This is an unedited version of my article in yesterday's Irish Examiner.
The last three days have seen dramatic volatility and extreme upward pressures on Irish, as well as Greek and Portuguese Government bonds. Briefly, early on Thursday morning, Irish 10 year bonds have set a new all-time record with yields reaching North of 7.07%. Much of these changes have been driven by the budgetary news from all three countries.
First, Greece and Portugal have shown the signs of increasing uncertainty about projected tax revenues and ability to deliver on ambitious austerity programmes.
Then, Ireland came into the line of fire.
Back in December 2009, the Government outlined a plan for piecemeal cuts in deficits over 2011-2014 that added up to a gross value of €6.5 billion (with at least €3 billion in tax measures). This was supposed to get us from having to borrow €18.8 billion in 2010 to a deficit of ca €9 billion in 2014. All courtesy of robust economic growth of more than 4% per annum penned into the Department of Finance rosy assumptions for 2011-2014.
This week, the Minister for Finance had to come down from the lofty heights of the “now you see the deficit, now your don’t” estimates by his Department. Courtesy of continuously expanding unemployment, declining tax revenues, plus ever-growing interest bills on Government debts, the headline gross savings target for 2011-2014 has been increased to €15 billion.
Dramatic as it might be, this figure is still far from being realistic – the fact that did not escape the bond vigilantes and some analysts. More than that, it represents the very conservative ethos of the Department of Finance and the Government that got us into a situation where three years into the crisis Ireland is still light years away from actually doing anything serious about correcting its fiscal position.
Let me explain.
First of all, take the actual announced plans for cuts in public spending. Over two months ago I have argued in the media that to get us onto the track toward reaching the goal of 3% to GDP deficit ratio, we need ca €7 billion in cuts in 2011, followed by €5 billion in 2012. The grand total of gross deficit reductions from now through 2014 adjusting for the effects of these cuts on our GDP and unemployment, plus steeper cost of financing Government debt, excluding new demand for funding from the banks is not the €15 billion, but €19-20 billion. In other words, once fiscal stabilizers (automatic clawbacks on Government spending) are added in, to achieve 3% target requires more than 33% deeper cuts than Minister Lenihan announced this Wednesday.
The markets know this. Just as they know that given the Government record to date there is very little chance that even €15 billion in cuts will be delivered. This mistrust in Government’s capacity to actually administer its own prescription is manifested most explicitly by the Croke Park agreement that effectively put one third of the current public expenditure out of reach of Mr Lenihan’s axe. It is further highlighted by the fact that this Government has failed to
substantially reduce public spending bills from 2008 through today. Back in 2008, net government spending stood at €55.7 billion. This year, we are likely to post a reduction of just €2.4 billion on 2008, all of which is accounted for by cuts in capital investment programmes.
Third, the markets also understand long-term implications of deficits. Even if the Irish Government manages to bring 2014 deficit close to 3% target, our Sovereign debt will grow by over €5 billion in that year. At this pace, Irish Exchequer is likely to be on the hook for a debt to GDP ratio of 125% by the end of 2014 reaching over 140% if expected additional banks liabilities materialise in 2011-2014. And all of this after we account for Mr Lenihan’s €15 billion cuts planned for 2011-2014.
Fourth, Government budgetary arithmetic falls further apart when one considers economics of the proposed deficit reduction measures. So far, the Government has planned for €3 billion increase in taxes on top of tax revenues gains due to rosy economy growth expectations between now and 2014. €15 billion target announcement raises this most likely 2-fold.
I have severe doubts that this economy has capacity left for tax revenue increases. Signs are, households are struggling with personal debts and their disposable after-tax incomes are barely sufficient to cover day-to-day spending. Credit card debts and utilities arrears are rising, savings are falling – all of which points to growing stress. Weakening sterling is pushing more retail sales out into the North just in time for Christmas shopping season. Cash economy – judging by
anecdotal evidence and corporate tax revenue in light of booming exports sectors – is expanding. The tax base is shrinking due to unemployment, underemployment and falling earnings.
