Saturday, 18 June 2011
Posted by Ray Kinsella at 17:19
Friday, 17 June 2011
The Credit Union movement is under growing pressure. This pressure arises from the effects of the on-going economic crisis. Rising unemployment, falling disposable income and high levels of indebtedness are pushing up existing- and like future- payments arrears. This, in turn, is impacting on their reserves and capital. At the same time, investment income on deposits has been reduced because of developments in global stock markets and historically low interest rates.
However, in sharp contrast to the banking system there are strong reasons for believing that not alone will the credit union movement come through these difficulties but, with the right kind of leadership, may well be on the brink of a process of renewal.
To do so, the movement will have to deal with two sets of challenges. The first is how best to deal promptly and effectively with growing arrears and making provision for the increased levels of risk embedded in their loan book. The second relates to a process of fundamental regulatory form, which is part of the IMF-EU-ECB Bailout, these reforms are aimed in strengthening the internal systems and capabilities of Credit Unions; of enhancing governance at board level and also of introducing a new stabilisation regime, including, in the last resort arrangements for winding up unviable credit union and transferring both deposits and members to other stronger units. At the same time the reforms envisages a sharp reduction in the number of credit unions by more than half. All of this will, almost certainly, acquire financial support. It would be premature to put a figure on this but it is likely to be of the order of One and a half Billion.
This should not be seen as a ‘Bank Bailout’ in the sense in the sense of which Ireland has become all too familiar. It would be more appropriate to call it a ‘Bail-in’. The ‘Business Model’ at the heart of the collapse of the banks was self inflicted; the banks were deaf to the warnings of many within the banks themselves and also outside of the banks. In complete contrast the model which drives credit unions is based on voluntarism. It is based on a culture of cooperation, of self-help and of encouraging savings and thrift. These were precisely the values which were’ Crowded out’ by the short term-ism of the banks and by their fixation on shareholder value and maximizing profits.
Credit Unions have retained the trust of their members and also of the wider public at a time of financial stress and economic desolation. That Trust is the platform on which credit Unions will renew their mission and their mandate of service to the communities to which they are rooted.
The regulatory reform process poses serious challenges. The time scale is far too short and would appear to be driven not by the imperative of getting it right but rather of getting it done: Ticking the box. The need for reform and strengthening is evident. Fracturing in public trust and confidence in the credit union movement would have the most far reaching consequences. The credit union movement with its extensive membership base, total assets of fourteen Billion which are an integral part of right across the country, are very much the ‘last man standing’. But rush legislation is usually bad legislation. There is a strong regulatory capability in the Central Bank overseen by the registrar of creditary Unions. There has, over the past two years, been a strong and proactive engagement by the department of finance by the Oireachtas as well as by the Credit Union Advisory committee with the credit union representative bodies. All of this provides a favourable environment within which to set out the conditions for a strengthening in risk management as well as putting in place new structure for ensuring the sustainability of the movement.
Equally, a ‘One size fits all’ approach to regulation, which would involve imposing the same burden on credit unions as on banks would be unnecessary undesirable and unworkable, what is important is a proportionate regulatory and government system, based on the intrinsically sound and ethical ‘business model’.
Equally important the credit union movement itself which is beset by historical divisions will need to come together and demonstrate the kind of leadership that reflects the enormous importance in Ireland and on the Island : and which demonstrates a conviction that, had the banking system retained the kind of values which are at the heart of Credit Union, The country would not be in the position it is in today.
The credit union movement is the benchmark to which any sensible rebuilding of the banking system should be measured
Abridged version of paper delivered at CUNA Mutual Conference, Dublin Castle, 15th of June 2011
Saturday, 4 June 2011
Sooner, or later, Ireland will hold a Referendum on the Bailout. Hopefully it will be sooner. There is little enough time left before the Eurozone experiences the full consequences of the contradictions in the manner in which it was first established. There are no painless options- only, as Martin Woolfe of the Financial Times recently pointed out, intolerable options. Ireland needs a consensus on the Bailout before this happens; it will be too late afterwards.
There are a number of powerful arguments why the Government should hold a Referendum..
The first is a matter of principle - those who live in a democracy should be consulted on seismic changes in public policy. The Bailout was a response, albeit wholly misconceived, to the most serious financial crisis in the history of the State. It should have been put to the people. It was not.
The people, apparently, were not to be trusted to form a robust and responsible view on a set of policies- a national ‘change of ownership’- that would entail a crushing burden of adjustment on business’ and families throughout the country. Not for the first time the people were sold short- Ireland has had a crash course in finance theory - its people are very, very economically literate. Perhaps that explains the reluctance to trust to their good sense. Nor was the Bailout analysed and voted upon by the Dail. The then government’s actions in pushing the Bailout through, in an atmosphere of denial and near chaos, may have been constitutional-but it was hardly democratic.
The Bailout was retro fitted to a ‘Plan’ for ‘Recovery’, whose ‘forecasts’ were-and have been shown to be nonsensical. The Bailout involved using the welfare of the people as a kind of ‘Human Shield’ to protect a Eurozone orthodoxy aligned to the interests of the core countries and primarily intended to protect the financial stability of their financial systems. In these circumstances, it seems incomprehensible that the Bailout was not put to the Irish people, by way of Referendum. This lack of engagement and of trust will come back to haunt our democratic institutions, until the people have their say.
