Ireland's faltering economy is "banking" on a miracle

THE response to the decision by Danske Bank to retrench its operations here demonstrate how far official Ireland is in denial about our faltering economy, as it heads in to 2014.

The decision comes in the wake of the announcement of ACC Bank — owned by Rabobank — to surrender its banking licence. These decisions must be seen in the context of the announcement by Ulster Bank’s parent, RBS/UK treasury, to create an internal ‘bad bank’, into which €9bn of impaired assets will be transferred.

Each of these separate decision have distinctive features — those relating to Ulster Bank, for example, is positive. But there is an unmistakable message common to all three of them.

Danske has attributed its decision to move out of personal and business banking to “the difficult economic and trading environment”. In the case of ACC/Rabobank, it was “the on-going recession in Ireland”. RBS, having again committed to a continued presence on the island, requires by 2014 an economic environment that will support “a viable and sustainable business model”.

Three major banks from three different countries are delivering one message. These are banks which have stuck by their Irish operations through the worst economic debacle in our history. These are banks that have done the hard sums on profit and loss, going forward. They know all about the so-called exit from the bailout. They know that any bank is only as robust as the economies that it serves. The three banks, each in their own way, are effectively saying austerity is continuing to suffocate the Irish economy; that households and businesses are emaciated to an extent that no longer provides a viable environment.

Banks made bad decisions and they are impacted by the consequences. But these are banks which have engaged in successive, and very painful, rounds of restructuring, including, large jobs losses, branch closures, and considerable investments in new technologies. Danske, for example, has made the point that had it not taken the decision to close its banking operations, its costs in 2014 would have exceeded income.

And yet its decisions have been greeted with clichéd responses of shock and outrage, and calls for the Government to do something. This reflects a mindset of denial and foolish thinking — above all by the banks themselves that created the crisis in the first place. It also deflects attention from the message that needs to be heard. The economy simply cannot support their operations.

The Government points to a plethora of jobs initiatives in the budget and elsewhere. These have a role to play — but their impact is lagged and frequently muted. Equally, it makes little sense to announce such ‘initiatives’ while simultaneously bleeding the economy of demand.

Households, traumatised by falling disposable income and interminable increase in charges — from water meters to increases in health insurance — are forced into deleveraging and increasing their precautionary savings.

The economic growth that was forecast, and on which the legitimacy of austerity rests, have failed to materialise. No wonder, then, that global banks with a presence in Ireland have walked or retrenched.

It’s not just economic decisions that impact on future strategy by overseas companies with subsidiaries in Ireland. Political stability and risk are also important. These have always been a major positive in attracting, and retaining, overseas investment. Political stability is now brittle, soured, by austerity and by its failure to stabilise the economy. The mainstream political parties are like dinosaurs, cut off from their foundational values while ferociously defending the status quo, even at the cost of a repressive ethos.

In all of this, it is important not to lose sight of what is happening to the ‘pillar banks’. AIB has made significant progress in strengthening its balance sheet and instilling a new culture within its business model. The share-price performance of Bank of Ireland reflects a further strengthening in market confidence.

The exit/retrenchment of overseas banks will benefit each of the domestic institutions in the following ways:

* A reduction in completion that will impact on customers — both retail and businesses;

* Reduced innovation. For example, the introduction by Ulster Bank of a new specialised service for the not-for-profit sector genuinely breaks new ground. It is an example of the kind of innovation that is needed across a banking sector at risk of an implosion of a duopoly;

* An increased burden arising from even greater State intervention and from ‘rent seekers’ extracting value from a shattered economy;

* An unambiguous signal to the global marketplace that Ireland, even after ‘exit from the bailout’, will be mired in a deflationary cycle burdened by massive impairments, an enfeebled domestic economy and massive interest payments on a debt burden that is not sustainable.

What needs to change? Ireland needs a debt write-off, in one form or another, of €50bn by our European partners.

Citibank’s chief economist recently said: “The Irish sovereign has on its books at least €30bn — possibly up to €60bn — worth of debt that is only there because Ireland was forced into taking a hit for the team, ie for the euro and for major eurozone banks.”

That’s what the next government will have to deal with either unilaterally or in the form of the joint approach with peripheral countries, which continue to suffer in the shade of Germany. Ireland needs more competition in the retail banking sector.

A joint venture between credit unions and the post office network could — as previously argued in these pages — help make competition in the retail banking sector.

A reform of the political system and a new approach to governance in the public sector is a major priority. The dead hand of managerialism needs to be transformed into a force that empowers and that engages — and which radically scales back a truly maligned mindset of control. It needs to repatriate economic autonomy and policy instruments that energise Ireland’s economic performance in the past.

The key inflection points in the modernisation of the economy — rural electrification in the 1920s, liberalisation in the 1960s and the vision-driven IFSC in the bleak 1980s — would not have been possible were Ireland trapped in the kind of dependency that exists today.

We are better than that — and when a government begins to live up to this, then maybe overseas banks will have reason to revise their expectations of what we can deliver.

The social economy — what communities need for everyone to develop and use their capabilities — is central to all faith groups in Ireland.

So why don’t politicians ask for prayers in undertaking the return of the economy to health. It is, after all, what we do when a parent is sick or when a job is lost. Ireland needs all the help we can get.