In 1919 Michael Collins was elected as Minister for Finance in the first Dáil Éireann. The first Dáil was convened following the 1918 election at which an overwhelming
Members of the First Dáil, 10 April 1919 First row, left to right: Laurence Ginnell, Michael Collins, Cathal Brugha, Arthur Griffith, Éamon de Valera, Count Plunkett, Eoin MacNeill, W. T. Cosgrave and Ernest Blythe. Kevin O’Higgins is in the third row (right)
majority of the entire Irish people had voted for pro-independence candidates. At the time, Ireland was a backwater of empire, a country without international recognition, sovereign independence or even a line of credit.
The general (sic) consensus is, that with few cards to play, Collins was an outstanding success in this role: “In overall terms, Collins’ performance in Finance was outstanding by any criteria. … Collins’ personal organization skills were exceptional, allowing him to hold four major positions simultaneously, prompting him to impose order and clarity on a world of disorder and confusion. If his unexpected death robbed the state of its most capable administrator, it also denies the historian the opportunity to compare him with his successors in Finance.” Andrew McCarthy
His master stroke was the raising of a National Loan which, with a target of £250,000 actually generated some £400,000 for the fledgling state. This loan was raised from ordinary Irish people, not bankers, not governments, not the IMF nor the European Central Bank.
For a country with only the resources of its people, primarily agricultural in nature and with only its potential to sell, this was a true triumph of confidence on the part of Collins. Indeed at this time Belfast was the industrial centre of Ireland. It had been for some time with the shipyards among the best in the World. There were other industries, of course, such as the Linen mills but these were already in steep decline by 1919.
As for the Czar, (well, the Russian Republic, I plead artistic licence) ordered Ludwig Martens the head of the Soviet Bureau in New York City to acquire a “national loan” from the Irish Republic, offering some of the Russian Crown Jewels as collateral. The jewels remained in a Dublin safe, forgotten by all sides, until the 1930s, when they were found by chance! Perhaps FJH can offer some further information? 😉
We are all, I am sure, aware of what happened next, partition, independence for most of Ireland and a divergence of economic as well as political fortunes, so where are we now?
Today most of the Island is a dynamic outward looking, open economy with a highly educated, well paid and generally happy population. Yes, I know the past few years have been difficult but, coming from a very high plateau, the fall has been checked and the re-bounce is well underway. As the Irish Times says “Irish people enjoy among the highest quality of life and standard of living in Europe, according to the European Union.” – Well, some of the Irish People at least.
In the north eastern six counties there is a different story to be told. Whatever the rights and wrongs of partition it is, nevertheless, an established historical fact. Both juristictions withdrew into a self regarding political and economic cul de sac from which the south only truly emerged thirty years ago. In the north, that is yet to happen. With the decline of the heavy industries upon which Belfast in particular prided itself the search is still continuing for its place in the economic world.
Is the north east best served as a destination for low wage service companies (eg: call centres) or, like the rest of the country, should it be marketed as a destination for successful, ambitious companies requiring a young, smart, highly educated workforce, a business friendly environment and unfettered access to the wider European economy or should it be constrained by a Daily Mail reading, mostly elderly, backward looking collective of pin striped, bowler hatted, myopic neo-victorians?
One of the most awkward questions of recent years is the level of subvention or subsidy by the colonial paymasters in Westminster. The most interesting point is that there is no solid answer to the actual figure here is the source material. As may be seen from this link the figures are, at best, arbitrary, at worst a best guess. Meanwhile an ongoing argument is engaged regarding Sinn Fein and the DUP regarding welfare reform and the price of implementing a Tory government policy, a Tory govt that was not elected or voted for in any way in this part of the world.
My question is simple, how do we approach, define and challenge this economic question?
Where to start then as so much has went on over the past week? So, on Thursday a ‘deal’ of sorts was hatched out whereby the Fine Gael led government was able to bring about legislation that in effect caused the IBRC (Irish Banking Resolution Company, comprising Anglo-Irish Bank and the Irish Nationwide Building Society) to be put into liquidation. IBRC had in it’s possession a promissory note of approximately €31 billion whereby the government was making payments of approximately €3.1 billion per annum, the next installment was due in March as well as another due in May as last year’s payment was delayed, all of which was acting as a massive drag on the budget, the economy and the nation as a whole. In the middle of the night, the zombie bank was gotten rid of, consigned to history, but where does this leave the country in general?
