4/12/2012: Irish Exchequer Returns Jan-Nov 2012

So 2013 Budget will be expected to deliver 'cuts' and 'revenue measures' to bring fiscal stance €3.5 billion closer (or so the claim goes) to the balance. Which prompted the Eamon Gilmore to utter this:
"It is the budget that is going to get us to 85% of the adjustment that has to be made, and will therefore put the end in sight for these types of measures and these types of budgets".

Right. €3.5 billion will be added to the annual coffers on expectation side comes tomorrow. €3 billion will be subtracted on actual side comes March 2013 for the ritual burning of the promo notes repayments, and IL&P - the insolvent zombie bank owned by the state - will repay €2.45 billion worth of bonds using Government money comes second week of January. I guess, something is in sight, while something is a certainty-equivalent. €3.5 billion 'adjustments' vs €5.5 billion bonfire.

Six years into this shambolic 'austerity heroism' and we are, where we are:

1. On expectations forward, the Government will still have fiscal deficit of 7.5% of GDP in the end of 2013, should Gilmore's 'end in sight' hopes materialise. That is set off against pre-banks measures deficit of 7.3% in 2008. In fact, the 'end' will not be in sight even into 2017, when the IMF forecasts Irish Government deficit to be -1.8% - well within the EU 3% bounds, but still consistent with Government overspending compared to revenues.
2. Overall Government balance ex-banks supports in Ireland in 2012 will stand around 8.3% of GDP. In 2013 it is expected to hit 7.5% of GDP. The peak of insolvency was 11.5% of GDP in 2009, which means that by 2013 end we have closed 4 percentage points of GDP in fiscal deficits out of 8.5 percentage points adjustment required for 2009-2015 period. In Mr Gilmore's terms, we would have traveled not 85% of the road, but 47% of the road.

But wait, there's more. Here's a snapshot of the latest Exchequer returns for January-November 2012:

• Government tax revenue has fell 0.5% below the target with the shortfall of €171 million and although tax revenues were €1.96 billion ahead of same period (January-November) 2011, stripping out reclassifications of USC and the delayed tax receipts from 2011 carried over to 2012, this year tax receipts are running up 4.5% year on year.
• Keep in mind that target refers not to the Budget 2012 targets, but to revised targets of April 2012. 
• Meanwhile, Net Voted Government Expenditure came in at 0.6% above target. 
• So in a sum, on annualized basis, expenditure running 1.03% ahead of projections and revenue is running 0.86% below target. All of the sudden, the case of 'best boy in class' starts to look silly.

Things are even worse when you look at the expenditure side closer.

• Total Net Voted Expenditure came in at €40,635 million in 11 months through November 2012, which is €26 million above last year's, and  is 0.6% ahead of target set out in April. In other words, Ireland's heroic efforts to contain runaway public sector costs have yielded savings of €26 million in 11 months through November 2012.
• All of the net savings relative to target came in from the Capital side of expenditure, which is 20.5% below t2011 levels(-€629 million). Now, full year target savings on capital side are €562 million, which means that capital spending cuts have already overcompensated the expenditure cuts by €67 million. 
• On current expenditure side things are much worse. Relative to target, current spending is running at +1.7% (excess of €654 million). It was supposed to run at -1.6% reduction compared to 2011 for the full year 2012, but is currently running at +1.6% compared to Jan-Nov 2011. The swing is over €1.2 billion of overspend.
• Recall that in 2011 Irish Government expropriated €470 million worth of pensions funds through the 0.6% pensions levy in order to fund its glamorous Jobs Initiative. It now has cut €629 million from capital spending budget or €405 million more than it planned. In effect, thus, the entire pensions grab went to fund not Jobs Initiative, but current spending by the state.
• The savage austerity this Government allegedly unleashed saved on the net €26 million in 11 months. Pathetic does not even begin to describe this policy of destroying the future of the economy to achieve effectively absolutely nothing in terms of structural adjustments.
• The overspend took place, predictably, and at least to some extent justifiably by Health and Social Welfare. However, two other departments have posted excess spending compared to the target: Public Expenditure & Shambles-- err Reforms -- posted excess spending overall, while Transport, Tourism and Sport has managed to overspend on the current spending side of things.

On the balance side of things, stripping out banks measures and capital cuts, but retaining reclassifications of revenues and carry-over of revenues from 2011 into 2012, overall current account balance deficit was €9.626 billion in 2012, contrasted by the deficit of €9.712 billion in 2011. This suggests that the Government has managed to reduce the deficit on current account side by €86 million,

Laughable as this sounds, stripping out carry over revenues from 2011, the deficit on current side of the Exchequer finances was €9.45 billion in 2011 and that rose to €9.97 billion in 2012. Which means that the actual current account deficit is not falling, but rising.

Now, let's control for banks measures:

• In 2011 Irish state spent €2.3 billion bailing out IL&P, plus €3.085bn repaying promo notes for IBRC and €5.268bn on banks recaps. Total banks contribution to the deficit was thus €10.653 billion, This implies that overall general government deficit ex-banks was €10.716 billion in 2011.
• In 2012 we spent €1.3 billion propping up again IL&P (this time - its remnants) which implies ex-banks measures deficit of €11.668bn
• Wait a second, you shall shout at this point in time - 2012 ex-banks deficit is actually worse, not better than 2011 one. And you shall be right. There are some small items around, like our propping up Quinn Insurance fallout cost us €449.8mln in 2012 and only €280mln in 2011. We also paid €509.5 million (that's right - almost the amount the Government hopes to raise from the Property Tax in 2013) on buying shares in ESM - the fund that we were supposedly desperately needed access to during the Government campaign for Fiscal Compact Referendum, but nowadays no longer will require, since we are 'regaining access to the markets'. We also received €1.018 billion worth of cash from our sale of Bank of Ireland shares in 2011 that we did not repeat on receipts side in 2012. And more... but in the end, when all reckoned and counted for, there is effectively no real deficit reduction. Nothing dramatic happened, folks. The austerity fairy flew by and left not a trace, but few sparkles in the sky.
• Aside note - pittance, but hurtful. In 2012 Department for Finance estimates total Irish contributions to the EU Budget will run at €1.39 billion gross. For 2013 the estimate is €1.444 billion. That is a rise of €59 million. Put this into perspective - currently, the Government has run away from its previous commitment to provide ringfenced beds for acute care patients at risk of infections, e.g. those suffering from Cystic Fibrosis. I bet €59 million EU is insisting this insolvent Government must wrestle out of the economy to pay Brussels would go some way fixing the issue.

