Tuesday, 9 August 2011

A Bankrupt Ireland...

Economist reveals appalling vista of bankrupt and beleaguered Republic...

THE EURO ZONE debt crisis will be solved “eventually” as it is to Germany’s benefit to remain in the euro, UCD economist Morgan Kelly has said.

Delivering the Hubert Butler Lecture at the Kilkenny Arts Festival on Saturday, Kelly predicted very large European Central Bank loans to Ireland, Spain and Italy. Even if the Republic were to receive favourable terms, “deep problems in Ireland remain”, he added.

In an hour-long address, Kelly also predicted that Irish debt will approach €250 billion by 2015, €50 billion more than Coalition estimates, and has said there was “no way we can repay that”.

He also warned that the losses in the Irish banks would be much greater than predicted, reaching €100 billion rather than the €60 billion estimated.

The academic, who has been praised widely for forecasting the depth of the recession, has recently warned of an impending mortgage default crisis and on Saturday described “ghost estates, empty retail parks in Longford and land banks around Carrick on Shannon” as “more or less worthless”.

The mortgages of particular worry were interest only mortgages given out to “lawyers, solicitors and estate agents at the peak of the bubble”, he added.

Estimating 10,000 such loans were advanced on properties worth €1.1 million each, Kelly said “that is €11 billion in loans to these high rollers most of whom couldn’t buy you a cup of coffee now”.

He said that while prices have fallen by 50 per cent, with “almost no transactions taking place at that price” and with unsold properties starting to accumulate, we are far from the bottom of the market.

He said the next problem the banks will face would be organised opposition to repayment with the possibility of some Michael Davitt-type figure emerging, or a risk of “paramilitary intervention”.

With Irish banks unable to be sold, Kelly said they will become loss-making, gold-plated, semi-States.

But he warned that with politically appointed bank boards able to decide who gets relief on their mortgage and who gets their mortgage written off, “this opens up vistas of patronage that Charlie Haughey wouldn’t even have been able to dream of”.


Discussing the State’s economic and political history, Kelly said that while Irish incomes had been above the western European average at the time of independence, by the mid-1980s they had fallen to half of that – a “dismal performance only maintained by mass emigration”.

By the 1990s, however, he argued that income levels had risen to the European average and unemployment was disappearing, an overnight miracle that could be traced back to free secondary education, the expansion of universities and increased competitiveness.

Describing the boom of the 1990s as an extraordinarily beneficial period for Irish society, he said the only group not to benefit were politicians. “In the past, how they operated was direct patronage for jobs and being moved up local authority housing lists” but the problem for politicians in the 1990s was people suddenly had jobs.

“Before it was, ‘oh, I might be able to get your son a job in the post office’. That didn’t matter now because he had a job in Dell.”


Kelly said that as competitiveness slowed in the late 1990s a decline to ordinary European growth levels of 2 to 3 per cent a year might have been expected. Instead, he said, “we continued to grow by 6 to 8 per cent a year”, driven by property.

He said that while “usually you get about 5 per cent of your national income from building houses, by the mid-2000s this had risen to 15 per cent,” in the Republic.

Noting that by 2007, we were building half as many houses as Britain which is 15 times our size, he said the building boom was caused by rising house prices with the average Dublin home costing, 15 times the average industrial wage.

“Bank lending more than tripled in about six years and everything that happened flowed from that.”

With lending incentivised by bonuses, “as the banks couldn’t find enough people to borrow from them”, they found a new market in property developers, a move he said that was pioneered by Anglo Irish with AIB and Bank of Ireland foolishly following suit.

Describing the culture of development as a big boon for Irish politicians, he said planning laws were simply a means of ensuring baksheesh [bribes] for local politicians, where the rule which applied was: “You can build anything, anywhere so long as you pay the right amount to the right people.”


With a decline in the numbers taking out mortgages by 2006, Kelly said the banks had started to run into problems a lot earlier than people think.

Noting that while bank economists predicting a soft landing were “pushed out by their employers to tell you people to keep buying houses, stuff wasn’t getting sold so developers had started to run into trouble”.

Assigning responsibility for the property boom, he said “it was the senior management in the Irish banks; in particular AIB and Bank of Ireland”.

“They could have gone to the government and said, ‘Anglo are out of control, you need to stop them.’ Instead, they imitated Anglo and tried to poach developers from Anglo.”


Kelly described the bank guarantee that followed as “Cowen and Lenihan’s idea of shock and awe” which, designed to frighten speculators, instead turned out to be “shocking and awful”.

He said the real mistake, however, was not establishing the guarantee, but in sticking with it. Describing governor of the Central Bank Patrick Honohan as the government’s “chief economic adviser”, he said “he could have walked away from it . . . but he said no, the losses were manageable”.

Referring to the subsequent EU-IMF bailout, Kelly said while Honohan and the government might have expected easy terms for being “good kids”, instead the European Union made an example of us.

He said Ireland was now a sort of “EU protectorate”.


Listing excessive personal debt, unemployment – particularly among young men – the closure of indigenous businesses and the international economy, Kelly said the only solution was to have a better-educated workforce than everybody else.

But he warned that the low ranking of Irish students on maths skills against their Organisation for Economic Co-operation and Development counterparts was not a statistical blip.

Referring to his own teaching experience, the economics professor said “we have dumbed-down our education system and unfortunately the rest of the world hasn’t”.

In conclusion, he recalled the economic crises in the 1950s and 1980s: “It seems that every 30 years we go and destroy ourselves.”

The Republic’s problem was “not so much a tolerance of corruption as an understanding of human frailty . . . a reluctance to cast the first stone”.

He said the alternative is that we toughen up. “We have to be better educated . . . intolerant of corruption and fighting all the time to stay one step ahead. The choice is ours and we are going to be facing it soon.”

Report by JOANNE HUNT - Irish Times

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