20/12/2011: IMF IV Review of Ireland Programme

Fourth review of Ireland's programme under the Troika package is out and makes for some interesting reading. As usual, between-the-lines reading skills required. This is the first post on the report, focusing on housing markets and mortgages arrears.


The review is overall positive, complimentary and almost glowing. This warrants a number of caveats:

• The review is based on QNA data through H1 2011, so Q3 2011 fall-off in GDP and GNP are not factored in
• The review is based on the general data sources through mid-October, so November Exchequer results do not appear to have been factored in either

Aside from the strengths highlighted in the media, here are the critical points of the report. Mortgages arrears first, with subsequent posts dealing with other core issues covered.

"However, housing market and household debt indicators continue to deteriorate (Figure 2). With the fall in house prices accelerating in October to 15.1 percent on an annual basis, prices are down 45.4 percent from their peak in 2007. The rate of mortgage arrears by value continued to rise, reaching 10.8 percent in September 2011 (8.1 percent in terms of the number of mortgages), up from 6.6 percent in September 2010. With the share of longer-term arrears (greater than 180 days) continuing to rise, the authorities have deepened their analysis of the mortgage arrears problem (Box 1)."

Of interest here is the analysis the IMF refers to. Here is the summary (quoted from the IMF report, my comments in italics):

1. Aggregate mortgage arrears continue to rise sharply and in September 2011 reached 8.1 percent by the number of loans to owner-occupiers. 
2. To better understand the nature of mortgage distress, the CBI has utilized loan-by-loan data from end-2010 that were collected as part of the review of banks’ capital needs published at end-March 2011. [I am puzzled with this statement. CBI clearly stated at the time of PCARs that they did not analyse individual loans data for mortgages, but considered samples of mortgages. At a later date - in September 2011, CBI gave a presentation of a study based on the specific loans data, but this was also based on a sample of data, a large sample, but still a sample, not the entire population of the mortgages on the books of 4 banks.]
3. Of those households in arrears over 90 days, almost 40 percent have been in this position for a year or more. The average amount of arrears on these loans is €27,000, compared with an average outstanding balance of just over €200,000. [Please, keep in mind, per IMF, this is data through the end of 2010, so it is, by now - one year old!]
4. On top of arrears of 90 days or more, there are a significant number of borrowers who have restructured loans or delinquent payments of less than 90 days, bringing the total affected to about 20 percent of borrowers at end-2010. [These figures - 20% of borrowers either in arrears or restructured, or as I call these 'at risk' - is much greater than reported by the CBI in their quarterly report, showing for Q3 2011 that only 12.96% of all mortgages outstanding were either in arrears, restructured or repossessed]
5. Arrears tend to be highest in relation to buy-tolet properties and first-time buyers, as these purchasers took on large debts owing to high house prices during 2005–08. 
6. Negative equity is extensive. It is estimated that 36 percent of owner-occupier households with mortgages in these institutions are in negative equity (at September 2011 house prices). [This, of course, is now higher again, as October and November price declines totalled 3.71%] 
7. For owner-occupier loans taken between 2005 and 2008 (half of outstanding loans), 48 percent of properties are in negative equity, while 52 percent of buy-to-let loans are in negative equity. [The two numbers are remarkably close to each other.]
8. Negative equity does not imply arrears. Despite widespread negative equity amongst borrowers, the vast majority of negative equity borrowers, over 90 percent, were not in arrears at end-2010. 
9. About half of owner-occupier borrowers in arrears at end-2010 had positive equity, with around 38 percent having at least 20 percent equity in their homes. The average negative equity of owner-occupiers without arrears is €68,000, modestly smaller than the average of €84,000 for owner-occupiers in arrears. [Which, of course, means that these arrears can be dealt with at no loss to the banks via a combination of restructuring, equity stakes assumption by the banks and/or foreclosures. In the end, this also means that significantly less resources will be needed to help those who are in negative equity and at risk of arrears - i.e. those who are subject to punitive provisions of our personal bankruptcy code]
10. Buy-to-let properties. Of the total loan book analyzed, 22 percent (€20 billion out of €87 billion), relates to buy-to-let property debt. The average outstanding balance for the 52 percent of buy-to-let properties in negative equity is about €320,000 and the average negative equity is just over €100,000.
11. Within the four institutions covered by the Financial Measures Program, 33 percent of buy-to-let borrowers also have an owner-occupier mortgage with the same lender.  

Some very interesting observations from the IMF summary of the CBI evidence on drivers of arrears: 

• Studies, including from other countries, point to unemployment, debt service, and loan-to-value ratios as key determinants for arrears, although geography and loan vintage are also important, as are rental and payment rates for buy-to-let properties. 
• Data availability can be an issue, however, especially for current income. 
• An alternative approach developed a transition matrix for predicting mortgage arrears based on loan vintage, borrower type, interest rate type, and region.

There's no summary of the transition matrix provided.

Here are three more interesting charts relating to the Irish property market:

Economics 16/7/10: IMF Article IV CP on Ireland: part 3

This is the third post on the IMF's Article IV consultation paper for Ireland. (The first two posts is available here and here).

V. THE FISCAL OUTLOOK AND CONSOLIDATION AGENDA

35. To counter the deteriorating fiscal position, the authorities moved early to make substantial, balanced, and lasting consolidation efforts. As the fiscal situation deteriorated and a large structural deficit emerged, the authorities acted repeatedly to take additional measures and raise the ambition of their fiscal consolidation goals. This was achieved in a remarkably socially-cohesive manner and represented a balance of economic and social considerations. The strong upfront measures are expected to yield a net adjustment of 5½ percent of GDP over 2009–10.

[The Fund is generally positive on the measures taken so far. However, in the chart at the bottom of page 22, the report shows the overall contribution to fiscal imbalances across various categories of spending and receipts. Picture 1 reproduces, with added details, the IMF analysis. Several things that are not covered by the Fund analysis stand out as significant omissions, most likely politically motivated. First, there is a very substantial role played by the continued deterioration in transfers (social welfare, health etc) which the Fund glances over. Second, public sector wages bill continues to represent further downward pressures on fiscal deficit despite the measures taken in 2009.
Third, noted (to the IMF credit) in the footnote on the following page, banks supports are likely to exert additional pressures in years to come. Per IMF: “A re-classification of a capital injection (2½ percent of GDP) as a capital transfer raised the 2009 deficit to 14¼ percent of GDP. In the first half of 2010, the government issued promissory notes worth 8½ percent of GDP to increase capital in one bank and two building societies. If these injections are considered capital transfers, the 2010 deficit would increase by this amount. As it would represent a once-off adjustment, it would not impact on the trajectory of the deficit for 2011. The further possible capital injection of 5 percent of GDP would add correspondingly to the 2010 deficit.”