In the mean time, our interest payments on debt have been steadily accelerating. In January-November 2011 our debt servicing cost us €3.866 billion. This year over the same period of time we spent €5.659 billion plus change on same. Uplift of 46.4% in one year alone.

So here you have it, folks. This Government has an option: bring Irish debt into ESM, for which we paid the entrance fees, and avail of cheap rates. Go into the markets and raise the cost of funding our overall debt even higher - from €6.17bn annual running cost in 2012 to what? Oh, dofF projects 2013 cost to be €8.11 billion - a swing of additional €1.94 billion. So over two years 2012 and 2013, Irish debt servicing costs would have risen by €3.89 billion swallowing more than 1/2 of all fiscal 'adjustments' to be delivered over the same two years.

At this stage, there is really no longer any point of going on. No matter what this Government says tomorrow, no matter what Mr Gilmore can see in his hazed existence on his Ministerial cloud cuckoo, real figures show that Europe's 'best boy in class' is slipping into economic coma. 

4/10/2012: Investor's Daily: We've been telling you porkies

In the previous post I tried to make some sense out of the headline numbers from the Exchequer returns through Q3 2012. This time around, let's take a look at the overall Exchequer balance.

Headline number being bandied around is that overall exchequer deficit stood at €11,134 mln in January-September 2012, down €9,526 mln on same period in 2011 (an impressive drop of 46.1%). Alas, that is a pure hog wash. Here's why.

In 2011, Irish state assumed banks recapitalizations and insurance shortfalls funding spending of €10,653 mln, this time around, the Government allocated only €1,775 mln to same.

Adjusting for banks recaps, therefore, Exchequer deficit stood at €10,007 mln in January-September 2011 and it was €9,359 mln in the same period this year, implying deficit reduction of €647.5 mln y/y - a drop of 6.47%.

But wait, in both 2011 and 2012 the state collected extraordinary receipts from banks recapitalization and guarantee schemes - the receipts which, as the EU Commission warned us earlier this year are likely to vanish over time. These amounted to €1.64bn in 2011 and €2.06bn in 2012 (January-September figures).

Subtracting these from the balance we have: exchequer deficit ex-banks recaps and receipts in 2011 was €11,650mln and in 2012 it was €11,417mln. In other words, the State like-for-like sustainable deficit reductions in the 9 months through September 2012 compared to the same period in 2011 were… err… massive €233.7 million (2%).

Let's do a comparative here: Budget 2012 took out of the economy €3.8 billion (with €2.2 billion in expenditure measures and €1.6 billion in taxation measures). On the net, the end result so far has been €233.7 million reduction of like-for-like deficit on 2011. How on earth can the Troika believe this to be a 'best-in-class' performance?

Or alternatively, there's €9.36 billion worth of deficit left out there to cut before we have a balanced budget. At the current rate of net savings, folks, that'd take 40 years if we were to rely on actually permanent revenues sources or 14 years if we keep faking the banking system revenues as not being a backdoor tax. Either way… that idea of 'under 3% of GDP' deficit by 2015 is… oh… how do they say it in Paris? Jonque?

And just so I don't have to produce a separate post on this, the Net Cumulated Voted Spending breakdown is also worth a line or two. You see, the heroic efforts of the Irish Government to support our economy have so far produced a reduction of €474 million on capital investment budget side y/y. But, alas, similarly heroic efforts at avoiding real cuts to the current spending side also bore their fruit, with current voted expenditure up year on year by €369 million in 9 months through September 2012.

So the bottom line is - savage austerity, tears dropping from the cheeks of our Socialist err… Labour TDs and Ministers… has yielded Total Net Voted Spending reduction cumulated over January-September 2011 of a whooping €105 million… And that is year on year. extrapolating this to the rest of the year implies that in 2012 we can expect roughly to cut our Net Voted Expenditure by a terrifyingly insignificant pittance amount of €140 million.

Yep… Jonque!

5/9/2012: The balance of imbalance: Irish Exchequer deficit in January-August 2012

In the previous two posts I examined the Exchequer receipts and net voted expenditure for January-August 2012. Now, on to the overall balance.

In July 2012, the Exchequer deficit stood at €9.13 billion against July 2012 headline deficit of €18.89 billion. In August, cumulated 2012 deficit rose to €11.35 billion (up €2.22 billion in one month) compared to €20.43 billion in 2011 (2011 monthly rise in August was €1.54 billion).
Fact 1: Irish Exchequer deficit rose at faster pace in August 2012 than in August 2011, so in monthly changes terms, August 2012 was not an improvement on August 2011.

However, the headline figures are incorporating several factors that gold-plate our deficit performance in 2012 compared to 2011, none of which the Government is willing to actually directly separate to identify the true performance. Let's try doing this job for them:

• As mentioned earlier, €233 million on 2011 revenue side came from the one-off sale of the Bank of Ireland shares, while €251 million of corporate tax receipts booked into 2012 is really the revenue from 2011. This means the deficit in 2011 should be adjusted by -€18 million and the balance in 2012 should be adjusted by +€251 million.
• In January-August 2011 the state spent €7.6 billion on recapitalizing banks, while this year the spending was only €1.3 billion plus there was a payment of €450mln in 2012 into the ICF (Insurance Compensation Fund). This means we should adjust the Exchequer balance on 2011 side by -€7.6 billion and 2012 by -€1.75 billion.
• Promo notes 'restructuring' this year meant the net cost of the Notes booked at €25mln, against €3.1 billion in 2011. This means adjusting 2011 deficit by -€3.1 billion and 2012 deficit by €25 million.
• In 2011 revenues from the banks measures - clearly a temporary source, as the EU Commission has warned Ireland already about the future tapering off of these receipts - amounted to €1.27 billion, while in 2012 they amount to €2.06 billion.

