There was a vicious joke doing the rounds in Ireland a few months ago at the height of the banking crisis which went as follows: "What is the difference between Iceland and Ireland?" Answer: "One letter and six months." There was a great deal of truth in this and the economic fallout in Ireland is seriously hurting the real economy with unemployment and emigration both rising, while there are even proposals on the table from the wonderfully named 'An Bord Snip' translated as 'The Snip Board' to cut the minimum wage and welfare.
This has led to considerable unrest and it was only a few months ago that enraged pensioners stormed the Irish parliament resulting in a u turn by the government on pensioners' medical cards. Farmers are also on the march as are the trade unions and others. Recently the closure of cancer services at a hospital in Sligo, in the north west of the Republic and the removal of those services to Galway, which is 86 miles away, resulted in two Fianna Fail members of the parliament for the area revolting and withdrawing from the party whip. This has left the government, which includes the Greens, dependent on the vote of the Speaker, and there is much talk of a general election by the end of the year.
But a new challenge now faces the Irish government, and particularly the Green Party which is a member of it. The government plans to pour billions of taxpayers' money into a toxic bank. The plan is called NAMA (National Assets Management Agency) which will take on all the bad debts of the Irish banks.
BACKGROUND
The current crisis has arisen out of a property bubble that was deliberately created by a tight alliance of Fianna Fail, the bankers and property speculators.
Banks were allowed to borrow funds from international money markets to push loans at customers who were desperate for housing. The government turned a blind eye while the banks ran their business on the equivalent of a low fuel reserve. As a result, Irish banks maintained the lowest ratio of underlying capital to the outstanding loans in the EU.
They were motivated by sheer greed as each of the top three banks – AIB, Bank of Ireland and Anglo-Irish - aimed at securing profits of over €1 billion a year. The more they hyped up the property market, the more profit they gained.
Just seventy directors controlled the Irish banking system but of these a mere twenty acted as executive directors and these were the main decision makers. They paid themselves outrageous salaries and, even after they left office in disgrace, they continued to enjoy pensions that were well beyond the reach of average workers. Brian Goggin, the former director of Bank of Ireland, for example, now lives on a pension of €626,000 a year – the equivalent of the wage of 17 average workers.
Table 2:
Salary Package and Annual Pension Entitlements of Directors of Three Main Banks.
Name of Director Total Salary Package Annual Pension Bank
Brian Goggin 3,998,000,000 626,000 Bank of Ireland
David Drumm 3,274,000,000 258,000 Anglo Irish
Eugene Sheehy 2,105,000,000 526,000 AIB
Colm Doherty 1,663,000,000 289,000 AIB
John O Donovan 1,581,000,000 202,000 Bank of Ireland
William McAteer 1,427,000 94,000 (DC) Anglo Irish
Declan Quilligan 1,366,000,000 147,000 Anglo Irish
Source: Bank of Ireland Reports and Accounts 2007; Anglo Irish Bank Reports and Accounts 2007; Allied Irish Bank Reports and Accounts 2008
The extraordinary feature of the NAMA scheme is that the very institutions which helped to cause the economic crash are being rescued.
But the government does nothing for those suffering the most from this crash – the poor, the unemployed or mortgage holders on negative equity.
Even before NAMA is introduced, the government has already poured billions into the banks in three main moves.
On September 30th 2008 the government announced a scheme to guarantee all the loans taken out by Irish banks. This guarantee covered a total of €485 billion and was the equivalent of 2.5 times the size of the Irish economy. This special insurance scheme was given to the banks at a reduced rate and so involved a subsidy of an estimated €425 million.
Since December 2008, the government has injected €4 billion into Anglo-Irish Bank to prop it up and to prevent foreign investors calling in loans as the company is barely functioning.
A further €7 billion has been injected into Allied Irish Bank and Bank of Ireland.
In other words, even before NAMA has been introduced the government has already spent more than €11 billion propping up failed banks.
THE NAMA SCHEME
The plan drawn up by Bacon involves the transfer of mainly toxic loans to the tune of €90 billion to a state-run assets management agency, NAMA. It has already been acknowledged by the Minister of Finance that half of these loans are not ‘performing’. This means that the builders or speculators who took them out have ceased making the necessary re-payments. But the banks have not closed in on them. At first sight this may appear unusual. If you were a small borrower, for example, the banks would haul you before the court to demand their money back. But if you are a large Irish builder, the banks ‘roll over’ your loan – because they know that they can eventually hand over responsibility to NAMA to collect it. NAMA will take over these bad loans at a discount rate - most likely at a 25 per cent discount. If a builder was loaned €500 million by a bank, the state will buy that loan from the bank for €375 million and then chase up the builder for the assets if it is not paid. In all, the Irish state will pay out around €67.5 billion to take over toxic loans that were at one time supposed to be worth €90 billion.