Clearly, the Fund is not interested in making any predictions about the markets reaction to such an one-off adjustment. But one must wonder, if the Irish deficit shoots past 20% of GDP mark, even on one-off measures – what will our bond yields be at? And if 2011 brings about more capital injections into the banks, how long can these ‘one-off’ measures continue to hammer our deficits before someone, somewhere screams ‘The Irish Exchequer has no clothes!”]

[In the box-out on page 23, the IMF states:]

When adjusting for the impact of asset prices, the Irish structural deficit reached 8 percent in 2007, spiking to 12 percent of GDP in 2008. Spain and the U.K. also experienced sharp but smaller increases in structural deficits. However, after fiscal adjustment of 5½ percent of GDP, the Irish structural deficit is expected to decline to 8½ percent of GDP in 2010, while discretionary fiscal stimulus has raised the structural deficits in Spain and the U.K.

[Two things worth mentioning here. One: if the Bearded Ones of the Siptu/Ictu alphabet soup economics have their way, what would our structural deficit look like today? 8.5% is a hefty number. Recall that structural deficits won’t go away once economy is back on long term growth path. Second: at 8.5%, structural (long-term) sustainability of our Exchequer finances would require a combined reduction in expenditure, plus increases of taxation (assuming 50:50 split between the two) of roughly speaking a further €6.5 billion cut in spending and €6.5 increase in tax revenues. Given that roughly 700,000 households pay income, stamps & CGT taxes in this country, that would mean an annual tax bill increase of a whooping €9,300 per household. Does the Fund or the Government, or even the Bearded Ones think this is feasible?]

36. The 2010 budget adheres to the consolidation track, but risks remain. The authorities project the 2010 deficit to be 11½ percent of GDP. Because of lower nominal 2009 GDP than assumed in the 2010 budget and a weaker growth projection, staff projects lower revenues, leading to a deficit of 11.9 percent of GDP in 2010. The accounting treatment of the government’s equity injections into the troubled banks is still being determined but could raise the 2010 headline deficit substantially. The authorities noted that the associated fiscal outlays have already been incorporated into the official debt figures.

[Here is an interesting one. So banks-related outlays are in the debt figures already, but they are not in the deficit figures yet. How can Brian Cowen sit with a straight face in front of CNN cameras and tell the world that fiscal consolidation is working if Ireland Inc is heading for a deficit in 2010 that is vastly in excess of the deficit in 2009? And if he can, then why is DofF already factoring in the banks numbers into official debt? Gosh, it does begin to appear that we can’t even do a banana republic thing right.]


37. The remaining sovereign financing need in 2010 is limited. The average maturity of Irish treasury bonds is high—at 7½ years—and the rollover need is therefore limited. [That’s the good news…] For 2010, about three quarters of the planned government bond issuance (€20 billion) had been obtained as of June. The annual financing needs in 2011–12 are projected at about the 2010 level. The authorities maintain sizeable cash balances, financed by short-term debt, which could act as a buffer against any temporary difficulties in issuing long-term debt.

[Two things jump out: one the annual financing requirements for 2011 and 2012 are around €20 billion each. Which really means that the Government is not planning any substantial reductions in overall size of its expenditure. The con game of taking spending out of one pocket and shifting it into another pocket, while calling its transition from hand to hand a ‘saving’ will keep going on through the next elections… This explains why, for all our talk of ‘taking the pain’ the Government expenditure stubbornly keeps climbing up. Second, there is a quick sighting of the substantial additional costs of our overspending habits here. Short-term buffers kept by the DofF in order to insure ourselves against the possible tightness of the normal borrowing channels are ‘substantial’ per IMF. These buffers are subject to the higher risk of rising interest rates and also have no productive role in financing public spending. The costs of funding these buffers is a pure insurance premium we have to pay on top of standard borrowing costs in order to keep on rolling the vast social welfare/public spending machine we have created.]


38. Staff supports the appropriately ambitious fiscal consolidation plan through 2014 but cautioned that the required adjustment may be larger than projected by the authorities. The consolidation plan, outlined in the December 2009 Stability Programme Update, aims to reduce the deficit to below 3 percent of GDP by 2014. The plan envisages fiscal adjustment of 4½ percent of GDP over 2011–14, of which about 1 percent of GDP represents reductions in capital expenditures. The staff’s macroeconomic projections imply that the required medium-term adjustment could be larger than projected by the authorities. Starting from a higher projected deficit in 2010 and based on less optimistic macroeconomic projections, staff estimates that the adjustment need over 2011–14 would be 6½ percent of GDP, 2 percentage points of GDP higher than the authorities do.

[Quite a nasty turn for the ‘authorities’ here. The Fund clearly has little faith that the Irish Government can reach the set target of 3% by 2014. In fact, the IMF now projects that Irish Government deficits will be 5.9% of GDP in 2014 (driven by macroeconomic and target differences between DofF projections and IMF forecasts), with our debt to GDP ratio reaching 97.7% ex-banks supports in 2010 (5% of GDP additional to 8.5% announced in March) and 2011 (by my estimates around 5% of GDP). Worse than that – 5.2% of GDP will be our structural deficit in 2014 – a massive 88% of the total deficit.

A little footnote to the table on page 24 gives explanation: “The difference between the fiscal projections of the Department of Finance and the IMF staff is due in part to assumptions of lower growth on the part of the IMF staff. The IMF staff’s baseline fiscal projections for 2011–12 incorporate the adjustment efforts announced by the authorities in their December 2009 Stability Programme Update, although 2/3 of these measures remain to be specified. For the remainder of the period, the IMF staff’s projections do not incorporate the further adjustments efforts outlined in the Stability Programme Update.”

In other words, folks, in IMF terms, these projections include what has been promised but is not specified. And furthermore, the IMF doesn’t really believe anything this Government has set out to do beyond 2012 elections. They rightly suspect that any commitment of FF/Greens made before 2012 will face a serious uphill battle in implementation should the coalition fall apart.]

Economics 15/7/10: IMF Article IV CP on Ireland: part 2

This is the second post on the IMF's Article IV consultation paper for Ireland. (The first post is available here).

Several issues, previously stressed by this blog have made their way into Article IV – a good sign for those who read these pages regularly, and bad news for the Government. Emphasis is mine, throughout.

21. Given the sharp increase in leverage, this will be a drag on the pace of recovery. In order to achieve the required internal devaluation, some fall in Irish prices is necessary. However, in the transition to lower price levels, deflation will slow the pace of recovery. The debt of households and businesses, fueled by the low real interest rates before the crisis and with unchanged nominal values, has now to be repaid in an environment of falling prices, higher real interest rates, and low GDP growth rates. These factors lead staff to conclude that the normally-sharp bounce back to close the output gap after a large output decline will be muted on account of the deflationary drag.

