Friday, April 23, 2010

Economics 23/04/2010: Further details on Irish deficit numbers

More detailed analysis from the Eurostat on reclassification of the Irish deficit is available now. The link to the document is here. Go into Ireland file, spreadsheet for 2009.

Here is what is now apparent from the Eurostat analysis (italics are mine):

"In normal circumstances, under the National Pensions Reserve Fund Act, an amount equivalent to 1% of GNP (about €1.5bn) is paid by the Exchequer into the NPRF every year, in 12 equal monthly instalments. In May 2009, the total due to be paid under this arrangement for the remainder of 2009 and 2010 was paid in one tranche, in order to allow NPRF to fund the bank equity purchase entirely from liquid assets. (The actual 'extra' amount paid at this time was some €2.5bn, given the amount already paid or due to be paid under the normal Exchequer- NPRF funding arrangement.) The impact on Government D4_pay in 2009 is therefore the cost of borrowing this extra €2.5bn earlier than it would otherwise have to have been borrowed..."

In other words:
  • The Government has by-passed voted-in Budgetary procedures to inject €2.5 billion in additional funding into Anglo by front-loading future NPRF funds into 2009 provision. There was no Dail vote on this.
  • The Government pretended that the additional 2010 funds injected were not borrowed for under General Government Balance, thereby de facto claiming a right to transfer future expected receipts into 'liquid' current receipts. There was never any Dail vote to allow for this, as far as I know.
  • This is not the only time that the Government exceeded its remit in by-passing the Dail vote in relation to recapitalizations. One can argue that the entire Anglo recapitalization was planned and committed in advance of the Dail vote on the issue.
Furthermore, under contingent liabilities section 7:
"7. Special purpose entities included here are those where government has a significant role, including a guarantee, but which are classified outside the general government sector (see the Eurostat Decision and accompanying guidance note for details). Their liabilities are recorded outside the general government sector (as contingent liabilities of general government)."

Per table 2 in the same spreadsheet, the above does not cover the Guarantees which amount to over €281 billion in 2009 (line 5). And in fact, these refer to Nama. Now, notice that 'imputations relating to the financing costs should be included' in line 4, which does count as a full General Government liability. Guess where the euribor cost of Nama bonds should be entered? Thus, Irish deficit might also include the 1.25%-odd payments to the banks from Nama bonds, or, assuming €35 billion issuance of these bonds - €437.5 million in additional deficit not accounted for in the Budget 2010.

Now, recall that in 2007 euribor has reached well over 4%. Suppose we go to a 3-3.5% euribor pricing on Nama bonds, rolled over annually. In subsequent years, if Eurostat retains this classification of liabilities, up to €1,225 million will be added to our deficits courtesy of Nama.

5 comments:

Thos said...

Please explain what happens to our savings deposits, pensions and funds in shares with Irish and UK brokers if the worst happens ie Ireland defaults on its debt

Thos said...

No comment from Mr Gurdievf? Its obvious he a spoofer like the rest of them.

TrueEconomics said...

Well Thos, given it's a weekend & given I've been working on some nice data on global debt problems (tune in tomorrow for that) I'd say I have legitimate reasons for a delayed replies. Your question is not something that bothered me too much. But here are my thoughts;
1) our private contracts - savings, deposits etc - are goverened by the laws of the holding institution and are enforceable in the court of law. Irish sovereign default or a default by one or more of our banks does not change these contracts, which cannot be repudiated.
2) a significant devaluation of the euro such a default might cause will mean our US, UK and other assets held outside Eurozone will be more valuable in our internal market.
3) if our default triggers default by other nations, our assets held abroad will still be legally enforceable in the courts.
4) Iceland's refusal to cover UK & other depositors was an act of sovereign refusing to cover private liabilities of nationalized banks, so the default was not sovereign, but a private banks default, which means this case does not apply to us.
5) there is no legal or moral reason for our sovereign protecting our savers abroad at the expense of general taxpayers - you invest, you take risk, you pay for your mistakes! These are private contracts.

While I would be saddened if anyone loses any money, I have no legal obligation to allow my own wealth and income to be pillaged to rescue them.

Thos said...

Apology to Dr.Gurdgiev, my comments were very out of order.

TrueEconomics said...

No worries, Thos. Keep commenting!