LAST week, just when we thought things were so bad they could not possibly get any worse, they did exactly that. All week the Irish stock market sank like a stone. On Friday alone, €3 billion was wiped off the value of shares. That was 6% of the Irish market gone in a single day.
There is now an all-enveloping air of gloom here. Recession — and the unemployment and high emigration that will come with it — is staring us in the face, and no one knows what to do to avoid it.
The new Taoiseach (Prime Minister) Brian Cowen and his new Minister for Finance Brian Lenihan both look shell shocked and clueless. But then that’s hardly surprising since both of them are lawyers rather than business graduates or economists.
They parrot what their officials are telling them and they don’t sound very convincing. In fact they don’t even sound convinced themselves of what they are saying.
The government line goes something like this — Ireland is a small player in the global economy and it is the international downturn that is to blame rather than anything we have done here. We have to tighten our belts and grin and bear it until things pick up again on the world market.
Last week the government began the belt-tightening process when it announced a range of cuts in state spending. Faced with a dramatic fall-off in tax revenue, it chopped half a billion euro off planned spending this year. And there are clear indications that this is only the beginning and that the government is likely to be back again later in the year with a fresh round of cuts.
These cuts are necessary to reduce our bloated state spending so that we can balance the government’s books without going over the 3% borrowing guideline that all European Union countries have agreed to observe.
The truth is, of course, that what is happening here now is not only the result of the global slowdown. The Irish economy has not been well managed in recent years, and we have blown much of the wealth earned in the Celtic Tiger years on state spending that somehow did not really improve state services.
But the really big mistake we made, apart from splurging so much on unproductive state spending, was allowing the Irish economy to become so dependent on the construction sector. We watched as all our low skill manufacturing jobs went overseas.
Then we watched as our high tech jobs went as well, to call centers and computer plants in India and elsewhere. We watched and the government did nothing about it because we were in the middle of a building boom that filled the state coffers with tax money.
A big chunk of our economy and of government tax revenue depended on this unsustainable building boom in recent years. Everyone knew that it needed to be cooled down, that we were building so much so fast that gross over-supply had to be the end result.
That is what has now happened, with a huge inventory of unsold homes and commercial buildings and a market that has collapsed as a result.
The government — and particularly Fianna Fail — carries a lot of the responsibility for this mess. There’s no point in Cowen looking depressed and perplexed about our imploding economy because he and his party played a major role in creating the mess.
Before the last election, when they should have been trying to curb government spending and cool the property market, they primed it yet again to prolong the boom and win a return to power.
To be fair to the government, however, they were not the only culprits. Step forward the senior Irish bankers and take a bow, boys.
The two biggest Irish banks, Bank of Ireland (BoI) and Allied Irish Bank (AIB), poured money into the construction boom as fast as the developers could pour concrete. The result is that around 60% of AIB’s loan book is now property related and the figure for BoI is an incredible 70%. Which explains why, as the property market crashes, bank shares are now worth about a third of their value a year or two ago.
Even as the boom peaked, the banks continued to fling money at the developers, as well as home buyers. Huge amounts of money were loaned to developers to buy expensive sites and build apartment blocks, trophy homes and vast complexes of ordinary houses in commuter land. And now that the market has stalled and the developers have no cash flow, the banks are panicking.
They have stopped lending to developers, which has intensified the downturn in construction because some builders are now unable to finish the projects they are working on. They are forcing developers with unsold homes to cut prices to pay back loans, even if this means selling below cost. They are threatening those who don’t cooperate with liquidation.
It’s all designed to minimize the bad debts on their books and they don’t care what the consequences are for anyone else. Nice guys, those bankers.
Their attitude to buyers has been just as irresponsible. Over the years of the boom and even up to a few months ago, all the old rules that used to apply went out the window.
I remember when I bought my first house, you had to have 10% of the price in cash as a deposit and the maximum loan you could get was two and a half times your annual earnings. If you were married, they added on half of your partner’s annual earnings.
The maximum mortgage you could get then was 90% (from one building society) and most banks and loan companies only gave 85%. You had to produce letters from your employer proving your earnings, and you also had to show where the 10% cash had come from, to prove you had not borrowed it somewhere else.
All this was designed to prove that you would be able to pay back the house loan, even if interest rates went up. The banks were very careful. It was a pain, but it worked and it protected both the banks and the home buyers.
As I said, all that changed over the past decade. During the boom, if you were single you could borrow four or five times your annual earnings. If you were with someone, your partner’s earnings were taken into account whether you were married or not, and you could borrow a multiple of both salaries.
If you were still short, you could borrow even more by claiming that one room would be rented out. And of course you could now get a 100% mortgage, which meant that you did not even have to show that you could save a 10% deposit. Basically, they threw money at you.
The banks also deluged existing homeowners with unasked for offers of loans, to buy the SUV, the boat, the cottage down the country and so on. So there was a lot of re-mortgaging as owners borrowed more and more as the value of their homes increased during the property boom.
Now, as the economy slows, a lot of these people are finding it hard to make repayments. In particular, young people who bought homes in the last few years as the boom crested are now finding that they are in negative equity ... their home is worth less than they owe, even if they could sell it. And prices are continuing to fall.
The banks have suddenly got cautious as well. Instead of giving out 100% loans, they have now gone back to 90% loans, and many of them are doing their own valuations, routinely discounting the price of the house by 5% or 10% before they even calculate the loan. All of which is putting even more downward pressure on the housing market.
So for all these reasons the major Irish banks carry a good deal of responsibility for the mess we are now in. The fact that Bank of Ireland’s loan book is over 70% in property is not only preposterous, it’s also lousy and lazy banking and bad for the country as well.
Instead of loaning money to start-up manufacturing companies or expanding businesses, where calculating risk was more difficult, the banks took the easy option and poured it into property. How many Irish companies in high tech manufacturing or the information technology sector were turned down for loans in this period?
Now the jobs are gone and the property bubble has burst. And all the banks are doing is squeezing the last few drops out of the property market, even if it means driving people out of business. As I said, a really nice bunch of people.
It is, of course, the collapse of the property market here that has punched the gaping hole in the government’s finances, since so much tax revenue came from the property sector. It’s different to some degree to what has happened in the U.S.
The sub prime sector of the market here is very small. Our problem has been created more by an irresponsible lending system and government, both of which continued to fuel a property boom long after it was clear that it could only end in collapse. And they did it at the expense of other ways in which the economy could have been expanded in other sectors on a more sustainable basis.
Unemployment here is already up to 5%, and it will be 6% or more by the end of the year. I look at my own teenagers and I think there are tough times ahead for them.
People in jobs will probably be okay, for the immediate future anyway. It is the coming generation I am concerned about. And this is happening at a time when the U.S. option — like all you who went over in the eighties — is no longer there.
All we can do is hope it won’t last too long. The estimates here are for the pick up to start in 2010 ... but I think we are looking at four or five years of a downturn instead of one or two.
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