Again, any rational investor will look at this as the evidence that the Government has run out of capacity to tax itself out of the fiscal corner.
But wait, this is only half of the story. The other half relates to the banking side of consumer affairs. In 2011 we can expect significant increases in mortgages costs as Irish banks once more go rummaging through the proverbial couch in search for a new injection of pennies. Bank of Ireland’s bond placing this week, with a yield of 5.4%, suggests a bleak future for lending markets. Any increases in mortgages costs will hike Government expenditure (by raising the cost of interest subsidies), hammer revenues (by reducing household consumption) and trigger new demands from banks for capital (to cover defaulting mortgages).
None of which, of course, appears to be attracting much attention from the Upper Merrion Street. At least judging by the budgetary projections released so far. At the same time, these numbers are impacting our long term growth potential and increasing the probability that Ireland, in the end, will have to restructure its public debt.
This week, similarly brutal arithmetic concerning Greek fiscal situation has prompted Professor Nouriel Roubini to make a dire prediction of the inevitable default by Greece on its Sovereign debt. Given Minister Lenihan’s recent statements and his boss’ staunch unwillingness to scrap the Croke Park agreement, it is hard to see how the forthcoming budgetary framework for 2011-2014 can get us out a similar predicament.
Showing posts with label Irish deficit forecast. Show all posts
Showing posts with label Irish deficit forecast. Show all posts
Sunday, October 31, 2010
Saturday, October 9, 2010
Economics 9/10/10: Facing the Budget
This is an unedited version of my column in Business & Finance magazine for October 2010.
James Carville famously remarked that: "I used to think if there was reincarnation, I want to come back as a president or the pope or a .400 baseball hitter. But now I want to come back as the bond market. You can intimidate everybody."
Three years into financial, fiscal and growth crises, Ireland’s continued lack of progress in resolving our long term fiscal deficits has finally caught up with our policymakers. Since mid August, the bond markets have been breathing the fear of fundamentals.
Make no mistake, all the talk about ‘ridiculously high’ bond yields on Irish sovereign debt, foreign analysts errors and conspiracy theories according to which a number of home grown academics have colluded with international media to play down Irish success story are nothing more than saber rattling. Damaging to our internal process of shaping the correct policies and disastrous to our external reputation, these claims have no foundation in the reality.
The facts that inform, at least in part, market assessment of our sovereign bond risks, are simple. After three years of struggling with deficits, Ireland is once again facing an Exchequer shortfall in excess of 11% of our GDP this year. Even ex-banks recapitalization measures, we are the worst performing country in the Eurozone in terms of fiscal balances two years in a row. With banks support measures counted in, we will post the worst peace-time fiscal deficit in the history of Europe.
More than that, looking forward, we are facing a daunting task of brining our deficits down to 5.3-5.9 percent of GDP by 2015. Repeated promises by our Finance officials and politicians to cut deficit to 2.9% by 2014 are now firmly relegated to the realm of fiction.
Combining Department of Finance, IMF and my own forecasts (which fall closer to those of IMF), the expected deficit path for Irish Exchequer through 2011-2015 is shown in the table below.
In difference with our official forecasts, IMF predicts Ireland’s 2014 deficit to reach 5.3% of our GDP based on May 2010 estimates for economic growth and absent accounting for the latest banks recapitalization costs. Adjusting this path to reflect stickier unemployment and lower growth (both across GDP and GNP) as consistent with IMF revisions of global economic growth forecasts since May 2010 yields the expected exchequer deficit of 5.99% of GDP for 2014.
Equally important is a steeper debt curve that is factored in the above projections courtesy of higher cost of financing, cumulated banks and NAMA losses and lower growth. By my estimates, total state liabilities, inclusive of Nama and banks recapitalization measures, will reach 127% by 2013. The risk to these numbers is to the upside.
