Friday, 31 July 2009

NAMA €90bn Squandermania

NAMA: The €90bn gamble

Sweeping powers for 'bad bank'
1,400 loans from 50 top developers

THE Government last night gave its 'bad bank' sweeping powers over developers and judges as it unleashed a €90bn plan to rescue banks and kickstart the economy.

But Finance Minister Brian Lenihan admitted it could take up to 30 years for the new National Asset Management Agency (NAMA) to sort out the toxic bank assets.

The State will effectively become one of the biggest property owners in the world as NAMA is granted extensive powers to take over land and development projects from borrowers who are not keeping up with their repayments.

Among the more controversial provisions in the proposed new legislation -- described by Fine Gael as a massive gamble -- is a radical series of rules and procedures to ward off legal attacks that could be disastrous for taxpayers.

But the plans, which include limited appeals to the Supreme Court and a clampdown on injunction proceedings, have alarmed lawyers. They claim that the proposals trample on judicial rights.

Under the new legislation:

* NAMA will take over up to €90bn in risky loans. As the current market value of these loans is far less, NAMA will pay well below this figure.
* The Government will take over 1,400 loans by the end of next June. The top 50 developers will be brought into NAMA before Christmas.
* NAMA will have the power to borrow up to €10bn to help complete projects it takes over -- but only if that development further enhances their value.
* Developers who are in default and whose property has been seized by NAMA will not be allowed to buy back their assets at a later stage.
* builders will not automatically lose their primary homes if they cannot repay their loans.

However, the proposed new legislation does not outline what the full cost of taking over the impaired loans will be.

It will not be possible to work out the full extent of the writedowns until all the €90bn loans have been transferred to NAMA.

The European Commission is expected to rubber-stamp the formula the Government hopes to use to value the loans ahead of the crucial Dail debate on the legislation in early September. Shortly after this, Mr Lenihan then hopes to be able to give an estimate of the discount that the banks will have to take on the loans.

Mr Lenihan unveiled the proposed legislation yesterday, and signalled that it could take 30 years for NAMA to sort out toxic bank assets.


He said he expected the bulk of NAMA's work to be done in seven to 10 years, but admitted that some would go on a long time beyond this.

He claimed there was nothing in the proposed bill that would provide a "bail-out" for builders or developers. "Anyone who owes money before NAMA continues to owe it, and is expected to repay the full amount of that debt," he said.

However, the Government now faces a political dogfight to set up the agency as opposition parties highlighted the serious potential pitfalls facing NAMA.

Fine Gael deputy leader and finance spokesman Richard Bruton described NAMA as a "major gamble" that was effectively asking taxpayers to sign a blank cheque.

"The Government are saying 'trust me' on this. I think many people would feel that they don't deserve that." He said that the developers would be left in their "palatial homes", no matter what happened.

Labour's Ruairi Quinn said the Government was asking taxpayers to foot the bill and bear all the risk.

"Despite a figure of €90bn being bandied about, there is nothing in the bill to prevent it going even higher," he said.

The leader of the country's biggest union also declared his opposition to the new agency.

"The bill shows no evidence of new thinking, no willingness to learn from past mistakes and every intention of making ordinary people pay for the squandermania of the rich and powerful," SIPTU's Jack O'Connor said.

Report by Joe Brennan, Senan Molony and Dearbhail McDonald - Irish Independent

Thursday, 30 July 2009

It's So Toxic...

Government to publish Nama legislation today...

The Government will today publish legislation setting up the controversial National Asset Management Agency (Nama), the State’s new toxic assets agency.

The €90 billion “bad bank” scheme will use Government bonds to buy property loans at a discount from banks, which will then be able to cash the bonds with the European Central Bank.

The draft legislation will be published at 5pm today on the Department of Finance website, but the Government intends to amend it next month when it is debated by the Oireachtas.

The complex draft laws run to 150 pages and contains more than 200 sections.

Nama will operate under the aegis of the National Treasury Management Agency.

Banks will have one chance to appeal the price put on their loans by Nama to “a valuations panel”, which will advise the Minister of Finance Brian Lenihan, but the final decision will be his, the Department of Finance has said.

Officials expect that loans to the 50 largest property developers, worth some €30 billion, will be moved into the new agency by December.

Meanwhile, the department again made it clear that the State would buy controlling stakes in Irish banks if property asset losses wipe out their capital after the bad, or distressed loans have been taken off their books.

The decision to establish Nama was announced by the Minister in his budget statement of April 7th, “with a view to addressing in a comprehensive way the problem of impaired or potential impaired assets in the banking system”.

Speaking ahead of the publication of the legislation today, economic consultant Dr Peter Bacon, who is the architect of the bad bank plan, said he was confident about the contribution NAMA would make to the economy.

"We cannot go back to exchanging beans. A banking system, an efficient one that meets the needs of a growing economy is needed," said Dr Bacon on RTÉ's Morning Ireland .

"(Ireland) cant afford not to have an efficient, functioning banking system. If we went that course the result would be a stagnant economy into the long term future," he added.

The Irish Banking Federation (IBF), which represents all the major Irish banks, said NAMA was critical important in safeguarding financial institutions.

"All of the banks will co-operate with NAMA to whatever degree is necessary in order to make the project a success," said Pat Farrell, chief executive of IBF.

Report - Irish Times

Tuesday, 28 July 2009

Sold...Into Life-Long Debt...

What happens if you voluntarily surrender your home? If the sale doesn't cover the mortgage you could be in trouble...

One of the unspoken legacies of this recession will be the hundreds of people left paying full-term mortgages on properties they no longer own having been forced to sell at massive losses by the threat of repossession.

With the 12-month moratorium on repossessions agreed as part of the government's recapitalisation programme for the Bank of Ireland and AIB and political pressure generally, the prime lenders are reluctant to be seen opting to force people out of their homes. However, it's understood that many are opting to give customers in serious financial difficulty six months to sell their property despite the fact that they are almost certainly going to do so at a significant loss.