Accounting for the above one-off and temporary measures, the underlying deficit figures are:

• 2011 January-August period: €10.98 billion or €9.71 billion if we omit accounting for banks receipts;
• 2012 January-August period: €11.88 billion or €9.82 billion if we omit accounting for banks receipts.
• Hence, January-August 2012 period deficit, comparable to that for the same period in 2011 is worse, not better, by €109-896 million depending on whether we consider windfall differences in temporary revenues from banks.

Fact 2: On comparable basis, stripping out one-off measures and temporary allocations, Irish Exchequer deficit is worse in the first 8 months of 2012 than it was in 2011.

2/8/2012: Irish Exchequer Fog: Reality Isolated?

Let’s take a look at the Exchequer numbers for January-July period out today.

Tax revenue shows an increase from €18,633 mln in January-July 2011 to €20,313mln in same period 2012. 

This is primarily accounted for by increases in Income Tax (which are running pretty much in line almost exactly with what the USC reclassification would have yielded). The Department states that "Income tax is €159 million (2.0%) ahead cumulatively and is over 11% up on the same period last year on an adjusted basis. This is a strong performance." However, as far as I can understand the numbers, the adjustment only includes PRSI and does not cover reclassification of the entire USC (Health Levy). Which suggests that even 2% might be questionable. Per April note (link here) PRSI reclassification was 'estimated' by the department to run €300 million in 2012. It could be, in the end, 280mln or 330mln - take our guess, but it is significant.

Another 'major' factor is a rise in corporation tax of some €400 million of which more than half is accounted for by carry-over of tax from 2011 into 2012, not new tax receipts. Here's the Department note from April (linked above): "The Department is also taking this opportunity to adjust the corporation tax profile for the €251 million in receipts which were  expected in December 2011 but were  only received into the Exchequer account in January 2012". So setting aside timings of the corporation tax and netting out €251 million of carry-over, how much is corporate tax really up? The answer is - we do not know. But not by much enough to be excited about this.

There was a €200 mln odd rise in VAT - the real impact of the Budget 2012. Which means that on the net, there are very few real increases in revenues. Total taxes went up by €1,680mln odd, but on a real comparable basis, they went up less than €1,254mln over seven months! Again, this is before we clarify what exactly happened with the Health Levy. With Health Levy effects, the impact would have been probably closer to €250mln (I am using here 2009 figures for Health Levy and PRSI to estimate).

Non-tax income rose from €1,545mln to €2,355mln – of which almost €300mln is accounted for by increased revenues by the Central Bank and another €200mln odd is from the stronger receipts on the Banks Guarantee. There was €300mln interest on Contingent Capital Notes - also from banks. Sort-of the zombie giving back odd €800mln to the town it is killing. This is the 'reforms' the Government instituted to correct for the fiscal imbalances? Not quite: earlier this year the EU warned Ireland to not consider these 'revenues' as a part of long-term adjustment as they are bound to disappear in time.

Voted Current Expenditure – the stuff that this Government is supposedly cutting back – has actually increased – from €24.008bn in 2011 to €24.563bn in 2012.

Non-voted current expenditure is up more than €2 billion: from €3.556bn in 2011 to €5.573bn in 2012 – primarily driven by increases in the cost of servicing Ireland’s debt from €2.426bn in 2011 to €3.801bn in 2012. Timing effect on sinking fund contribution of €646mln also put a dent.

This means total current expenditure rose (not fell) from €27,564mln in 2011 to €30,136mln in 2012. This is very poor performance, folks.

Thus, current account deficit also increased in January-July 2012 from €7,386mln to €7,468mln.

Sinking fund transfer debit above was offset by credit to the capital receipts, which has meant that capital-related exchequer receipts rose to €1.454bn in 2012 compared to €789.9mln in 2011. Again, there is nothing miraculous here – the state simply transferred funds from one pocket to the other.

On the capital expenditure side, however, there are – on the surface – huge ‘savings’ year on year. Total capital spending amounted to €12,298mln in January-July 2011, but that was ‘cut’ to €3,112mln in same period 2012.

How were such miraculous savings achieved? Well, simple, really. In 2011 the state spent €10,655mln on “Non-Voted (Expenditure charged under particular legislation)” items and in 2012 this line of spending was only €1,775mln. 99% of these expenditures in both 2011 and 2012 relate to banks recapitalizations (and in 2012 added insurance fund support loan of €449.75mln). So the entire savings delivered by the Government amount to putting less money into Irish banks recapitalizations.

Here’s the summary of these ‘savings’.

TABLE

But wait, things are even worse! In 2011 Irish Government paid down the promissory note to the Anglo-Irish Bank in the amount of €3.085bn. This increased Government spending in that year. This year, the Government had converted the note into Government debt, and thus got to claim that there was no payment made, so instead of €3.085bn in spending, the State registered just the cost of conversion €25mln this time around.

All in, of the entire deficit reduction claimed by the media, full €8.9 billion of the ‘savings’ are simply what the Irish Government (rightly) claimed a year ago to be ‘temporary’ one-off measures. In other words, there is no reduction in deficit via expenditure side.

Let's do one final exercise: if we subtract one-off measures from the capital side, total - current and capital accounts exchequer deficit in the first seven months of 2011 was €8.24bn, in the same period of 2012 it is €7.35bn adding to it the reclassification measures and corporate tax carry over implies like-for-like deficit in 2012 of €7.78bn. Which means 'savings' of ca €426mln. 

Of these €306mln is accounted for by timing differences and cuts to voted capital spending which the Government is going to more than undo using the latest 'off-balancesheet' stimulus. And an unknown amount is due to Health Levy reclassification, let's say ca €250mln so far (an under-estimate for 2009 figures, but...) for which the Department does not appear to adjust the numbers. All in, Irish Exchequer finances have most likely deteriorated on comparable terms by around €80million in 7 months through July 2012 compared to 2011.

