Honohan: The Irish Banking System and the Irish State

Governor Honohan reviews the current situation in relation to the Irish banking system and the Irish sovereign in a speech to the Small Firms Association: you can read it here.

17 replies on “Honohan: The Irish Banking System and the Irish State”

I suppose we can all be too negative at times. I certainly can. Ireland’s debt is sometimes exaggerated. The Governor is correct that once the uncertainty over bank debts are removed, the guarantee is gone and the deficit is further reduced then everybody should take a more sanguine view of Ireland’s credit worthiness. One sometimes forgets how low our net debt is. I for one am going to try to desist from exaggerating the difficulty of servicing the debt. We do need to face up to our problems but a national psychosis, or even a simple exaggerated pessimism about all things financial, should be guarded against. I don’t want to be part of an amplifying effect.

(I did not understand about there being loads of shareholders funds in the banks which surprised the Governor. Anyone else care to clarify?)


It is also worth reminding ourselves about just how difficult it is to model and forecast public sector finances. The relevant elasticties of tax collection and government spending with respect to GDP growth are not known with precision. It is a cliche to point out that future deficits are the difference between two very large numbers, both of which are hugely dependent, in an uncertain way, on unforecastable economic growth. The evolution of our debt crisis depends in large part on the nascent global economic recovery where, right now, the signs are surprisingly good. We could get lucky. Even then, we still have a lot of work to do and it is always a fool who both trusts to luck and bets on it continuing.

I am delighted to see that Mr Honahan uses the term “shocking”. It seems that he is saying that borrowing is normal and to be expected to continue for some considerable time.

I am glad that Chow and Lie will stop exaggerating matters. It could help to stick to facts. Depression, deficit after deficit, migration, employment loss will all continue. Relying upon reports in the MSM, and from Governments that have deceived their citizens does not suggest that Mr Honahan was being pessimistic, but he was unable to forecast much and wisely he therefore said little. There is little to be optimistic about after all.

He found funds that he did not expect. That suggests book-keeping offences and yet more skull duggery. The depths of miscalculation have yet to be revealed, both by government and the banks. But there have been widespread cover-ups, which should be addressed by Commissioner F Murphy and Tony Appleby.

I have every confidence in Mr Honahan and wish him well. Augean stables?

“This takes account of the low prices being paid – much lower than originally envisaged – for the loans being transferred to NAMA. The NAMA purchases replace risky property-related loans with risk-free NAMA bonds and are part of the process of putting them on a solid foundation. By the way, knowledgeable experts on the property market assure me that, at the low prices they have paid, that organization now has a good chance of breaking even over the coming years, as indeed has been its stated intention all along. ”

“Knowledgeable experts on the property market”? I wonder what “knowledgeable experts on loan recovery” would tell him? Given the NAMA valuation date of 30th November, 2009 (and Christ why don’t they change that for future tranches???) with a nice 5-10% fall in prices generally since then and the belief amongst many that we are not yet at The Bottom, I sincerely hope NAMA are right about their 20% loan default rate being prudently high because if NAMA has to depend on property recovering in price in a 7-10 year timespan to break even then that is looking a greater challenge in the State with every passing day.


difficult to be optimistic with these numbers (courtesy daily telegraph)-

Fresh EU data shows that total debt is 224pc of GDP in Greece, 272pc in Spain, 309pc in Ireland, and 331pc in Portugal, each with a heavy reliance on external finance that can dry up at any moment. They are all being forced to impose austerity measures, risking a slide into deeper slump and a potential debt-deflation trap.

It is accepted that
a) the fiscal problem is real and
b) finance and allied specialisms exist for a purpose

Anyone with a titter of wit, however, can see that we have gloriously squandered our sovereignty and development prospects. Given the increasingly empty nature of the CB Governor post, it’s hard to see much here beyond kicking the can down the road for the current shower.

The most worrying symptom is the resolute refusal to acknowledge the malpractices and consequent bankruptcy (both moral and financial) of the most privileged and educated groups in our society.

