  

He was refusing to pay, he explained, not because he was denying that he had unintentionally exceeded the speed limit, but because money going to the state was now being used as "a slush fund to pay gangster bankers."  

He said in his letter to the fines office that his refusal to pay was "an act of civil disobedience."
Having failed to pay the fine on time, he was summoned to court. He appeared before the judge last week, but the prosecuting Garda (police officer) failed to turn up in court on the day so the case was dropped. 

After his court appearance Des told reporters that he thought it was unacceptable that the government should act as the "bag men" for the bankers and bondholders who are taking money from "people who never had any dealings with them."  

Which is precisely how the vast majority of people here feel. They deeply resent the fact that ordinary taxpayers here are now being saddled with the vast bill for the IMF-EU bailout, and that most of the money is being used to pay back the foreign banks and bondholders who gambled on the Irish property market and lost.  

A huge chunk of the money that is raised in taxes here -- and in all other sources of state revenue like my friend's speeding ticket -- will in the future be going to pay back the massive bailout from the IMF-EU.  Even paying the interest on the bailout money each year is going to take a significant amount of state revenue.  

As we have pointed out here before, the primary reason for the €85 billion euro bailout is to prevent an Irish default and to enable our now state guaranteed banks to repay all the money that was pumped in here by the German and French banks and the bondholders who all wanted a piece of the action in the Irish boom. 

Most ordinary people here feel that this is unjust and unfair.  They deeply resent the fact that so much of their tax money in the years ahead will be used in this way instead of being spent on schools, hospitals and all the other services provided by the state which are in need of improvement. 

They deeply resent the fact that so much money is going to be sucked out of the Irish economy every year at a time when we desperately need it at home to get things moving again.  

In fact resentment is far too mild a word to describe the feelings of the majority of people here about what is happening.  A better description would be seething with anger. 

People here mistakenly believed that the new government would be able to offer an alternative solution to the deal negotiated by the previous administration.  Now they have woken up to the truth.

Now they realize that the new government is not able to offer any alternative to the economic crucifixion of the country.  And they are boiling with rage as a result.

Talk to anyone here right now and that fury comes pouring out.  Some people talk about leaving the country rather than staying and seeing their taxes being used to pay off the billions the banks owe. 

But others -- a small but growing minority -- talk about staying and refusing to pay into an economic system they now see as unjust.  What they are really talking about is civil disobedience. 

The stand taken by my friend Des Nix is probably one of the first examples of the kind of action that a lot of people here might decide to take in the future.  Which is why what happened in court last week is potentially revolutionary. 

Suppose people decided to stop paying not just speeding tickets, but car tax, waste collection charges ... even income tax? 

This might seem far fetched now.  But those of you who are old enough may remember the tax marches that brought the center of Dublin to a standstill back in 1979.   That was over what was perceived as an unbalanced tax system at the time, an internal matter.

But the situation facing taxpayers here now -- all taxpayers -- is a far greater injustice, with everyone being forced by external forces to carry a heavy tax burden for at least the next four or five years (and possibly much longer), not to improve life here but to repay the billions our banks owe to foreign banks and bondholders.  

There is no sign of widespread civil disobedience here yet.  But mark my words, give it time. 

Des Nix may have been the first.  But he won't be the last.  Unless there is significant debt restructuring and burden sharing with our EU partners and the IMF -- unless the foreign banks and bondholders accept that they have lost a lot of the money they lent into Ireland -- there is going to be trouble. 

Unless this is done the ordinary Irish taxpayer will have to carry the entire enormous debt burden, and that will cause public outrage because it is seen as totally unfair.  Not much has happened yet because although the recession is deep and unemployment is high, the real impact of what is happening has yet to hit us.

When the cumulative effects of the cutbacks and tax hikes really start to hit home in the years ahead, there is likely to be a mass reaction with street protests and possible widespread civil disobedience.   

It may only take a single issue -- something like the means testing of the old age pension, for example -- to set it off.  But once it starts I believe it will be difficult to contain, and the authority of the government and the cohesion of Irish society will then be at risk.  

This may seem alarmist at this stage, but there is a serious underestimation at EU and IMF level of the anger and bitterness that is now festering among ordinary people here at the situation we face. 

The bottom line is that the boom was not driven by ordinary people here, yet they are being forced to pick up the tab for its collapse, a tab so big that it has bankrupted the nation, stolen our economic sovereignty and will swallow a huge part of the taxes we pay for years to come. 

Over the past week we have seen several developments which have added fuel to the flames of fury here.  First up was the revelation that the former head of Ireland's biggest bank AIB, the black hole which has been taken over by the state, got a €3 million severance package when he was removed last year. 

He was part of the senior management team throughout the period of the boom when AIB went completely off the rails.  Yet he has walked away with a personal fortune at a time when thousands of ordinary people are struggling to keep their heads above water. 

That is just one example.  Details of the departing pay and pension packages given to many senior managers who were key figures during the boom were published last week and added to the outrage of everyone else. 

Also last week, two important reports were published. The first was the one on the collapse in Irish banking which was commissioned by the last government and produced by the respected Finnish banking expert Patrick Nyberg. 

Finland came through a banking crisis over a decade ago which is why he got the job.  
But his report was disappointing.  It told us what we knew already, that the crisis was caused by poor regulation, flawed lending policy and what amounted to a "mania" in the banks which replaced normal risk management. 

What Nyberg did not do was name names.  He did not identify all the people who had been in the key positions in the various banks when the mania was in full flow.  Instead he spread the blame across all of Irish society. 

The following sentence from his report was run as a headline across the front page of The Irish Times: "The extent to which parts of Irish society were willing to let the good times roll on until the very last minute, a feature of the financial mania, may have been exceptional."

This enraged ordinary people even more. Was Nyberg saying that we were all to blame for what went on in the banks? 

Were we all to blame for the tens of billions that were lost in property speculation?  Were we all to blame for the failure by politicians, regulators and banks to calm the market? 

The other report which emerged last week was the one recommending the sale of state assets (like the electricity and gas utility companies) to pay back some of our debt.  This may well result in higher prices and even poorer service for ordinary people. 

