A straight and narrow road to recovery
INTERVIEW:THERE’S A GAP on the wall over Michael Noonan’s left shoulder in the Minister’s conference room at the Department of Finance for his photograph where he will join the rest of the State’s finance ministers since 1919 in the gallery of portraits.
Noonan’s tenure in Merrion Street is likely to be judged on the success in recouping some of a bank bailout bill of €64 billion, narrowing the €19 billion gap in the public finances and setting the economy on a course to recovery.
Even after austerity measures of €21 billion since 2008 and a further €12.4 billion earmarked for the next four years, the Minister is being told that he must go further. The Irish Fiscal Advisory Council, the budgetary watchdog, said this week he ought to apply a further €2.8 billion of measures up to 2015, including €400 million this year.
They said the Government’s forecast for growth was on the high side given the uncertain outlook for our trading partners.
Noonan says it is disappointing that growth targets won’t be met but, based on “nominal growth”, the budget deficit target of 8.6 per cent of GDP will be reached this year.
“We will see what will happen next year. I can’t predict yet but we will be doing our figures in April again,” said the Minister.
Noonan believes the measures introduced in Europe to stem the debt crisis have created stability and that US growth is reasonably strong again. “It seems to me that our growth rates in the second half of the year could be better than in the first half of the year,” he said.
Noonan believes that reducing the deficit to below 3 per cent by 2015 is still reasonable, but also accepts that austerity is not the be all and end all. Stimulating domestic demand, which he admits is “somewhat flat”, is essential to economic recovery.
He points to the one-third share of the proceeds from the sale of state assets to be used for investment and funding and the European Investment Bank as two ways to breathe life into the domestic economy.
The Government was looking at other areas to help boost activity, he said, and he will be looking at the demand side of the economy in preparations for the 2013 budget.
Before that, the Government has the referendum on the EU fiscal treaty, which is designed to put manners on how governments set budgets. Unlike previous referendums on EU treaties, Noonan says the balance of uncertainty lies on the “no” side: “If you vote yes, you know what you are voting for – if you vote no, you are taking a jump in the dark.”
A yes vote would ensure continued stability, he says, and guarantee Ireland could tap Europe’s permanent ESM bailout fund. “If we were ever in a situation where we needed funds from Europe again, shouldn’t we position ourselves so that we can access them?” he said.
Noonan said the Government was making no links between a yes vote on the treaty and EU agreement on a deal on bank debt.
Negotiations on finding a way to reduce the long-term annual costs of the bailouts of Anglo Irish Bank and Irish Nationwide – tied to further repairs to the State-controlled banks – is keeping Noonan busy.
THE NEXT THREE weeks will be dominated by officials making final touches to a draft paper yet to be agreed by the Government and the troika of the EU Commission, the European Central Bank and the International Monetary Fund. The paper must be ready for the troika’s next review of the bailout programme in the second half of this month. Noonan said he hasn’t seen the paper yet.
“We will be examining every line of it,” he said. “Unless it benefits us, we have no interest in it.”
Once the Government and troika agree on the draft paper, it will go for political approval. The Minister doesn’t know where the suggestion that this could happen by mid-May at a meeting of euro zone finance ministers came from.
Noonan says ECB agreement on last week’s settlement of a €3.1 billion cash payment for this year’s instalment on the Anglo/Irish Nationwide promissory notes with a 13-year Government bond opens the door for a deal on the remaining payments.
“I don’t know would you could call that a breakthrough or not, but certainly it is a change in the principle position that the promissory note was untouchable. We can see now that it is not untouchable,” he said.
To avoid a €3.1 billion cash payout hitting the exchequer’s balance sheet, the Government instead issued a 2025 bond to Irish Bank Resolution Corporation, the former Anglo Irish Bank that holds the promissory notes. A deal was reached that involved IBRC “repo-ing” the bond with Bank of Ireland in a swap for cash. IBRC would then use the cash to pay down the bank’s emergency loans from the Central Bank, while Bank of Ireland would in turn “repo” the bond with the European Central Bank for cash.
