Debt Mountain 'Ireland Inc' IV

Spot the odd one out...

Chart 1 shows the most indebted (in absolute terms - gross external debt volumes) nations of this world with their debts expressed as percentage of Ireland's gross external debt. This clearly ranks Ireland as the 9th most indebted nation in the world, and 6th in the Eurozone. Note that in absolute terms, Irish total debt is greater than that of Japan!Now, Chart 2 is even more revealing, as it plots per capita debt levels of the most indebted (in absolute terms) countries in the world. Ireland is a clear outlier!Massive, unpredictable and a (possible) danger to others... Is there something moving in the corner?

Debt Mountain 'Ireland Inc' III

An anonymous reader asked in a comment to the previous post if I can provide any solutions to the problems we currently face in Irish economy.

It is a matter not to be taken lightly, but given time constraints - this has been an extremely busy week for me - here is an outline of what my thoughts are on this subject:

Policy 1: cut excessive public sector expenditure:
DofF projected budgeted expenditure to be in the region of €49bn and receipts in the region of €37.7bn. I forecast, based on the latest Exchequer results the latter to be no more than €33.6bn. My figures now imply (assuming that the €2bn savings factored in by DofF in January and announced this week will yield real savings of €1bn) a General Gov Balance of €23bn (or 12.1% of GDP) up from €17.98bn (or 9.5% of GDP) allowed for by DofF. Note - yes, you've read it right - GGB of €23bn for 2009!

Allowing for the deficit of 7% in 2009 implies Exchequer balance for 2009 of -€13.3bn and savings to be achieved of €9.7bn. Thus, my fiscal plan, inclusive of stimulus package finance (see below) would be to:

• cut by 40% net capital budget expenditure - saving ca €3.3bn in 2009,
• cut by 17% net current expenditure - savings ca €8.3bn in 2009.

To achieve the latter savings, I would suspend up to 75% of the overseas assistance, cut by 75% pre-funding for future pensions liabilities, roll back all public sector pensions indexation to 2006 level, carry out significant cuts in non-front-line personnel in health and education, public service and semi-state companies, and cut welfare payments by approximately 5%.

I would also move to privatise the remaining public assets, etc. Some of the cuts can come through a direct increase in the efficiency of public sector operations. For example, we can use existent IT and university facilities to increase the number of students attending each class, accommodating those who become unemployed and wish to pursue educational opportunities. This will save significant amounts on the Continued Education grants.

Policy 2: Stimulative measures for economy
1) Banks: I would use recapitalisation scheme to inject equity (stock options) into households' savings and draw down household debt - I've outlined such a scheme before. The real stimulative benefit of the planned €10bn recapitalization scheme will be (assuming 15% appreciation in banks shares to 2013 and a one-off 40% CGT on options at maturity) ca €2.2bn pa through 2013. Draw-downs in HHs debt (at 50cents per €1) will imply additional benefit of €1bn pa.
2) Taxation: I would finance through a surplus savings of ca €2bn on the expenditure side (see bullet points above) a tax cut in employer PRSI and expand investment tax credits for labour-intensive investments. I will also freeze local authorities charge and levies, review regulated price controls (energy, gas, water, public transport etc).

Long Range Reforms:
1) Local Authorities: drastic redrawing of the entire local governance structure in Ireland, reducing the number of local authorities to 4 or 5 (e.g GDA, South, North East & Midlands, West) with proportionate 40% reduction in personnel;
2) Property/Land Value Tax: to finance local authorities I would impose a land value tax to be computed on the value and size of the plot occupied by your dwelling. The tax will be phased in allowing for those who have paid stamp duty in recent years to obtain credit against the tax value. Stamp duty tax will be abolished.
3) Flat income tax: on all income, including corporate profits - to be set at a revenue-neutral rate (suggesting, for example a tax of ca 16% flat on all income in 2008 terms). I provided details of calculations and complexities involved in computing this tax years ago, but the core idea remains. If this implies raising our corporate tax a notch - so be it. There is absolutely no economic or moral reason as to why physical capital should be taxed at a different rate from human capital.
4) Balanced Budget & State Property Amendments: pass a constitutional amendment to ensure that the real growth in Government expenditure cannot exceed at any year (with exception of the national emergencies, of course) the real rate of growth in GNP less 1%. Pass a constitutional amendment barring the State from ever holding a stake (except in the cases of emergency, subject to a 2/3 majority vote in the Dail) in any commercial enterprise.
5) Spatial Development & Social Partnership: I will abandon all economic and social engineering projects that do not explicitly and directly involve a 2/3-majority vote in the Dail;
6) Anti-monopoly laws: I will strengthen the Competition Authority to reflect the powers of competition enforcing bodies in the UK and will require that no company in any sector be allowed to control more than 30% of the market share.

Sorry, guys & gals - we are in 1am territory and I have a busy day ahead. I will return to this topic in the future posts, but for now a call to arms - send me your ideas for reforms!

