Per Financial Times report (here): CBs of Eastern Europe are issuing coordinated statements calling recent currency weakness unjustified and raising the possibility of intervention on foreign exchange markets. Take this, in line with George Soros' weekend cry to arms for state-led socialism to replace liberal financial markets regulation (as if such really does exist in any developed country today). Recall the classic lesson taught by Soros in the case of British experience with ERM: Central Banks interventions in Forex markets impoverish taxpayers and enrich George Soros.
So what should the strategy be for anyone with a position in Poland’s zloty, Hungary’s forint, the Czech koruna and the Romania’s leu? These currencies rallied after the statement. Three scenarios are thus possible:
Scenario 1: CBs mount a spirited defense driving currency valuations up for ca 1 month before all currencies come down again on the back of excessive fiscal deficits, private economy contractions and implosions of housing bubbles (in some countries), with private banking continuous deterioration (in other). Foreign banks and domestic banks use the opportunity to aggressively expatriate capital at higher currency valuations, driving down demand for domestic paper. Shorting now is a 'win' proposition.
Scenario 2: CBs do not mount a serious/credible defense and instead preside over further devaluation to bring currencies down to longer term recessionary equilibrium levels. Foreign banks, suffering their own crisis at home continue to expatriate capital, further contributing to devaluation pressures. Shorting now is a 'win' proposition.
Scenario 3: George Soros gets his wish and EU-styled over-regulation reigns supreme over the Forex markets in which case we get stiffening of the ERM mechanism and a coordinated effort on behalf of the EU to drive down the Euro over a period of time. No Eastern European country would enter an ERM band at a peril to its exporters, so Poland (and potentially at a later date - Hungary, Romania and Czech) will devalue their currencies before the ERM accession to boost the chances of economic recovery. Shorting now is a 'win' proposition.
As with the 1990s ERM crisis, this is a one-way bet assuming you have a stomach for being open in the Eastern European currencies in the first place. (All usual caveats apply of course, plus a disclosure: I hold no open position in the above currencies.)
Tuesday, February 24, 2009
Sunday, February 22, 2009
Germany to the Rescue! - Update I
Now a peak at the CDS spreads again (hat tip to BL). To my earlier post (here) see the chart below: Gheez - we have Irish CDS reaching toward Philippines around mid February...
Of course, per Davy (here) there is no need to panic. “The risk of Ireland not being able to meet ongoing debt payments over the next few years is very low.”
Low? Hmmm.
Ireland government bond CDS at 3.4% and a recovery rate of 40-50% is equivalent to a risk-neutral (frictionless markets etc) default probability of CDS/(1-RR)=3.4%/0.6 = 5.67 pa or (1- (1-0.0567)^5)=25.3% cumulative default probability over 5 years. For 50% recovery rate, the latter figure is 29.7%.
Now, investors are risk averse, not risk neutral, and the Irish bond market is not exactly frictionless which can push the above probabilities down, although we do not know by how much.
What is, however, not accounted for here is the potential downside to the recovery rate - the amount that can be expected to be recovered should a sovereign actually default. For now, the markets price in a 40% recovery, implying that in the case of a default investors can expect to get 40c on each Euro back. But how realistic is this?
One recent experience with sovereign default shows that in the case of Argentina in 2000-2002 (see Andritsky, J (2005) Default and Recovery Rates of Sovereign Bonds, The Journal of Fixed Income, September 2005)
" Uncertainty about the expected recovery value is a main caveat when pricing credit-contingent claims in reduced-form models...The resulting recovery value estimated from Argentine global bonds starts out above 50% and falls to 25% after default."
So back-track from the above to today's Ireland Inc scenario and, suppose the recovery rate of 60% today implies a recovery rate of 30-40% at default and the current probability of default over 5 years of (1-[100-CDS/(1-RR)/100]^5)=36%... Nothing to worry about, folks, then - in plain English the above means that if Ireland Inc is any better than Argentina (the country that routinely and with frightening regularity takes foreign investors to the cleaners), our CDS levels today might be consistent with an equilibrium cumulative default odds of over 1 chance in 3.