The plan hit a snare when it was deemed that Bank of Ireland required shareholder approval at a vote next month. In the interim, Noonan directed the National Asset Management Agency to complete the swap deal with IBRC.
Noonan said Nama was providing “bridging finance” while the bank ballots shareholders. (The State owns 15 per cent and will abstain as “a related party”, the reason for the shareholder vote in the first place.)
The Minister said the ECB had given its blessing when he first told the Dáil on the night of Wednesday, March 21st that the
€3.1 billion cash payment could be settled with a Government bond. But the plan could not be announced until details of the “repo” deal with Bank of Ireland was in place due to legal constraints on shareholder approval.
“It wasn’t that there was this big negotiation going on with the ECB – that had been done and dusted the previous week,” said Noonan. “It was that we wanted to make sure that we didn’t do anything in our talks with Bank of Ireland which took away the rights of shareholders which are, as you know, enshrined in law.”
The Minister says officials had at one stage thought it might be possible to conclude the “repo” transaction with AIB, which is 99.8 per cent owned by the State. “But the ECB expressed a clear preference for a bank that wasn’t in State control. But I mean if we had done it with Deutsche Bank, they would have been equally happy,” he said.
Noonan says there was a “coalition of interests” between the Government and the ECB to find a way to reduce the costs associated with the promissory note and to get IBRC off the large-scale emergency borrowings from the Irish Central Bank.
The Minister said an arrangement around changes to the promissory notes could be used “to do other things in the banks as well”. The removal of the loss-making tracker mortgage books from AIB and Irish Life Permanent was “on the table as well”.
Improving the balance sheets of the two banks, which are virtually State-owned, would make a restructuring of the banks “more malleable”, he said.
The Government has injected €20.8 billion into AIB and will have pumped €4 billion into Irish Life Permanent by the end of June once the sale of Irish Life to the State has been completed.
Cleansing the banks of their trackers would, like changes to the promissory notes, help reduce the State’s debts as it would make the banks attractive to investors, allowing the State to sell down its stakes in each, he said.
“It is all tied in, and tidying up the balance sheets along the lines that has been signalled . . . would enhance the value of the banks and position them for selling part initially, but maybe selling all subsequently,” said the Minister.
“Our policy position is that we have no interest in running State banks in the long term. We would like to get them back into private hands but we will only do that when we can take the taxpayers’ value back out.”
Tapping the EFSF bailout fund as part of this restructuring shouldn’t be interpreted as a second bailout by the State, he says. The Government guarantee of 2008 – “from which all the debt ran” – predated the State’s bailout.
“What I am trying to do is to have a different solution for a pre-bailout piece of policy formation,” he said. “I don’t think it is fair to say that it’s a second bailout when the thing that we are trying to fix predated the bailout.”
Noonan says there was “political panic” at the time of the EU-IMF bailout in 2010 and the last government was “all over the place” during that period. “I am not surprised that the best deals weren’t made and the bits that should have been included weren’t,” he said.
He is working on a strategy to extract the best return on the €64 billion of State cash that will be injected into the banks but doesn’t yet know how much it would recover.
The so-called placing agreements with the banks through which the State recapitalised the lenders last year blocks them paying bonuses to bankers. The Minister, however, has left the door open in the “relationship framework agreements” published last week governing the arm’s-length relationship between the State and the banks that will enable them to incentivise senior bankers to make their lenders profitable.
No agreement has been reached with any banker, but Noonan wants the measures in place so they could be approved by the troika.
“They [the bankers] can only cash in at the same time the State cashes in, is the way I would envisage it, and it would be very limited to very key people,” he says.
Noonan says his call last year for all bank directors in situ on the night of the guarantee in 2008 to step down to renew the boards has become a “more refined approach” since Bank of Ireland has avoided State control.
