Ireland financial system doesn’t know how to change

Members and supporters of Sinn Fein protest outside the Merrion Hotel in Dublin where representatives of the EU/ECB/IMF were staying in April.   

You might think that because our state finances are bust and we are being propped up by the EU and the International Monetary Fund (IMF), a complete overhaul of all state spending in Ireland would have been completed by now.

You might think that, given that we will soon be two years on the lifeline of the bailout.  But you would be wrong.  The Irish state is still spending around one-third more than it raises in tax.  

This is Ireland, folks. We don't like doing the math.  We talk a lot, but we're not so keen on follow-up action.
Despite all the moaning about the so-called austerity program here, the fact is that the adjustments we have made so far are minor. We've made only a tentative start on rebalancing our spending and revenue -- just enough to keep the EU/ECB/IMF troika placated -- but real progress is painfully slow.  

To be fair to the government, the problem has been made much more difficult because of the huge cost of the welfare bill caused by an unemployment rate that exceeds 14% -- we have 430,000 people out of work.

As well as that, there is the huge cost of the repayments we now have to make on our bailout money.  That is also counted as part of the state spending we are supposed to be getting down.  

So there is an excuse.  But at the same time as this is happening, we also have a state workforce that is among the highest paid in Europe.

When our top civil servants go to the Europe to plead for a better deal for us, their counterparts on the other side of the table, even the Germans, are on much lower salaries.  

And all our state workers have guaranteed life long pensions of at least half their salaries, something that has vanished in the private sector here and which the state cannot afford.

But the state continues to pay these pensions because it is afraid of what might happen if workers across the state services went on strike.

No one is against state workers getting pensions.  But the level has to match the private sector.

And the horrible fact is that in the private sector, 80% of pension schemes are bust.  Some will collapse altogether and be shut down, and many more will drastically cut the level of pensions they were supposed to pay out.

While this carnage is going on in the pension schemes of workers in the private sector, the state sector pension payments continue on at their generous levels as though nothing has changed, as though the Celtic

Tiger is still filling the coffers of the Revenue.  In fact all state pensions are paid for out of current revenue, which now means bailout money.  

The government should act to cut pensions to state workers by the same average margin that private sector pensions have fallen.  But it is doing nothing.

The same failure to act is evident in almost everything the state touches here, like in the fees it pays to consultants, lawyers and so on. Little has changed.

And the effect of that seeps across the private sector as well, keeping the cost of living high for people in the private sector (the real economy) who have seen their pay go down as well as their pensions evaporate.

The IMF has already told the government that state sector pay and professional fees are way too high here, even if we were not a busted flush.  In the context of a country on a bailout, they are simply ridiculous.

The IMF has also suggested that instead of reducing numbers of state workers to get down costs, we should cut pay instead and thereby protect levels of public service in hospitals, schools, local services and so on.
But the government seems incapable of real change.  They are paralyzed with fear of what might happen if they upset the unions.  

Instead they are sticking with the so-called Croke Park Agreement under which state workers agreed two years ago to a four year program which would make savings by increasing efficiency, thereby allowing some voluntary reductions in state staff numbers.  

The overall effect was supposed to sharply reduce the huge cost of pay and pensions in the state services, a shift which is essential to allow us to close our enormous budget deficit.  

In the last few weeks we have seen both government and unions slapping each other on the back about how they are "meeting all their targets under the Croke Park Agreement."  

If you look at the most recent figures, however, the reality is that the overall cost of the state payroll (including pensions) in the past year has gone down by 0.4%.

Yet at the same time over the past year or two so many workers in the private sector have accepted savage pay cuts and reduced pensions in desperate attempts to keep the companies they work for solvent.

The situation is ridiculous.  The government talks about reform, yet they don't want to upset the large section of the public (people on the state payroll and professionals of all kinds) which wants to keep things more or less as they are.  

As I said, we're great at talking, not so good at doing.  

There used to be huge resentment in the air here at the idea of the IMF and the EU experts coming in and telling us how to run things. Those days are gone.

These days you hear many people in the private sector expressing the hope that the IMF will lose patience with our dithering government and take over altogether.  Or at least that they will exert their bailout leverage and push through the changes that need to be made in the unbalanced, unfair and wasteful way state money here is being spent.

