Ivan Yates on Michael Noonan

It’s Noonan’s moment of truth — can he change the course of the nation?
By Ivan Yates
Thursday, March 17, 2011
MICHAEL NOONAN can correctly claim a lot of credit for the resuscitation of Fine Gael in the polls since last June by providing a credible anchor of economic policy.
Since 1981 he has been the master of the sound bite, transposing complex issues into smart one liners that are readily understandable. His reward is the poison chalice of finding solutions to fixing our bankrupt banks. Unlike Brian Lenihan, he cannot have the alibi of a fool’s pardon. When Lenihan claimed the bank guarantee would be the cheapest bailout ever, he probably believed his own rhetoric, not knowing the real level of losses.

Noonan inherits a legacy of failed initiatives. The taxpayer is all out of ammunition having underwritten Anglo Irish Bank by €34bn and Nationwide Building Society by €5.4bn, without any prospect of a return. The remaining four institutions, AIB, BoI, EBS and IL&P are subject to liquidity and capital stress tests that are almost completed. Two key portents have emerged that compound a dire situation. Firstly, ECB and our Central Bank emergency support has increased to €187bn to the end of February, with an extra exposure to Dame Street of €19bn. Secondly, Alan Dukes told the truth during the election, that the EU/IMF bailout package for the banks was insufficient by €15bn of recapitalisation and €25bn of bond finance over a decade.

These developments mean previous banking policy is heading up a cul de sac. It is simply unsustainable for the Irish state to continue picking up the tab for bank lending books that were five times larger than Ireland Inc.

Another €45bn of national debt comes on top of a three year budgetary requirement of €42bn of credit to run state services up to 2014. The maximum that the Irish tax payer can afford in annual debt servicing is €4bn-5bn. We have reached a point of no return. We can envisage meeting insolvency criteria where liabilities exceed assets and we will not be able to pay our bills as they fall due. Time to press the alarm bells.

Having personally experienced the ordeal of corporate insolvency, I can vouch for the trauma of being a defaulting debtor. The emotional pain and public difficulty for Ireland will be followed by rational benefits. An examiner or receiver has powers to restructure debt and repudiate contracts, unlike the entrepreneur who has to face all legal obligations.

The psychological transformation permits a fresh start eventually. The election result and change of government allows the new administration to reverse engines. The critical shift is that Noonan needs to get all the toxic manure out of the system now, whereas previously the paramount priority was to kick the can down the road beyond polling day.

Politics and economics of the appalling vista facing Noonan, requires him to bring the crisis to a head. Outright confrontation will involve two phases of default. The initial conflict lies with bank bondholders. €11bn of bonds this year and a further €16bn in 2012, held by our commercial banks, are due to be redeemed. These involve senior debt that is not guaranteed. An inability to honour these has already been factored into five and 10-year rates of 9.7%. Outside of the EU Commission and ECB, analysts and even the IMF acknowledge the inevitability of arithmetic. The second wave of restructuring will come in relation to sovereign debt on a multilateral basis in 2013 involving us, the Greeks and Portuguese.

Perusal of the commentary by the ratings agencies will verify the hopeless situation facing Irish lenders. Moody’s, in yet another downgrade last week, highlighted further erosions in the credit quality of Irish mortgages. The property asset base, against which loans are held, has deteriorated in value by 60% from the high point in 2006 to date. They paint a bleak picture with falling incomes, increased austerity, extra unemployment, higher interest rates and a return to inflation. The housing market cannot establish a floor to residential values because of the oversupply of accommodation and the lack of mortgage credit. In other words, we cannot be assured that house prices will not fall further.

Any default option will be depicted as a doomsday debacle by official ministerial advisors such as the Department of Finance and Central Bank. These are the same discredited characters that got every previous assessment of bank losses and recapitalisation utterly wrong. These jokers lost all credibility in their latest derision of Alan Dukes during the election campaign. They are a busted flush in the credibility stakes. Noonan’s FG can suffer the same fate as Lenihan’s FF if he relies on the same advice. His consideration of personal advisor (successor to Alan Ahern) is a critical appointment. Noonan is exceptionally cute and savvy. He needs to break free from the shackles of disreputable mandarins.

The cabal of indigenous banking establishment, NTMA/NAMA bosses and Merrion Street aficionados have come up with another novel wheeze. Under the guise of Glas Research, they suggest a new financial vehicle, called “Paddy Mac”. This latest creation is ethnic American, claiming ancestry to Freddie Mac in the US. To avoid previous recapitalisation consequences of haircuts from NAMA transfers, they propose a conglomerate banking vehicle instead of a statutory one. The proposal being pedalled is that bad loans can be converted to ECB bonds, while not part of the state’s balance sheet. More than €64bn of toxic loans is being earmarked for this funny money solution. Every conceivable ruse, including ensuring certifiable losses, will be pursued before the fundamental acceptance of insolvency is acknowledged.

Angela Merkel and Nicolas Sarkozy face their electorates imminently. It’s a no brainer that asking their taxpayers to subsidise the residual costs of the Irish Celtic Tiger party is unacceptable. Mood music in Paris and Berlin can only remain bellicose, hectoring and intransigent. This reminds me of landlords dealing with loss making retailers. “What part of the lease have you not read?” An ultimatum from a bond holder becomes hollow when faced with default. The landlord does a volte face with a receiver or examiner, accepting a revised “market rent” — up to 50% of costs stipulated in the lease. The tables are turned. If the Irish taxpayer cries halt to blanket guarantees, bondholders have few options but to negotiate discounts.

Noonan may seem to be between a rock and a hard place. That’s only if he keeps on the same course as the last government. He can be emboldened with courage given that Enda Kenny and the cabinet will completely back him if he pursues the conflict route. Like many senior ministers of the last cabinet, he may not face the electorate again personally. If he faces down bondholders and the ECB, his role in history will be etched with short-term pain and long-term gain. He can be credited changing the course of the nation. While still in the Government’s honeymoon period he can pass the odium of delinquency onto his predecessors.

This opportunity will not be possible a year or two into the lifetime of this administration. Put simply, this is Michael Noonan’s moment of truth.

This appeared in the printed version of the Irish Examiner Thursday, March 17, 2011