These are then the colossal savings that the headlines like "Ireland Cuts Deficit in Half" simply mis-represent.


Update: Someone highlighted that the Health Levy was incorporated into the PRSI receipts. My view of the Health Levy is based on this document.

24/6/2012: Sunday Times June 17, 2012

This is an unedited version of my Sunday Times column from June 17, 2012.

The current Government policy, and indeed the entire euro area crisis ‘management’ is an example of ‘the lesser of two evils’ con game. The basic set up involves presenting the crisis faced by the euro area or the Irish economy as a psychological construct, e.g. ‘We have nothing to fear, but fear itself’. Then present two options for the crisis resolution, similar to the choice given to Neo by Morpheus in the Matrix. You can take the blue pill, the surreal world you currently inhabit will continue unabated (the ATMs will keep working, the banks will be repaired, the economy will turn the corner, etc) but a cost of complying with the demands of the system (the banks bondholders and other lenders must be repaid, the EU systemic solutions must be embraced, confidence in the overall system must continue). Take the red pill, you go to the Wonderland and see how deep the rabbit-hole (of collapsed banks, wiped-out savings, destroyed front-line services, vulture-funds circling their prey, etc) goes.

Unlike in the Matrix, it’s not a strong, cool, confident Morpheus who’s offering the option, but Agent Smith, aka the Government and its experts. And, unlike in the Matrix, we are not heroic Neo, but scared humans, longing for stability and certainty in life. This disproportionality of the power of the State as the offerer of the false choice, and the powerlessness of the society assures the outcome – we take the blue pill and go on feeding the Matrix of European integration, harmonization, and self-validation. The very fact that the blue pill choice leads to the ever-accelerating crisis and ultimate demise of the entire system is irrelevant to our judgement. We are in a con-game.

How I know? I was told this by the Government own statistics.

We all agree that our real economic performance is abysmal. Take unemployment – officially, it rose to 14.8% in Q1 2012, unofficially, broader measure of unemployment – that including those recognized as being under-employed – is hovering over 22%.

But to-date, our fiscal performance has been so stellar, we are ‘exceeding Troika targets’. Right?

Ireland’s Exchequer deficit for the period from January 2012 through May was €6.5 billion or €3.7 billion below the same period last year. This ‘improvement’ in our deficit is due to €1 billion transfer from the banks customers and taxpayers (via banks holdings of Government bonds) to the Central Bank of Ireland that was paid out by the Central Bank to the Exchequer. Further ‘improvement’ was gained by the ‘non-payment’ of the €3.1 billion due on the promissory note, swapping one government debt for another.

Underlying day-to-day Government spending (ex-banks and interest payments on debt), meanwhile, is up year on year. Tax receipts are rising, up €1.6 billion, but if we take out the USC charge which represents reclassified non-tax receipts in the past currently being labelled as tax revenues, the increase shrinks to €726 million. In the mean time, interest costs on Irish national debt rose €1.3 billion on same period of 2011, wiping out all gains in tax revenues the Government has delivered on.

Take that blue pill, now and have a 15% increase on the 2007 levels of budgeted Government spending (protecting ‘frontline services’, like HSE senior executives payouts in restructuring and advisers salaries), or a red pill and face Armageddon. Yet, the red pill in this case would lead us to the realization that the entire charade of our reforms and austerity measures is nothing more than a false solution that risks making the crisis only worse.

This week, Professor Karmen Reinhart of the Kennedy School of Government, Harvard University was dispensing red pills of reality at the Infiniti 2012 conference over in Trinity College, Dublin. Her keynote address focused on the area she knows better than anyone else in this world – debt overhangs and the pain of deleveraging in resolving debt crises. The audience included many central bankers and monetary and fiscal policy experts from around the world, including even ECB. No one from the Irish Department of Finance, the NTMA or any branch of the Irish Government, save the Central Bank, showed up. Blue pills crowd don’t do red pills dispensations.

Professor Reinhart spoke extensively about Europe and, briefly, about Ireland. In our conversation after the speech, having met senior Irish Government decision makers, she reiterated that, like the rest of the euro area, Ireland will have to face up to the massive debt overhang in its fiscal, corporate and household sectors and restructure its debts or face a default. In 26 episodes of severe debt crises in the history of the world since the early-1800s she studied, only three were corrected without some sort of debt restructuring, and in all three, “the conditions that allowed these countries to resolve debt overhang problems absent debt restructuring are no longer present in today’s world”.

Worse than that, Professor Reinhart explicitly recognized that “Ireland has taken debt overhang to an entirely new, historically unparalleled, level”. She also pointed out, consistent with this column’s previously expressed view, that in the Irish case, it is the household debt that “represents the gravest threat to both short-term stability and long-term sustainability of the entire economic system”.

Per claims frequently made by the Government that debt deleveraging is on-going and progressing according to the policymakers’ expectations, Professor Reinhart stated that “in the US, deleveraging process had only just begun. Despite the fact that house foreclosures and corporate defaults have been on-going since 2008, the amount of deleveraging currently completed is not sufficient to erase the build up of debt that took place over preceding decades. With that, the US is well ahead of Europe and Ireland in terms of what will have to be achieved in terms of debt reductions.” Furthermore, “structural differences in personal and corporate insolvency laws between the US and Europe imply the need for even deeper debt restructuring, including direct debt forgiveness and writedowns in Europe. And, once again, Ireland is in the league of its own, compared to the European counterparts on personal bankruptcy regime.”

But don’t take Professor Reinhart’s and my points of view on this. Take a look at the forthcoming sixth EU Commission staff report on Ireland, leaked this week by the German Bundestag. The Troika is about to start dispensing its own red pills of reality to the Irish Government.