And the bottom line is that it is unlikely to raise more than €5 billion when our total debt is now heading for €250 billion.  So we would be selling the family silver to give the money to the foreign banks and in the end it would not make much difference, except that ordinary people would eventually lose out.

Much more of this and my friend Des Nix will not be the only one making a stand.

Bargain hunters feast on bust property in Ireland

Bargain hunters line up for the property auction at the Shelbourne Hotel in Dublin last week

So is the Irish property crash over?  Have property prices here hit bottom at last? 

All eyes in the country last Friday were on the first mass auction of distressed properties since the bubble burst.   The sale of a mixture of over 80 apartments, houses and commercial properties had been widely publicized in recent weeks, with reserves (minimum prices) for the auction pitched at about one-third what the properties had been worth at the peak of the boom.

It was going to be the biggest test of just how far the market had collapsed, the experts said.  It would reveal just how far prices had fallen and put a floor under the property market for the future. 

The properties were mostly in Dublin but some were down the country, and the main thing they had in common was that almost all of them were being sold by receivers (court appointed administrators) of bust developers or on behalf of broke bank clients, or else they had been repossessed.

The mass auction was held in the biggest function room in one of Dublin's poshest hotels, the Shelbourne on St. Stephens Green.

So many people turned up in search of a bargain that the crowd spilled out onto the pavement and the Gardai (police) arrived to maintain order. 

Inside in the auction room there was seating for 350, with standing room for an additional 500.  And even with that amount of space people were not able to get in. 

All but two of the 82 properties on offer were sold in a few hours, amid frenetic scenes the likes of which have not been witnessed since the height of the property madness here four or five years ago.   

The real estate agents involved -- a U.K. company that specializes in handling fire sales of this kind -- said it was so successful they are going to have another one, much bigger, with more properties, in a couple of months.  

The event illustrated a few things clearly.  One was that, in spite of everything the country has gone through, a lot of Irish people still have not lost their fascination with property as an investment.  

Another is that there are still a lot of people here with plenty of cash at their disposal. And their fascination with property borders on the obsessional. 

They don't like shares and they don't trust the banks.  So if they think prices are low enough they still fall over each other in a rush to buy property.  

So were there real bargains to be had?

Well, yes, there were some properties that seemed cheap.  One pub, which sold for €3 million in 2005, had a reserve price of just €260,000 and there was a lot of interest as a result.  It went for €400,000 in the auction, which seems like a bargain. 

But the pub is in Arklow, a town in Wicklow which has lost most of its jobs.  And we all know the pub trade in Ireland, especially in small towns like Arklow, has been struggling badly in recent years.

So a bargain? I'm not so sure.  If it can't make a profit it's not going to be cheap at  €400,000, even if it once sold for €3 million.

Another property that attracted media attention was a studio apartment in Temple Bar, the trendy "Left Bank" area of old Dublin beloved of tourists. It sold for €126,000 (nearly 60% over its reserve price) and during the boom here it would have made more than twice that. 

A bargain?  Well, maybe.  Temple Bar is also a favorite weekend destination for stag parties and younger tourists who want to get the Irish pub experience, listen to diddle d-i music and drink plenty of Guinness. 

Which means it's not necessarily the best place to live, and a lot of local apartment dwellers have learned that the hard way.  Add in the fact that there are thousands of unsold apartments around Dublin in areas where you don't have to step over the vomit in the morning, and the studio in Temple Bar seems like less of a bargain.

So maybe not all the properties sold last Friday were as much of a bargain as the media suggested.  Even so, the mega auction was certainly a ray of hope, however faint, for the property market here.
Real estate agents had tried a similar bumper property auction here in April of last year and only six of the 70 properties being sold that day found buyers. So last Friday did show that confidence is starting to return. 

Because of the variety of properties being sold and the fact that they were a mix of commercial and domestic, of houses and apartments, it's hard to be definitive about what it told us about the market.   Looking across the auction results, I think it would be fair to say that it suggests that prices in general are now just under half what they were at the peak.  

For example, a few properties last Friday were houses in Dublin 14, around the mature Churchtown area.
This area was never as expensive as Dublin 4 or the costal strip on the south side of the city. But it's a solid middle-class family area with good facilities and was always a desirable place to live.  

Last Friday four houses in the area sold at the mega auction for prices in the €400,000 to €500,000 range, or just under half what they were making during the boom.  

Local real estate agents say that these prices are very close to what similar houses in the Dublin 14 area have been making in recent months.  So it seems, for the moment, that is where the floor is in the market. 

Using the established Churchtown suburb as a guide, we're down between 50% and 60% from the top of the market about four years ago.  That's what the real estate agents want to think. And that's what the few people who have been buying property want to believe. 

They want to believe we have now reached the floor and that things won't get any worse.  But I'm not so sure.  

And the reason I'm not so sure has to do with a few rather bemused people who walked past the crowd outside the Shelbourne last Friday.

They were none other than the now famous Ajai Chopra and his mates from the International Monetary Fund and the EU who were in town last week for the first inspection of the Irish government's books to monitor our progress in cutting state spending to meet the targets that were agreed when we got the bailout money. 

The Shelbourne happens to be close both to Government Buildings and to the luxury hotel our IMF/EU masters stay in.  So it was not that surprising that Ajai and his chums happened to stroll past. 

What they thought of the renewed outbreak of property fever can only be guessed.  Their expressions caught on camera are of mild embarrassment, as though they had stumbled across something they would rather not have seen.

Whatever they thought of the shenanigans in the Shelbourne, they seem to have been less than impressed with the Irish government.  They issued a bland statement saying they were pleased that Ireland had met all conditions for the loan in the first three months since we got the bailout cash.  

But this did not fool anyone.  The fact is that last year the bill for the state payroll here was €18.8 billion, which was 60% of our total €31 billion euro tax revenues.  This was up from 37% of tax revenues in 2007. 

What’s happened is that tax revenue has collapsed since then but state pay has continued to increase. Now you don’t have to be an economist to see that this can’t go on, particularly now that we have huge interest bills to pay on the bailout and bank rescue.

