Saturday, 23 May 2009

Time To Pay For Excesses Of Past...

We will have to pay for excesses of the past...

RECENT economic reports have a hint of desperation about them as they struggle to suggest the battered economy will revive in two years time.

The bit between 2009 and 2010 is being glossed over, as the economy is expected to plunge to its worst recession ever in modern history.

If it’s true, the 9-10% fall in output this year is from a high base and even if growth reverts back to 2005 levels then that would be no bad thing.

That was the year before we built a record 96,000 houses and employment doubled towards 2 million over a 10-year period.

That’s all positive, but the reality check still has to kick in. One report from West Cork suggests house prices in some areas are in desperate trouble. One source has reported that 10 houses built in 2007, achieved prices of €400,000, some bought with €390,000 mortgages.

But as the market tanked, unsold houses were bought for €180,000, leaving many in negative equity territory.

It is also a fact that houses built as holiday homes 10 years ago can now be rented without restriction. Rental periods were quite tight under the old tax rules that boosted the housing splurge in the first instance.

With pressurised buyers needing income to keep up repayments, many homes will come on the market, damaging it further.

The problem is that with people quitting the country as the economy slows, we actually have more homes than the economy needs.

Overall, the attitude driving some economic reports is to accent the positive.

The ESRI last week talked of growth of 5% out to 2015 starting to take hold in 2011. A new all-Ireland report from Ernst & Young also says we will kick into recovery in 2011.

It does point out, however, that 250,000 jobs will be lost on construction by 2010. It notes that the impact of the property collapse may be generational and it could be 2021 before house building recovers.

And a report yesterday from Merrion Capital had also some chilling figures on the housing front. It said 76% of house builders are currently not building, with 36% expecting to deliver zero completions in 2009.

The overhang of housing stock is expected to take until the second half of 2010 at the earliest to clear and Merrion expect housing completions of 16,000 this year and 14,000 in 2010.

Almost all respondents see selling prices continuing to fall year on year.

The report concludes that the much talked about NAMA was "causing effective paralysis in the industry".

The unpalatable reality is that construction and banking in this country is on its knees and the pain involved in correcting this mess will hit us right between the eyes over the next two years.

Up to 500,000 people could be unemployed before any recovery starts.

As dole queues rise the possibility of social unrest, with angry unemployed Irish turning their fury on those welcomed here with open arms during the boom cannot be ruled out.

An RTÉ programme this week featured migrants living happily here now getting the distinct feeling they are no longer wanted.

The stark message is that we have to pay for the excesses of the past. To that extent the budgets just gone and the planned cuts for next year are at least honest, because they recognise that we cannot afford our current standard of living.

It is reckoned that the budgets of 2009 and 2010 will take about 7% of GDP out of our pockets.

We will recover. We have the infrastructure and flexibility that are the hallmarks of a modern economy.

But remember that Japan, which conquered the global economy from the 1960s, had a 20-year recession before it recovered.

We will have to suffer the pain and uncertainty that comes with living beyond our means before we start to see the light.

Report by Brian O’Mahony - Irish Examiner.

Tuesday, 19 May 2009

Negative Equity Increases...

Home debt-trap hits 340,000...

Massive rise in borrowers caught in negative equity

AS many as 340,000 people could now be in negative equity following a sharp fall in house prices.

New research which reveals up to a third of a million people owe more on their mortgage than their homes are worth is considerably higher than recent estimates that found 250,000 homeowners were in negative equity.

Being in negative equity means you cannot switch mortgages for a better deal, fund a move to a larger home to start a family, or move house to take a job somewhere else.

Economist with property website Ronan Lyons has calculated that 340,000 people, or one in five homes, are now in this predicament.

"That's 340,000 homes where if the homeowners have to sell, they will not be able to pay the bank back solely through the money they get from selling the house," Mr Lyons said on his blog site (

The findings are broadly in line with a survey by Amarach Research in February, which found that 15pc of those with a mortgage thought their homes were worth less than they paid for them.

Mr Lyons estimates many of the homes bought in the past five years are in negative equity, especially those where a 100pc mortgage was taken out.

But even many of those who took out a mortgage since 2004 with a mortgage for 70pc of the value of the property (ie they had a deposit of 30pc of the value of the property) would also now be in negative equity.

People in negative equity have been characterised as being "prisoners in their own homes" as they cannot trade up or switch mortgage providers.

This is particularly the case for those locked into uncompetitive fixed-rate mortgages.

These people will not have benefited from the seven falls in European Central Bank interest rates since last October and may be paying up to €500 a month in repayments than someone on a good value tracker mortgage. And lenders are reluctant to do deals to release homeowners from fixed rates, especially if the mortgage holder is in negative equity.

Homeowners need their bank or building society's permission to sell their home if it is worth less than the mortgage secured on it. House prices may have fallen as much as 40pc since the peak of the housing boom in the first three months of 2007, according to estate agents.

However, the ESRI/Permanent TSB house price index records much less dramatic falls. According to that index, the price of an average house nationally was €311,000 in March 2007, but has fallen to €250,000 now.

Negative equity is not a problem for those who do not need to move house and can meet their monthly repayments.

Separately, new figures show that the number of people who are more than 90 days in arrears on their mortgage has almost doubled for Irish lenders.

Figures from credit ratings agency Moody's showed that 1.7pc of a large sample of mortgage holders were in arrears.

Report by Charlie Weston - Irish Independent

Saturday, 16 May 2009

Economic No-Brainer Country Going Bankrupt ...

Economist says 15pc chance of country going bankrupt...

CUTTING the Irish minimum wage is an "economic no-brainer" while social welfare rates must also be tackled to kick the economy back into gear, a senior official at the Economist Intelligence Unit said yesterday.

Economist Dan O'Brien also gave the Irish state a 15pc change of "going bankrupt" in the next year, a bleak outlook that comes just a month after ratings agency Fitch gave the country a 1.5pc chance of defaulting over the next decade.

Mr O'Brien was addressing the AGM lunch of small business lobby group ISME, which had just voted in Kildare accountant Eilis Quinlan as their next chairman.

Asked by Friends First economist Jim Power for his views on the lowering of the minimum wage, Mr O'Brien described the move as an "open and shut case from an economic point of view". Ireland's minimum wage, at €8.65, is the second highest in Europe.

"You only have to look at the competitiveness with other countries [to see that]," he added.

"I'm a strong advocator of the minimum wage as long as it doesn't prevent job creation. If the minimum wage is too high, you're not helping people, you're locking them out of work."

The Economic Social and Reseach Institute (ESRI) expects unemployment to grow rapidly to a peak of approximately 17pc by 2010.

