Monthly Archives: May 2013

Five years have passed since the Irish economy began contracting. The economy has begun growing again, slowly. Unemployment remains unacceptably high and is likely to remain in double digits for much of the remainder of the decade. Ireland’s banking system is broken, and deleveraging is set to continue for some time. Public and private sector investment is at its lowest level in the country’s recorded economic history, undermining growth and job creation in the short-term, and productivity in the long-term.

Recognizing the challenges imposed by tight fiscal constraints and still-fragile access to sovereign bond markets, it is time to revisit the Labour Party’s pre-election proposal for a Strategic Investment Bank (SIB) to finance investment in infrastructure and lending to SMEs. Using funds from the National Pension Reserve Fund (NPRF), such a bank could off-set austerity without impacting negatively on the budget balance. Every €1bn can support 10-15,000 new jobs.

There are long-standing, successful models of state investment banks the world over, not least in Germany. Chancellor Merkel made KfW central to their economic stimulus efforts immediately after the financial crisis struck. More recently, the UK has set up a Green Investment Bank to finance environmentally friendly infrastructure and is in the process of setting up a Business Bank to finance SMEs. President Hollande established a Public Investment Bank in France soon after being elected, incorporating the Strategic Investment Fund established by his predecessor. President Obama has been a strong advocate of a national infrastructure bank in the US.

Ireland’s Programme for Government includes a commitment to establish an SIB, and many of its building blocks are already in place, notably the nascent Strategic Investment Fund (SIF). The SIF has yet to have a real impact in driving investment. It requires urgent legislative change to clarify its investment mandate. Moreover, €1.15bn, or 50% of the proceeds from the sale of Irish Life and Bank of Ireland bonds, should be allocated to capital investment, in line with the government’s commitment and troika agreement, and could be allocated to the SIF.

Along with such an expanded SIF, and the three new SME funds and one infrastructure fund managed by the NPRF, some €2.5bn of existing funds could be used to capitalize a fully-fledged SIB capable of funding €6bn in assets and ultimately supporting total public and private sector investment of €25bn. In the short term, steps must be taken to free up NPRF funds for productive investment in Ireland rather. In the medium-term, an SIB would add significant value to Ireland’s banking landscape.

Prior to the 2011 general election, opposition parties were falling over themselves telling us how they were going to play hardball with the banks. One senior opposition spokesperson, now a Minister, famously said a new government wouldn’t give the banks ‘another red cent’. Maybe, as another senior Minister in the FG-Labour government has said, that’s just the sort of think you say during an election campaign.

As a parting gift, the outgoing FF-led government decided to postpone publishing the results of the ‘Prudential Capital Assessment Review’ (PCAR). This was carried out by Blackrock Solutions, a credible player in the global financial world. The PCAR was supposed to put a number on the ‘red cents’ the banks would require to ensure they were bullet-proofed against what was supposed to be a worst-case economic scenario. To this end, Blackrock ran a slide rule across the banks’ accounts and loan portfolios and reported back to the authorities.

Fianna Fail clearly didn’t like what they saw. The election happened in February. The PCAR was published in March. The banks got another €24bn to tide them over until 2013. And bondholders continued to laugh all the way to the … well, not to the bank, I suppose. Continue reading →