The sad thing about the government's failure to act is that this is the perfect time for them to have a go, to take a few bold steps towards reducing and rebalancing state spending.

They have a large majority in the Dail (Parliament).  They don't have to face a general election for another four years.  The longer they leave it, the more difficult taking action will become as another election begins to appear on the horizon.    

But don't hold your breath. It's a sad state of affairs when a mere 90 years after we got command of our own economy, we completely screwed it up.

We can moan all we like about the Brits and colonialism and 800 years of oppression, but we can hardly claim to have made a success of running things ourselves.  

In particular, we don't seem to be able to produce politicians who are capable of offering real leadership and taking tough decisions. The present government is turning out to be almost as bad as the last.

Where are the IMF heavies when you need them!  

At present the IMF experts come in for a few days once every three months to have a look at the books here and see if we are sticking to the headline figures in the bailout program.

They do have a small permanent presence in government departmental offices.   But it's a monitoring function and it's not enough.

Since we are failing to make the necessary changes ourselves, the IMF heavy gang need to be in here much more often telling Taoiseach (Prime Minister) Enda Kenny and his ministers exactly what to do and where to make the cuts.

They're not capable of doing it by themselves.  Sad, but true.

Reflections on Ireland's UEFA Cup performance

A group of excited Irish soccer fans at Dublin Airport heading out for the European Championships earlier this month.  

Sitting on the sofa beside my resident soccer expert watching the Ireland-Italy game on Monday night was both emotional and frustrating.  

The soccer expert -- "it's football, not soccer, Dad" -- is 18 and one of two of my kids doing the Leaving Cert (high school graduation exam) this month.  Which explains why we were not camped out in Poland with the rest of the fans.

Ireland was out of the tournament already, as you know, so all there was to play for on Monday night was honor and pride. And we played our hearts out.

That was emotional.  Somehow even 2-0 did not seem like a defeat.  Watching the crowd in the stadium in Poznan, it looked like a party rather than a funeral for Irish football. Once again the Irish supporters were magnificent.  

The commentator said that the Irish had filled four-fifths of the big stadium, with the Italians taking just one-fifth, something that was clearly visible in the sea of green on the screen. Given that we were out of the competition anyway, even if we had won this last game, that is extraordinary.  

And given that you can drive from Italy to Poland and that it's twice as far from Dublin to Poznan as it is from Rome to Poznan, it is incredible.  Our honor -- that of the team and that of the fans in the stadium -- is intact.
Our supporters showed the rest of Europe how to behave and celebrate even when you know your team is going home.  

So yes, it was emotional.  But it was also deeply frustrating because it was clear to me and to my resident expert that so much more had been possible.

Listening to the analysis by Ireland's best soccer commentator Eamon Dunphy after the game confirmed what myself and my own expert already knew.  We had been robbed, not by the opposing team, but by our own manager, Giovanni Trapattoni, who had sold us short.  Not just in this game or in this tournament, but since he took over.  

Coincidentally last week I was reading a new biography of the commentator Eamon Dunphy (yes, he's that famous) which has just come out here and is a fascinating read.  It's called Dunphy: A Football Life and it's an assessment of the veteran commentator's punditry career over the years.

The author is a young lawyer  (probably useful when quoting Dunphy) called Jared Browne, but before that he was a talented young footballer who had trials at Man United and Liverpool and played for Ireland at under-15 level.  So he knows his football, and as famous past player John Giles says on the cover, the book is "well written" and "very well researched."

It's also thought provoking and convincing, making it difficult for any reader to stick with the usual lazy cliché of Dunphy as a self-promoting curmudgeon who always ends up contradicting himself.

It's clear from the book that the author has a very high regard for Dunphy.  "Nobody does frustrating inconsistency and blatant contradiction quite like Eamon Dunphy," Browne says.

"But due to his footballing brain, razor-sharp wit and fearless incisiveness, he is, by a distance, the most important and fascinating football analyst to work in Ireland or Britain over the last three decades."

I agree.  I also agree with Dunphy's views on the Irish manager Giovanni Trapattoni.  You can't teach an old dog new tricks, and Trapattoni's problem is that he is still living off the one trick he learned a long time ago.  
Dunphy first became famous -- or infamous, depending on your point of view -- because of the provocative stance he took on our last foreign manager Jack Charlton in the great Ole Ole years.

