The Euro zone rescue deal - "them and us"

The announcement of the Euro zone rescue package, which included a 50% loss on Greek bonds for those banks that held them, led to a number of reactions here in Ireland. One was from Mr. Peter Brown of the Irish Institute of Financial Trading, who said, on the RTE news on Thursday 27th. October:

“If they’re that keen on keeping the Euro intact, Ireland needs a deal”.

Who are “they”, in this context? The ECB? Angela Merkel and Nicholas Sarkozy? The European Commission? Ireland is a member of the ECB and the EU Commission. France and Germany are our comrade states in the entity that has given us massive social, equality and consumer legislation improvements at home and free access to a market of over half a Billion consumers, not to mention significant capital transfers through the EU Common Agricultural Policy and the Structural and Cohesion funds.

Our membership of the Euro zone provides us with protection from speculative raids on what would otherwise be our local currency, such as that which cost the Bank of England an estimated £3.4 billion in 1992. As a result of Irish government attempts to protect the Punt at the time, interest rates on Irish mortgages reached a staggering 16% at one stage.

We have vitally important price stability through the determined and consistent actions of the ECB, although we undo some of that by our own inflationary actions here at home. Our most recent crisis has shown that use of the Euro gives us access to technical and monetary assistance from those other member states, such as Germany, The Netherlands, Finland and France, that have the discipline and experience to be able to deal with low interest rates and increases in the money supply, and to impose adequate regulation on their financial institutions. Our recent property related bubble and its subsequent bursting has shown that we in Ireland are still only in the learning mode with regard to these matters.

An important consideration for travellers is that the Euro gives us the convenience of a common currency as well as valuable transparency in pricing throughout those states that use it.

And being in the Euro zone is yet another asset to go along with our educated workforce, our status as the only English speaking state in the zone and our competitive corporation tax rate to help us attract Foreign Direct Investment (FDI).

In a nutshell, when Mr. Brown talks about “them” he really means us - in order to make good on the implication of his remark, Ireland would have to be prepared to leave the Euro zone and, in so doing, jeopardise the whole EU project. In the light of the benefits we have and can continue to expect from remaining in, this would constitute the greatest example that can be imagined of cutting off one’s nose to spite one’s face.

Book review: Anglo Irish Bank as it was going down the tubes

The essential elements of the Anglo Irish Bank story and the rapid transformation of the man who personified it, Sean “Seanie” Fitzpatrick, from a perceived banking genius and darling of the business press to something of a pariah among his compatriots, are well known by all who have even a passing interest in matters financial in Ireland.

It is, however, as always, fascinating to be able to wallow in the gory details of such a tale. Simon Carswell is a Financial Correspondent with the Irish Times. He seems to enjoy access to the means of providing the kind of inside stories which, when linked together, provide a good account of what happened in Anglo, particularly towards the end.

“Anglo Republic” is reminiscent of the book produced some years ago by Carswell’s colleague at The Irish Times, Fintan O’Toole, on the Beef Tribunal and Larry Goodman called “Meanwhile Back at The Ranch”, although the new book somewhat lacks the literary poise and the finely turned phrase of O’Toole’s work.

The book is a page turner when we arrive at what might be described as the heart of the matter, the behind the scenes activities which became more and more fraught as FitzPatrick and his successor as CEO, David Drumm, found they had to deal with massive capital outflows, a rapidly sinking share price and, above all else, the severe problems caused by Sean Quinn’s ultimately disastrous decision to build up a very large secret holding of Anglo shares using Contracts For Difference (CFDs). Here Simon Carswell comes into his own and his confident knowledge of the details is impressive. Whatever faults David Drumm has, it comes across from Carswell’s material that he at least has a sense of humour.

Of course, in order to make a real contribution, a book such as this must offer some insight into the mechanisms that brought about the catastrophe that was the recent Irish economic collapse. There is a general acceptance that the culprit was reckless lending to property investors and developers, which was initiated by Anglo, who were then copied by other institutions when it became the perception that Sean Fitzpatrick’s operation was earning profits that "properly" belonged to the more established banks. This, however, does not deal with the detail, where the devil lies.

This writer saw a presentation by an Anglo Irish banker some years ago, back when they could do no wrong. The attitude of the presenter was that safe and profitable lending was really very straightforward – three things were required: security, the ability to repay and recourse. The irony is that the cocky presenter was probably correct. The real problems arose afterwards in the execution of the strategy when the principle was compromised, in particular by neglect of the third element, recourse, which means that loans should only have been given to those individuals who were prepared to give personal guarantees and who had a net worth sufficient to cover the repayment in the event that the asset which was the subject of the loan, and which normally provided the security, lost its value, and the ability to repay, for whatever reason, disappeared.

What happened in practice was that the usefulness of recourse was lost in two ways. Firstly, it was not insisted on at all in many cases in the later stages of the operation of Anglo and the other banks and secondly, it fell prey to an insidious development which came about because, over time, when it was in place, it depended more and more on a net worth statement that was itself totally made up of only one asset class, property. Then when all property values were destroyed, so were the means by which recourse could be exercised.

