Gavin's Blog

This will be a long post, so stay with me if you can:

Countries are in a desperate economic situation for one simple reason—the powerful elites within them overreached in good times and took too many risks. Emerging-market governments and their private-sector allies commonly form a tight-knit—and, most of the time, genteel—oligarchy, running the country rather like a profit-seeking company in which they are the controlling shareholders. When a country like Indonesia or South Korea or Ireland grows, so do the ambitions of its captains of industry. As masters of their mini-universe, these people make some investments that clearly benefit the broader economy, but they also start making bigger and riskier bets. They reckon—correctly, in most cases—that their political connections will allow them to push onto the government any substantial problems that arise.

In Ireland, for instance, the private sector is now in serious trouble because, over the past seven years or so, it borrowed at least $130 billion from banks and investors on the assumption that the country’s property sector could support a permanent increase in consumption throughout the economy. As Ireland’s oligarchs spent this capital, acquiring other companies and embarking on ambitious investment plans that generated jobs, their importance to the political elite increased. Growing political support meant better access to lucrative contracts, tax breaks, and subsidies. And foreign investors could not have been more pleased; all other things being equal, they prefer to lend money to people who have the implicit backing of their national governments, even if that backing gives off the faint whiff of corruption.

But inevitably, oligarchs get carried away; they waste money and build massive business empires on a mountain of debt. Local banks, sometimes pressured by the government, become too willing to extend credit to the elite and to those who depend on them. Overborrowing always ends badly, whether for an individual, a company, or a country. Sooner or later, credit conditions become tighter and no one will lend you money on anything close to affordable terms.

The downward spiral that follows is remarkably steep. Enormous companies teeter on the brink of default, and the local banks that have lent to them collapse. Yesterday’s “public-private partnerships” are relabeled “crony capitalism.” With credit unavailable, economic paralysis ensues, and conditions just get worse and worse. The government is forced to draw down its foreign-currency reserves to pay for imports, service debt, and cover private losses. But these reserves will eventually run out. If the country cannot right itself before that happens, it will default on its sovereign debt and become an economic pariah. The government, in its race to stop the bleeding, will typically need to wipe out some of the national champions—now hemorrhaging cash—and usually restructure a banking system that’s gone badly out of balance. It will, in other words, need to squeeze at least some of its oligarchs.

Squeezing the oligarchs, though, is seldom the strategy of choice among governments. Quite the contrary: at the outset of the crisis, the oligarchs are usually among the first to get extra help from the government, such as preferential access to foreign currency, or maybe a nice tax break, or—here’s a classic Dublin bailout technique—the assumption of private debt obligations by the government. Under duress, generosity toward old friends takes many innovative forms. Meanwhile, needing to squeeze someone, most emerging-market governments look first to ordinary working folk—at least until the riots grow too large.

Eventually, as the oligarchs in Cowen’s Ireland now realize, some within the elite have to lose out before recovery can begin. It’s a game of musical chairs: there just isn’t enough cash to take care of everyone, and the government cannot afford to take over private-sector debt completely.

First, an admission. The above is a quote from Simon Johnson’s excellent essay in the Atlantic in May of this year, The Quiet Coup. But I have modified it ever so slightly. I simply replaced the word ‘Russia’ with ‘Ireland’, and other slight edits to take into account energy versus property. You can see the original here.

Why the modification? Well it demonstrates at exactly the level Ireland is at.

We are a two-bit emerging market economy, dominated by political and business elites. I think it’s an open and shut case. Every word Johnson intended for Russia accurately applies to Ireland. We are almost the definition of a banana republic.

The only difference is in the last paragraph. “Some within the elite have to lose out before recovery can begin.” No. In Ireland, no oligarch property developer will lose out if the government can help it – thanks to the €90 billion NAMA, what will be the largest property ‘firm’ in the world.

The only people who will end up paying are you and me, our children, and our grandchildren. If people think our political leaders are acting out of the interest of the taxpayer they are dead wrong. Our political leaders are acting only in the interests of themselves and their paymaster developers.