These estimates have some serious implications to the pricing of Irish debt in the markets.
In August IMF published research (WP/10/184) titled "Fiscal Deficits, Public Debt, and Sovereign Bond Yields" which provides analysis "of the impact of fiscal deficits and public debt on long-term interest rates during 1980–2008, taking into account a wide range of country-specific factors” for 31 economies.
The paper finds that “higher deficits and public debt lead to a significant increase in long-term interest rates, with the precise magnitude dependent on initial fiscal, institutional and other structural conditions, as well as spillovers from global financial markets. Taking into account these factors suggests that large fiscal deficits and public debts are likely to put substantial upward pressures on sovereign bond yields in many advanced economies over the medium term. …An increase in the fiscal deficit of 1 percent of GDP was seen to raise real yields by about 30–34 basis points."
By the above numbers, Irish bonds currently should be yielding over 7.5% in real terms, not 6.5% we've seen so far. This puts into perspective the statements about 'ridiculously high' yields being observed today.
If we add to this relationship the effect of change in our public debt position plus a risk premium over Germany (+180bps), the expected historically-justified real yield on our 10 year bonds will rise to around 9.3%.
Looking at a historic range of values, our ex-banks deficits warrant the yields in the range of 8-20%. Alternatively, for our bond yields to be justified at 6.5% we need to cut our deficit back to around 5.2% mark and hold our debt to GDP ratio steady.
The IMF findings are hardly alone. Another August 2010 study, this time from German CESIfo, titled "Long-run Determinants of Sovereign Yields" produces similar results, while using distinct econometric methodology and data from that deployed in the IMF paper. "For the period 1973-2008 [the study] consider the following countries: Austria, Belgium, Denmark, Finland, France, Germany, Ireland, Italy, Luxembourg, Netherlands, Portugal, Sweden, Spain, UK, Canada, Japan, and U.S."
Current Account deficits, Debt to GDP ratios, and fiscal deficits all have predictable effect on the long-term interest rates and thus bond yields. Crucially, the Current Account channel of risk transmission to bond yields is based on the view that “the deterioration of current account balances may signal a widening gap between savings and investment, pushing long-term interest rates upwards."
Ireland shows relatively weak sensitivity in interest rates to debt, moderate to current account balances but severely strong (3rd strongest, in fact) to deficits. By combined measures of three responses, we are now firmly in the PIIGS club, with our bond yields based on fundamentals justified at the levels well above Portugal.
And the matter doesn’t rest at the macroeconomic fundamentals. The latest bout of bond yields pressure, culminating in a number of large scale interventions in the market by the ECB is based on significant concerns about the quality of the collateral backing our covered bonds – theoretically the safest of all bond instruments. The bonds downgrade by the Moody’s – an action which in itself represents an extremely rare event in the advanced economies – also puts direct pressure on the likes of the Irish Central Bank and our banks’ repos with the ECB. Illustrative here is the case of the Anglo repos and other derivatives – some €14 billion of which have already gone into Nama and €11.5bn of which rests with the Central Bank under an Anglo MLRA repo agreement secured against the non-Nama loans.
Which, of course, brings us to the logical question of what has to be done to correct our current position.
The forthcoming Budget 2011 is the last line of defence the Government can attempt to hold. Failing to deliver significant (well in excess of €3 billion for 2011) reduction in the deficit, while providing a crystal-clear picture of all deficit measures and targets through 2013-2014 will likely see our long term bond yields rising to the levels above 7%, where Ireland’s application to the European Stabilization Fund (aka IMF/ECB rescue) will be inevitable.
Overall, the Government must cut current ex-banks deficit by around 5.5% of GDP before 2015. Using my projection for GDP growth, this amounts to over €10 billion in cuts.
