This week we are going to talk about two Irelands, business Ireland and bureaucratic Ireland. They were both evident this week and both view the world from very different angles.

I’m sitting in the wonderful Urban Picnic cafe in Georges Street Arcade in central Dublin, listening to the government’s press conference about Ireland leaving the bailout. It is quite a surreal experience. The language of the press conference is pure bureaucratic Ireland, while the reality of the cafe is classic business Ireland.

In bureaucratic Ireland, the tone of the conversation this week has been almost entirely informed by a ”what will the neighbours think” bias. The high priest of the bureaucracy, the Minister for Finance, even referred to Jean-Claude Trichet as being a ”highly sophisticated Frenchman”, as if our neighbour the Frenchman, is on a higher cultural and intellectual planet to us Paddies.

In fact, Trichet has displayed neither sophistication nor particular ability in his two senior public roles. As governor of the Banque de France he presided over a calamitous run on the French currency in 1992 and as the boss of the ECB, European banks imploded on his watch nearly taking the euro with them.

I can’t count the number of times I have heard bureaucratic Ireland talking about the economy this week using terms like reputation, humiliation, shame and embarrassment as if we are talking about an unwanted teenage pregnancy in the 1960s rather than using 21st century economic terms like hard work, customers, balance sheets, productivity and profits.

In business Ireland, people know that economics and economic recovery is not some sort of Victorian morality costume drama: we are talking about buying and selling things for a profit – that’s what a recovery is. It is not about being respectable. It is about getting up every day, going out and selling stuff to other people in such a way that they are happy to buy and you are content to get paid at the price.

The contrast between bureaucratic Ireland and business Ireland isn’t just one of language, it is about identifying what is important and what is not.

Economic recovery is not about getting backslapped by European politicians, American multinationals or photo opportunities with spokespeople for investment funds that have no real fixed abode.

The recovery is about small businesses having a chance and it is about people deploying their talents and energies to make it happen. To make things happen we need to have enough credit to grease the wheels, enough customers to buy the product and enough energy to get there.


Banking dilemma

Assuming we have the energy to rebuild, business Ireland needs credit, customers, domestic demand and properly functioning banks. In Ireland we don’t have these, yet. In fact, the absence of a properly functioning banking system is still one of the biggest holes in the recovery narrative and it is one of the major unexploded landmines that could go off in 2014.

Indeed the banks are one of the places where bureaucratic Ireland and business Ireland meet because the banks are now agencies of the state and businesses need to deal with them every day. The banks are the link between press conference Ireland and hard-pressed Ireland.

You are probably familiar with the official story from bureaucratic Ireland. The account that has been spun all over the world is that Bank of Ireland is fine. Last week there was much made of the fact that foreign investors had made a few quid on its share price since 2011 and that it paid money back to the state at a profit to the country.

But a closer look at Bank of Ireland reveals the sharp distinction between the cheerleading of bureaucratic Ireland and reality of business Ireland.

According to its own figures, 10 per cent of the bank’s owner-occupied residential mortgages are in arrears and 16 per cent of its buy to let mortgages are too. This makes it about 6 per cent better than the rest of the banks. So far so okay.

But let’s look at how much it has provided against losses on these loans. The bank has set aside €824 million on a €20 billion loan book. This is about 4 per cent.

Now let’s consider when all these mortgages were taken out to see how bad these loans are likely to be. Over half were in the 2005-2008 period, ie at the height of the boom. Indeed, by way of comparison, the complexion of Bank of Ireland’s loan book is almost identical to that of KBC, the Belgian-owned bank.

Three weeks ago KBC announced that it was increasing its provision to Euro 1 billion for bad loans on a total loan book that is smaller than half of Bank of Ireland’s Euro 20 billion book. This move was driven by the ECB announcing stress tests for all eurozone banks in 2014. Clearly the Belgians decided to sort out the Irish problem by providing lots of capital.

Assuming that KBC and Bank of Ireland have the same problems in their loan books, this implies that Bank of Ireland might need to double or even triple the amount of money it sets aside next year to cover losses when the ECB looks at it with its new more strict stress tests.

This banking dilemma plays out in small business Ireland in two ways.

First, if Bank of Ireland, and the other banks, need cash, where will they get it?



This is where the new notion of bail ins’ comes into play. If the banks can’t raise money on the markets, deposits are likely to be raided – as happened in Cyprus. Given that most European banks will need capital at the same time, why would you think Irish banks would be at the top of the capital-raising queue?

Quite apart from the deposits side, the lack of adequate capital in the banks is strangling credit in business Ireland. It means that even when interest rates in Europe are at 1 per cent and moving towards zero, Irish business (or young Irish couples aiming to buy houses and profit from the fall in property values in the last five years) have to pay 5 per cent interest for the pleasure of a loan.

Contrast this with the foreign player in the market who can buy distressed assets at close to zero per cent financing and will therefore always outbid the Irish player. And so too will the cash buyer in Ireland always be able to outbid the young couple trying to get a house because the young couple don’t have the cash and have to borrow at 5 per cent.

Foreigners are being gifted the Irish recovery over the locals and, among the locals, the middle-aged cash investor is in a much stronger position over the young owner-occupier couple.

When you compare the rhetoric of bureaucratic Ireland with the realities of business Ireland, the disparities, as we exit the bailout, are as great as ever.

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David McWilliams is launching a new financial markets daily newsletter on Wednesday to coincide with the Federal Reserve’s crucial meeting. It will be accompanied by a new Punk Economics animation. Details either @davidmcw on Twitter or

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