Showing posts with label Irish Government policy. Show all posts
Showing posts with label Irish Government policy. Show all posts

Thursday, May 16, 2013

16/5/2013: There are jobs & then there are...

Off the start - there is nothing wrong with debt collection as business when it is properly delivered and regulated / supervised. And there is nothing wrong with debt collection agency growing its workforce.

But, then again, there is nothing particularly laudable about this either.

Unless, that is, you are an Irish Government Minister who cares none but for a headline grabbing opportunity.

Capita - some background on the company is given here: http://www.rte.ie/news/2013/0516/450722-capita-jobs/ and http://namawinelake.wordpress.com/2010/08/15/capita-aka-crapita-%E2%80%93-service-provider-for-one-of-nama%E2%80%99s-most-lucrative-contracts/ - is to double its workforce in Ireland by bringing in 800 new jobs. There is no information on the split of Capita's activities in the ROI, but one can venture a guess that booming business of debt collections here will take up the bulk of the new jobs 'created'.

Irony has it - Capita's new HQs in Dublin will be at the heart of the pride of Irish economy: the Barrow Street cluster that houses top firms in law and ICT services, but also has the dubious distinction of housing Ireland's 'bad bank' Nama. Nothing like calling the 'knowledge economy neighbourhood meets debt collectors' a 'vote of confidence in the Irish economy'.

Have we lost all bearings and compases?

I, for one, can't wait for the next congratulatory flyer from FG to my home - it will undoubtedly explain how the misery of thousands of Irish homeowners facing repossessions benefits my local economy of Ringsend-Irishtown with blessed new jobs.

Monday, April 22, 2013

22/4/2013: Government Latest Hair-brained Idea

Earlier today, RTE has reported that:
"The [Irish] Government has launched a plan to facilitate the creation of 20,000 jobs in the manufacturing sector by 2016." Frankly speaking, I can't be bothered to read much more into the idea. In times of aplenty it is bonkers to allow the state to pick winners in the economics game and then let civil servants lavish 'investment' supports onto them. In times when debt/GDP ratio is up at 120% of GDP marker and private debt is bending the nation into the ground, the very same idea is simply a prescription for massive waste we can't afford. 

But here's what, according to RTE report is even worse: 
  1. "Under the plan fledgling manufacturing companies will get to apply for support from a specific start-up fund." Wait... start-up funds invest in start-ups which, by their definition can't be in existence long enough to become 'fledgling' - unless they are 'fledging from the start-up phase' which is equivalent to being dead-on-arrival. So question for Irish boffins: you will be investing in freshly-dead firms or fledgling ancient 'one-day-were-start-ups'?
  2. "There will also be a support fund for capital investment by manufacturing companies and additional financial support for R&D investment in engineering firms." Aside from capital investment (presumably, having nationalised most of the banking system, our markets-supportive Government now has appetite to take on equity in manufacturing firms too) idea which suffers from the same problem of 'winners-picking', leading to risk-mispricing (which in current fiscal conditions can be labeled 'waste' outright), there is a problem of R&D supports. Targeted tax and sponsorship allocations to R&D supports are not a good policy for stimulating high value-added R&D. Here's one study that found as much. 
  3. "The plan also contains proposals to maintain or reduce company costs for energy, waste, regulation and tax." Wait, how is that going to be achieved, if, per our semi-state behemoths and the Government, there is no ripping-off of consumers/users going on in Irish energy, waste and tax environments? Either things are being priced to rip-off customers today (thus allowing for some price reductions), or there is no room for price reductions, or - as most likely - the Irish Government is planning to increase rip-off of other customers (e.g. households) to subsidise select manufacturing ones.
  4. If Irish Government pumps said subsidies into select manufacturers, how does this square with the equal markets treatment laws within the EU? And how will the Irish Government deal with the pesky problem that you can engage in industrial favouritism while making any serious claims about having a real markets-oriented economy here?
I can go on about this latest idea. It is promised that it will 'create' 20,000 jobs by 2016 - a claim that is, as always is the case with the Irish Government pronouncements, is neither verifiable, nor based on any serious analysis. But, needless to say, there will be loads of PR opportunities involving flowers, ribbons, Ministers and RTE cameras in months to come. Meanwhile, when your taxes go up comes December 2013 once again, don't ask why, think Government 'jobs creation' plans... Think big... Think someone else is getting subsidies so you don't have to...

Wednesday, April 10, 2013

10/4/2013: IMHO Submission on the Review of Code of Conduct on Mortgages Arrears



The Irish Mortgage Holders Organisation Ltd.,
www.mortgageholders.ie
Not for profit organisation.

Submission on the review of code of conduct on mortgage arrears consultation paper CP 63

Irish Mortgage Holders Organisation, April 9th 2013.

Attention: Mr. Bernard Sherridan, Central Bank of Ireland.



Dear Mr Sheridan,

We would like to thank you and your team for meeting us recently about issues and concerns we have at the treatment by banks of Mortgage Holders.


We are very concerned by the statements made by Mr. Elderfield at the launch of the “targets” (set by government and the Central Bank) for banks, with respect to dealing with those in arrears as well as comments surrounding the changing of the Code Of Conduct on mortgage arrears to allow banks to take swifter action against mortgage holders.

It is our view that the process of mortgages arrears resolution is being facilitated in an unsupervised and unstructured way, without due regard to the need for transparency and openness which would be consistent with the best practices for arrears resolution and consumer protection. The process – as outlined to-date – leaves the mortgagees fully exposed to banks putting their own objectives and strategies ahead of the needs of the Irish economy, society and borrowers, and provides a large deficit in consumer protection.

We would like to make the following specific points regarding the review of the code of conduct on mortgage arrears notwithstanding the fact that it may already be predetermined as demonstrated by Mr. Elderfield’s comments as referenced above.


Legal standing:

In the first instance and reluctantly we have to raise the issue of the legality of the Code Of Conduct. This issue has been discussed behind closed doors for some time now and it is an issue of the utmost importance as the legal status of the code of conduct on mortgage arrears is by no means certain. We wish to reaffirm our concerns about the legality of the code which we expressed originally in our email to Governor Honohan last month.

A number of recent high court cases refer to this issue including Irish Life and Permanent v Duff where Justice Hogan raised “the somewhat troublesome issue of the precise legal status of the code of conduct”. Justice Hogan followed recent high court precedent in the Fitzell case and warned The question, for example, of what constitutes a “reasonable effort” on the part of the lender does not easily lend itself to judicial analysis by readily recognisable legal criteria. How, for example, are “reasonable efforts” to be measured and ascertained? If, moreover, non-compliance with the Code resulted in the courts declining to make orders for possession to which (as here) the lenders were otherwise apparently justified in seeking and obtaining, there would be a risk that by promulgating the Code and giving it a status that it did not otherwise legally merit, the courts would, in effect, be permitting the Central Bank unconstitutionally to change the law in this fashion’.