According to leaked report, the IMF and its European counterparts are becoming seriously concerned with two key failings of our reforms. The first one is the delay in putting in place measures to address – on a systemic basis, not in a case-by-case fashion as the Government insists on doing – the problem of households’ debts. Incidentally, this column has warned about this failure repeatedly since mid-2011. The second one is the rising risk that accelerating mortgages defaults pose to banks balancesheets. Again, this column covered this risk in April this year when we discussed the overall banks performance for 2011.

From independent analysts, to world-class researchers like Professor Reinhart, to Troika, red pills of reality are now vastly outnumbering the blue pills of denial that our Government-aligned experts are keen at dispensing. The problem is – no one seems to be capable of waking up inside the Matrix of our doomed policymaking.

To put it to the policymakers face, let me quote Professor Reinhart one more time: “Europe’s solution to the crisis, focusing on austerity instead of restructuring household and sovereign debts will only make the crisis worse. The pain of deleveraging is only starting. …Europe’s hope that growth can help in addressing the debt crisis is misplaced, both in terms of historical experiences and in terms of European economic realities.” And for our home-grown Mr Smiths: “Ireland’s current account surpluses [or exports growth] are welcomed and will be helpful [in deleveraging] but are not sufficient to avoid restructuring economy’s debts.” So fasten your seatbelt, Dorothy, cause Kansas is going bye-bye…

Charts:

Sources listed in the charts

Box-out:

Few months ago I highlighted in this very space the risks poised to the Irish banks and Nama from the excessive over-reliance, in the pre-crisis period on covered bonds and securitization-based funding. The core issue, relating to these two sources of funding, is the on-going deterioration of the quality of the collateral pools that have to be maintained to sustain the bonds covenants. Things are now going from bad to worse, and not only in Ireland. Per latest Moody’s Investors Service report, across Europe, 79 percent of all loans packaged into commercial mortgage-backed securities rated by the agency that came due in Q1 2012 were not repaid on time. Three years ago, the non-repayment rate was only 35 percent. Per Moody’s, “real estate with mortgages that match or exceed the value of the property… suffered defaults in nearly all cases in the first quarter. About a third of borrowers with LTV ratios of up to 80 percent didn’t pay on time.” If this is the dynamic across Europe as a whole, what are the comparable numbers for Ireland, one wonders? And what do these trends imply for the Irish banks and Nama?

22/4/2012: Irish Crisis Requires Drastic Action, but Not a Euro Exit

In light of Prof Paul Krugman's comments concerning the desirability of the GIIPS remaining in the euro earlier this week, the Sunday Independent has asked myself (amongst other commentators) to provide my opinion on Prof Krugman's proposed solution. Here is the link to the published article and below is an unedited version of my comment:

In his article, Paul Krugman puts forward what he terms an alternative solution to the current course of policies, chosen by the EU in dealing with the Sovereign debt and financial sector crises. The core of his argument boils down to the need for the EU ‘peripheral’ states, notably Greece, Spain, Portugal, and potentially Ireland, to exit the euro and restore national currencies.

In my view, such a course, undertaken in cooperation with the EU member states and the ECB is a correct one for Greece, and possibly Portugal, but is not an option for Ireland, and the rest of the periphery. The reason for this is that unlike Greece and Portugal, Spain and Ireland are suffering not so much from the Sovereign debt overhang, but from a private and banking debts crisis. Resolution of these latter crises will not be sufficiently helped by an exit from the euro, primarily because private debt deflation will not be feasible for debts already denominated in euro. In addition, exiting the euro will entail significant economic and reputational costs to an extremely open economy, like Ireland, reliant on FDI and high value-added euro-related services, such as IFSC.

Two years ago, prior to the completion of the contagion from banking debts to Sovereign debt, exiting the euro was a workable solution, albeit a disruptive and a costly one for Ireland. Today, such an exit will require default – most likely an unstructured and disorderly – on both Sovereign and private debts, with simultaneous collapsing of the Exchequer funding and the banking sector. This will lead, in my opinion, to a disorderly unwinding of the entire economy of Ireland.

Professor Krugman is correct in his analysis that “continuing on the present course, imposing ever-harsher austerity on countries that are already suffering depression-era unemployment, is what’s truly inconceivable”. He is also correct in stating, that, “if European leaders wanted to save the euro they would be looking for an alternative course.”

The new course that the European and Irish leaders must adopt is the course that will preserve and strengthen Irish participation in the Euro zone economy, not push Ireland out of the common currency. This course requires a number of steps to be taken by Irish and European authorities in close cooperation with each other.

The first step is to recognize that Ireland’s economy is suffering from a private (namely household) debt overhang and the incomplete nature of the banking sector restructuring here. This means making a choice: either Ireland continues down the current path, with economic adjustments to the crisis stretched over decades of pain, or we jointly, with our European ‘partners’, take real charge of the economic restructuring. The former path implies that Ireland will be sapping Euro area monetary and fiscal resources for many years to come, while being unable to implement deep reforms due to the lack of supportive economic growth and facing continued risks of a Sovereign default. The latter path means that we take a quick, sharp correction in our private debts and get back onto the growth path.

The second step is to devise a solution – most likely via the ECB (to avoid placing burden of our adjustment on European taxpayers) – to write down significant proportion of Irish mortgages and other household debts while simultaneously allowing the banks to deleverage out of the household debts. This can and should be achieved by the ECB canceling all of the Central Bank of Ireland ELA and a part of Irish banks borrowing from the ECB itself and using these cancellation proceeds to write down household debt. Delivering such a deleveraging will open up room for stabilizing Government finances, as reduced debt burden on private balancesheets will allow Ireland to divert resources to paying down Sovereign debt, while a new cycle of domestic investment and growth can commence, allowing for structural reforms in the economy (covering both private and public sectors).

The third step is to create a long-term warehousing facility – within the ESM – to roll over existent Government debt so Ireland will have a period of 10-15 years within which this debt can be reduced without the need to face uncertainty of market funding. This would be primarily a cash flow management exercise. ESM lending rates should be set around funding cost plus administrative margin, or in current terms around 3.0-3.2% per annum, saving Irish Exchequer up to €3.4 billion annually in interest repayments, which can be diverted to more rapid paying down of the national debt. Hardly a chop-change, under conservative assumptions, this approach will allow Ireland to save over €27 billion in funds from 2013 through 2020, reducing overall nominal debt levels by 11.6% by 2020 compared to status quo scenario.