That this option avoids the repossession process is almost irrelevant to the mortgage holder because the end result is the same – the customer is left with a potentially huge outstanding balance to repay on the mortgage with no asset to show for it. The long-term effect is that they are unlikely to ever again be in a position to buy their own home thanks to a mortgage they continue to pay on a property they don't own.

The arrangement is essentially a private agreement between the lender and the customer and, as such, it is impossible to know just how many people are being forced down this route. However, industry sources believe that the number of houses being sold at a loss at the lenders' behest or being voluntarily surrendered to the banks and building societies far outweigh the number of possession orders being issued in the High Court.

Colin Daly, staff director with the Northside Community Law Centre says that the practice is obscuring a potentially major problem.

"It is very difficult to get a true and accurate picture of exactly how often this is occurring. There is no data on the number of properties that the banks and building societies have threatened to repossess but then end up giving people six months to sell. It is masking the true extent of the problem," he said.

The real cost of the practice was driven home by a report in The Drogheda Independent last week. Kevin and his girlfriend, both working at Lourdes Hospital, bought a three-bedroom house in a village close to Drogheda in February 2007 for €405,000 having secured a 100% mortgage with repayments totalling an €1,800 monthly. However, when his girlfriend lost her job, pressure mounted and the couple split up. Attempts to rent out their home failed and there were no takers for the property at the original price.

Eventually, the building society gave them an ultimatum – sell or face repossession proceedings. They eventually sold for €230,000 and will be paying off the €175,000 balance at €300 a month each for the next 35 years.

According to Kevin: "I've thought about skipping the country but then I could never come home. I've considered refusing to pay up but I'm in a state job and the building society could get an attachment on my earnings. There is no help and bank rescue package for people like us."

Crazy as it may sound, Kevin and his girlfriend probably did the right thing in selling their property at an enormous loss. By selling the property themselves they were able to maintain, at least, some control over the situation as the alternatives of voluntary surrender or repossession are even more financially punitive.

Voluntary surrender, also known as voluntary possession, is where a homeowner enters into an agreement with their lender whereby they take the house with the mortgage holder's consent and the lender then handles the sale of the property. It's understood that the majority of voluntary surrenders taking place at the moment involve people who bought at the height of the boom, borrowing 90%-plus of the property's value – and who now find themselves in serious negative equity. Once again, this is a private arrangement between the lender and mortgage holder and the prime lenders have been incredibly cagey about just how many voluntary surrenders are taking place.

Money Advice and Budgeting Service advisers are reporting a noticeable increase in the number of clients who have been considering voluntary surrender, says spokesman Michael Culloty.

"There are certainly a lot of people talking about it right now. People seem to see it as a panacea to all their problems where they can just walk away from the whole situation but that is not the case at all. We would advise anyone to seek independent legal advice if they are considering it," he said.

The Irish Bankers Federation pointed out that its members are statutorily obliged to assist borrowers as far as possible to manage their mortgage arrears before reaching the voluntary surrender stage but admitted that there may be instances where people enter into surrender arrangements unaware that they will be liable for outstanding balances.

As with a repossession or forced sale, voluntary surrender sees the mortgage holder remaining liable for any residual balance owed. It can also end up being incredibly expensive, according to Colin Daly of the Northside Community Law Centre.

"Our advice to people is that they should think very carefully before they set this in train. While voluntary surrender may seem like a quick and easy way to solve the problem of a mortgage gone into arrears, there are elements to consider before you go down that route.

"You will have to vacate the property and you are essentially handing over the carriage of the sale to the lender. They will negotiate solicitor and estate agent fees. You have no control over what those fees will be and they are added to your debt.

"It's also likely that a property sold by a lending institution will not achieve as high a price. It is better to put the house on the market yourself. That way, at least, you can possibly minimise your losses," he said.

Report by Gareth Naughton - Sunday Tribune

Friday, 24 July 2009

Fiscal Ruin Of Western World

Fiscal ruin of the Western world beckons...

For a glimpse of what awaits Britain, Europe, and America as budget deficits spiral to war-time levels, look at what is happening to the Irish welfare state...

Events have already forced Premier Brian Cowen to carry out the harshest assault yet seen on the public services of a modern Western state. He has passed two emergency budgets to stop the deficit soaring to 15pc of GDP. They have not been enough. The expert An Bord Snip report said last week that Dublin must cut deeper, or risk a disastrous debt compound trap.

A further 17,000 state jobs must go (equal to 1.25m in the US), though unemployment is already 12pc and heading for 16pc next year.

Education must be cut 8pc. Scores of rural schools must close, and 6,900 teachers must go. "The attacks outlined in this report would represent an education disaster and light a short fuse on a social timebomb", said the Teachers Union of Ireland.

Nobody is spared. Social welfare payments must be cut 5pc, child benefit by 20pc. The Garda (police), already smarting from a 7pc pay cut, may have to buy their own uniforms. Hospital visits could cost £107 a day, etc, etc.

"Something has to give," said Professor Colm McCarthy, the report's author. "We're borrowing €400m (£345m) a week at a penalty interest."

No doubt Ireland has been the victim of a savagely tight monetary policy - given its specific needs. But the deeper truth is that Britain, Spain, France, Germany, Italy, the US, and Japan are in varying states of fiscal ruin, and those tipping into demographic decline (unlike young Ireland) have an underlying cancer that is even more deadly. The West cannot support its gold-plated state structures from an aging workforce and depleted tax base.

As the International Monetary Fund made clear last week, Britain is lucky that markets have not yet imposed a "penalty interest" on British Gilts, given the trajectory of UK national debt – now vaulting towards 100pc of GDP – and the scandalous refusal of this Government to map out any path back to solvency.

"The UK has been getting the benefit of the doubt, both in the Government bond market and also the foreign exchange market. This benefit of the doubt is not going to last forever," said the Fund.

France and Italy have been less abject, but they began with higher borrowing needs. Italy's debt is expected to reach the danger level of 120pc next year, according to leaked Treasury documents. France's debt will near 90pc next year if President Nicolas Sarkozy goes ahead with his "Grand Emprunt", a fiscal blitz masquerading as investment.

