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Is Cowen ready to throw golden circle to the wolves

Issued : Friday 3 July, 2009

Not everything the IMF says or does merits its traditional bogeyman reputation among progressive politicians.

Its present Director Strauss Khan is one of the leading promoters of an international stimulus package to reverse the present recession.

On the other hand the hard medicine inspectors continue to ply their traditional trade with abandon in individual countries.

Like Janus in the ancient Greek myth, the IMF shows two faces to the world, one for stimulus and nutrition , one for medicine and the draining of blood.

I have been reading an interesting article by the IMF chief economist for 2007-2008 a Mr Simon Johnson. He is now Professor of Economics at the world famous MIT.

He has some very relevant things to say about his former organisation’s approach to countries in the kind of difficulties we are now experiencing.

One lesson you learn quickly, he says, when working at the IMF is that no one is ever very happy to see you.

A visit from the IMF is the signal of failure when circumstances are dire and all else has failed.

I want to quote one really vital thing that is most relevant to Ireland now:

The real concern of the fund’s senior staff, and the biggest obstacle to recovery, is almost invariably the politics of countries in crisis.
Typically, these 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.

I think that is rather a perfect description of Ireland’s plight in 2009.

Johnson goes on :

These elites reckon—correctly, in most cases—that their political connections will allow them to push onto the government any substantial problems that arise.

That, Deputies, is the core of what we are debating, the efforts of a politically well connected golden circle to push our government to take their losses on board. That is what the ill-fated September 30th guarantee was all about. That is the heart of the NAMA policy. And that is why this country is at the edge of an abyss.

I go back to Mr. Johnson because he has been through this experience elsewhere and we can draw lessons.

Squeezing the golden circle, he writes, is seldom the strategy of choice among governments. Quite the contrary: at the outset of the crisis, those in the golden circle are usually among the first to get extra help from the government, such as the assumption of private debt obligations by the government.

Meanwhile, needing to squeeze someone, governments look first to ordinary working people—and it seems this Minister has set his eyes on Ireland’s children as the first victims of this strategy by cutting family allowances.
It is at this point where Mr Johnson is at his most revealing:
Listen to this : How does the IMF judge a Government’s resolve ?
The IMF staff looks into the eyes of the minister of finance and decides whether the government is really serious . The Fund will give a country a loan but first it wants to make sure the Prime Minister is ready, willing, and able to be tough on some of his friends.
If he is not ready to throw former pals to the wolves, the IMF can wait. And when he is ready, the IMF is happy to make helpful suggestions—particularly with regard to wresting control of the banking system from the hands of the most incompetent and avaricious “entrepreneurs.”

There is this really valuable lesson to be learned from IMF people like Mr Johnson because it allows us to test the genuine resolve of Ministers.

From long years of experience, the IMF staff knows its program will succeed—stabilizing the economy and enabling growth—only if at least some of the golden circle who did so much to create the underlying problems take a hit.
So I wonder how an IMF team would judge the capacity of this set of Ministers to face down their old cronies .
Would a serious IMF team look Brian Cowen and Brian Lenihan in the eye and see there men with the resolve and the determination to show their former friends the door.
I think we all know the answer to that.

It might have to come to that eventually but first this Government has a different mindset that the plain people of Ireland are to be the first in the firing line, the children of Ireland are to be the target of cuts in welfare, in education, in health care before any effort is made to face down the elite that has been the favoured recipient of public largesse, of tax breaks, of easy tax exile status, of Cinderella rules, of public contracts.

NAMA

I read the banking section of this report on Ireland with particular care. That €35 billion figure for bank losses should make any citizen pause and wonder if this Government has taken leave of its senses.

The IMF’s advice on banks is well worth careful study. Right from day one I put the
valuation of impaired loans front and centre of the debate on NAMA. Still today months later we are none the wiser about Government policy on this matter. One Minister went on Questions and Answers and said, as an article of faith, that developers would be pursued to the ends of the earth by NAMA to recover money loaned to them. What a joke. This Government is encumbered with so much baggage from its cosy dealings with developers that it could not chase anyone even to the end of the Leinster House plinth.

There is a justifiable fear and there is an echo of it in the IMF document that the so called haircut, the value discount, to be applied to impaired loans will be so minimal that these assets will be acquired at way over the odds. At present the stock market trade in bank shares reflect this belief and brokers are talking up the idea that the haircut will be no more than 20% in general. Now I ask who will decide? I don’t doubt that NTMA staff are on the taxpayers’ side on this. After all it is they who have to go into the market to negotiate the bonds to be used to finance this operation. They know the score about the interest rates that will have to be paid on these bonds, as much as €50 to 60 billions worth, maybe even more. The €3 billion already transferred this week to Anglo had to be borrowed and the NTMA people know that was not done easily.

The IMF are clear that the discount must be set at a level that is a genuine protection for the taxpayer even if the result triggers further State equity in the banks involved even to the point of full nationalization, rather the exact point my Party has made time and again in this House. I hope Minister Lenihan reads that section of the IMF document with care and with an open mind.

The various formulas he has used to date such as European guidelines about a wholly mythical long term economic value offer no protection against over valuation.

Is the interest of the taxpayer the primary consideration or is it not? For all the patriotic rhetoric we get from Minister Lenihan, we all know a deeper truth. The purpose of public policy at this point in time is to offer a rescue package to the FF Golden Circle.

As long as this mindset prevails this Government is unsafe at any speed.