Little or no progress has been made in reducing this state worker pay bill beyond the small adjustments that happened a year ago.  Instead the government has been sticking with the ludicrous Croke Park agreement under which the unions were guaranteed a year ago there would be no further cuts in pay for state workers until 2014, on the basis of increased productivity.

This has turned out to be a joke, with no measurable increase in productivity over the past year even though the Croke Park deal was supposed to deliver real change in the public service fast. 

Instead we have had more revelations about long holidays, inefficiency, poor service and so on … and of course despite the small cuts a year ago state workers are still earning far more than their counterparts in the real economy, and have guaranteed jobs for life and generous pensions that private sector workers can only dream of. 

The fact is that NO progress on the state sector pay bill has been made in the three months since we got the bailout.  And you can be sure that Ajai and his hit-men pointed this out to the new government behind the closed doors of Government Buildings. 

Which may explain why there were three cabinet meetings in four days last week.  And why the minister in charge of the public service made a tough statement saying that the public service was “not fit for purpose” and that we needed a service that was “leaner, more efficient etc.”

No doubt all this was for the benefit of our IMF and EU masters to give the impression that the new government has got the message.   But talk is cheap. 

Getting real change is going to be very difficult, particularly now that Labor, which depends heavily on the public sector unions, is part of the government.

What's Another €24 Billion?

The sky here was dark last week with flocks of chickens coming home to roost. 

After all the promises in the election about a new approach to the economic crisis to protect Irish taxpayers, all the talk about standing up to Europe and making bondholders share the burden, all the guff about telling the European Central Bank (ECB) that we would do things our way, not Frankfurt's way, last week we found out that nothing is going to change. 

There is no real difference in policy between the new government and the last government.   The policy is still to pay up in full and let the Irish taxpayer take the pain.

We will be doing exactly as we are instructed to do by the ECB.  We won't be burning any senior bondholders, or any of the big European banks who lent our banks the money to fuel the property boom.
Instead of that, the Irish state and therefore the Irish taxpayer will be shouldering the full massive debt that is now sinking the country. 

That debt is set to grow even more enormous with the news last week, following the publication of the stress tests on the Irish banks, that our zombie banks need an extra €24 billion.  This will mean that in total we will be sinking an incredible €70 billion into them. 

And bear in mind the main reason they need the money is so they can go on meeting the repayments on all those bonds and on the massive loans they got from the German and French banks.  

In what was the most pathetic climbdown heard here for some time, the new Minister for Finance Michael Noonan last week admitted the truth and even tried to deny that Fine Gael had promised anything else during the election.

Noonan told journalists last Friday that the government had ended its efforts to force senior bank bondholders to accept write-downs because when he had raised this with the Frankfurt-based ECB, they had said "No."
But what about all the tough talk, all the threats Fine Gael and its coalition partners Labor made during the election? 

“We never said we would burn bondholders," Noonan insisted.  "We said we wanted burden sharing (with senior bondholders) but would not do it unilaterally.  We would only do it with Frankfurt’s agreement, and we didn’t get the agreement.”

And the Labor Party, with unbelievable brass neck, chimed in with the same line.   A few weeks ago their core election message was that they would get tough with Europe and the bondholders and demand burden sharing. 

On the campaign trail Labor leader Eamon Gilmore was almost frothing at the mouth at the injustice being perpetrated on the ordinary Irish taxpayer.   Now they are saying that, er, this is not what they meant at all.  Oh no.

It can only be done by agreement, you see, and Europe won't agree.  So we're stuck. 

Another humiliation last week was the news that the ECB would not be providing Irish banks with a proposed medium-term loan facility, to replace the present emergency funding they are on which has to be renewed every week or two. We had been given the impression that this was in the bag.  But again, the ECB said no.  And that is that.

So after all the bullish talk of facing down Europe, the new government has had a baptism of fire and a high speed lesson in who's the real boss. 

And the real boss these days is not sitting at the cabinet table in Dublin.  He and his colleagues are sitting in the ECB boardroom in Frankfurt.

Our problem is that without the money our banks are being  loaned by the ECB, they would collapse in the morning.   We may not like the deal, but we have no alternative because nobody in the money markets will lend to us.   It may not be pretty, but that's the reality.  

The scale of the problem we face grew dramatically last week with the news that the stress tests had shown that the Irish banks need another €24 billion to meet capital requirements.    It's almost inconceivable that they have got themselves into such a deep hole.

In total, as I said above, this means that it will take €70 billion to fill the hole -- an unbelievable amount in a country with four and a half million people.

How did the Irish banks do it?  A few hundred million to this big developer and the same to his buddies, and then a few tens of millions to this smaller developer and the same to his buddies and before you know it you're talking billions -- even €70 billion. 

And of course it wasn't just for projects in Ireland.  We're talking global development here.
All being run from this tiny island on the edge of Europe.  Is it any wonder everyone loves the Irish!   You couldn't make it up.     

On top of that is the amount of money shoveled out by the banks to tens of thousands of property buyers here who were given 100% mortgages at the top of the boom when prices were really crazy.  Now property prices have fallen by more than half, job losses have soared as the economy has shrunk,  and these people can't or won't pay back the banks.  

Even if we could once have followed the American example and done a Lehman’s on it by letting a bank or two go to the wall, that is no longer an option because of the state guarantee given by the last government. 
This means that the bank debt has been transformed into sovereign or state debt.   So if the banks go down, the country goes down with them. 

There is a growing awareness here of just how disastrous that decision two and a half years ago was for Ireland.  In the beginning there were just a few lone voices pointing this out, the odd maverick economist or politician. 

But those lone voices are now becoming a deafening chorus.   The realization that the enormous bank debts are on such a scale that they could bring down the country is beginning to sink in with people in general. 
Last week, in his statement to the Dail (Parliament) on the bank stress tests, Noonan gave the most blunt judgment yet on the state guarantee to the banks.