[Let’s revisit the above comment of mine about the shocking state of economics understanding amongst the Irish ‘authorities’ (see the first blog post on Article IV paper). If the Irish authorities disagreement with the IMF on deflation is correct, then surely the state can drive up inflation in sectors it controls to the full extent of inducing deflation of our debt. No need to worry about, as the IMF does, about the adverse effects of deflation on debt sustainability. Alas, the IMF is much more sophisticated in its analysis. The Fund understands that in order to deflate our debt, Ireland will need inflation in capital goods and consumer goods. Not in state-controlled and economically unproductive services and sectors, such as health, public services, public transport, energy, etc. Inflation, you see, is not the same across all goods and services, contrary to what our economics bureaucrats might think.]

[Page 15 of the report shows two very good charts, similar to what I’ve been posting before. Irish households’ debt roughly, per IMF estimate, is ca 215% of our net disposable income, while Irish corporates’ debt (ex banks and financial corporations) is ca 160% of our GDP. Now, recall that our corporates are our GNP, which is roughly 24% below GDP. By both measures we are more leveraged than Spain and Portugal! We are, per these charts, darn close to being insolvent as an economy. But of course, there is not a peep from the IMF about Government programmes for addressing this core problem. For a good reason – there isn’t such a programme. Instead we have denials from all official sources that debt insolvency might be even an issue here.]

22. As banks emerge from the worst phase of the crisis, they remain weak. While capital ratios of the eurozone banks have risen since the crisis, they have declined for the large Irish banks. Banks’ reliance on wholesale funding—and, hence, high loan-to-deposit ratios—has yet to be corrected significantly. The ratio of nonperforming loans (NPLs) to all loans increased from ¾ percent at end-2007 to 9 percent at end-2009 and can only be expected to increase further, particularly if rescheduled loans fall into arrears. In the meantime, the ability to provision for these NPLs has declined sharply.

[Now, let me see. We, the taxpayers, have been taken to cleaners by the bank rescue measures. Something almost the size of our annual national income has been committed by the Government to underwrite the banks – from the implicit expected liability on the Guarantee to the explicit cash injections. Just this week our Taoiseach has gone as far as tell the banks: “Burn cash away, should you need more, we’ll give you as much as you need”. And for all that, the banks “remain weak”.

And notice the IMF statement on expected losses on loans. We are now beyond 9% (as of the end of 2009) and closer to 12% by the end of H1 2010. Recall that our Nama and Government assumed just 9 months ago – in October 2009 – that the banks losses will be on par with those experienced in the UK in the early 1990s – aka 10%. We are past this number already and the banks ‘remain weak’. In what book do these outcomes constitute a successful policy response? Stage three of the banking crisis, per IMF warning, is looming if ‘rescheduled loans fall into arrears’. In other words, all the toxic loans on the banks books back in 2007-2008 that were rapidly re-negotiated by the end of 2008, many of these ‘new’ loans come to the end of the repayment holidays and interest only periods and fall due for recovery around the end of 2010-2011. When these loans tank – and there is really no reason for them not to – the arrears will shoot up. Ask yourselves the following questions – are those billions committed to BofI and AIB and Nama taking into account those possible defaults? Not really. Why? Because for now, until the recovery begins, these are performing loans! So in real terms, the banks are not just ‘weak’ as the IMF says. They are potentially gravely sick.]


[But just how gravely ill are the banks? The IMF says the following:] 23. Liquidity pressures remain serious. The authorities estimate that over €70 billion (44 percent of GDP [or 55% of our annual national income]) of banks’ obligations will mature by September this year. …Irish banks have also been heavy users of ECB liquidity facilities. The stock of retail bank deposits has been either flat or declining.

[This is pretty dire, if you ask me. As noted by me on many occasions before, our banks are close to being the most over-leveraged in the entire developed world. So they are in the poor state when it comes to solvency issues. As the IMF above states, and many other sources – from BIS to many Irish observers, including myself – confirm: Irish banks are also illiquid. That’s like a patient who is brain dead and has no pulse. Dare to call that a corpse? I am no medical specialist, but something tells me that some shock therapy – Significant bondholders haircuts? National cash for equity swaps on massive scales? Debt for equity conversions with deeper haircuts on lenders? – is needed here.]

[But do recall that by now every Government Minister and almost every Governing Coalition TD have gone out on the record telling us that Nama will restore credit flows in the economy. Of course, people like myself, Brian Lucey, Karl Whelan, Peter Mathews, and a number of other observers were saying that this won’t happen. The IMF has said the same before. This time around on page 17 the state: “…staff analysis was cautionary regarding the ability of the banks to lend for a recovery.” And then on pages 18-19: “deleveraging to reduce the loan-to-deposit ratio and banks’ risk aversion will likely constrain lending and the pace of economic recovery, at least in 2010–11. Higher than expected losses, uncertainties in global regulatory trends, and renewed financial market tensions—that may restrict access to funding—create downside risks. In this environment, targets for SME lending, which have been imposed on two major banks in 2010–11, could have adverse effects on credit quality and hence require strong prudential safeguards, as the nonperforming loans of this sector have grown rapidly.”]

[Oh, my goodness, is that the IMF warning that politically motivated targets the Government has imposed on the banks for lending out in this economy might be… hmm… damaging to the banks objective of repairing their balancesheets? Indeed the Fund is concerned. As should be Irish taxpayers. After all, the taxpayers have been repeatedly and routinely deceived by the official statements as to the expected outcomes of Nama and banks recapitalizations despite having been warned by independent economists and bankers that their claims concerning restored credit flows will not materialise. Anyone to take responsibility for that?]

28. … Governance of NAMA is strengthened by its independent board. However, given the government’s large presence in the property market, implementing the provisions for the oversight of NAMA’s operations, is vital.

[Clearly, the IMF is concerned that outside of the main board of Nama, the structure itself is not provided with sufficient oversight, transparency and/or accountability. This is not surprising. Core Nama decisions-making committees are rigged up so as to exclude all and any external independent participation. Nama operations will have a limited and not subject to FOI ‘oversight’ only ex post the operational decisions are implemented. Nama strategy and decisions will not be subject to ex ante or contemporaneous oversight of anyone, save for Nama staff itself.

[It is also interesting to note that the IMF report makes absolutely no references to specific policies aimed at restructuring banking operations in the main two Irish banks. Paragraph 31 does attempt to pay lip-service to Government efforts to “reshape the system” but it so miserably fails to note a single implemented ‘reshaping’ measure adopted that it makes it clear that there has been no meaningful change in the ways Irish banks operate. This contrasts with more robust actions on the regulatory reforms side – paragraph 32.]