But hold on, if the CDS rates are not a decent measure of implied default probability and a purely speculative tool instead (as our Nobel-prize contesting gurus from Davy, the DofF and CB keep telling us), why should the CDS data track closely the yield spreads? Maybe because they 'kinda feel so, man!' or maybe because the speculators in both markets are all in some global conspiracy club (wearing Venitian Canvivale masks and speaking in secret signs), or maybe, just maybe, both markets are really not buying the DofF-led and Davy-repeated story of 'no risk of default for Ireland Inc'.
Either both, the markets for CDS and Irish bonds are wrong, or Davy and the Government are. Take your pick.
Of course, per Davy (here) there is no need to panic. “The risk of Ireland not being able to meet ongoing debt payments over the next few years is very low.” Low? Hmmm.
Ireland government bond CDS at 3.4% and a recovery rate of 40-50% is equivalent to a risk-neutral (frictionless markets etc) default probability of CDS/(1-RR)=3.4%/0.6 = 5.67 pa or (1- (1-0.0567)^5)=25.3% cumulative default probability over 5 years. For 50% recovery rate, the latter figure is 29.7%.
Now, investors are risk averse, not risk neutral, and the Irish bond market is not exactly frictionless which can push the above probabilities down, although we do not know by how much.
What is, however, not accounted for here is the potential downside to the recovery rate - the amount that can be expected to be recovered should a sovereign actually default. For now, the markets price in a 40% recovery, implying that in the case of a default investors can expect to get 40c on each Euro back. But how realistic is this?
One recent experience with sovereign default shows that in the case of Argentina in 2000-2002 (see Andritsky, J (2005) Default and Recovery Rates of Sovereign Bonds, The Journal of Fixed Income, September 2005)
" Uncertainty about the expected recovery value is a main caveat when pricing credit-contingent claims in reduced-form models...The resulting recovery value estimated from Argentine global bonds starts out above 50% and falls to 25% after default."
So back-track from the above to today's Ireland Inc scenario and, suppose the recovery rate of 60% today implies a recovery rate of 30-40% at default and the current probability of default over 5 years of (1-[100-CDS/(1-RR)/100]^5)=36%... Nothing to worry about, folks, then - in plain English the above means that if Ireland Inc is any better than Argentina (the country that routinely and with frightening regularity takes foreign investors to the cleaners), our CDS levels today might be consistent with an equilibrium cumulative default odds of over 1 chance in 3.
But hold on, if the CDS rates are not a decent measure of implied default probability and a purely speculative tool instead (as our Nobel-prize contesting gurus from Davy, the DofF and CB keep telling us), why should the CDS data track closely the yield spreads? Maybe because they 'kinda feel so, man!' or maybe because the speculators in both markets are all in some global conspiracy club (wearing Venitian Canvivale masks and speaking in secret signs), or maybe, just maybe, both markets are really not buying the DofF-led and Davy-repeated story of 'no risk of default for Ireland Inc'.
Either both, the markets for CDS and Irish bonds are wrong, or Davy and the Government are. Take your pick.
IL&P: next in line? Update
And so the papers today follow our lead...
Tribune (here) starting to smell a rat:
"Irish Life & Permanent (IL&P) and Anglo Irish Bank could be facing fines of €5m each if the Financial Regulator determines the two banks engaged in market abuse by executing €8.2bn in circular transactions to make Anglo's customer deposit base appear more robust. ...which it has called 'completely unacceptable'."
It might be not a smoking gun for IL&P's 'new' sins, but it should keep markets on its trail.
That said, the article has a hint on balance sheet questions for IL&P (and others):
"...banks will either have to demand significant equity from developers or renegotiate loan terms. Most loans were given on the basis of a loan to value ratio, meaning that if the sites are revalued downwards the developer has to come up with the difference. This is viewed as unrealistic. As a result, banks have again moved to avoid formal valuations and there are claims some are setting up special vehicles to move loans off their balance sheet so they can amortise them over time, rather than writing them down."