This was the era of Jacko's Army, when we qualified for the European Championships in 1988 in Germany and then for the World Cups in 1990 and 1994, during which Ireland came to a standstill and half a million people came out in Dublin to welcome the team home.

Charlton, "a large, belligerent, bloody-minded English toerag,” as Dunphy once called him, bullied his players into using the long-ball method.  Instead of playing the passing game (the ultimate exponents of which are Barcelona) and building up an attack on the ground from the back through midfield, you hoof the ball up from the back to land well into the opponent's half, and then you hope for the best.  It's an ugly game instead of the beautiful game.  

Despite having really creative players on the team, this is what Charlton did, "turning them into a pub side" who occasionally got lucky, according to Dunphy.   And Dunphy had the courage to say so even at the height of the Jacko's Army hysteria.

Dunphy was right then, of course.  And he is right now.

His assessment of Trapattoni is similar to that of Charlton, and when you think about it the parallels are striking. Dunphy calls Trap "the poor man's Jack Charlton," fixated on a defensive method that has no place for creative playmakers.  He points out that the real story of that unforgettable Ireland performance in Paris during the 2010 World Cup qualifiers was not Thierry Henry's handball, but how brilliantly Ireland had played when they had nothing to lose and started to pass the ball around and go for it.  

As Dunphy said at the time, it showed that so much more had been possible if Trap had been more flexible at an earlier stage.

Dunphy believes that Trap prefers ordinary players "unburdened by talent" who have a defensive mindset because they will do exactly as they are told.  The defensive Trap method, he points out, can work effectively at certain times over a long season in league football.   But it's different at international level.

Dunphy pointed out that the Trap method sank Italy's chances at Euro 2004 when they had the chance of going further and it has done the same to Ireland.  Dunphy, like his former hero Roy Keane, thinks we are capable of much more and so do I.

Keane, of course, has stirred things up by his comments after the game, which I see are already on Irish Central.  "I think the players, and even the supporters, they all need to change their mentality," Keane said.

"It's just nonsense from players speaking after the games about how great the supporters are. The supporters want to see the team doing a lot better and not giving daft goals away like that...I'm not too happy with all that nonsense.

“Let's change that attitude towards Irish support as well...They want to see the team winning as well, let's not kid ourselves. I know we're a small country and we're up against it, but let's not just go along for the sing-song every now and again."

This was misinterpreted by some of the media as an attack on Irish supporters.  But if you read carefully what
Keane said, it's an appeal for us to be more ambitious rather than settling for being good losers who are always up for a party no matter what.  It is also a clear indictment of the Trapattoni approach.

What matters now, of course, is the future.  It's worrying that (a) we have just given Trap a new contract and (b) we have only one friendly against Serbia before the World Cup qualifiers start in September.  There is no sign that Trap has any intention of changing his approach.

In contrast with other international managers, Trap rarely sees his players in action.  They all play in the U.K., and Trap had it written into his contract that he would not be expected to go to see them in action during the year as they played their league matches week by week.  He delegates that to others, and he stays at home in Italy unless there's an Ireland game coming up.

Which is nice work if you can get it when you're being paid €2m a year. But it's hardly the best way to monitor the progress of individual players or to identify potential players for the future.  

Since Monday night there's been a lot of talk about changing from our current defensive default approach to the creative passing and attacking style that most of our players are using every week for their clubs in the U.K.  There's been talk about older players being phased out to make room for the next wave of younger players.  But what we really need is a younger, more creative manager.

FOOTNOTE: The following gem from the book Dunphy: A Football Life gives the pundit’s comment on
David Beckham's lucrative move to L.A. Galaxy in California: "I think it’s an awfully vacuous way of living. What can you do with money? You can put it in the bank but you can’t talk to it. You can’t play football with it and you can’t make love to it.

“What good is it to you? You get all that money but you have still got to sit in your house at night in L.A. and you have got to say to yourself, ‘What are you doing? What is my life about?’ Where he has gone now is a pretty empty place."

Spanish bailout from the EU won’t help the Irish

Spanish Prime Minister Mariano Rajoy 

When is a bailout not a bailout? When it's a Spanish bailout, of course.