The promissory note itself came about because the government needed to inject cash into the banks that have now become a part of the IBRC, however, it was unable to finance this with money gathered through the bond market as it had effectively been blocked off from this due to insanely large coupons (interest rates) being placed on Irish government debt, that and the National Pension Reserve had already been exhausted back in 2010. Issuing the note meant the government did not have to produce €30+ billion there and then, a sum it clearly did not have and would have great difficulty getting. With this note, the IBRC would be able to use this as security to borrow from the Irish Central Bank (ICB) via the ELA or Exceptional Liquidity Assistance facility which is an exceptionally expensive way to finance debt (8.2%) with the state paying back approx. €48 billion between now and 2031. So, in 2010 the Fianna Fail government spoke to the ECB about the whole venture, plucked this ‘solution’ out of somewhere to which the ECB said it could run with this.
As an aside, it should be noted that a promissory note, or simply a ‘note’ is nota contract or an IOU as it contains a specific promise to pay on demand the sum of the note rather than acknowledging a debt owed, in effect it is just like a bank note that you may (!) have in your purse or wallet now. A simple explanation of what a ‘note’ is can be found here.
Now, the Central Bank will take the promissory notes with NAMA buying some of IBRC’s collateral held by the Central Bank by issuing some more NAMA bonds and NAMA will then sell these assets off by the end of the year (more on this issue to follow in later posts on my own site). The government will now issue bonds for a period of around 40 years at a coupon of 3% as opposed to the 8.2% it was previously. Where this is hopefully a good deal for us is that all we will do is pay interest on the bonds until 2038, thus easing the cost to the state of having to pay down any principal too, or so it is supposed to go. Further, as time goes by, inflation should make the sum a lot more manageable and who knows, by 2038 €30 billion should be worth a lot less than it is today thus making any payment of principle manageable. Both an Taoiseach, Enda Kenny and the Minister of Finance, Michael Noonan, have used the rather apple pie comparison of moving from have an expensive over draft to a mortgage instead, and that is kind of what’s happening here, or at least supposed to happen. While we may pay more money as a sum total in the long run, that really won’t matter due to the length of time this has been spread out over and inflation in the long run.
Further, we had two organisations (NAMA and IBRC) administering a book of poorly performing assets and loans which meant a duplication of services in a state that can ill afford it. IBRC costs about €320 million pa to run, while NAMA costs about €130 million. A large part of the 1,000 odd staff at IBRC will be made redundant with a number being transferred over to work for NAMA, however, while I don’t like making assumptions I do expect the board and senior management to receive cushy redundancy packages, something I do not expect for the non-senior staff (probably statutory redundancies for them).
This deal also means that the NTMA will have it a bit easier when managing the raising of finances as it should require some €20 billion less over the coming decade and we will hopefully have around €1 billion pa of austerity in each budget. Will we see some form of small, targeted stimulus from the government now that it has a stay of execution with the finances? Who knows? I suspect probably not, the serious looking foreigners you see at night eating and drinking in and around Merrion Square and St Stephens Green will want to make sure that there is no real or perceived loosening of determination to ‘reform’ the economy and the current coalition of Fine Gael and especially Labour must be very tempted to throw a few treats to the electorate if their current slide in the polls is to continue all the way to polling day. So, expect some kind of smoke and mirrors and violence with figures and accountancy rules between now and polling day with implied permission from the Troika’s representatives when you see a government minister outside the opening of a creche, a large centralised Garda station, a new specialist department in a hospital or some capital spending like the digging of a sod to signal an extension to the LUAS line telling us that we are back on track, economically speaking. The guys over at the incredibly sharp NAMA Wine Lake have went over the figures and how the government is already ‘fibbing’ and understating the room for cushioning austerity and providing some form of a stimulus, who’d have thunk it?!