Yes – cuts. My projections for deficits above are based on rather optimistic assumptions concerning Exchequer revenues (rising €8.2 billion between 2010 and 2015 or 23.8% on 2010 figure). Majority of these increases will happen due to tax burden increases, as capital spending and other automatic stabilizers will be weaker in years ahead due to contraction of capital investment. This implies that the Exchequer will have no room for further significant tax increases in years ahead. In addition, my projections factor in the need for a token reduction in cumulated debt, which spikes dramatically around 2014.
Of course, the above estimates do not account for the adverse effects of higher taxes and lower Government spending on our growth and unemployment. Virtually all of the tax increases to-date (both direct and indirect) fell on the shoulders of households. At this point in time, I see no room for further increases in the tax burden. Data from private savings and deposits shows clearly that Irish households are suffering a precipitous decrease in terms of their net financial buffers, resulting in an adverse knock-on effect on future spending and investment.
While no serious analysis of the labour force and growth sensitivity to tax rates and public spending in Ireland is available, both theory and practice elsewhere suggest that these will be non-trivial. Here, not only the level of cuts, but also their sources matter. So far, three quarters of the adjustment in public spending to-date has been carried on the shoulders of capital spending. Yet, capital expenditure is perhaps the only part of Government spending that is not subject to large economic losses to imports. Furthermore, unlike current spending, capital spending has a growth dimensions that is spread over time.
All in, Minister Lenihan needs to refocus our spending cuts away from capital programmes – where the cuts have already been dramatic, leaving very little new room for manoeuvre – and firmly on the side of current expenditure. Per chart below, the latest Exchequer figures strongly show that this has not been the case so far in the crisis. Furthermore, cuts to current expenditure are severely hampered by the Croke Park deal. In effect, by leaving out of the balancing equation current spending on wages and earnings in the public sector, the Croke Park deal is one single largest obstacle on Ireland’s path to solvency.
[see updated chart here]
Looking across the current spending landscape, it is completely inevitable that cuts will have to focus on reducing the numbers employed and the levels of pay in the public sector. Under current conditions in the labour markets, the Exchequer simply cannot avoid dramatically slashing back its wages bills. Thus, the 2011-2014 framework should aim to reduce public sector employment by at least 70-90,000, yielding savings of some €4.5-5.5 billion once statutory redundancy costs are netted out. Another must will involve reforming welfare system, once again reducing the overall costs. Savings here can amount to 12% of the current expenditure target of €10.6bn – much smaller reduction than that in the wages bill, but a very significant number when it comes to vitally important benefits for the most vulnerable members of our society.
Next in line are health and education. The Government can enact an ambitious reform of our health services, shedding completely the responsibility for managing services provision and aiming to act solely as a payer for these services for those who cannot afford private insurance. Such a reform can see savings of ca €2-2.5 billion netted out of the system on both current and capital sides. Education reforms – especially introduction of third level fees – can provide another €1 billion.
The Government should not only slash current spending, but also develop and implement strategic long-term reforms of management in the public sector. Currently Ireland lags behind the average levels of international best practice in deploying advanced management (including ICT) systems in public sector. Reforming the managerial processes in public sector, per international evidence, can yield longer-term savings of ca 5% of the total net current spending of the state, or €2 billion.
Overall, comes December, Minister Lenihan needs to present a convincing and extremely ambitious programme for reforming public spending in Ireland. At this point in time, international bond markets, as well as domestic economy will need to see a serious change in the path to fiscal solvency chosen to-date before our bond yields, as well as our businesses and households propensity to invest in Ireland improve.
James Carville famously remarked that: "I used to think if there was reincarnation, I want to come back as a president or the pope or a .400 baseball hitter. But now I want to come back as the bond market. You can intimidate everybody."
Three years into financial, fiscal and growth crises, Ireland’s continued lack of progress in resolving our long term fiscal deficits has finally caught up with our policymakers. Since mid August, the bond markets have been breathing the fear of fundamentals.
Make no mistake, all the talk about ‘ridiculously high’ bond yields on Irish sovereign debt, foreign analysts errors and conspiracy theories according to which a number of home grown academics have colluded with international media to play down Irish success story are nothing more than saber rattling. Damaging to our internal process of shaping the correct policies and disastrous to our external reputation, these claims have no foundation in the reality.