There was a case for an emergency boost last winter to cushion the blow as global industry crashed. That moment has passed. While I agree with Nomura's Richard Koo that the US, Britain, and Europe risk a deflationary slump along the lines of Japan's Lost Decade (two decades really), I am ever more wary of his calls for Keynesian spending a l'outrance.

Such policies have crippled Japan. A string of make-work stimulus plans - famously building bridges to nowhere in Hokkaido - has ensured that the day of reckoning will be worse, when it comes. The IMF says Japan's gross public debt will reach 240pc of GDP by 2014 - beyond the point of recovery for a nation with a contracting workforce. Sooner or later, Japan's bond market will blow up.

Error One was to permit a bubble in the 1980s. Error Two was to wait a decade before opting for monetary "shock and awe" through quantitative easing.

The US Federal Reserve has moved faster but already seems to think the job is done. "Quantitative tightening" has begun. Its balance sheet has contracted by almost $200bn (£122bn) from the peak. The M2 money supply has stagnated since January. The Fed is talking of "exit strategies".

Is this a replay of mid-2008 when the Fed lost its nerve, bristling over criticism that it had cut rates too low (then 2pc)? Remember what happened. Fed hawks in Dallas, St Louis, and Atlanta talked of rate rises. That had consequences. Markets tightened in anticipation, and arguably triggered the collapse of Lehman Brothers, AIG, Fannie and Freddie that Autumn.

The Fed's doctrine – New Keynesian Synthesis – has let it down time and again in this long saga, and there is scant evidence that Fed officials recognise the fact. As for the European Central Bank, it has let private loan growth contract this summer.

The imperative for the debt-bloated West is to cut spending systematically for year after year, off-setting the deflationary effect with monetary stimulus. This is the only mix that can save us.

My awful fear is that we will do exactly the opposite, incubating yet another crisis this autumn, to which we will respond with yet further spending. This is the road to ruin.

Report by Ambrose Evans-Pritchard - UK Telegraph

Thursday, 23 July 2009

Rise & Fall Of Tiger Nouveau Riche...

Rise and fall of the Tiger nouveau riche...

NOW THAT we’re in an economic war zone, I’ve been thinking about the Economic War. As my family was a direct victim of that conflict, I was reared with a rather one-sided view of the times that went beyond the abstract account in history books...

My great-grandfather retired from a successful medical career and bought land in Meath which he farmed profitably.

He must have done well because my grandfather was educated privately in England and in a literal manifestation of his position in society there was even a family pew in the upstairs gallery of the rural parish church.

All went well until Éamon de Valera, the most pernicious and malign figure in Irish history, in a fit of ideological insanity implemented a set of policies that cut off our country’s only export market – England – for our only product – food – and thus crippled Ireland’s economy and in the process permanently ruined that class of people to which the now poor Dr Carey belonged.

Impoverished and never able to work themselves out of the debt into which de Valera plunged them, the Land Commission finished off what the war started.

Understocked or unoccupied farms were bought by the State, but in reality seized and paid for in worthless bonds. Landless labourers from the west of Ireland were then brought up and planted on the carved up holdings.

The targeting of farms and the division of the holdings was widely believed to be a purely political matter. The bitter joke was told that the only difference between a meeting of the Land Commission and the local Fianna Fáil cumann was a five minute recess.

Our lot lost just about everything except the pew until one Sunday in 1976 when my heavily pregnant mother refused to climb the stairs. A rebellious Cavan woman completed what de Valera began and we moved downstairs 40 years after our class had been kicked downstairs. Revolution comes in many forms.

Well, that’s how the losers tell the story. A grander narrative might argue that through the Economic War, de Valera succeeded where other post-colonial and post-revolutionary countries failed. He ended the claims of the English to the land they once held here, won back the ports which kept us out of the second World War and, without any violence, he redistributed wealth from the rich to the poor. For a conservative man who embedded property rights into the Constitution, he achieved peacefully what many socialists failed to do violently. Uniquely he also ensured that the losers in our Civil War destroyed the winners.

Politically inspired poverty was an unhappy experience for my relations, but that collateral damage aside, the Economic War brought some long-term benefits for Ireland. There were still big farmers and the professional classes, but we ended up with a relatively equal society in which class distinctions were more about manners and attitudes than income levels. A rising tide would have been preferable to pulling out the plug, but perhaps it was the only way. There was still a gap between the masses and the rich – but “rich” was a relative term. It didn’t take that much to stay ahead.

One dividend was the development of an economically humble political class in which Charles Haughey’s ostentation was an anomaly. The modesty in which Bertie Ahern lived is a testament to the fact that even for those with a loose approach to financial matters, in Irish politics visible personal wealth is a toxic asset.

This relative equality was undone during the Tiger years. Through labourers turned builders to the professional classes and laterally the top layer of the public sector, a new class was born. Inequality made a comeback not because the poor got poorer but because the rich got richer and the number of rich people increased enormously. That development wasn’t confined to Ireland but was particularly visible and intense here.

It’s so early in the process that overstating the case is too easy, but reading about one bankruptcy proceeding after another, I can’t help wondering if the nouveau riche upper class is collapsing in the same way that it did in the 1930s.

Statistics will probably show that in the next three or four years Ireland will be a more equal society than it has been for the last 10. Not because the poor are catching up, but because the wealthy are falling back.

The ironies are many and almost amusing. I don’t think de Valera ever claimed to be a socialist yet with great calculation he ruined a wealthy class of people. Bertie Ahern proclaimed his socialism yet led the policies that enabled the creation of the multimillionaire builder class. Of course, by actively encouraging them to overextend, he has also ensured their destruction. Presumably this was a matter of accident rather than design, unless his cunning went far beyond our imaginations.

The survival instinct is strong and you have to assume that although the new rich are taking a beating they’ll find a way to get through this crisis.

When the dust settles they’ll still be ahead, but there’s no doubt the gap will have narrowed. Ireland will be a more equal society but yet again, through the destruction of wealth rather than its creation.