This is not just about a few shoneens in high places. The failure has been collective and institutional. Incited cynically from the top, and boosted blindly by the broad middle class. As long as we contine to spoof about and evade that, the deeper we are going into the bog.

@ Paul quigley
If the malpractices were admitted then the loans would be not be forceable in law as the contract would be deemed an illegal contract and you cannot bring that to the courts and say here, enforce that!

Imagine the impact that would have on the loan books of our banks? It is an accident waiting to happen and it will happen. Lord Denning uttered the words …this would be “a vista too appalling to contemplate.”

Yet, eventually they had to grin and bear it. Same will happen with sub prime lending here. All it requires is one person clever enough to use the law to his/her advantage rather than simply going into court and playing by the banks rules. Their rules cannot give them to the right to leverage up 31 times blow up the mortgage market and then pin the blame on other people.

@paul quigley
“As long as we continue to spoof about and evade that, the deeper we are going into the bog.”
If we do stop what you say, what then?
What mechanisms, if any, can you propose to, at a minimum, limit the scope for the spoofing and evasion you see – immediately and for the future?
My sense is that failure to address institutional failures (eg. not controlling the price of land along the lines proposed by Judge Kenny in the early 1970s) which led to the 1980s crisis here have compounded the crisis we are now in.

The Guv’nor: “I won’t speak today about important details such as the cross-subsidization between tracker mortgages and other lending.”

Do you mind stopping staring at my tracker Mr Honohan?

@ Donal and Robert

The vista is too apalling to contemplate. For those who feel ‘entitled’ to lead us, and those who prefer not to think for themselves.

It wasn’t just the price of land that we failed to regulate. It was our tribe of rent seekers who were bent on installing themselves, and their families, at every crossroads of business, professions and the state. As the US General is reputed to have once said: ‘I have seen the enemy and it is us’.

While respecting most people’s hard work, rights and hopes, I think we have to be careful about believing our own BS. That’s for international consumption.

I hate those typing errors that creep in, especially when you are trying to get out the door to meet somebody. In Sept ’08, I was sitting beside an erudite, very successful business man at a Board Pleanala hearing into Sean Dunne’s “Knightsbridge development” for D4. A man once owned and ran the biggest landbanking company in Ireland. He will not be in NAMA as he never endorsed the casino school of politics and banking.

We were talking about fiduciary trust. I said, what we had been listening to sounded like “malfeasance”. What’s that, he said? Strange, I thought. Next day I handed him a short definition of the word on a single A4 piece of paper with nothing else written on it; malfeasance |malˈfēzəns| noun Law wrongdoing, esp. by a public official. Light touch regulation turned deliberately into no touch regulation with disastrous consequences.

Patrick Hohohan says, things are “shocking but manageable”. Does he mean, that they can manage the bank (rescue) with 75 billion of tax payers money raised or borrowed? Is it implied too that, the tax payer is not to be saved from the fiduciary and malfeasant actions of bankers, regulators and DoF officials? How come?

This, “we are all to blame strategy”, is being drip fed to the public from the same media which fanned and cheer led the bubble every single day. It is a key element of the Lenihan/Ahearne strategy that the state do not have to bail out ordinary mortgage holders.

Economists cannot allow what happened to be dressed up in the language of obfuscation with escape clauses deliberately stitched in to the findings. The state will be desperately trying to avoid the taint and actuality of malfeasance. It is very much in the economic interest of the state that people get away with what they have done. It is especially in the state’s interest not to jail people as this would indicate a line had been crossed into criminal behaviour which would open the flood gates of claims against the state and state supported banking system.

Recently, in the Supreme Court, Justice Adrian Hardiman gave a most damning 73 page judgement on the tribunals. But it took 13 years for this piece of jurisprudence to percolate into the public domain from our most learned colleagues.