Combined, these policy steps will be able to put Irish economy and Exchequer finances on the security platform from which structural and longer-term reforms can take place without undermining economic growth potential. In addition, good will extended by the EU to Ireland under such a co-operative and coordinated approach to the crisis will assure continued Irish support and participation within the EU. This, in turn, will assure that Ireland can play an active and positive role in the Euro area growth and sustainable development in years to come. Exiting the euro today is neither necessary, nor sufficient for restoring Irish economy to growth. Resolving our debt crisis is both feasible and the least-costly part of the solution to the broader Euro area crises. 

2/2/2012: Exchequer non-returns from January

Exchequer returns pose no surprise - and none were expected, given this is just January - so no point of updating the detailed data sets.

Some top figures.

On tax receipts:

• Income tax revenues are up at €1,260mln in January 2012 over €987mln in January 2011 as USC kicks in full tilt this year.
• VAT is at +3% yoy to €1,725mln in part boosted by small gains in sales over Christmas period in terms of volumes.
• Corporation tax is up to €271mln from €72mln a year ago, but €250mln of this was due to delayed receipts from December 2011, so in reality, Corpo is down on 2011. 

None of the above are really significant as timing might have been a factor in all of these. It will take through March to see the real changes in the underlying numbers.

Exchequer deficit is at €393.7mln down from €483.2mln a year ago. So now, deduct that €250mln from the receipts side and you get Exchequer deficit at €643.7mln or some €160mln ahead of January 2011. Not pretty, eh?

Of course, as I said above, there is no point of doing any analysis on returns for just one month, so take the above comment with a huge grain of salt.

7/1/2012: Irish Exchequer Results 2011 - Shifting Tax Burde

In the previous 3 posts we focused on Exchequer receipts, total expenditure by relevant department head, and the trends in capital v current spending. In this post, consider the relative incidence of taxation burden.

Over the years of the crisis, several trends became apparent when it comes to the shifting burden of taxes across various heads. These are summarized in the following table and chart:

To summarize these trends, over the years of this crisis,

• Income tax share of total tax revenue has risen from just under 29% in 2007 to almost 41% in 2011.
• VAT share of total tax revenue has fallen, but not as dramatically as one might have expected, declining from 30.7% in 2007 to 29.7% in 2011
• MNCs supply some 50% of the total corporation tax receipts in Ireland. And they are having, allegedly, an exports boom with expatriated profits up (see QNA analysis last month). Yet, despite this (the exports-led recovery thingy) corporation tax receipts are down (see earlier post on tax receipts, linked above) and they are not just down in absolute terms. In 2007-2011 period, share of total revenue accruing to the corporation tax receipts has fallen from 13.5% to 10.3%. So if there is an exports-led recovery underway somewhere, would, please, Minister Noonan show us the proverbial money?

 So on the tax side of equation, the 'austerity' we've been experiencing is a real one - full of pain for households (whose share of total tax payments now stands at around 58% - some 12 percentage points above it levels in 2007) and the real sweet times for the corporates (the ones that are still managing to make profits to pay taxes, that is). This, perhaps, explains why even those working in protected sectors are talking about their biggest losses coming from tax changes.

7/1/2012: Irish Exchequer Results 2011 - Capital v Current Spending Trends

In the previous posts we considered Exchequer results for 2011 for tax receipts and headline expenditure items. In this post we look at the capital and current spending composition breakdown for total spending.

One core assertion that was made in the previous posts is that capital spending carried the main load of Exchequer spending adjustments in 2011. Overall, year on year, total net cumulative voted spending by the Irish state declined 1.6% or €721 million. At the same time, current expenditure went up by 2.2% or €903 million. Capital expenditure dropped 27.4% year on year in 2011 or €1,623 million.

Table below highlights the yearly changes over the crisis period:

The table above clearly shows that while during the crisis Net Voted Current Spending went up by €663 million, capital spending has declined by €4,265 mln on aggregate. The table also shows that despite all the austerity discourse, our Net Current expenditure was rising in 2010 and 2011, while our capital expenditure was declining to compensate for these increases.

In addition, the table highlights the trend that shows current expenditure rising at accelerating rate in 2010 and 2011 and capital expenditure falling at accelerating rate in 2011 relative to 2010.

If capital spending by the state constitutes either a 'Keynesian' stimulus (as claimed by the Governments over the years) or an investment in future productive capacity of our economy (as also claimed by the Governments in the past), we are now into a third consecutive year of bleeding the economy dry.

And the dynamics are best illustrated by referencing to the longer time horizons:

So current expenditure share of total spending by the Government now stands at 90.6%, up from 2010 level of 87.3% and 1998-2002 average share of 82.3%. On the other hand, capital investment share of total Government spending has dropped from 21.7% average for 1998-2002 period to 21.0% in 2008 and to 14.6% in 2010. In 2011 this share declined to below 10.4%.

 Between 2000 and 2010, Irish State invested in new capital stock some €66.26 billion of funds. Assuming 8% combined amortization and depreciation on this stock implies the need for continued gross investment of ca €5.3 billion annually. This means that 2011 Net Capital Spending fell some €1.01 billion short of covering the depletion of the state-financed capital stock.

The above, of course, is a rather crude calculation, since amortization and depreciation are at least in part covered from the current spending and since we use net voted capital spending figure for the capital stock measurements, but it does clearly suggest that current rates of capital investment cannot be sustained in the long term. And hence, much of the savings that have driven our Exchequer deficit improvements to-date are not sustainable either.

7/1/2012: Irish Exchequer Results 2011 - Expenditure

In the previous post I looked at the tax revenues side of the Exchequer figures for 2011. The core conclusions emerging from that analysis was that:

Irish Exchequer tax receipts did not perform well in 2011 compared to both 2010 and the target, with most of the improvement (some 80%) accounted for by reclassification of the Health Levy as tax revenue and addition of the temporary, extra-Budget 2011 Pensions Levy.