As the Cylons in Battlestar Galactica said, “all of this has happened before and all of this will happen again”. The wheel will turn and a new class will rise and fall. Of course, we’ll still have the poor for whom opportunities are strangled at birth. Maybe next time?

Report by SARAH CAREY - Irish Times

Friday, 17 July 2009

Sniptoeing Through The Tulips...

No Sniptoeing through the tulips for Brian's gang...

Colm McCarthy was laid-back, but serving up his menu to a queasy public is going to strain Ministers’ stomachs...

AFTER YEARS of high living, our political leaders arrived at the Café From Hell yesterday and were forced to confront a menu of the most foul and indigestible choices.

The Taoiseach and his Ministers will have recoiled from the bill of fare, but they also know that if they don’t order and dispatch an ample sufficiency, the consequences for them and the rest of the country could be catastrophic.

There’ll be no Sniptoeing through the tulips for Brian and the gang after the steaming mess of cuts that Colm McCarthy served up to their sophisticated noses.

What’s worse, when they’ve properly perused what’s on offer, they’ll have to dish out McCarthy’s recommendations to an already queasy public.

Will the Government have the stomach to do it? Brian Lenihan – the man who has to send out the plates – appealed for calm after the full list of possible sickeners was disclosed to the media at a private lunchtime sitting in the Department of Finance.

There were no politicians at this briefing; they were probably off stocking up on the Imodium. Only the man who devised the recipes and a number of departmental officials were there.

In keeping with the austere tone of the occasion, the meeting took place in an unlit room where the two pieces of art on the walls depicted a stormy landscape and an assemblage of torn bits of paper.

Colm McCarthy took his audience through the long list of options, designed to shave a potential €5.3 billion off the public service bill. His work is nearly done; he’s put together a package in accordance with the dietary requirements submitted by his Government employers. All that was left for him to do was to explain the components of each dish, and why he chose them.

It’s strong stuff.

But the laid-back and straight- talking McCarthy – a man who clearly takes pride in what he does – was happy to answer all the questions and explain the method behind his work.

He tells it as it is. Take it or leave it. Refreshingly awful.

Never mind the Government. A nation waited apprehensively to discover the outcome of his labours. But here’s an interesting thing – Colm McCarthy is not prepared to send anything out before he has dipped in himself and licked a finger.

The man behind the eye-popping menu from “An Bord Snip Nua” has worked long and hard for months on the project. With his team, they held 52 meetings between January and July, on 45 separate days, not to mention the work in between. These people are highly paid and sought-after experts.

What did they cost us? The total damage, bar some additional courier costs this month, came to just under €38,400.

In Bertie Ahern’s time, a consultant wouldn’t have left the golf course to consider writing a report for that sort of money.

The figures outlined by McCarthy were stark. “I just don’t think there is another alternative other than to push ahead with the fiscal consolidation we have commenced,” he said, in coded language meaning it’s full steam ahead for the slash and burn.

For social welfare recipients and public servants in particular, the conclusions, in the celebrated words of that same Bertie, “are enough to send cold spines up and down your back”. The gory details can be ingested in glorious technicolour in other parts of this newspaper today. But one of the more astonishing aspects of the collection of cuts McCarthy has pinpointed in the public sector is the fact that he could identify so many. Exotic quangos garnishing buffets of quangos, all set up by the people who are now paralysed at the thought of trying to dismantle them.

Their grannies would have told them a snip in time saves nine. But would they listen? Look at them now, and the streets are sure to be heaving with protesters as a result.

McCarthy doesn’t have much time for the Seanad – €25 million to keep them going every year. He’s a bit tepid on TDs too, but hamstrung by the Constitution. As for Cabinet Ministers? Fifteen is probably the right number, but “some of them are run off their feet and for some of them . . .” he paused and smiled. “Eh, it’s not so demanding.”

Judges should do away with their stick-banging, book-fetching tipstaffs and use law interns to help them out. That’ll please the Mrs Judges, as they obsess about starry-eyed young wans, some might even be called Monica, assisting their learned husbands on a daily basis.

Ministerial pensions earned by serving TDs don’t do much for Colm either. “The accelerated accrual arrangements are very expensive,” he remarked.

There are many very worrying suggestions relating to children, carers, pensioners, medical card holders – the list goes on.

But McCarthy put everything on the menu. It’s not his job to choose – that’s up to the Government. But he built in plenty of wriggle room for them, holding out a scenario where they can at least argue that they are sparing the most vulnerable from the worst of the carnage.

“You were involved in this process 20 years ago, how does it compare with this one?” he was asked, bringing to mind the TV clip from last week of a British news channel doing an item rating the funeral of Princess Diana against the funeral of Michael Jackson.

Back in Leinster House, the furniture has been disappearing over the last few days. Wolfe Tone’s bust is missing. So is the Grandfather clock in the hall. It looks like the bailiffs have been in.

Times are hard indeed. And the Opposition is mindful of this. They came out on to the plinth to give early verdicts on the report.

First Fine Gael’s Richard Bruton – The Great Brutini – did a delicate high-wire manoeuvre (while balancing a curate’s egg on his head) between welcoming the harsh measures which must be taken and citing the shocking implications for the less privileged in society.

Labour’s Eamon Gilmore – The Mighty Eamo – also managed a fine balancing act, lambasting the Government for setting up most of the agencies that are costing so much while welcoming many measures suggested in the report.

But he strongly opposed a lot of the recommendations. The report had a feel of “This is Ireland viewed from the snug of Doheny and Nesbitt’s.”

Doheny’s is the hostelry of choice of economists of Colm McCarthy’s ilk.

It’s going be a long summer.

Service complete, McCarthy turned off the gas and declared he wanted to go off and watch some hurling matches, leaving the politicians behind in the Café from Hell to deliberate, cogitate, digest and decide.

They’ll hate every minute.

Report by MIRIAM LORD - Irish Times

Monday, 13 July 2009

It's A Miracle - Recession Religion...