[Paragraph 34 is the ill-fated section of the report mistakenly identified by the Irish press as an endorsement of the idea of banks levy:] 34. To complement regulatory safeguards, and to reduce and meet the costs of future crises, a financial stability charge could be contemplated.

Such a charge would have two elements. A risk-adjusted levy, tied to a credible resolution mechanism, would provide resources for a resolution fund to be used for future crises. A financial activities tax, levied on the profits and remuneration (of senior executives) would represent a fair contribution from the sector to general revenues but also serve the purpose of reducing the sector’s size and, hence, its systemic risk. Such tax measures remain controversial but are being contemplated in a number of other countries. The authorities noted that Ireland would be guided by the evolving international practice and these initiatives may need to be deferred until more normal conditions apply.

[So let us summarize the argument here: the levies can be contemplated (not a ringing endorsement by the Fund of the idea) and their introduction will lead to a reduced size of the banking sector in the economy.

The latter, of course, would reduce banks’ ability and willingness to supply credit, thus limiting leveraged investment and growth. Now, that might be a fine objective to set for the future, but… how does it square off with the fact that we already have too constrained of a credit supply in the economy which, per earlier IMF statements, is choking off the recovery? Do you sense a contradiction here? I do.

Irish Times folks don’t. Actually, they can't even exactly reflect what the report says. Hence in today’s paper: “The Government should introduce a tax on senior bankers’ pay and bank profits to help reduce the risks the financial sector poses to the economy, according to the International Monetary Fund (IMF).” I failed to notice where the IMF says the Government ‘should introduce a levy’…

More from Irish Times: “It notes, however, that implementation of such measures may need to be deferred until more normal financial conditions apply.” Opps… it was the authorities – as in Irish authorities, not the Fund staff – who stated this to the IMF, as the above quote from the report itself clearly states.

In short, there is no ‘should’ to the banks levy, just ‘could’… which of course may mean that the Irish Government also could do a number of other things, some palatable in a civilized society, some not. Could does not equate to should, unless you are on a preaching podium, such as the Irish Times.]


More to follow, so stay tuned...

Economics 15/7/10: IMF Article IV CP on Ireland: part 1

Amended (hat tip to Paul MacDonnell & Mack)

IMF Article IV consultation paper on Ireland. Several issues, previously stressed by this blog have made their way into Article IV – a good sign for those who read these pages regularly, and bad news for the Government. Emphasis is mine, throughout.


This is the first post of several on the Article IV consultation paper for Ireland:

2. …the path from crisis to stability and recovery is a narrow one. With some reversal in the earlier loss of competitiveness and improvements in the global economy, exports will lead the recovery. But spillovers to the domestic economy will be limited because of exports’ heavy reliance on imports, their tendency to employ capital-intensive processes, and the sizeable repatriation of profits generated by multinational exporters.

[This is bang on with my assessment of the earlier Government noises about the exports-led recovery]

Moreover, the unwinding of home-grown imbalances from the boom years—arising from rapid credit growth, inflated property prices, and high wage and price levels—will create deflationary tendencies that act as a drag on growth. Banks remain a source of downside risks from higher than expected losses, uncertainties in global regulatory trends, and continued financial market tensions that restrict access to funding.

[Note the assessment of the banking sector problems – especially lack of available credit – this will come handy later on when I highlight the self-contradictory nature of the IMF assessment of the banks levy. This is an issue raised as central to the IMF Article IV analysis in today’s Irish Times, which missed the point that the IMF does not actually call for the banks levy, but stresses that it is a controversial measure that will lead to further reduction in credit.]

[So in brief, the opening part of the IMF report does not bode well for the Government claims that we are on a road to recovery. And crucially, it does not put much credit in our Government’s claims that the recessionary adjustments have led to restoration of Ireland’s competitiveness. It also cuts across majority of our economics commentators and some MNC leaders. In contrast, I have always stressed the fact that by most metrics, our competitiveness ‘improvements’ have been either totally invisible or tentative at best.]

3. Along the long-haul path to normalcy, retaining policy credibility will require demonstrated commitment and active risk management. The appropriately ambitious fiscal consolidation plan demands years of tight budgetary control. Likewise, the weaning of the banking sector from public support and its eventual return to good health will proceed at only a measured pace.

[The IMF folks have to be wondering what the hell has happened to our Government commitment when Brian Cowen negotiated the Croke Park deal that effectively prevents any meaningful reforms of our public spending into 2014. That was some ‘demonstrated commitment and active risk management’.]

In the interim, unforeseen fiscal demands may occur. In this context, at times heavily bunched banks’ funding needs and episodes of market volatility could generate unwelcome pressures and disruption. With limited fiscal resources for dealing with contingencies, maintaining a steady policy course will require mechanisms for oversight and transparency, and high-quality communication to minimize risks and sustain the political consensus and market confidence.

[We have seen this all before – in a number of IMF previous statements. What the Fund is saying here is very clear – given the distortionary nature of our banks guarantee scheme and Nama, the Exchequer remains heavily exposed to the moral hazard problem on the banks side. In this environment, one needs a vigilant Exchequer, willing to impose severe pain on the banks in order to keep them in line and prevent future over-loading of publicly guaranteed liabilities. The IMF doesn’t openly claim we don’t have one, but we really do know that we do not. The IMF instead insists on the need for proper checks and balances in the system in order to at the very least cushion the adverse impact of banks perverse incentives to pile on publicly guaranteed debts. But the IMF does not realise (or at least does not acknowledge) that Ireland’s Government and the Dail operate effectively without any real checks and balances. How else can a democratic country run on regular unscheduled appearances of the Minister for Finance to announce another round of banks funding with no real debate, real votes, real accounts given?]


6. The economy is projected to resume growth in 2010. Short-term indicators present a mixed picture of prospects. After a sharp rise in January, industrial production has pulled back. Goods exports are recovering from a weak performance in the second half of 2009. Sentiment measures have also shown improvement, but they incorrectly predicted a much stronger 2009:Q4 and do not as yet reflect the recent financial market tensions. Recent unemployment data were disappointing.

[Errr… we’v turned the corner, as Brian Cowen keeps repeating on international news channels]

Consequently, likely outcomes are in a larger than usual zone of uncertainty. Even as the economy recovers through the year, staff projects the GDP for 2010 to be ½ percent lower than in 2009, but with a q4-on-q4 increase of about 2 percent.

[In other words, April 2010 forecast remains untouched by the IMF. The Fund sees, apparently no ‘turn around’ that would require it to raise their forecasts. More importantly, the IMF also shows 2011 and 2012 projections for growth. Thus, DofF predicted in its SPU 2010 GDP growth of 3.3% in 2011 and a whooping 4.5% growth in 2012. IMF in contrast expects growth of 2.3% in 2011 and 2.5% in 2012. That’s a massive difference on DofF. And should IMF forecasts come true, Ireland Inc will require even more cuts in deficits in years ahead.]


