The Permanent TSB move to raise its variable rate is a taste of what is to come.  Margins are going to widen to whatever the customer can bear and fee income will be driven up.  You can take that to the bank.  Overwhelming arguments will be presented to boards and to the Department for Finance as to why prices have to rise regardless of the public outcry which will be calculated to wane in time.  Bust banks have to repair – and, in the absence of economic growth leading to new lending opportunities, just how do you think banks will grow profits?

Banking interest margins and fees are going to go through the roof – a stealth tax by another name.  Despite the guff about public interest directors and shape throwing by opposition politicians, what, in the absence of competition, do you think will be given primacy – consumer protection, keeping deals as cheap as possible or growing profits aggressively to repair capital?  The waxing or waning of competitive forces is what drives the market and, as we move from a fast growing confident economy to a retracting one uncertain of its future, banking competition is thinning, credit is tightening and prices will rise.

Remember banking margins in Ireland were sky high until foreign competition arrived.  The Bank of Scotland entry into the market forced a cut in home mortgage lending margins of 67% across the board as Irish banks and building societies were caught fleecing Irish customers.  Interest rates on term loans and credit cards were amongst the highest in Europe and ownership of money transmission system was used as a barrier to discourage foreign competition.

Once NAMA has hovered up the loans off the balance sheets of AIB and Bank of Ireland, the hiatus ends and the real action will start.  You can expect both banks to turn the screw on customers in arrears on anything not protected by the protocol agreed on defaulting home mortgages.  That means:

Taxpayers expecting an increase in bargaining power because public funds have been used to bail out banks will face bitter disappointment.  Bank pressure on distressed borrowers will be perceived, not as banking logic, but as an act of personal betrayal.  Calls will mount for political interference further down the chain from board representation. But ask yourself if the Government can’t be trusted to run its own house well, just what kind of a pig’s breakfast would come of TD’s lobbying within the banking system?

Ultimately the market will correct itself as economic growth returns, but, in the meantime, don’t bank on a return to the credit markets of yesterday with cheap mortgages and easy credit.  Even with NAMA’s surgery complete Irish banks will emerge cautious, pricey, highly selective and very aggressive on arrears.  Banks won’t be taking prisoners, and, when pushed, will argue with some warped justification that they are doing so to protect the common good – after all they have the State guarantee to safeguard!

Dear Brian,
Are your advisors nuts? It’s already proven that runaway public sector pay hit insane levels during the tenure of last Government. Like for like pay is at least 25% more than in the private sector. But switch to pensions and the contrast goes off the chart. That’s why talk among your civil servants of hitting private pensions, now that the ship of State is holed, threatens to take life jackets off passengers in steerage to give extra buoyancy to fellow guests in first class;

• Civil Servants, Teachers, Garda and High Court judges have pension pots that would require career-long contributions of 27%, 31%, 48% and 87% per annum respectively. The average contribution rate in the private sector is 11%. It’s not higher because people don’t have the money.
• Any worker retiring in the public sector on a salary at retirement of €60,000 has a pension pot worth over €1 million but 40% of the private work force have none and most that do have one that is wholly inadequate. This is retirement apartheid, plain and simple.
• Those that have none can’t afford them regardless of tax incentives. Those that do can’t afford to put in more. Now you cut tax relief and guess what happens next – you’ll swell the retirement ghetto.
• Public sector pension pots that pay 150% tax free cash and 50% pensions are worth between 15 and 18 times the salary paid at retirement. How many private pensions do you reckon will ever come with an asses roar of these staggering numbers? Just who do you think will be the comfortably retired in the future and who, having paid for it, will be writing begging letters to relatives?
• Private pensions are hugely exposed to investment losses and the unaffordable cost of buying a pension. Nobody in the public sector is because we, taxpayers, guarantee them and pay for most of them.
• We are already paying €2.3 billion in pensions to retired public sector workers but what’s building up on the clock in the background is a further €5.4 billion per year. That’s excluding the €1.7 billion that goes into the National Pension Reserve Fund.
• Do the math and the total capitalised value of the public sector pensions bill is running at €60 billion over the years ahead.
• In the private sector 90% of employers who are trying to guarantee pensions to their staff have schemes that are underfunded and are in deficit, meanwhile €1.2 billion of deficits from state agencies have already been transferred into the public sector pot. FAS was one such scheme, transferring with a €216 million black hole. 
  Minister, that’s why talk of slashing into private pensions will set fire to the smouldering anger already in the private sector. Whatever way you do it, you’ll simply make things worse;
• You cut tax relief on contributions and you’ll destroy the incentive to save. People aren’t stupid -why get reduced tax relief on the way in to be mugged by the full force of income tax on the way out.
• You tax lump sums at retirement today and you’ll be kicking people in the teeth – remember their retirement lump sums are already down 40% while those in the Public Sector are rising with increments.