The Code itself has no specific legislative status. It is neither a piece of primary legislation in the form of an act of the Oireachtas nor a secondary piece of legislation in the form of a ministerial regulation issued by the Minister for Finance. The Code is not even stated to be admissible in legal proceedings. It is a Code issued under the terms of Section 117 of the Central Bank Act 1989 and therefore lenders who infringe its terms may be subject to the Central Bank’s Administrative Sanctions Procedure. This is an internal process that allows the Bank to control the conduct of and helps to define its regulatory relationship with financial service providers, but it is not one that a consumer as a borrower has any involvement in. This we believe is a matter of extreme urgency that needs addressing.


Right of Appeal:

Section 49 & 52 as proposed allows for a lender to have 3 senior staff act as an appeals board. This is completely unacceptable and allows for no independent oversight. The appeal process must be fully detached from the banks or banking sector representative institutions and vested with an independent authority acting to protect the interests of all parties involved in a dispute. The process must be made explicitly transparent and any asymmetries in representation during the dispute that may arise due to (a) nature of the processes that lead to the appeal, and (b) resources available to the parties prior to and during the appeal should be removed. In practical terms, this requires provisioning for the independent and fully funded counsel for borrowers who cannot afford such professional help, and an appeals board that is fully operationally and membership-wise independent from both borrowers and lenders.


Moratorium:

The proposed and current code is flawed in not being prescriptive in defining the periods of time over which the moratorium clock is ticking. No time is given for gathering of financial information or indeed an exchange of offers between the lender and the borrower. This will become a significant issue when the legislation is introduced to reverse the Dunne Judgement, which will lead to a significant rise in repossession applications. Lenders can initiate delays in corresponding with borrowers, as they have done on many occasions to-date, and such periods of delays will account for time eaten into a moratorium period. Borrowers, however, are not accorded similar powers. Again in the absence of prescriptive process and recording of times borrowers can be seriously and unfairly disadvantaged by losing time that is taken off them ahead of potential repossession proceedings.

Provision 37 proposes ‘Prior to completing the full assessment of the borrower’s standard financial statement, a lender may put a temporary arrangement in place where a delay in putting an arrangement in place will exacerbate a borrower’s arrears or pre-arrears situation. Such a temporary arrangement should not last for more than three months. Any subsequent arrangement should be based on a full assessment of the standard financial statement’.

This provision should state that the duration of this temporary arrangement does not count for the purposes of the 12 month moratorium on repossession proceedings. Similarly, Provision 57 should state in relation to the twelve month moratorium that ‘the twelve month period does not include any time period where a proposal for an alternative repayment arrangement is being negotiated’.


Unsolicited Contact by Lenders with Borrowers:

The Central Bank “themed inspections” as to the banks adherence to the previous rule of no more that 3 unsolicited contacts in one month was typical of light touch supervision. The lenders seem to have
had significant influence in this proposal and the Central Bank seem to have accepted the industry’s lobby position on this. In addition the Central Bank gave advance notice to banks before their “inspection”.

‘Feedback from industry would indicate that the current requirements, particularly the limit of three successful contacts, are preventing lenders from making contact and engaging with borrowers and are therefore impeding the consideration and resolution of borrower’s cases. The Central Bank does not believe that this is in the best interests of borrowers’.

There are no provisions for the engagement with mortgage holders in this feedback system. Similarly, there are no explicit, transparent and enforceable provisions to ensure that lenders engagements with the borrowers will be “proportionate and not excessive”. There are no data disclosure provisions relating to inspections and any remediation measures applied to institutions violating code of conduct.

The new unlimited contacts must not be “aggressive or intimidating”. Once again, how is it proposed to ensure this will be the case? How will it be proven that all attempts to contact the borrower have been made and that these attempts have been made within the confines of the Code-permitted procedures? The removal of this limited protection of mortgage holders is a significant regressive step in consumer protection and has left the borrowers unprotected against potential abuses by the banks.

Debt collectors acting on behalf of lenders are still unregulated within the existent structure and under the proposed code. How does this code cover their activities or can they adopt any means they deem appropriate to recover monies?

The Central Bank will have failed to provide symmetric protection of the interests of the borrowers and the lenders unless it allows for explicit, enforceable and transparent safeguards to protect many vulnerable people who are in arrears and will be set upon by lenders who have been given a free rein.


Unsustainability: 

Many actions taken by the bank to repossess property are predicated on a decision by a lender that a loan underlying the property is unsustainable. The Code should include prescriptive rules defining what is sustainable and what is not sustainable. This may involve some sort of expenditure guidelines. These rules and guidelines should be transparent, public, enforceable and compulsory for all banks, and applicable to all borrowers.


Trackers:

It is vital that provision 12 (d) is not changed unless there is a clear system for borrowers to seek advice to ensure that any removal off a tracker is of benefit to the borrower. Such advice should be delivered on a professional basis and borrowers in need of funding for procuring such advice should have access to such funding. Page 4 of the consultation paper suggests that the removal off a tracker might have merit if in the interest of the borrower. This determination cannot be solely in the remit of the lender nor can it be left subject to the appeal system that incorporates explicit conflict of interest between the appeals process and the bank interests per note above.


Engagement:

Our experience, confirmed by the experience of other organisations working on behalf of the borrowers in distress, is that lenders do not respond in a timely manner to borrowers proposals or engagements, which is unacceptable. What happens to a lender who does not engage, who does the borrower appeal or complain to, other than the bank, which is alleged to engage in the abuse of the system?

Engagement by lenders with borrowers can be painfully slow, tedious and difficult leaving the borrower exhausted, their financial resources significantly reduced and without a resolution. There needs to be a clear code of conduct enforcement by the central bank on lenders for their behaviour and engagement and such enforcement should be transparent, effective, verifiable and not based on an ad hoc system of inspections, criteria and judgements.


Borrower representation and advice:

Even in normally functioning bankruptcy regimes around the world, those in debt are at a significant disadvantage compared to the might of creditors. They face corporate strength and power that can crush any debtor financially, emotionally, socially and psychologically. Observed by passive regulators, as in Ireland, compounded by the insolvency regime that is both under the current statutes and in its ‘reformed’ reincarnation nothing short of draconian, leaves the debtor in great peril.

When this financial crisis happened it was the citizen who suffered where the regulated entities and regulators enjoyed protected pay, conditions and functionality. Now, the very same citizen is facing the immense power of the state backing the already significant powers of the banks when it comes to the personal debts.

Bankers have a Banking Federation that represents them. Bankers are also availing of the weaknesses in the Irish competition laws to sustain and even consolidate their market powers at the expense of the taxpayers. They discuss issues and present their views publicly and to the government rather effectively and are assisted by a receptive media. They tend to be in sync with government announcements and findings and have direct access to the Social Partnership process and all other avenues of policy formation.

Debtors lack any statutory or institutional power. They need assistance and protection, care and support. This is best achieved by a coming together of advocates and organisations that provide services and assistance to debtors. Organisations and bodies such as MABS, The Irish Mortgage Holders Organisation, Flac, Phoenix Project and others are providing exceptionally effective and professional services to debtors usually on the basis of voluntary engagement of experts and ordinary citizens, and in the majority of cases, with no cost to the state. These and other organisations have a combined knowledge, experience and passion of their volunteers to help those is debt.

Mabs has been effectively assisting debtors for the last few decades and they have experience and a national foot print from where services and supports could be head quartered.

Yet, even with these organisations behind them, Irish debtors do not have the resources needed to deal with aggressive and disruptive creditors. With many commentators and practitioners expressing concerns and uncertainty as to how the new personal insolvency act will work there is a need to address the imbalance that exists today between debtors and lenders, as well as prevent the exacerbation of this imbalance threatened by the new legislation.

The new Insolvency regime will add additional hurdles for debtors, allowing vultures prey on the hundreds of thousands of households saddled with excessive debts, while providing little certainty to the debtor or any chances for a renewal to the economy.

Successive governments have chosen to ignore the one constant support debtors have had which is Mabs, in favour of diluting their effectiveness and giving banks and creditors a strengthened hand. Successive governments have also opted to ignore all other organisations currently working on the frontlines of the debt crisis. Despite the governments’ best efforts these organisations continued to offer a better balance and chance for debtors to be represented and protected effectively. These organisations deserve to be recognised as the de facto debtors’ representatives and be allowed to fund professional provision of services to debtors by linking arrears and insolvency resolution savings delivered to the economy at large via their efforts to the resources available to them to achieve such savings.

The insolvency bill raises a serious question of how those deeply in debt will be able to afford professional representation to assist them deal with their debt in favour of those with cash flow who can avail of professional services. This will promote a two tiered system leaving the most vulnerable to fend for themselves in unchartered waters full of predatory creditors and commercial service providers.

What would be helpful to debtors in the years ahead would be a number of organisations that compete to provide a full suite of services to debtors including legal, financial, negotiation, mental health, conveyancing and creditor payment services. These organisations should be modelled around Mabs, with Mabs established on a stand alone basis with an independent Board filled with experienced directors. A Board with a strategic plan that addresses the needs of debtors in the years to come.

Mabs is currently funded from the department of social protection to the tune of EUR18,5 million per annum. This funding could be directed towards the new organisation and additional funding could be raised by charging creditors as is done in many other jurisdictions. Many consumer credit counselling services agree voluntary payment arrangements with creditors on behalf of debtors and facilitate the cash transactions for a fee. A truly independent and well-resourced Mabs can act as a coordinator and supervisor over other organisations that compete with each other for representation of debtors in the
process of developing systemic resolution to the debtor arrears or insolvency.

Given the disproportionate powers granted to the banks by the new legislation, existent debtors’- representing organisations will undoubtedly try their best to help but they are not adequately funded to achieve significant scale and scope of their operations to fully function as representatives of families and people in difficulty. Indeed, majority of them are not funded at all. There is an urgent need to consolidate these organisations’ efforts, provide them with proper supervision and supports, and allow them to raise resources to deliver meaningful and effective change.


Yours sincerely,
David Hall
Dr. Constantin Gurdgiev
Directors
Irish Mortgage Holders Organisation.
Dublin, Ireland
April 9, 2013

THE IRISH MORTGAGE HOLDERS ORGANISATION LIMITED is Registered in Ireland No: 517549 Directors: Arthur Mullan, David Hall, Lucy Cronin, Tracy Mullan, Constantin Gurdgiev

Monday, January 21, 2013

21/1/2013: An Uncomfortable Question


Let's ask our Government an uncomfortable question: 

The Government claims (legitimately, to some extent) that 
  1. The economy has stabilised & fiscal situation has improved significantly and
  2. The Croke Park agreement 1.0 delivered what it required in terms of savings. 
Thus, by (1) & (2) things are going according to the MOU-sealed plan (signed within the confines of the Croke Park 1.0) and there are no new urgent pressures or shocks arising. 

In that case, why does the Government need Croke Park 2.0 with another round of EUR1bn 'savings'?

The idea that we need structural reforms in the public sector is not exactly hot on the Government's agenda. Furthermore, that idea was already, allegedly, reflected in the Croke Park 1.0 which was a 'success' per Government official accounts. Lastly, all structural reforms were supposed to deliver on targets set within the MOUs and these are consistent with the Croke Park 1.0.

So which side of the Government is talking porkies? The side that claims Croke Park 1.0 has delivered on reforms and changes and savings needed or the side that claims we need Croke Park 2.0?

Sunday, October 7, 2012

7/10/2012: Goldman on Euro Area banks


Some very interesting stats on the Euro Area (comparatives) banking sector from the recent (October 4) research note from the Goldman Sachs (link here). Here are some bits:

In a recent (October 4) presentation to retail investors in Cork I was speaking about the mismatch in non-financial corporations funding sources between the US and Euro Area. My conclusion was that in the medium term (2013-2015) Euro Area corporates will be forced to increase issuance of corporate bonds since their preferred source of funding - banks lending - is going to stay subdued on supply side, while the equity issuance cannot absorb simultaneous deleveraging of the banking sector, and demand for increased equity from the corporate sector, especially as Governments across the EU are going into 'tax-em-to-hell' mode when it comes to potential investors.


Here are two charts from GS note on the same:




And where are banks largest, dominant players in the economy? Why, in usual suspects...


Now, what's the problem with the above chart? Oh, let's see: Swiss and UK bankers are bankers to the world, with more exposures to assets outside their countries than inside. Irish banks listed include some IFSC banks, but... adjusting for that and adjusting for GNP/GDP gap, Irish figure is as follows:

  • Covered banks: 295% of GNP as of Q2 2012 (using 2011 GNP)
  • Total Assets of Domestic Group of banks as of August 2012 are 447% of 2011 GNP. Of these, 318% are purely assets relating to Irish residents.

Thus, if we are to control for the international exposures of the banks, the same relative position for Ireland is most likely to be maintained as in the chart, albeit the numbers will be smaller across all banking systems. And now think of adjusting these for the quality of assets held... and weep.


And here's a note for Michael Noonan and his friends at Irish banks: this time it is NOT going to be much different:
Do note the above is in nominal Yen, which is kinda telling - Japanese banks have not grown since 1990, inflation-adjusted, through probably 2009-2010. And that with Japanese printing cash and piling up public debt like there is no tomorrow between 1990 and today. What hope is there for the return of lending and profitability in Irish banking ca 2014 that the Central Bank and the Government and the banks have been betting on throughout their disastrous disaster management practices 2008-present?


Lastly, here are two tables neatly summarizing the epic fiasco of European (and Irish - see second table) banking:


Do note prominent positioning of Ireland's zombies, right there, with Tier Last Marfin, B of Cyprus, and Dexia...