Until we see some real green shoots, praying to a tree stump may be the next best thing...

It's a miracle. It's a sign from above in bad times. It's a tree stump.

It all depends on where you stand, how you view the tree stump in the churchyard in Rathkeale, County Limerick. People from all over the country have been coming to pray at the stump, in which they perceive an image of the Virgin Mary.

Workmen removing old trees from the grounds of the Holy Mary Parish Church, having sawn away the upper part of the tree, noticed that the leftover stump had an unusual shape.

They believed it looked like the Virgin Mary.

The parish priest could have seen this as a great opportunity to revive the faith, but instead, he talked commonsense.

"There's nothing there," he said crisply "It's just a tree. You can't worship a tree."

God help him, he's fighting an uphill battle, as local teenagers line up in the Church in the evenings to say the Rosary in a throwback to their grandparents. Not to mention the cars with out-of-town reg plates lining the streets as people from as far away as Dublin come to be moved by the graceful shape of the Virgin they insist is to be found in the rough side of the standing stump.

This is shaping up to be the new example of Recession Religion.

We had it before. Last time we had a recession, moving statues came into play.
It's a function of bad times, and it's not confined to Catholicism. When times get tough, the tough may get going, but the frightened want to believe that something bigger and better than themselves is taking care of things. The common factor in virtually all claimed apparitions of the Virgin, for example, is that they happened in times of death, disease, despair and poverty.

It's easy to mock the very idea of people getting into their cars to visit a tree stump. It's even easier to laugh at the idea of someone getting two thousand signatures on a petition to preserve the tree stump.

But the fact is that following the best advice and the most rational approaches has landed pensioners in poverty, because they bought bank shares. It has landed homeowners in negative equity. It has landed the nation into ownership of useless land banks. The reasonable world has been turned upside down, and when that happens, it's time to bring on the rain-makers.

That's what primitive societies have always done, when there's a drought. The most expert witch doctor is called in to do a rain dance. Everybody gets involved in the singing and the hand-clapping, to the point of exhaustion. If luck and coincidence happen, rain begins to bucket out of the sky and everybody runs for shelter, happy that they did the right thing. Even if luck doesn't happen and the drought continues, hearts lift for a while because of the collective effort and the shared belief.

We may be the most educated generation in history, but we have not a single brain cell more than our primitive ancestors. And what we have in common with them is an atavistic yearning to believe that we're not alone. That somebody up there cares about us. That the Great Father (as the Native American tribes saw him) is on the job. Or that the Virgin Mary (much preferred, as an apparition figure in Ireland, France and Italy) is going to take care of us.

The Virgin of Rathkeale has already done a lot of people a service. She's given a bit of excitement to a flat summer. She's attracted visitors to a town that's not usually thought of as a tourist attraction. She's fulfilled a gut-need to sing, light candles and get involved in ritual -- and that gut-need is enormously powerful when to look at one's own finances is to face apparently insurmountable problems.

The parish priest is quite right. This has nothing to do with serious religion.

But the local man who pointed out that local people of all religions and ethnic backgrounds were coming out at twilight to pray has a point, too.

"What's wrong with that?" he asked.

Not a lot, it has to be said. Until we see some really green shoots, a tree stump may be the next best thing.

Report by Terry Prone - Evening Herald

Friday, 10 July 2009

Credit Crunch...

Learning from the credit crunch.

NEXT MONTH marks the second anniversary of the “credit crunch”, the global financial crisis which has led to the worst economic downturn Ireland has experienced in a century...

However, these experiences can be put to good use by informing future investment decisions. While the most obvious lesson to be learnt from the crisis is that nothing is certain and anything is possible – who could have predicted that Anglo would be nationalised – there are basic investment fundamentals that got lost during the boom years that should be borne in mind.

1 Diversify, diversify, diversify:

Diversification, whereby you spread your investments across asset types, industries and economies, is a fundamental investment technique aimed at reducing risk and increasing long-term returns.

During the celtic tiger, when Irish property prices soared and bank stocks led the Iseq to boom, investors were loath to spread their investments away from the Irish economy. That has resulted in disaster for many when the bubble burst.

Nowhere are the risks of not diversifying as clear as in Irish pension funds, which experienced some of the most dramatic falls in values among developed economies. Too many so-called balanced funds managed by Irish firms were not only overweight in equities compared to international norms, but were also top heavy in Irish stocks, particularly financials. That led to drops of over 30 per cent in values. The five-year average for managed funds is still in the red and they have not even compensated for inflation over the 10-year period.

Although the situation has improved since the creation of the euro zone – up to 10 years ago it was not unusual for an Irish fund to have 40 per cent invested in domestic equities – most funds were still overweight until the credit crunch, thus exacerbating losses. According to the Mercer Market Insight report, in the first quarter of 2008 the average allocation to equities was 73.4 per cent, of which 14.6 per cent was invested in Irish equities.

With Irish financials accounting for almost half of the Iseq index at the time, there was not enough diversification, either in asset class, industry or economy.

Now however, the collapse in values of Irish shares, combined with a concerted effort to diversify, means that funds are becoming more appropriately balanced. For the first quarter of this year, equities account for only 64 per cent of the average Irish managed fund, while the proportion allocated to fixed-interest investments has increased from 14.8 per cent to 22.2 per cent, with cash accounting for an increased share at 7.3 per cent.

Most dramatic however, is the decline in importance of Irish equities, which now make up just 6.8 per cent of the average fund – but it is still some way away from the 1 per cent allocation recommended by experts. In part, this will be a function of the collapse of the prices of the Irish banks rather than any conscious reallocation.

Another obvious lesson in the need to diversify is illustrated by the collapse in Irish property values. If you had put all your eggs in this basket, you would have seen your investment decline considerably and would also find it very difficult to liquidate your position by selling your properties.

2 Property prices move in two directions

A few years ago, the general feeling in Ireland was that you couldn’t lose money on property and that if you failed to buy at a particular time, you would pay 10-20 per cent more a year later.