If the world economy begins to grow in 2011, then unemployment could drop to 6-7pc by 2015. A longer global recession would delay the domestic process.

Mr O'Brien's comments were widely welcomed by the assembled owners and managers, who have repeatedly called for the minimum wage to be scaled back.

Speaking after the event, Mr O'Brien declined to say by how much the minimum wage should be cut, but he said it was hard to see how the Government could get its affairs in order without decreasing social welfare rates as well.

Mr O'Brien said there was "a 15pc risk of Ireland going bankrupt by next year". That position makes us the riskiest country in Europe, save only Greece whose position is "slightly worse" than Ireland's, Mr O'Brien added.


Addressing the conference earlier, Mr O'Brien listed the "unprecedented" property market bubble and Ireland's banking system as two of the main challenges facing the economy.

Mr O'Brien added the US government's moves to clamp down on multinationals sheltering earnings overseas were "certainly bad" for Ireland.

And he was critical of the Irish Government's recent mini-budget, pointing out that it flies in the face of traditional economic wisdom, which advises spending cuts rather than tax hikes as the route out of recession.

"People are certainly taking a lot of pain, lets hope its not in vain," he said ominously.

When rounded on by an ISME member for not delivering the "positivity" businesses need, the seasoned economist replied: "I'm sorry not to have better news but that's just the way it is."

However, in his speech he did note a number of positives in the Irish economy.

"The quality of the labour force is a plus and in the event of an upturn, Ireland would be well-positioned to create jobs," he said.

He added the we also have had "unique" success in attracting foreign direct investment and even with the threat of the US tax code changes, there is no reason why we couldn't continue to attract multinationals.

Mr O'Brien's comments came the day after the ESRI think-tank said that Ireland could return to rapid economic growth by 2011.

Report by Laura Noonan - Irish Independent.

Thursday, 14 May 2009

House Price Collapse Good For Economy...

Collapse in house prices will be good for economy...

Many people in recent weeks have tried to explain what is happening to the economy.

How can we visualise why credit has dried up? How do we rationalise the fact that we went from a situation of so much money we didn't know what to do with it, to a situation of no cash at all? Where did it all go?

One interesting way to look at this, and this column has used it before, is to think of events in the natural world.

Think of the aerial photos of the Serengeti at the beginning of the annual rainy season. What was a parched arid climate where nothing grows suddenly become florid, verdant and full of life. Animals, flowers insects flourish and the place is abuzz. We see migrating wildebeest, crocs and birds and then, at the height of the season, the whole plain is crackling with energy, fuelled by that most precious of commodities, water.

Then as the seasons change, the water begins to evaporate. Life disappears from the edges of the plain, animals flee, plants die and as the waters recede life recedes with it. In the end, there is only a pathetic lush patch at the source of the river, everything else is barren, lifeless and arid.

Credit in the Irish economy acts the same way as water does in the real world. When it gushes into the various different nooks and crannies of the globe, economic life and vitality springs. So, all over the country, the water of the economy ushers economic vitality in -- credit. Anything is possible, anywhere. Money gushes out of the traditional core countries such as the US and Europe and finances projects in the most remote places, giving people hope.

Then the financial season changes, due to the psych- ological interaction between investors' hopes and fears, and the money retreats back to the centre again, leaving the exposed areas like the high plain of the Serengeti, exposed and lifeless. This process is happening all over the country now as businesses are left to fend for themselves without their lifeblood, credit.

This is why Irish house prices will continue to fall and fall. We are the victims of the retrenchment of credit. No-one will lend to our banks and they won't lend to everyone else.

Yesterday, I drove to Galway from Dublin and then up to Letterkenny. It was quite a trip, but it gives you a good idea about what is happening in our towns around the country and why the thousands of vacant properties will continue to fall like a stone.

Every single town I passed has a huge ghost estate on the outskirts: Athlone, Craughwell, Oranmore, Tuam, Castlerea, Sligo, Ballybofey, Bundoran, all the way up to Letterkenny. The place is full of them. These houses will never sell for the prices that are demanded. The reason is simple: they are still madly overvalued.

In most cases the houses will never produce any rental income. With unemployment rising so quickly and emigration replacing immigration, there simply are not the people to fill the houses. Even if credit were available, there is no deman

Also, if we look out a few years, the banks will have to wean themselves off all the money they were borrowing abroad to sustain the boom. For the two main banks this was 160pc of their deposit base. Put simply, the banks were lending €16 for every €10 of deposits. In order to get their capital ratios back to a reasonable level, this figure needs to go back to parity. This financial pendulum swing means billions of euro will be sucked out of the economy in the next few years and not replaced.

So, how low will Irish house prices go?
To establish this, we need to figure out what a house is worth.

A house is just a simple investment and should be valued according to some financial benchmark. In America, where they have had booms and busts in every generation, the long-term price of a house is equal to 14 times the annual rent the place can generate. Using this valuation, where could Irish prices go?

So, let's pick a typical ghost estate area such as Oranmore in Galway. If you go on you will find all the answers. If you want to buy a three-bed semi in Oranmore, it will set you back €335,000. However, you can rent the same place for €800 a month. What's more, there are 75 vacant three-bed semis in Oranmore advertised on alone.

Using the American valuation method, it implies that the house generates rent for the owner of €9,600. The house is worth 14 times that which gives us a value of €134,400. Yet the seller expects to get €335,000 for it!

In other words, to make it worth your while buying the house, the price would need to more than half from where it is now. We have to assume that the days of large capital gains on houses are over. Therefore, the average Irish house in these estates is likely to fall by anywhere between 50pc and 60pc in the next few years. And even that is assuming that prices don't undershoot on the downside the way they overshot on the upside.

This is a tragedy for the people who own the properties, and for us, because, ultimately, many of these shells will find their way into the NAMA. However, looking out a few years, the fall in the price of houses will be very positive for the economy.

Cheap accommodation, like cheap energy, is a competitive plus for any economy. In fact, if we look at successful European economies, cheap accommodation relative to wages is the basis of a dynamic economy.

After all, we are amongst the least densely populated countries in Europe. By the time this recession is over we will have house prices that will reflect this sparse population. And the economy will be stronger for it.

Report by David McWilliams - Irish Independent

Monday, 11 May 2009

Exposing The Lie Of The Land...

Take a long look at the chart below. Digest it. Maybe look again if you have to. This happened in the most sophisticated economy in the world.

This is what happened to the price of development land in Japan. Prices roared upwards and then collapsed, ending up below where they started at the beginning at the boom. This is likely to happen here; development land is likely to settle back to 1996 prices. We haven’t seen the half of it yet. When we hear some property lads talking about green shoots, this chart should be enough to tell them to snap out of it.

