Only for Irish government spending cuts, it would be a Greek tragedy

If you were reading your world news last week you will know that the European Union leaders came to the rescue of Greece. The Greek economy is in crisis, it has a massive budget deficit, the country is at the limit of its borrowing ability, and without EU backing it would go belly-up.

Sound familiar? There but for the Grace of God and the spending cuts goes Ireland.

Taoiseach (Prime Minister) Brian Cowen said as much last week after the EU summit. Greece needs to follow Ireland's example in getting its state spending under control. They have to cut their deficit.

Tell that to the militant unions in Greece, which make the Irish trade unions look like sheep. They brought Greece to a standstill last week, shutting the airports and filling the streets with protests. They want higher taxes on the rich and even more state borrowing to protect their lifestyle, even though the country can't pay its way.

The reason the EU leaders intervened is because the big Greek economic mess is destabilizing the euro. The euro has sunk in value against the dollar in recent weeks, and the international money markets are becoming more nervous not just about Greece but about some of the weaker countries in Europe, including us.

In official European circles, the group of problem countries in question is called the PIGS -- Portugal, Ireland, Greece and Spain. And make no mistake about it, even though the sense of crisis in the Irish economy has abated in the media here in recent weeks, the fact is we are just as deep in the smelly stuff as we have been for the past two years.

The soft guarantee given by the EU leaders to the markets last week about Greece has given the Greeks some time and breathing space to get their act together. But there is a lot more belt-tightening to come over the next few years -- for them and for us -- before we will all come through this recession.

So Cowen's suggestion last week that Greece should follow the Irish example caused a few sniggers here. I'm not sure following Ireland's example is what anyone should do, given how we messed up our economy and our current snail's pace towards putting it right.

There is still no real sense of urgency here, either in government circles or in the media. For the past week, for example, Irish TV news and newspapers have been saturated with coverage of the resignation of George Lee from Fine Gael, the main opposition party.

Lee is a former RTE economics correspondent with a big profile who gave up his job to join Fine Gael and help save the country. Or so he thought.

Some of the senior Fine Gael people, while they were glad to have him as a vote getter, did not share his high opinion of himself as the national Messiah. He felt ignored and, in what looked like a fit of pique, he resigned from the party and the Dail (Parliament) last week after less than a year in politics.

This storm in a tea cup was interpreted as a failure on the part of Fine Gael leader Enda Kenny, and it became a huge national story which went on for days. The truth is that Lee's resignation is of little national significance.

What was of real significance here last week was the revelation that a senior International Monetary Fund (IMF) official, an American economics expert called Steven Seelig, had told the Irish Minister for Finance Brian Lenihan in April last year that the IMF did not believe that NAMA would result in a significant increase in bank lending in Ireland.

This was a real bombshell. You will remember that the National Asset Management Agency (NAMA) was set up by the government here to buy the bad property loans from the Irish banks to stop them going bust. It was going to cost billions, and it was justified on the basis that if we bought the bad loans and also put enough billions in new capital into the banks (so far we have put in ****11 billion) this would get the banks lending to businesses again and get the Irish economy going again.

Now we learn that the IMF representative who came to Dublin last year told the government that, while NAMA might save the Irish banks, the IMF did not believe it would get credit flowing here again. This revelation, which emerged under a Freedom of Information request, was really shocking, implying that the government's strategy was wrong then and is still wrong.

Even before this revelation, a lot of people here were getting very disenchanted with NAMA. It's way behind schedule -- the billions in loans from the top 10 developers were due to be transferred out of the banks in December but that is still a month or two away, at least.

NAMA is operational and the valuation work is proceeding. But there is still a lot of uncertainty about the value of the property involved in the loans and the discount that is to be applied when NAMA takes them on. The original estimate by Lenihan of an average 30% discount now seems to be too optimistic, and the valuations coming in from the experts are much lower than 70% of the original price.

This has major implications for Irish taxpayer. On the one hand it increases the chances that when NAMA eventually sells the properties back into the market in 10 or more years, it may not make a loss.

On the other hand, it means that there will be such a big hole in the books of the banks right now that the government will have to pump billions more in to recapitalize them. Already the Irish taxpayer has underwritten ****11 billion in funding and another ***15 or even ****20 billion might be needed to keep the banks here afloat.

Last week the ratings agency Standard & Poors estimated that the cost of Ireland's bailout would be as high as ***25 billion, and other estimates have been even higher. What this means is that the government will effectively be nationalizing the banks, which is something it has always said it wanted to avoid.

But it seems likely that the amount of capital that will have to be put into the big two banks here, AIB and Bank of Ireland, will mean that the taxpayer will end up owning as much as 80% of both banks.

Welcome to Communist Ireland, you may think. And it's true that nationalizing the Irish banks, however reluctantly, would cause all kinds of problems in the future. But as far as I'm concerned, it's still better that than paying way too much for the property assets coming into NAMA.

I don't mind being a taxpayer shareholder in the Irish banks. Maybe I will get some money out of it in the long run, or maybe my kids will. And maybe they will also get something back when NAMA sells all those properties after holding on to them for years.

There is another big plus in nationalizing our banks, one that could even please the IMF, an organization that is not a big fan of state ownership. If the government is in ultimate control, it can dictate bank policy and make lending to businesses happen again. Everybody wins!

Except the existing shareholders, of course. But then they have already lost almost everything.

It's a tough world these days, especially for the PIGS.

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