Now however, with purchase prices in freefall and rents falling, the risks of investing in property are evident. While in the long term capital appreciation is possible, investors should pay closer attention to yields and ensure their properties generate enough cashflow to weather the recession.

3 Beware of incentivised property investments

During the boom, investors rushed into property purchases at home and abroad on the back of additional incentives, such as tax relief or guaranteed rental income. However, property investments should stand up on their own, in terms of likelihood of capital appreciation and rental potential. Many people were blinded by the incentives and now are stuck with a depreciating asset that will be very difficult to shift.

In Ireland, tax incentivised property investments were first introduced during the 1980s to encourage urban renewal. While purchasers of Section 23 properties were often in a win-win situation – property prices soared and the property investment reduced their tax bill – the sheer volume of houses and apartments built in the last 10 years has led to a glut of properties on the market leading to major declines in value.

At the same time, the tax attractiveness of such schemes has also considerably deteriorated as the amount of rental income looking for a shelter has declined.

While some people may have inadvisably bought Section 23 properties as they didn’t have enough rental income in the first place to warrant such investments, a more serious problem was the purchase of property in remote areas of the country.

There are now large rural housing estates all over the State lying vacant with little possibility of being sold or rented.

Similarly, problems have also beset investors in French sale and leaseback properties, which were developed by the French government to develop in tourist areas. The main advantage of the scheme was a VAT rebate and guaranteed rental income. However, some of the management firms have gone to the wall, bringing rents with them, which means investors are often stuck with properties in difficult to rent areas.

As the guaranteed rental income was often factored into the price, many will have paid over the odds for their investment and will find it very difficult to sell at a satisfactory price. So while incentivised property investments can be beneficial, remember that you should approach a purchase in the same manner as if there was no incentive.

4 Take your profits

If the credit crunch has taught us anything, it is that blue-chip stocks do not necessarily mean risk-free stocks – see the Irish banks, particularly the collapse of Anglo – as a case in point.

Don’t be afraid to cash in your investments once your returns have reached a certain level and move your gains into a less risky asset. While you may miss out on potential gains, such an approach will give you more control and a more stable portfolio.

For example, markets have rebounded significantly over the past few months, including the Irish market, which is up by over 40 per cent since March. However, many analysts suggest that this is not the start of a new bull run but rather a bear market rally, and that markets won’t stabilise until the economy does.

So if you have recently invested in the market rather than adopting a strategy of old, which may have been to buy and hold for the long-term, consider taking your gains now.

Similarly, by setting a stop-loss on your investment, whereby if it falls to a certain level you sell, you will also limit the downside. If you had set a stop-loss on AIB at a fall of 20 per cent value in value, for example, you might have cashed in your investment at about €18 a share – instead of losing far more as is the case at present.

The key to such an approach is to set your limits before you invest and be disciplined to follow through. While it means you end up selling the next Microsoft before its price soared, it also means that you won’t end up in the position so many people are in now whereby their investments have been decimated.

5 Cash is king

It used to be enough to keep a small emergency fund on deposit in case of emergencies, but, with the asset rich now falling bankrupt due to a lack of cashflow, cash should take up a larger chunk of your portfolio.

Traditionally, wealth managers advised that you keep 5-10 per cent of your portfolio in cash, either on deposit or in money market funds, but unless you are certain that you won’t need access to your money in the short term, it may be prudent to increase these levels.

While mega-rich investors like Warren Buffet recommend you avoid cash due to the negative effect of inflation, this crisis has highlighted the illiquidity of property and stocks compared to cash, leaving many smaller investors short on money and unable to sell their properties and shares because of market conditions.

Having a ready supply of cash also means you will be able to invest if opportunities appear – for example the dramatic decline in Irish property prices means that people who are sitting on piles of cash can get excellent value.

6 Dividends aren’t guaranteed

“Do you know the only thing that gives me pleasure? It’s to see my dividends coming in,” US industrialist and philanthropist John D Rockefeller once said. However, in the current environment he wouldn’t have seen much activity as companies cut dividends to conserve cash.

AIB and Bank of Ireland have axed their dividends, leading to hardship for many who depended on dividends as a source of income in retirement. At its height AIB paid a dividend of €0.79 a share, so a shareholder with 10,000 shares would have received €7,900 in 2008 before tax.

While many expressed outrage at the cancellation of the banks’ dividends, companies are under no obligation to continue paying dividends, and just because they were generous in the past does not mean this will always be the case. So if you buy shares to collect dividends, you must be prepared for the consequences if the company stops paying them.

Report FIONA REDDAN - Irish Times

Tuesday, 7 July 2009

House Prices Plummet...

House prices fall 20pc but owners still battling to sell...

THE average asking price of a house in Ireland has plummeted by almost 20pc over the past year, a new survey has revealed.

And asking prices for residential property in Dublin's city centre have been slashed by almost a third, compared to the same period 12 months ago.

A report by property website reveals that asking prices for residential property fell almost 6pc nationwide in the second quarter of the year, a significantly larger drop than in the first three months and in line with falls in late 2008.

Dublin continues to be worst affected by tumbling house prices
-- the average price tag on a home in the capital is 27pc lower than the 2007 peak, while prices for city centre houses have fallen by 34pc.

During April, May and June of this year, homes in the city centre fell a further 11pc, compared to a 4pc drop for houses in Cork, 6pc in Limerick and a fall of just over 2pc for homes in Galway and Waterford cities.

The report confirms a continued sluggishness in the market, with most homes taking more than six months to sell.

The average time on market for residential sales properties is now over seven months, compared with only six weeks during the boom.

However, analysts said buyers were beginning to respond to smaller price tags.

"The large price drops we have seen in Dublin over the past year appear to have had an effect on the level of transactions in the capital," said economist Ronan Lyons.

"Over the past three months, the percentage of properties coming off the market in Dublin has risen steadily, suggesting that if properties are priced correctly, they will sell."

Oliver Gilvarry, head of research at Dolmen Stockbrokers, said the continued decline in the property market reflected the decline in Irish economic conditions.