There’s a simple principle to follow. Sort out the Public Sector first. Cut pay instead of social welfare and reform pensions. Equalise treatment and you come back to the private sector with your scalpel in clean hands. Do it any other way and you’ll destroy this window to make fair what has become unfair, to treat workers in both public and private sectors equally and to restore power to the Oireachtas.

Politics is local so they say, which explains why domestic events dominate our news, but the real story of recovery will first happen elsewhere. What's happening in US shopping malls has a direct bearing on the level and length of pain we are to experience and it's pretty easy to understand why. Exports account for over 80% of Irish GDP, that´s three times France's and over two and a half times Britain's dependency on demand from economies outside their own borders. Despite the surge in the importance of non-OECD economies like China, India and Brazil, the USA still remains the dominant world consumer. That's why the US remains the key to the lock.

Ireland is hugely leveraged to a global recovery, more so than any other economy in the world and similar to other very open, global traders like Singapore and Taiwan. While these are also experiencing above par economic contractions estimated at-5% this year compared to ours at -8%, neither is also dealing with a property burst created by reckless Government policies- the so-called structural deficit that Brian Cowen rejects as a spawn of Fianna Fail's political loins.

There's still very significant forces dragging against a global recovery and to underestimate them would be a folly but we are in far better shape than we were coming into this year:

The Big Threats

• Business defaults and consumer bankruptcy will create a vicious feedback loop in banking, magnifying losses.
• Rising unemployment will depress consumer demand
• Increased commodity prices, especially oil, will act like a tax on recovery from oil producing nations.
• Once the effect of the stimulus wears off, another downturn will begin.
• Government borrowing costs spike especially for the USA and interest rates rise, killing off any recovery

The Big Pluses

• US manufacturing has stopped falling.
• Credit is loosening.
• Economic growth forecasts for the USA and China are improving.
• Business and consumer confidence is rising as hope replaces despondency
• Huge excesses created by the recession should keep inflation down throughout next year

A global recovery, beginning in the second half of this year, can only be sustained into next year by an improvement in US housing and a return to spending rather than saving by US households. That hasn't changed. Governments may need to step in with new stimulus like car scrappage schemes, tax rebates and green initiatives to push consumers out shopping and avoid a second slump. Still the betting looks good for continuing strength from Asian economies where China and India are expected to grow 9% and 7% respectively next year while forecasts for the US have been upgraded by some major players like Bank of America from 1.8% to 2.6%. Europe, which is expected to contract at double the US rate this year, will be slower to recover next year due to much lower stimulus spending.

So it's early and it's fragile but it's time for hope. I prefer to see the glass half full - the strength and speed of the US economic recovery could yet defy sceptics and doomsayers and Ireland may begin to feel the fresh winds of economic recovery a lot quicker than it feels at the moment. That doesn't translate into fast growth, far from it. Next year would still feel like a recession with growth hardly above zero, but at least we'd stop contracting.

Tip: I can't really see how the ECB can seriously look at raising interest rates again until the back end of next year. That leaves about a year to repay as much lifestyle debt as you can, before the next cycle of rising rates creates runaway costs. So don't idle your cash on deposit for too long, get rid of those toxic loans left over from the big party 1994 to 2006. RIP.

Despite the huge media attention on big developers who owe us squillions, the capitulation point in this property burst hasn’t happened yet. So far Ireland’s domestic and foreign banks have been consumed with saving themselves, repairing their capital and reconstructing their business models. But watch this space because we ain’t seen nothing yet.

The real squeeze hasn’t started. Once NAMA is underway, banks will begin to pursue distressed debt with vigour as teams of salespeople morph from zealous sellers of debt to pernicious debt recovery agents. Everybody will be targeted and not just developers but anybody finding it impossible to meet repayments on car loans, mortgages, overdrafts, credit cards and any other type of debt. Meanwhile much larger numbers of borrowers will tip over into the debt trap as their spare cash burns up attempting to bridge the yawning gap between much lower income or the dole and, debt demands. Government better pray for a slow European recovery especially in Germany because as it gathers pace, interest rates will start rising sharply. It’s as ugly as it is inevitable. 

