Statements made by economic think tanks and fiscal councils have two distinct styles: incomprehensible gobbledygook, when they are trying to hide inconvenient truths using highly technical language written for the exclusive enjoyment of university professors on the verge of retirement, and press savvy sound bites with a technocratic veneer so that they don’t look out of place when dropped wholesale into an article published somewhere on the business pages in our daily newspapers. The latter ensures that a required agenda can enter the media at a fictional arm’s length from government. These pronouncements can then be commented upon by Ministers and politicians as if the expert’s opinion is expressed independently of them. Most often, the discrepancy between the opinion of the fiscal council and the government is such that the former will be more extreme in what it recommends. This provides the minister with room to offer a more ‘political’ solution; one which suggests that they are not monsters, after all.
Irish banks are on the verge of a Euro wide stress test. The banks, as we know, despite years of unprecedented support are still fucked (I can’t think of a nicer way of putting it). They were given everything and they are still hollowed out.
In 2008, at the height of the crisis the state promised to pay all investors, even the short term money markets via the shadow banking system, who had provided the banks with most of their wholesale capital.
Just to note the shadow banking system is unregulated because if an alternative fund makes a loss on an investment it is expected that the investor will eat that loss (it’s also expected that they would have hedged against it and probably made a profit from selling on the insurance taken out to cover any potential loss etc ). Because of this they are outside the money system and, unlike normal banks, they do not get support from a central bank to balance their books at the end of the day.
The bad loans (debt) that Irish retail banks had accumulated through failed commercial property speculation was taken off them. The book losses from the haircuts on the bad debt was repaid in full through recapitalisation and the purchase of the loans was paid for through direct government funding and the selling of state-backed bonds.
All these things were justified on the basis that it was of the utmost importance that we have ‘a well-functioning credit system’.
Irish banks were left, however, with what at the time were performing loans – house mortgages.
I can’t emphasis this enough: the property collapse in 2007-8 was a collapse in the investments made in commercial property. The majority of these transactions were not those of parents funding their children’s attempt to get on the first rung of the property ladder. They were not young couples beginning a new life in a suburb in Portlaoise. They were not recently graduated school teachers and nurses who bought overpriced apartments in Leapordstown. They were transactions made by people like former tax inspector Derek Quinlan who used his knowledge of the Irish tax system to sell tax breaks to those with lots of surplus cash that needed protecting from a recently tightened up Revenue system. These were sold to the sort of high net worth individuals who operated as independent companies and whose ‘earned’ income comes through a holding company that enjoyed a financial boost when corporation tax for Irish businesses was reduced from 38% to 12.5% overnight. The collapse occurred in the asset prices of property that had been paid for through rolled up debt taken out by a relatively small number of people who in turn were often organised and managed by the banks themselves.
The high prices of the houses that people bought up to the peak in 2006-7 with borrowing reaching several times average annual income, occurred because of the activities of the banks – funding lending through increased use of the shadow banking system and taking advantage of price speculation of paper assets which was itself fuelled by tax breaks on profits.
2007 marked the point that prices could no longer continue to rise because, literally no one could afford them any more.
In the years between 2008 and 2013 of course, we’ve had five years of austerity. The escalation of unemployment and emigration, as well as the eviscerating of the economy since then has had a bad effect on those performing loans, where the number of people who are now unable to pay their mortgages has increased enormously.
Now in 2013, having completed an EU/IMF/ECB finance program that was required to credibly finance the decision to provide a blanket bank guarantee, completely protect Anglo Irish Bank and Irish Nationwide and cover the cost of NAMA and the recapitalisation program, we are being told that we might need to recapitalise Irish banks for a second time. Those who are still able to keep up with their repayments are forced to pay for a mortgage that is often twice the price of the asset they are paying for with little likelihood that the value will return to those levels for a considerable time. Those who are unable are referred to as ‘strategic defaulters’. Those who are unemployed are told that they are better off in whatever few low paid job exist than on unemployment benefit, yet they are ‘strategically defaulting’ because they are less than enthusiastic about working for the minimum wage while paying down debts that there is every chance could keep them impoverished for the rest of their life. In any case, in the vast majority of cases people prefer to work than being unemployed, so we must assume that ‘strategic defaulters’ are avoiding taking jobs that simply don’t exist.
There is much emphasis in the newspaper article quoted below on the Fiscal Council’s hope that new funding for the banks will come from either the market or the ESM:
“The council added that given the stressed nature of the State’s finances it would be “desirable” that any additional capital needed be “sourced from the private sector or the ESM [European Stability Mechanism] if possible”.
‘Desire’ requires an object, which more often than not, is not obtainable.
But to return to the original point about the function of the Fiscal Council vis-a-vis the government. One cannot read this without feeling that something is getting inserted in to public consciousness:
“However, given the importance of adequately capitalised banks to a well-functioning credit system, which may require a continuing cushion relative to whatever are the minima set by the European-wide regulatory authorities, further injections might prove unavoidable,” the council added.”
The basis upon which Irish banks now operate is that they have to be in a position to make profits as soon as possible. The only way to do this, given the mortgage crisis precipitated by austerity, is that their debt is off loaded without obtaining losses. The method of justifying the unparalleled action of government to ensure this is to say ‘we must stabilise the banking system’ or as the Fiscal Council gloss it: “a well-functioning credit system”.
So, if they are to experience losses by the widespread eviction of people from their homes through repossession, or through debt write downs of buy-to-let properties (and the selling on of those cut priced properties to REITs companies who plan to professionally manage the rental market) they must have capital in place to absorb those losses in the interests of ‘a well-functioning credit system’.
As before, there is every reason to expect that that the cost of that capital will come from the redirecting of resources provided mainly by those who work in Ireland and who don’t have additional supplementary wealth etc.
Once again European is proving useful when the Irish government and Irish banks engage in class warfare. The idea that Ireland would have ‘a well-functioning credit system’ is a joke, no matter how well capitalised it is, given the damage that the credit system has caused. The Fiscal Council is trying to suggest that the prosperity of Irish banks, that is, increasing profits and eye-popping top-level salaries, is the prime ingredient required for the future development and prosperity of the Irish economy as a whole. The Irish banks for their part want to remain in or fully return to private hands, boost their share price through equity sell offs, and get back into profit without lending in the Irish economy.
If any economic progress occurs in the next 10 years it will be despite the profit seeking of the banks, not because of it. The demand that Irish banks, in order to return to profit quickly, must be protected from the losses they have wrought through the state financing the full repayment of debt means that it’s highly unlikely.
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