He added that he believed the worst of the crisis was behind us, although economic growth would remain weak for a number of years.

"The collapse of the housing market will also result in a large number of social issues that must be faced by the Government," Mr Gilvarry said.

In particular, falling house prices have resulted in large numbers of owners facing negative equity. A recent estimate suggested that 340,000 people were in this position.

Mr Gilvarry noted that couples may remain trapped in family-unfriendly apartments because they can't afford to move to larger homes.

"These type of situations highlight the need to prevent residential property bubbles in the future," he said.

According to the report, the average asking price nationally in June was €263,000, similar to levels in February 2005, and almost one-fifth below what the same house would have fetched this time last year.

Outside Dublin, drops in house prices were lowest in Munster, down 15-20pc on 2007 peak levels, while Leinster, Connacht and Ulster homes have experienced a 25pc drop since their 2007 peak

Report by Grainne Cunningham - Irish Independent

Monday, 6 July 2009

Crazy To Sell...

Crazy to sell in a buyer's market?

If you are considering selling property but are afraid it might be neither nor viable nor sensible at this time, you may be pleasantly surprised to discover that there is a market out there – you just have to know your audience and what appeals to them...

If you have a property that you are keen to sell, you may be debating the wisdom of doing so at a time when prices are dipping and so many others are holding back, but though it may feel like a lonely and risky path to take now, you would not be the only person in the country doing it.

"We're seeing a mix of people selling at the moment," says Gillian Flanagan of Felicity Fox Auctioneers in Dublin. "We have a lot of people trading up, particularly young families with children who have outgrown the space they're in, people who need to move because their employment has changed location and people from different countries who are moving home. At the same time, a lot of people who want to sell can't afford to, but every circumstance is different."

Taking a close look at the current typical buyer demographic is a good barometer for any potential seller trying to gauge their chances of selling a property in the current market.

"A lot of them are living in rented accommodation, have been so for quite some time, are fed up renting and want to live in their own homes" says Ronan O'Hara, director of Savills in Ireland. "Some people sold when the market was strong and have been sitting on the fence ever since. Others are coming back from abroad, seeing for the first time in ten years that there is a bit of value in Ireland. There are also people who know they are going to take a big hit when they sell their homes, but they are getting that back on their purchase as they are typically trading up and the higher the price on a property before, the bigger the fall now."

First-time buyers are said to be seizing the chance finally to buy an affordable property.

"First-time buyers don't have to wait for a property to sell before they buy, and they also don't have to pay stamp duty, which is a big plus," points out O'Hara.

"We're seeing a little more activity now," agrees Gillian Flanagan. "Interest rates are low and so it's a good time to lock into a fixed-rate mortgage. There's more value out there now, whereas first-time buyers would have been priced out of the market a few years ago. People can't keep their lives on hold forever. I was talking to a couple who are getting married and they've been renting for the past two-and-a-half years; now they just want to buy."

With specific types of buyers emerging, it follows that certain types of properties will be more popular than others.

"It has always been the way in a down market that people will go back to basics and look for the normal, traditional sort of houses; three or four bedrooms, semi detached or detached – nothing weird or wonderful," says O'Hara. "Flashy isn't flavour of the month because you have to pay a premium for that."

"The older period properties in the city centre with a back garden are selling well," says Flanagan. "A lot of period houses in Dublin 4 and Dublin 6 that were expecting well over €1 million a while ago can now be had for €700,00 or €800,000. They are still selling, as they are limited in supply, and they also have good original features."

Unfortunately there are few words of comfort or optimism for those who have an apartment to sell.

"There is an enormous amount of brand new apartments sitting empty, so second-hand apartments are almost impossible to shift," admits O'Hara. "If it was bought in the last few years you would be better off to hold onto it."

"There are a lot of people who would have had to buy apartments in the past because they couldn't afford what they wanted, but are now well-placed to buy something that's well located in the city centre" says Flanagan.

Three crucial factors prevail when it comes to your property's attractiveness to prospective buyers: location, price and presentation.

"There is nothing that you can do about the location," says Fiona McLoughlin of website, "but what you can do is look at price and presentation. If you're not getting any calls about your property then it may be worth looking at the price. If people are coming to view the house but not bidding then the price isn't the main issue, but the presentation."

When you're pricing your property, selling the house yourself, rather than through an agent, is an avenue that you might like to consider to slice a chunk off the asking price.

"Sixty-five percent of people who sell from our website are people who started out with an auctioneer but failed to sell their property and are now looking to try something new," explains McLoughlin. "Private sellers can factor the profit that would have gone to auctioneers into the price of the property and use that to make it more attractively-priced than competitors' property, immediately dropping thousands of euro from the asking price."

Put time and effort into making your property attractive and appealing and you'll be positioning it well to stand out against the crowd. Interior designer Neville Knott, colour consultant with Crown Paints, advises playing it safe when it comes to décor.

"Neutralise everything to appeal to the masses, and tone down anything that is too individual. Go pale with off-whites and creams to keep the house looking fresh and make it feel bigger. It's important to paint a house before you sell it – it will help to get rid of all those smells that a house retains. It gives a sense of cleanliness – if it smells clean and it looks clean then it must be clean. When prospective buyers come to look at your house they're not actually looking at your house, they're looking at their home of the future. It's a psychological barrier that people need to cross. They need to go into a house and feel as though they will be able to say 'this is my home'."

Interior designer Danielle MacInnes of Fuse recommends some hard work and just a little cash to spruce up your property.

"It's a cliché, but the biggest thing that you can do is to declutter," she says. "In the kitchen, clear off all of your countertops, but leave a few necessities. If you have a wooden kitchen paint it white, as wood absorbs light. Remove some of the furniture, if possible, to make rooms look as spacious as possible, but don't go overboard. If bedlinen is looking old and grubby replace it with inexpensive plain white duvet covers and always make sure that they are ironed and that the beds look neat."

The key to a successful sale is knowing your audience, and post-boom Irish property buyers are a clued-in bunch who won't be taken for fools – especially on price.