“Tuesday, 30th September, 2008, will go down in history as the blackest day in Ireland since the Civil War broke out," he said.  “The 30th September 2008 was the day on which the then government extended the infamous guarantee to the Irish banks ... "

On that fateful night in September 2008, the senior bankers covered up or did not understand the scale of the problem, nor did the few government ministers and officials involved in making the decision.  In the rush to stop the collapse of an Irish bank when the markets opened the next morning, the ministers, on behalf of the country, took on debts of such an incredible scale that no one in the room imagined their eventual size at the time. 

“The JCB and the swinging crane had become the logos of the banks, and Irish bankers were as likely to be funding apartment blocks on the Black Sea or dabbling in property schemes in Singapore, as they were to be investing in the Irish economy," Noonan told the Dail last week.

"The country has been left with an appalling legacy: a legacy of debt, of unemployment, of emigration..." 
There were two elements to the crisis back in 2008, and there are still two parts to the problem.   In 2008, we had a mushrooming budget deficit and  banks who were finding it difficult to get funds on the interbank market. 

Today we still have an enormous budget deficit, and thanks to the state guarantee we gave on all our bank borrowings neither the Irish state nor the Irish banks can borrow money on the international markets. 
So we're in a far more difficult position now. Instead of seeing light at the end of the tunnel, it's blacker than ever thanks to the huge amounts we have had to borrow since then to keep going. 

In spite of severe budget cutbacks, we still have a huge deficit because the savings we made are being eaten up by the increased interest payments on our bailout money from the EU and the IMF and on other debt we have. 

When you look objectively at this situation -- which is what the markets are doing -- it's pretty clear that we are in an unsustainable position.  That's why the interest on Irish debt being traded at the end of last week was over 10%.

The fact is that our debt burden and the interest payments on it are so huge that there is nothing left to revive the economy, and we are trapped in a downward spiral at the bottom of which is likely to be a staged sovereign default by Ireland over 2013 or 2014.  It's hard to see it going on any longer than that. 

Nor is it likely that the new government will last any longer than that, despite their huge majority at present.   Labor won't be able to take the pain and will peel off.  And after that it will be chaos.

The only alternative to this scenario is burden sharing, an acceptance by senior bondholders and by the German and French banks who poured money in here during the boom that they must take a heavy hit on the billions we owe them. 

And the EU and the IMF need to stop parroting drivel about having faith in the Irish economy to bear the heavy costs of the bailout.   We can't and we won't.  It's that simple. 

At the same time, the government here must take drastic action on spending cuts to reduce the budget deficit.  All that has happened so far is pussy-footing around that barely scratches the surface of the problem. 

The way we are going now, we are still spending over a third more than we raise in taxes, partly due to the increased interest burden.   Given the catastrophic situation we face that has to stop, and there is no time to do it gradually.  

If we make those extreme cuts in state spending quickly and also force through burden sharing, we have a chance.  If not, we are going to slide into default.  

Those of you who got out of here in the last five, 10 or 20 years because you could not find anything at home can stop feeling sorry for yourselves.  Instead you can start feeling sorry for those of us left behind.

Irish are still stressed out

It has been a stressful week here in Ireland, and no one was feeling it more than the former minister Michael Lowry. 

Back in the mid-1990s he was the minister for communications when Ireland's second national cell phone license was awarded to a company led by the businessman Denis O'Brien. 

O'Brien subsequently sold the business and made over €200 million, which became the basis for the billion dollar fortune he has made from phone businesses in the meantime.  But there were allegations right from the beginning that Lowry had influenced the selection process which gave the license to O'Brien's company rather than other applicants. 

A Tribunal of Inquiry was set up by the Dail (Parliament) to examine corrupt payments to politicians, and after running for an incredible 14 years, making millionaires out of the lawyers involved and racking up costs which are likely to exceed €100 million, it's second and final report was published last week.   (Its first report was the one which exposed Charlie Haughey.)

This second report by the Moriarty Tribunal (Michael Moriarty is the judge who ran it) is probably the most costly 2,000-page document ever written.  And to no one's surprise, it found that the awarding of the cell phone license had been corrupt. 

It described Lowry's actions at the time as “disgraceful” and detailed various covert ways it believed O'Brien had paid him off.  The report said that O'Brien gave Lowry the equivalent of around $1 million, either by way of direct payment or facilitated loans, in the years after he was given the cell phone license. 

Of course both Lowry and O'Brien flatly denied the findings, pointing out that the report is “just the opinion of one man,” Judge Moriarty.  They said it was all circumstantial and supposition and that there is no hard evidence of anything illegal.  They challenged the state to bring them to court, to put up or shut up. 
The government has sent the report to the Gardai (police) and the Director of Public Prosecutions to see if there is enough hard evidence in it to bring a case. 

But that is doubtful. There's a big difference between Moriarty deciding that he knows something and the police being able to prove it in court. 

Much more worrying for Lowry is the announcement on Tuesday that the Criminal Assets Bureau is going to examine the case.  This is the body that has the power to take assets from someone who cannot explain how they financed them. 

It has been used against major drug dealers and other criminal bosses here.  But there is no reason why it can't be used against anyone else, including a politician.

This week there is a two-day debate in the Dail about the Moriarty Tribunal report and its implications.  All of which is highly embarrassing for Fine Gael because Lowry used to be a big wheel in the party and played a leading role in raising funds for the party to pay off its large debt at the time.  That's what the opposition will want to focus on, not Lowry's murky personal finances.

And it's important that this matter is pursued to the bitter end, partly because foreign companies bidding for licenses and contracts here (there were several foreign consortia in for the cell phone license that O'Brien got) must be reassured that our processes are fair and independent.

But the real tragedy about all this is that it is taking attention away from where the spotlight should be this week, the publication of the all-important stress tests of the Irish banks.

On Thursday, the results of the latest stress tests of the Irish banking system by teams of outside experts will be given to the new government.  Finally, after weeks of waiting, the awful truth about our banks will be revealed.  

As if we didn't know already.  We all know it will be bad. The only thing we don't know is exactly how very bad the very bad news is going to be.   

There is already an extra €10 billion in fresh capital funding agreed for our banks under the EU/IMF deal for Ireland, which included €35 billion for the banks.  The last government delayed putting it into the banks as the election approached, deciding they might as well let the new government take the blame for putting even more money into our zombie banks. 

