2/10/15: The plight of Irish self-employed and our backward economic policies

This is a copy of the Business Retail Union of Ireland public letter sent to the Minister for Social Protection regarding equal treatment of the self-employed in Ireland:

Source: @brui_ie

The key questions raised in this letter are other questions of great importance to this country for a number of reasons are:

1. Per latest CSO data there were 327,500 self-employed persons in Ireland in 2Q 2015, constituting 16.9 percent of total employment in the country. The number of self-employed persons is roughly comparable to the current counts of people on Live Register (332,000). Which means these are hardly ‘negligible’ or ‘small’ numbers. What is being done to make sure these people have access to basic, normal, civilised levels of representation in the economic and social system that is, allegedly, modern Ireland?
2. Self-employed people in Ireland face upfront tax penalty for their activities in terms of higher rates of taxation and higher cost of tax compliance. Why? Where is the balance between proportionality of taxation and representation?
3. Self-employed people in Ireland have no access to basic social protection benefits that PAYE workers can avail of. Why? Where is the balance between social services access based on need vs access based on privilege of arbitrary categories of employment?
4. Self-employed people in Ireland have no access to basic training and jobs activation schemes that PAYE workers can avail of. Why? Again, per (3) above, where is that balance?
5. Self-employed people in Ireland are discriminated against in access to state pensions. Same questions as in (4).
6. Self-employed people in Ireland have to deal with huge degree of income volatility with our tax system inducing more uncertainty in their after-tax income than PAYE workers. Why is that the financial markets operate on a basic principle of risk premium, whilst markets for human capital operate on the basis of risk penalty?
7. Self-employed people in Ireland have no basic supports in terms of annual holidays, sick leave, family leave, etc and are often placed at severe disadvantage compared to some PAYE and public sector workers in terms of jobs-related benefits. Which, of course, is understandable, but reinforces the point made in (6) above.

Many of the above differences cannot (and probably should not) be removed by state policies (e.g. (7)). Others can. None have been removed and no one - in our leadership establishment - appears to, frankly put, give a damn.

However, the reality of modern workforce is that:

• Self-employment is going to rise dramatically in the future as our economy moves further and further along the lines of developing skills, professional occupations employment and a ‘gig’-economy. In simple terms, global economy is becoming more and more self-employment intensive and Ireland can’t avoid the same fate, no matter how ignorant our policymakers remain;
• The recent decline (on pre-crisis trend) in self-employment is driven by the sheer mass of economic activity destruction in Ireland since the onset of the Global Financial Crisis, highlighting the extreme nature of jobs and income security volatility faced by the self-employed;
• Self-employment is set to expand in the future as we become more entrepreneurial and intrapreneurial.

If anything, current penalty to the self-employed should not only be erased, but reversed, due to higher risk nature of their work, they deserve a risk premium, not a risk penalty in the markets.

It is high time we gave a thought as to how on earth can we continue developing an entrepreneurial modern, human capital-based economy whilst penalising starting entrepreneurs and people taking risk deploying their skills through self-employment. Bragging about ‘entrepreneurial Ireland’ and ‘knowledge economy’ at international venues can’t get us anywhere, if we fail to first reform ourselves. The mentality of civil service ‘jobs-for-life’ entitlement culture that dominates our policy formation has to change. Good starting point - addressing the above issues for the self-employed.

19/7/2012: Minister Noonan's 'valuations' & NTMA's latest scheme

An interesting - and potentially revealing - contribution from Minister Noonan on the prospective ESM involvement in purchasing Irish banks assets held by the Government - see full link here (H/T to Owen Callan of Danske Markets).

Here are some interesting bits (from my pov - note, emphasis in quotes is mine):

"...if Europe's new rescue fund takes over the government's stakes in its banks, it would need to do so at prices significantly above their current low valuations."

So what should be the prices benchmark to be paid by ESM for Irish banks?

