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Irish are still stressed out

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It has been a stressful week here in Ireland, and no one was feeling it more than the former minister Michael Lowry. 

Back in the mid-1990s he was the minister for communications when Ireland's second national cell phone license was awarded to a company led by the businessman Denis O'Brien. 

O'Brien subsequently sold the business and made over €200 million, which became the basis for the billion dollar fortune he has made from phone businesses in the meantime.  But there were allegations right from the beginning that Lowry had influenced the selection process which gave the license to O'Brien's company rather than other applicants. 

A Tribunal of Inquiry was set up by the Dail (Parliament) to examine corrupt payments to politicians, and after running for an incredible 14 years, making millionaires out of the lawyers involved and racking up costs which are likely to exceed €100 million, it's second and final report was published last week.   (Its first report was the one which exposed Charlie Haughey.)

This second report by the Moriarty Tribunal (Michael Moriarty is the judge who ran it) is probably the most costly 2,000-page document ever written.  And to no one's surprise, it found that the awarding of the cell phone license had been corrupt. 

It described Lowry's actions at the time as “disgraceful” and detailed various covert ways it believed O'Brien had paid him off.  The report said that O'Brien gave Lowry the equivalent of around $1 million, either by way of direct payment or facilitated loans, in the years after he was given the cell phone license. 

Of course both Lowry and O'Brien flatly denied the findings, pointing out that the report is “just the opinion of one man,” Judge Moriarty.  They said it was all circumstantial and supposition and that there is no hard evidence of anything illegal.  They challenged the state to bring them to court, to put up or shut up. 
The government has sent the report to the Gardai (police) and the Director of Public Prosecutions to see if there is enough hard evidence in it to bring a case. 

But that is doubtful. There's a big difference between Moriarty deciding that he knows something and the police being able to prove it in court. 

Much more worrying for Lowry is the announcement on Tuesday that the Criminal Assets Bureau is going to examine the case.  This is the body that has the power to take assets from someone who cannot explain how they financed them. 

It has been used against major drug dealers and other criminal bosses here.  But there is no reason why it can't be used against anyone else, including a politician.

This week there is a two-day debate in the Dail about the Moriarty Tribunal report and its implications.  All of which is highly embarrassing for Fine Gael because Lowry used to be a big wheel in the party and played a leading role in raising funds for the party to pay off its large debt at the time.  That's what the opposition will want to focus on, not Lowry's murky personal finances.

And it's important that this matter is pursued to the bitter end, partly because foreign companies bidding for licenses and contracts here (there were several foreign consortia in for the cell phone license that O'Brien got) must be reassured that our processes are fair and independent.

But the real tragedy about all this is that it is taking attention away from where the spotlight should be this week, the publication of the all-important stress tests of the Irish banks.

On Thursday, the results of the latest stress tests of the Irish banking system by teams of outside experts will be given to the new government.  Finally, after weeks of waiting, the awful truth about our banks will be revealed.  

As if we didn't know already.  We all know it will be bad. The only thing we don't know is exactly how very bad the very bad news is going to be.   

There is already an extra €10 billion in fresh capital funding agreed for our banks under the EU/IMF deal for Ireland, which included €35 billion for the banks.  The last government delayed putting it into the banks as the election approached, deciding they might as well let the new government take the blame for putting even more money into our zombie banks. 

The new government has continued that delay, insisting that they need the stress test reports to tell them just how deep the black hole is before they fling any more money down it. 

Rumors here in the past few weeks have suggested that the extra amount needed to recapitalize our banks to the minimum level now required by EU rules -- on top of all that has been put in already -- could be at least double the €10 billion which had been planned.  Some people are predicting that even €20 billion won't be enough. 

The government is saying that no matter how bad it turns out to be, knowing is better than being in the dark.  At least we will then be able to see where the bottom is and we can draw a line under the situation. If we can quantify the full extent of the problem, we can start to tackle it.  

Certainly the government is right that the present uncertainty is killing us.  It has meant that the Irish banks have been unable to borrow funds at any price on the international money markets for months now, and have had to depend on the Irish Central Bank and the European Central Bank to keep them going.
Nobody else will trust them because they lied about the size of the black hole to the last government, and they are still minimizing the problem rather than facing up to it. 

So yes, we do need to know the truth.  But the government's view that these stress test reports will at last uncover the very bottom of the black hole may be a bit optimistic. 

The truth is that no one knows where the bottom is, and that includes the very experienced international experts who have been trawling through the books of the Irish banks for weeks now (and charging a fortune in fees for doing so). 

The problem is that stress testing banks is not an exact science.  It all depends on models used and the assumptions the testers make. 

As we all know, a huge part of the bad debt problem in the Irish banks is the result of the property crash. In the last week I have heard expert estimates of how much property values here have fallen that have varied between 35% and 60%. 

Even the experts can't agree on it, and to be fair to them it's very difficult because every house, every site, every half built office block or housing estate is different. 

Another problem is trying to assess whether we have hit the bottom, and again the experts don't agree.  So have we another 10% or 15% to fall, or are prices about to stabilize?

My own gut instinct is that we still have some way to go down because prices of ordinary houses are still far higher than someone on the average pay level can cope with on a 20-year mortgage. 

And, of course, these calculations and considerations are critical if you are trying to stress test Irish banks which are up to their necks in property. Every percentage point one way or the other costs them billions.  
Stress testing the banks means trying to predict the future of the property market.  And we all know how difficult that is.  

And it's not just about the big developers who borrowed hundreds of millions.  Many people are out of work here now, and many of them bought property during the boom at inflated prices when they were earning a lot of money. 

Now their pay has been cut or they have lost their jobs and they can't make their mortgage payments. Tens of thousands of bank customers are expected to default on their mortgage payments in the coming year.  And again getting a handle on this is difficult. 

The banks are also dependent on the wider economy, not just on a property recovery.  The dramatic slowdown in many sectors of the Irish economy has implications for repayments of business loans. There are all kinds of loans out there apart from the billions tied up in property.  

Putting all this together in a stress test model and hoping the right answer comes out the other end has to be problematic.  Also worrying is the fact that this is not the first time the Irish banks have been stress tested, and the experts were wrong before. 

But at least the figures we will get this week for the black hole in the banks will be an indication of the perceived size of the problem we face.  Then it's going to get really interesting.  

Already this week the state has said it is taking over another Irish bank, Irish Life and Permanent, which includes the biggest life assurance company in the country.  It has to inject massive funds to stop it collapsing, which means taking it into state ownership. 

And don't forget the state already owns Anglo Irish and Irish Nationwide, and it has a big majority stake in Allied Irish Banks.  In fact the only one it doesn't own is Bank of Ireland, but it has one third of that and rising. 

The Irish banks are basket cases and the entire system could end up in state ownership.  This is the huge problem the government faces, on top of the budget deficit problem. 

There is no sign of any give by the EU on the proposal for burden sharing which the new government has been pushing hard.  But something has to give if Ireland is to avoid a sovereign default.

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