The facts that inform, at least in part, market assessment of our sovereign bond risks, are simple. After three years of struggling with deficits, Ireland is once again facing an Exchequer shortfall in excess of 11% of our GDP this year. Even ex-banks recapitalization measures, we are the worst performing country in the Eurozone in terms of fiscal balances two years in a row. With banks support measures counted in, we will post the worst peace-time fiscal deficit in the history of Europe.
More than that, looking forward, we are facing a daunting task of brining our deficits down to 5.3-5.9 percent of GDP by 2015. Repeated promises by our Finance officials and politicians to cut deficit to 2.9% by 2014 are now firmly relegated to the realm of fiction.
Combining Department of Finance, IMF and my own forecasts (which fall closer to those of IMF), the expected deficit path for Irish Exchequer through 2011-2015 is shown in the table below.
In difference with our official forecasts, IMF predicts Ireland’s 2014 deficit to reach 5.3% of our GDP based on May 2010 estimates for economic growth and absent accounting for the latest banks recapitalization costs. Adjusting this path to reflect stickier unemployment and lower growth (both across GDP and GNP) as consistent with IMF revisions of global economic growth forecasts since May 2010 yields the expected exchequer deficit of 5.99% of GDP for 2014.
Equally important is a steeper debt curve that is factored in the above projections courtesy of higher cost of financing, cumulated banks and NAMA losses and lower growth. By my estimates, total state liabilities, inclusive of Nama and banks recapitalization measures, will reach 127% by 2013. The risk to these numbers is to the upside.
These estimates have some serious implications to the pricing of Irish debt in the markets.
In August IMF published research (WP/10/184) titled "Fiscal Deficits, Public Debt, and Sovereign Bond Yields" which provides analysis "of the impact of fiscal deficits and public debt on long-term interest rates during 1980–2008, taking into account a wide range of country-specific factors” for 31 economies.
The paper finds that “higher deficits and public debt lead to a significant increase in long-term interest rates, with the precise magnitude dependent on initial fiscal, institutional and other structural conditions, as well as spillovers from global financial markets. Taking into account these factors suggests that large fiscal deficits and public debts are likely to put substantial upward pressures on sovereign bond yields in many advanced economies over the medium term. …An increase in the fiscal deficit of 1 percent of GDP was seen to raise real yields by about 30–34 basis points."
By the above numbers, Irish bonds currently should be yielding over 7.5% in real terms, not 6.5% we've seen so far. This puts into perspective the statements about 'ridiculously high' yields being observed today.
If we add to this relationship the effect of change in our public debt position plus a risk premium over Germany (+180bps), the expected historically-justified real yield on our 10 year bonds will rise to around 9.3%.
Looking at a historic range of values, our ex-banks deficits warrant the yields in the range of 8-20%. Alternatively, for our bond yields to be justified at 6.5% we need to cut our deficit back to around 5.2% mark and hold our debt to GDP ratio steady.
The IMF findings are hardly alone. Another August 2010 study, this time from German CESIfo, titled "Long-run Determinants of Sovereign Yields" produces similar results, while using distinct econometric methodology and data from that deployed in the IMF paper. "For the period 1973-2008 [the study] consider the following countries: Austria, Belgium, Denmark, Finland, France, Germany, Ireland, Italy, Luxembourg, Netherlands, Portugal, Sweden, Spain, UK, Canada, Japan, and U.S."
Current Account deficits, Debt to GDP ratios, and fiscal deficits all have predictable effect on the long-term interest rates and thus bond yields. Crucially, the Current Account channel of risk transmission to bond yields is based on the view that “the deterioration of current account balances may signal a widening gap between savings and investment, pushing long-term interest rates upwards."