“If the shareholders who came in and invested in Bank of Ireland wanted particular directors, it is more their call than ours,” he said.
Regardless, the Central Bank is carrying out “fitness for office” tests on current directors in place at the time of the crisis, he notes.
He points out that, of 64 bank directors in place at the time of the guarantee, just four remain.
On the customer side at the banks, Noonan says the proposed personal insolvency legislation, which paves the way for the writedown of mortgage debt in out-of-court settlements, was only part of a set of solutions to tackle the heavy burden of personal debt.
The Bill is still being drafted before publication by the end of this month, he says, but he feels “it has got the balance right”, despite bankers’ concerns that a cap of €3 million debt on non-judicial mortgage write-off deals goes too far.
While the scale of mortgage arrears is increasing, Noonan says the numbers actually slipping into arrears have “bottomed out”.
“We are not quite there yet but we are close enough to knowing the actual number of households that are in arrears,” he said.
SHORTLY BEFORE HIS first anniversary in one of government’s busiest portfolios, the Minister’s wife Florence, who had lived with Alzheimer’s for more than a decade, died. In recent years, the burden on the family had eased as his wife had been cared by professionals in a nursing home, he said.
He visited his wife every day he was at home in Limerick. “It was very difficult when the family were caring for Florence at home,” he said. Had Fine Gael won the election in 2007 and the Taoiseach offered him the Finance job, he would not have been able to accept due to his commitments to his family.
The Minister said that he had forgotten he held German government bonds as a personal investment until he read about them in an article in The Irish Times on the register of TDs’ interests last year. He sold them straight away, making a return of 11 per cent, he said.
“In the excitement of being appointed minister I forgot I had them,” he said.
Noonan’s work now in Finance is as busy as his time as Minister for Justice in the 1980s.
“There was an IRA campaign and extraordinary stuff going on then. It was very time-consuming. We worked into the night, which is similar now,” he said.
His stint as Minister for Health in the 1990s was at a time of economic prosperity when money could be thrown at problems, a far cry from the situation the country finds itself in now. “Solving problems with very little resources is a far more creative activity, and far more interesting as well,” said Noonan.
“It is doing a far better job for the economy because the fixes that are being made now are radical and they will work.”
IN HIS OWN WORDS . . .
ON RESOLVING THE MORTGAGE CRISIS
You cannot have so many citizens with a burden of debt that keeps them out of the economy. We can’t have so many talented people not participating in the economy for regeneration.
ON THE BLAME GAME
There is looking back by people who are looking for people to blame, which is grand, but is a futile exercise. Then there is looking back by people who want to rewrite history to justify positions, which is equally futile.
ON THE CAMPAIGN FOR A YES VOTE ON THE EU FISCAL TREATY
We have to campaign very strongly. My experience of referenda is that people will vote No unless they know exactly what they are voting for.
ON THE HOUSEHOLD CHARGE
I don’t think there is evidence to say that there was a widespread refusal to pay the charge. It is a fact that people didn’t pay the charge before the deadline, but there are a lot of reasons for that.
ON IRELAND’S DEBT BURDEN
If you never had banking debt, the State debt is very significant as well. There is a kind of fallacy around that it wasn’t the State at all, it was the banks and, if it wasn’t for the bank guarantee, we would be in great shape. We wouldn’t. About 20 per cent of the imposition is due to the banks. An awful lot of it is due to the mismanagement of the country and the budget deficits that we were running.
THE GOVERNMENT’S GRAND PLAN
At the end of the day, it is not about banks or statistics; the Republic is about the people of Ireland and the bottom line in our agenda is that Ireland is a happy place to live and rear a family, that you will own your own home, you will have a job and that you will have a decent living standard. They are the objectives really – everything else is ways and means.
ON WHETHER THE ECB BOUNCED IRELAND INTO A BAILOUT
It was the inadequacies and stupidities of the previous government that landed us in the programme. It is grand to be blaming someone else.