Well put, boys, revaluing on the balance sheet
Ireland is inching closer and closer to the 'Bad Bank' solution that should have been enacted some months ago. At the very least, to repair the repairable - household loans and mortgages - thus providing more room for addressing the developers loans.
The difference today is that we are out of cash to get such a bank going, thanks to a rushed re-capitalization and the Government's unwillingness to extract real value out of public sector waste. And private money is already smelling the roses (here): €10bn outflows out of Ireland in one week - some 5.6% of our GDP or 3.2% of all main banks deposits gone in smoke. What is the downside to the Exchequer on this? Should the outflow continue unabated, within a week or two we will be facing the need for a new round of banks recapitalization, this time around - ca €10bn... and the money will come from?..
The minute the markets recognize this reality - Mr Lenihan with an empty policy gun and the bear still charging undeterred - things are going to get rough.
Tribune (here) starting to smell a rat:
"Irish Life & Permanent (IL&P) and Anglo Irish Bank could be facing fines of €5m each if the Financial Regulator determines the two banks engaged in market abuse by executing €8.2bn in circular transactions to make Anglo's customer deposit base appear more robust. ...which it has called 'completely unacceptable'."
It might be not a smoking gun for IL&P's 'new' sins, but it should keep markets on its trail.
That said, the article has a hint on balance sheet questions for IL&P (and others):
"...banks will either have to demand significant equity from developers or renegotiate loan terms. Most loans were given on the basis of a loan to value ratio, meaning that if the sites are revalued downwards the developer has to come up with the difference. This is viewed as unrealistic. As a result, banks have again moved to avoid formal valuations and there are claims some are setting up special vehicles to move loans off their balance sheet so they can amortise them over time, rather than writing them down."
Well put, boys, revaluing on the balance sheet
- land banks that are virtually worthless
- sites that are nearly worthless and
- buildings that saw their value decline by 30-50%
Ireland is inching closer and closer to the 'Bad Bank' solution that should have been enacted some months ago. At the very least, to repair the repairable - household loans and mortgages - thus providing more room for addressing the developers loans.
The difference today is that we are out of cash to get such a bank going, thanks to a rushed re-capitalization and the Government's unwillingness to extract real value out of public sector waste. And private money is already smelling the roses (here): €10bn outflows out of Ireland in one week - some 5.6% of our GDP or 3.2% of all main banks deposits gone in smoke. What is the downside to the Exchequer on this? Should the outflow continue unabated, within a week or two we will be facing the need for a new round of banks recapitalization, this time around - ca €10bn... and the money will come from?..
The minute the markets recognize this reality - Mr Lenihan with an empty policy gun and the bear still charging undeterred - things are going to get rough.
Saturday, February 21, 2009
IL&P: next in line?
All this week, while the politicians were preoccupied with Anglo's saga, I've been watching what appears to be the next downgrade target: IL&P. Intimately linked to the Anglo Irish Bank's shenanigans, IL&P has had a rough ride alongside its other free-standing (for now) peers: the AIB and BofI. Towards the end of this week, it seems, this term - 'alongside' - has become far less descriptive of IL&P's share price behavior.
Are markets on to something we are yet to discover? I don't know, but here is how strange the things got in the course of last week.
Chart above shows correlation between the daily volumes for IL&P shares and the average daily volumes of AIB and BofI shares since December 2008 through February 20 close. Clearly, things gotten a bit out of pattern ever since the local low -0.5 correlation was approached on February 16. More importantly, Friday the 20th of February saw a reversion of correlation down to below 0.25.
As illustrated in the following chart, this is not surprising, given that both AIB and BofI volumes declines on Friday have been countered by a significant volume uptick in IL&P.
Of course the volumes changes - especially pattern reversals over historical averages - are significant as they signal (in this case) a rising support to the general direction of share price movement. At this moment, the market appears rather committed to downgrading IL&P, while treating AIB and BofI much lighter.
