22/4/2014: On Irish Taxes, Quangos, Trade and other recent links

Some interesting links from recent media reports:

1. Apparently, completely unpredictably, unexpectedly, shockingly abruptly etc etc etc... but Ireland-based MNCs are allegedly concerned with the OECD (aka G7-G20 prompted, EU-supported) efforts to reforms international tax systems to close off the more egregious loopholes in corporate taxation: http://www.independent.ie/business/world/major-companies-concerned-over-oecds-plans-for-global-tax-reform-30202748.html Now, with the IBEC, DofF, and everyone else in irish Officialdom repeatedly declaring that our tax regime is above the water and thus not in the firing line, one must wonder just why are these companies concerned with the OECD moves?
2. On a related note, I just posted a new paper I wrote for the Cayman Financial Review on the above topic - see link here: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2427359
3. Unrelated to taxation issues, but related to fiscal policies of the Irish state, a note from the Irish Times on Government's heroic struggle with one electoral objective they set before 2011 GE: the objective of rationalising the massive spread of quangoes in Irish public policy ecosystem: http://www.irishtimes.com/news/politics/coalition-s-quango-cull-falls-well-short-of-promises-1.1768500. Core facts pointed out in the article are: The Government promised to abolish 100-145 quangoes right before it came to power in Q1 2011. Three years later, 45 have been either abolished or planned for abolition, of which only 20 are likely to be completely shut by the next GE in Q1 2016 net of new created. To-date, only 28 bodies have been abolished, 17 more are set to be culled in the remaining tenure. And 33 new agencies have been created or planned for creation. Net impact: of 732 quangoes in existence in mid-2012, we are likely to have 720 quangoes in existence in mid-2016. 
   
4. Now, recall that we are being repeatedly told that life outside the Euro for Ireland means kissing good bye our wonderful exporting capabilities. Here is a chart showing current account balance for Ireland and Germany (two star performers in the euro area in terms of trade) as contrasted by Denmark (a non-euro country that should be suffering from the trade deprivation due to its absence from the euro club). It turns out Denmark consistently outperforms Ireland in terms of current account surplus... So next time one of the Government parties' candidates start talking about Ireland's alleged benefits from the euro membership, do suggest they should take a trip to Denmark...
   
5. An absolutely brilliant short summary of Economics as a field of inquiry in 297 words by Professor Thomas Sargent http://www.vox.com/2014/4/19/5631654/this-graduation-speech-teaches-you-everything-you-need-to-know-about It is superb.
6. On artsy side of things, a stunning and powerfully original statement from China for Milan Expo 2015: http://www.dezeen.com/2014/04/01/china-pavilion-expo-milano-2015/ 
   
7. A set of excellent, insightful essays and articles on Ukrainian crisis or more significantly - on Russia's position vis-a-vis the West: http://www.reuters.com/article/2014/04/18/us-ukraine-putin-diplomacy-special-repor-idUSBREA3H0OQ20140418 and http://www.foreignaffairs.com/articles/141018/mitchell-a-orenstein/get-ready-for-a-russo-german-europe and http://euobserver.com/foreign/123879

02/03/2011: Irish Daily Mail - February 28

Here is an unedited version of my article for Irish Daily Mail for February 28, 2011.

The hardest thing in the General Election 2011 for Fine Gael and Labor is yet to come. After Sunday rest and celebrations this week will start for both parties with a political wrangle over positions of power. This too will be the easy part.

However, comes the week of March 7^th, the entire weight of the ongoing crisis will fall on the shoulders of Mr Kenny and his colleagues. There is no rulebook the new Government can consult in these times of need. Old policies, having comprehensively failed to stabilize our banking system, will be of no use. In fact, some – like Nama and the extended guarantee – will have to be unwound or scrapped altogether and fast. New policies touched upon during the campaign – like ‘renegotiation’ of the EU/IMF loans – will be just a side-show to the escalating crisis.

The problem is that, largely unseen by us, the banking crisis continues to rage. We’ve heard about the perils of ATMs running out of cash should we ‘unilaterally burn the banks bondholders’. Alas, our banks are now running ATMs on the back of IOUs they issue to themselves. In other words, every time we dine out or buy a newspaper, we are spending cash that Irish banks have borrowed from the ECB or the Central Bank of Ireland against the collateral that is only worth anything because the taxpayers promised to repay the loans. You might think that your Laser card is a debit card – taking money you own from your account. Courtesy of our bust banking system, it really is a credit card with the debt being spread across the entire economy.

Tens of billions of new debt have been created over the last few months through this ‘backdoor’ borrowing. And the new Government will have to stop this merry-go-round before the taxpayers, and with them the entire economy, collapse under the weight of this debt.

