Shane Ross

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Reckless Decisions, Encouraged By Tax Breaks

Posted on: October 3rd, 2008 1 Comment

For several months, the specific problem we face has been out of the control of the Minister and Government. The stock markets, hedge funds and those unpopular people, the clever analysts of the world, spotted something pretty rotten in Ireland. The Irish banking shares, have been among the worst performers in the world this year and last year. Those who analyse stocks of this type decided Irish banks were vastly overvalued and did so at a time when we consistently boasted that we did not have the problems being experienced in global markets. Bank chief executive after bank chief executive congratulated themselves and claimed Ireland did not have a sub-prime problem. In doing so, they implied that the Irish banking system was somehow unique and safe and they had been clever enough not to get involved in sub-prime lending unlike the foolish, dreadful Americans, Brits and others. That, they said, was where they problem lay.

The world did not believe their claims because those who deal in shares and examine banks’ balance sheets and behaviour decided the problem here was worse than in the United States, United Kingdom, Europe and elsewhere. They shorted Irish bank stocks – a perfectly legitimate course of action – because they disliked the Irish story and the manner in which Irish banks were behaving and lending much more than they disliked the activities of many of the American banks.

To take a specific case, we witnessed an unprecedented series of events on the Irish stock market yesterday, Monday 29th. We must remember that selling short was not allowed yesterday, which means one cannot blame short sellers or hedge funds. International holders of funds dumped Irish stock at any price, despite their lack of exposure to the sub-prime problem. The reason for this course of action was that they, like the Minister for Finance, anticipated a catastrophe in the Irish banking system because they knew we could not continue to survive and were as vulnerable as anyone else. The Minister’s response was to take the action he took today.

After the collapse of talks in Congress yesterday, God knows what would have happened this morning, not just on the stock market. We should not give a fiddler’s about shareholders. As the people who take the risk, they are the first on the firing line. If they lose their money, it is tough, but they were not the only people who were set to respond. It is abundantly clear that a big run on the banks as well as a major movement of funds would have taken place this morning. People had already moved substantial funds – we are unable to learn what are the numbers because they are not being released – from the ordinary, supposedly secure banks to An Post, while those with larger sums of money had invested them in short-dated Government stocks, which are a safe haven. They moved funds to places which were guaranteed. There was a complete loss of confidence among consumers and international holders of Irish stocks and the entire investment community decided there was something wrong with Irish banks.

What was wrong with Irish banks that the measure taken by the Government this morning became necessary? The Government side is making a great virtue of the decision and arguing it will be a template for the world. I heard on radio this morning that other countries will copy Ireland by taking the courageous step of guaranteeing all deposits. We are taking this action because we have been forced to do so. Without it, there would have been a run on one or other bank. The decision to guarantee deposits of up to €100,000 was not considered sufficient because those with deposits in excess of that threshold – the big punters – had decided to move their funds around. For this reason, we responded with the measure announced this morning.

The whole world is exposed to the paralysis in the banking community in terms of interbank lending. Although the problem is common to all banks, no other banking system has lost the confidence of the international community to the same extent as the Irish banking system. What gave rise to this loss of confidence? What people saw and did not like was that we had gone bananas lending to property developers. They saw the Irish property market tanking, the banks having taken an extraordinarily high proportion of their security from property and refusing, initially at least, to regard these as bad debts. Those who analyse bank balance sheets decided that if the banks wanted to tell big porkies about their bad debt provision and adjust their profits accordingly, they would sell their shares and make money. No one believed the banks, as became clear two weeks ago when Bank of Ireland announced it was halving its dividend for the year. While I am open to correction, I understand this has not happened since 1929 and never happened to an Irish bank. The announcement was made because the bank was worried about its capital base and it had to preserve its capital. The signal went out to the world that the banks in Ireland had behaved irresponsibly and were beginning to pay the price.

What is important here is not to lay blame but to solve the problem today and ensure the Bill presented tonight includes guarantees that the Financial Regulator is put in irons and the Government insists he enforces much stricter lending criteria. The regulator, as I stated on the Order of Business, should be fired because he allowed these developments to take place. The business of lending to a small number of property developers —–and huge tax breaks being given to them is insane and unique to Ireland. The Financial Regulator knew this was happening, that certain banks were lending huge sums of money to a small number of people who were taking reckless decisions, encouraged by a Government that was looking after them with tax breaks.