Monday, January 17, 2011

ECB Director Bini-Smaghi: ‘Ireland’s meltdown is the outcome of the policies of its elected politicians’

The Members of the Executive Board of the European Central Bank
September 2010 Executive Board, European Central Bank: Back row (left to right): Lorenzo Bini Smaghi, José Manuel González-Páramo, Jürgen Stark. Front row (left to right): Gertrude Tumpel-Gugerell, Jean-Claude Trichet (President), Vítor Constâncio (Vice-President).

The Irish Times published an interview with Lorenzo Bini-Smaghi, a member of the Executive Board of the European Central Bank, on Saturday, Jan 15, 2010.

The following is one of Michael Hennigan's contributions to a related Irish Economy Blog thread.

Bini-Smaghi is correct when he implies that there was strong public support for boomtime policies and the slow-motion response to the banking crisis resulted in the eventual collapse of market confidence.

1. If the global credit crunch had been deferred to 2013, the most likely result of the 2012 Irish general election would be a Fianna Fáil-Labour coalition.

While I don’t buy the argument that the whole population had been transformed into a shower of eejits, absent a global downturn that would be much worse than 2000/2001, fiscal prudence was never likely to be popular with the majority of the electorate who had become obsessed with the paper-profits of the bubble.

For older people with their mortgages paid off and the attraction of equity release, they no longer had to dream of summer days competing with pushy Germans for deck chairs on a tacky beach in Spain but they could aspire to their own place in the sun — even if it was somewhere they had never heard of.

2. The credit crunch broke out in early Aug 2007, 7 months after HSBC Bank announced big subprime losses in the US and revealed the rickety state of the US housing market; by mid-Sept 2008 when Lehman Bros. collapsed, Irish political leaders and the Department of Finance were still relying on reassurances from the financial regulator and the banks themselves on the strength of the banking sector.

Using the Pareto 80/20 rule, how long would it have taken to establish the true state - - who was meeting interest obligations etc? One week?

Anglo made a powerpoint presentation to DoF officials days after the Lehman collapse and Fingleton of Irish Nationwide was also reassuring; liquidity not solvency was the problem.

3. Whatever was discussed on the Trichet-Lenihan phone call a week before, the Irish government was the only member of the Eurozone to guarantee existing bank debt and it was presented as a fait accompli to the ECB and both the Ecofin and Eurogroup. The decision of Sept 29/30 was made without access to crucial information by the political leadership or their advisers.

4. Anglo was nationalised in Jan 2009; in Jan 2010, the head of NAMA said on the detail of property loans presented by the banks: “We opened it up and said, ‘Oh, my God,’ What they are telling us is not the reality.”

5. I have seen no credible analysis to support the case that outside of the euro, the same individuals who were responsible for the economic crash would have behaved prudently at a time when the carry-trade would have been attracted by Ireland’s ‘miracle’ economy.

6. All the wealth hasn’t evaporated; some €60bn was invested in commercial property mainly in Europe; investments were made in prime properties in for example New Bond Street in London, where values have recovered and tenants are usually sound PLCs.

The focus has been on the transferring of homes in Ireland; there are surely many overseas investments in shelter vehicles that are difficult to source.

Irish per capita GNP is at the average of the EU27.

7. As for restructuring, in March 2010, Germany’s top bank, Deutsche Bank, had a combined €14.8bn of gross sovereign debt exposure to the “peripheral” EU states of Greece, Spain, Portugal, Ireland and Italy, of which €10.4bn was to Italy.

So depending on the number of countries involved, German banks should be able to handle bond losses well in coming years.

While it should be easy for Greece to make its case for a ‘haircut,’ with a public debt GDP ratio of over 150%, how could Ireland’s case be accepted without including say Italy and Belgium?

Include private debt and argue that Irish consumers weren’t as prudent as Italian counterparts during the credit boom!

8. If parliamentary pay and allowances are an indicator of public costs, Ireland has still some road to travel.

Sweden is one of Europe’s fastest growing economies and the members of the Riksdag receive a basic, monthly pay of SEK 56,000 (€6,200), a sum that is subject to income tax - - and is at a higher level than Ireland’s.

Members living more than 50 kilometres from the Riksdag are entitled to reimbursement of up to SEK 7000 (€780)/month spent on overnight accommodation in Stockholm. However, the Riksdag has about 250 overnight apartments which are provided free of charge for members.

Fifty TDs only get the basic Dáil salary of €92,672 and their overall earnings in 2010 were at an average of €112,000

A TD living in the range 60-90km from Leinster House can claim €30,350 annually with effect from March 2010.

Chart here of Irish bond yield spreads since early 2008: