Wednesday, September 9, 2009

Economics 09/09/2009: Has the Green Party Leadership Sold the Country for a Broom?

Gutless and short of any sort of vision!

The Green Party leadership (per RTE here) has announced a series of "significant changes" to the Nama bill. So what are those significant changes, then?

Before we dive into the details, here is what the papers are not telling you - Green Ministers, the birdie has chirped (hat tip to KOD), received a trade-off from FF: in exchange for introducing a Carbon Tax they signed off on Nama. Why this is the bad news for the Greens and the country? Two reasons:
  • First a minor one - Nama is infinitely more important to this country than the Carbon Tax, so much so, that the Greens' leadership in effect sold family jewels to buy a new broom;
  • Second a major one - Carbon Tax is simply another punitive unavoidable tax for this country. Do not confuse it with some environment improvement incentive measure. Here is why. If Carbon Tax were to be a true behavior modification tax, then at least in theory its introduction should induce people to opt for greener alternatives: use of more public transport (that should be less polluting), more telecommuting, more energy efficiency etc. All of these are good things. But the problem is that a family that works in Dublin and, because of past FF policies was forced to buy their house in Cavan (for example), there is no alternative to driving and there is no alternative to switch to 'cleaner' energy. Indeed, with ESB (legacy of FF) in charge of generation and Eirgrid (legacy of FF) in charge of the grid, we have no real less polluting alternative. So Carbon tax will be unavoidable to many of us and thus it fails as a real 'behavior modification' tax.
  • (Note 1: Carbon Tax is not a punitive tax for middle class Dublin and Cork voters - core Green constituency, so the question I would ask Messr Greens - are you selling the entire country in hope that your small number of voters will swallow the pill?)
  • (Note 2: Has the Green Party leadership signed off on Nama before their general party meeting in an attempt to prevent democratic process within the party forcing their leadership to take a more ethical position on Nama?)
Which brings us to the conclusion on this sad chapter in Irish Green Movement history - Ministers Ryan, Gormley, Sargent and Senator Boyle did indeed agree to Nama in exchange for being allowed to levy another consumer-abusing tax that will feed general budget hole left by the grotesque spending commitments of this Government.

Now to the news:

Just minutes ago Minister Ryan has told the nation that Nama is ok because Ireland will be getting money from ECB at a very low cost. This is the long-mulled 1.5% assertion. To remind you all - Nama supporters have for some time made the claim that Nama will come cheap - at 1.5% ECB financing rate. Of course, they won't tell us the term. We are in the dark as to how long will the maturity of these bonds be.

Here comes the flashlight: 1.5% charge is consistent with 9-month paper. This will be fine, if we are borrowing to cover short term liability. Or if we were looking at ordinary sort of repos volumes, so that rolling the bonds issued at 1.5% would not be a problem on an annual (or even less) basis. But hold your breath -
  • We will be rolling over some €55-70bn in Nama paper annually! Plus whatever we get to borrow on short term to finance our ordinary deficits, say odd €15bn. Total amount of Irish bonds to be rolled over at the end of 2010 can thus be €60-85bn, in 2013 this amount will reach €104-120bn once interest is rolled up - that means that by 2013, 34-39% of Irish expected GDP will be rolled over in short term bond markets! I thought, honestly, that borrowing short to buy long term assets has gone out of fashion some time ago in the current crisis!
  • A 1.50% is a premium of 1.25% over the ECB rate, and 50bps above the ECB fixed rate tenders. Back in Fall 2008 - amidst raging crisis, ECB rate was 3.25% and tenders were at 4.75% in October 2000. What happens if we go back there? In say 5 years time? By then, cumulated roll over will amount to €120-135bn and our 2016 interest bill on this Green Party legacy will be €5.3-6.4bn. That is interest charge alone!
Finally, let us look at the last set of news on the Green Party leadership shameful surrender. Per RTE site report: "Minister Eamon Ryan said the new measures would increase the protection afforded to the taxpayer." How? Apparently via:
  • The introduction of risk sharing between the banks and NAMA: "in the case of a small proportion of the loans, the banks will not get all the money immediately. Whether or not the banks would get a further payment would depend on whether NAMA is successful.
  • A windfall tax of 80% on profits will apply to developers where they gain from land that is rezoned.
  • The amount of money NAMA can borrow will also be cut from €10bn to €5bn.
  • The new agency will be obliged to report to the Minister for Finance every three months instead of the annually as included in the earlier draft legislation.
What does all of it mean?

First bullet point above: remember that 'levy' on banks that was deemed unfeasible because it creates an implicit option on the banks? Well, the same, in converse, applies to this risk-sharing scheme. If a share of proceeds issued to the banks will be held back, it simply cannot be brought into banks capital reserves without adjusting for the risk of Nama failing. What should such risk adjustment assume about the probability of Nama failure (which will mean banks don't get that extra cash)? Go back to my and other's estimates of the expected losses under Nama. Even Davy Stockbrokers earlier showed that Nama is likely to generate a net loss of ca 5bn. So even by Nama cheerleaders assumption, Nama cannot be expected to work. Thus, the proposed risk sharing scheme will never pay out that share of funds 'held back'. In other words, the expected value of the 'held back' share is Nil!

Further problem arises in the context of the Nama being lauded by various financial analysts (stock brokers etc) as the 'liquidity' event. In other words, it is supposed to solve the problem of our banks' balancesheets and inject liquidity into banks. Now, the amount to be injected will be reduced by exactly the amount of this 'held-back' payment. So if Nama was to be a success because it was injecting liquidity, holding this liquidity back certainly constitutes now a failure of Nama.

Lastly, Nama was supposed to reduce the risk of banks coming to the Exchequer and asking for direct recapitalization. The more 'risk sharing' is involved, the lower will be risk-weighted capital and the greater will be post-Nama demand for recapitalization. So, again, if Nama was in the first place to reduce secondary round of capital demand, new risk-sharing scheme will increase it.

Second bullet point: folks, I thought we were told that developers are not being rescued by Nama. So which profits are they taxing? You can't, Minister Lenihan, have a cake and eat it. Either Nama will rescue the developers (by helping them achieve profit in which case an 80% tax makes sense) or it will not rescue developers (in which case there will be no profits and an 80% tax makes no sense). I wonder if Eamon Ryan actually gave a single thought to this absurd proposal!

Third bullet point: this is irrelevant, because the proposed bill allows Nama to borrow unspecified (unlimited) amount of money in the future with approval of the Minister. So who cares if they can borrow 10bn or 5bn on day one of their operations if they can borrow 30bn more on day two of their existence? Again, have Ministers Gormley and Ryan actually given a single thought to what they were signing?

Fourth bullet point: reporting to the Minister for Finance (behind the closed doors and no public scrutiny) is simply short of proper transparency and accountability procedures. It does not matter how often it is done. Putting a phone connecting two windowless and door-less rooms ain't going to let any light into either one of them, Messr Gormley and Ryan.

So to sum up - we now have it on the record. Ministers Gormley and Ryan, alongside the rest of the Cabinet have signed off on a document that will:
  1. Coercively take ordinary people's incomes;
  2. Clandestinely pass the money over to the banks;
  3. Creating a buffer of opaqueness and evasion of responsibility and accountability between themselves and us, the taxpayers;
  4. The banks will have no incentive to lend to the economy, the households will have no money to pay the bills - a new wave of mortgage defaults and personal loans defaults will be rolling over the banks. The economy will stagnate. Property markets will stagnate. Emigration will be back with the 1980s vengence.
Full stop. Nothing else worth adding.


Holbrook Fields said...

I don't have the energy to even read all of your post. I read the first bit about you claiming as fact something you heard secondhand. To me that doesn't inspire confidence in your opinions. But I do admire the energy you have to dissect this issue and I think your criticism is necessary. Peace. Holbrook.

Adrem said...

Is NAMA not operating on the basis that the Interest we pay on the bonds will be more than met by the income we generate from the performing loans??? In which case where does all that rolling up of interest come from?

Philip said...

Lads, it's like this...Zoe just got the heave ho 3rd time around. All he needs is time for another appeal, NAMA will arrive just on time to save the day...for O'Carroll. You have to admire them

ryano said...

I don't know who your little birdie is, but the carbon tax trade-off story is false. Brian Lenihan announced in last year's budget speech that a carbon tax would be introduced in 2010.

The windfall tax is not supposed to target existing developers and land speculators - it's about ensuring that a new round of land speculation doesn't start up again in the future. Presumably our current generation of developers and landowners aren't unique in their motivations.