But we can’t seem to snap out of it. We are still caught in the trap. We seem to believe that the price of houses and land will miraculously rise again some time soon. This will not happen. It can’t and shouldn’t. In fact, houses prices are likely to fall another 50 per cent from here before we see anything like the bottom.

International comparisons bear out these forecasts. Until now, many Irish people have clung to the myth of what I call ‘Dunnes Stores economics’. You know it: it is the school that suggests ‘‘the difference is we’re Irish’’. Well, the bad news is that being Irish makes no difference at all. It offers no protection. What happened to the Japanese will happen here and, in terms of the recovery, the sooner the better.

I came home last week having been making a documentary since late February in the US, China, Iceland and Australia. In all these countries, property prices have fallen, but in no country did they ever get as high as they did in Ireland.

In the US, I went on a repossession bus tour, where houses were being sold at between 50 per cent and 30 per cent of their peak value. In Iceland, we saw failed banks sell off their portfolios at even bigger discounts. The original loans in hard currency will never be paid back. Last Wednesday, I was in Perth in Western Australia, where property prices are falling.

Even taking into account the fall in Irish property prices in the past few months, property in Perth is still twice as cheap as it is in Dublin - and Australia is not even in a recession yet.

The paper on the plane home, specifically the Irish Times’ property section, made for depressing reading. Not because prices had fallen, but because they hadn’t fallen half enough. We are still fooling ourselves. Irish property prices are still criminally high. Can people not understand that it is over?

Irish property, like Japanese property in the 1980s and 1990s, will take decades to recover - and will only do so after years of consecutive falls. How much more evidence do we need to conclude that the spin we were sold of the immutable triumvirate of banks, credit and property was a sick joke?

The question of how low property will go is not just a matter for people who are selling or buying, of how much equity we have or how much we owe. Given the establishment of the National Asset Management Agency (Nama),the price of property affects everyone, even those who never got involved.

This is why, according to the Japanese example, if Nama is going to buy property assets, it needs to buy them at a 70 per cent discount from their peak market value, to make sure that it is not bailing out banks. Anything less than a 70 per cent discount and the taxpayer will be subsidising bank shareholders. This is hardly fair.

So how low are prices likely to go? The best way to answer this crucial question is to start with the premise that the age of property speculation is over. There can be no more ‘hope value’. There can be no more belief in the notion that there will be a big capital gain in buying a property, any more than there will be capital gain in buying a sofa.

The value of the asset will have some relation to the yield the asset returns. In houses, the yield is the rent. In the US, a house was traditionally valued at some multiple of the rent it generated. Typically, the value of a house was calculated at 12 to 14 times its annual rent. This relationship has held in the US for over 100 years. There is no reason to believe that this shouldn’t be the way to value Irish houses.

This is a normal price/earning ratio that we would use in the stock markets to assess value. What the US valuation model is saying is that, over time, property should trade on a price/earnings (P/E) ratio of 14 times.

So, let’s see where Irish houses will end up. Take a typical house in a commuter town. On there are hundreds of them. For example, in Newbridge, Co Kildare, you can buy a new three-bed house for €335,000.This is a steal, according to the ad. A bank will finance this for €9 95 per month.

According to the same website, the average rent for a three-bed in Newbridge is between €950 and €1,000 a month. This house, if it can be rented, will yield €11,400 a year. This implies that, applying the US valuation to the asset, the house should be valued at €159,600.However, in Ireland, we are expecting the house to sell at €335,000.

The Irish house, at a ‘bargain’ price of €335,000, is still more than 53 per cent overvalued. It will have to fall by half again to make the sums ad up.

The real fair value means that, in a world where house price speculation is over, Irish house prices will have to fall on average by 50 per cent from where they are today to be worth buying. Madly, even after a year of house price contraction, the P/E for the average Irish house stands at over 29 times - twice the historical average for property.

So, let’s snap out of it. Why can’t we just mark down prices to where they should get to, take the bankruptcies and move on? Why should we be any different in coming to terms with the new reality?

Maybe Dunnes Stores was right all along. Maybe that’s the reason. Maybe ‘‘the difference is we’re Irish’’.

Report by David McWilliams - Sunday Business Post

Sunday, 10 May 2009

House Prices Plunge Even Further...

Almost €200m was wiped off the value of houses in price reductions in less than a month by sellers desperate to offload their properties, the Sunday Independent can reveal.

In what is being described as the introduction of "a major dose of reality" to the housing market, price drops of over 50 per cent have been reported on many houses, particularly in the Dublin area.

Price reductions before last month had slowed, with sellers refusing to budge below their expectations, but the lack of activity has forced them to massively reduce their original prices in order to sell, industry figures have said., which charts property price falls and increases, in a report on the period March 15 to the April 20, showed that over 3,700 properties dropped their prices, while only a small number raised theirs.

The largest drop in price was over €1m, from €2.9m to €1.9m, while the average price drop was €41,989.

It's report showed that over 80 per cent of houses had been on the market for over 3 months, 71 per cent took more than 6 months to sell, 57 per cent took longer than 9 months to sell, and 42 per cent took more than a year to be sold.

Examples of large drops in prices include Firkale, Glengarriff, West Cork, which has dropped from €2.5m to €1.9m, a fall of €600,000; and 38 Rathdown Road, Grangegorman, which was originally listed for €995,000 last year, but now for sale at €575,000.

Peter Wyse, a leading estate agent in Dublin, said yesterday that sellers are finally becoming realistic about what their properties can fetch.

"For too long people were refusing to budge on price but certainly, in the past couple of months, a major dose of reality has come about and prices are coming down," he said.

"I have had to let all my sales guys go because there was nothing moving and I won't take anything on unless people are willing to be realistic about what the house will fetch," he concluded.

Mr Wyse also said that he has sold two houses, one in Rathgar and one in Dun Laoghaire, both of which originally went on the market for over €1.1m, for €500,000 and €600,000, in recent weeks.

Last week, Sherry Fitzgerald estate agents revealed that out of 192 sales in the Dublin area in the first four months of the year, prices had dropped by up to 52 per cent from their original asking price.

The properties covered a wide rage of homes on practically all levels of the market. Many of the houses had been on sale since 2008, with a number on the market since 2007.

The Sherry Fitzgerald figures revealed that at the lower end, price drops ranged between 5 and 20 per cent below asking price. A very small number in this category actually sold for more than the asking price.

In the mid-range market, between €500,000 and €1m, values had fallen by between 35 and 45 per cent. Houses over the €1m mark fell by in excess of 50 per cent, according to the figures.