Let us examine some of Johnson’s indicators that we are an emerging market, dominated by oligarchs. We could make a checklist:

* “Emerging-market governments and their private-sector allies commonly form a tight-knit—and, most of the time, genteel—oligarchy, running the country rather like a profit-seeking company in which they are the controlling shareholders.”
Check.

* “As masters of their mini-universe, these people make some investments that clearly benefit the broader economy, but they also start making bigger and riskier bets. They reckon—correctly, in most cases—that their political connections will allow them to push onto the government any substantial problems that arise.”
Check.

* “As Ireland’s oligarchs spent this capital, acquiring other companies and embarking on ambitious investment plans that generated jobs, their importance to the political elite increased.”
Check.

* “Growing political support meant better access to lucrative contracts, tax breaks, and subsidies.”
Check.

* “Oligarchs get carried away; they waste money and build massive business empires on a mountain of debt.” Check.

* “Local banks, sometimes pressured by the government, become too willing to extend credit to the elite and to those who depend on them.”
Check.

* “Overborrowing always ends badly, whether for an individual, a company, or a country. Sooner or later, credit conditions become tighter and no one will lend you money on anything close to affordable terms.”
Check.

* “Enormous companies teeter on the brink of default, and the local banks that have lent to them collapse.”
Check.

* “If the country cannot right itself before that happens, it will default on its sovereign debt and become an economic pariah.”
Check.

* “The government, in its race to stop the bleeding, will typically need to wipe out some of the national champions—now hemorrhaging cash—and usually restructure a banking system that’s gone badly out of balance. It will, in other words, need to squeeze at least some of its oligarchs.”
Check.

* “Squeezing the oligarchs, though, is seldom the strategy of choice among governments.”
Check.

* “At the outset of the crisis, the oligarchs are usually among the first to get extra help from the government, such as preferential access to foreign currency, or maybe a nice tax break, or—here’s a classic Dublin bailout technique—the assumption of private debt obligations by the government“.
Check. NAMA.

* “Under duress, generosity toward old friends takes many innovative forms. Meanwhile, needing to squeeze someone, most emerging-market governments look first to ordinary working folk—at least until the riots grow too large.”
Check, minus the riots. Yet.

* “Some within the elite have to lose out before recovery can begin. It’s a game of musical chairs: there just isn’t enough cash to take care of everyone, and the government cannot afford to take over private-sector debt completely.”
Except in Ireland, where we are trying to assume €90bn in private sector debt. Liam Carroll as the elite one losing out? Check.

And so we return to the original question posed: What is wrong with Ireland? My answer is this: We believe we are something we are not.

We believe we have a more mature regulatory environment, a mature, transparent and accountable political system, we believe the media holds our government to account, and we believe that our elected leaders will act in the best interests of citizens. Even the media believes it holds the government to account.

These assumptions are all wrong.

When you examine, even to a minor degree, any aspect of Irish society, you will invariably find a distinct lack of all the above factors. For example captured regulators: The Financial Regulator, the Irish Stock Exchange, the ODCE, ComReg, the Financial Ombudsman.

Whenever and wherever corruption is discovered, nothing happens. Whenever and wherever whistles are blown, nothing happens. We live in a country where the very idea of accountability, or that our politicians are our servants, simply does not exist.

As a nation state, we are a failure. As a democracy, we have failed. As a country we are bankrupt, both morally and financially. We are the emerging market, banana republic of the European Union. Our political system is broken. It is beyond redemption.

Some will reply that I am a socialist, or other such attacks. I am actually right of centre economically, I just recognise what is standing in front of me for what it is. An almost incalculable political and financial mess – generations are being saddled with the debts of the oligarchs, and the taxpayer is being lied to by its own government.

The only hope is this: That the people, in whose hands all power rests, will realise the appalling vista of a broken Ireland – a country in need of radical political reform – and demand that it is changed.

If it is not, everything that has happened, will continue to happen, and we, the citizens, will continue to pay the price.

Please fell free to Digg this :-)

Related links:
Michael Taft reckons NAMA won’t be so bad. Maybe.
Constanin Gurdgiev is less optimistic about NAMA.
Karl Whelan has lots of posts on NAMA