Now for a quote... but wait a second first a preliminary set up: Irish Government claims that new regulatory regime will be a departure from the past for Irish banking. The same Government claims that too much competition in Irish banking was contributing to regulatory failures. So a duopoly of BofI + AIB zombies should foster more effective regulatory regime, right? Oh... Goldman on that (italics mine):

"At the other end of the spectrum, countries with central banks as their supervisor have generally done better, the two exceptions being the Netherlands and Ireland (where supervisors fared badly owing to the huge size of the banks that these countries had relative to their GDP – the sheer size of these made it much too difficult to supervise these, ‘too big to save’ banks in these cases)." So, tell me - if having TBTF banks = "much too difficult to supervise" banking system, how will having Duopoly banking system help supervisory effectiveness? Answer: it will hinder such effectiveness. Instead of being captive to a bunch of banks, Irish regulatory regime will be captive to two banks - incidentally, the very same ones that led capture of regulators back in 1990s-2000s.

Let's stop the reading here...


Update: In a fair criticism of the GS report, it ignores Solvency II implications, although does cover Basel III and Dodd-Frank. Solvency II omission was pointed out by the @creditplumber / David McKibbin. 

Friday, January 20, 2012

20/1/2012: Deputy Peter Mathews v Minister Noonan

Here are some extracts from an excellent contribution by Peter Mathews TD (FG) from yesterday's topical debates in the Dail (full record available here). This was comprehensively overlooked in the media reporting which focused solely on the non-event (save for Vincent Browne's questions) of the Torika 'approving' Ireland's 'progress'. My comments in italics.


Deputy Peter Mathews: 
      Next Wednesday, 25 January, is the due date for the redemption of a bond issued originally by Anglo Irish Bank Corporation, now the Irish Bank Resolution Corporation. 
      We are at an important financial crossroads in the history of our country. Anglo Irish Bank has been insolvent and supported by financial engineering, promissory notes and the emergency liquidity assistance of the European Central Bank and funds from our Central Bank.  The debt that lies embedded in what was Anglo Irish Bank was not created by the citizens of this country.  It has been meted out onto their backs by a mixture of incompetence and mismeasurement over a certain period under the past Administration.
      We are at a moral crossroads.  We should bring to the attention of the creditors holding the bond the facts that the bank is insolvent and that, in effect, it is not a case of our not wanting to pay but of our not being able to do so...
      Consider the debt of €1.25 billion.  The attention of the creditors will be in sharp focus because the banking system, the Irish-owned banks, are in debt to the ECB and our Central Bank at a level of approximately €150 billion.  It is the forbearance and tolerance of citizens that keeps the financial edifice and engineering of the eurozone and the greater financial system of the developed world in place.  We have been doing considerable work, facing enormous challenges.  Through the great work of the Minister for Finance, Deputy Noonan, and the Taoiseach, we are bearing the load of trying to bring about a fiscal adjustment in line with the troika agreement signed in November 2010.  All that work is important and must be done but the legacy debt is outside the responsibility of the people of this State.
      One and a quarter billion euro is almost half the budget [measures] introduced in December.  It is eight times the sum that will be raised from the household charge and twice that which will be raised by the VAT increase.  The debt crisis in Ireland and other countries cannot be solved by adding more debt...  Loading more debt on this country to pay legacy debt is like suggesting a drink problem can be solved by another whisky.

Minister for Finance (Deputy Michael Noonan): 
      I thank Deputy Mathews for raising this very important issue.  The repayment of the bond in question is an obligation of the bank and will be repaid by the bank.  It is important to be clear that it is the bank and not the Exchequer which will meet this obligation. [Need anyone point the following to the Minister, that the 'bank' has no own assets or capital over and above that which has been committed to it by the State and that the Promissory Notes are being financed by the Exchequer?]
      The Government has committed to ensuring that there is no forced or coerced involvement by the private sector burden sharing on Irish senior bank paper or Irish sovereign debt without the agreement of the ECB.  This commitment has been agreed with our external partners and is the basis on which Ireland's future financing strategy is built.  While the cost to the Irish taxpayer has been and will remain significant, the Government clearly recognises the need to work as part of the eurozone in order to ensure a return to the funding markets in the future.  The only EU state where private sector involvement will apply is Greece.
      The following was agreed by all 27 member states at the euro summit last October:
      15. As far as our general approach to private sector involvement in the euro area is concerned, we reiterate our decision taken on 21 July 2011 that Greece requires an exceptional and unique solution.
      16. All other euro area Member States solemnly reaffirm their inflexible determination to honor fully their own individual sovereign signature and all their commitments to sustainable fiscal conditions and structural reforms.  The euro area Heads of State or Government fully support this determination as the credibility of all their sovereign signatures is a decisive element for ensuring financial stability in the euro area as a whole.
      This was agreed by the Heads of State and Government at their meeting in October, and Ireland was included in the 27 states that agreed to it. [Minister Noonan fails to note here that it was on insistence of his own Taoiseach that article 15 does not include Irish banking sector resolution-related debts. And he deflects the arguments made by Deputy Mathews on feasibility of repaying these debts.]
      It is not correct to state that only taxpayers have borne the burden of rescuing the Irish banks.  Holders of equity in the banks have been effectively wiped out in burden sharing while holders of subordinated debt have incurred a €15.5 billion share of the burden to date, including €5.6 billion since this Government took office less than a year ago. [Again, Minister Noonan is dis-ingenious in his comments. Equity holders and bond holders are contractually in line for these losses. Taxpayers are not. In effect, Minister suggests that there is some sort of equivalence between treating harshly contracted parties to an undertaking and treating harshly an innocent by-stander. There is no such equivalence.]
      To impose burden sharing on senior bondholders, or to postpone the repayment of this bond at this point in time, is not in Ireland's best interest.  What is in the Irish people's best interest is that we regain our financial independence and that we place ourselves in a position to re-enter the financial markets at the earliest possible date...  We do not need to scupper our recovery, scupper the goodwill generated or alienate our partners by taking unilateral action which in the medium to long term will prove wholly counterproductive. [This is an outright conjecture by the Minister that is unfounded in fact. It is not in the interest of the Irish people to simply regain access to financial markets. It is only of such interest if we can regain it at a lower cost than alternative funding provided. Furthermore, his statement assumes that not repaying Anglo bondholders will cause the detrimental impact on 'goodwill' and the 'financial markets'. This remains to be tested and proven.]
      If we were to postpone or suspend payments to creditors of IBRC, this would have a significant impact on both the bank and, ultimately, the State. The senior debt, unsecured as it is, is an obligation of the bank. If the bank does not meet such an obligation, it would lead to a default and, following that, most likely insolvency. Insolvency would result in a very significant increase in the cost to the State to resolve the IBRC. [What cost? The Minister scaremongers the public, but cannot name a single tangible expected cost. Why is the interest of the bank aligned with the interest of the State, Minister?] ... Further, the financial market's view of Ireland as a place to do business or invest would be seriously undermined. [Is Minister Noonan seriously suggesting that Ireland's reputation as a place to do business or invest dependent so critically on a bust bank with worst history of speculative decision-making ability to repay its insolvent borrowings? Would IDA confirm they are directly referencing Irish taxpayers willingness to cover private sector losses in any undertaking, no matter how risky, as some sort of the 'investment promotion' positive for Ireland? Can Minister Noonan confirm that he has done the analysis of the effects that bonds repayments by Anglo, and the resultant increases in the sovereign debt have on sustainability of our Government's reputation in the bond markets? Does he not know/ understand that any investor looking at his statements will immediately price into their valuation of Government bonds the possibility that the Irish Government can at will, out of the blue simply hike its own debt pile in the future to suit some other risky private sector fiasco? What does that risk alone do to our 'reputation'?]

