Thursday, April 22, 2010

Economics 22/04/2010: Ireland's deficit tops Greece

Updated below

Breaking news: Eurostat just revised Irish General Government Deficit figures from 11.7% officially reported in Budget 2010 to a whooping 14.3%, raising our deficit above revised Greek figure. Here is the link to the note.

Excerpt: "Ireland had its budget deficit revised even more [than Greece] -- to 14.3 percent from the initially reported 11.7 percent. Irish Finance Minister Brian Lenihan said this was a result of a technical reclassification associated with government support provided to the banking sector. "It is important to note that the underlying 2009 general government deficit for Ireland is 11.8 percent of GDP, which is broadly similar to that projected in December's budget," he said. "There is no additional borrowing associated with this technical reclassification. This is a once-off impact, and will not affect the government's stated budgetary aim of reducing the deficit to below 3 percent of GDP by 2014," Lenihan said."

That would be putting a brave face on what now amounts to the most deficit-ridden country in the EU!

One question remains to be answered - given that all 2009 recapitalization funds for banking sector came from NPRF, what 'technical reclassification' yielded this massive upward revision?

Update: There has been a lot of talk in the blogosphere about the 'silver lining' to today's news. In particular, one argument is making rounds that goes as follows: "Since our deficit has increased for 2009 to 14.3%, then the reduction to 10.6% envisioned in the Budget 2010 will be even more impressive to the markets".

Here is why this argument is fallacious:
  1. Today's revision of deficit for 2009 represents a reflection by Eurostat that cash injected into the Anglo Irish Bank by the state was borrowed via general spending fund in the open markets and as the result constitutes deficit financing. If so, where do you think this year's banks recapitalization will come from? Uncle Sam? or may be Angela Merkel? These recapitalizations are not, repeat not factored in the Government Budgetary projections per Budget 2010. The Eurostat rulling means that should the Government borrow the €10-12 billion to recapitalize the banks in the markets this year, this too will be reflected in our deficit. Now do the math - Government budget allows for €18.7 billion in General Government Deficit or 11.6% of GDP in 2010. If we add to this the lower bound of recapitalization estimates, our deficit rises to over €28 billion or a whooping 17.4% of GDP. Even if the Government wrestles out of the NPRF more cash to plug the banks balancesheet black hole, and assuming that our borrowing for banks purposes goes up by just half of the announced requirement, our Gen Gov Deficit will reach 14.7% of GDP. At which point we can all shout 'Eat our shorts, Greece!' once again.
  2. Today's revision clearly shows that the Government has been caught red-handed in attempting to avoid labeling our true General Government liabilities as such. This is about as reputation-destroying as Greece's use of financial derivatives in the past.
  3. An argument of a 'silver lining' assumes that as a one-off increase, this deficit revision does not matter going forward. This, in effect, is equivalent to saying that no cyclical deficit matters, no matter how big it is. Of course, such an argument is absolutely devoid of any anchoring in finance or economics. Cyclical deficits add up to total deficits. Total deficits - cyclical or not - add up to the total debt. This is exactly how Greece got itself into the bin!

13 comments:

Lorcan said...

didn't the €4bn for Anglo come from government revenue?

Sandymount said...

Flow vs stock difference being that Greece total level of debt is enormous versus GDP compared to Ireland. Small comfort but highly relevant to markets.

Seamus Coffey said...

Like Lorcan I think the €4 billion for Anglo came from the Exchequer. By the time the €4 billion was put (May) the bank had already been nationalised (Jan). There are rules or some such that prevent the NPRF 'investing' in Irish state owned companies.

The money for BOI and AIB came from the NPRF alright though.

John Muldoon said...

Isn't this the kind of thing the Greeks got in trouble for?

TrueEconomics said...

John, BINGO!

patrick1978 said...

This isn't the first time the Department of Finance has misled the Irish people.

1."The bank guarantee is the cheapest bailout in Europe."

2."We wont nationalise Anglo Irish Bank"

3." I never read the detailed report on Anglo Irish bank"

4. "It would cost more to wind down Anglo than leave it as a going concern"

5. " The IMF has agreed with me and Alan Ahearne that NAMA will get credit flowing into the economy"

6." I can guarantee the Irish taxpayer that I as Minister for Finance will appoint an outsider to AIB bank and BOI bank.

