Sunday, March 6, 2011

06/03/2011: The Programme for Government - Part 1

Here are some of my comments (notice - not criticisms, by comments - these are thoughts in progress) on the FG-Labor Programme for Government. Off the top, I think there are some very good objectives outlined in the document, but...

The current post covers pages 2-7 and the subsequent posts will be dealing with other sections.

“The Parties to the Government recognise that there is a growing danger of the State’s debt burden becoming unsustainable and that measures to safeguard debt sustainability must be urgently explored.” Page 5.

[The problem, of course, is that the debt burden is not becoming unsustainable, it is already unsustainable. In other words, the core objective is significantly misplaced in the PfG 2011. Instead of dealing with the core issue of excessive debt, the PfG 2011 is attempting to address the ‘unsustainable rate of growth in debt’.

Imagine achieving such a objective in full and arresting growth in debt. The level of debt of ca €220bn already accumulated by the state in direct and quasi-direct forms will exert interest repayment pressure of ca €12-13 billion per annum depending on financing arrangements achieved. That implies that ca 30% of the tax revenues will be driven into simple maintenance of interest on the debt. Paying this debt down to 60% of GDP over, say, 10 years horizon will cost additional €9 billion per annum in principal repayments (assuming 3% average annual rate of growth through 2021). That means a massive €21-22bn will be outflowing annually from the state revenue to maintain the path to debt reduction consistent with the EU targets over 10 year horizon.

What does this translate into in terms of our tax revenue. If the Government were to achieve the tax revenues of 35% of GDP (roughly consistent with the current plans), in 2011 or debt servicing and repayment plan would swallow 37.5-39.3% of our total tax revenues, declining gradually to 27.1-28.4% of total tax revenues by 2021. Again, these numbers assume 3% pa growth on average through 2021.]

“We will seek a reduced interest rate as part of a credible re-commitment to reducing Government deficits to ensure sustainability of our public finances.” Page 6. [See comment above]

“…we will defer further recapitalisation of the banks until the solvency stress tests are complete and known to the new Government.” [This is fully correct – the process of recapitalization of the banks should start with the full assessment of the capital requirements]

"As an interim measure, we will seek to replace emergency lending to our banks with medium-term, affordable, official financing ...” [I wonder what this means...]

“We will end further asset transfers to NAMA, which are unlikely to improve market confidence in either the banks or the State.” [This is a good starting point, but a much deeper review of NAMA, and, in the end, a full roll-back of NAMA will be required. The PfG 2011 does not reach that deep.]

“We will ensure that an adequate pool of credit is available to fund small and medium-sized businesses in the real economy during the re-structuring and down-sizing programme.” [Where is this pool of credit come from? Who will administer the new lending? How will the new lending be priced? None of these questions are answered neither in principal, nor in sufficient operational detail.]

“The Government accepts that enabling provisions in legislation may be necessary to extend the scope of bank liability restructuring to include unsecured, unguaranteed senior bonds.” [Again, a vaguely phrased, but correct principle.]

“We will create an integrated decision making structure among all relevant State Departments and Agencies to replace the current fragmented approach of State bodies in dealing with the financial crisis.” [This is a good idea, but I cannot understand how a new body can override the independent decision-making across CBofI, NTMA, NAMA and DofF.]

“The new Government will re-structure bank boards and replace directors who presided over failed lending practices. We will ensure that the regulator has sufficient powers of pre-approval of bank directors and senior executives. To expedite this change-over we will openly construct a pool of globally experienced financial services managers and directors to be inserted into key executive and non-executive positions in banks receiving taxpayer support.” Page 7.

[Excellent idea, much need and all, but… (1) How will the Government deal with those directors and executives who should be replaced, while their contracts remain running? Fire them? Breach contracts? (2) What does the ‘pool’ mean? You can’t secure people to ‘stand by’ as a part of the pool while waiting for an appointment – you either will have to pay them to be in the pool, or you will need to hire them in immediately.]

“We will insist on the highest standards of transparency in the operation of NAMA, on reduction in the costs associated with the operation of NAMA, and that decision-making in NAMA does not delay the restoration of the Irish property market.” [Another excellent objective, but again, this raises more questions than it answers. NAMA legislation sets out NAMA as non-transparent, secretive and completely arms-length entity. This was also, in part, conditioned by the funding structure of NAMA. Breaking this structure implies full contagion from NAMA operations and funding to the Exchequer. The implication is that the quasi-Governmental debt might become fully sovereign debt. As far as the NAMA effect on the property market goes, in order to prevent NAMA from continuing to induce market uncertainty, the Government will need to reverse NAMA and force the banks to manage their own exposures. Some immediate sales of properties will be required.]

“Once the banking sector has been restored and is functioning effectively, we will introduce a bank levy based on the size of a bank’s liabilities (other than shareholder capital).” [This is a major problem. (1) A bank levy cannot be set against any new banks or banks that are not covered by State recapitalizations, otherwise no new entries will take place into the Irish market, and the existent non-State dependent banks will exit the market. (2) Any such levy will be in effect another tax on ordinary users of banks services, as in the reduced competition in the market, the banks will be able to pass the full cost of the levy onto their customers. In other words, such a levy will be a tax under a different name.]

“We will establish a Strategic Investment Bank” [Which again raises the issue of fair competition in the market for those banks which currently operate without Government subsidies and/or any potential new entrants. It also raises a huge number of questions as to the nature of the SI Bank, its management, strategy, funding, operations etc.]

“We recognise the important role of Credit Unions as a volunteer co-operative movement and the distinction between them and other types of financial institutions. In Government, we will establish a Commission to review the future of the credit union movement and make recommendations in relation to the most effective regulatory structure for Credit Unions, taking into account their not-for-profit mandate, their volunteer ethos and community focus, while paying due regard to the need to fully protect depositors savings and financial stability.” [A good idea, but might be coming dangerously close to the politicized alteration of both the regulatory regime in financial services and the Credit Unions industry itself.]

“We support the future development of the IFSC as a source of future employment growth, subject to appropriate regulation. We will establish a taskforce on the future of the financial services sector to maximise employment opportunities in financial services for staff leaving employment as a result of downsizing.” [Again, a good idea, but the devil is in the detail. There are plenty of task forces dealing with the future of IFSC and delivering very little on the cost of running these. How will the new task force be different?]
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