Deputy Peter Mathews: 
      While I will not get into a long debate, Greece will be the beneficiary of at least a 60% write-down of its debt obligations. The Greeks got the attention of their creditors by going out in the streets and having riots and by people being killed. We have knuckled down to correcting a fiscal imbalance and, at the same time, we have stayed silent. We have been straitjacketed by the legacy debt. Our loan losses in the banking system were €100 billion. While I know the shareholders and some of the subordinated bondholders suffered, the remaining losses were in the banks without being declared. The ECB stepped in to redeem bondholders to date, which was a mistake. We are compounding the mistake by going along the same route now.
      We have got to be honest about it and open up the discussion. We are not defaulting; we are opening a discussion. I made the point that we cannot pay. I use the word "we" euphemistically or collectively in regard to the bank and the State. We cannot pay because of the guarantee that extends over the bank. It is a case of us lifting the telephone and asking, "Can we have your attention, please?"  We cannot pay and we want to open a discussion and explain to exactly how the creditor liabilities of our banking system remain, and how they should be written down. There is further writing down to do. We have a €60 billion to €75 billion of write-down to organise and negotiate.
      To use an analogy, we have a steeplechase race with about four miles to go.  We have big jumps ahead.  Normally, a steeplechase horse will start with about 12 stone on its back.  Ireland's legacy debt of private debt, non-financial corporate debt and national debt when it peaks out at €120 billion is the equivalent of 24 stone on the back.  It is not a possible race to run.

Deputy Michael Noonan: 
      I do not disagree with Deputy Mathews' analysis.  However, we are in a situation which we inherited from our predecessors, who entered into solemn and legally enforceable commitments in respect of Anglo Irish Bank, as it was then.  Of course, Deputy Mathews is correct that we should do everything possible to reduce the debt burden on the taxpayers of Ireland and to enhance Ireland's capacity to repay its debts.  We are working on that and making some progress. [So that's it, folks. The Last Refuge of the Scoundrel = the arguments the Minister puts forward for expropriating personal property and income through higher taxation and reduced services for which we paid and continue to pay is: We are where we are. This alone should be very re-assuring to the future investors here.]

Thursday, December 1, 2011

1/12/2011: Sunday Times, 27 November 2011

Here is the unedited version of my article in the Sunday Times, November 27, 2011.


Since the collapse of the bubble, Irish perceptions of the residential and commercial property markets have swung from an unquestioning adoration to a passionate rejection.

As the result of the bubble, the overall share of property in average household investment portfolio is likely to decline over time from its Celtic Tiger highs of over 80% to a more reasonable 50-60%, consistent with longer term averages in other advanced economies. But housing will remain a significant part of the household investment for a number of good reasons.

While providing shelter, housing wealth also serves as a long-term savings vehicle and an asset for additional borrowing for shorter-term investments. Security of housing wealth in normal times acts as an asset cushion for family-owned start up businesses and a convenient tool for regular savings. Over the lifetime, as demand for housing grows with family size, we increase our savings, normally just as our life cycle earnings increase. We subsequently can draw down these savings throughout the retirement when income from work drops.

In short, in a normal economy, housing and household investment are naturally linked. In this light, the grave nature of our economic malaise should be apparent to all. Ireland is experiencing a continued and extremely deep balance sheet recession, with twin collapses in property prices and investment that underlie structural demise of our economy.

The latest Residential Property Price Index, released this week, shows that things are only getting worse on the former front. Overall, residential property price index fell to 71.2 in October from 72.8 in September. The latest monthly decline of 2.2% is the sharpest since March 2009 and the third fastest in the history of the index. Relative to peak prices are now down 45.4%. Take a look at two components of household investment portfolios: owner-occupied and buy-to-let properties. For the majority of the middle class families, the former is represented by a family home. The latter, on average, is represented by apartments. Nationwide, per CSO, prices of these assets are respectively down 43.7% and 57.9% relative to the peak.


The impact of these price movements is significant and, contrary to the assertions of the Government and official analysts, real and painful. House price declines imply real capital losses to households and these losses have to be offset, over time, with decreased consumption and falling investment elsewhere. Absent normal loss provisioning available to professional financial sector investors and businesses, households suffer catastrophic collapses on the assets side of their balance sheet, while liabilities (value of mortgages) remain intact. Decades-long underinvestment and low consumption spending await Ireland.

Dynamically, things are not looking any brighter today than a year ago. House prices have fallen 14.9% year on year in October, the worst annual drop since February 2010. Apartments prices are down 19.8% over the last 12 months – the worst annualized performance since April 2010.  Given the price dynamics over the last three years, as well as the current underlying personal income, interest rates and rental yields fundamentals, Irish property prices remain at the levels above the short-term and medium-term equilibrium. This means we can expect another double-digit correction in 2012 followed by shallower declines in 2013.



Not surprisingly, the collapse of the property markets in Ireland is mirrored by an even deeper crash in overall investment activity in the economy. The latest National Accounts data shows that in 2010, gross fixed capital formation in Ireland declined to €19 billion in constant prices. This year, data to-date suggests that capital formation will drop even further, to ca €17 billion or almost 58% below the peak levels. In historical terms, these levels of investment activity are comparable only with 1996-1997 average. If we assume that the excess investments in the property sector were starting to manifest themselves around 2002, to get Irish economy back to pre-boom investment path would require gross fixed capital investment of some €26.9 billion per annum or more than 60% above current levels.

Between 2000 and 2009, Irish economy absorbed some €319 billion in new fixed capital investments. Assuming combined rate of amortization and depreciation of 8% per annum, just to keep that stock of capital in working shape requires €25.5 billion of new investment. This mans that in 3 years since 2009, the Irish economy has lost some €15.5 billion worth of fixed capital to normal wear-and-tear. In short, we are no longer even replacing the capital stock we have, let alone add new productive capacity to this economy.

Looking into sectoral distribution of investment, all sectors of economic activity outside building and construction have seen their capital investment fall by between 18.4% in the case of Fuel and Power Products to 70.4% in the case of Agriculture, Forestry and Fishing sector. So the aforementioned aggregate collapse of investment is replicated across the entire economy.