Ireland shows relatively weak sensitivity in interest rates to debt, moderate to current account balances but severely strong (3rd strongest, in fact) to deficits. By combined measures of three responses, we are now firmly in the PIIGS club, with our bond yields based on fundamentals justified at the levels well above Portugal.
And the matter doesn’t rest at the macroeconomic fundamentals. The latest bout of bond yields pressure, culminating in a number of large scale interventions in the market by the ECB is based on significant concerns about the quality of the collateral backing our covered bonds – theoretically the safest of all bond instruments. The bonds downgrade by the Moody’s – an action which in itself represents an extremely rare event in the advanced economies – also puts direct pressure on the likes of the Irish Central Bank and our banks’ repos with the ECB. Illustrative here is the case of the Anglo repos and other derivatives – some €14 billion of which have already gone into Nama and €11.5bn of which rests with the Central Bank under an Anglo MLRA repo agreement secured against the non-Nama loans.
Which, of course, brings us to the logical question of what has to be done to correct our current position.
The forthcoming Budget 2011 is the last line of defence the Government can attempt to hold. Failing to deliver significant (well in excess of €3 billion for 2011) reduction in the deficit, while providing a crystal-clear picture of all deficit measures and targets through 2013-2014 will likely see our long term bond yields rising to the levels above 7%, where Ireland’s application to the European Stabilization Fund (aka IMF/ECB rescue) will be inevitable.
Overall, the Government must cut current ex-banks deficit by around 5.5% of GDP before 2015. Using my projection for GDP growth, this amounts to over €10 billion in cuts.
Yes – cuts. My projections for deficits above are based on rather optimistic assumptions concerning Exchequer revenues (rising €8.2 billion between 2010 and 2015 or 23.8% on 2010 figure). Majority of these increases will happen due to tax burden increases, as capital spending and other automatic stabilizers will be weaker in years ahead due to contraction of capital investment. This implies that the Exchequer will have no room for further significant tax increases in years ahead. In addition, my projections factor in the need for a token reduction in cumulated debt, which spikes dramatically around 2014.
Of course, the above estimates do not account for the adverse effects of higher taxes and lower Government spending on our growth and unemployment. Virtually all of the tax increases to-date (both direct and indirect) fell on the shoulders of households. At this point in time, I see no room for further increases in the tax burden. Data from private savings and deposits shows clearly that Irish households are suffering a precipitous decrease in terms of their net financial buffers, resulting in an adverse knock-on effect on future spending and investment.
While no serious analysis of the labour force and growth sensitivity to tax rates and public spending in Ireland is available, both theory and practice elsewhere suggest that these will be non-trivial. Here, not only the level of cuts, but also their sources matter. So far, three quarters of the adjustment in public spending to-date has been carried on the shoulders of capital spending. Yet, capital expenditure is perhaps the only part of Government spending that is not subject to large economic losses to imports. Furthermore, unlike current spending, capital spending has a growth dimensions that is spread over time.
All in, Minister Lenihan needs to refocus our spending cuts away from capital programmes – where the cuts have already been dramatic, leaving very little new room for manoeuvre – and firmly on the side of current expenditure. Per chart below, the latest Exchequer figures strongly show that this has not been the case so far in the crisis. Furthermore, cuts to current expenditure are severely hampered by the Croke Park deal. In effect, by leaving out of the balancing equation current spending on wages and earnings in the public sector, the Croke Park deal is one single largest obstacle on Ireland’s path to solvency.
[see updated chart here]
Looking across the current spending landscape, it is completely inevitable that cuts will have to focus on reducing the numbers employed and the levels of pay in the public sector. Under current conditions in the labour markets, the Exchequer simply cannot avoid dramatically slashing back its wages bills. Thus, the 2011-2014 framework should aim to reduce public sector employment by at least 70-90,000, yielding savings of some €4.5-5.5 billion once statutory redundancy costs are netted out. Another must will involve reforming welfare system, once again reducing the overall costs. Savings here can amount to 12% of the current expenditure target of €10.6bn – much smaller reduction than that in the wages bill, but a very significant number when it comes to vitally important benefits for the most vulnerable members of our society.