8. The high and persistent unemployment reflects ongoing structural changes. The headline [unemployment] rate is likely to peak this year at 13¾ percent before declining to a still high 9½ percent by 2015. In addition to the cyclical component, the large increase in unemployment reflects significant structural changes with the unwinding of the boom years. The sharpest decrease in employment has occurred in construction and manufacturing. Some of these lost jobs may never come back, especially as the duration of unemployment increases, with the attendant depreciation of human capital and future growth prospects.

[Oh, and the IMF doesn’t hold much trust in Fas’ ability to retrain all those construction and manufacturing workers with relatively low skills and education into ‘knowledge economy’ workers? I wonder why… The key phrase here is ‘structural unemployment’ – the phrase that implies that no return to growth at the level of long term economic potential will ever reduce that portion of unemployment.]

Persistent unemployment may become a policy challenge going forward, and the younger generation could face discouragement and loss of human capital.

[Again, current policies do absolutely nothing to address this issue. We are facing education cuts, education grants for the unemployed are basically unavailable in real terms.]


10. The pace of recovery remains constrained by continuing imbalances. …By staff’s estimates, the potential growth rate will rise gradually to about 2½ percent by 2015 as the internal imbalances—arising from rapid credit growth, overvalued property prices, and high price and wage levels—are corrected.

[Again, nothing new here for the readers of this blog. I have been on the record for some time now saying that long term growth for Ireland should be around (and below) 2%. In my view, IMF estimate of potential GDP growth of 2.5% by 2015 is pretty much bang on with my view. Potential GDP is the trend line. If the trend line is 2-2.5%, while the economy experiences a long term structural underperformance, then long term growth average of 1.5-2% is highly probable. And this is exactly my estimate for Ireland 2010-2020.]

The analysis cautions that the Irish economy may be in a regime with the relatively-modest potential growth and the high unemployment reinforcing each other. The authorities recognize these dislocations but are more optimistic about the medium-term growth prospects. They judge that the traditional flexibility and international openness of the Irish labor market will provide a self-correcting mechanism towards more robust growth.

[This is really a damning statement. It contains two important things. First, the explicit statement that Irish Government is excessively optimistic in its forecasts and is basically ignoring the risk of twin shocks of unemployment and low growth capacity, despite being aware of them. Second, the IMF put it on the record that the entire long term Government recovery programme is based on the hope that large enough number of Irish people will emigrate to sufficiently reduce the labour force and unemployment. This is really equivalent to a country Government wishing for a natural disaster or a plague in order to reduce economic pressures through Malthusian per capita wealth model.]


13. Even before the crisis hit, the rapid rise of Irish wage levels and increasing global competition had diminished traditional Irish advantages. The departure of Dell, …to Poland in early 2009 was symbolic of a loss of edge in low-end manufacturing [amazing, Dell operates in High tech Manufacturing sector. To call its operations in Europe ‘low-end’ is most likely an honest admission by the IMF that what was going on in its Ireland facilities was nothing more than a 'screwdriver' assembly of imported components - aka a transfer pricing 'manufacturing']. Ireland’s share of the value of global and European manufactured exports, which had risen sharply between 1995 and 2001, fell steadily thereafter. In recent years, export growth has been sustained, though at lower levels than in the 1990s, by the repositioning of Ireland as a service exporter and “knowledge hub.”

[So we were not competitive up until now. Nothing new here, but a good reminder. Again, the bit about ‘knowledge hub’ is puzzling – Ireland doesn’t register on the international radar in terms of exporters of education services or healthcare. We do not export patents produced domestically. We do not ship much of indigenous software or biotech/pharma formulas. What ‘knowledge hub’ are we talking about that accounts for our services exports? Full 90+% of our services exports are MNCs, not indigenous firms.]


14. The recent decline in unit labor costs from their high levels will need to be sustained to close the competitiveness gap and make a material difference to growth prospects. …the high Irish price and wage levels will require a period of “internal devaluation” over the next few years to support export growth. …For now, however, unit labor costs have fallen primarily because of improvements in labor productivity. [Oh, sounds so great – we became more productive… err.. not really:] …the productivity increase reflects mainly compositional shifts in the labor force as the relatively-unproductive construction industry has contracted. Thus staff was concerned that productivity increases may not continue and, hence, the decline in unit labor costs to competitive levels is not yet assured. The authorities expect wage compression to continue on account of continuing weakness in and flexibility of the Irish labor market.

[Great, Mr Cowen’s plan to ship unemployed out of the country, while cutting wages for those remaining behind is working, then… Really, folks, this is IMF’s admission (in polite society terms) of our comprehensive failure to drive up productivity! On a side note – I have been running regularly updated posts on Irish competitiveness indicators based on data from CSO, ECB and CB, so stay tuned for more… And another side note, the IMF do not say anything explicitly about public sector wages, but on page 12 they show a chart that highlights the fact that wages in the public sector and industry (also dominated by unions contracts) have driven up wages across the entire economy in Q3 2009 relative to Q3 2008.]


16. Even with faster growth, the spillover from exports to the domestic economy will remain limited. An increase in Ireland’s exports, being highly correlated with an increase in imports, generates a much smaller increase in domestic value-added. Moreover, foreigners have large claims on the value-added generated in the export activity, as demonstrated by high correlation between the change in net trade and the change in income outflow on account of direct investment—the exceptions being the crisis years when imports fell for domestic reasons. Finally, Irish exporting activity has traditionally been relatively capital intensive, becoming more so with the downscaling of lower-skilled electronic assembly.

[In other words, the GDP/GNP gap is real and it matters to the economy, from the point of view of the IMF. I’ve said this all along. But the Government continues to insist that it collects tax on the gap as MNCs repatriate profits from Ireland. This is the joke that passes for our economic analysis. Tax we collect on profit earnings of MNCs is 12.5% after net deductions on transfer pricing through internal company billings etc. The same profits earned by domestic firms are recycled into the economy in form of dividends, wages, investment etc. Which means that while Exchequer earns at most 12.5% on MNCs profits, it earns multiples of that on profits from the domestic firms. This difference is further amplified by the fact that, as IMF also point out, MNCs are less labour intensive in production and returns on labour are taxed at much higher rates of income tax than returns on capital. It is frustrating to have to point these simple things out again and again in the face of denials from the official commentariate.]


18. The decline in prices reflects the high Irish price levels prior to the crisis and the collapse in domestic demand. Despite Ireland’s extensive trade relationships with the U.K., the depreciation of the British pound relative to the euro does not, in staff’s view, appear to be a primary source of the price decline. Irish import prices seem to have fallen after goods prices. Rather, Irish price levels were substantially higher than eurozone price levels prior to the crisis, mainly reflecting higher services prices but also higher goods prices (possibly because of the domestic distribution component).