We know what Minister Noonan thinks what they should not be:
"We wouldn't think we were being assisted or treated fairly if we were only offered the terms we could get from a willing hedge fund who wanted to purchase the stake the Irish government has in the banks," Noonan told a news conference"

Ok, a willing hedge fund is mentioned as a benchmark floor. What willing hedge fund? 1) Have there been approaches that set out some valuation? 2) Have these approaches involved sufficient depth of discussion to show the actual price the fund was willing to pay, other than the low-ball first bid? 3) Have these approaches been systematic or random?

Now, suppose there has been a series of approaches and the hedge funds' willing price is €X million. Suppose Minister Noonan insists on ESM paying a minimum price of €Y million that is above €X million, which means there is a positive premium to be paid by ESM.

What principle should guide this premium valuation? "The valuation will be an issue for negotiation but before we could agree, they would need to be significantly in advance of those figures," Noonan added, referring to figures showing that investments by the country's National Pension Reserve Fund (NPRF) in its top two banks were now worth 8.1 billion euros."

Is Minister Noonan seriously suggesting ESM should pay Irish Government more than €8.1 billion? Since NPRF valuations of the banks stakes are make-believe stuff with absolutely no proven testability in the actual markets, will ESM be buying into a loss then? Ex ante?!



Another interesting comment in the article cited above is the following one:

"The NTMA also confirmed plans to diversify its sources of funding later this year with its first sovereign issuance of annuity bonds to Irish-based pension funds and inflation-linked bonds also aimed at domestic investors.

Corrigan said it was not inconceivable that it could raise 3 to 5 billion euros over the next 18 months from the two new instruments.

"International investors don't owe us a living, they don't have to buy our paper, and if the local investors don't have the confidence to invest in the market and aren't seen to have that confidence, it's going to be very difficult to get international investors back," he said."

Which, of course is all reasonably fine but for two matters:

1. Domestic pension funds will be acting against normal practice and investing in low-rated (high risk) government securities within the very same economy in which they face future liabilities (reducing risk diversification). In other words, Irish insurance funds will have to be compelled to undertake such investment in violation of acceptable international standards. Have the Government now also taken over the pensions industry to add to their banking sector portfolio?
2. If foreign investors 'won't owe Irish Government a living' why should domestic investors owe Irish Government anything? By treating two investors differently rhetorically, does Mr Corrigan explicitly differentiate treatment of domestic investors from foreign investors? It appears to be exactly so because the products he references are not going to be offered to foreign investors. Which begs the third question:
3. Will NTMA create sub-category of seniority for Irish pension funds and 'domestic investors' to effectively load even more risk onto them compared to foreign investors? After all, he seems to suggest domestic investor owe him something that foreign investors don't?

Economics 5/12/10: Debt, debt, debt... for Irish taxpayers

I decided not provide any analysis of the figures below. These figures speak for themselves. To explain their purpose: I have computed the expected burden on current and future taxpayers from the total ex-banks debt carried by Ireland Inc as:

• Households debts (mortgages, car loans, personal loans, credit cards, etc);
• Government debt (inclusive of quasi-Governmental debt undertaken under the EU/ECB/IMF loans and Nama).
  
• I also incorporate total corporate sector debts, including non-financial corporations debt and debts entered into by non-banking financial corporations. However, the corporate debt DOES NOT form the part of taxpayers liabilities, although at least some of it will have to be repaid out of our (taxpayers) pockets one way or another.

All figures input into calculations were taken from CSO and Central Bank of Ireland databases. All core assumptions are outlined in the second table.

Finally, note - the total figures of debt per taxpayer are for Household Debts and Government (including Nama & ECB/EU/IMF loans) debt. Do not, please, confuse them with the official Government debt alone.

So here are two tables. Interpret them as you wish:


PS: some people accused me of double-counting:

• banks debts and mortgages/households debts. I am not - banks debts are excluded from the above considerations;
• Government bonds outstanding and rolled over. I am not - the only net increase between 2010 and 2014 in Government debt due to roller overs of existent (pre-2011) bonds is due to an increase in the interest rate taken on rolled over bonds at 1% (again, conservative, as per ECB/EU/IMF deal we will be paying 1.13% over the current average rate of interest on already issued bonds).
  