Elsewhere, hundreds of people queued for over two nights for affordable housing apartments in Dublin, in the hope of buying one of 68 apartments that went on sale yesterday morning.

Over 800 people had registered interest in purchasing the one-, two- and three-bed apartments priced between €210,000 and €295,000.

The apartments, at Sir John Rogerson's Quay, were quickly snapped up by bargain-hunters yesterday.

Affordable housing is offered at a 20-30 per cent discount.

However, in exchange, the property can't be sold for 20 years without a break-out charge being levied.

Report by - DANIEL McCONNELL - Sunday Independent.


Your essential guide to language in the 21st century economy...

It's happened to us all. One minute you're in your element, waxing lyrical about the big match over a bag of peanuts down the pub, the next the talk turns to the markets and you're left clutching at more straws than an octopus playing Kerplunk.

Worry no more. Like a white knight with a big dictionary under his arm, The Times today charges to the rescue with the Recessionsaurus — Robert Cole's guide to modern vocab.

We've listed and defined some of the most common phrases to have cropped up over the past few months, and we hope you find them useful. But this is an interactive service — we want your input, too.

Use the Have your Say box below to query any economic tongue twisters and terminology to have come your way recently. We'll monitor your feedback and add new entries, quicker than you can say quantitative easing.

Well, almost...

Administration One step from bankruptcy. If a company is on the ropes, the people and institutions who are owed money may chose to appoint so-called “administrators” to run the company on their behalf. The aim, ostensibly, is to get the company back on its feet but in most cases administrators (normally accountants) are in the salvage business. They chase up unpaid bills, flog off whatever they can, and return the proceeds to ill-fated backers.

Bad bank A financial institution, or part of one, that looks after a bucket of debts that may turn sour. Strictly speaking it is the loans, not the bank, that is bad. Good banks, and especially talented bankers, are needed to orchestrate bad-bank salvage operations.

Bear A pessimistic investor

Billion One and nine noughts (1,000,000,000). AKA a thousand million

Bookrunner Holder of the begging bowl. A book runner is someone that leads negotiations about the pricing of shares, or bonds, or other financial thingumy-jjgs. Normally it is an investment banker and the terminology is borrowed from the race track. Indeed, a bookrunner is not unlike a bookmaker: he or she or it acts as a go-between with those that have money (investors) on one side and those that want it (companies, banks and governments) on the other. As Leslie Crowther or Bruce Forsyth might say, companies and governments will only raise the money they want if the price is right. If shares or bonds are priced too high, investors will give them the cold shoulder. If the price is too low, the government of company could sell itself short, and taxpayers or pre-existing investors may well get the hump. A bookrunner may hold a formal or informal auction, or solicit bids in other ways, and work out from the information received where to set the final price. Another name for a bookrunner is a lead manager. Co-bookrunners, or co-lead managers, share the responsibilities. Book runners, like bookmakers, may also put their own money where their mouth is and invest in the issue, or underwrite it.

Bull A stock market investor with an optimistic disposition. Only sceptics reckon bulls talk rubbish.

Certificates of deposit Sometimes, in finance land, jargonised names are more self explanatory than the innocent observer might think. A “certificate of deposit” (CD) is exactly that, a document that represents a deposit, often at a bank. All other things being equal, a CD is worth the amount deposited with the bank. Think of one like an old-style building society pass book, if you like. The owner receives all the interest payable on the deposit, just as the holder of a building society pass book received all the financial goodies payable. Why do CDs exist? They usually have a fixed life span, and because they do, banks know that the can rely on having the funds in the coffers for that time. For their part, depositors get a better interest rate by agreeing to the lock-in. Because CDs are tradable, the original depositor can get his or her hands on money before the end of the pre-agreed term, by selling the CD — together with all the rights and responsibilities that go with it — in the second-hand market. Proper CDs are among the most boring and reliable investments there are. In the Stanford case, it seems that financial instruments called certificates of deposit were weird mutants, or not real CDs at all.

Commercial paper Promises, made by companies, to pay. Invoices, which are glorified IOUs, represent one variety of commercial paper. The IOU may be a promise to settle an unpaid bill for work done; it may be a promise to repay a loan.

Credit insurance Guarantees given to banks, and other lenders. With government-backed credit insurance, the lender will not lose money even if the borrower welches.

Creditors People who lend money, or those who are in credit

Debtors People who borrow money, or those who are in debt

Deflation What happens when things get cheaper. While many might think falling prices are a good thing, it is bad in at least three key ways. Firstly, if the price of stuff is going down, consumers will be tempted to wait before buying. Since tomorrow never comes, steady reductions in prices means that stuff never gets bought. And if falling prices becomes a widespread problem, companies stop making stuff, the economy stagnates, shops empty and people lose their jobs. Secondly, falling prices means that companies get less money for selling goods and services. If revenues fall, there is less money knocking around to pay wages and companies reduce their wages bills by stopping over-time, or making people redundant. If they do that, prices continue to spiral downwards because there is less money around to spend. Thirdly and most scarily, deflation increases the real, underlying, weight of debts. The size, in pounds, dollars, euros or yen, of a mortgage does not change, but if you earn less, it will take longer to pay the interest and pay off the capital. Governments hate deflation because they are habitual borrowers, and the last thing they want to do is spend a larger part of their declining tax revenues on paying interest. Those with mortgages should be similarly fearful. Although inflation is disliked, it is seen as the better of two evils — not least because inflation lightens the underlying weight of outstanding debts.

Depression When recessions get really bad, they become depressions. Unlike recession there is no widely accepted textbook definition of a depression, although some say it comes when GDP shrinks by a total of 10 per cent. It will feel distinctly like a depression if a recession goes on for more than a year. After two years, talk of recessions is sure to be replaced by ultra-glum references to depression.

Discount Sometimes thought of as a bargain. More often a measure of financial desperation

Dove An observer who is believes that friendly economic levers (such as interest rates) should be pulled

Due diligence Homework of the business and, or financial kind. It is undertaken ahead of any large transaction and is intended to discover exactly what lies beneath the bonnet of a company and how that company is likely to fare in future. But as is suggested by Edmond Jackson, our correspondent, due diligence is not always as thorough as its fancy name, and its participants, might lead you to believe.