[Finally, someone of IMF’s authority has confirmed what myself and a handful of other economists were saying for years – public sector-driven inflation (services such as education, health, sectors such as energy and transport) plus our Governments staunch resistance to introducing meaningful competition into retail and logistics (the Wal-Mart or Ikea effect) – are the core culprits in our prices being out of touch with our trading partners. Has anyone heard any discussion of reforming these bottlenecked areas of Ireland Inc’s economy from the Government? I haven’t. In fact, price inflation continues in state-dominated sectors. In the preceding paragraph, the IMF states that: “The annual pace of price decline was 2½ percent in April, but moderated to 1.9 percent in May, largely due to higher energy costs.” Guess who sets prices for energy in Ireland? Bingo – the Irish state.]

Ireland is currently among the most vulnerable nations to continued deflation. An index, capturing deflationary pressure based on indicators such as GDP growth, the output gap, the real exchange rate, equity prices, housing prices, credit growth, and monetary aggregates, suggests that Irish deflation is likely to persist into next year. After a 1.8 percent decline in prices this year, staff projects a further fall of 0.5 percent in 2011. The authorities expect inflation to turn positive next year. They view staff’s focus on domestic demand as unduly influenced by the experience of larger economies and, noting recent month-on-month price increases, emphasize that in Ireland’s small open-economy setting, exchange rate movements and short-run energy and food price increases would prevent further deflation.

[Again, the backward thinking of our ‘authorities’ is fully reflected in the above paragraph. The IMF staff concerns that deflation will continue are based on their view that Ireland is at a risk of continued slump in consumer demand and investment activities. The disagreement from our ‘authorities’ suggests that they think that charging higher food prices, gauging consumers on energy prices and raising the cost of living in areas where the demand is relatively price inelastic will be the good news going forward. This suggests that our ‘authorities’ really have no clue how economy operates in the real world. Shocking! But more on this in a second…]

Economics 24/06/2010: IMF statement on Irish fiscal policies

IMF released today its Concluding Statement for the 2010 Article IV Consultation from May 31, 2010.

1. Through assertive steps to deal with the most potent sources of vulnerability,

Irish policymakers have gained significant credibility.

2. Along the complex and long-haul path to normalcy, retaining policy credibility will require active risk management. The appropriately ambitious fiscal consolidation plan demands years of tight budgetary control. Likewise, the weaning of the banking sector from public support and its eventual return to good health will proceed at only a measured pace. In the interim, unforeseen fiscal demands may occur. …With limited fiscal resources for dealing with contingencies, maintaining a steady policy course will require mechanisms for oversight and transparency, and high quality communication to minimize risks and sustain the political consensus and market confidence.

[The really significant bit here is the IMF voicing their position that “maintaining a steady policy course will require mechanisms for oversight and transparency, and high quality communication”. In a diplomatic world of IMF’s statements, neutered by the ‘consultative’ bargaining with the Government, this is likely to mean the following: “Ireland has no mechanism for transparency and oversight (enter Nama). Ireland has no quality communications mechanism, with the preference given to ‘hit-and-run’ announcements of successive cash injections into the banks preceded by no policy debates, and followed by meek Dail talking shops in which discordant voices of fiscally and financially unqualified opposition and backbenchers bicker over minutiae, missing the big picture.”]

3. Ireland is likely to emerge from its output contraction into a period of relatively modest growth potential and high unemployment. Current Irish and global conditions make forecasts subject to much uncertainty. Various indicators point to a return to economic growth during this year, but following its earlier steep fall, GDP in 2010 is projected to be about 1/2 percent lower than in 2009. As the post-crisis dislocations are undone, annual growth rates should rise gradually to about 3.5 percent by 2015. After peaking around 13.5 percent this year and, absent additional policy measures, a sizeable structural component will likely keep unemployment at around 9 percent in 2015.

[Now, these numbers fly in the face of our budgetary projections – see table from the Budget 2010 estimates submitted to the EU Commission. And they imply much more significant challenge on fiscal consolidation side than what the Government has been aiming for.]

4. The improved global outlook will help, but to a limited extent. With some reversal in the earlier loss of competitiveness and improvements in the global economy, exports will lead the recovery. But spillovers to the domestic economy will be limited because of exports’ heavy reliance on imports, their tendency to employ capital-intensive processes, and the sizeable repatriation of profits generated by multinational exporters.

[I’ve been saying this for some time now. Exports will not get us out of this corner. More importantly, since our exports rely on inputs imports so heavily, we are staring at the situation where positive effects from the weaker euro on exports will be offset by the negative effects of rising cost of imported inputs. Also notice – this statement clearly puts IMF at odds with the Government, in so far as the IMF is explicitly stating here that for fiscal balance, it is Irish GNP, not GDP that matters most. Again, good to see another one of my long term concerns validated.]

5. Moreover, home-grown imbalances from the boom years will act as a drag on growth. The unwinding of these imbalances—arising from rapid credit growth, inflated property prices, and high wage and price levels—will limit the upside potential.

Financial sector weakness, fall in real estate prices, and high unemployment could continue to reinforce each other.

[In other words, as I have recently pointed out in the press and on the blog – the twin credit and asset markets crisis is likely to last long time. Years in fact. And this really blows apart the entire Nama strategy of getting the transferred loans back to the par with 10% (or was it not 5% before that?) appreciation in property values.]

But deleveraging to reduce the loan-to-deposit ratio and banks’ risk aversion will constrain lending and the pace of economic recovery, at least in 2010–11. Higher than expected losses, uncertainties in global regulatory trends, and renewed financial market tensions—that may restrict access to funding—create downside risks. In this environment, the targets for SME lending need to be combined with strong prudential safeguards as the non-performing loans of this sector have grown rapidly.

[So unlike the Irish Government, IMF sees banks deleveraging impacting adversely the real economy, higher margins pushing homeowners deeper into insolvency, higher banks charges and banking costs destroying operating capital capacity in the economy, etc. All the things we’ve been warning the Government about – Karl Whelan, Peter Mathews, Brian Lucey, myself – but to which our policymakers paid no attention whatsoever.]

7. Three restructuring priorities deserve attention:

NAMA should schedule an orderly disposal of the property assets acquired aimed to reduce the large overhang of property in state hands, restart market transactions and, thus, help normalize the property market. Oversight of NAMA operations, which is provided for in the legislation, is desirable.

[Thank you, IMF, for supporting exactly the criticism that myself and others have been levying against Nama. Nama needs transparency, oversight, clear business plan. Unfortunately, the legislation does not provide for proper oversight. Nama is an insider-run institution with no meaningful oversight capacity given to anyone, save for the Minister for Finance. Of course, the IMF is saying this indirectly. If the legislation did provide oversight systems sufficient enough, why is the IMF concerned about the need for oversight of Nama operations?]