Next in line are health and education. The Government can enact an ambitious reform of our health services, shedding completely the responsibility for managing services provision and aiming to act solely as a payer for these services for those who cannot afford private insurance. Such a reform can see savings of ca €2-2.5 billion netted out of the system on both current and capital sides. Education reforms – especially introduction of third level fees – can provide another €1 billion.
The Government should not only slash current spending, but also develop and implement strategic long-term reforms of management in the public sector. Currently Ireland lags behind the average levels of international best practice in deploying advanced management (including ICT) systems in public sector. Reforming the managerial processes in public sector, per international evidence, can yield longer-term savings of ca 5% of the total net current spending of the state, or €2 billion.
Overall, comes December, Minister Lenihan needs to present a convincing and extremely ambitious programme for reforming public spending in Ireland. At this point in time, international bond markets, as well as domestic economy will need to see a serious change in the path to fiscal solvency chosen to-date before our bond yields, as well as our businesses and households propensity to invest in Ireland improve.
Thursday, April 22, 2010
Economics 22/04/2010: Ireland's deficit tops Greece
Updated below
Breaking news: Eurostat just revised Irish General Government Deficit figures from 11.7% officially reported in Budget 2010 to a whooping 14.3%, raising our deficit above revised Greek figure. Here is the link to the note.
Excerpt: "Ireland had its budget deficit revised even more [than Greece] -- to 14.3 percent from the initially reported 11.7 percent. Irish Finance Minister Brian Lenihan said this was a result of a technical reclassification associated with government support provided to the banking sector. "It is important to note that the underlying 2009 general government deficit for Ireland is 11.8 percent of GDP, which is broadly similar to that projected in December's budget," he said. "There is no additional borrowing associated with this technical reclassification. This is a once-off impact, and will not affect the government's stated budgetary aim of reducing the deficit to below 3 percent of GDP by 2014," Lenihan said."
That would be putting a brave face on what now amounts to the most deficit-ridden country in the EU!
One question remains to be answered - given that all 2009 recapitalization funds for banking sector came from NPRF, what 'technical reclassification' yielded this massive upward revision?
Update: There has been a lot of talk in the blogosphere about the 'silver lining' to today's news. In particular, one argument is making rounds that goes as follows: "Since our deficit has increased for 2009 to 14.3%, then the reduction to 10.6% envisioned in the Budget 2010 will be even more impressive to the markets".
Here is why this argument is fallacious:
Breaking news: Eurostat just revised Irish General Government Deficit figures from 11.7% officially reported in Budget 2010 to a whooping 14.3%, raising our deficit above revised Greek figure. Here is the link to the note.
Excerpt: "Ireland had its budget deficit revised even more [than Greece] -- to 14.3 percent from the initially reported 11.7 percent. Irish Finance Minister Brian Lenihan said this was a result of a technical reclassification associated with government support provided to the banking sector. "It is important to note that the underlying 2009 general government deficit for Ireland is 11.8 percent of GDP, which is broadly similar to that projected in December's budget," he said. "There is no additional borrowing associated with this technical reclassification. This is a once-off impact, and will not affect the government's stated budgetary aim of reducing the deficit to below 3 percent of GDP by 2014," Lenihan said."
That would be putting a brave face on what now amounts to the most deficit-ridden country in the EU!
One question remains to be answered - given that all 2009 recapitalization funds for banking sector came from NPRF, what 'technical reclassification' yielded this massive upward revision?
Update: There has been a lot of talk in the blogosphere about the 'silver lining' to today's news. In particular, one argument is making rounds that goes as follows: "Since our deficit has increased for 2009 to 14.3%, then the reduction to 10.6% envisioned in the Budget 2010 will be even more impressive to the markets".