Fractional banking This lies at the very heart of the credit crunch, and near the centre of most, if not all, financial crises. Fractional banking is widely deployed and sees banks lend much more money than they hold in deposit. Deposits of money, in other words, are a fraction of the amount of money created as debts to businesses, individuals, governments and homeowners. Fractional banking is a force for economic good – it means that many more people can use the money to buy things they want, to build factories and create jobs, and to engage – generally – in economic activity that improves standards of living. Fractional banking is inherently unstable, however; if depositors want their money back for any reason banks can rapidly run out of funds. Confidence plays a key role, and if confidence dissipates, the unstable boat that is fractional banking can quickly become swamped, and then sink. Once a run on the bank starts it rapidly becomes catastrophic for the institution concerned. As a rule of thumb, sound fractional banks lend out the equivalent of £10 for every £1 of safely-deposited capital they hold. In the lead up to the credit crunch, some banks lent out more that that and were consequently more vulnerable were confidence began to disappear.

GDP A number that represents the size of national economies. It is a measure of economic activity. GDP is usually referred to in terms of the change on previous periods and since relatively sound economies grow, over the long term, at about 3 to 5 per cent a year, even small-looking percentage changes in GDP can have a dramatic impact.

Gilts Government debt. When the state borrows money, it borrows from institutional and, or, individual investors. Normally, the British Government sells gilts in exchange for hard cash to spend on things such as education, health and defence. At present the Government is issuing gilts in exchange for commercial paper in the hope that the exchange will increase levels of trust in the financial system. (NB “Gilt” is a nickname: the full name is “gilt-edged government security”. Why? Because in Napoleonic times, when the British Government started borrowing in this way, the IOUs were written on paper edged with gold leaf. It was a sign of the reliability, or creditworthiness, of the Government-borrower.)

Haircut Financial loss. A bit like Shylock’s pound of flesh.

Hawk Someone who thinks that you have to be cruel to be kind when it comes to economic policy

Hyperinflation is to inflation what depression is to recession: the same only much worse. Opinion divides as to textbook definitions: but inflation that runs at 10 per cent or more a month, or 100 per cent or more a year, is hyperinflation. When inflation gets really bad it destroys faith in currencies, and when faith in currencies dissolves, economic activity goes down the drain. Money helps trade, and helps build complex - hopefully civilised - societies. Without money, civilised societies are weakened, and inefficient bartering takes the place of more advanced, better, forms of life-enhancing trade.

Inflation The fancy name for rising prices. Inflation is bad for lots of reasons. It is bad because it creates economic instability. Companies are always uncertain about the future, and that makes it hard for them to plan. If inflation is high, the sense of uncertainty rises and companies may play safe and decide against developing new products, building factories, and employing staff. High inflation therefore stunts economic growth, in the long term, although in the short term, a little inflation serves as economic encouragement.

Leverage A fancy name for debt often expressed in proportion to a borrower’s assets. Also known as “gearing”.

Liabilities Debts

Liquidity A fancy name for money. The more liquidity in the financial system, the more money there is sloshing around. If liquidity is scarce, as now, there is only a small amount of money in the system. The Government is attempting to improve liquidity by replacing low-quality commercial paper with high-quality gilts. It is crucial, in this context, to understand that cash is only one type money. Money is anything that is used in the exchange of goods and services. Gold bars, IOUs, hire purchase agreements, and mortgage debts, are some examples of “other” sorts of money. Different types of money have different qualities, some are good, some are bad, most are in-between. The quality of money shifts, over time, as economic circumstances change. The quality of money also changes as people, particularly people who are also investors, adjust their opinions.

Nil paid rights New shares created as part of a rights issue are usually priced at a discount to the prevailing market price. The difference is the value of the right to buy the shares ahead of investors at large. Say a company's shares trade at 300p, and new shares are issued at 200p. The right to buy the new shares is worth 100p because, in theory at least, they could be bought and sold for that amount of profit. NB this right has a value separate from any obligation to buy the new shares or fill the company's begging bowl. The value of so-called "nil-paids" will also move, sometimes dramatically, in line with the market value of the shares. Since time separates the launch and the completion of a rights issue, the value of nil paid rights can evaporate.

Ponzi schemes Alarmingly simple but powerfully deceptive investment schemes – especially if you are the gullible type. Also known as “pyramid selling”, the schemes often start with a genuine investment idea but become derailed in order to line the pockets of fraudsters. They work, temporarily, by paying mouth-watering investment profits out of fresh investments of new investors’ cash. Ponzis might be compared to a hose pipe. As long as water (that is, money) goes in at one end, water (that is, more money) comes out at the other. And as long as the water flows, the founders siphon off a fat share of the loot for themselves. But as soon as the tap is turned off, the whole kaboosh is seen for being the hollow pipe-dream it really is. Ponzi schemes are named after an Italian-American by the name of Charles Ponzi, one of the most famous fraudsters of the ilk.

Profit margin an indicator of profitability rather than just profits. It is calculated by dividing the turnover (aka sales or sometimes revenues) of a company by its profits to get a percentage figure. For example: imagine that Lollipop PLC sells £1 million-worth of lollipops in a year, and makes a profit of £50,000. Its profit margin is £1 million divided by £50,000 or 5 per cent. Now imagine that Gum PLC sells £10 million of chewing gum and makes £250,000 of profit. At first glance it might seem that Gum is doing better. But since Gum's profit margin is only 2.5 per cent, you might say that the opposite is true.

Preference shares Financial agreements used by companies to raise money. Companies usually raise finance in one of two ways. They either issue shares, selling ownership right and responsibilities in exchange for the cash raised. Companies also borrow, often through the issue of glorified IOUs called bonds, that confer no rights of ownership. Preference shares are a hybrid: they get dividend before holders of ordinary shares, but come lower than bondholders (x-ref creditors) in the pecking order.

Primary market transaction Where cash passes from investors to companies or governments.

Quantitative easing Quantitative easing is a posh way of describing the practice of pumping money into the economy to encourage banks to lend. The hope is that if Governments print money, and inject it into the economy, people and companies will be more likely to spend. If they are more likely to spend, there is a greater chance that the economy will spring into life. Take a bar-room illustration: the bloke at the bar with a fistful of dollars is more likely to splash out on a round than the man who is down to his is last nickels and dimes. Even if the cash is borrowed, it is hoped that greater quantities of cash will breed greater generosity.

How does quantitative easing happen? A central Bank (such as the Bank of England or the US Federal Reserve) buys its own government-issued bonds (such as gilts), or bonds issued by companies or other assets. As with any purchase, the central bank gives money to the sellers, many of which will be commercial banks. Commercial banks, with their accounts electronically credited by central banks, will then (hopefully) have the confidence to increase lending to customers as well as each other.

Government, or its agents in central banks, can also replace poor-quality money in the economy with good money. Old IOUs issued by companies that may welsh on promises to pay up are replaced with IOUs underwritten by the full force of the state, and its ability to raise tax revenues. This is also like printing money because the old IOUs become useless as a means of exchange. Replacement, in other words, is akin to creating new money. And by boosting confidence some forms of money (that is, corporate IOUs and the like), it is hoped that confidence across the economy will rise.

