Celtic tiger turns into sick moggy: Public Finance

Posted on March 14, 2009 · Posted in Public Finance

It all looked so good – a Celtic Tiger that repeatedly delivered annual growth of 9%. The Scottish Nationalists even talked of an ‘arc of prosperity’ that drew together Ireland, Iceland and Scotland. Now, said one wag, it looks more like an ‘arc of insolvency’.

 

How life changes, as Ireland’s ministers will readily testify. It is not merely that Alex Salmond’s political strategy needs rethinking. Ireland’s economic situation is so bleak that there are suggestions of support packages from the International Monetary Fund and the European Union and even rumours that some EU countries would like Ireland evicted from the eurozone.

 

After months of trying to play down the scale of its fiscal crisis, the Irish taoiseach (prime minister) Brian Cowan has now admitted that it expects to lose €18bn of its projected €55bn tax revenues for this year. An emergency budget is tabled for next month.

 

Measures being considered include a new higher rate tax; an increase in the basic tax rate; and bringing more lower paid workers into the tax bracket. There is also to be a clampdown on benefits cheats, including against the thousands of people living in the border regions of Northern Ireland who claim in the Republic instead, using false addresses to receive the more generous Southern welfare.

 

Yet it was only in February that the government announced an earlier package of emergency measures – a cut in capital spending, a target of a 3% reduction in public sector payroll and a graduated pensions levy of up to 10% on public sector workers that is to save €1.4bn a year. The imposition of the levy pretty well ended the ‘social partnership’ with trade unions and led to unprecedented anger against the government, with a demonstration of about 120,000 massing through Dublin.

 

There are now serious concerns that Northern Ireland will also suffer. The Southern government had promised to spread its wealth northwards, assisting economic development in the North by paying for the upgrade of transport links that service the all-Ireland economy – the Dublin to Derry and Belfast to port of Larne roads and the City of Derry Airport, owned by its district council.

 

These worries are shared by the Northern Ireland Executive, which has met with ministers from the South. A spokeswoman for Northern Ireland’s Department of Finance and Personnel says: “The [finance] minister [Nigel Dodds] is aware of recent press speculation that the Irish Government is reviewing it’s commitment to fund previously agreed projects in Northern Ireland. This is speculation at this stage as no formal confirmation of this intention has been relayed to the Northern Ireland Executive. The Irish Government previously announced a range of projects in Northern Ireland that they would make a financial contribution towards. Until notified that this is no longer the case, then we will proceed on that basis. “

 

But comments from a spokesman for Ireland’s Department of Finance to Public Finance add to the doubts. “Given the current situation we are facing, the government will be looking at all aspects of expenditure, capital and current,” he says. “It remains committed to North/South co-operation and exploring ways of working with the Northern Ireland Executive, within the current economic environment. There is still a commitment on the basis of what has been promised, but everything is on the table.”

 

If the Republic does pull back from its support for the North, it would be no surprise given the state of the Irish economy. There has been a series of major job loss announcements in recent months, with an 87% rise in those claiming jobseekers’ benefits in the last year. In a typical example of the economic crisis, Dell has announced the closure of its Limerick factory, with a loss of 1,900 jobs, to move production to lower cost Poland.

 

Political pressures on the government are so severe that it is seen as at risk of collapsing, with the governing Fianna Fail/Green Party coalition creaking. High profile Green Party members have already resigned over the party’s involvement in a government making service cuts. Fianna Fail is suffering badly in the polls.

 

And the banking crisis in the country puts that of the UK in the shade. One of the country’s leading banks, the Anglo Irish, has been nationalised, while the two largest, the Bank of Ireland and Allied Irish Banks, may be next. Support packages will probably be needed for the country’s two building societies, the Irish Nationwide (unconnected to the UK’s Nationwide) and EBS.

 

The financial sector had become the mainstay of the economy and it loaned massively for construction and property development. With property prices nearly halving in Dublin in the last year, the banks are sitting on phenomenal losses and bad debts.

 

Worse still is a scandal that evokes images of Dublin cronyism. When Anglo Irish was at risk of breaching its regulatory deposit requirements, the Irish Life & Permanent stepped in with a short term €7.45bn deposit, matched by a comparable payment from Anglo Irish into an ILP subsidiary. The transaction gave a misleading appearance of Anglo Irish’s deposit strength. ILP has since apologised.

 

Then when Anglo Irish’s share values fell, the bank loaned ten well-known business people the money to buy a large quantity of shares. That had the effect of keeping the share price high. Because the loans were made on ‘non-recourse’ terms – the bank cannot get the money back – a share support operation has been retrospectively bankrolled by the Irish state.

 

And – the cherry on a rotten cake – the chairman and former chief executive of Anglo Irish, Sean FitzPatrick, has admitted that he borrowed €129m from his own bank, without declaring this in the annual accounts. The loan was hidden by an arrangement with the Irish Nationwide Building Society through which the loan was temporarily transferred to Irish Nationwide at the end of the bank’s trading year. The affair is now the subject of a fraud investigation by the Irish police.

 

As details of these three scandals have emerged, so the directors of the three organisations have been involved in a frenzied round of resignations – not only from the boards of these financial institutions, but also as Ireland’s great and the good from a range of other large companies and public infrastructure projects. It is not just the credibility of Ireland’s banking system that has suffered, but also that of the Irish government – whose pleas of ignorance of any wrongdoing are being treated with growing scepticism by an unhappy population.

 

Even more than the global financial system, it is now clear that Dublin’s banking and property sectors were constructed on metaphorical quicksand. So too, it seems, was the Celtic Tiger.