LORD JOHN Maples, sitting in a cramped room in the House of Lords with hideous floral wallpaper, still finds the Irish banking crisis impossible to understand.
In Greece, it was the government that borrowed ridiculously, not its banks. In Iceland, they “suddenly decided that they were better at investment banking than they had been at fishing”. In Ireland, however, the seeds of destruction were clear. “It was very easy to do the arithmetic. We were mind-boggled here about what was happening to the prices of houses on Merrion Square, thinking it can’t go on.
“It was in many ways more obvious and, therefore, people weren’t watching what was likely to go wrong – or if they were watching it, they weren’t spotting the signals,” says Maples, a former deputy chairman of the Conservative Party.
He has been thinking about Ireland quite a bit recently because next week, he and Lord Mark Malloch-Brown will speak at a conference in Dublin organised by the Irish arm of Maples and Calder – the international legal firm he co- founded – on The European Conundrum – Perspectives on the Future.
Neither he nor Malloch-Brown – who joins the discussion by phone – are short of views on the subject even if they appear doubtful that euro zone states will be prepared or able to take the measures required, despite the current lull in the euro crisis.
Banking crises are a feature of economic life, Maples says. “They nearly always are built around property and the belief that property values are going to go on rising and therefore you have got security and banking crises are always the result – and ‘always’ is the right word – from lending money to people who can’t repay it.
“That may sound axiomatic, but all this stuff about solvency and liquidity and ratios and all the rest is designed to stop people lending money to those who can’t repay it, because if they can’t repay it the bank has got a big hole in its reserves.
“It seems to me that if you look at any individual case, the Irish was the most obvious one that was going to go wrong, because it was a very small number of banks and all the money was going into property development. They must have built enough houses to give two to every person in Ireland. Clearly, there were far more than were ever needed.”
The decision by governments to protect bank bondholders, not just in Ireland, is one that he still finds extraordinary.
“You might have chosen to protect individual domestic depositors up to a certain level, say £85,000, but why we were protecting bondholders who are professional investors and on the whole knew what was going on; this stuff was trading at 50 per cent of its value on the market.
“There’s a lovely story here [in the UK] about one of them [bondholders] here trying to sell some senior debt back to the banks for 50 pence in the pound and the bank wouldn’t deal and the next day the British government announced that it was guaranteeing 100 per cent of the liabilities. It was only worth 50p the day before. I just think that the losses have, to an unnecessary extent, been borne by the taxpayer and I agree that few of the senior executives have been punished.”
Maples favours an attempt to renegotiate, although he concedes that legal guarantees are harder to unravel.
Malloch-Brown has experience dealing with indebted countries, following years at the World Bank and the United Nations and, later, serving in Gordon Brown’s Labour government. However, he is unwilling to enter the debate about Anglo Irish Bank’s promissory notes because the company he chairs, FTI Consulting, once did some work for it.
Nonetheless, he has opinions. In Greece, the recent haircut suffered by bondholders has made some effort to place the responsibility for risk where it lies best.
“But the difficulty with the Irish situation is that once you have made a commitment like that at the height of a market crisis, if you renege on it the next time there is a market crisis the most important thing that you have to fight that crisis is that your word is your bond. It is not going to be believed again.
“I would agree that it was a very expensive commitment to try and stabilise the markets, it sent the wrong signal, but whether it would be correct to undo a pledge made at the height of the crisis I am not sure. It would be like a firefighter giving up his hose.”
He acknowledges that Ireland feels it is getting compliments from others for implementing austerity, but little in the way of relief on the scheduling, or the size of its debt.
“I have spent a lifetime in crises, nationally and internationally, and there are different ways to skin a cat. You march down a street and you get a reduction, but you lose the confidence of the market in general and you go through periods of lower growth, in general.
“Argentina may be an exception on that second point.
Then there are “the good behaviours”, Malloch-Brown says, where you take a higher debt burden but get higher growth and attract foreign investment much more quickly. “I was in Athens a few weeks ago and there is almost no sign of privatisation activity or anything else because there is no market confidence. Ireland has restored that.”
Accepting that the Irish and Greek cases are different, Maples acknowledges that the Irish Government should not “renege on a legally binding promise that it made that then induced people to do things that they would otherwise not have done.
“But if that is not the position, if they are not bound to repay these debts, then some renegotiation is in order and maybe takes out half of them. Ireland has built up enormous debts and I don’t know how much they will get back from the rotten assets that the Government took on, but I suspect that it will be lucky to get half.”
Left with an €85 billion ECB- IMF debt, “plus whatever debt you run up before”, leaves Ireland in “a very difficult situation in which to get growth and it is difficult to get debt to reduce simply by waiting for taxes to pay it off.
“It is too big. I think anything that they can do that would reduce their commitments to pay out something like €3 billion I would certainly want my lawyers crawling all over it to see if I don’t have to do it.”
Both, however, exclude Ireland from membership of the same club as Portugal, Italy, Greece and Spain. “I don’t think Ireland needs permanent transfers of cash from the EU,” Maples says.