While it may be a necessary emergency measure, the danger is that is quantitative easing leads to runaway inflation. And runaway inflation reduces wealth alarmingly.

Recession Wags would have you believe that a recession happens when your neighbour losses his or her job, and it is a depression when you are made redundant. Economic textbooks tell that a recession is what happens when the economy shrinks for six months on the trot. GDP is used to measure the size of the economy, and when the figures go negative for two successive three months periods (or quarters) the technical definition is met.

Rights issue Begging bowl. One of the ways a company can raise new cash. It achieves this by creating new shares for sale. It is called a rights issue because existing investors have the right to subscribe before anyone else. In this way investors can, if they chose, maintain their proportional holdings in a company.

RPI Stands for retail price index and is a measure of changes in the cost of living. If it is positive, we have inflation. If it is negative we have deflation. The RPI is only one measure of inflation as calculated by National Statistics, the UK Government agency although it is important because, among other things, it is the one used for increasing state pension payments.

Run of the bank A financial avalanche. Thanks to the existence of "fractional banking" there is less money deposited at banks than there is money lent out to finance business activity. As long as confidence remains and people are happy to keep their money with banks practicing this tricky balancing act, the system works - and works well. As soon as confidence begins to leak, however, savers rush to withdraw their money. The process takes place quickly because savers fear the bank will run out of money. As a result of that, and the fact there are only limited funds available, a run on a bank can quickly turn into a catastrophe - for savers who do not get out in time, the bank itself, and the businesses which borrow money because they will be asked for it back - pronto.

Secondary market transaction Where shares or bonds created in primary market transactions are sold second-hand, usually between different groups of investors.

Sub-prime Equals dodgy. Sub-prime borrowers are people who prove themselves unable to repay what they owe. Sub-prime loans are debts that may not be repaid. Sub-prime mortgages are home loans where the debt will not be settled even if the house on which it is secured is sold because the property has fallen in value.

Systemic threat A threat to the whole financial system, rather than just a part of it. Government is obliged to act against systemic threats because failure may bring financial Armageddon. Banking failure is systemic because banking (that is, the practice of exchanging money, goods and services between people) is everywhere. In extremis, a country can do without a motor industry. Modern society would collapse if banks ceased to exist because money would cease to exist.

Theoretical ex-rights price A Terp is much more interesting than it sounds because allows you to get a quick clue what the market thinks of a right issue. A company's share price will, almost inevitably, fall after the announcement of a rights issue. But if it falls to a point higher than the theoretical ex-rights price, the market is giving the move the thumbs-up. If it falls below the Terp, the market doesn't like it. How do you calculate a Terp? Say shares in company trade at 300p and it doubles the number of shares it has by issuing new ones at 200p. The Terp is the sum of the two share prices divided by two - because there are twice as many shares in existence. If the market value of shares in the company falls to 250p, natural order is restored. If it falls less, investors are showing positive vibes. If it falls below 250p, it is as if the black spot has been passed.

Trade deficit Occurs when the value of imports is higher than exports

Trade gap When the total value of exports is more, or less, than imports. Concern often arises if a country import more than it exports because it suggests a country spends more than it earns. This, in common with many economic fears, is rough and ready

Trillion One and twelve noughts (1,000,000,000,000) AKA a million million

Toxic debt Loans that may not be repaid. They are especially scary because of the risk that one toxic debt may poison other loans that were previously OK. For example, if one home loan on one street goes bad, it might make people think that all the loans on the street will go bad.

Underwriter A financial institution, or person, that provides a guarantee. Insurance policies and rights issues are among the things most often underwritten. Underwriters usually charge a fee, which is payable whether or not they are called on to stump up. NB. The quality of guarantees given are only as good as the guarantor.

Writedown If a company, or a bank, thinks that it might lose money it “writes down” the value in its ledgers. The company may or may not actually lose the money, a writedown process is a precautionary move – albeit one that often leads to “write-offs”.

Write-off Like a car involved in a bad accident, a loan that won’t be repaid is written off. Prior to the accident, the car will have value. After it, it does not. Ditto for money involved in a credit accident. Where does the money go? It disappears, with the resulting gap being eventually reflected in the year-end tally of corporate or governmental profits and loss.

Recessionsaurus — Robert Cole's guide to modern vocab - UK Times

Thursday, 7 May 2009

Dublin House Prices Fall By 50 %

What Dublin buyers are really paying...

What’s your house really worth? Secret house sale data for the first four months of the year shows that in some cases, houses in the Dublin area are selling for half what the owners wanted. And nearly 20 per cent of buyers are paying cash...

DATA FROM the sale of almost 200 homes in the Dublin area seen by The Irish Times show that house prices in the capital have dropped by up to 52 per cent since 2007.

The data relates to 192 sales conducted by one of the country’s leading estate agencies in the first four months of 2009.

The properties represent a wide range of homes at virtually every level of the market and in most postal districts. The majority of the 192 homes sold had been on the market since 2008, with some properties on sale since 2007.

Analysis of the sales show that homes at the lower end of the price scale have fared best, selling for between 5 and 20 per cent below asking prices. In a very small number of cases starter homes actually attracted bids over the asking price. Two of the 192 properties sold for above their asking prices and both were in the €300,000 to €400,000 bracket. In both cases the buyers paid around €10,000 over the asking price in competitive bidding.

Sellers in the middle market, with houses priced between €500,000 and €1 million have seen the values of their homes fall by between 30 and 45 per cent. On the plus side, there is a good deal of activity at this level of the market as buyers identify value in solid family homes in top suburban locations.

Houses priced in the €1 million-€2 million market have seen their value halved, where they are selling at all. Of the 192 properties sold, just 14 fetched over €1 million.

A surprisingly high number of buyers are paying cash – 19 per cent of the sample, while AIB has emerged as the foremost lender.

The prices provide the first true snapshot of the current state of the second-hand housing market in over a year, since auctioneers stopped revealing the sale prices they’d achieved following a row with the National Consumer Agency (NCA) (see panel on page 6).

While the information relates to sales from one estate agency chain only, the geographical spread and the range of house types, from apartments, through three and four-bedroom semis up to large period houses, provides a valid view of the market.

Properties that have been on the market for over a year have seen the most significant drops. For instance, an apartment in Clontarf that went for sale in late 2007 at around €430,000 sold last month for just over €300,000, a drop of 39 per cent.