The dramatic destruction of capital investment in the private sector is not being helped by the fact that Government capital expenditure is also contracting. In 2010, Voted Capital Expenditure by the Irish Government declined to €5.9 billion. This year, based on 10 months through October data, it is on track to fall even further to €4 billion – below the target of €4.35 billion and more than 53% below the peak. In fact, the entire adjustment in public expenditure to-date can be attributed to the capital spending cuts, as current expenditure actually rose over the years of crisis. Since 2008, current expenditure by the state is up 1.9% or €775 million this year, based on the data through October. Thus in 2008, Irish Government spent 17.4% of its total voted expenditure on capital investment. This year the figure is likely to be under 8.8%.

Forthcoming Budget 2012 changes are likely to make matters worse for capital investment. In addition to taking even more cash out of the pockets of those still in employment – thereby reducing further the pool of potential savings – the Government is likely to bring in the first measures of property taxation. This will reinforce households’ expectations that by 2013-2014 Ireland will have a residential property tax that will place disproportional burden on urban dwellers – the very segment of population that tends to invest more intensively over time in property improvements, making the urban stock of housing more economically productive than rural. A tax measure that would be least distorting in terms of incentives to increase productivity of the housing stock – a site-value tax – now appears to be abandoned by the Government, despite previous commitments to introduce it.

Furthermore, we can expect in the next two years abolition of capital tax reliefs, increases in capital tax rates and high likelihood of some sort of wealth taxes – direct levies on capital and/or savings for ordinary households. In the case of the euro area break up, Ireland will also see draconian capital controls.

In short, we are now set to experience an 8-10 years period of direct and accelerating destruction of our capital base. It doesn’t matter which school of economic thought one belongs to, there can be no recovery without capital investment returning back to growth.



Box-out:

In the recent paper titled “The Eurozone Crisis: How Banks and Sovereigns Came to Be Joined at the Hip”, published last month, two IMF researchers identify Europe’s Lehman’s moment in the global financial crisis as the day when the Irish Government nationalized the Anglo Irish Bank. In contrast to the current and previous Governments’ assertions, the IMF study argues that the Anglo was not a systemically important bank worthy of a rescue. As the paper puts it: “The problems [of collapsing financial sector valuations] entered a new phase – becoming a full-blown crisis – with the nationalisation of Anglo Irish in January 2009. The relevance of Anglo is, at first, not obvious, since it was a small bank in a relatively small country. However, …it is possible that the large fiscal costs as a share of Ireland’s GDP associated with this rescue raised serious concerns about fiscal sustainability. Suddenly, the ability of the sovereigns to support the financial sector came into question.” In other words, far from helping to avert or alleviate the crisis, Anglo nationalization caused the crisis to spread. “In retrospect, the nature of the crisis prior to Anglo Irish was simple, being mostly driven by problems in the financial sector… The winding down of Anglo Irish, for example, would have been preferable to its nationalization…” In effect, the previous Government made Anglo systemically important by rescuing it. If there ever was a better example of the medicine that kills the patient.



Sunday, September 19, 2010

Economics 19/9/10: Irish banks - Government intervention still has no effect

Returning to my old theme - let's take a fresh look at the Government and its policy cheerleaders success rate with repairing our banking sector. Here is a quick snapshot of history and numbers as told through the lens of Irish Financials index.
So clearly, we have some really powerful analysts out there and keen commentariat (actually one and the same in this case) on the future prognosis for our banks.

But what about recent moves in the index itself?
Take a look at the chart above, which maps the Financials Index for two subperiods:
Period 1: from Guarantee to March announcement of the 'final' recapitalization of our banks,
Period 2: from Guarantee to today.
Now notice the difference between two equations. That's right, things are not getting any better, they are getting worse.

Next, let's put some historical markers on the map:
Surely, our financials are getting better, the Government will say, by... err... not getting much, much worse. The reality, of course is, any index has a natural lower bound of zero. In the case of Irish Financials Index, this bound is above zero, as the index contains companies that are not banks. As far as the banks go, there is a natural lower limit for their share values of zero. Our IFIN index is now at 80% loss relative not to its peak, but to its value on the day of Guarantee!

Having pledged banks supports to the tune of 1/3 of our GDP already, the Government policy still has not achieved any appreciable improvement in the index.

Forget longer term stuff - even relative to Q4 2009, Government policies cannot correct the strategic switchback away from Irish banks shares that took hold:
A picture, is worth a 1000 words. Unless you belong to the upbeat cheerleaders group of the very same analysts who missed the largest market collapse in history, that is.

Wednesday, August 4, 2010

Economics 4/8/10:Exchequer July receipts

Note: Corrected version - hat tip to Seamus Coffey!

As promised in the previous post (which focused on the Exchequer balance, here), the present post will be focusing on actual tax receipts.

I have resisted for some time the idea that Budget 2010 targets are somehow analytically important. Hence, you will not find targets-linked analysis here. But the main tax heads - their comparative dynamics over 2008-2010 to date are below.

First, take a look at the actual cumulative to date levels.Overall tax receipts are now running below 2009 numbers, and are still way off 2008 numbers (off €1,536mln on 2009 and €5,520mln on 2008). This means we are now 8.22% below 2009 and 24.35% on 2008.

Two largest contributors to the receipts are Vat and Income Tax:Vat is now €483mln below 2009, and still €2,453mln behind 2008, which means we are now 6.9% down on 2009 and 27.5% behind 2008. One wonders how much of this Vat intake in 2010 is due to automotive sales increases driven (as I explained in earlier posts) predominantly by the 'vanity plates' with '10' on them. Income tax shows a similar pattern: down €537mln on 2009 (-8.45%) and €1,060 on 2009 (-15.4%).

Corporate tax and Excise are the next largest categories.Cumulative year to date, corporate tax receipts are performing weaker than in 2009 (-€260mln and -13.8%) and ahead of 2008 (+€192mln and 13.4%), but this is due to timing issues and financial markets recoveries in H1 2010. Excise taxes are still under-performing: down €87mln on 2009 (-3.37%) and €773mln (-23.7%) on 2008.

Stamps
Transactions taxes are not faring well. Stamps are down €75mln on 2009 (-18.3%) and down €808mln on 2008 (-70.7%).

Surprise surprise, Capital Gains Tax is singing similar song:
So CGT is down €89mln (-44.3%) on 2009 - despite being beefed up by bull markets in financial assets, and is down €544mln (-83%) on 2008.

Year on year changes show stabilisation around 2009 levels.
Usually, the Exchequer returns publications now days provoke a roaring applause from our banks and other 'independent' analysts and the remarks about 'turning a corner'. This time - no difference. Nope, folks - let me stress - there is not even a stabilization around horrific results for 2009. Exchequer revenues are heading south. We haven't gotten anywhere close to resolving the crisis.