A second reason related to the punitive and counter-productive terms of the Bailout- a point highlighted by, amongst others, Dr. Michael Somers, former head of the NTMA. There are deep structural imbalances in the Irish economy and in the Public Finances which need to be addressed. This will require Leadership-not a ceding of responsibility to Eurozone ‘Partners’ and Institutions who have displayed no understanding whatsoever of the importance of assisting Ireland to grow its economy, as the platform for addressing these imbalances and restoring our solvency.
The facts speak for themselves. There has been no reflow of overseas corporate deposits into our financial system. The capital markets remain closed to Ireland. The outflow of capital from the economy has been accompanied by an exodus of entrepreneurial talent. Domestic businesses continue to struggle desperately with increased pressures, within a contracting economy. Many have given up the unequal struggle. Ireland is becoming more unequal, more divided; hundreds of thousands are becoming marginalised and scarred by the experience of being semi-detached from the labour market. This most profound negativity will cast a long shadow. We have been sold out; not, incidentally for 85billion but for the much more manageable ‘consideration’ of just over 30 billion.
As for the banks, a banking system is only as strong as the economy it serves. The Irish economy is emaciated. There are major anomalies in the manner in which the Irish banking system is being re-modeled within the terms of the ECB/EU/IMF Bailout. Irish life and Permanent as well as AIB have been required to shed their only profitable businesses just at the time when they were being taken into public ownership. This makes little sense. A major shedding of high- quality jobs in financial services is under way. This will make it much more difficult to regenerate a domestically headquartered international capability and to attract the interest of the kind of major global banking provider who could instil international confidence in the Irish financial system.
The Bailout has trapped Ireland within a nihilistic trajectory, characterised by widespread economic distress and acute societal stress. A Referendum is needed, if only to legitimize what is happening.
A third reason relates to the instability that has been generated across the Eurozone periphery by Bailouts in Greece, Ireland and Portugal- and by the fact that these bailouts are simply not working. The policies being pursued in the Eurozone are not credible. The failure to acknowledge this reality-which is all too clear to the financial markets-only compounds the Euro zone’s failure to achieve convergence through growth and solidarity. Shortly after the General Election the Taoiseach and the Minister for Finance presented an all- too compelling case to the EU Finance Council, and to the Eurozone, for a reduction in the Bailout debt burden that is suffocating peripheral economies. The IMF could see the merits of the case that was being made. So, too, could members of the European Parliament who have looked at the situation on the ground. But neither the ECB or the Commission nor the ‘core’ countries wanted to even acknowledge the case that was being made, except as a bargaining chip to pressurize Ireland into showing ‘flexibility’ on its CT regime.
Now it’s too late. A reduction in the interest rate burden would, in practice, have done little to address the problems of achieving a return to solvency and a new macro- economic stabilisation, by growing an economy abundantly rich in natural resources, including carbon-free renewable energy. But it would have done a great deal in terms of morale and good will. It is likely that some form of concession will be offered in the coming months but it will be an empty gesture, devoid of any practical significance.
The reality is that we cannot change others, we can only change ourselves. Sr. Consilio Fitzgerald, who founded Ireland’s largest service provider for individuals suffering from addiction, has this truth enshrined in every Cuan Mhuire on the Island. It goes to the heart of Ireland’s current plight.
We should not rely on persuading those not open to persuasion, even in their own enlightened self –interest. Power, political hegemony, is the most damaging of all addictions. It ‘crowds-out’ respect for others; in this instance, respect for the smaller EU peripheral countries. That is why I have argued in these pages that we should now leave the Eurozone and not for a moment doubt our capacity to rebuild our economy and heal our society within the broader EU. We have overcome more serious challenges.
This will, however, only work if we are capable of addressing our own national addictions and shibboleths. It is difficult to do this when our political orthodoxy has discarded the very values that held Ireland together, and shaped our identity as a Christian nation. We have grown timid and too willing to appease. Ireland is graced by extraordinary natural resources; land, maritime resources and, crucially, carbon-free renewable energy within a European Union facing an enormous energy deficit. Energy is the most credible of all currencies and the key to solvency and economic recovery. We should as the most urgent economic priority capitalise on these resources while there is still time- the global geo-political system, which largely determines the availability and price of energy, is highly unstable and Ireland was never more vulnerable to an energy ‘shock’.
Soon we will be facing into the pre-Budget period and yet further deflationary measures in an economy running on empty. It makes no sense. We need a Finance Act that is not dictated by the gatekeepers of negativity; one which is focussed on resource-based growth, and an explicit recognition that, alongside Foreign Investment, it is domestic businesses that are keeping the economy (barely) afloat. We need a Referendum before producing a Budget so that the people have their say and some form of consensus is maintained: political stability will fracture under the pressures of the Bailout-driven Budgets, leading to the worst of all possible worlds for the new Government struggling with the malign legacy they have inherited. The Government have nothing to fear from a Referendum on the Bailout-there may come a time when they will.
There was a moment when we might have faced down a rogue Eurozone mindset and told them how in our national interests, and the interests of the wider EU, we were going to go about rebuilding our future. A Referendum provides the only second chance for an economy being impelled along an appalling vista.