In Blackrock, a substantial family home first offered a year ago at €1.6 million was eventually sold for around €850,000 – a 47 per cent drop.

In Dún Laoghaire, a period house that was on the market for 12 months dropped from over €1.5 million to around €900,000, a drop of around 44 per cent. A large country-style property in south Co Dublin that came on the market a year ago at €4 million eventually sold for €1.9 million – a drop of 52.5 per cent.

Across the city in Dublin 5, a spacious detached house offered in 2007 at around €750,000 eventually sold for just under €400,000 – 48 per cent lower. In Dublin 6, an attractive semi on one of the better roads of Rathgar was offered early in 2007 at €1.9 million but sold early in 2009 for around €1 million – 45 per cent below the original asking price. In Stillorgan, a typical four-bedroom semi sold for 36 per cent below its asking price, after 16 months on the market.

The market has continued to correct through the first quarter of 2009. Sellers who put their homes on the market in the January-March period invariably had to drop prices to achieve a sale. For example, in Dublin 9, a terraced three-bedroom house that came on the market in February at close to €400,000 was sold shortly afterwards for 9 per cent less.

In Stepaside, a modern duplex on the market at just over €400,000 at the end of 2008 sold for €360,000 in early 2009, a drop of around 8 per cent.Neighbourhoods that saw big price inflation during the property boom have seen corresponding drops since the peak of the market.

The correction has been severe in parts of Dublin 18 – Foxrock and Carrickmines in particular, where there is an oversupply of newly built high spec homes. Two large contemporary homes in Dublin 18, on the market since late 2007 and early 2008 respectively, were both sold at approximately €2 million each – around 50 per cent less than their original asking prices.

Parts of Dublin 4 have also taken a big hit on prices. In Sandymount for instance, an attractive four-bedroom semi with a garage that last year was expected to make over €1 million eventually sold for €700,000, while nearby, a three-bedroom semi that had been priced at close to €900,000 in late 2007 finally sold for just over €450,000 – a 48 per cent drop.

Buyers at the lower end of the price scale have not been able to avail of such large discounts, since starter and trade-down home prices seem to have held up, pricewise, better than their more salubrious neighbours.

For instance, in Sallynoggin a refurbished former Corporation house on the market at over €350,000 sold for just 4 per cent less. In Clontarf, an apartment priced at €280,000 was sale agreed at a modest 10 per cent below the asking price; in Clonee, Dublin 15, a modern three-bedroom semi fetched just over €300,000, 7 per cent down from its asking price, while in Sutton, a three-bedroom home on the market at just over €330,000 sold quickly for over €325,000, or 2 per cent less than the asking price.

Finance was disclosed in 109, or 57 per cent, of the 192 cases. Of this, 109, a high proportion – 19 per cent- were cash buyers. Among those who had secured mortgages, 38.5 per cent were being funded by AIB; 12 per cent got mortgages through brokers; 10 per cent with Bank of Ireland; 7 per cent with the EBS; 6.5 per cent from the agent’s broker; 2 per cent from Permanent TSB; Halifax, Vision Financial Services, Bank of Scotland and Lombard Finance all supplied 1 per cent of mortgages each; and 1 per cent came under the shared ownership scheme.

Interestingly, in 6.5 per cent of the cases where finance was disclosed, the mortgages were given to people who worked in banks and financial institutions. This group secured discounts of up to 44 per cent on the original quoted price – or an average discount of 29 per cent. In 34 cases – 18 per cent of the 192 sales – an initial sale had fallen through with the eventual sale coming later, after further price drops. In at least six cases a sale had fallen through on more than one occasion.

Earlier this week the Irish Auctioneers Valuers Institute (IAVI) published a survey showing that house prices continued to drop in early 2009, by an average of 8.7 per cent nationwide in the first three months of the year. The survey, conducted among the IAVI’s 2,000 members, shows that the decline in Dublin was less – on average 5.6 per cent compared to 12 per cent in Munster and 8.5 per cent and 7.5 per cent in Leinster and Connaught respectively.

The house price data seen by The Irish Times bears this out, though it does show that the pace of sales accelerated in the first quarter of the year where the price was already seen to be fair, and a further discount could be negotiated.

In Dublin 8, a two-bedroom artisan cottage on the market at just over €350,000 quickly sold for around €300,000 while in Walkinstown, a typical three-bedroom terraced house was sold for €15,000 under its asking price of €300,000. Meanwhile a recently completed one-bedroom apartment in Sandyford was quickly sold for around €260,000 – about €5,000 below its asking price.

In Howth, a village cottage sold for just 6 per cent below its asking price. While the 192 sales do not make much of a dent in the large oversupply of homes in the market, the signs are that buyers are prepared to move where they perceive real value. The next step for the market will be to get transparency on prices.

With legislation currently being pushed through to activate the National Property Services Regulatory Authority, auctioneers can only hope that one of its first moves will be to demand that property prices to be recorded and put into the public domain.

Report by ORNA MULCAHY - Irish Times.

Sunday, 3 May 2009

The Storytellers...

The justice minister's declaration on national television that the budget is merely a statement of intent confirms our worst fear: they don't mean what they say. If only they'd told us before...

Mystery solved. We now know why Dermot Ahern found nothing on Ray Burke when he was up every tree in north Dublin. It's because he wasn't actually looking.

One day long, long ago, the taoiseach summoned him to his office and said "Dermot, I want you to carry out an exhaustive investigation to establish once and for all if Rambo's been on the take from the builders."

"Righto, boss," said the future minister for justice, and off he scampered to fetch his climbing boots. But not a whiff of a brown envelope did he detect among the abundant sycamores and great oaks of Swords and Malahide. Why? Because he kept his eyes closed all the time he was looking.

Well, if Humpty Dumpty was your boss, would you take his instructions literally? Even pedantic, pettifogging, party-pooping economists thought it wise to apply a metaphorical interpretation when Bertie Ahern ordered them to go and commit suicide.

The problem with custom and practice, though, is it turns into a habit. Next thing you know, it's policy. Last Monday night, when the justice minister appeared on Questions & Answers and declared that the (supposedly) annual budget is no more than a statement of intent, he confirmed our worst suspicions. Nothing they say means what it purports to mean. His defence, in a blizzard of logic that the government had brazenly reneged on its budget promise to abolish long-service payments for TDs, was to deny they meant it when they said it.

As there has been no demur from a single member of the Greens or the single cabinet member of the PDs, we must assume that empty promises are the coalition's official policy. The government has gone native after too much company-keeping with Fianna Fáil and its family motto is that a solemn undertaking is as good as a nod 'n' a wink, lads.

Ahern's answer explains everything.