The Spanish Prime Minister, Mariano Rajoy, did his best on Sunday to portray the €100 billion bailout of his country's banking system by the European Union as anything but a bailout.   It was a win all round, he insisted -- a win for the euro, a win for the European Union and a win for Spain.

The bailout money coming from the EU would go directly into Spanish banks, he said, although he never once used the unspeakable word "bailout" in his press conference.   Instead of calling it a bailout, he said the funding being provided was a "credit line" for Spanish banks.

Because it was going directly into the banks, it would not be added to the Spanish national budget deficit. It would not involve any oversight by the EU or the European Central Bank or the IMF of Spain's budgets, state spending and fiscal policy. Only the banks would be under the EU microscope, not the state.
So it was completely different than the bailouts that Greece, Ireland and Portugal had been given. Completely different.  Not a bailout at all.

He may not have realized it, but the more insistent Senor Rajoy became, the more hilarious he sounded.   Manuel from Fawlty Towers would have been proud of his countryman.

In fact it was a performance that should win Senor Rajoy the Brian Cowen Fiscal Comedy of the Year Oscar.  He looked like Cowen in the weeks before Ireland was force-fed its bailout when he was still insisting that no bailout was being negotiated and that Ireland's economic sovereignty was completely safe.

Funny though the Spanish hubris was, no one here was laughing.  Ireland's best hope of an escape from a large part of our national debt was vanishing before our eyes.

There had been intense interest last weekend here in the Spanish bailout, because anything that Spain got in terms of better conditions or interest rates, we were going to demand as well.

In particular, if Spanish banks were going to be bailed out directly by the EU, we would want our banks to be directly funded by the EU as well.  

Instead of that, the Irish state had been forced to take the bailout money as a loan; the Irish state then gave the money to the banks so they could repay their debts and bondholders in full and recapitalize themselves. The enormous cost of this was then added to our national debt and is being carried by the Irish taxpayer through relentless cutbacks and tax hikes, the so-called austerity program.  

Was there a chance that Spain had done the impossible and that we were going to benefit as a result?
Watching Senor Rajoy being hilariously dogmatic, I had immediate doubts.  The details he provided of exactly how the EU is going to give the money to Spain were very sketchy.

One thing we do know is that the Spanish banks are up to their necks in bad property loans (just like Ireland) and are effectively bust.  It is clear they will never be able to pay back the bailout money they are being given.

So is the EU just going to wave goodbye to the funding?  The answer is no.

When Senor Rajoy finished his press conference on Sunday he flew off to Poland to watch Spain play Italy in the Euro 2012 soccer tournament.   While he was in the air, EU officials were already "clarifying" what was going to happen.

Yes, the bailout was going to the banks.  But it was being underwritten by the Spanish state, they said.   So if the banks default on their repayments, the Spanish taxpayer will be on the hook.

Just like Ireland, in fact, a helpful German official put it bluntly.

And with that the hopes of Irish taxpayers for an escape from the burden of Ireland's banking debt were sunk.    

It's true that Spain appears to have got something, but it's mainly a gloss aimed at avoiding the public humiliation of Europe's fourth largest economy.

The main thing is that the IMF is not providing the funds, so it's not an IMF bailout. The funds will come either from the euro zone's temporary rescue fund, the EFSF, or the new permanent rescue mechanism for countries in trouble, the ESM, which is due to start next month.  It's an indication of how unclear all this is that we don't even know which it will be.

The Spanish made a big deal out of the fact that the IMF is not providing the money.  The oversight by the EU and the ECB would only be of the Spanish banks (avoiding the humiliation we go through every three months when the EU/ECB/IMF troika come to Dublin to examine the state's books and basically tell us what we should do).

The IMF was not directly involved because the money was coming from the EU, the EU officials explained. However, they said that the EU had invited the IMF to help them in monitoring Spain's banks.  Which is not the kind of thing that the Spanish prime minister wants to hear at all.

The other big difference is that the €100 billion bailout for Spain is to solve their banking crisis.  No money is being given to the Spanish state to get it through its fiscal crisis, with huge budget deficits as it tries to grapple with a double-dip recession and unemployment at 24%.  

The hope was that shoring up the Spanish banks would allow the Spanish state to go on borrowing on the money markets at sustainable rates.   Sadly, that is not happening, with the interest rate being sought on Spanish bonds back up around 6%.