In the big squeeze those sitting on property with rolled up interest or capital repayment holidays will be greeted by the born again banker – and there is nothing worse than the convert. This is the banker who survives the imminent wholesale job losses among staff and is now freed up from the chaos of restructuring, with strict instructions to get in as much cash as possible. So far banks have stayed their hand in forcing property sales at any price for fear of bringing their own house down around them. But once rescued by the public purse, that tactic will change dramatically triggering a capitulation point in property prices and finally heralding the real bottom of the market as supply surges on to it. Recent comments by some auctioneers that we’ve reached the bottom, is self serving propaganda. These are the same people who that told us prices would keep rising even when starter homes hit ten times average wages, a discredited self regulated profession of chancers hoping to return to the good old days when what they had to say dominated social discussion and paid them handsomely. You can safely file their predictions under The Bermuda Triangle, Elvis-is-alive and Area 51 as pure Sci-fi. 

The recent adoption of a code on mortgage foreclosures, delaying repossessions for twelve months is a welcome relief but it doesn’t protect all other types of debt. The great difficulty in Irish law is the unequal relationship between borrowers and lenders. Recklessness by one party can be subject to jail as 276 people learned in 2008. Recklessness by the other leads to a public bailout. Borrowers get punished. Bankers get rescued. That jail is the ultimate weapon of the lender is sheer stupidity. Putting people in jail doesn’t repay debts. The problem is that the Courts, relying on Dickensian laws that are a hangover from the days of Poor Houses, have no other option. What’s needed is an equalisation in the relationship. If a Judge finds that debt has been mis-sold by lenders, especially by sub prime parasites, he or she should have the authority of modern legislation to strike out the debt or to redraw the terms so that the borrower can manage. Such legislation, balancing consumer rights with bank rights, would beat overhauling regulatory boards hands down.

The moment has finally arrived with the delivery of the Bord Snip report when the three biggest questions facing Ireland have to be answered;

1. Do we protect the most or least vulnerable from the butchers bill? Is it to be cuts in disability and old age pensions or cuts in excessive public pay awards?
2. Where does power reside in our democracy, is it at The Oireachtas or is it behind it in the unelected hands of powerful lobbies like union chiefs?
3. What kind of moral fibre does this Cabinet really have? Will they match the rhetoric of serving Ireland first or will self preservation and fear overwhelm them?

What do you think? They’ll be taking three months holiers in the next few days and you can whistle Dixie for the publication on the Bord Snip report until after The Lisbon Treaty vote – the Government don’t trust the world’s most sophisticated electorate from differentiating between continuing effective European Union membership and the pain of spending cuts.

Meanwhile with the publication of two key reports dealing with the security of oil supplies and what happens in the event of oil shortages, you can rest easy that we’re in informed hands at the Department of Communications Energy and Natural Resources. There’s no problem with world oil supplies. That’s official. In the multitude of risks assessed by the Government covering everything from labour disputes at our ports to terrorist attacks, there’s not a word about the game changing audit of world oil reserves undertaken by the IEA (International Energy Agency) of which we’re a member. Now just to remind you of what the IEA has found;

• Just to offset the decline rate in oil production from aging fields we need to discover four new Saudi Arabia’s over the next twenty years and six if demand growth is to be matched. (By the way no giant fields have been found since the 1960’s, since 1984 production has exceeded discovery and since 2005 there has been zero growth in crude oil production – all that’s increased are by-products of maturing oil fields like butane and propane)
• The decline rate is 6.7% per year, nearly double previous estimates.
• Even allowing for the goldilocks scenario of huge investment in new oil infrastructure and burning up massive amounts of gas to heat Canadian oil sands to release more oil, we’re still facing an immediate oil crunch for at least the next five years.

But these things don’t bother our boys. All of the risks they've assessed are temporary little disruptions in supply, nothing permanent so you can sleep easy knowing that they’ve figured out what to do;

• Garda enforced reduced speed limits. Alternative driving days for private cars. Restrictions in petrol supplies at stations. A ban on containers or cans and home or business storage facilities.
• Reduced supplies to airlines. Imposition of maximum sales to any one customer. Reductions in supplies to commercial customers. Designated pump islands for emergency services and priority personnel.
• Lots of TV and radio ads to remind us of the fines and imprisonment for up to ten years for breaching the new rules under the Fuel Acts 1971 and 1982.

Yep, they’ve thought of everything and included in the list of key personnel to get priority at designated petrol pumps? All members of The Oireachtas, including over their three months hols. Go one admit it, don’t ya just want to cuddle one right now!