Of course, the chart above lends some support to my last hypothesis: while both AIB and BofI are seeing moderating decreases in prices alongside falling volumes, IL&P is seeing increasing downward pressure on price alongside increasing volumes (note the chart above plots the product of price to historic average ratio and volume to historic average ratio). But don't take my word for this: chart below illustrates by referring directly to prices.
And the weekly moving average of correlations between closing prices for AIB and BofI with IL&P are starting to show strain as well.
On the net, out of the four main parameters I usually use to gauge the possible shifts in market attitude toward a specific stock:
Can it be that the markets are becoming aware of some new set of skeletons in IL&P's closets? Also, possible. And, given the scandals surrounding Anglo, Irish Nationwide and other players, somewhat probable as well.
Of course, time will tell for sure, but I would watch IL&P very closely on Monday...
PS: Oh, yes and intraday volatility for IL&P is also moving against the peers:
Are markets on to something we are yet to discover? I don't know, but here is how strange the things got in the course of last week.
Chart above shows correlation between the daily volumes for IL&P shares and the average daily volumes of AIB and BofI shares since December 2008 through February 20 close. Clearly, things gotten a bit out of pattern ever since the local low -0.5 correlation was approached on February 16. More importantly, Friday the 20th of February saw a reversion of correlation down to below 0.25.As illustrated in the following chart, this is not surprising, given that both AIB and BofI volumes declines on Friday have been countered by a significant volume uptick in IL&P.
Of course the volumes changes - especially pattern reversals over historical averages - are significant as they signal (in this case) a rising support to the general direction of share price movement. At this moment, the market appears rather committed to downgrading IL&P, while treating AIB and BofI much lighter.
Of course, the chart above lends some support to my last hypothesis: while both AIB and BofI are seeing moderating decreases in prices alongside falling volumes, IL&P is seeing increasing downward pressure on price alongside increasing volumes (note the chart above plots the product of price to historic average ratio and volume to historic average ratio). But don't take my word for this: chart below illustrates by referring directly to prices.
And the weekly moving average of correlations between closing prices for AIB and BofI with IL&P are starting to show strain as well.
On the net, out of the four main parameters I usually use to gauge the possible shifts in market attitude toward a specific stock:- divergent price moves relative to historic average and peers;
- volume changes to signal increasing support for one share relative to its peers;
- moving price correlations relative to peers diverging away from strong positive values; and
- moving volume correlations diverging from strong positive values
Can it be that the markets are becoming aware of some new set of skeletons in IL&P's closets? Also, possible. And, given the scandals surrounding Anglo, Irish Nationwide and other players, somewhat probable as well.
Of course, time will tell for sure, but I would watch IL&P very closely on Monday...
PS: Oh, yes and intraday volatility for IL&P is also moving against the peers:
Friday, February 20, 2009
Anglo Irish Bank Annual Report
http://www.rns-pdf.londonstockexchange.com/rns/6782N_-2009-2-2 0.pdf
The link to the most wanted publication - the Anglo's annual report for 2008.
Let anyone reading this while posessing knowledge in corporate finance and balance sheet analysis (I have none) comment on this and any other findings relating to the report.
So... guess what? The report is a hog wash, containing no real information on
Other notables:
I am staying off Anglo case for now, having done more than our wonderous Minister for Finance, who could not be bothered to read the entire PWC report on banks he was generously recapitalizing with the taxpayers' money.
Let anyone reading this while posessing knowledge in corporate finance and balance sheet analysis (I have none) comment on this and any other findings relating to the report.
So... guess what? The report is a hog wash, containing no real information on
- the impairments outlook,
- the reclassification of the loans,
- loans under 'watch'
- roll-overs of loans, and so on.
Other notables:
- page 6: Ireland lending up from €37bn in 2007 to €42.8bn in 2008. Given lack of demand for new loans and tight credit finance, is a part of this growth due to the rollover of non-performing loans with interest charges absorbed into 'new' loans? The report says: "In keeping with the Bank’s relationship based banking model, lending activity during the year was targeted solely towards the Bank’s longstanding customer base." Should we read this as 'the long-term developers reclassifying and rolling over loans'?