Economics 08/04/2010: AIB first Nama loans

Earlier this week, Nama had completed the first transfer of loans from AIB. Per official report, Nama bought loans with a nominal value of €3.29bn for €1.9bn in NAMA bonds, implying a discount of 42.2%. This was below the discount of 43% announced by the Minister for Finance last week.

But what do these figures mean? Without knowing exact nature of the loans, it is hard to tell just how much did Nama over pay for the loans. Here is an averages-based estimate, however.

First, let us reproduce the original claimed discount of 42.2% using averages. Table below does exactly this:
In the above, I assume:

1. Vintages of loans transfer running between 2005 and 2007;
2. 2 year roll up on interest maximum allowed in the loan covenants;
3. Roll up of interest commencing at a new rate in year 2008 and running through 2009;
4. 2 scenarios of average interest rates applied (Scenario 1: 5% pa, Scenario 2: 6% pa) – as you shall see below, these are optimistic rates;
5. Declines in values affecting different vintages as follows: loans of 2007 vintage – decline of 50% in value of the loan; loans of 2006 vintage – 40% and loans of 205 vintage – 35%.

As the last row shows, taking a simple average across all scenarios and vintages yields a discount on the loan face value of 41.7%, which, factoring in 0.5% Nama-reported risk margin yields the effective rate of 42.2% - bang on with the desired.

Having matched Nama numbers, let’s examine the assumptions and bring them closer to reality:

1. Let us use the actual average annual lending rates for non-financial corporations reported by the Central Bank Table B2 (here)
2. Let us also adjust the loans for security of collateral claims – remember, per official statements from Nama many loans (in the Anglo case up to 20%) are non-secured, with effective claims against the underlying assets of nil) – to do this, we induce the following security risk adjustments to value: 6% for vintages of 2005, 9% for vintages of 2006 and 12% for vintages of 2007. So the average is 9.9%. Although these are significant, remember – reports of 20% for Anglo loans are based on untested cases. It remains to be seen how higher these will go should other lenders contest Nama take over of the claims.
3. Since Nama valuations were carried out through November 2009, we must factor in further declines in value, so let us push up value discounts to 35% of 2005 vintages, 45% on 2006 vintages and 55% on 2007 vintages. Again, these are conservative, given evidence presented in the commercial courts.
4. Instead of running alternative interest rates scenarios (remember – I am taking actual rates reported by the Central Bank), take two different scenarios on vintages compositions: Scenario A assumes uniform distribution of loans across three vintages, Scenario B assumes a 20% for 2005 vintage, 30% for 2006 vintage and 50% for 2007 vintage split.
5. Finally, let us estimate two other alternative scenarios: Scenario 1 has no mark ups charged on average lending rates, Scenario 2 has a set of mark up reflective of higher risk perception of loans, especially in 2008-2009 period. Remember, lenders became unwilling to provide funding for property investments in 2008-2009, which means they would be expected to charge a higher interest rate (risk premium) on loans related to property than those reflected in the average corporate lending rates.

Tables below show the results of model estimation:
Alternative scenario 1: Nama overpayment over the current market value ranges between 42% and 51% or €561-638 million.
Alternative scenario 2: Nama overpayment over the current market value ranges between 48% and 57% or €617-688 million.

So averaging across two tables: Nama overpayment on AIB tranche 1 loans is estimated at between 42% and 57% or between €561 million and €688 million. At a lower estimate range, this suggests that Nama is at a risk of overpaying some €26 billion for the loans it purchases, should this type of valuations proceed.


Of course, some would say this overpayment reflects the expected long term economic valuation of these loans. Fine. Suppose it does – how long can it take for the LTEV to be realised to break even (real terms) on Nama assets then?

Let’s make two assumptions:

• suppose that Irish property markets see price increases of 150% of expected economic growth,
• suppose that expected long term economic growth will average in real terms between 2% and 3% per annum.

If Nama overpays 48% on the current value of the assets (lower range of my estimate), Nama will break even – absent its own costs of operations and funding – and assuming full recovery of the loans per their value – by the end of 2027 if the growth rate average 3% pa or by the end of 2035 if the growth rate averages 2% pa in real terms.

