As we sleepwalk through crisis, it’s time to stress test our exchequer

BEFORE the good people from BlackRock Solutions and Boston Consulting Group leave the jurisdiction, they might be asked to do an additional stress test — on Ireland’s exchequer. Larry Fink and the lads carry the ultimate status of credibility worldwide. No one seems to have followed the logical conclusion of their analysis, beyond banks, for their state guarantor.

If over the next three years, house prices fall by a further 24%, unemployment rises to 15.8%, private consumption falls by 5% and investment by 3%, where does that leave government finances? If this stressed scenario and fallout is required by markets for banking reassurance, it’s equally applicable to our sovereign accounts.

Obviously some new analysis is required to convince the European Central Bank that Ireland’s insolvency is real. If international consultants explain the unsustainability of repaying our total indebtedness, they might accept the inevitable. Their denial to date knows no bounds. Fiscal facts could not be more plain. The national debt presently stands at €95 billion. This will rise by €18 billion, the current budget deficit for 2011. The IMF/EU bailout provides €50 billion to maintain state services over the three-year period. Add on ultimate liabilities from promissory notes and bank recapitalisations and the sum is heading for €200 billion.

Ignore current market rates of funds on 10-year sovereign bonds at 10.8% and even apply the government’s requested rate of 4.8%, debt servicing costs amount to almost €10 billion annually. It’s a no-brainer that the weight of these obligations is too great.

The burden of higher taxes will drag the real economy back to stagnation. Having lost all ‘A’ credit ranking by rating agencies, we will be consigned as being a dullard in the eurozone. Euro colleagues continue their implacable opposition to allow us to impose the costs of banking failure on investors and are oblivious to the necessity for default. Maybe a memo from Fink & Co might open their eyes to the trajectory of national bankruptcy.

The politics of the bank’s stress tests augurs poorly for Kenny and Gilmore. Earliest signs of déjà vu with the two Brians are emerging. The agility of ministerial script writers knows no bounds. The Finance Minister’s Dáil text excoriated the September 2008 bank guarantee decision. The same officials in the Department of Finance, who recommended the last government’s actions can now somersault. It is amazing that ministers don’t expose their failings.

Having been a vital component of the problem, they’re hardly best placed to be part of the solution. Messers Patrick Honohan and Matthew Elderfield also suffered a massive credibility impairment last week.

Throughout 2010 they reassured us that Permanent TSB had adequate capital and liquidity. We were repeatedly promised that their lending book had avoided property development bubbles. A few years ago analysts raised questions that their loans to deposits ratios were analogous to that of Northern Rock.

Regulators were satisfied. Out of a clear blue sky, it transpires they have a black hole of €4 billion. All shareholders were wiped overnight. Taxpayers are left with a likely capital contribution of €2.9 billion, after Irish Life is sold. The Government have provided no explanation of where this institution will ultimately end up, on a consolidated or stand alone basis. Meanwhile, net losses on tracker mortgages will amount to €400 million annually. A new underwriting guarantee has been committed on our behalf.

This hapless new information, more than two and a half years since the crisis began, means official supervisors cannot be trusted. They are guilty of incompetence or hopeless optimism. We were supposed, at the fifth attempt, to get full final combined costs of bailing out our six indigenous financial institutions. No acceptable explanation has been given as to why the same stress tests on Anglo and Nationwide are being held back until May. Identical criteria of depressed economic circumstances applies to their loan books. Expect several billion euro to be added to the total of €70 billion when these are finalised.

It’s all akin to peeling an onion, as you cut through layers, there are involuntary tears. UCD’s Professor Morgan Kelly is vindicated again in predictions of a new wave of losses from €130 billion mortgage books.

He hoped we could rely on the “kindness of strangers”. They couldn’t even reassure us about €60 billion of medium term liquidity funds to replace hand to mouth existence on bi-monthly Emergency Liquidity Assistance.

Fine Gael and Labour had two core election catch calls: “negotiate the bailout” and “burden sharing”.

It is unreasonable to expect miracles after less than a month in office, but the fear is they are sleepwalking through this nightmare. They have bought into the mantra of overriding rhetorical reassurance instead confronting the crisis. When the Titanic hit that fateful iceberg it was absorbing 400 tonnes of water per minute.

The captain knew the vessel would sink. They insisted the music played on and food served in order to avoid panic. When you address symptoms, as opposed to fundamentals, the outcome eventually ends in disaster.

I started this column in the middle of 2008. I hoped and believed that Brian Cowen was brainy, blunt and decisive. He procrastinated on resolving the budget deficit and craved for a soft landing. Brian Lenihan believed that by underwriting the banks he could secure their future. He blindly bit off more than he could chew. Instead of following a market solution, as the United States, he refused to let non-systemic institutions go into administration or receivership. The €40 billion spent saving Anglo and Nationwide should have been reserved for AIB and Bank of Ireland. We will end up with, at best, two clearing banks. Unfortunately we have paid the full price for the four failed entities that will not provide future credit facilities.

Every step of the way, the previous government was behind the curve. It seems the new administration is following on, implementing more of the same. While the US bank rescue has turned the corner and generated more than $250 billion of a payback to federal taxpayers, we wallow in limbo-land. The future of NAMA remains totally unclear. Provisions for more transfers in the bailout deal (€16 billion worth of smaller loan portfolios) are no longer being proceeded with. No reference was made of NAMA last week.

Ordinary folk are faced with the prospect of bailouts being rolled over into bigger sums over longer periods, despite an electoral mandate for a change of direction. The basis of economic recovery is visible. This includes a rationalised and consolidated banking landscape that focuses on funding needs of the domestic economy and households. Ireland Inc is winning new contracts and export orders at an 8% growth rate. Investor confidence and enhanced competitiveness face the stumbling block of legacy costs of government fiscal deficits and a banking collapse. Restoring economic health will take many years. It is unattainable without debt restructuring. As we drift on a tide of mediocrity, the game changer has to be manufacturing a default. The bailout boys are back in town, it’s time to start persuasion.

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