- page 7: Impairment charge on the loan book went from 0.5% in 2007 to 1.31% in 2008. Again, no guidance on future impairment charges, but should we agree with my/analysts numbers produced in December (here), we are looking at 4-5.3% impairment on property-linked loans or 3.5-4.6% on loan book. Some distance to travel yet.
- page 70 §12: total provisions for impairment were up from €149mln in 2007 to €879mln in 2008. Again, applying this dynamic to the 2008 figures and projecting into 2009, expected impairment charge for 2009 should be around 5%. Even assuming away the counterparty risk under the investment securities impairment (which might be unlikely to remain as high in 2009 as in 2008), we have a consolidated projected loan impairment charge for 2009 of 5.1% - higher than my 4.6% moderate risk scenario forecast.
- page 74 §20: serious fall off in financial assets held, with a rise in unlisted financial assets - is this again showing some financial engineering on the existent loans side? Unlisted assets against customers' liabilities up over 10% y-o-y, listed - down by ca 60%... losing the 'house' while accumulating the 'rubble'?
- page 81 §22: serious deterioration in the quality of loans and advances to banks. AAA/AA rateds down by more than 1/2, A rateds up by a factor of 3+. And this is to September 30, 2008, since when things went even further South globally. Ouch...
- page 82 §24: assets available for sale securities are ramped up in 2007 and unwound in 2008, potentially depleting the assets risk cushion? Per table below,
one has to have a laugh at the AAA/AA classification of a lion's share of Mortgage Securities and ABS. Take
- the financial institutions downgrades across Ireland (assume 10% moves to BBB and 20% to A),
- the mortgage securities at 15% negative equity (corresponding to the estimated 120,000 households) to BBB level and
- ABS at 25% (US-level) downgrade to Sub-investment Grade and further 25% downgrade to BBB and
- page 84 §25: total loans and advances to customers per Bank itself were up €12.5bn in 2008;
- page 86 §25: Lower quality, but not past due nor impaired loans: up from €363mln in 2007 to €2,736mln in 2008, past due but not impaired: up from €1,621 in 2007 to €1,782mln in 2008, impaired up from €335mln in 2007 to €957mln. In the mean time, satisfactory quality loans amounts moved from €322ml in 2007 to €6,302mln in 2008. So in common parlance terms, Anglo's 'slury' loans creek has swell from ca €2,641mln in 2007 to €11,777mln in 2008, an increase of 359% - all in the year when impairement charge officially went up by only 162%. Now, taking 2008 impairment ratio at this rate of deterioration in the quality of loans implies 2009 impairment charge of 4.5% across the entire book (see the second bullet point above)... Hmmmm, someone is foolin here?
- pages 148-149 show loans to Directors and related parties. No new skeletons here - Sean Fitzpatrick is the only name on the list, with the rest of Directors names missing next to loans amounts. Anglo issued loans against its own shares as underlying collateral guarantee funds, and held no impairment provisions for Directors loans.
- page 150: a small goodie: "During 2008 close family members of Sean FitzPatrick received rental income from the Group of €31,500 (2007: €35,500) in respect of a UK property that, rather than hotels, is actively used to accommodate Group employees working in the UK on a temporary basis. Total future minimum payments under the tenancy agreement are €7,600 (2007: €8,600)." So buy-to-let UK markets are alive and kicking then...
I am staying off Anglo case for now, having done more than our wonderous Minister for Finance, who could not be bothered to read the entire PWC report on banks he was generously recapitalizing with the taxpayers' money.
Wednesday, February 18, 2009
State of our Democracy
For those of you who missed my today's musings on Irish Democracy in The Irish Daily Mail, here is an unedited text of the article:
We live in time of unprecedented crisis of confidence. Last week, carnage in the financial markets saw Irish shares sliding deeper into the red. Yesterday, for a brief period of time, our Government bonds were trading at the levels indicative of the markets pricing in a 22-25% probability of the state default on the loans – a level that would, in any functional democracy, see the Government facing a vote of no confidence. And yet, the circus of the private sector scandals alternating with policy debacles continues to repeat itself with a frightening regularity, undermining further international opinion of Ireland as a robust economy and a transparent democratic state.