The new government has continued that delay, insisting that they need the stress test reports to tell them just how deep the black hole is before they fling any more money down it. 

Rumors here in the past few weeks have suggested that the extra amount needed to recapitalize our banks to the minimum level now required by EU rules -- on top of all that has been put in already -- could be at least double the €10 billion which had been planned.  Some people are predicting that even €20 billion won't be enough. 

The government is saying that no matter how bad it turns out to be, knowing is better than being in the dark.  At least we will then be able to see where the bottom is and we can draw a line under the situation. If we can quantify the full extent of the problem, we can start to tackle it.  

Certainly the government is right that the present uncertainty is killing us.  It has meant that the Irish banks have been unable to borrow funds at any price on the international money markets for months now, and have had to depend on the Irish Central Bank and the European Central Bank to keep them going.
Nobody else will trust them because they lied about the size of the black hole to the last government, and they are still minimizing the problem rather than facing up to it. 

So yes, we do need to know the truth.  But the government's view that these stress test reports will at last uncover the very bottom of the black hole may be a bit optimistic. 

The truth is that no one knows where the bottom is, and that includes the very experienced international experts who have been trawling through the books of the Irish banks for weeks now (and charging a fortune in fees for doing so). 

The problem is that stress testing banks is not an exact science.  It all depends on models used and the assumptions the testers make. 

As we all know, a huge part of the bad debt problem in the Irish banks is the result of the property crash. In the last week I have heard expert estimates of how much property values here have fallen that have varied between 35% and 60%. 

Even the experts can't agree on it, and to be fair to them it's very difficult because every house, every site, every half built office block or housing estate is different. 

Another problem is trying to assess whether we have hit the bottom, and again the experts don't agree.  So have we another 10% or 15% to fall, or are prices about to stabilize?

My own gut instinct is that we still have some way to go down because prices of ordinary houses are still far higher than someone on the average pay level can cope with on a 20-year mortgage. 

And, of course, these calculations and considerations are critical if you are trying to stress test Irish banks which are up to their necks in property. Every percentage point one way or the other costs them billions.  
Stress testing the banks means trying to predict the future of the property market.  And we all know how difficult that is.  

And it's not just about the big developers who borrowed hundreds of millions.  Many people are out of work here now, and many of them bought property during the boom at inflated prices when they were earning a lot of money. 

Now their pay has been cut or they have lost their jobs and they can't make their mortgage payments. Tens of thousands of bank customers are expected to default on their mortgage payments in the coming year.  And again getting a handle on this is difficult. 

The banks are also dependent on the wider economy, not just on a property recovery.  The dramatic slowdown in many sectors of the Irish economy has implications for repayments of business loans. There are all kinds of loans out there apart from the billions tied up in property.  

Putting all this together in a stress test model and hoping the right answer comes out the other end has to be problematic.  Also worrying is the fact that this is not the first time the Irish banks have been stress tested, and the experts were wrong before. 

But at least the figures we will get this week for the black hole in the banks will be an indication of the perceived size of the problem we face.  Then it's going to get really interesting.  

Already this week the state has said it is taking over another Irish bank, Irish Life and Permanent, which includes the biggest life assurance company in the country.  It has to inject massive funds to stop it collapsing, which means taking it into state ownership. 

And don't forget the state already owns Anglo Irish and Irish Nationwide, and it has a big majority stake in Allied Irish Banks.  In fact the only one it doesn't own is Bank of Ireland, but it has one third of that and rising. 

The Irish banks are basket cases and the entire system could end up in state ownership.  This is the huge problem the government faces, on top of the budget deficit problem. 

There is no sign of any give by the EU on the proposal for burden sharing which the new government has been pushing hard.  But something has to give if Ireland is to avoid a sovereign default.

Smiles as bail out crunch approaches Ireland

Prime Minister Kenny's St. Patrick's Day trip to the White House went very well, judging by the reaction in the American press and the way it looked on Irish TV, showing the instant easy rapport he had with President Obama.

Kenny is good in that kind of situation ...he's personable, relaxed, good company, he can tell a joke and deliver a speech. So back here we're not surprised that he carried it off so well and so effortlessly.

That kind of intimate, friendly setting is where he shines. His speech was poetic, moving and inspired (take a bow whoever wrote it), cleverly linking the experience of the slaves from Africa and the destitute Irish immigrants after the Famine and their joint role in building America.

Given Obama's Irish and African roots it was the perfect note to strike in advance of the president's visit here in May. And Kenny delivered the speech well.

In return, Obama said some positive things about our future ... and Lord knows we need to hear the positives because confidence here is at a very low ebb.

Equally, Bill Clinton's Irish America magazine address last week (and there's a guy who can really deliver a great off the cuff speech) was a boost, a reminder that all is not lost, that we still have the talents that make us unique and that, in time, we can rebuild our prosperity.

So yes, the uplifting words from our American friends were very welcome here last week. Boosting confidence in Ireland is important.

But unfortunately the economic problems we face are on such a scale that kind and inspiring words, no matter how well meant, cannot do much to help.

Equally, although Kenny did us proud in the White House last week, the fact that he is a socially engaging guy who has an easy rapport with other leaders and can deliver a prepared speech effectively does not mean that he can handle the biggest economic crisis to hit this country since the foundation of the state. The jury will be out on that one for a while.

As you may know, we are now reaching crunch point with our EU partners on whether they are going to relax the terms of the bailout that is keeping Ireland afloat. Our new Minister for Finance Michael Noonan, a famously tough nut, has spelled it out for Europe and the International Monetary Fund (IMF) in stark terms.

If it was just our budget deficit, then we could sort that out in a few years, painful though it's going to be, he told them. But when you add on the enormous bank debt on top of that, the situation becomes untenable.

There has to be some kind of shift, not just on the interest rate we are being charged, but on the extent of the debt itself. Or to put it another way, it has to be accepted that we are never going to be able to pay all the money back.