If Nama overpays at the top of the estimates range – 57%, then real recovery will take up to the end of 2039 if the average annual growth rate is 3% or up to 2053 is the average growth rate is 2% per annum.

Again – notice that these figures do not include:

• Legal costs of running Nama;
• Losses that might occur on the loans since November 30, 2009 valuation cut off date;
• 3 years long roll up interest holiday built into Nama;
• Operating costs of running Nama (inclusive of very costly advisers it contracts);
• Cost of Nama bonds financing
• Cost of actual working through the bad loans

Still thinking Anglo is the worst case scenario for us?

Economics 16/08/2009: A tax too far?

Here is a nice one from the Sunday Papers. Sunday Times "In Gear" supplement is featuring tow different cars: a Devon Motorworks GTX, 8,354cc V10 650bhp super-car that goes 0-60 in 3.5 sec and costs £300K (pages 4-5) and Mazda MX-5 1,999cc 4-cylinders, 158bhp ordinary bloke/gal car, priced at estimated €37,000 pages 14-15. Guess why am I writing about them?

Well, Devon's in the UK road tax band M, which sets you back £405pa, or €470.06pa, Mazda is in Ireland's rod tax band E, which sets you back €630pa.

Assuming that

• a 'sensible' consumer would tend to purchase a car for about 7-12% of their income;
  
• hold it for 7-10 years;
• sell at the end of the holding period of 50% or 20% of the value, then
  

the following table shows just how close our road tax policy comes to highway robbery:
Yes, you are reading it right -

• a buyer of a small middle class car in Ireland will pay between 1.4 and 2.1 percent of their annual income per annum in road tax;
• a buyer of a large super car in the UK will pay between 0.14 and 0.315 percent of their income in annual road tax.

And I know what you are going to say - the UK is closer to meeting its Kyoto Protocol commitments than we are, and it has better roads than we do.

Where is our National Consumer Agency in all of this? Oh, well, busy counting Government payoffs for staying quiet on the rip-off culture of our public policies...

Heard enough? Part 1: Mr Lenihan's cheap talk

In a series of 3 post I will look at the speeches delivered by Brian Lenihan, Mary Coughlan and Brian Cowen to their party ardfheis this weekend.

Tax increases part of economic solution - Lenihan
Based on Irish Times report from February 28, 2009, 20:31


“Higher taxes for everybody will be introduced in Ireland, the Minister for Finance, Brian Lenihan has declared, ‘Yes, the wealthy groups will have to pay. But everybody will have to pay something,’ the Minister told the Fianna Fáil ardfheis.”

Back in August 2008 and later in the annual edition of Business & Finance, I predicted exactly this outcome and timing for the tax increases announcement.

The sad part, of course, is that were we to cut the waste choking our public sectors, we would have had no need to raise taxes. Once again, since late July 2008 I offered proposals that would have provided requisite and ample capital repairs to the banks while reducing the burden of this recession on the households. Brian Lenihan decided instead to sacrifice the financial security of private sector workers in order to appease his protected constituency around the Liberty Hall.

There was one truth in what Mr Lenihan was telling his party: no matter how much he taxes the rich (aka anyone earning over €100,000), the tax impact of such measures will be minimal.

Why?

Firstly, per Minister Lenihan, “two in every hundred people earn more than €200,000 a year, and they pay 28 per cent of all the taxes; while six in every hundred earn over €150,000, and they contribute 28 per cent of the total; while 6 per cent earn more than €100,000, and they pay nearly half of the Exchequer’s returns." Raising their tax bill by 10% will yield less than 3-4% of the current returns, or around €1.4bn. A chop change for Mr Lenihan’s public sector cronies. At the rate of spending to which our public sector became accustomed, the entire 10% tax hike would evaporate in 24 days!

Secondly, any tax increases will lead to a wholesale tax optimization drive by anyone outside the PAYE system – and that covers the majority of the Lenihan's ‘rich’. Taking an assumption that some 3/5 of the 'rich' own their business or professional practice and they can reduce their tax exposure by a modest 20%, a draconian 10% hike in taxes will yield well below €1bn in added revenue.