Dr. Constantin Gurdgiev said...

ryano, thaanks for commenting. Per your points.

Carbon Tax was pre-announced, but there was significant resistance in the Cabinet to its imposition. This is why, as far I can gather, the Carbon Tax was a part of the revisions to the Platform for Government that the Greens still hope to secure. In fact, environmental partners within the Social Partnership are still including the Carbon tax into their submissions. Seems like they are not too confident that what Minister Lenihan promises will be delivered...

Brian Lenihan 'announced' many things, including that he will not soak the taxpayers and that he will achieve real savings. These were then rescinded on. What did George Bush say once? "Fool me once, shame on you. Fool me twice..."

Per your second point - are you asserting that the 80% windfall tax will be on future speculators and developers? As I read it, it will apply to Nama-linked developers as well.

If it does apply to new (future) developments, I would love to see how this can be administered? How can you separate the value that accrues to land from rezoning from the value of built facilities?

Now, suppose I buy a site for 100, rezone it and put a building for 80, selling the building with land for 360. I got an upside of 100%. Which part of 100% accrues to rezoning? Without rezoning, there can be no building. Without the building there won't be a 360 value.

Don't you think that an 80% arbitrary tax will spell a zombie development market in this country into years to come?

I know that we can hedonically separate the value of a permission to build. But will it hold in courts? On every development occasion?

So windfall tax cannot apply to developers.

Can it apply to speculators - aka those who rezone and resell rezoned and without any additions to it being made. If I am an even half-brained speculator, I would do the following. I would buy a site for 100, rezone it, making it market value (estimated), say 200. Tax of 80% would require me to surrender 80, so I will 'invest' 10 into fig-leaf 'development' activity and sell land as an unfinished ongoing project not as a land. I make slightly smaller profit, but the Exchequer gets no windfall tax.

The windfall tax as a general, non-Nama related tax, is a cherry on the pie of stupidity that passes in this country for tax policy. The crust of it being Lenihan's Budgets and the icing being the new self-assessed property tax. Oh, the filling is, of course, the Carbon Tax.

We will need heavy earth moving equipment to move the legacy of FF-Greens horror off our economic policy books in years ahead.

At any rate, if your comment is right, then what does the new windfall tax have to do with Nama and protection of taxpayers within Nama that Minister Ryan is talking about?

Finally, my main concerns with Minister Ryan's statement is that in substance it is pure hogwash. He is stating that the taxpayers will be protected via risk-sharing. yet there is still not a single taxpayer representative within Nama, there is still no requirement onto the Exchequer to guard taxpayers interests, there is still no transparency and accountability. 80% windfall taxes or not, Minister Ryan is either attempting to deceive us, the taxpayers, or is deceived himself.

Further to the same point, Mr Ryan betrays woeful lack of understanding of finance in his claims about the cost of financing Nama. Again, he was either deceived in this or is deceiving us knowingly.

Lastly, Mr Ryan does not understand the principles of risk sharing and Prof Honnohan's proposal. Shall I repeat again the same formula of who deceiving whom here?

The more your comments make me think about Minister Ryan's statements, the more absurd (to be benign) they appear to me.

Best, Constantin

The Galway Tent said...

The Pontious Pilate and 'lying'(a) Green Party is now worse than Fianna Fail. At least everyone knew what to expect from Fianna Fail, run by The Galway Tent Cartel(b).

The Greens have set back the credibility of environmental issues in Ireland by decades.

(a) 'possibly' lying, maybe just green between the ears. (b) Current Galway Tent project: NAMA's €90,000,000,000 of taxes and the €490,000,000,000 guaranteed by taxes.

ryano said...

Well, at present we have a promise of a carbon tax. Why would the Greens trade anything for a further promise of a carbon tax? What does the second promise add to the first?

I agree that the windfall tax is non-NAMA related, although I don't agree that it's a stupid tax. Capturing windfall gains from land rezoning has long been an aim of the Green Party. No previous government has even tried it, and the frenzy of rezoning which these gains have fuelled has contributed to our current woes.

You say it's unworkable but "betterment" taxes of this nature are in operation in many countries, including I think Denmark. It can certainly work, although obviously if you think it's a bad idea in itself then fair enough.

karim said...

Very thoughtfull post on leadership. It should be very much helpfull.

Karim - Mind Power