You can call it debt forgiveness or burden sharing or debt restructuring or whatever you like. But it comes down to the same thing. Europe better wise up to the fact that they're not getting all their money back.

Noonan may not have phrased it as baldly as that (even if he is known as Baldy Noonan), but he has put this to the EU leaders much more directly than Brian Lenihan would ever have dared. Famous for his blunt turn of phrase, Noonan has given them the message.

He has also made it clear that loading all this debt on the Irish taxpayer (thanks to the state guarantee that turned bank debt into state debt) is inequitable as well as untenable. The ordinary Irish taxpayer did not make this problem.

It was the German and French banks (mainly) who were out to make a killing in the Irish property market who recklessly lent all those billions to the Irish banks to lend on to our developers. And it was the European Central Bank whose job it is to regulate the national Central Banks in European countries which stood idly by while all this was going on.

It did nothing about it, even as the Irish property market expanded into a dangerous bubble and blew up.

These guys at the top of the French and German banks and at the top of the European financial food chain are the ones who took the risk, not the ordinary Irish taxpayer. Yet they want the Irish taxpayer to pay the price, to carry the entire debt burden, a burden so great that it will eat up a huge proportion of our tax revenues here and leave little to be spent on getting the Irish economy back in shape again.

It's true that the Irish banks behaved recklessly during the boom here and that financial regulation here was a joke. But the Irish banks were not printing the money -- they were borrowing it. The people who lent us the billions took a risk and when the property bubble in Ireland burst they lost.

Now they must take the consequences of that lost gamble. They must accept that they have to share in the pain. But instead of that the French and German bondholders and banks want all their money back.

The reason these banks want it all back is that they are protecting their shareholders and protecting their solvency. This thing is so big it has the potential to destabilize some of the French and German banks that gambled most heavily on the Irish market.

That's why French President Nicolas Sarkozy and German Chancellor Angela Merkel are being bullish on this. They are protecting their political backs and protecting the wobbling European financial market and screwing the unfortunate Irish taxpayer to do so.

They're bad, but even more nauseating in the past few days has been the president of the European Central Bank Jean-Claude Trichet. Even for a
Frenchman his hubris is a wonder, particularly for one who sits atop the organization which was asleep at the wheel when this huge financial pile-up across Europe was happening.

And boy is he patronizing. Responding last weekend to the signals coming from the Irish government that the bank debt on top of the deficit debt will be too much to handle, he said he did not agree.

He said he has confidence in our ability to take the difficult measures needed so that we can pay our debts.

Well thanks for nothing, Jean-Claude.

Quite by coincidence, as I was writing this column, an electrician arrived at my house this morning to fix the outside lights that did not survive the winter and are now blowing our fuses. The guy is middle-aged like myself with a teenage family and I've known him for a while. We sat down for a cup of tea in the kitchen before he started and shot the breeze about how tough the times are.

He said that in spite of the construction collapse he was surviving on "bits and pieces" of work because he has a lot of domestic customers like me who still call him to get small jobs done.

“So you'll be okay,” I said. “That's good to hear when so many of our plumbers, electricians, block layers and so on are emigrating.”

“Oh no,” he said. “I'm off as well at the end of the summer. We're all going to Australia. It's not that I can't survive here. It's just that I'm determined not to pay my taxes here and then see them being used to pay off all those greedy bastards who caused this in the first place.”

My electrician friend is not alone. In fact there are thousands, probably tens of thousands, who feel just like him.

They feel there is no future here either for themselves or their teenage kids who will be coming out of college in the next few years. So even if they can get by at whatever they do, it's not enough. They're out of here. Why should they put German banks before their kids?

We only get one life. And many people here don't want to spend it paying back the banks and bondholders who gambled their billions on Ireland and lost.

It's not the fault of the ordinary Irish taxpayer. And the sooner the EU, the IMF, the German banks and the European Central Bank wise up to this, the better for us all.

Irish Government suffers a shaky start as Europe says no

The new Irish government is off to a somewhat shaky start. You could almost feel sorry for them.

The customary thing here is for the media to give an incoming administration a honeymoon of a week or two to give them a chance to settle in. But this time it’s different. This time there can be no honeymoon.

Like many newly married couples in Ireland these days, the new coalition partners did not really expect to get one. Given the crisis we face, the country cannot afford the time.

The government has had to hit the ground running. As the new Taoiseach (Prime Minister) Enda Kenny said before the election, there is not a moment to lose. And the pace of events since he took power last Wednesday shows that he was right.

Last Thursday, the day after he became taoiseach, Kenny was on the plane to Brussels for a meeting with Jose Manuel Barroso, president of the European Commission. The next day he was in the thick of a full EU summit rubbing shoulders with the other prime ministers in Europe.

The emergency EU summit had been called to discuss Libya, but Kenny was also pressing Ireland's case for a better deal on the bailout. He got absolutely nowhere, and if he had any illusions about how tough it's going to be he won't have any left now.

All his illusions were shattered, and he looked pretty shattered himself when he got back home, saying that this was just round one.

Some of the simple things he has done in his first few days have been encouraging and good for the optics, as they say in political circles these days. The new taoiseach arrived on foot at Government Buildings for his first day at work, walking up the footpath through the waiting cameras and reporters who are more accustomed to seeing a taoiseach sweeping through the gates of the Dail (Parliament) in a chauffeur driven Mercedes.

His driver probably had dropped him off around the corner from Government Buildings, but somehow it didn’t matter. It looked good.

It was the same on Wednesday when Kenny appointed his new Cabinet. The practice in the past has been for the new ministers to go up to the president's residence in the Phoenix Park in a convoy of black limos to get their seals of office.

This time they left their ministerial Mercedes behind them and they all went up together in a mini-bus. It was an effective visual signal that we are entering a very different era in Ireland.

At the first meeting of the new Cabinet a further cut in pay for the taoiseach and his ministers was agreed. Again, a good way of sending out the message that everyone here will be affected by the cuts that have to be made (even if our ministers are still paid far more than their counterparts elsewhere!)

But as well as these positives, there were worrying signs as well. As we pointed out in this column last week, all the heady election rhetoric about radical change and new beginnings is being quietly shelved.

