ANALYSIS:After a rocky start, the new Government still has a chance to boost domestic confidence and reassure international markets, writes DAN O'BRIEN
IT KEEPS getting worse: ever more bank losses; ever more debt shackled to taxpayers; and ever more questions raised about prospects of recovery. How can the banks’ bleeding be staunched and when will the bad news stop? After yet another milestone week in the banking fiasco these questions will be on the minds of many people.
Although some economists still speak with great certainty of what will happen in the future, if the crisis here and elsewhere has taught anything it is that economists are not good at predicting the future. At best, one can sketch a range of possible outcomes, from a worst- to a best-case scenario.
A worst-case scenario involves stress testing Ireland Inc. The biggest domestic danger is a banking panic. Because banks are to the economy what the cardiovascular system is to the human body, the financial system must keep functioning if economic activity is not to arrest.
Short of the euro disintegrating (still a low-probability event) the European Central Bank will continue to infuse cash through the Irish banking system.
This guarantees that the banks will remain open and the economy’s basic payments infrastructure will continue to function. The deceleration in the rate of deposit withdrawals from the Irish banking system in recent months, as new figures revealed this week, suggests that nervous depositors may be acknowledging this.
With no further domestic banking shocks and the absence of other domestic risks which could make things suddenly and materially more difficult, a worst-case scenario for the economy (barring the euro crisis going critical) is for no real recovery to take hold.
Japan’s failure to take off again after its economy crash-landed two decades ago shows that when big property bubbles burst and financial systems are badly damaged, the after-effects can prove extremely long lasting.
In the absence of any new external shock, Japan’s fate would appear to be a worst-case scenario for Ireland’s economy, with many years of little improvement in conditions on the ground, more austerity and an open-ended, sovereignty limiting bailout remaining in place in order to prevent default.
Giving reason for hope is the fact that Ireland’s unusually large trade and investment links to the rest of the world make it very different from Japan. And the benefits of those links continue to be seen in the thriving internationally focused sectors of the economy which are succeeding in export markets.
Better still, a survey released yesterday showed the manufacturing sector – which is mostly export-focused – created more jobs in March than it has in 10 years. If the survey proves truly reflective of the sector, the long-hoped-for but elusive jobs-rich, export-led recovery might be starting.
More widely, the restoration of confidence will be important if the economy is to end up closer to the best-case scenario end of the spectrum of possible outcomes.
For everybody involved in economic activity – consumers, home buyers, small businesses and investors – confidence is central.
Confidence in the creditworthiness of the State is crucial, and now more than ever as the banking system has been largely nationalised.
Without more certainty about economic recovery, and given the sheer size of the State’s debts, it is difficult to see confidence being restored in the medium term without some significant EU-level intervention. Such an intervention may happen as part of a bigger euro-area bargain, but it is far from certain.
The absence of international confidence in Ireland was to be seen yesterday. Despite the rigour of the stress tests, revealed after financial markets closed on Thursday afternoon, the reaction of those same markets yesterday was mixed at best. Most disappointingly, there was no improvement in the markets assessment of the risk of sovereign default.
Domestically, confidence could be boosted by renewed faith in government. If the new Coalition can give people a sense that it is proactively dealing with problems and reacting competently to unforeseen events, one source of confidence-killing uncertainty would be lessened.
Three and a half weeks into its first 100 days in office, the Coalition has not conducted a well-choreographed rolling out of initiatives and announcements. Thursday’s bank stress tests were an example.
While the tests were designed and supervised by the bailout troika, it is disappointing that the new administration did not put its own stamp on them by following through on pre-election commitments to root out senior bank managers and directors still in place from the bubble era.
The new Government had plenty of time in opposition to prepare for changes. There would have been few signals that might have demonstrated more clearly how things have changed than removing individuals who should never have been appointed in the first place and who have no business holding senior positions now.
Nobody fits that description more than the chief executive of Bank of Ireland. Richie Boucher bafflingly remains in place this weekend.
By failing to act on its pre-election pledges the new Government will face accusations that it is as passive as its predecessor in ensuring that taxpayers’ money is being used to bailout the system and not bankers. This will do little to instil confidence.
Nor will the consequences of ill-judged campaign rhetoric. Michael Noonan and Co are facing accusations that they have caved in to pressure from the bailout troika. Talk of laying down the law to “Frankfurt” always had a mouse-that-roared quality to it and has predictably led to the appearance of weakness and impotence now that countless more red cents have been poured into the banks. This can only undermine confidence in the Coalition’s ability to do better than its predecessor.
The new Government has not hit the ground running, but appears still to be finding its feet. If they fall behind events, they may struggle ever to catch up, so fast is the pace of events moving.
A best-case scenario for the economy involves the Government getting ahead of the curve, a partial European-isation of the costs of bailing out the banks and the materialisation of jobs growth in the export sector. If all three things were to happen, greater domestic confidence would surely follow.
This would encourage people to save less and spend more – high levels of savings are the only immediately available pent-up source of demand in the domestic economy now.
This, in turn, would generate more growth and hence more tax revenues, reassuring international investors that the State will be capable of repaying them.
The prospect of returning to the markets to borrow would then improve, making the exiting of the EU-IMF bailout more likely. Such a virtuous cycle remains possible.