Month: December 2008

So said that Sunday Independent yesterday. It went on:

Mr Lenihan effectively admitted that the Government only became aware of the “decline” two months after he had been appointed Finance Minister. He said: “When we first saw the sign of decline in July …”

While I think the headline does not entirely warrant the content, it does say something about the Government’s inability to see what was coming down the line. Indeed their actions thus far point to a make-it-up-as-you-go-along strategy. But in fairness, they were not the only ones.

July was the month that the ESRI declared we were facing a recssion, which perhaps crystalised the minds of some politicians and commentators. The ESRI estimates looked low-ball to me at the time – and I said as much. I added:

As for the recent rise in unemployment, things are going to get much worse I fear. Unemployment hit 5.7% according to CSO figures released last week. That means 217,400 people out of work.

Now double it. 10% in 2009, or half a million people out of work. How bad would that be for the economy? Fundamentals are sound my ass.

That was July 6. Glass half full left a comment completely disagreeing with my forecast (which I based on what I was hearing anecdotally, and on what I would call a common sense view of the construction sector, the unwinding property bubble, banks that had overextended themselves, and the estimated 6 months that is given for the collapse of Bear Stearns to filter through the international monetary system). Some of the commentators over on Property Pin helped to crystalise my own views. Glass half full said:

I fear the litany of media reports about recession may have got to you. I don’t agree with your 10% unemployment forecast for next year. It is my view, and it’s only a hunch of course, that unemployment could reach 6% next year but no higher than that. As for the cycle we are in now, well yes troughs happen every so often and we are entering one now.

Yes, shoot the messenger. Could reach 6%? We’ve passed that already. However only this weekend, 6 months later, does Mr Lenihan come round to the more pessimistic view:

Unemployment is likely to rise to 10 per cent of the workforce next year, Brian Lenihan, the Minister for Finance, has warned, meaning it will have doubled in the space of a year.

I am no economic genius. Nor am I a fortune teller. But it was clear a very long time ago that the economy, and specifically employment, were in very serious trouble. Just the number of workers involved in the construction sector was reason enough to predict 10% unemployment in 2009. And Lenihan, it appears, struggled to see that coming.

Update: South reminded my of the Economist’s own forecasts about the Irish economy, published back in November 2007.

* The fiscal position is deteriorating, and this will place constraints on government expenditure. A deficit is expected by 2009.
* GDP growth is expected to slow sharply in 2008, mainly because of the ongoing slowdown in the previously overheated property sector. However, there is a real risk of recession.
* Unemployment is expected to rise over the outlook period, as the construction sector shrinks,

Why does it feel like Ireland will be seeking IMF assistance within 12 months? This strikes me as a very cack-handed response…

The Government have just put a statement up on the Department of Finance website. Serious stuff.

The Government has today decided on an approach to the recapitalisation of credit institutions. The Government’s objective is to ensure the long-term sustainability of the banking sector in Ireland and to underpin its contribution through the availability of credit to individuals and businesses in the real economy. This initiative will help to foster and encourage the flow of funds to the economy, and limit the impact of financial market difficulties on businesses and individuals.

The Government noted that recapitalisation is recognised by the European Commission as one of the key measures that may be used by Member States to preserve stability and proper functioning of financial markets, and that it believes that in current market conditions even fundamentally sound banks may require additional capital to respond to widespread market perception that higher capital ratios are appropriate for the sector internationally.

The Government decision followed the Minister for Finance’s statement of 28 November 2008 which confirmed the State’s willingness to supplement and encourage private investment in the recapitalisation of credit institutions in Ireland with State participation.

In that context, the Government has decided either through the National Pensions Reserve Fund or otherwise and subject to terms and conditions, to support, alongside existing shareholders and private investors, a recapitalisation programme for credit institutions in Ireland of up to €10 billion.

The State’s investment may take the form of preference shares and/or ordinary shares and the State may where appropriate participate on an underwriting basis. In principle existing shareholders will be expected to have the right to subscribe for new capital on the same terms as the Government.

A key principle in the operation of such a fund will be to secure the interests of the taxpayers through an appropriate return on, and appropriate terms for, the investment.

The next step in this process will be for the Minister for Finance to initiate detailed engagement with the credit institutions themselves in respect of specific proposals.

In order to safeguard fully the interests of the taxpayer, State investment will be assessed on a case-by-case basis in an objective and non-discriminatory manner, having regard to the systemic importance of the institution, the importance of maintaining the stability of the financial system in the State, and the most effective and economical use of resources available to the State and each credit institution’s particular requirement for capital. Any State investment will be undertaken in line with best practice in the EU and elsewhere and consistent with EU State aid rules and in particular the recent European Commission communication on recapitalisation.

Recapitalised institutions may be required to comply with such requirements as to transparency and commercial conduct as the Minister sees fit.

The National Pensions Reserve Fund Act, 2000 will be amended, as necessary.

Discussions with the relevant credit institutions are ongoing, and the institutions continue to progress proposals for private investment. Institutions are being asked to submit their proposals by early January.

The Government guarantee Scheme remains in place.

You really have to wonder what on earth the people in the Department of Finance are thinking. This strikes me as extremely poorly thought out, and smacks of interference from the banks themselves. Brian Lenihan should resign. (I call for these things an awful lot, don’t I?) And does anyone remember the only recent announcements that Irish banks were well capitalised? Or that PwC report that said they were well capitalised?

RTE link.