There are two excuses -- first, the financial crisis means reforms must wait, and second, the agreed program for government does not include many of the specific reforms that were in the individual Fine Gael and Labor election manifestos.

Let’s take a simple example, one that raised great hopes among the teenagers in our house. Before the election Fine Gael promised that the compulsory teaching of Irish in schools would be ended.

Now they are saying they will look at it, but not before a complete reassessment of how Irish is taught has been completed. Which could take years.

On a more serious note (although nothing is more serious in our house than the hated system that force feeds Irish to kids) there was Kenny’s promise to reduce the size of government. He still went ahead and appointed 15 ministers, as before, plus he even squeezed in an extra seat at the Cabinet table for a super junior minister, who will be able to speak at Cabinet meetings but not vote.

Of particular concern is the fact that Kenny ignored the promise he made before the election to reduce the number of junior ministers from 15 to 12. He went ahead and appointed a full team of 15, all of whom will have ministerial salaries and all the perks that go with being a minister. In a country this size it’s ridiculous even when we can afford it -- and absolutely crazy now when we can’t.

Also on the Fine Gael hit list as part of the drive to smaller government were the hundreds of so-called quangos, all those organizations funded by the state with offices and staff who never seem to do much except make red tape, spend tax money and produce mountains of paper.

We were told that Fine Gael would be swinging the axe on a hundred or more of these bodies without delay. But there is nothing happening so far on that, and instead the program for government and the plans of the two parties actually envisages the creation of about 30 new quangos. Of course these ones will be useful!

Before the election Fine Gael published a list of 28 major changes they would make in their first 100 days in office. Labor, of course, had its own list.

The problem for those trying to monitor whether they both keep their word is that the agreed coalition program has fudged many of the promises from both parties. Nice trick that.

One of the main planks in the Fine Gael election document was the undertaking to cut public sector numbers by 30,000. Getting down the numbers on the state payroll is essential if we are to get our deficit under control.
But Labor, which is backed by the public sector unions, wanted the lower figure of 18,000 jobs to go on a voluntary basis. The compromise in the program is that the number of public sector workers is to be cut by up to 25,000 by 2015, which is a less watertight commitment and a longer timeframe than before.
And it will be mainly voluntary. So don’t hold your breath on that one.

There are various other promises in the program aimed at stimulating the economy and increasing jobs. There is to be a slight cut in sales tax to encourage consumers to spend, and a small cut in tax for employers who take on extra workers.

There is also a plan to provide an extra 15,000 training places for people out of work (although the much criticized FAS national training agency is to be wound down). Plus there is a so-called NewERA construction project to build even more infrastructure which is to be funded by billions taken out of the National Pension Reserve Fund.

Nobody seems worried that we have been down this construction route before and that although it gives a quick boost on jobs it’s no substitute for permanent jobs in manufacturing industry or services. And not everyone seems to realize that using the pension reserve like this is really just another form of borrowing.

A quick read of the program for government reveals that it is very short on specifics, and that the clear plan for cuts that Fine Gael had proposed has now been fudged. Instead of reducing state spending and raising taxes in a significant way, it trims a little here and adds a little there but not enough to make much difference.
It completely ducks the issue of reducing state benefits to make savings. And with Labor on board this is going to be much more difficult.

One paper here last week highlighted the case of an employer who wanted to hire two or three workers and had found people qualified to do the particular jobs servicing vending machines. He was offering €28,000 a year. But he could not get anyone to take the job because those he interviewed said they could get more on welfare.

The paper then did an analysis and found that at present an unemployed couple with three children would need to be paid more than €50,000 a year before it would make sense for one of them to come off welfare (and rent allowance, fuel allowance, clothes allowance, free health care and the other benefits that you only get if you're on welfare). Reform of this system is essential if we are going to get anywhere reducing the budget deficit.

All the news here over the past week has been about Kenny squaring to the EU to get a better bailout deal. But the biggest challenge the new government faces is here at home.

It's how to get spending down to bring it into line with tax revenue. We can only keep spending at the rate we are because we have been given the bailout fund by the International Monetary Fund (IMF) and the EU.

That deal requires us to get the deficit down to 3% over the next few years. The target was the end of 2014 and it's now the end of 2015 -- and even meeting that is going to be very tough. It will require much more cuts and tax hikes than anything in the program for government. This feeling in the air here at the moment that we can carry on as before is very misguided.

On the bailout, the EU (mainly Nicolas Sarkozy and Angela Merkel) have made it clear to Kenny that it's too early to contemplate any change in the terms, since we've only just got the deal ... unless of course we want to raise our 12.5% corporation tax rate a bit in return.

That would seriously impact on Ireland's attractiveness as a base for multi-national companies, so we don't want to go there. But it irritates the hell out of the French and Germans since it undermines their moves towards a common tax system for the EU as a whole.

The Greeks have already got a lower interest rate on their bailout deal, but we are still being told that we have to wait. So far there is no give on the idea of restructuring our overall debt so that we have to pay back less. That is what we really need.

That is the elephant in the room at these EU summits because it is now clear that unless we are given a degree of debt forgiveness then the possibility of sovereign default (Ireland saying it can't pay back the money) becomes a very real one.

It's that serious -- and the chances of and implications of a sovereign default by Ireland is something we will be looking at in this column in the coming weeks.

Ireland's new Government established - What's the plan to save the country?

I had a teacher many years ago who was forever using the French phrase “plus ca change, plus c'est la meme chose.” In Ireland's second official language, it means the more things change, the more they stay the same.

My old teacher and his catchphrase kept coming to mind over the past week as the dust settled after the election and it became clear how desperately eager Fine Gael and the Labor Party are to grasp the reins of power.

They're so eager they could not even put on a show of disagreement and brinkmanship as they held talks to hammer out an agreed program for governing the country over the next five years.

Given the wide differences between the policy platforms they campaigned on during the election, you would have thought that the negotiations between them would have been extremely difficult. But not a bit of it.