So, what issues might arise from this whole ‘deal’ then? Well, the legislation winding up IBRC was a rushed affair and there already have been a number of questions asked about whether certain parts of it are even constitutional. This is something I will discuss in a further piece once I have reviewed the legislation in full, however, I would be welcome to assistance with this by way of crowd sourcing or someone’s thoughts on the matter away from the blog before posting something, email is footballcliches1@gmail.com. Further, we have a number of cases ongoing where the IBRC was a party to proceedings, most famously against the Quinns, what happens now? The IBRC had loans outstanding with a number of borrowers such as Dennis O’Brien, Applegreen and Topaz fuel groups or Arnotts Department store, will they be able to refinance their loans over the next 6 months because if not their loans go up for sale to third parties or are transferred to NAMA who have a notoriety for being a lot more ‘forensic’ with their book. Again, I will look at this in more detail over the coming days.
For me though, while I do not wish to belittle the achievement of the government, they have worked long and hard to bring this about and have to a certain extent staked their future on success, I do wonder how big a deal it is in the grand scheme of things, I mean, it barely registered on some sites that I view like the Guardian, the Telegraph or over on the Beeb. The ever interesting and prescient David McWilliams helps to place this deal (or at the time he wrote it, suspected deal) in some kind of perspective. Let’s all be honest here for a moment, what is €31 billion in the grand scheme of things? The ECB is not actually that concerned about what goes on in Ireland as we think it is or should be, it is far more concerned about what goes on in bigger countries, ones that have an impact, like Japan, China or the United States and how this may effect the whole Eurozone.
At the moment we are in the middle of a lot of deflation or stagflation where prices either decrease or stay as they are. People put off buying goods now that they think will be cheaper in the future, things become cheaper and cheaper, meanwhile more people are out of work meaning less money is around to spend, less goods are bought and deflation continues, however, our debts increase and are increasingly difficult to service. Do you know of anywhere where this may be happening right now? Now I want you all to remember that the modus operandi of the ECB is the stabilisation of inflation and prices across the Eurozone, nothing more, and certainly not stimulation of economies.
‘Europe and the European project can’t survive a decade of deflation. The first thing to go when politicians know they have to reflate the economy is central bank independence. Therefore, with money being printed everywhere and currencies such as the yen, the dollar and sterling involved in competitive devaluations, the ECB’s ideology is hardening today to protect itself from political interference tomorrow.
Therefore, Ireland is caught in the teeth of an ideological battle for the future of central banking, which is why what happens in Tokyo is much more important than anything Irish politicians say.‘
Essentially, this deal is not about Ireland, it is about the ongoing independence of the ECB. The ECB like many central banks may be seen to be part of the problem (see the Bank of England and its rather protracted response to the financial crisis. How many board members didn’t want to lower interest rates or delay it? Jenkins I find to be quite interesting on the BoE in general) and politicians will see curbing it’s independence and interfering in monetary policy as part of the solution. They’ve decided to avoid this problem by dealing with Ireland now and being pragmatic as opposed to dogmatic, nothing more.
I’ll finish up with some thoughts and observations from McWilliams who I think tells us where we are right now and where this may go in the future:
‘The ECB was created by politicians. It will be brought to heel by politicians. That is what democracies do. The last time we had independent central bankers try to threaten social peace in an era of deflation and high unemployment, central bankers lost. That was the Great Depression and the Gold Standard. The lessons are there for anyone with a grasp of history.
This brings us to the promissory note. We know that keeping a dead bank alive with real money makes no sense, but we are told that the consequences of not paying the money will be dire. But what are they, these consequences?
Here I write as a former central banker, and I can tell you the consequences are likely to be minimal. We know the ECB won’t push the little red button and detonate the nuclear option. It didn’t do that in Greece. It knows failure in Ireland will bring the Japanese solution closer, so that will be avoided at all costs. ATMs will continue to work. Life will go on and if you believe that the Irish State will be around in one hundred thousand years or one million years, we will pay back the promissory note in installments of €30,000 a year. We would still be paying it. We would have simply adjusted the terms of the IOU.
During recent times it has become fashionable in certain quarters to talk about the current economic circumstances in the South in a political context. Unionist politicians and commentators in particular tend to dismiss the Southern economy using terms such as; “Basket case, Bailout, Bankrupt and Broke”. Unsurprisingly their motivation is one of sectarian politicking rather than economic reality.
Let’s look at some facts.
Firstly, the Southern economy was not “bailed out”. It was advanced loans at better than the going market rates with stringent conditions attached. This involved a degree of loss of economic independence. These loans must be repaid. Indeed Jim Alistair of the TUV was, no doubt, discomfited to learn recently in reply to a parliamentary question, that the bilateral loan from the UK to the Irish government has been substantially paid off with interest.