Debt Mountain 'Ireland Inc' II

For those who missed yesterday's Irish Times article by Brian Lucey and myself - here is the link. Of course, the followers of this blog would know most of these facts already.

Another article - my quick analysis of the Exchequer figures for January - is in today's Irish Independent (here).

And I actually do mean we are in a soap-opera land when it comes to policy. In fact, in July, I wrote for an investment newsletter a piece that provided a metaphor for our public finances condition as of June 2008 - a metaphor of a Wile E. Coyote frozen over an abyss nanoseconds before a disaster. Memorably, I was informed that the metaphor was taking things too far... Hmmm... was it? Judge for yourselves:If you are still not feeling the wind whistling into your ears as Coyote gains speed, take a look at this...Two facts are apparent:
1) we are witnessing the steepest assent in the unemployment in years, with the speed of unemployment rise shown in the table below; and2) DofF forecast in January 2009 was for the economy to reach 9.2% unemployment this year. Just a month into 2009, we are already there in standardized unemployment terms. DofF 2010 target for social welfare spending is based on the projection that unemployment will reach 10.5% or a notch over 372,000 in today's labour force terms. 2009 Live Register average was assumed to be at 290,000 in the Budget. In other words, at the rate of jobs losses in January, we are less than 2 months away from blowing through 2010 assumption, never mind the 2009 estimate!

Whiiiishshsh! Goes Coyote...

2009 budgeting in October assumed unemployment at 7.3% 2009 (I wrote before about the abysmal quality of our boffins' forecasts here). The €2bn spending cuts were also based on this figure as a part of budgetary estimates. It is now crystal clear that DofF has grossly missed the estimate on social welfare and unemployment benefits. By how much? I will leave budgetary eggheads to do all the math, my guess is ca €2bn.

.... Splat!

But it can be more. Why? Well, last year an unknown, but potentially significant number of foreign workers have left Ireland. This undoubtedly kept Live Register somewhat lower. But as the best and most employable workers leave first - because they have better prospects of gaining a job elsewhere - adverse selection will most certainly see marginal and poor foreign workers remaining. These workers face much lower prospects of gaining a job elsewhere, so on the margin, Irish unemployment benefits are much more lucrative an incentive for them to stay here. In other words, if emigration was keeping Live Register below what it might have been in 2008, the same is unlikely to happen in 2009 and 2010.

Good luck to all who bought rental apartments in the outlying areas of Dublin and across the country. With Poles and others heading either for the airport or to the dole office, the rents are going to follow land values - into agricultural pricing territory...

P.S. Given that our banks spent 2008 busy converting development loans into investment loans by forcing developers to turn completed properties into rentals, what does this mean for our banks' impairment charges? BofI at €0.30 and AIB at €0.50 after the recapitalization?.. The answer is unpalatable, but I will leave the numbers as an exercise for Ireland's best banking sector analysts...

Falling from disgrace

Ah, another day, another screw up in the Biffoland – the veritable emporium of economic policy oddities and quaint Boggerista collectibles. So much drama, RTE’s / ESRI’s tax-everyone-to-death crowd is getting all excited. In reality, if 2008 was the year Biffo & Co have fallen from grace, 2009 is shaping up to be the year when they will fall through the bottom of hell itself.

The 'savage cuts' were announced at last – ‘adding to just under €2.1bn’ in RTE’s official interpretation. In the mean time, the Exchequer results get sidelined by David Begg’s and Jack O’Connor’s pleading poverty for the public sector workers.

Let’s cut through the fog, shall we?

In the entire ‘package’ announced by Cowen the only hard budgetary measure was the pension levy. But even here, Mr Cowen fails the reality test. If the pensions levy is tax deductible – and all indications are that it is – the alleged €1.4bn in savings will shrink to ca €800mln.

The only announced economic rescue measure – some two-years old capital spending programme slightly neutered by the second-largest ‘cut’ of the day. But give it a second to take the perverse 'logic' of this Government's thinking in. If capital spending programme under the NDP is a stimulus package today - in the recession - what on earth was it enacted for some two years ago? To boost rabid inflation to Zimbabwean levels?

The rest of this 'new' package is pure hot air.

Cuts in professional fees and administrative savings?.. This beggars a question why these were not cut by Biffo when he was the Minister for Finance? So, either Biffo was an inept Minister for Finance (in which case he has some room to cut these lines of spending today) or he is an inept Taoiseach (in which case he has no room to cut these). Take your pick.

Child benefit restriction – aiming to save €75mln – is another hit at the same soft target. Remember Budget 2009 – children already got some whacking from our Biffo ‘The Gruffalo’. How much more can he milk out of them, should more ‘adjustments’ be needed in the near future (see below)? Lots! He can tax the un-born off-springs of the rich (income in excess, of oughh, say €150K pa) household.