Mindful of the moral hazard risks, narrowly-targeted support measures for vulnerable homeowners would limit the economic and social fallout of the crisis. …This process will be aided by an overdue shift to a more efficient and balanced personal insolvency regime.

[Again, everything here is a repeat of what we, the critics of the Government approach to the crisis, have been saying for months now. Including the need for reforming our atavistic bankruptcy laws (the calls that have been falling on Government’s deaf ears for some months now) and the need for a support package for homeowners in negative equity and distress (the calls that the Government is responding to by preparing to introduce new taxes on the same homeowners already stretched financially).]

10. Looking ahead, substantial challenges remain. Following the already sizeable consolidation in 2009 and 2010, further consolidation measures, although not as large as that already achieved, of at least 4.5 percent of GDP are required to reach the 2014 target. If GDP growth outcomes are weaker than those currently foreseen by the authorities—a clear possibility within the current range of scenarios—the additional effort needed may even be greater. Staying on target is critical to retain the hard-earned credibility. But the risk of “consolidation fatigue” and, hence, a fraying of the necessary social cohesion cannot be ruled out. For this reason, greater specificity on further proposed measures is necessary. Sustainable expenditure savings will be central, including through efficiencies in public services. Broadening the tax base for revenue enhancement will also be necessary.

[This is clearly the heaviest-edited section of the statement from the point of view of ‘consultative’ additions added by the Government. The language clearly states that the IMF does not believe Government current plans for reducing the deficit to 3% target by 2014. Just month and a half ago, IMF showed its estimates of Government deficit and they are clearly above 5% mark in 2015. Yet, a month ago the Government already had in place plans to further reduce the deficit by 4.5% before 2014. So either the IMF is saying that the Government will require a fiscal adjustment of 4.5% on top of previously announced 4.5% - to the total of 8.8% of GDP or roughly speaking €14.5 billion in total between now and 2014, or their numbers do not add up – per link above.

The really important stuff in this statement is just what risks concern the IMF. The risk of ‘consolidation fatigue’ – referring most likely to the Croke Park deal that effectively shut down any new savings in the public sector wage bill through 2014 would be one. The risk of the Government falling off the target – the risk reinforced by the continued delusionary rhetoric emanating from the ‘turnaround is upon us’ crowd. The risk of weaker growth than forecasted in the Budgetary estimates (table above).

Note that the IMF insists on central role in the adjustment to be played by ‘sustainable expenditure savings’. This is certainly divergent from the approach adopted so far, with tax measures and capital spending cuts (one-offs) being responsible for the lion’s share of fiscal adjustments.]

[On the net, the IMF is clearly seriously concerned about the ability of the Government to achieve meaningful consolidation of the budgets. On the day when Irish Government 10-year bond yields hit 5.38%, this concern means that means that IMF polite wording is just catching up with the bond markets’ clear and loud vote of low confidence in Ireland’s ability to match its tough rhetoric with equally resolute actions.]

Economics 29/06/2009:

IMF Report last week highlighted some pretty nasty sides to our policies of the past, present and the future. For those of you who missed my Sunday Times article this week, here is the unedited version:


“They who delight to be flattered, pay for their folly by a late repentance,” said Phaedrus of Macedonia some 2000 years ago. No matter how much our Ministers herald this week’s IMF report as ‘being supportive’ of the Government policies, these words can be a leitmotif for the international organization’s view of our economy.

The IMF clearly states that the bulk of our economic problems was predictable and stems from our own policies choices.

Structural deficit, notes the report reached 12.5% of GDP back in 2008. Now, even following the savagery of April supplementary budget, the deficit remains at 11% of GDP for 2009.

Profligate in spending, Irish authorities project deficits of 10.75% of GDP in 2009 and 2010 falling to 2.5% of GDP by 2013. IMF projects – as a benign scenario - deficits of 11.75% in 2009 and 12.75% in 2010, and 4% in 2013. Bang-on in line with my forecasts published in January 2009. And this is before we factor in our ongoing short-term borrowing binge and the costs of NAMA.

IMF staff’s baseline scenario implies “stronger expenditure consolidation than currently projected by the authorities”. Read: Minister Lenihan is off the mark in his fiscal consolidation exercise. Over 2009-2014 primary expenditures will have to be brought down by a whooping 9.5% of GDP – a cut of some €16.2bn against additional revenue raising of €4.3bn. A note: An Bord Snip is toiling overtime to reportedly cut just €4bn.

The balance between new taxes and spending cuts that the IMF suggests is so out of line with the Government approach two Budgets and two policy documents issued to date that it is impossible to interpret the Report as anything more than a motivational platitude that a senior scholar would accord to a not-too-bright student attempting a difficult proof. That Minister Lenihan failed to notice this irony is truly remarkable.

The IMF has a right to be critical of our policies. The Fund has been at the forefront of warning the Government about the problems we facing today. Annually, in Article IV Consultation Papers of 2003-2007 Fund analysts said that Ireland must focus on reforming grossly inefficient public services, stabilizing tax revenues, and deflating the property and public spending bubbles. Time and again the Government presented the IMF polite warnings as the marks of its approval of our policies. Cheers were sounded at numerous press conferences and nothing was done to address specific risk factors.

In its 2004 paper the Fund noted, that “Increases in public sector employment ...gradually inched up from a low of 3.7 percent in January 2001 to 4.8 percent by July 2003. Domestic demand was supported by the ECB’s easing of monetary policy and an expansionary fiscal policy.” Later, the Fund told the Government that “progress in improving public expenditure efficiency, controlling public sector wages, and increasing domestic competition has been limited.”

Throwing good money after bad to ‘improve’ public services as the Government preferred to do was never sustainable for the IMF: “the size of government [in Ireland] is not small in comparison with other OECD countries when compared to GNP, the more relevant measure of domestic economic activity.”

Bertie Ahearne’s response to this was to declare himself the last standing socialist in Europe and accelerate spending growth, triggering a wave of public sector waste. By 2007, Ireland became the country with one of the most generous welfare systems in the OECD.

“The ongoing rise in debt levels over the past decade has placed Ireland above the average of household debt-to-income ratio for Euro area countries, only surpassed by the Netherlands and Luxembourg,” said IMF in 2006.

Neither CBFSAI nor the Department of Finance stepped in to reign in this activity, despite IMF warnings. No tightening in reserve ratios or regulatory restrictions on excessive and risky loans took place. Capital to risk-weighted assets ratio has fallen from 14% in 2003 to 12% in 2005 for domestic banks. Contingent and off-balance sheet accounts have risen from 538% of total assets to 879%. Annual credit growth to private sector ballooned doubled to 29%. Today, the Government continues to promote our low public debt with no references to the private sector indebtedness.

