You’re our last hope, Dominique – just let us know what you want

Open letter to Dominique Strauss-Kahn Managing Director International Monetary Fund700 19th Street NW Washington DC 20431

Dear Dominique, we have received your report on Ireland, further to your team’s visit in April. We hope the delayed publication wasn’t due to domestic tweaking of the text.

Of all our international and domestic economic reports, the IMF publication is unique in setting out remedial action. Our politicians didn’t get beyond the first page where you set out the context of how we arrived at our present difficulties.

Your previous warnings in relation to the fragility of our public finances, due to dependence on property-related revenues, have caused a blame game relating to our Taoiseach’s former role as finance minister from 2005-’07.

The opposition parties have focused on your views about the property and credit bubble, while the Taoiseach has robustly accused everyone else of wisdom through hindsight. This circular nonsense is part of the political paralysis which is at the core of our problems.

Our politics seems transfixed with a rear-view mirror approach – continually focusing on what has gone behind. We taxpayers recognise the severity of the situation. You outline the four core dilemmas we face: the contraction of the global economy, resulting in reduced demand and the credit squeeze; the loss of competitiveness and consequent export market share due to high cost structures; the near insolvency of our banks and, lastly, “achieving fiscal credibility”, namely our banjaxed public finances.

Like the OECD, you state that we will have the largest contraction of any advanced economy at 15.5% of GDP and unemployment of more than 500,000.

Your forecast of recovery being delayed until late 2010 shows that our Government’s forecasts in the April budget are again overly optimistic.

Your recipe for labour cost reduction is drastic. Due to the high value of the euro we have lost a 20% margin in competitiveness, based on the real exchange rate. It will not be possible to reduce the average industrial wage from €35,000 to €23,000 per annum. Deflation will be 4.7% this year. Private sector firms are cutting payroll costs by 20%. Property-owners are resisting similar rent reductions. Energy costs are still a joke. Your commentary on our banks is terrifying. We were aware we had toxic loans of up to €90bn, but not that the crystallised losses would be €35bn net. This hit equates to 20% of our economic annual output. Your proposals to restructure the banks are profoundly significant.

Our Government has spun the line that you are endorsing the Nama plan and their strategy. Although this is partly correct, it conceals your two other key points: firstly, the mega risk on behalf of the taxpayer if these assets are not priced correctly; secondly, you are advocating a different strategy whereby our banks would be temporarily nationalised.

You cogently advocate we should learn from the experience of Japan, Sweden and the United States “where a period of public ownership has been used to cleanse balance sheets and pave the way to sales back to the private sector.”

Your logic is compelling. Unless there are “upfront risk-sharing structures” the taxpayer could be screwed to the benefit of existing bank shareholders. I agree this is the best way to ensure bank mergers and consolidation. Your formula of Nama, plus temporary nationalisation and recapitalisation, is the smartest proposed solution to date.

Government spindoctors are superbly skilled at filleting out points of concurrence with their plans. Your endorsement for agreed proposals for a new financial regulatory system along with Nama has been used to deflect from the key divergence. In sections 25 and 26 of your report, you crudely highlight the disagreement between you and the Government on the key point of their insistence of retaining the banks in private ownership. Our media have not highlighted this sharp conflict adequately.

Your most impersonal language in assessing the state of our public finances disguises the brutal proposals.

You outline Ireland’s growing fiscal structural deficit of 12.5% of GDP that could reach 15% of GDP; the additional state borrowing of €25bn this year and €22bn next year; a resulting national debt of 80% of GDP by 2014, despite a Maastricht/EU limitation of 60% ceiling.

In layman’s language, this means our national debt, which was lowered to €30bn, is racing towards €150bn. Your consolidation strategy is extremely understated. You want more than €2bn cut off our social welfare budget and a massive downsizing of our public service numbers of 371,000. You require public expenditure to be cut by several billions over the next three years. You may not be aware just how difficult and unpopular these measures will be, hence our politicians’ preference to bicker and score points off each other. They don’t want to face up to the leadership requirement of radical public sector reform and lowering living standards.

We want to put on record that the European Central Bank (ECB) is doing everything possible to support us. Our membership of the eurozone has protected us from being an isolated independent buffeted currency like Iceland’s kroner. Anglo Irish Bank has received €23bn of their corporate deposits. They have also invested €12bn in Irish Life & Permanent. They may underwrite Nama’s €90bn of toxic debt. They continue to avail of our Government bond offerings to finance our burgeoning national debt. But we Irish are always afraid of wearing out our welcome.

HENCE, we look to you as “a lender of last resort”. We are surely a better prospect than Zimbabwe? What can we do for you? In return for an extensive line of unlimited credit (with perhaps the prospect of convertible loan notes into equity?) we want to make you a special offer… would you initially relocate yourself and your team in our IFSC in Docklands, Dublin? We could confer all the relevant tax and “light touch” regulatory facilities… just let us know your requirements.

Our social partnership is going through a turbulent time so you could become the new “economic partner” to steer us through stormy seas. Moreover, our Central Bank governor and the secretary general of the Department of Finance are due to retire shortly – we would welcome your nominees. As you may be aware, our Department of Finance has not been fit for purpose for some time. Your team could take over from these mandarins in Merrion Street.

In Ireland, we have a noble tradition of “decent skinsmanship”. We don’t like conflict – cutting welfare, depriving pensioners, sacking people and deliberately downgrading public services. We urgently require some bogeyman to blame – to oblige us and do the dirty work. You fit the bill perfectly. We look forward to an early favourable response.

Yours affectionately

Gubnet O’Lunacy

(aka the Irish taxpayer)