The reason for Ireland’s declining status amongst our peers is that by any measure, be it a measure of ethical and legal compliance in our financial sector or the benchmarks of transparency in governance, we are lingering at the lower end of the developed world league. Yesterday’s events surrounding the Joint Oireachtas Committee on Economic Regulatory Affairs illustrate the point.
The Committee, set up by what in theory should be the most powerful legislative and policy entity in the country – the Dail – was exposed as largely toothless grouping of elected representatives. If the fact that the Committee has no powers to punish or prevent any wrongdoing by corporate and regulatory bodies operating in this country was not enough of an affront to public accountability, the fact that it has no capability to compel private individuals and public representatives to appear in front of the nation’s legislators certainly does the trick.
At the core of this is the refusal by former Anglo-Irish Bank chief Sean Fitzpatrick to appear before the Joint Oireachtas Committee. But, before him, the same Committee heard an equally loud ‘No’ in response to an invitation to testify from Ernst&Young, Anglo’s auditors, the former Financial Regulator and the former FAS chairman.
Despite being perfectly legal under the current system, Mr Fitzpatrick’s refusal to answer legislators’ questions concerning the alleged wrong doings at the now state-owned Anglo-Irish Bank is morally, ethically and economically disastrous for Ireland.
Here is why.
From the moral perspective, Anglo-Irish Bank was taken over by the state at the expense to the taxpayers on the back of the managerial and strategic errors and alleged dubious practices. Mr Fitzpatrick was the Chairman in charge of this institution at the time of its failure. Mr Fitzpatrick – as both a Chairman and a private citizen – was also a party to several questionable transactions that allegedly precipitated the collapse of the Bank. Taxpayers are owed full disclosure of the events that led to the Anglo-Irish nationalization and Mr Fitzpatrick, alongside a number of public officials from the Financial Regulator and the Central Bank, must face open and transparent public questioning by the Dail. Of course, legally, the rights of all questioned should be respected, but compelling them to appear in front of the Joint Oireachtas Committee does not imperil such protection.
From the ethical point of view, the democratic process must grant full respect and complete investigative powers to the Parliament. This simply means that the power of compulsion extended to the Courts must be matched by the similar powers available to the Parliament and its Committees. This is more than a theory – it is an act of establishing practical checks and balances to safeguard the interest of the people against the interest of the narrow groups and state institutions. In a functional democracy, Parliament must act as a guardian of the society, while courts must guard the rights of individuals. We are, clearly, getting that simple formula wrong, with our judiciary pontificating about social conditions in individual judgements and our Parliament incapable of even gathering investigative information.
This Parliamentary investigative function has been imperilled many times before, including in recent months by the former Financial Regulator Patrick Neary and former FAS chairman Rody Molloy, who was forced to attend only by the wave of popular outrage over the FAS mis-spending of taxpayers’ funds. Mr Fitzpatrick’s move this week simply adds to this list of public figures who are allowed by law to ignore this country’s main democratic institution. Then again, what is there to be said about individuals, when the Government itself is unwilling to disclose due diligence information on banks rescue to the Oireachtas?
Lastly, robust and effective markets require robust and effective compliance with the letter and the democratic spirit of the law. Thus, existence of Irish economy itself is predicated on our ability to investigate suspected wrongdoings, publicly disclose relevant information and identify and punish those who breach the law. The investigative work of the Joint Oireachtas Committee is at the heart of this process. Moreover, it is central to the issues of how transparent and open our market makers (top corporate brass, regulators, politicians and others at the helm of Ireland Inc) are. Once again, Dail’s inability to compel Mr Fitzpatrick to testify in front of elected legislators on the issues relating to the Anglo-Irish Bank’s nationalization is nothing less than a public admission of the fact that the Irish economy and society are not meeting the high standards of transparency that are required of the mature economies today.
