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Inside The World Of Business

What does the OECD really know about Ireland?

THE LATEST OECD economic survey of Ireland tells us much that we already know. The economy was mismanaged; the banks were badly regulated; Nama is risky; and the road back to financial viability will be long and hard.

Its main criticism is that we are not doing enough to prevent welfare dependency developing among the newly unemployed. But overall it is supportive of the Government’s response to the crisis. Or, more specifically, it is supportive of what the Government says it’s going to do.

But before drawing too much comfort from the OECD’s latest judgment on the economy, it’s worth pausing for a while to look at the organisation’s record on Ireland.

Along with pretty much every other commentator – both domestic and international – it failed to see what was coming down the economic tracks

In its previous survey in April 2008 – some eight months into the global credit crunch – the OECD said the following: “The Central Bank and Financial Services Authority of Ireland had clearly identified the major vulnerabilities and taken action to mitigate them.

“The Irish banks are well-capitalised and profitable, which provides a cushion to weather the more difficult times ahead.”

The secretary general of the OECD acknowledged as much yesterday. But rather worryingly, he laid a good portion of the blame on the information they received from the Central Bank and the Financial Regulator.

This of course is the Achilles’ heel of all OECD reports. The organisation relies for a large part on governments themselves for the information they use in preparing their reports.

It is not unreasonable – who else has the information and what point is there really in lying to the OECD about the state of your economy.

The problem seeps in when the Government in question doesn’t really know what is going on in its own economy, as was manifestly the case here.

We don’t know who the OECD spoke to this time around, but the presumption is that it was to somewhat chastened officials in the Central Bank, Department of Finance, Central Statistics Office and so on.

The real question then is: do these officials know more about what is going on in the Irish economy now than they did in April 2008? If they don’t then the OECD’s latest report needs to be treated with some caution.

It’s worth bearing in mind that pretty much every important tax heading either missed or exceeded its Department of Finance target in the October exchequer returns.

Whither Mary O’Dea?

MARY O’DEA, the acting chief executive of the Financial Regulator, will take a pay cut of about €80,000 when she moves from that role to the post of assistant director general for financial operations in the new Central Bank Commission.

O’Dea had enjoyed the benefits of a €260,000 annual salary since taking over as acting chief executive. She will revert to the pay level of her previous role as consumer director when she starts her new job on February 1st.

It’s a step down in terms of pay and ranking. O’Dea had certainly been perceived as a contender for the top job as head of financial supervision – the new name for the role she currently holds on an acting basis, which will be filled in January by Matthew Elderfield, the current Bermuda regulator.

However, given the hammering the regulator has endured over its handling of the banking crisis, the appointment of an external candidate with an international reputation was always on the cards.

O’Dea, for her part, is said to have rolled up her sleeves after the departure of Pat Neary at the start of this year following the controversies at Anglo Irish Bank and helped lead important changes within the regulator, particularly following the harsh criticisms of the organisation by accountants Mazars in a report paid for by the regulator. Industry insiders had suggested that O’Dea may be interested in the post of financial services ombudsman, which becomes vacant at the start of next year with the retirement of Joe Meade.

In the meantime O’Dea is taking over the responsibilities currently covered by Brian Halpin, who is retiring, at a high level within the re-merged Central Bank and regulator. She will monitor ECB funding and market-related banking issues.

Two further senior roles below Elderfield and his equivalent in the central banking function side of the new regulatory commission, Tony Grimes – and at the same level as O’Dea – have yet to be filled.

One wonders whether these will be external recruits to help balance the new with the old.

Banking baby steps

IRISH BANKS appear to be having some success in weaning themselves off the cheap funding available from the discount hatch at the European Central Bank (ECB).

ECB funding into the wider system, including IFSC-based institutions, fell from €130 billion in June to €91.5 billion in September.

While recent share price declines have been unhelpful, they do not appear to have translated through to the funding markets, which have remained open.

Allied Irish Banks (AIB) and Bank of Ireland have tapped bond investors by raising a combined €2.5 billion on public bonds falling partly outside the guarantee.

This development is both positive and encouraging.

Bank of Ireland said at its interim results yesterday that it had raised €7.9 billion in term funding through public and private placements and that all but €2.5 billion was raised privately.

The bank said that it had €13 billion in funding maturing next year but that it has (and is) pushing out its funding profile for well over a year, avoiding any large debt roll-over when the two-year blanket guarantee ends next September.

The regulator will be pressing all banks to push out their funding duration to prevent a bottleneck in the debt markets for Irish banks next September.

To that end, the regulator should sleep easier when the Government extends the guarantee to cover specific bonds so all domestic banks can raise funding that doesn’t need repaying for periods of up to five years.

The willingness of the banks to replace cheap ECB money with funds raised in the reopening debt market also gives rise to cautious optimism over the success of Nama as a source of liquidity for the economy.

It would give some hope that the banks will actually lend on the €55 billion they will receive from the ECB in exchange for Nama bonds, rather than simply use it to replace existing ECB emergency funding.

Today

Nobel Prize-winning economist Nouriel Roubini, who in 2006 predicted the current global recession, is one of the speakers at the International Financial Services Summit in Dublin today. The summit will be opened by Minister for Finance Brian Lenihan and will also feature contributions from Financial Times columnist Martin Wolf, chairman of KPMG International Timothy Flynn and former minister for finance Alan Dukes.

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