All the current indications are that Ireland will exit the IMF/ EU programme before the end of the year. Indeed, Government bonds have already been issued and oversubscribed on the international open markets at favourable interest rates. The current interest rate for the benchmark 10 year bond is 4.4%. Down from 15% at the height of the crisis in July 2011. The Irish Government even managed to sell €1B worth of its holdings in an Irish bank last week at a €10M profit. Who would have believed that possible until recently.
What of the wider economy?
GDP increased by an average of 0.8% year on year in 2012. (Both the UK and the rest of the Eurozone are back in recession over the same period.
The trade surplus was €41 Billion last year for the first 11 months. (Exports minus Imports).
Consumer spending returned to positive growth in the 3rd and 4th quarters of 2012.
Unemployment, the biggest problem in my view, has finally started to reduce 14.9% down to 14.6% most recently. I am conscious that emigration is a major factor here but at least the figures are moving in the right direction. With increased employment comes increased consumer spending, less Govt spending and thus the entire domestic economy benefits.
Property prices, the trigger for the meltdown, are rising. 4% in Dublin, in a month.
The future prospects are what may be termed, somewhat brighter, than in recent years. The latest predictions are for 1.6% growth this year.
The big risk is another major economic shock. As an export driven economy, the exposure to international conditions is considerable. The southern export success is built upon a number of key factors. A benign tax and regulatory environment, a young, well educated and mobile workforce and well developed infrastructure and communications networks as well as easy access to the wider European market. The key industries are technology, pharmaceuticals and food related.
The south is extremely well positioned to ride out the storm and I look with optimism to the years ahead.
The north eastern six counties however….where do I start? I believe tourism is the great untapped cash cow. After the past few weeks events it is likely to remain so. Heavy industry is dead in the North. The only inward investment seems to be minimum wage businesses, retail and call centres mostly. How is it fixed? Look a few miles south! Encourage graduates to stay and develop their skills at home, specialize in something, invest in innovative new businesses, develop a mid to long term economic strategy. A corporation tax deal would help but it is only part of a package oh, and ask why the north has been completely left behind in the modern economic world. An insular, inward looking north obsessed with its own importance while existing only as an economic backwater will never develop, find its own place and pay its own way in the world. As part of a reinvigorated, re-energised Ireland it will. The only question to my mind is when.
Fianna Fail have been very vociferous in recent times about things North of the border. Most of it revolves around criticism of Sinn Fein and the governance of the Stormont regime in general. They have been organising Cumman, notably in QUB and Derry. Micheál Martin, the Party Leader, seems to be rediscovering the party’s Republican roots and testing the water for a move into party politics up North.
Or is he?
So I decided to delve a little deeper into the recent Fianna Fail commitment to the North, actual commitment that is, not rhetoric. I had a good read of their current Policy Document here. Fascinating document to be honest. There’s 30 pages of policies ! Great stuff. Except the first 8 are all about telling us how wonderful they were until they lost power in the last election. On the North? Well we have ONE paragraph in those eight pages.
” Achieved Peace in Northern Ireland
We have overseen historic developments including the Good Friday agreement in 1998 and the Hillsborough Agreement in February 2010 which led to the devolution of policing and justice powers from London to Belfast”
“Overseen”. Quite. “Achieved Peace”. Right so.
On I read, twice, in case I missed something. Guess what?
Precisely nothing. Zilch. Nada. Zero.
So we have a “Republican” party organising on an All Ireland basis with absolutely no policies for six of the counties it aspires to govern.
So,
Us Southerners have voted yes. god help us now. Not so much lap of the Gods as lap of the Bankers. Big mistake in my view but at least we had a vote and something of a debate. I can’t argue with a democratic vote even though I disagree with it.
In my view it is the presence of a written constitution that ensured that the vote took place at least.
As the Irish Constitution is based, theoretically, on the French and US models, I am surprised that no other European Country had the same opportunity.
Thus the democratic deficit in the EU project is yet again exposed.
At least the robustness of the Irish Constitution has been proved again. I am curious as to what the result would have been had the North been included in the vote, as I believe it should have been.
Interestingly, the economic indicators in the South are improving gradually, Manufacturing output up, services sector up, fragile economic growth (Today’s Irish Times)
In comparison the six county economy seems to be standing still.