Last week, before Mr Fitzpatrick’s latest decision, one international investor, previously an active buyer of Irish shares, has told me that his fund is no longer willing to hold any shares in what he termed a ‘cosy cartel that is Ireland Inc’. The reason for such drastic re-assessment of the fund position was that his managers found it hard to believe the corporate and regulatory culture of Ireland in the environment where the Government refuses to openly discuss the issues of due diligence in the cases of state investments in the banks, the regulators who fail their basic functions are getting off with a golden handshake payoffs, and corporate leaders cannot be called to public account.
Sadly, the events surrounding the Joint Oireachtas Committee on Economic Regulatory Affairs this week are proving him right.
Yet, the pathetically inadequate power of the Joint Oireachtas Committee uncovers democratic deficit in our legislative and policy-making systems that is hardly new to anyone living in this country. For over two decades now, a group of unelected and unaccountable public and private sector representatives has presided over economic and social policies in this country. The name of this club is the Social Partnership. Its modus operandi was and remains clandestine negotiations carried out behind the closed doors with the Government acting as a go-for boy to this Big Brother. Its remit over the society was and remains huge – with powers to set wages, promotion and hiring policies, taxes and public spending and investment priorities. To all of this, our elected Parliament is an external observer with no power to change the course of the Partnership agreements.
In effect, Ireland has long ago ceased to be a properly functioning democracy, where policies are set by the Parliament of the people for the people. This week events at the Joint Oireachtas Committee remind the entire world that our legislators can not question our public and corporate leaders even when their decisions and actions expose the Irish taxpayers to potential financial ruin. This is, by all means, an apt conclusion to the corporatist state saga of the Social Partnership – a neutered Parliament, a toothless democracy and a dysfunctional market short on international confidence.
Thanks, Sean, for showing us the true state of this State.
We live in time of unprecedented crisis of confidence. Last week, carnage in the financial markets saw Irish shares sliding deeper into the red. Yesterday, for a brief period of time, our Government bonds were trading at the levels indicative of the markets pricing in a 22-25% probability of the state default on the loans – a level that would, in any functional democracy, see the Government facing a vote of no confidence. And yet, the circus of the private sector scandals alternating with policy debacles continues to repeat itself with a frightening regularity, undermining further international opinion of Ireland as a robust economy and a transparent democratic state.
The reason for Ireland’s declining status amongst our peers is that by any measure, be it a measure of ethical and legal compliance in our financial sector or the benchmarks of transparency in governance, we are lingering at the lower end of the developed world league. Yesterday’s events surrounding the Joint Oireachtas Committee on Economic Regulatory Affairs illustrate the point.
The Committee, set up by what in theory should be the most powerful legislative and policy entity in the country – the Dail – was exposed as largely toothless grouping of elected representatives. If the fact that the Committee has no powers to punish or prevent any wrongdoing by corporate and regulatory bodies operating in this country was not enough of an affront to public accountability, the fact that it has no capability to compel private individuals and public representatives to appear in front of the nation’s legislators certainly does the trick.
At the core of this is the refusal by former Anglo-Irish Bank chief Sean Fitzpatrick to appear before the Joint Oireachtas Committee. But, before him, the same Committee heard an equally loud ‘No’ in response to an invitation to testify from Ernst&Young, Anglo’s auditors, the former Financial Regulator and the former FAS chairman.
Despite being perfectly legal under the current system, Mr Fitzpatrick’s refusal to answer legislators’ questions concerning the alleged wrong doings at the now state-owned Anglo-Irish Bank is morally, ethically and economically disastrous for Ireland.
Here is why.