The fact that our banking inquiry is happening behind closed doors, at snails pace and is being run by those the government saw fit to appoint tells a story. It is totally unlike the Congressional enquiry in the US. The state has played and is playing for time, then it will play for more time, then it will try to limit the blame to platitudes it will be very, very sorry but unwilling to take any legal responsibility. It may go for a few token scapegoats.

The net of blame is being tactically and deliberately cast as wide as possible, in order to hold, nobody specifically accountable. Platitudes and epithets will reign supreme. We will be told that it was “systemic failure” caused by contagion from abroad etc. What does that mean? Well it depends on who is telling the story. The narrative will be, that the government failed, the regulatory system failed, the banks failed and that you the public are to blame for your own misery too. In essence, we will be told that we all qualify for victimhood but only some, important people, qualify for rescues. But will we accept this outcome?

@ zhou_enlai Says:

Yes, you are right about the number of pages. However, the blunt statements that came from Justice Hardiman are worrying in the extreme.

From Hardiman’s judgment “they withheld material from them which it is now admitted should have been disclosed and in doing so knew (as any lawyer must have known) they were gravely hampering the appellants in making their defence.” The word “they” meaning Council for the Tribunal itself.

“gravelly hampering” that is justice Hardiman’s interpretation. Another interpretation, my own, is that they needed a certain outcome and they were prepared to pursue that outcome regardless. They did not think they were going to be found out.

The state does not want to have a full public inquiry into our banking crisis (much more of course than a banking crisis). It, has already decided that their desired outcomes would not be best served by a public enquiry.

The main outcome sought by the state will be the avoidance of any legal responsibility. They desperately need to distance themselves from the disastrous fiscal, regulatory, decisions taken or not taken which led to the current fiasco. That’s the state. However, who is going to represent the legal interests of the tens of thousands of citizens in negative equity or financial ruin, as a result of the actions or more likely inactions, taken by government, regulatory authorities, financial auditors and bank boards?

To quote Justice Hardiman again, “It is salutary to remember that the concealed materials would never have come to light in this case had the appellants not taken these proceedings. It is chilling to reflect that a poorer person, treated in the same fashion by the tribunal, could not have afforded to seek this vindication.”

The people who have been fleeced are the new “poorer person”. Who is going to vindicate them against the government, bankers and state authorities? Who will make sure that the truth is not buried away, by greed consensus in some dark vault.

@ all
It strikes me that this ongoing crisis, and this thread, really points up the absence of an adequate account of the nature of our state. It could be argued that such a topic does belong on this blog, but the reality is that no solution of our economic problems is possible without a reform of our political (not just electoral) institutions.

One of the core issues involves the relationship between civil servants and business or professional entities. Principal-agent problems are sadly, regarded as normal here. The fate of the tribunals illustrates the way in which attempts to root out corrupt practices can be colonised and neutralised by a professional elite.

Some of the worst practices will be curtailed as we lose more of pur sovereignty, but the dominance of the Law Library, with its privileged access to power and wealth, will continue unless challenged. We need to focus, not just on what has been created and destroyed, but on what kinds of power have thus far escaped scrutiny.

@ paul quigley

I take your point anyway few are interested in this thread.

At the end of the day economic theories cannot operate in a vacuum. What I have found most disappointing is the manner in which economists form opinions then defend them using only the language of accountancy, statistics and formulae. I often feel I am being invited to live in the monochrome world of economics. Most academics fear straying from their comfort zones and seldom if ever try to address political and social realities, using the excuse that they have to stick to what they think they know.

They never ask, if this economic policy is successful what will its impact be on the society we live in. We obsess on the impact NAMA will have on some balance sheet but all too often fail to make the qualitative leap to describing what life in Ireland will be like under a NAMA like regime, or under a government hooked on borrowing and bailing out banks. Irish economists are not stepping up enough to the mark in this regard. The shock of seeing our economic system collapse, our regulatory system found to be non existent, has had a profound effect on silencing most economists who have stuck with a very limited set of vowels and language to describe events.

Comments are closed.