But the reality is that they are worth nothing like this, since the property market has collapsed. The case of the Zoe Group which is owned by Liam Carroll illustrates this. Zoe owes the banks more than €1 billion and recently went to the court to seek some protection form its creditors. In evidence it stated that, if it was forced to sell off all its properties, the banks would still be left with a shortfall of €900 million. In other words, as Irish Times journalist John McManus put it, ‘based on this write-down value, properties on which it has borrowed €1.1 billion from eight banks would fetch €275 million if they went on sale this morning. That means a 75 percent writedown for the banks.’ If this example was typical, the assets backing the €90 billion in loans are only worth a quarter of their value - or €22.5 billion. But the Irish state will agree to pay €67 billion for these loans. It might not be as bad as that – but it also might because no one knows the exact repercussions. This government is taking on huge debts in a desperate gamble to save the banks.
WHY THIS MADNESS?
The government advances a number of reasons to justify this madness. The first is that we need banks to get credit and we just have to pay the price to fix them. In other words, the Irish state has to pump vast sums into the banks, in the hope that they eventually start giving out loans again and get the economy moving. There are however a number of problems with this argument: Most obviously, why should Irish society have to pay so much— just to get access to credit? Are there not cheaper ways of ensuring that this vital function is carried out? There is also no guarantee that even if billions are pumped into the banks, that banks will provide sufficient credit for society. They are more likely to adopt an extremely cautious approach – and will certainly not change their policy of depriving the poorest sections of society of credit. The other argument advanced by the government is that in the ‘long run’ the values of the underlying assets will improve – and so the state will incur no loss. But there is absolutely no evidence that this will occur – it is purely a hope.
Many of the Greens are opposed to this mad scheme and four constituency parties have called for a special Green Party convention to debate it. However, party leader John Gormley, is convinced that they will not gain the two thirds majority of votes needed to force the parliamentary party to vote against it. In today's Irish Times Gormley is quoted as saying:
“We have already held two special seminars on Nama for interested members, one of which was attended by the interim head of Nama, Brendan McDonagh” .
Mr Gormley said it was understandable that party members would like an input into such important legislation and a meeting of officers this weekend would see how that could be facilitated.
“You can crunch the numbers any way you like but Nama works out as the most preferable solution.
“We have already briefed our members on the issue and I am confident their views can be accommodated,” he said.
“Our strong commitment to party dialogue was evident in our recent convention on the EU Lisbon Treaty, which was endorsed by a two-thirds majority of our members,” he said.
Many political commentators think that if the Greens now vote against NAMA, it will be the rock on which the coalition founders, leading to a general election. I sincerely hope that for the sake of ordinary Irish workers and taxpayers that the Irish Greens vote against this. The convention is due to take place before September 16th if one more constituency party calls for it.
Meanwhile in Iceland the banking situation is also causing uproar and could lead to the fall of the government again.
Over 3,000 Icelanders demonstrated outside parliament, the Althing, on Thursday (13 August) against a proposal to compensate clients of the online Icesave bank for money lost when it went bust last year.
Icesave was Landsbanki's online savings unit in the UK and the Netherlands and attracted over 320,000 British and Dutch savers with high interest rates.
When Landsbanki was nationalised in October 2008, the Icesave deposits were lost but only domestic clients' savings were guaranteed, creating anger in the UK and the Netherlands.
In June, the Icelandic government agreed with London and The Hague that Iceland would be provided with loans to compensate the foreign Icesave account holders to a certain extent.
But there is still one major problem. A large majority of the people of Iceland do not agree to the package for British and Dutch savers, who took advantage of the higher interest rates in Icesave before the bank collapsed.
To pay the bill Iceland needs to take a loan of almost €4 billion euro from the British and Dutch governments – close to €13,300 per Icelander.
One speaker at Thursday's protest, author Einar Gudmundsson, said Icelanders were being punished for the deeds of a private company. "A crime we as a nation had nothing to do with," he said, according to Reuters.
Iceland's prime minister Johanna Sigurdardottir, writes in an article published in the Financial Times that her government plans a 30 percent cut in public spending over the next three years to meet the obligations.
It is "a heavy burden for our population of 300,000" people, she adds in the article.
"Icelanders ..... are angry at having to take on the burden of compensation for the Icesave savings accounts of Landsbanki – a failed, privately owned, commercial bank, which attracted hundreds of thousands of UK and Dutch savers with high interest rates. The amount to be shouldered by Iceland is huge – about 50 percent of our gross domestic product."
The centre-right opposition party, The Independence Party has threatened to bring down the left-leaning government over the issue.
If they are succesful, Iceland's EU application as well as loans from the IMF needed to restore the country's economy could run into trouble.
The Indepence Party is traditionally opposed to EU membership, while the promise of IMF loans is linked to the Icesave deal.
Public support for membership of the EU has fallen over the summer with a majority of 48.5 percent opposed to entering the EU against 34.7 percent in favour, the latest poll published on 5 August showed.
This could be the biggest crisis yet for the Left Green/Social Democrat coalition government,whom many Icelanders believed would save them from the worst which big business and a neo-liberal economic modle had meted out to them. It looks like there could be more trouble ahead in the small country. Both countries lived way beyond their means but the same speculators and spivs who ran both economies and their cronies in government are being allowed to walk away with their ill gotten gains while the poor and the most vulnerable are being expected to bear the cost. It really is a shocking state of affairs and needs radical addressing.