What this means is that Spain is unlikely to be able to continue very long without needing an injection of funding into the state to avoid a collapse.  It won't be as bad as Greece, but it's similar to Ireland and Portugal.  

There won't be any avoiding the bailout word then, or the involvement of the IMF.
Adding to the pressure on the Spanish state is the fact that the €100 billion euro bank bailout funding now being put in place is being underwritten by the Spanish state, according to EU officials.

Ultimately that means the state carries the can for the bank bailout loans if the banks cannot service them. Given the state of the Spanish banks, that's an accident waiting to happen.

There is another unexplained problem ahead for Spain.  The new ESM fund, which will have pledges from all the EU countries, is different from the temporary EFSF, the temporary fund used to help Greece.
Bailout money from the ESM will be treated as senior debt, first in line for repayment if anything goes wrong.

So if the Spanish bank bailout money comes from the ESM, existing and future commercial lenders to the Spanish government will rank behind euro zone governments if Spain is unable to repay all its debts in full.    

The money markets will not like this, and the effect will be to make it even more expensive for Spain to borrow from the markets in the future.  Which would hasten the day when Spain will need a full bailout and will no longer be able to pretend that it is different from Ireland or Portugal.  

So we can't look to Spain for hope.  But eventually some solution will have to be found to all this by the EU, other than loading the cost of the banking collapse on to the shoulders of ordinary citizens in countries like

Spain and Ireland where there was  a massive property bubble. The European Central Bank and the EU did nothing about it when it was happening so they can't escape the consequences either.

Ireland will be watching Spain closely after 'Yes' result in EU Fiscal Treaty

Taoiseach Enda Kenny speaks to the media on Saturday after the yes vote was confirmed 

You never show your hand at the card table, and you certainly don't give away the ace you are holding before the game even begins.

Yet by voting yes in last week's referendum on the EU Fiscal Treaty, that is exactly what Ireland has done.
It's a huge leap of faith, one we made very reluctantly in the hope that the EU will feel duty bound to pay us back with a fairer deal on our crippling bailout.

It's a jump we would never have made if we had an alternative.  But there really was no alternative because we are likely to need more EU funds in the next few years, and a no vote would have made us ineligible for the new EU fund now being set up.  

Our problem now is that we have given away our best card.   Instead of holding the EU over a barrel, we are once again relying on the kindness of strangers, on the sense of fairness and justice of the Germans and the French.  Whether they live up to our trust and expectation remains to be seen.

There was something pathetic about Taoiseach (Prime Minister) Enda Kenny immediately getting on the phone to the other EU leaders last Friday after the yes victory was clear to give them the good news. It smacked of the old cap-in-hand poor Paddy.

The reality is that Angela Merkel, Francois Hollande and the others have bigger worries than poor little Ireland and are already taking our yes vote for granted, even though a no vote would have caused some embarrassment for them. Eaten bread is soon forgot.

The difficulty for us is that Europe is a churning vortex of fiscal and banking problems at the moment in which Ireland is a very small and easily forgotten part.

The fact that we have been crucified with a massive, unjust and unsustainable bailout can easily be overlooked as the EU struggles to cope with the much greater problems of Spain, Portugal, Italy and Greece.

We could have demonstrated our anger at the situation by voting no.  But we voted yes, and we are now expecting Germany and France to do the right thing and encourage the EU and the IMF to give us a fair deal.

When our banks went belly-up a few years ago and our budget deficits soared after the property crash, the markets stopped lending to us and the EU-IMF bailout was brought in to rescue us from financial and social collapse.

The billions came with a penal 5.8% interest rate, deliberately pitched high to punish us and show other countries there is no cheap and easy way out of national profligacy.

It also came with strings attached, mainly the diktat from the European Central Bank that no banks would be allowed to fail, no bank debts would be written down and no senior bondholders would be burned.   Instead the bailout would give billions to the Irish state so that it could pay its own bills and also recapitalize the Irish banks.  Our banks would then be able to go on paying back their debts even though they had lost billions in the property crash and were bust.

Not realizing the scale of what we were facing, the Irish government had already given a blanket state guarantee on all our bank debt. The bailout conditions cemented that in place.  The effect was to turn tens of billions of private banking debt into state debt.

