Wednesday, July 1, 2009

No evidence of any mid-year green shoots of recovery

downturn Today is the first day of the second half of 2009 and the latest data to assess our economic wellbeing does not provide grounds for reassurance, optimism or encouragement.

Employment and Unemployment

One of the great consequences of our EU membership and the economic growth that it enabled was the expansion in employment numbers and in the population of the country. Approximately one million people had a job in Ireland around 1990, a period when all the economic indicators and the level of government debt and the interest liability on it was punitive. Our labour force in March of last year comprised 2.23 million persons. A year later, 1.965 million persons had a full or part-time job in Ireland, a fall of 7.5%. The number unemployed at the end of March was 222,800 - an unemployment rate of 10.2% that has subsequently exceeded 11%. The most worrying aspect is that the long-term unemployment rate has increased from 1.7% last October to 2.2% last March.

There were over 418,000 persons listed on the Live Register at the end of June, an increase of over 197,000 in twelve months. This number includes persons unemployed , part-timers and seasonal workers.


Gross Domestic Product

Personal consumer spending, in volume terms, was 9.1% lower in the first quarter of 2009. Capital investment declined by 34.1 per cent in the first quarter of 2009 compared to the first quarter of 2008. This has resulted in a record GDP contraction of 8.5% in Q1 2009.

Anglo Irish Bank

The first Interim Report, since nationalisation, for the 6-month period to 31 March 2009 indicated that the capital base of this wretched bank has been effectively wiped out. There was an instant demand for a €4 billion capital investment by the Government with the high probability that a further €7 billion will be necessary.  The Government parted with €3 billion this week and God alone knows what the owners of that money will ever obtain for it.

This Bank built its business almost exclusively on property development and speculation. The hypothesis upon which it functioned was predicated on its customers achieving a 30-60% cash return on the sites they developed. The ensuing burden eventually mortally crushed the financial spine of struggling house buyers and the taxpaying public are now expected to bridge the enormous and unascertainable gap.

But the taxpaying public have not been introduced to the interplanetary world of bling-incarnate and the faces and the circumstances behind these impaired loans.

The public have been told about a proposed business plan that is intended to:

  • Rebuild trust and confidence in the Bank
  • Maximise the recoverability of loans, and
  • Reduce the cost base

Rebuilding trust and confidence

A fundamental component of trust and confidence is candour, honesty and openness. The conclusion of the protracted but ongoing investigation by the Garda Fraud Squad and the Office of the Director of Corporate Enforcement is an absolute prerequisite.  Bernie Madoff needs some shamrock-wearing, shillellagh-shaking companions from the universe of moral hazard!

Ireland’s contemporary introduction to the concept of ‘systemic importance’ was in 2007 when the palaver was put about which suggested that the massive high-density developments proposed for Ballsbridge, Dublin with projected construction costs north of €1 billion, would ‘have to win planning approval’ because the big property developers were too big to fail’. No consideration was given to the economic sustainability of this development at a consumer level by Anglo and other finance providers. The developer who described economic commentators then as laughing hyenas – harbingers’ of doom and gloom’ has proven to be myopic and certainly not infallible.

Anglo is now a State owned business with a single shareholder. It is no longer a business with 17,111 shareholders’ who owned 89.2% of the equity; - who were fed a bill of fare by your predecessor about “the excellent performance…of a relationship based business … grounded in the Group’s disciplined and focused business model … prudent risk appetite and very limited exposure to areas affected by the current credit market issues”.


Maximising the Recoverability of Loans

The most devastating information in the Interim Report is that Anglo Irish Bank, the State-owned bank lent €175 million to 10 directors and 2 managers and that €31 million of this is impaired, against corresponding deposits of only €20 million - €8 million less than a year earlier. This is not merely a debt but it is the stripping away of national self-respect. What other State system of corporate governance would tolerate incumbent directors of major public companies being a party to impaired directors’ loans raised in a bank of which they were directors and appointees to the Risk and Compliance Committee?

The impaired loans of directors and managers of Anglo align Ireland more closely with Harare than with London, Frankfurt, New York or Geneva. What is the difference between the Zimbabwean taxpayers’ picking up the tab for the extravagant shopping trips to Hong Kong and Paris by Mrs Robert Mugabe while their citizens die from cholera? The difference with Ireland is one of scale and disease type. Our liabilities are much greater and our people will die of cervical cancer rather than cholera because resources committed to Anglo are not available for cervical screening.

Secondly, will this incidence of directors’ loans impairment not set a very low ceiling on the prospects of debt recoverability, causing further exposure to moral hazard? Developers will be thrilled and their legal advocates will argue that their client’s obligations should not be dealt with differently, or more urgently, than those of the directors’ and mangers’ who recommended and approved their loans, possibly completed on-site reviews at least twice a year and stress tested the impact of potential adverse consequences.

Religious congregations on whose sites half-finished properties exist will wonder will they ever reap the agreed selling price that was to have been paid on project completion.

Reducing the cost base of the Bank

The bonus culture meant that average salaries at Anglo Irish Bank almost equate in extravagance to the salary and pension combination of politicians. The average salary reported in the Interim Report is equivalent to €96,976 for staff numbers reduced from 1,922 to 1,753. This is a reduction of the corresponding annual figure of over €137,000 in 2006 and 2007.

The average salary estimated to be paid in 2009 in the Department of Finance is €58,600. The average salary estimated to paid, in 2009, in the Office of the Director of Public Prosecutions, who will hopefully be directly involved with former executives of the Bank, is €68,635. The average at Bank of Ireland, a business like that of Anglo, with activities in Ireland, Britain and the US, is €74,426.

When this is considered in the context of there being no value added at the Bank since September beyond dealing with existing customers the overhead seems exorbitant.

Credit Crunch

It is not surprising that as personal consumption collapses through lack of confidence that that demand for credit is also lower. Outstanding private sector credit amounted to €389.6 billion at the end of May.  This declined by €981 million, €185 million of which is attributable to lower personal credit in May. But the overall amount outstanding is equivalent to over  twice the annual level of total personal consumption on goods and services – in other words, a lot of lolly.  That explosion of private sector credit mirrors what occurred in Iceland.

There were 2,203,000 credit cards in issue to individuals in Ireland at the end of May, a number broadly comparable to a year earlier. New monthly spending on these personal cards has moderated from over €1 billion in June 2008 to €801 million at the end of May. The growth in the level of indebtedness of them at the end of May has moderated to 0.1% compared to 4.4% last January and 19.6% in March 2007. Residential mortgages fell by over €100 million in April and by a further €18 million in May, a trend that is not surprising when the number of planning permission sought in Q1 2009 was 23.7% lower than a year earlier.

No comments:

Post a Comment