From the moral perspective, Anglo-Irish Bank was taken over by the state at the expense to the taxpayers on the back of the managerial and strategic errors and alleged dubious practices. Mr Fitzpatrick was the Chairman in charge of this institution at the time of its failure. Mr Fitzpatrick – as both a Chairman and a private citizen – was also a party to several questionable transactions that allegedly precipitated the collapse of the Bank. Taxpayers are owed full disclosure of the events that led to the Anglo-Irish nationalization and Mr Fitzpatrick, alongside a number of public officials from the Financial Regulator and the Central Bank, must face open and transparent public questioning by the Dail. Of course, legally, the rights of all questioned should be respected, but compelling them to appear in front of the Joint Oireachtas Committee does not imperil such protection.
From the ethical point of view, the democratic process must grant full respect and complete investigative powers to the Parliament. This simply means that the power of compulsion extended to the Courts must be matched by the similar powers available to the Parliament and its Committees. This is more than a theory – it is an act of establishing practical checks and balances to safeguard the interest of the people against the interest of the narrow groups and state institutions. In a functional democracy, Parliament must act as a guardian of the society, while courts must guard the rights of individuals. We are, clearly, getting that simple formula wrong, with our judiciary pontificating about social conditions in individual judgements and our Parliament incapable of even gathering investigative information.
This Parliamentary investigative function has been imperilled many times before, including in recent months by the former Financial Regulator Patrick Neary and former FAS chairman Rody Molloy, who was forced to attend only by the wave of popular outrage over the FAS mis-spending of taxpayers’ funds. Mr Fitzpatrick’s move this week simply adds to this list of public figures who are allowed by law to ignore this country’s main democratic institution. Then again, what is there to be said about individuals, when the Government itself is unwilling to disclose due diligence information on banks rescue to the Oireachtas?
Lastly, robust and effective markets require robust and effective compliance with the letter and the democratic spirit of the law. Thus, existence of Irish economy itself is predicated on our ability to investigate suspected wrongdoings, publicly disclose relevant information and identify and punish those who breach the law. The investigative work of the Joint Oireachtas Committee is at the heart of this process. Moreover, it is central to the issues of how transparent and open our market makers (top corporate brass, regulators, politicians and others at the helm of Ireland Inc) are. Once again, Dail’s inability to compel Mr Fitzpatrick to testify in front of elected legislators on the issues relating to the Anglo-Irish Bank’s nationalization is nothing less than a public admission of the fact that the Irish economy and society are not meeting the high standards of transparency that are required of the mature economies today.
Last week, before Mr Fitzpatrick’s latest decision, one international investor, previously an active buyer of Irish shares, has told me that his fund is no longer willing to hold any shares in what he termed a ‘cosy cartel that is Ireland Inc’. The reason for such drastic re-assessment of the fund position was that his managers found it hard to believe the corporate and regulatory culture of Ireland in the environment where the Government refuses to openly discuss the issues of due diligence in the cases of state investments in the banks, the regulators who fail their basic functions are getting off with a golden handshake payoffs, and corporate leaders cannot be called to public account.
Sadly, the events surrounding the Joint Oireachtas Committee on Economic Regulatory Affairs this week are proving him right.
Yet, the pathetically inadequate power of the Joint Oireachtas Committee uncovers democratic deficit in our legislative and policy-making systems that is hardly new to anyone living in this country. For over two decades now, a group of unelected and unaccountable public and private sector representatives has presided over economic and social policies in this country. The name of this club is the Social Partnership. Its modus operandi was and remains clandestine negotiations carried out behind the closed doors with the Government acting as a go-for boy to this Big Brother. Its remit over the society was and remains huge – with powers to set wages, promotion and hiring policies, taxes and public spending and investment priorities. To all of this, our elected Parliament is an external observer with no power to change the course of the Partnership agreements.
In effect, Ireland has long ago ceased to be a properly functioning democracy, where policies are set by the Parliament of the people for the people. This week events at the Joint Oireachtas Committee remind the entire world that our legislators can not question our public and corporate leaders even when their decisions and actions expose the Irish taxpayers to potential financial ruin. This is, by all means, an apt conclusion to the corporatist state saga of the Social Partnership – a neutered Parliament, a toothless democracy and a dysfunctional market short on international confidence.
Thanks, Sean, for showing us the true state of this State.
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