On top of this, there is a new instalment in the series of horror shows looming on the horizon, as AIB is set to report its 2010 results in days to come. For AIB is most likely to reveal this time around that it is not that much better off, when it comes to lending and investment books quality, than Anglo and INBS. AIB spent last three years in active denial of the extent of its impairments. Now, it will have to start airing its dirty laundry. Again, the Government will have to react to put some active policy buffers between the markets – easily spooked by the zombie giant rearing its head – and the bank.

Add to that much anticipated Prudential Capital Assessment Review (PCAR) – the new set of ‘stress tests’ on Irish banks balancesheets – and you have some seriously disastrous newsflow that the Government is heading into. To be credible, the PCAR will have to be really honest. We already had a number of previous reviews that spectacularly failed to reveal the truth about banks, including the ones carried out by the EU which gave AIB and Bank of Ireland their clean bills of health just before AIB was nationalized and Bank of Ireland required new financial wizardry from the Government to avoid the same fate. An honest PCAR expected next month will most likely send AIB into a tailspin.

Last, but not least, the Government will be facing the EU negotiations relating to the Franco-German push to ‘reform’ EU-wide macroeconomic stability rules. During these talks, our fiscal position will come under renewed scrutiny by the very same EU Commission and ECB who have already voiced concerns that the Government 4 year plan for restoring order to our public finances is a castle built of sand. Should the EU take a keen interest in our economic assumptions and forecasts, the Government might be forced to either increase the ‘savings’ planned for 2011-2014 by, possibly, as much as €5-6 billion, or sacrifice something else in return. No prizes if you guessed that it will be our corporate tax rates.

Here is an example. We all heard about unrealistically high assumptions on economic growth that underlie our recovery plans. Over the last couple of weeks, things have gone from bad to worse. For example, Government plan, supported in principle by Fine Gael, assumed oil price inflation of just 10.4% in 2011. Alas, since plan’s publication, oil prices have risen on average by over 20% already. Every 10% increase in oil price in Ireland translates into roughly 0.5% cut in our GDP growth. So if the Budget 2011 projected expected growth of 1.75% in GDP over this year, all signs to-date suggest that in reality we will be lucky if we can get 0.5% (0.1% for larger and less oil-dependent economies, like Germany). And this means that in year 2011 alone, to keep up with the 4 year plan, the Government might need to find additional ‘savings’ of some €200 million net.

So forget the 5 points plans. The new Government will have to get off to a fast start on drawing up the realistic plans for dealing with the crises we faced. Comes Monday week, the honeymoon will be over for Fine Gael and Labor.

02/03/2011: Irish Mail article - February 23

Here is an unedited version of my Irish Daily Mail article from February 23, 2011.

With the new Government standing to inherit a ca 10% deficit this year and a prospect of the sovereign debt in excess of €240 billion by the end of 2013, Friday elections will deliver only one certain outcome – our next Toiseach will most likely enjoy the shortest honeymoon with the voters in the history of the state. Given all the opinion polls, Enda Kenny will be redecorating the offices occupied previously by Brian Cowen. Fresh ‘IOU’ forms with Fine Gael’s insignia and new Taoiseach name will be gracing the desk. The change, alas, risks stopping there.

On a serious note, given the gravity of our economic and financial situation, it is virtually certain that the new Government will have to abandon, at least for the next 24 months, all of its 5-point plans. Fighting forest fires sweeping across our banking landscape will, once again take priority. No matter who wins in these elections, our State Guaranteed (and mostly State-owned) banks will continue to print own bonds (also State-Guaranteed) to roll over €9.7 billion of the older paper maturing this year. No matter what parties will end up forming the Government, deposits flight will go on, powered over, under the un-blinking eyes of the Financial Regulator and the Central Bank, by more borrowing. In the mean time, state finances will continue flopping along the ‘road to recovery’ like a deflated tyre.

By the end of 2013, the state will run out of the EU/IMF funds and own cash (aka NPRF), so forget whatever promises you heard throughout the current campaign about ‘stimulating growth’ and ‘improving competitiveness’. In the mean time, with the blessing of the Croke Park agreement, the public sector reforms will continue in the pages of newspapers, but not on the ground. All signs suggest that by the end of this year, the EU will face a severe banking crisis of its own, which will further exacerbate our local problems and will risk derailing our exports – the only bright spot on otherwise leaden horizon.

All of this suggests that the new Government will have to go into yet another crisis management exercise and this time around possibly without a safety cushion of the EU. The radical, unthinkable today, solutions will have to be considered. This is why the current elections are unlikely to give us much of a relief from the disasters of the last three years.

The only real uncertainty worth considering in the context of the Friday vote, therefore, is that of the new emerging power of the independents. Should the outcome of the vote this week return, as forecast, some 20 independent TDs, Ireland will be on a road to formation of at least two new parties, each with popular votes close to the combined votes of PDs and Greens, averaged over the last 4 elections. A combination of such robust support for independent alternatives to the 4 main parties and continued and amplifying economic crisis will then set the stage for a watershed change in the next elections. That date, in my estimates, is now no more than 18-21 months away.