Two budgets (one of them euphemistically labelled "supplementary") in the space of six months have left such a trail of dishonoured commitments as to make Casanova look like a sincere gentleman. While we have come to expect the occasional effluvium of disingenuous waffle from our politicians, the budget is traditionally regarded as sacrosanct. It is the most ritualised expression of self-determination in the Oireachtas calendar. On budget day, the words spoken by the minister for finance are deemed so irrevocable they are strictly embargoed. To breach that embargo is to be in contempt of the constitution itself. Fine Gael's Phil Hogan paid for his indiscretion on 8 February 1995 by resigning from the government, barracked out of it by an incandescent Fianna Fáil. As if secrets warrant being secrets when they are as flimsy as flights of fancy?

How strange to hear the minister responsible for law enforcement blithely announcing on national television that the budget is little more than a parliamentary cabaret, when servants of the state scrupulously guard it as the gospel of the nation. Someone should tell those Department of Finance officials who burn the midnight oil working on its contents and the Dáil ushers who are forbidden to circulate copies of the minister's speech until proceedings are under way. And what about purveyors of the old reliables? When increases in excise duty on petrol, alcohol and cigarettes are scheduled to come into effect at midnight after a budget, do retailers shrug their shoulders, think "sure, the budget's only an oul' statement of intent", and ignore it? No, it's a safe bet that, were they to try that, they would soon find themselves in the shadow of the taxman.

Not 'measures', just wishful thinking

Politicians see themselves as being above all that. They see themselves as incapable of breaking promises because they don't make them in the first place. Most citizens are under the delusion that the government has already rowed back on a dozen or so measures announced by Brian Lenihan in his brace of budgets. Well tut-tut, us nincompoops. For now we discover they weren't 'measures' at all; just wishful thinking. When elder citizens hovering around the poverty line worried themselves sick after the 14 October budget that their medical cards would be rescinded, really, they ought to have known better. It was only the government flying one of its kites. Forty-eight hours later, the minister raised the eligibility income threshold and ordered that such expenses as mortgages, tax and medical expenses be deducted before the qualification level was calculated. Quite a different story.

When Lenihan said in October that he was introducing a two-stage income levy of 1% and 2%, he really meant he was bringing in a 3% one as well, but he didn't get around to mentioning that until a month later. Then, in the 7 April 'supplementary' budget, he lowered the qualifying thresholds for payment, starting with 2% at €75,000, and said: "These measures will take effect from 1 May 2009". Eight days later they had been back-dated to 1 January, with utter disregard for households' needing full knowledge to formulate their own micro-budgets; especially where income-earners had taken a cut in pay for the latter part of the year and, so, were extra-badly hit when the levy was made retrospective.

Around the time he introduced the after-thought 3% levy for high-earners, the finance minister promised to tackle the inequity of tax-exile. Then he came and went with another budget in April, and the 5,800 tax exiles kept coming and going too – flying in and out, immune in their private jets from the new travel tax.

Once again, of course, it's all the fault of that ass, the law. Tougher restrictions could not be imposed, Lenihan explained a month after promising to deal with it, because Ireland is saddled with various double taxation agreements with other countries which would have to be reopened for negotiation. My, but how the law keeps getting in the way of obvious measures like judges taking the same pay cut as everyone else, or former taoisigh foregoing crazy pensions payments.

As for the travel tax, it was not set in stone either when first announced in the October budget. Soon after, the cut-off point when common-or-garden airline passengers had to pay €10 instead of €2 to get off the island was rejigged to account for Knock and Shannon being farther from Manchester, Birmingham and London than Dublin. The problem with spinning a statement of intent – as opposed to formulating a budget – is you tend not to waste time on the practical minutiae.

Take the parking levy. In October, we were told that a flat-rate €200 levy would attach to any car parking space provided in an urban area by an employer. As the days bleed into weeks and the weeks bleed into months, and the potential complications multiply, that one is looking less and less likely ever to become a reality.


The following statement, uttered by Lenihan in his 7 April budget, sounds categorical, don't you think: "Deputies will no longer receive long-service payments or increments"? And how about this one on the same day: "The arrangement whereby former ministers are paid ministerial pensions while they are still members of the Oireachtas will be discontinued"? Pretty unambiguous, wouldn't you say? Sorry, but once again you're wrong. A week after uttering those words, the minister let it be known that TDs will continue receiving their perverse long-service payments and that some impressive, legalistic-sounding way is being devised to wriggle out of denying Bertie-in-a-sulk-Ahern his €150,000 pension. Yet more good intentions falling by the wayside of constitutional banana skins. Who'd have thought?

Government-by-Walter Mitty ordained in the October budget that it "has decided a targeted voluntary early retirement scheme will be introduced for the HSE and discussions are under way on the development of such a scheme". Nearly five months later, health minister Mary Harney told the Dáil the government would implement the planned €2 billion public expenditure savings before even thinking about the HSE's personnel. "When this has been dealt with, the government then will consider other matters, including the introduction of a voluntary early retirement scheme for the HSE," she said, contradicting what the finance minister had said back in October.

In that first budget too, Lenihan announced: "I am conducting a review of the National Pension Reserve Fund in the context of recent economic and fiscal developments. It is my intention to complete this review before the end of the year." The deadline year, he clearly implied, was 2008. Here we are nearly into the fifth month of 2009 and – guess what? – no sign of the promised report. The value of the national pension reserve fund fell by 6.7% in the first three months of this year and the government extracted €7 billion from it for the banks' bailout (that the IMF says will cost us closer to €24 billion), and still no analysis of the fund's performance is forthcoming.

Hans Christian Andersen

Back in October, the finance minister undertook in his budget speech: "We are determined to protect the most vulnerable in our society and we will redirect resources to that end." Then he announced 32 cuts in the education budget, 16 of them at primary level. Such was the outcry when it became clear that 534 children in 119 schools would lose their teachers because of reductions in the budget for special needs education, yet another volte face was required.

If only Dermot Ahern had told us in advance that the budget is the collaborative creation of Hans Christian Andersen and the Brothers Grimm, we would not have raised our hopes when Lenihan avowed on 7 April: "Fairness must be the cornerstone of all our efforts to achieve economic renewal." Amid the avalanche of evidence that the government puts its own and party interests ahead of the people's (flying from Malin to Mizen in tax-paid jets and unable to muster a blush of embarrassment over the millions squandered on e-voting machines), to find that even they do not believe their own words must be some kind of watershed in the democratic relationship with the people. As the government prepares to skip down the path of imagination for next December's budget, it might, perhaps, pause to ponder this: What happens in the land of ever-after when everyone stops believing?

Justine McCarthy - Tribune News