Irish Exchequer tax revenues for 2011 cannot be interpreted as being indicative of any serious improvement. Factoring in Pensions Levy and delayed receipts (Corporation Tax receipts for December carried over into 2012), overall Exchequer revenue fell 3.1% short of the target set in Budget 2011, not 2.5% claimed by the Department of Finance.

The above shortfall amounts to 0.66% of the expected 2011 GDP and 0.81% of our expected GNP and comes after significant increases in taxation burden passed in the Budget 2011, suggesting that the economy’s capacity to generate tax revenues based on the current structure of taxation is exhausted.

Subsequent posts on the topic of Exchequer balance will focus on overall balance, capital spending dynamics and relative distribution of tax burdens. This post focuses on the expenditure side of the Exchequer balance.

In general, there are good reasons as to why discussion of the expenditure side of the Exchequer balance is a largely useless exercise, rendered such by:

-       Constant re-alignment and renaming of departments, and

-        Changes in the departmental revenues (as in the case with the Health Levy reclassification) impacting the Net Voted Expenditure on Health

Here’s a good post on the above caveats from Dr Seamus Coffey which is worth a read.

So let’s consider some of the higher level figures.

Overall Net Voted Expenditure for 2011 came in at €45.711 billion, or €723 million (-1.56%) below 2010 levels and with a savings of €3.602 billion (-7.3%) on 2008. The target for 2011 expenditure was set at €46.022 billion and the end outrun implies that the Government has under-spent the target by €311 million. Note: I am referencing the original Budget 2011 target, as referenced, for example, in End-June 2011 - Analysis of Net Voted Expenditure. The Department for Finance reference figure for the annual 2011 target is €46.151 billion or €129 million ahead of the original estimate. This discrepancy is reflected in part in the capital carryover figures for 2010-2011 and 2011-2012.

Year on year, 2011 marks the third year of declining cuts. In 2009 yoy spending fell €2.150 billion, in 2010 it declined by €0.730 billion and in 2011 the drop was €0.723 billion. In proportional terms, expenditure declined 4.56% in 2009, 1.57% in 2010 and 1.58% in 2011. Cumulated net expenditure ‘savings’ since 2008 are now standing at a miserly €3.602 billion. Given that over the same period we accumulated €81.017 billion of deficits clearly shows the inadequate extent of cost reductions in the public services. Whichever way you spin it, to cover just ½ of already accumulated deficits out of cost savings achieved so far would take decades, and that before we factor in interest payments and the fact that much of the ‘savings’ delivered to-date comes out of temporary cuts to capital spending. More on this in the forthcoming analysis of capital and current spending.

Now, since we cannot clearly de-alienate actual spending, let us at the very least consider the spending priorities. These have changed over the years and changed in the direction that, while inevitable in the current crisis, is worrisome nonetheless.

Please keep in mind that although I did try to adjust as much as possible for changes in departments compositions, the data below is not fully reflective of these. Nonetheless, it does present some interesting changes in the overall spending dynamics.

As shown above,

-       Agriculture, Food and the Marine net voted spending constituted 3.36% of the total spending in 2008. This now has fallen to 2.28%.

-       Tourism, Culture and Sport accounted for 1.43% of the total spending in 2008 and is now down to 0.60%.

-       Communications, Energy and Natural Resources share actually rose from 0.54% in 2008 to 0.55% in 2011.

-       Defence saw a relatively shallow decline from 2.16% in 2008 to 1.93% in 2011.

-       Education and Skills – the third highest spending department in 2008 and 2011 – remained relatively static with 18.31% of total spending in 2008 and 18.07% in 2011.

-       Jobs, Enterprise and Innovation share of total spending fell from 2.94% in 2008 to 1.73% in 2011.

-       Environment, Community and Local Government spending fell from 6.41% in 2008 to 3.39% in 2011 – the drop that largely reflects changes in the departmental composition.

-       Finance share of spending declined from 2.83% in 2008 to 0.75% in 2011 – a dramatic fall.

-       Foreign affairs and Trade, despite gaining a new function of Trade have seen their share of spending decline from 1.99% in 2008 to 1.51% in 2011.

-       Health – the largest spender in 2008 at 27.45% dropped to the second place in spending distribution with 28.25% in 2011 despite having lost a number of functions. Adding back Children function to the DofH, the department spending share rose to 28.7% in 2011.

-       Justice and Equality accounted for 5.25% in 2008 and this dropped to 4.84% in 2011.

-       Social Protection rose from being the second highest spending department in 2008 with 19.06% (virtually identical share to that of Education) to the first highest spending department in 2011 with 29.16%.

-       Public Expenditure and Reform – a new department that, at least in my opinion is failing to show much value for money so far – has managed to rake in spending amounting to 1.71% of total net voted expenditure in 2011 – higher spending priority than Foreign Affairs and Trade, almost identical priority to Jobs, Enterprise and Innovation, more than double the spending priority of the Department of Finance. Let us presume - for a moment - that the Department has two important, related, but not fully coincident functions: bring down current spending (since bringing down capital spending is no-brainer) and produce longer-term reforms of public services (which is not all about cuts, of course). Given the numbers achieved to-date - see forthcoming post on capital and current expenditure reductions - one should have serious questions about the new department value for money.

-       Taoiseach group saw its spending priority virtually unchanged over the years, declining marginally from 0.38% in 2008 to 0.37% in 2011.

-       Transport – the department with significant compositional changes – has seen its spending share decline from 6.47% in 2008 to 4.18% in 2011.

So overall, top 3 departments accounted for 64.83% of total net voted spending in 2008 and this figure rose to 75.48% in 2011. The rate of increase in these expenditure shares has accelerated over the years. Year on year, share of the three top spending departments in overall expenditure rose 2.97 percentage points in 2008-2009, 3.80 percentage points in 2009-2010 and 3.89 percentage points in 2010-2011. Once Children function is added back to Health, the rate of increase in 2010-2011 jumps to 4.34 percentage points.