In 2007 the IMF warned about the risks to our fiscal sanity: between 2003 and 2006, Irish real GDP grew by 22%, while real primary public spending rose 27%. Unfunded forward expenditure commitments have swallowed all existent and expected future primary surpluses.

Not surprisingly, this week, the IMF found that cyclical public deficit (the deficit that can be attributed to the world-wide recession) accounts for less than 30% of our total shortfall – in line with my own analysis published in August 2008. We are, as a nation, borrowing tens of billions of euros in order to pay grotesquely over-paid public sector employees their wages.

Perhaps the most perverted reading of the report by the Government concerned the IMF assessment of NAMA. Far from being an unguarded endorsement of the Government strategy, the report is tactfully telling our leaders to start thinking about the basics.

Per IMF, the main risks to NAMA are with pricing of the loans, post-NAMA recapitalization, narrowness of its remit and potential lack of flexibility. Protection of taxpayers’ funds is a serious concern. All these issues were raised by a number of critics of the Government approach to NAMA over the recent months. None have been addressed by the Government.

Crucially, the IMF sees a room for considering nationalization of the banks with shareholders taking full hit on their asset values. The IMF suggests that such nationalization can be triggered by either insolvency of the bank or by cash flow constraints. Given that the IMF estimates that some €34bn of the loans can end up in the rubbish bin, the cash-flow constraints that can trigger nationalization may apply to all major banks in Ireland. This is hardly comforting to the Government that categorically ruled out nationalizing well before it got to do the sums on NAMA itself.

Interestingly, a much over-looked sentence inserted in just two places in the report states: “A number of Directors considered that, for bank restructuring, other [than NAMA] options including a greater equity interest by the government should not be ruled out.” Given the current market valuations, any ‘equity interest by the government’ in our ailing banks would spell an outright nationalization to have any meaningful impact on the financial institutions. This hardly constitutes the IMF endorsement of the Government strategy.

On potential for NAMA success, the IMF says that “if well managed, the distressed assets acquired by NAMA could, over time, produce a recovery value to compensate for the initial fiscal outlays.” Note that the Fund says nothing about recouping the cost of final outlays: bond financing, managing NAMA, inflation or recapitalization post-NAMA. These lines of expenditure are likely to yield tens of billions in taxpayers’ losses.

In short, IMF report, even after rounds of ‘consultations’ inputs and delays by our officials, presents a picture of Ireland as a country that is yet to address the grave and domestically rooted policy disasters it faces – 22 months after the onset of the crisis. Hardly an endorsement we can be proud about.

Box-Out:
Another week, another bond offer from Ireland Inc. Last week, NTMA has sold a syndicated bond offer worth €6bn, with a whooping 5.9% annual coupon. The good news: it was a large issue and the maturity date for the new paper was 2019 – well away from 2012 and 2014 dates in previous two syndicated issues of this year. The bad news was the cost of the latest borrowing to the taxpayers. If the first €4bn bond raised this year was pricing each €1 in borrowed funds at €1.25, once expected inflation is factored in, the latest offer will cost us over €2.31 per each €1 borrowed. Not exactly a deal of a century. Another interesting feature of the syndicated bond offers to date is that the demand from banks, including Irish banks, remains very strong, covering more than 50% in all three placements despite continued problems in the banking sector. Funds allocations into Irish bonds rose steadily from 10% in the earlier offer to 26% in the latest placement. This can suggest two possible things. Either the fund managers re-discovering genuine interest in Irish paper or there is some sort of parking facility arrangement between the dealers and the issuer to store-up bonds for future use in NAMA-related transactions. Of course, one can only speculate…


And here are few quotes from earlier IMF reports on Ireland that did not make it into the article:

In its 2004 Article 4 Consultation Paper the Fund noted, in relation to the 2000-2003 period that: “The substantial contribution of multinationals to Irish output and associated profit flows creates significant differences between measures of output, and the recent cycles in GDP and GNP have not been synchronized. ...Increases in public sector employment ...gradually inched up from a low of 3.7 percent in January 2001 to 4.8 percent by July 2003. Domestic demand was supported by the ECB’s easing of monetary policy and an expansionary fiscal policy.”

Thus, the IMF was diplomatically telling the Government that by 2003 Ireland was running overheated housing markets, slowing productive sectors and unsustainable expansion in the public sector employment and spending. Per IMF “...steps toward improving efficiency in public transportation have been met with resistance by public sector unions,” clearly identifying the main obstacle to the path of public sector reforms in Ireland.

The Fund had also serious criticism of the rising levels of public spending in Ireland. Preserving the emphasis placed by the IMF itself, Article 4 document told the Government that “the size of government is not small in comparison with other OECD countries when compared to GNP, the more relevant measure of domestic economic activity in Ireland. Lower tax rates in Ireland as compared to the EU reflect favorable demographics, prudent fiscal policies that have delivered lower debt and debt-servicing costs, smaller defense requirements and lower unemployment-related social spending.”

2006 Article IV paper identified “several macro-risks and challenges facing the authorities. As the housing market has boomed, household debt to GDP ratios have continued to rise, raising some concerns about credit risks. Further, a significant slowdown in economic growth, while seen as highly unlikely in the near term, would have adverse consequences for banks’ non-performing loans.”

Government response to this was extending a range of property tax incentives schemes and encouraging banks lending. No tightening in reserve ratios or regulatory restrictions on excessive and risky loans took place. Indeed by 2005, regular capital to risk-weighted assets ratio has fallen from 15% in 2003 to 13.6% in 2005 for all banks, and from 13.9% to 12% for domestic banks. Contingent and off-balance sheet accounts as a percentage of total assets have risen from 538% to 879%. This deterioration in the quality of our financial systems took place against the backdrop of rapidly rising lending with annual credit growth to private sector balooning from 15% pa in 2003 to 28.8% in 2005.

In 2006 and later in 2007 the IMF staff “suggested broadening the tax base by phasing out the remaining property based incentive schemes, reducing mortgage interest tax relief, or introducing a property tax.” Despite agreeing with the staff, Irish Government has gone into 2007 election year with double digit growth in current expenditure and massive handouts to the pressure groups. The tax base was not only left unreformed, but new tax measures were introduced that pushed the state deeper into dependency of property tax revenues.

In September 2007 the IMF took a look at the quality of Irish Government targets delivery. Table A.1 of the report contains an often neglected line specifying the rising disconnect between the policymakers’ rethoric and the actual outrun. Between 2003 and 2006, Irish primariy surpluses rose from 1.1% to 3.4%. Over the same period of time, real GDP grew by 21.8%, while real primary public spending rose 27%.