This stable inter-party Government has increased economic volatility writes Ivan Yates (He’s largely right)

By Ivan Yates

Thursday, March 15, 2012

HULLABALOO over Fine Gael’s aborted PR stunt to mark the anniversary
of their year in office was a sideshow.

Good relations between FG and Labour are the main achievement of the
Government. Political stability in the form of a mega-majority and
inter-party harmony is the basis for a five-year term of office. It’s
in stark contrast to the mayhem of the FF/Green disarray. Brian Cowen
had lost the confidence of his party and didn’t even contest the
election. The remaining ministers, after a botched reshuffle, were
testament to the worst government in the history of the State. That
disaster sets the bar too low to assess our new masters.

Enda and Eamon claim, on their own self-assessed report card, to have
pulled us back from the edge, stabilised the economy and revitalised
our international reputation. Facts are less than supportive: over the
past year, company insolvencies have risen from four to five per day;
unemployment is up from 14.4% to a projected 14.6% in 2012; weekly
emigration is beyond 1,000; householders in mortgage arrears over 90
days have increased by 20,000. Domestic demand and GNP are declining
(after inflation) for a fifth consecutive year. Repeatedly asserting
our image has been transformed doesn’t make it a reality. If the Irish
economy’s difficulties could be resolved by spin, they would have been
already. It took FF 12 years to be disconnected from reality. This lot
are well down that road in 12 months.

The Cabinet must face more critical analysis than they have applied to
themselves. Positives exist. Reorganisation of the Department of
Finance and establishment of the Department of Public Expenditure and
Public Service Reform are key innovations. These focus on modernising
the apparatus of state. IDA and Enterprise Ireland have had notable
investment successes. Tourism is in a turnaround with extra visitor
numbers, enhanced by reduction in the VAT rate to 9%. Visits by US
president Barack Obama, the Queen and the Chinese VP went well. The
tailwind of Greek debt restructuring provided EFSF modifications to
reduce our sovereign debt servicing by €9bn. Promotion of John Moran
and Robert Watt as secretary generals is welcome.

These pluses don’t protect both government parties from ubiquitous
criticism of their irresponsible and cynical election promises.
Remember Fine Gael’s five-point plan? Kenny repeated the mantra often.
Three of those pillars now look dodgy. Universal health insurance for
all, with free GP care and inpatient hospital waiting times reduced to
a year, look extremely remote. 67,000 people have departed from
private health insurance due to cost hikes. The ERA (Economic Recovery
Authority) promised to spend €7bn of privatisation receipts to create
100,000 jobs in broadband, water utility and renewable energy
enterprises. This was always daft. Abolition of the Seanad is a long
shot, in the context of defeat for the Oireachtas inquiry referendum.
Labour promised free water, no third-level fee increases and a
strategic investment bank. All are reneged upon.

The central challenge for the Cabinet is to achieve game changers in
relation to Ireland’s debt. Do they get it? Ireland’s collective
indebtedness, be it sovereign, corporate, household or personal,
exceeds any other OECD state. Cumulative liabilities amount to 6.6
times our GDP. The path to economic recovery can be facilitated by
enhanced competitiveness, investment and growth. No matter how
successful we are in these pursuits, they won’t resolve the profound
debt nonsustainability. Greece has evolved from bailout to bail-in.
Default on €100bn of sovereign bonds held by private investors is the
first instalment, to be followed by a further round of debt discounts
— next time, it’s the ECB. Ireland, Portugal, Spain and Italy will
require a write-off of bad debt. Germany, as principal paymaster of
the ECB, won’t get back credit they lashed out between 2002 and 2006.

Government’s banking policy isn’t working. NAMA was supposed to free
up domestic banks’ lending activity by putting toxic loans into
quarantine. It hasn’t worked. The property market has not stabilised.
The strategy of two pillar banks is running into the sand. Mortgage
credit to credible first-time home-buyers has evaporated. Business
loans are only available to blue-chip clients. Corporate refinancing
is being downsized, resulting in asset-stripping and sales of
subsidiaries at fire-sale prices. Lack of finance pervades every facet
of the economy — depressing property values, starving cash flow in
enterprise and dampening consumption. The EBS has been shunted into
AIB and wiped out of the mortgage market. PTSB is a basket case. No
home has been found for this institution, which has endemic losses
through an abundant proportion of disastrous tracker mortgages.

Rationalisation of the retail network of financial institutions and
several thousand redundancies represent only a small feature of
required reorganisation. Cost reductions of €200m in AIB are a drop in
the bucket of impairment losses. No indigenous bank has a
debt-forgiveness strategy. They are still, three years after clear
visibility on the extent of the crisis, in denial about repayment
capacity. Their principal shareholder, the Department of Finance, has
shown no leadership in sorting out debt delinquency. The result is
corporate and personal paralysis. There is no benchmark or coherent
programme of debt restructuring. The complexity and pain of these
problems have resulted in financial immobility. They won’t go away. No
political direction or leadership has been provided to resolve
Ireland’s internal credit crunch. Because there are no votes in
bankruptcy, it will continue to be neglected.

Insiders inform me of ministerial fatigue. Senior ministers may not
seek re-election in 2016, due to understandable disallowance of
pension entitlements as a serving TD. Who’s our next EU Commissioner?
Lack of enthusiasm from politicos, who’ve been 14 years in the
opposition wilderness, was unexpected. Emphasis on survival and not
upsetting backbenchers has come too early in this administration. The
first year should have contained jaw-dropping tough decisions. Do you
recall any? No front-loading of radical expenditure reductions or
quango rationalisation — just compliance with the troika. Insistence
on accountability has been absent — no banker or regulator has been
accosted, just paid off. Great on spin, poor on substance, sums up the
initial assessment.

What lies ahead? Miniscule growth means a second bailout. Like Greek
default, it’ll be termed something else. The troika will insist on
detailed terms and conditions. More than €600m of welfare reductions
await implementation. Privatisation of state assets will be pressed to
the point of reality. The Constitutional Convention will be an idle
talking shop. More backbenchers will jump overboard. Health and
education reforms will become mired in the quicksand of cutbacks,
inertia and resistance by vested interests. U-turns on DEIS schools,
disability payments, septic-tank charges, Vatican embassy, turf
cutters, etc, will lead to contagion on big-ticket items. A unique
impetus for courageous leadership, created by the election result and
the coalition, has been lost. We are set to continue on the
happy-clappy road of self-congratulation.

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