"If a prospective buyer sees something to be overpriced then they will tell you, and they will usually give you a lecture about why it is way overpriced," says Ronan O'Hara. "Unless they feel that a property is priced reasonably, buyers won't even look at a property – they're extremely well educated now."

"Before, people were prepared to compromise, but now they're not" warns Gillian Flanagan. "They want everything on their wish list and they'll keep looking until they find it. Sometimes there is just nothing you can do other than alter your price to reflect the features your house doesn't have – if it has a north-facing garden or if there is no parking, for example."

Report by Eimear Nic an Bhaird - Sunday Tribune

Sunday, 5 July 2009

Government On Holiday As Economy Crashes...

TDs 'cut and run' as 3,000 jobs a week lost

Action on Bord Snip to be delayed as public sector gears for the fight...

The silent destruction of the real economy will continue virtually unchecked for a further six months, during which time TDs will enjoy a three-month summer holiday and the Government will prepare to re-run the Lisbon Treaty referendum.

In that six months, a further 100,000 jobs will be lost, bringing to an unprecedented 500,000 the number of private sector workers now out of work -- a staggering 90 per cent increase in just a single year of an unrelenting economic crisis.

The report of the Expenditure Review Committee, also known as An Bord Snip Nua, has now been submitted in draft form to various Government departments.

It makes recommendations in relation to cuts of up to €5bn in current spending to eliminate a deficit of €15bn, of which €6bn relates to bailing out the banks.

The report will be officially presented to Finance Minister Brian Lenihan on Wednesday, but will not go to Government for a further week, or possibly a fortnight.

The report may be published before the end of summer. However, a Government decision on what action it will take on foot of the report's recommendations will not be implemented for six months, during which time private sector job losses are expected to soar past half a million.

Without publicly admitting it, the Government has embarked on a strategy of allowing up to 3,000 private sector job losses a week -- with its attendant devastating social consequences -- as part of a long-term aspiration to increase competitiveness and return public finances to a sustainable position.

Last Friday, Taoiseach Brian Cowen effectively admitted that Government policy was to accept surging unemployment when he said: "There is no avoiding the difficult adjustment that needs to take place in the labour market. Costs have to fall and the level of employment in certain sectors -- in particular the construction sector -- was not sustainable."

The Expenditure Review Committee has examined the current expenditure programmes in each department and has made recommendations for "reducing public sector numbers".

It has also made recommendations on the "re-allocation of staffing or expenditure resources between public service organisations, as well as further rationalisation of State agencies".

It is expected the report will be published before the second Lisbon referendum in the autumn, despite the objection of some in Cabinet, notably Foreign Affairs Minister Micheal Martin, who fears that the proposals might cause protest to such an extent that the referendum could be defeated a second time.

Currently 350,000 people are employed in the public sector at a cost of over €20bn a year; this translates into a million votes when family members are factored in.

As such, the public sector represents the largest single lobby group in the country, wielding what many observers believe to have a disproportionate influence over decisions taken by the Government, which is itself largely dependent on the civil service, in particular, to function.

To meet its stated objective, the elimination of a €15bn deficit, the committee, which also comprises high-ranking civil servants, is thought to have made far-reaching recommendations which, if implemented, are certain to be met with resistance within the public sector.

The chairman of the committee, UCD economist Colm McCarthy, is known to be a strong critic of the operation of sections of the public sector, describing it six years ago as a "parallel universe, suspended in space somewhere".

Publication of the report will reveal whether he holds the same view having examined the public sector for nine months, in the company of senior civil servants either on or advising his committee.

Mr McCarthy is on record as stating his belief that a "peculiar feature" of the public pay review process is that no notice is taken of pay relativities with other countries, and the resulting anomalies. He feels there is "no justification" in many senior public officials now receiving pay well in excess of their counterparts in other jurisdictions.

He has said that there is "something redolent of Soviet-era central planning about Irish procedures for determining public pay." Pay rates and conditions, he believes, are highly centralised. "Bolshevik-style central bodies determine the minutiae of pay and conditions for 350,000 employees nationwide."

"If the private sector were run this way, it would seize up." he says. "No reliance is placed on the normal workings of supply and demand in the market -- the ultimate arbiter of pay in the [largely non-union] private sector.

"There is no reason, though, why a less Bolshevised system of pay determination in the public services could not be introduced. State agencies, including Government depts, local authorities, schools and hospitals could be allocated annual budgets and left free to negotiate their own pay deals -- reflecting supply and demand conditions in their own regions and in the specialised labour markets in which they operate."

Mr McCarthy also believes it is time to encourage greater mobility between the two sectors, a process which would help to ensure that public and private pay stayed in line, without the benefit of benchmarking bodies and the like.

Mr McCarthy believes an increase in competitiveness in the public sector could be achieved by trimming back on what he has called an "explosion in headcount".

The Government's first priority is to reduce the deficit back below three per cent of GDP by 2013, striking a balance between what it calls "sustaining economic activity" in the short-term and making a credible start on the "difficult adjustment required".

The Taoiseach has said: "We have taken some difficult decisions on both public spending and taxation, and more difficult choices lie ahead over the next few years."

The second part of the Government strategy is to restore stability to the banking and financial systems: the third, to restore competitiveness and return to sustainable economic growth. The Government says the final part of its strategy is to maximise employment in the short-term and help those who lose their jobs.

Last Friday, the Taoiseach said: "This week's Live Register figures show the scale of the challenge, and the best pathway to sustained job creation and economic growth is to regain competitive advantage in the market place by doing whatever is necessary to retain and regain market share in an environment of depleted demand."

Mr Cowen believes that creating job opportunities for the unemployed will only happen when the country's finances have stabilised, the banking system has become more sound and sustainable growth has been achieved "based on a competitive and innovative economy".

He said: "Despite what some people claim, there is no short-cut or easy solution. The adjustment is, and will continue to be, difficult. The Government is working with the social partners to try to manage that adjustment... but we will not try to fool people into believing that difficult decisions can be avoided."

Report by JODY CORCORAN - Sunday Independent