Top 4^th and 5^th ranked departments (Justice and Equality and Transport) saw their combined share of spending declining from 11.71% in 2008 to 9.02% in 2011. This largely reflects changes in composition of the Department of Transport.

Together, Social Protection, Health and Children accounted for 46.51% of the spending in 2008 and this now is up at 57.88% in 2011. In other words, almost €6 per every €10 spent by the state goes to finance the two functions that constitute in traditional nomenclature social welfare benefits and social benefits (note that private spending on health is netted out via departmental receipts in the net expenditure figures). Education accounts for roughly the same share – ca 18% of total spend – in 2011 as in 2008. Economic sectors departments (other than Transport) used to account for 6.84% of the total spend in 2008 and this is now down to 4.56% in 2011.

In short, the priority of the Government spending over the years of the crisis has shifted firmly away from supporting economy’s productive capacity and delivering structural subsidies to ‘social and environmental pillars’, to serving social welfare functions and preserving as much as possible public health spending. It is worth noting that the latter, of course, has been achieved by shifting more costs burden onto the shoulders of health insurance purchasers.

5/1/2012: Irish Exchequer Results 2011 - Tax Receipts

Irish Exchequer returns for 2011 are in and there has been much in the line of fireworks celebrating the 'strong' results. Alas, these celebrations are revealing more about the nature of the Exchequer figures analysis deployed by the Government spin doctors than about the real dynamics in tax revenues and spending reforms.

In this post, let's take a look at the tax performance over 2011.

Income tax receipts came in at the grand total of €13.798 billion this year, 22.4% up on 2010 and 16.6% up on 2009. Alas, the gross year on year gain of €2.522 billion achieved in 2011 is accounted for by re-labeling of the former health levy into income tax component. In 2010 the state collected €2.018 billion worth of health levies receipts which were not classified as a tax measure. This year, it was classed as such, and although we do not know just how much of the health levy has been collected, netting out 2010 receipts for this revenue head out of the 2011 tax receipts leaves us with an increase in income tax like-for-like of closer to €500 million year on year. And these net receipts would imply income tax still down on 2009 levels.

Overall, income tax was down €327 million on target set in Budget 2011 - a shortfall of 2.3% - not dramatic, but hardly confidence-instilling. 

The chart below illustrates trends over time, but one has to keep in mind that 2011 figures are gross of USC (and thus Health Levy receipts).

More revealing (as these compare like-for-like) are VAT receipts:

As the chart above illustrates, VAT receipts came in at €9.741 billion in 2011, down 3.57% on 2010 and 8.71% on 2009. Now, we are talking some real numbers here. While income tax 'improvements' were in reality very much marginal, VAT deterioration is very significant. VAT receipts are down 4.8% or €489 million on 2011 target and the receipts are off €360 million on 2010 and €929 million on 2009. VAT receipts are running €4.76 billion behind, compared to 2007 levels. 

Corporation tax is shrinking. Official numbers show Corpo receipts are at €3.52 billion in 2011, down €404 million on 2010. These include €261 million in delayed receipts, so year on year Corpo receipts are down really €143 million. This might look small, but for the economy that is allegedly 'recovering' the dynamic is poor. In percentage terms, Corporation tax receipts are off 10.29% yoy and 9.74% on 2009. Compared to 2007, corporate taxes are down €2.871 billion (disregarding the late receipts).

Relative to target, once December delayed payments are factored in, Corporation tax has fallen short of the projections by €239 million. In overall official terms, the tax is down €500 million on traget (-12.4%).

Another big tax head is the Excise. This came in exactly at the same level as 2010: €4.678 billion. Excise receipts are down just €25 million on 2009, but significantly lower - by €1.16 billion relative to 2007. Excise taxes are now basically in line with Department projections for Budget 2011. 

Stamps are up, but this is solely due to the pension levy introduction. Leve of Stamps receipts in 2011 reached €1.391 billion, which is €431 million ahead of 2010 and €461 million ahead of 2009. But once we factor out pension levy receipts, Stamps are actually down €26 million on 2010 and just €4 million ahead of 2009 levels. Compared to 2007 Stamps are down a massive €2.25 billion once pension levy is accounted for. And Stamps are down on target as well - by some €21 million.

When it comes to capital taxes, combined CAT and CGT receipts came in at €660 million or 12.9% ahead of 2010 receipts, although still 17.1% down on 2009 levels.

Both tax heads combined were bang-on on target.

So overall, of top 5 tax heads, 3 were behind the target despite the fact that Income tax included reclassification of tax revenues under USC, one was bang on target and one was ahead of target once temporary pensions levy is added, but behind target when this is netted out. In a summary, 4 out of 5 tax heads have underperformed the target and one came in at virtually identical levels to target. Where's, pardon me, the fabled 'improvements' and 'stabilization' in Exchequer revenues that Minister Noonan has been talking about?

Overall tax revenue stood at €34.027 billion in 2011, which is 7.16% ahead of 2010 and 2.97% ahead of 2009. However, if we are to correct for reclassified Health levy receipts and temporary pensions levy receipts, tax revenues for 2011 were at €31.552 billion, or 0.63% below those in 2010. tax rates went up, tax revenues went down, folks. Not what one would term an improvement in performance.

Even using dodgy apples-for-oranges accounting procedures deployed by the Government, tax revenues are down 2.5% on the Budget 2011 target. How on earth can anyone claim this to be 'stabilizing' performance or an 'improvement' defies any logic. 

Let's do the sums: 

• 2011 total tax revenues were €873 million behind Budget 2011 projections. These included non-tax revenue of at least €2 billion (Health levy) that was re-branded as tax revenues this time around, plus €457 million hit on pensions (not in the Budget 2011) and a delayed set of corporate returns of €261 million. So overall, tax revenues are down on target not €873 million, but €1.069 billion. 
• At the same time 2010-2011 outrun surplus claimed by the DofF at €2.522 billion in reality is a revenue gain of just €308 million.

That means that the Exchequer revenues side performance was really surprisingly unimpressive.