Here is why this argument is fallacious:
- Today's revision of deficit for 2009 represents a reflection by Eurostat that cash injected into the Anglo Irish Bank by the state was borrowed via general spending fund in the open markets and as the result constitutes deficit financing. If so, where do you think this year's banks recapitalization will come from? Uncle Sam? or may be Angela Merkel? These recapitalizations are not, repeat not factored in the Government Budgetary projections per Budget 2010. The Eurostat rulling means that should the Government borrow the €10-12 billion to recapitalize the banks in the markets this year, this too will be reflected in our deficit. Now do the math - Government budget allows for €18.7 billion in General Government Deficit or 11.6% of GDP in 2010. If we add to this the lower bound of recapitalization estimates, our deficit rises to over €28 billion or a whooping 17.4% of GDP. Even if the Government wrestles out of the NPRF more cash to plug the banks balancesheet black hole, and assuming that our borrowing for banks purposes goes up by just half of the announced requirement, our Gen Gov Deficit will reach 14.7% of GDP. At which point we can all shout 'Eat our shorts, Greece!' once again.
- Today's revision clearly shows that the Government has been caught red-handed in attempting to avoid labeling our true General Government liabilities as such. This is about as reputation-destroying as Greece's use of financial derivatives in the past.
- An argument of a 'silver lining' assumes that as a one-off increase, this deficit revision does not matter going forward. This, in effect, is equivalent to saying that no cyclical deficit matters, no matter how big it is. Of course, such an argument is absolutely devoid of any anchoring in finance or economics. Cyclical deficits add up to total deficits. Total deficits - cyclical or not - add up to the total debt. This is exactly how Greece got itself into the bin!
Monday, October 19, 2009
Economics 20/10/2009: Ahead of DofF
A quick announcement:
RDS Concert Hall 8pm Wednesday Oct 21st
HOW NAMA WILL LOSE €12bn: There's a Sounder Alternative
by Banking Expert Peter Mathews, MBA, FCA, AITI.
Peter is the only senior banker with experience in managing large distressed loans portfolio. His work, in collaboration with myself and Brian Lucey is featuring in the current issue of Business&Finance magazine. This should be very informative and worth attending. See Peter's excellent website in the issue of Nama costs: http://www.bankermathews.com.
We will also hold a Q&A session after the speech, with yours truly also on the panel.
Free for students.
A quick note:
Apparently the latest Government projections for 2009 tax intake are €31bn. Pre-budget estimate in April 2009 was €34bn, while January 2009 addendum to the Finance Bill was €37bn (here).
My forecasts earlier this year gave this figure (here) back in August, May (here) and April (here). In fact, since December 2008 I have been giving forecasts for revenue figures that were ahead of the official numbers produced by a sizable department responsible for doing these forecasts within DofF. Table below lists their projections before the April Budget:
Latest Government admission - €31bn... welcome to TrueEconomics, folks...
RDS Concert Hall 8pm Wednesday Oct 21st
HOW NAMA WILL LOSE €12bn: There's a Sounder Alternative
by Banking Expert Peter Mathews, MBA, FCA, AITI.
Peter is the only senior banker with experience in managing large distressed loans portfolio. His work, in collaboration with myself and Brian Lucey is featuring in the current issue of Business&Finance magazine. This should be very informative and worth attending. See Peter's excellent website in the issue of Nama costs: http://www.bankermathews.com.
We will also hold a Q&A session after the speech, with yours truly also on the panel.
Free for students.
A quick note:
Apparently the latest Government projections for 2009 tax intake are €31bn. Pre-budget estimate in April 2009 was €34bn, while January 2009 addendum to the Finance Bill was €37bn (here).
My forecasts earlier this year gave this figure (here) back in August, May (here) and April (here). In fact, since December 2008 I have been giving forecasts for revenue figures that were ahead of the official numbers produced by a sizable department responsible for doing these forecasts within DofF. Table below lists their projections before the April Budget:
Latest Government admission - €31bn... welcome to TrueEconomics, folks...
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