Portugal, Greece, Italy and Spain are “simply not competitive” at a fixed exchange rate with Germany – Greece in other circumstances would have devalued the drachma and made tourism competitive. “Then, it would be a lot cheaper and anyone who goes to Greece now is pretty horrified by how expensive it is compared with places like Turkey.
“The only remedy that I can think of, other than getting out of the euro which would have its own very painful consequences, is a transfer of funds by some sort of federal agency and that implies a level of European integration that we haven’t seen yet and hasn’t much been talked about,” Maples goes on.
For Malloch-Brown, visionary moves are needed, since the fiscal treaty is “probably in the current environment the most that Germany wants to do. But it is actually not enough to hold Europe together because of the rigidity of the exchange rate with these two different speeds of economies.
“So really the question is, where is our Alexander Hamilton when we need him? That’s what happened in the United States. Half the states were close to bankruptcy and half had big surpluses.
“He appealed to them all in the spirit of the founding fathers that if we are to be one nation and keep the Brits at bay, then we need to have transfers.
“It wasn’t just the negative leadership of trying to get West Virginia, or whatever it then was, of trying to keep to 3 per cent. It was a positive leadership of ‘we are going to bring our weaker brothers with us’. That is Europe’s real choice.
“In a sense, this treaty buys a little time but the fundamental issue is that Europe sinks or swims together. It either enters the world of transfers and starts to build a European citizenship and a collective sense of responsibility to behave sensibly economically [and] help each other when the other chap is down, or it goes the other way and the weaker countries detach themselves. But the idea that a fiscal straitjacket alone is going to do it is not going to solve these underlying problems.”
Questioned about Ireland’s future, Maples looks again at reducing the size of the debt, but is less sure now that it can happen.
“Governments must honour commitments that they make. If these commitments to bail out the banks and pay creditors are solid and unequivocal then they must be, but if there is some way of reducing that liability, I would.”
However, Ireland did have a successful economic model for a time that worked – low corporation tax, successful foreign direct investment. “I would be inclined to say go back to that, you were good at that and I would try to get back to that, and I would try to schedule this huge overhang of debt which the Government now has to make it as manageable as possible.
“I don’t know what the schedule of repayments is, but I would certainly want to string it out. And I would certainly not suggest that Ireland is one of the countries that might consider getting out of the euro. It is a very strong argument if I was a Greek, or maybe a Spaniard, but I don’t think it does apply to Ireland. It has done quite well in it, actually, and benefited from structural funds.
“The bubble was fuelled by everyone having low German interest rates which they had never seen before and went mad, except the Germans, who didn’t themselves borrow money. Their banks went crazy but the German public did not borrow money to buy houses.”
Malloch-Brown agrees, urging Ireland to build on what worked and to “correct what didn’t” – but insists that Ireland does not face a future where it is the West Virginia of the EU.
“You say West Virginia, but there was a Virginia economy [West Virginia’s much wealthier neighbour] as well in Ireland: a lot of IT headquarters and IT-savvy young Irish in Microsoft labs and Google.
“What Ireland found was a very competitive niche, reinforced by its low corporation tax rates for American and other international headquarters looking for a lower-cost, English-speaking language alternative to the UK.
“They found it in Ireland, which had created a very conducive business environment which gave Ireland a huge competitive niche.
“What went wrong is that it allowed the frothy asset bubbles to build on that, through some loose European money which went to the wrong places which is very unlikely to happen again – given that there isn’t any loose European money left – but also lack of regulation of property and banking.
“It seems to me that the elements of the solution are there: restore your competitiveness and protect your corporate tax rates against Paris and Berlin and anybody else who is tugging at it.
“Get back a confident story of growth and foreign investment but demonstrate that within that story, you have learned from your mistakes and on the back of that, get your debt rescheduled or managed to a point where it is bearable, but do it in a way that doesn’t leave foreign investors losing confidence and going elsewhere, as happened in Greece.”
LORD MALLOCH-BROWN
Mark Malloch-Brown served as a minister in prime minister Gordon Brown’s Labour cabinet, where he had particular responsibility for strengthening relationships with Africa and Asia and the international system.
The prime minister appointed him as his envoy for preparation of the London G20 summit.
In addition, Lord Malloch-Brown has served as deputy secretary general and chief of staff of the United Nations under Kofi Annan. For six years before, as administrator of the UN Development Programme, where he led UN development efforts around the world. Before that he was a vice-president at the World Bank.
He is well versed in global markets, economics and investing. After an earlier career in consulting when he advised political and business leaders around the world, he was vice-chairman of George Soros’s Fund and Foundation until he entered the British government. He has also served as vice-chairman of the World Economic Forum.
LORD MAPLES
John Maples was a founding partner of Maples and Calder. He is a former deputy chairman of the British Conservative Party and a member of parliament. He held various posts including parliamentary private secretary, treasury minister responsible for debt and international issues and various shadow roles including health, defence and foreign secretary.