But all of this pales in comparison with what should have been done by the Government in today’s announcement. As my earlier posts (here and here) estimate, in 2009 we are going to face “a shortfall of up to €7,080mln on 2008 revenue, not €3,898mln as DofF forecast in January. My previous post forecast €7,698mnl shortfall, so January figure appears to be generally supportive of this.”

The latest Exchequer results have just run over my correction – given the latest figures and the dynamic of different tax lines deterioration, we are now facing at the very least a ca €8bn shortfall on 2008 figures. Belatedly, some economists are coming to a realization that this indeed is the case (see here and scroll to Niall Says: February 3rd, 2009 at 7:50 pm comment). We are back to that original estimate of mine and things are likely to get even worse from here on, implying today's cuts should have been in the neigbourhood of €4-5bn!

In the end, Brian Cowen has loudly and publicly declared tonight that anyone expecting him to govern this economy out of the recession is a fool. He hasn’t got the balls, he hasn’t got the ideas and he hasn’t got the Cabinet to do the job. Full stop.

Someone, dial Trichet’s private secretary. We will need his money very soon!

P.S. Here is a problem no one noticed for now. If the basket cases Ireland, Greece and Italy are weighing heavily on the reputation of the Euro, then the lack of an immediate adverse reaction to today’s announcement by the bond markets might suggest that the Magnificent Three are now creating a drag on German bunds. In other words, Irish, Greek and Italian mess is now costing real money to German taxpayers through elevated spreads on the bund. I’d venture to say that Mrs Merkel might be a bit concerned about Brian’s economic flops.

S&P's visit: Pints!

S&P gang is in town (hat tip to P.O.) making rounds, sniffing out the need to slam the book on Irish bonds AAA rating. Better late than never, I'd say.

This blog has argued on numerous occasions (here and here) that Irish credit ratings should fall from their current AAA rating to at least AA-/A- levels. In fact, I called for S&P to climb down from its ivory tower of 'Ireland's low public debt...' myth and produce a more realistic assessment of the risks inherent in our borrowings (here).

This, of course, was predicated on:

• Irish Government's exposure to toxic banks debt (here);
• Irish Government's exposure to its own reckless spending (here);
• Irish Government's inability to carry out necessary economic policy adjustments to address the real crises in this economy: corporate and household debt (here), and public sector excessive cost to the rest of the economy (here and here);
• Irish Government's lack of realistic understanding of how economy works (here and here);
• Irish Government's wobbling on various aspects of economic policy (see all the Mushroom Cloud posts in January 2008 archive)...

...and so on. I can go on listing more reasons as to why this is no longer an economy warranting a gold-standard AAA rating, but let me put three facts in front of you:

Fact 1: Despite having (belatedly) recognized the need for some sort of crisis management solutions in July 2008, the Government has yet to produce any realistic plan for dealing with the above problems.

Fact 2: Courtesy of FT (hat tip to B.) there is a self-explanatory chart below (corrected per Anonymous update, the number for Irish bank liabilities should be at 396% of GDP). Of course, those of you who are regular readers would recognize this as something I have written about ages ago (here), but FT's authority helps.
Fact 3: Finally, another chart illustrates the fact that no one in the market actually believes that our bonds offer AAA protection from default.
Pretty conclusive, then? So what's the point of sending a team over to Dubs, S&P? To have a few pints with our BB&M Trio and listen to their assurances that our 'greenish knowledge innovation' errr... economy-thingy is steaming ahead?

To the icebergs, then, Captain Brian!

PS: I am currently working on preparing a comprehensive compendium of comparisons per our debts (across various sectors and maturities) to the rest of the Eurozone, so keep watching the blog...

DofF Forecast: Update I

According to today's reports, the y-o-y tax take in January is down 15% (hat tip to B.).

My personal projection, given the dynamics of 2008 tax intake (remember, Q1 2008 was still positive growth territory and lagged tax revenue was rolling in) is that we are going to finish 2009 with ca 15-17% down on 2008. 2007-2008 decline was 9.4%, implying we are going to collect €34,550-35,380mln in 2009 or a shortfall of up to €7,080mln on 2008 revenue, not €3,898mln as DofF forecast in January. My previous post forecast €7,698mnl shortfall, so January figure appears to be generally supportive of this.

As B. mentioned, this will bring our revenue to 2005 level - 'four years lost' as he puts it. This is about right - fundamentals (productivity, wages, costs inflation) all point to ireland having abandoned growth path around 2003-2004 which means a return - in nominal terms (using Eurozone average inflation rate) - to 2002-2003 levels by the end of 2011 will be mean reverting (with downward overshoot, of course) for underlying growth fundamentals.

P.S. Meanwhile - our Vacuum-Head in Politics Watch has spotted the following idea from Gay Mitchell (FG MEP). Surely, the nation falling off the cliff into an abyss of a severe recession and fiscal insolvency has nothing better to do than engage its MEPs in advocating Gaelic subtitles in cinemas. Too bad Gay's brain power never stretched to imagine watching a French or a German film with Irish and English subtitles littering the same screen. Oh, dear...