On top of our budget deficits, it left the Irish state bankrupt and the Irish taxpayer carrying the can. It meant that the German and French banks which had lent billions to the Irish banks to fuel the property boom here and get a slice of the action for themselves were home free.

They got all their money back, even though the Irish property market had crashed and the Irish banks were bust.

The tens of billions of private bank debt which were shifted on to the Irish taxpayer adds up to around 40% of our debt mountain, the rest being the result of our accumulated budget deficits.

As we said here recently, it is arguable that without that extra 40% to carry, the Irish state might have been able to cut back and cope with our fiscal situation without having to take a bailout.

But we were forced into taking the bailout and into agreeing that the Irish state would pay back all the bank debt.  To put it simply, we were stitched up.

It took ordinary people here some time to grasp what had happened.  We can understand why state spending and services have to be cut and taxes raised to get our budget deficits down.
But why should the ordinary person here have to endure all this pain to pay back foreign banks who were gambling on the Irish boom?

The main reason our ongoing deficits have remained stubbornly high in spite of cutbacks in spending is that so much of our revenue is now going to pay the huge cost of the bailout.

And a large part of the bailout is being used to pay down bank debt. As more and more people here understand this, the anger grows.

Which is why a no vote here last week was possible.  The yes victory carries a huge expectation with it that the EU will do the right thing and give us a fair deal.

The cynicism here about the way we have been treated is widespread, and with good reason.
When we got our bailout it was at a 5.8% interest rate.  When it later became clear that the Greeks could not pay that much on their bailout, a new mechanism was set up to give them the money at between 3.5% and 4% over a much longer period.

This new deal had to be available to everyone, of course, so suddenly Ireland's 5.8% rate was slashed to the same level and our repayment schedule was shoved out from 7.5 to 15 years.

Kenny tried to claim it as a victory for the government's negotiating skills, which is sad.

We were told there could be no debt write down, yet Greece was able to give a chilling haircut to the banks and markets who had lent it money.

In recent months we have seen the European Central Bank making around a trillion euro available at around 1% to banks across Europe to prop them up and stop them going bust.

Again, there was no sign of this kind of quantitive easing (printing money) when Ireland's banks were collapsing.  But now that banks in big countries like Spain and Italy are in dire straits, suddenly the money can be provided.

Is it any wonder people here are cynical?

In the last few weeks as the situation in the banks in Spain (where there was a property collapse on the same scale as ours) reached critical level, it emerged that the new European Stability Mechanism (ESM) - the massive new permanent rescue fund now being set up for the EU - might be allowed to recapitalize bust banks directly.

In other words, the ESM would loan the money directly to the banks rather than to the state, thereby avoiding the Irish situation where private bank debt became state debt and the taxpayer gets screwed for years.  

Here in Ireland we are watching this stuff going on, and all we can do is smile at the bare-faced cheek of it all.  It's now clear that the real reason we were screwed in our bailout was because we were not big enough to be a threat to the EU.  Unlike Spain.

The upside of all this is that if the Spanish banks continue to wobble, the deal they are cut by the ESM will have to be offered to us as well.

Not because we voted yes and are the good boys of Europe.  And not because of Kenny's imaginary skill as a negotiator.

It will have to be offered to us because that's the way the EU operates.  And if it's not, there will be an outpouring of anger here that will make Greece look like a picnic.

No one wants to wish ill on others. But if a few more banks in Spain like Bankia start looking for tens of billions to see them through, the ESM plan may have to be used.  And if it is, it will also have to be given to

Ireland on a retrospective basis.  That kind of deal could slice 40% off the top of the Irish national debt mountain (the segment that is due to our bank debt).

Whether it ends up being a direct recapitalization of Spanish banks by the ESM remains to be seen.  It may even be a full bailout for Spain, as in the case of Ireland.    

Whatever happens, you can be sure that Spain won't be asked to pay the 5.8% we had to pay or even the 3.5% to 4% that we now pay.  And it will be interesting to see if there is a debt write down and how much of the bank debt becomes state debt and is loaded onto Spanish taxpayers.    

The bottom line is that whatever they get, we have to get as well.  And it has to be retrospective.
Ole!  It's the Spanish solution to the Irish problem.