Governor's dilemma over banking crisis

Tue, Feb 12, 2013, 00:00

Cantillon:The governor of the Central Bank would appear to have given AIB, Bank of Ireland and Permanent TSB a final warning over problem mortgage loans.

Or did he?

A somewhat exasperated Patrick Honohan told RTÉ over the weekend that the Central Bank was “close to being more directive” but almost in the same breath warned that “if we tell them what to do, they absolve themselves of responsibility”.

A case of dammed if we do and dammed if we don’t?

The governor’s dilemma highlights the multi-headed nature of the banking crisis hydra and its contribution to the current stalemate.

The problem is that resolute action in one area can make things worse in another.

Mortgage debt is a good example. Dealing in a fair, resolute and timely fashion with the thousands of people whose mortgages are no longer sustainable is an imperative from the perspective of the wider economic recovery.

From the perspective of the banks themselves it’s not such a good idea, because doing so will crystalise the losses on their books and thus eat into their capital.

The fact that this capital was provided by the taxpayer for just this purpose seems to be neither here nor there as far as the banks are concerned.

The reason that they can be so blasé is that the banks are well aware that the Government’s over-riding concern is a successful re-entry into the bond markets this year.

Strongly capitalised banks are a key part of that strategy as anyone looking to buy Irish bonds is cognisant that Ireland’s debt profile over the next few years will teeter on the edge of sustainability – defined roughly as a debt to GDP ratio of 120 per cent.

And these calculations do not allow for any significant extra borrowing to pump more capital into the banks should the current buffers not prove sufficient to absorb mortgage losses.

As a result the Government had a powerful incentive not to push the banks too hard.

The additional headroom on debt won through the promissory note deal changes this dynamic somewhat, and perhaps the governor’s exhortation to the banks is best seen as a coded message to that effect.

IBRC staff left twisting in the wind

It was never going to take too long for unforeseen consequences to spring out of the whole IBRC affair.

One of the first appears to be that there are now anomalies between the treatment of staff in the Republic, who lost their jobs with the IBRC last week, and those outside this jurisdiction, who, it appear, still have their jobs and access to a redundancy scheme that is more generous than the statutory terms offered to those in the Republic.

The liquidators have rehired most of the staff in the Republic, but on the basis of monthly rolling contracts.

The immediate consequence of this is that the workers’ union, the Irish Bank Officials’ Association, is going to raise the matter with Government. That could result in some sort of extra payment being made to former IBRC staff, or some other concession being made.

The staff are mainly middle management and below. They would have had little or nothing to do with the activities that led to the bank’s downfall. They do look like a group the Government forgot about in the middle of its efforts to secure a deal on the hated promissory notes.

IBRC employees in the North and Britain are protected by the battery of employment rights that apply to workers in most EU countries. As the legislation passed last week does not apply in either jurisdiction, the State may also end up having to compensate these people for the loss of both their jobs and observe rights such as minimum notice etc.

The fact that IBRC operations in Britain and the North are still there, twisting in the wind, begs the question of what precisely the Government, their ultimate owner, intends to do with them. Why were they not placed in liquidation at the same time as the Republic-based parent?

Organising this would have been straightforward – there’s only one real shareholder – and such a move looks inevitable in the near term in any case.

Presumably last week’s priority was dealing with the situation in the Republic. As a result, there should be a few more unforeseen consequences from whole affair.

Sugar taxes leave bitter taste

The UK-based development agency ActionAid is among those in that jurisdiction that have been turning up the heat on the issue of tax avoidance, often drawing unwelcome attention to the role Ireland plays in multinational taxation structures.

The latest episode in the ongoing story involves Associated British Foods’ African sugar subsidiary, Illovo Sugar, and, in particular, the amount of tax that Illovo pays in Zambia.

According to ActionAid, Ireland plays a “pivotal” role in the structures Illovo uses to reduce its Zambian tax bill.

All of which is most unfortunate as Zambia is one of Ireland’s nine long-term development partners – countries that the State is targeting for its development budget. Ireland has had an embassy in the capital Lusaka since 1980.

Indeed, it would appear it was Ireland’s efforts to assist the African nation that, at least in part, lie behind the presence here of Illovo Sugar Ireland, a company that ActionAid says helps the ABF subsidiary escape Zambian taxes.

The African country operates a 20 per cent withholding tax but a 1971 tax treaty between Ireland and Zambia includes a provision that prevents Zambia imposing the tax on money going to Ireland.

The original objective of the provision, ActionAid believes, may have been to encourage investment from Ireland into Zambia, but it is now being used for an entirely different reason.

The ActionAid report on the Zambian sugar company, which is part of the South African Illovo group, estimates that, since 2007, the arrangement involving the Irish subsidiary may have deprived the Zambian exchequer of €1 for every €14 it has received from Ireland in aid. The report can be read at



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