Their negotiating teams wrapped the talks up in a couple of days and the agreed program was approved by the two parties last weekend, in plenty of time for the first meeting of the new Dail (Parliament) this Wednesday.

After so many long years in the wilderness, nothing was going to stop these guys. This is their chance.

Most of the senior figures in both Fine Gael and Labor are on the wrong side of 50, or even 60, so this may well be their last chance. And they are grasping it with unseemly haste.

All that talk of reforming politics and doing things differently, and all those radical proposals for saving the economy and the country and standing up to the EU and the International Monetary Fund (IMF), you can forget all that right now.

That stuff was good for the election campaign and it worked. But the election is over and it's back to reality now.

And the reality is that things are going to carry on much as before, except that it's a different team of middle aged men (and it's almost all men) in suits who will be running the show.

Radical? Original? Different? Don't make me laugh.

More competent, more effective, more honest? Time will tell.

The only thing that has become clear over the past few days is that the Fine Gael and Labor guys can't wait to get their bums on the ministerial seats. And they intend to stay there for the long haul.

That's why Fine Gael did not even bother to talk to the independents who could have supported a minority Fine Gael government. They wanted the massive majority that a Fine Gael-Labor deal provides so they can be sure of staying in power even when the going gets tough.

All the promises of radical change that Fine Gael and Labor made during the election, well, that's all vanishing like the proverbial puff of smoke.

In fact the election was barely over when the Taoiseach (Prime Minister) in waiting Enda Kenny was moderating the Fine Gael rhetoric about forcing the bondholders to share Ireland's pain, whether the EU liked it or not.

Ditto with Labor. The bould Eamon Gilmore, who made election headlines with his hard-hitting speech that it would be Labor's way, not Frankfurt's way (code for burning the bondholders) has gone all coy and quiet.

Suddenly, the threat is gone.

Now they are talking about "putting our case to our EU partners," about convincing the EU that there should be "burden sharing" and an EU wide solution to the problems of the weaker countries like Ireland, Greece and Portugal.

In other words, they have shifted to the position where they are no longer advocating a revolt by Ireland, but are now saying there must be an EU-wide change in the bailout mechanism. And that's a very different approach.

On the brink of power, Kenny and Gilmore are now confronted with the reality that the real power here is no longer in the Dail, but in the offices of the EU and the IMF.

They are confronted with the appalling vista of the Irish banks and the Irish economy and the fact that there is virtually no money to change anything unless it comes from the EU and the IMF.

They now have to face up to the fact that rhetoric does not put bread on the table, and that our very survival as a financially sovereign state depends on the support of the EU/IMF.

So after all the talk about a major renegotiation of the bailout deal secured from the EU/IMF by the Fianna Fail led government, it turns out that Fine Gael and Labor are going to continue with the deal after all.
It should not be a surprise because there is no alternative, but the realization has still come as a huge shock to many voters who believed what they were being told during the election.

There will be some finessing around the edges of the deal, of course, to make it look better, but the truth is that the incoming Fine Gael-Labor government will be continuing with Fianna Fail's four year plan of cutbacks and tax hikes to close the budget deficit.

They are sticking with the target of reaching a 3% deficit, although now that is to be achieved by 2015 rather than 2014. The only problem with this is that the 2014 target was part of the bailout agreement with the EU, and so far we don't know whether "our EU partners" will agree with the extension.

The signs from the EU heads are that they probably will, and also that they will give us a slight reduction in the interest rate on the bailout cash. But these new terms will also be available to any other country which needs EU support, and they will be the result of an EU reappraisal of how the euro zone can best be supported rather than of any special pleading by Ireland's new leaders.

My guess is that the new government will continue to front load most of cutbacks that have to be made to keep our EU/IMF "partners" happy, and that the change in target date won't really make much difference to the pain to be borne by the Irish people.

It's also a fact that a small interest rate reduction and a one-year extension of the time given to us to get our deficit down to 3% will result in much the same level of cutbacks that will be necessary here over the period.

Plus the EU chiefs have also hinted that for us to get new terms for our deal may require us to give something in return -- maybe like an increase in our very low corporation tax level, which Germany and other EU countries do not like.

So it's business as usual on the main challenge facing us. It's also business as usual on many of the other issues facing us.

A look through the 64-page program for government agreed by Fine Gael and Labor (it's on the RTE website) makes that clear. It reveals that most of the promises that Fine Gael and Labor made during the election have been fudged or long-fingered.

But of course they have a ready-made excuse --the financial situation is even worse than Fianna Fail had been saying. Plus we have to await the new assessment of the banks due in a few weeks to see how deep that black hole really is.

It's worth reading the program for government to see for yourself just how vague it actually is. Previous radical policy proposals have now been fudged, and the absence of a time frame for many of the changes is striking.
The most worrying thing is that the program lacks the coherence that a single party government could have offered at a time when the country desperately needs absolute clarity about where we are heading.

Instead we have bits of Fine Gael and Labor policy lumped in together and the big decisions on the three Bs (bailout, banks and bondholders) have been kicked down the road.

One indication of how Fine Gael and Labor have put their parties before the country is the decision to split the minister for finance role into two jobs. At any time finance is a key ministry, and at present it is critical.

But to avoid a dispute about who was to get finance, Fine Gael and Labor have divided it up between them. Fine Gael will keep the main role with control of the budget and economic policy. But control of the public sector, which eats up so much of state spending, is to go to a Labor minister.

And who are the main supporters of Labor? The public sector unions -- they will now have a stranglehold on the attempt to reduce the number of state sector workers and the huge state sector wage bill which is essential to get the deficit under control.

Even the Fine Gael proposal to cut the size of the Dail is now being hedged, just one example of what is going on. Fine Gael had promised to cut the number of Dail deputies by 20. But there is no number mentioned in the program, just a commitment to look at it after the results of the 2011 census are published.

Kenny said he would abolish the Senate, which got him huge publicity. Now it seems that this may take a very long time because there has to be a referendum.

It's the same compromise stuff throughout the program, whether it's on the proposed cuts in welfare or the increases in tax. We needed a clear vision.

What we've got is a contradictory plan so vague it leaves us in a fog of uncertainty.