But let me show you what this bottom will look like, once we are there.
It is a horrific place in which personal income and consumption-related taxes bear roughly 75.2% of all tax burden (up from 62.5% in 2008 and 68.6% in 2009). Meanwhile, physical capital taxes contribution to the budget have shrunk from 14.7% in 2008 to 9% in 2009 and 4.2% in 2010. Corporate tax, despite the robust performance now contributes only 9.5% of total tax receipts down from 2009 level of 12.4% and 2008 level of 13.5%.

In other words, those who benefit less of all demographic and economic groups, from public services - the upper middle classes - are now paying more than 50% of the total tax receipts bill. This, in the words of some of our illustrious guardians of social justice is called 'protecting the poor'. In other times, in other lands, it was also called 'taxation without representation'.

I would rather call it a tax on human capital - the very core input into 'knowledge economy' that we need to get us out of the long term economic depression.

Economics 4/8/10: Exchequer July results

Exchequer figures for July 2010 are out. Here are trends and some details. Analysis of revenue (by line) will follow later tonight.

Month on month changes first:
Notice seasonality. Seasonally adjusted surplus/deficit is not replicating the V-patterned change over three months. Instead, we are showing persistent worsening of the deficit. This is not due to a surprise expenditure deterioration, as current expenditure side held quite well relative to 2008 (down from €27,565mln to €27,039mln).

One interesting feature, however, on expenditure side is that May-July 2010 saw a net rise in overall expenditure, while same period in 2009 saw a contraction.

Convergence of tax and total receipts was in line with previous years:
This was achieved primarily by relative under-performance of tax revenues, down from €18,689mln in same period of 2009 to €17,153mln this year, plus slowdown in capital receipts mom (although still up yoy cumulatively). Automatic stabilizers are now in action.

Putting receipts against deficit:
Total receipts are persistently down in the last 3 months, and with them, exchequer deficit is rising. This again runs counter to the seasonal trends. Notice also that mean reversion on receipts side is now completed, while deficits are trending still above the long term trend line, primarily due to the fact that 2009 figure includes banks recapitalization costs, but 2010 figures so far do not account for these in full (more on this below).

The broken seasonality pattern on receipts side is evident in the chart above.

On to cumulative results for the year:
Tax revenue is significantly under-performing 2009, let alone 2008. Remember, with all tax increases on 2009 we should have been somewhere between the red and blue lines. Is this suggesting that higher taxes (certainly on the books for Budget 2011) might be counterproductive to revenue objectives?
Total receipts are still coming out slightly above 2009 - thanks to stronger performance in June.

Total cumulative expenditure is running below 2008 levels. That's thanks to cuts in capital spending and under-provisioning for banks in year to date 2010 (more on this below).

Now, deficits:
For a moment there, it looked like we were heading toward abysmal 2008 levels (but not as abysmal as 2009). That's because the Government booked all its capital spending savings into April-June. With these savings now exhausted, our deficit has taken a nose dive.

Shall we compare with banks in across the board?
Hmmm... were capital expenditures (inc banks supports) through 2010 so far running at 2009 levels, we would be worse off in terms of spending than last year.

Now, remember, we (well, actually IMF) were promised by the DofF that the bank recapitalization funds since January 2010 "are now reflected in deficit projections for the year". Actually - they are not. Not 6 in the Exchequer Statement details what is covered in banks recapitalization to date:So in brief - no actual capital injection of any variety is covered in Exchequer data. No purchases of equity in AIB and BofI are covered either. It looks like the Government might be waiting to push these numbers through at the last minute, say forcing recognition into December 2010. Such a move would allow it to pre-borrow funding from the markets without anyone raising too much fuss about contagion from banks balance sheets to the sovereign. Once 2011 arrives, the Government can turn to the markets and say 'Well, that was one-off stuff. Business as normal now."

One way or the other - look at the 2009 figure in the table above: that's the benchmark for our real performance.

Saturday, June 5, 2010

Economics 05/06/2010: Economics of Fiscal Stimulus

This is an unedited version of my article for June-July issue of the Village Magazine.

Weeks into a new round of ‘talks’ over the public sector reforms and Ireland’s Policy Kindergarten squad is getting more agitated by the issue of cuts in the Government expenditure. The logic of their arguments, led by the likes of Tasc, the Irish Times, and an army of Unions-employed ‘economists’, is perverse: “In order to get the economy back on track, we need to borrow more and spend on public services and wages.”

There are three basic arguments why stimulating Irish economy though increased public spending won’t work in the current conditions even in theory, let alone in practice. These are: the structural nature of the fiscal crisis we face, the size of the debt we face, and the lack of evidence that stimulus can work in a country like Ireland.

Structural deficits

Economists distinguish two types of deficits: cyclical and structural. The first type of deficits occurs when a temporary economic slowdown leads to an unforeseen decline in revenue and acceleration of certain components of spending (e.g. unemployment insurance and social welfare). By its definition, the cyclical deficit will be automatically corrected once economy returns to its long term growth path.

In contrast, structural deficits are those that arise independently of the short term changes in economic growth. They are the outcome of unsustainable increases in permanent spending and/or decline in the long term growth potential that might arise from a severe crisis.

In the case of Ireland, both of the latter factors are at play. Various estimates of the extent of structural deficits carried out by the likes of IMF, OECD, the European Commission, ESRI and independent analysts range between one half and two thirds of the 2009 General Government deficit, or 7-9.5% of GDP.

Reckless expansion of Government spending in the period of 2001-2007 is the greatest cause of these – not the collapse of our tax revenue. In the mean time, our economy’s long-term growth rate has declined from the debt-and-housing-fueled 4.5% per annum to a Belgium-like 1.8% per annum.

In 2000, General Government Structural Balance stood at roughly -0.5% of GDP. By 2008 this has fallen to almost -11% courtesy of a massive build up in permanent staff increases in the public sector, rises in welfare rates, explosion in health spending and creation of a gargantuan army of quangoes and supervisory organizations.

Forget, for a second, that majority of these expenditures represented pure waste, delivering nothing more than top jobs for friends of the ruling class, plus scores of jobs for public and quasi-public sector workers. Between 1981 and today Ireland has recorded not a single year in which Government structural balance was positive. Windfall stamps, VAT and capital gains tax receipts over 2001-2007 have masked this reality, as Goldman Sachs structured derivatives masked the reality of Greek deficits.

We are not getting any better


Over the recent months, the Government has been eager to ‘talk up’ our major selling points. Ireland, it goes, is a country with stabilized public finances and low debt to GDP ratio.

Last month, Eurostat exposed the lie behind the ‘stabilized public finances’ story. It turns out our Government has decided to sweep under the carpet billions of cash it borrowed in 2009 to recapitalize Anglo. Courtesy of this, our deficit for 2009 was revised to a whooping 14.3% of GDP – topping that of Greece.

