The Boom – what it really meant.
A couple of years ago after yet another glowing IMF report about Ireland, the then Taoiseach Bertie Ahern famously commented: “The boom is getting boomer.”
It was always goingt to be a spectacular boom. But there we were thinking it was all to do with economics when it was about the deafening noise that was made when the bubble burst.
Two reports were published yesterday. The IMF report is the one I read in detail (it’s very well written – you can download it here).
I’m not going to dwell on its finding but there are a couple of interesting arguments and points that the IMF raises:
1. A gloomy prediction on the economy – a contraction of 13.5 per cent between 2008 and 2010
2. Evidence that competitiveness has been in decline since 2002. In fairness to Richard Bruton of Fine Gael, this is a theme that he doggedly pursued between 2002 and 2007. Bruton also called for the scrapping of benchmarking as early as September 2003. So when the Government say that Labour and Fine Gael didn’t question the fundamental during the good times, it is wrong.
3. A quote: “Well before the crisis hit, public finances had developed serious structural weakness. The facts are well known. In the boom years, personal income tax rates were lowered and expenditure grew rapidly (at about the highest pace among OECD economies). Buoyant property-related revenues (stamp duties, VAT and capital-related taxes) masked the growing structural devicit, which reached 12.5 per cent of GDP in 2008.”
The unmistakable tenor of the IMF’s commentary is that the economy was poorly managed, especially in allowing the property spiral continue, between 2004/5 and 2008. And who was the Minister for Finance at the time? Brian Cowen. He kept on talking about a “soft landing” for the property market but did litte about it. He talked about reform of the public service but did little about did. Politically, to employ the cliche, the buck stopped with him.
4. However, the IMF does say that the Government was probably right with the recapitalisation of banks, and the use of the NAMA model to buy up banks assets, distressed and tood. Some of the IMF’s conclusions in this section are sobering. With regard to the banks, it estimates a potential exposure of €35 billion of bad debt (more than the Exchequer will bring in in all revenues this year). Worryingly, too, it warns of that economic oil slick dispersing over a wider area to other classes of loans… the potential of loans which are not property-related becoming distressed.
5. Different political parties took different things out of this section. The IMF argues that temporary nationalisation of banks might be a good gambit. It argues that it might be the only option “where the size of its imparied assets renders a bank critically undercapitalised or insolvent”.
Labour used this section as justification for its nationalisation call, which it is, but isn’t as fully as Labour might want us to believe. The Government used this section as justification for its setting up of NAMA, which it is, but isn’t as fully as the Government want us to believe.
6. Among the “consolidation strategies” (ie cutbacks) are ones that you would expect from the IMF. They include staff and wage cuts in the public sector; a widening of the tax base; plus more means testing. The latter will definitely lead to means-testing of child benefit (I have long argued that there is no justification for the universal availability of this). And it will also give the impramatur to the reintroduction of third-level fees. I, for one, have never opposed third-level fees. Where most State money should be applied in the education sector is at the earliest stages, where stamping out inequality would make the most difference. For middle class families in Ireland the scrapping of third-level fees meant that they transferred their resources to second-level, leading to a boom for the private education centre.
This blog has said on a number of occasions that the strategy pursued by Government since last September is no better or no worse than that pursued by other governments. The decision to guarantee the banks left no room for contemplation. Should Anglo Irish have been included back then? Was there a danger that if it was allowed collapse, could it have taken AIB with it? Is NAMA right? Should the banks have been nationalised? Should Anglo Irish have been nationalised in January?
The decisions of Governments (taken in haste and in an atmosphere of great urgency) have led to problems? But if the actions had not been taken, or if alternative actions were taken, would that have led to other problems, of equal or greater magnitude?
For example, the Government says that if nationalised AIB and Bank of Ireland it would send out the wrong signals?
There is also a strong message consistently put out by Government that we must honour the rights of bondholders in Anglo Irish (and presumably in other financial institutions). There is a distinct lack of information available on why this situation should pertain. Who exactly are the bondholders? Why can’t we default on their investment? Does it mean that the money that is ponied up by bondholders is risk-free? When a bank is insolvent can’t a government say to to a bondholder, we can give you a certain percentage but not the full 100 per cent?