Like many publications of its kind, “Anglo republic” could have benefitted from a bit more editing. Certain parts are overlong, such as that dealing with the genesis of Anglo. And do we really need another meticulous, words-of-one-syllable explanation of how contracts for difference (CFDs) work? At the very least this part could have been confined to a notes section at the back of the book. When tables start appearing in the text it becomes reminiscent of a business report rather than a work of history. There is a charming editorial oversight in chapter 12 when the sentence “Horan also spoke to Morgan Stanley himself” appears, referring presumably to a representative of the financial services firm that was founded in the 1930s by two individuals, now long-dead, whose surnames were Morgan and Stanley.

The conclusion arrived at by Carswell is also probably the right one – that the Anglo lenders were lucky for so long that they began to believe that what was really a flawed business model was actually a gilt-edged strategy. And how many of us are guilty of eventually coming to believe our own propaganda? How many times is it necessary to characterise each lucky break, as Lucy Kellaway once wrote, as a strategic master stroke before the next one becomes for the person responsible something that, somehow, was not luck at all but the working of an inherent, subconscious, natural acumen?

More positivity for the Irish economy - why am I worried?

Now I'm worried. So many international pundits have been rushing recently to extol the virtues of the Irish economic recovery that one has to start remembering that we've been here before – and it didn’t work out well.

Think about it. In the mid nineties the term “Celtic Tiger” was coined to describe what appeared to be a runaway success in terms of becoming a prosperous nation in the shortest possible time. We could do no wrong. Retired Irish politicians and business leaders toured the global lecture circuit telling the rest of the world how it should be done. The Irish bought anything that came up for sale, whether it was Polish banks or Chicago real-estate.

The truth of the matter is revealed in this video clip by Alan Mattich of Dow Jones Newswires. Ireland is a small, very open economy. We depend on international trade, much of it carried out by non-indigenous Multi-national corporations that have been attracted here by our corporate tax rate, combined it must be said by the very real facts that we have a sharp, young, well educated workforce, are the only English speaking state in the Euro zone (Memo to government: don’t even think about leaving the Euro or doing anything that might endanger it as a unit of currency) and enjoy the benefits of having one of the most professional and effective development agencies, IDA Ireland, in the world.

But it is so, so easy to lose the run of oneself. Will we be more circumspect this time around? And if so, for how long?

Has Ireland's economy turned the corner?

More and more international observers are making positive comments about the Irish economy. At the end of July 2011 an article appeared in Reuters’ US edition under the heading “Billionaire Ross bets on v-shaped Irish recovery”. It was a report on the comments made by the man who has just invested €300 million of his own money, as part of an overall foreign injection of €1.1 billion, in Bank of Ireland. Wilbur Ross is quoted as saying that the deal was fueled by positive news from Ireland that indicates it is breaking away from “its troubled peers in southern Europe” and embarking on a solid recovery.

Then, on August 17th 2011, the Financial Times published an article from two economists, David Vines, professor of economics at Oxford University, and Max Watson, fellow of Wolfson College at Oxford, who is also a member of the Central Bank of Ireland Commission.

The academics argue that Ireland is swiftly restoring its competitive edge. We’re moving towards a sizeable current account surplus. Our public debt will peak at 110 per cent of GDP, which while large is not unmanageable (Belgium’s debt to GDP ratio was 98.6 % in 2010 and had been much higher than that for many years – since well before the latest recession).

The major challenge facing Ireland, according to the authors, is the situation with the banks. They claim that the corner has been turned here too, due to recapitalisation, a sharp division between core and non-core assets, and regular and rigorous stress tests. They might also have mentioned the new broom, no-nonsense Financial Regulator. The investment by Wilbur Ross and his consortium in Bank of Ireland, reported in the Reuters article mentioned at the outset, feeds nicely into this assessment.

Then there is the much vaunted cost of insuring Ireland’s debt, calculated by reference to the spread on credit default swaps (CDSs). While CDS spreads have fallen for all of the EU states, including countries that have been the focus of much comment such as Greece, Portugal and Spain, those for Ireland were the first in that group to show a marked decrease. No doubt these instruments will wax and wane as always but, in any event, Ireland does not have to re-enter the sovereign debt market until 2014 because of the bailout arrangement with the ECB and IMF.

The quiet man of the Irish economy, agriculture, has seen significant buoyancy over the last year as so-called "soft" commodities, which go into food production, have been subject to sharp rises on world markets. Tourism figures too are well up on previous years and this is despite the relative high value of the Euro against other currencies, most notably the US Dollar. Both of these developments are all the more welcome because they involve indigenous, some might say traditional, sectors of the economy.

All in all, this is a positive picture. It’s certainly not one to get complacent about, but satisfactory none the less, and hopefully just what is needed to encourage the redoubling of official efforts into the future to consolidate and build on what has been achieved.