But Irish General Government deficit this year is expected to come in between 11.7% and over 12% of GDP, depending on who is doing the forecasting – Department of Finance or ESRI. And this is before we factor in March 2010 statement by the Minister for Finance, promising over €10 billion for the banks this year. This means that, as the rest of the world is coming out of the recession, our fiscal deficit for 2010 is expected to either match or exceed the revised level achieved in 2009. Some stabilization.

Irish Government debt is expected to reach 78-82% of GDP by the end of 2010 – on par with Eurozone’s second sickest economy, Portugal. With Nama and banks recapitalizations factored in, Irish taxpayers will be in a debt hole equal to between 117% and 122% of GDP by 2011 and to 137% by 2014. At the point of the Greek debt crisis implosion last year, Greece had second highest debt to GDP ratio in the EU at 117%, after Italy with a massive 119%.

In totality, current crisis management approach by the Irish State is going to cost every Irish taxpayer in excess of €117,000 in added tax liability. Neither Iceland nor Greece come close.

Economy on steroids


Still think that we should be stimulating this economy through more borrowing?

Take a look at the private sector debts. In terms of external debt liabilities, Ireland is in the league of its own amongst the advanced economies. Our overall debts currently are in excess of the critically high liabilities of the HIPCs to which we are sending intergovernmental aid. And rising: in Q3 2009, our external debt liabilities stood at a whooping USD 2.4 trillion, up 10.8% on Q3 2007. Of these, roughly 45% accrue to the domestic economy – more than 6 times our annual national income.

Ireland’s share of the world debt is greater than that of Japan and more than double that of all BRICs combined, once IFSC companies are included. Over the next 5 years, the entire Irish economy will be paying out around €206,000 per each taxpayer in interest on this debt. Adding more debt to this pile is simply unimaginable at any stage, let alone when the cost of borrowing is high and rising.

These figures show that the main cause of the current crisis is not the lack of liquidity in the system, but an old-fashioned problem of insolvency.

This problem is directly related to the actions of the Irish state. Over the last decade, there was a nearly 90% correlation between the average increases in the Irish tax revenues plus the rate of economic growth and the expenditure growth on capital and current spending sides. In effect, courtesy of the ‘Boom is getting boomier’ Ahearn/Cowen team Ireland had two bubbles inflating next to each other – a private sector borrowing bubble and a public sector spending one. Government’s exuberant optimism, cheered on by the Social Partners – the direct beneficiaries of this ‘fiscal policy on steroids’ approach – explains why during Brian Cowen’s tenure in the Department of Finance, Irish structural deficit doubled on his predecessor’s already hefty increases.

But what went on behind the glossy Exchequer reports was the old-fashioned pyramid scheme. Some got rich. Temporarily, we had an army of politically connected developers and bankers stalking the halls of premier cars dealerships and property auction rooms.

Permanently, an entire class of public employees reaped massive dividends in terms of shares in privatized enterprises that cumulated in their pension plans. Current claims that because the values of some of these payoffs have declined over time (often due to the intransigent nature of the unions in the semi-state companies, staunchly resisting change and productivity enhancing reforms) is irrelevant here. Prior to their privatization, these companies were called 'public' assets. Creation of any, no matter small or large, private gains to their employees out of the companies' privatizations or securititization through pensions funds liabilities of their assets in favor of employees, therefore, is nothing more than an arbitrary, unions-imposed grab of the public asset.

Benchmarking, lavish pensions and jobs security – also paid out of the economy leverage (just think of the NPRF - explicitly created to by-pass the illegal, under the EU rules, taxation of economy for provisioning for future public sector pensions liabilities) – was a cherry on top of the cake. Public companies management got dramatically increased pay and a permanent indemnity against competition through a regulatory system that was all but a client of their semi-state companies.

From our hospital consultants to our lawyers, academics and other professionals – a large army of state-protected, often non-competitive internationally professional elites collected state-subsidised pay so much in excess of their real productivity that we became the subject of diplomats’ jokes.

Our state’s response to this was telling. Just as the country was borrowing its way into insolvency, our Government gave billions to aid developing nations. That was the price our leaders chose to pay to feel themselves adequate standing next to Angela Merkel and Nicolas Sarkozy at the EU summits. Incidentally, as the country today is borrowing heavily to cover its basic bills, Brian Cowen still sends hundreds of millions of our cash to aid foreign states and has recently decided to commit over €1,000 million – full year worth of the money he clawed out of the ordinary families through income levies – to the Greek bailout package.

Economics on Steroids


Still think more state-centred economy is the solution to our problem? Irish economists, primarily those affiliated with the Unions are keen on talking about the ‘positive multiplier’ effect of deficit-financed stimulus. Sadly for them, there is no conclusive evidence that borrowing at 5 percent amidst double-digit deficits and ‘investing’ in public services does any good for the economy.

Firstly, one has to disregard any evidence on fiscal stimulus efficiency coming out of the larger states, like the US, where imports component of public and private expenditure is much smaller than in Ireland. The US estimates of the fiscal stimulus multiplier also reflect a substantially lower cost of borrowing. Even if Ireland were to replicate US-estimated fiscal stimulus effects, higher cost of our borrowing will mean that the net stimulus to Irish economy will be zero on average.

Second, international evidence shows that for a small open economy, like Ireland, the total fiscal multiplier effect starts with a negative -0.05% effect on economic growth at the moment of stimulus and in the long run (over 6 years) reaches a negative -0.07-0.31%. Add the cost of financing to this and the long-term effect of deficit financed stimulus for Ireland will be around -2.3% annually.

Third, no one on the Left has a faintest idea what the new spending should be used for. Simply giving borrowed cash to pay the wage bill in the public sector would be unacceptable by any ethical standards. Any investment that is bound to make sense would have to focus on our business centre – Dublin, where infrastructure deficit is acute and potential demand is present. Alas, this will not resolve the problem of collapsed regional economies. Pumping more cash into the ‘knowledge economy’ absent actual knowledge infrastructure of entrepreneurship, private finance, skills and without a proven track record of exporting potential, is adventurist even at the times of plenty.

In short, the idea that expanded deficit financing will support any sort of real recovery in the economy is equivalent to arguing that pumping steroids into a heart attack patient can help him run a marathon.


Ireland needs severe rethinking and reforms of the grossly inefficient and ethically non-sustainable spending and management practices of our public sectors. It should start with significant rationalization of expenditure first and then progress to a more deeply rooted revision of the public sector objectives and ethos.

Ireland also needs a significant deleveraging of what is a basically insolvent economic structure. This too requires, amongst other things, a significant reduction in overall public spending. Far from ‘borrow to spend’ policies advocated by the Left, we need ‘cut to save’ policies that can, with time, yield a permanent increase in the national savings rate, productive private investment and improved returns on education and skills. Otherwise, we might as well give our college graduates a one-way ticket out of Ireland with their degrees, courtesy of Tasc and the Unions.