7." NAMA discounts will an average of 30%, on the same day bank shares rise 25% after these FACTS

8. SUPER TUESDAY--- "No more time for the banks to raise capital"--- gives the banks an extra 9 months.

9." I will impose a bank levy on future bank profits to cover NAMA losses--- UTURN on the taxpayer once again".

patrick1978 said...

This isn't the first time the Department of Finance has misled the Irish people.

1."The bank guarantee is the cheapest bailout in Europe."

2."We wont nationalise Anglo Irish Bank"

3." I never read the detailed report on Anglo Irish bank"

4. "It would cost more to wind down Anglo than leave it as a going concern"

5. " The IMF has agreed with me and Alan Ahearne that NAMA will get credit flowing into the economy"

6." I can guarantee the Irish taxpayer that I as Minister for Finance will appoint an outsider to AIB bank and BOI bank.

7." NAMA discounts will an average of 30%, on the same day bank shares rise 25% after these FACTS

8. SUPER TUESDAY--- "No more time for the banks to raise capital"--- gives the banks an extra 9 months.

9." I will impose a bank levy on future bank profits to cover NAMA losses--- UTURN on the taxpayer once again".

patrick1978 said...

"Eurostat just revised Irish General Government Deficit figures from 11.7% officially reported in Budget 2010 to a whooping 14.3%, raising our deficit above revised Greek figure."

And Patrick Honohan said that the cost of propping up Irish banks was "manageable", who are you trying to mollycuddle and brainwash, not me Patrick

Unknown said...

I must get on to my accountant and do a bit of creative accounting ,it's all the rage with governments so why shouldn't ordinary joe blogs have a crack at it.

TrueEconomics said...

Patrick, you can add to this several (at least 3) statements that Ireland has turned the corner on recession.

What worries me is the levy - a levy on the banks is a levy on banks' customers, aka the taxpayers! Minister Lenihan will take our money twice - once in taxes, once in banks levy...

laughingbear said...

Papoulias/Merkel spread 2 years exceeded 10 years. Bond at 8,8%

Kaboom!

Euro? Well.... have a lucky guess.

Unknown said...

"whooping" should be "whopping".

Just mentioning as it's a favoured adjective. Puts images of whooping cranes in my head everytime I read it.

Apart from that great blog.

David in Seattle said...

As I read the news about the budget deficit, our friends in Greece, the trade union deal progress, the continuing worrying estimates for unemployment in Ireland, it makes me ask the following question, to which I don’t have an answer:

How will Brian Lenihan take another 3 billion out of the 2010 budget?

The usual suspects are there:
* Property Tax (though some speculate this would come after the general election)
* Water rates
* Tiny efficiency savings (at best 200M?) from the public sector deal
* You’d have to speculate a politically popular hike in the tax for higher earners.
* Some trimming of quite specific social benefits (e.g. child benefit for 13 yrs+)
* Cut the capital spending budget again (though perversely there’s never been a better time to build)

But this would surely leave about 2.5B to raise?
* You could increase taxes… but you’d get no gain because it would result in lower tax receipts, more retailers going bust and a likely end to the nascent recovery. Oh, and too high a tax will dampen Multinational investment as they won’t be able to attract top talent to live in Ireland because of the cost of living.
* You could cut social welfare or rent allowance… but given the legal precedent that property owners don’t need to renegociate rents mid-contract, this would likely result in more hardship.
* You could make 10s of 1000s of public servants redundant… but our schools/A&E are already straining, and there are no alternate jobs for these people to go into.
* Additionally, too much extra burden on people will result in mortgage defaulting, which in turn will result in more bank capital injections, which Eurostat has already told us counts as Budget Deficit.

Here’s a summary of what was originally in An Bord Snip: http://www.rte.ie/news/2009/0716/economy1.html

And here’s the progress: http://www.independent.ie/national-news/cuts-well-short-of-bord-snip-target-2133644.html

I was curious Constantin where do you think the 2.5B in savings will come from?