One should acknowledge the fact that after some 8 months of continuous failure to govern, Mr Lenihan finally offered a flaccid apology to his party (the country is still waiting for one, Brian): “if we could have foreseen the extent of the international crisis, we would have done things differently… There is little to be gained in beating ourselves up over this."

But he reversed even this attempt at humility by charging the country for the deficit financing that he and his predecessor in DofF have pursued. Let's be honest, Minister, it was you and Brian Cowen who decided to award lavish wage increases to the public sector. The country did not ask for the wages of the ESB workers to be hiked to above €80,000 pa on average. Nor did it ask for e-voting machines, €250K+ contracts for consultants, pay rises for Ministers and senior civil servants, an army of paper pushers you've hired for HSE, billions wasted on white elphant projects around the country in attempts to buy votes in advance of each election, and so on. The blame for this mess is your Government's.

"We have to get on and do what we can and do it in a united way.” Oh yes, Minister. United we stand: you with your aristocratic salary, drivers, cars, pensions and so on, your colleagues and immediate subordinates enjoying most of the same, and the people you are going to tax out of their homes, childcare and schooling money, the elderly whose meagre incomes you are going to butcher with higher VAT and other charges. Spare us your whingeing, Brian – take a pay cut yourself! A 50% cut would restore your wages and pension in line with those in other advanced democracies.

“We have an €18 billion hole in the public finances,” said our well-informed Minister. Actually, the hole is more like €21bn and that was before we add new unemployed to welfare rolls. NTMA admitted this much when it said last week that we will have to borrow up to €25bn in 2009. Where were you, Minister, when they made this announcement?

“The world is looking on,” said the Minister. It no longer does. Last Friday the world sold some 90mln shares in BofI and AIB. The world holds no belief in you and your Government and neither does the country. Why? You did nothing to address the real crises for some 8 months since you took the reigns of the Exchequer in July 2008. Between July 2008 and today you've repeatedly insisted that your Government will implement at least €2bn in savings this year. Your Department has built this into the budgetary forecasts for 2009-2013. To date, you've deliverd a puny €1.1bn in savings. The world is no longer willing to be fooled by you!

“We need to persuade those who might invest here that we are capable of taking the tough decisions now to get our house in order.” Too late to sob, Brian. The numbers of those who would consider investing in this country is now standing so dangerously close to nill that even companies with substantial capital already allocated to these shores are cutting their operations and laying off workers. After years of your and your colleagues waffle about 'competitiveness', 'productivity', 'education', 'knowledge economy' they have no trust in this Government.

He went on: “We voted through the Bill that gives effect to levy that will see public servants pay on average 7.5 per cent to the cost of their pensions. …The public service pay bill accounts for one third of all expenditure”. So let’s do the maths. That 7.5% levy, net of tax deductions, is going to take only 1.5% of the total Exchequer expenditure or ca €700mln. But in July, September, October, December 2008, January and February 2009, you, the Minister, went on the record claiming the cuts will add up to €2bn on top of €440mln that you promised to save (and also did not deliver) in 2008!

What a farce!

Talking up our economy

Today, Brian Cowen has issued a Bertiesque warning to commentators 'talking down Irish economy'. I beg to disagree. Firstly, the problem Ireland is facing is not that some commentators want to uncover the truth, but that our Government is failing to listen to anyone, save for a handful of public sector mandarins and political appointees. Secondly, lest anyone accuses myself of scaremongering, I remind our Taoiseach and his Cabinet that I have publicly put forward a constructive proposal for dealing with the current crisis as far back as in August 2008.

Here are few details:

In August 2008 edition of Business&Finance magazine, I predicted that Ireland will continue its downward trajectory in terms of stock market valuations and economic performance unless the Government were to tackle the issue of public sector overspend and consumer debt. In early October, from the same platform, I re-iterated a call for the Government to get serious with the problem of rising household insolvencies and corporate debt burden. At that time, I provided an outline of a basic plan that I hereby reproduce (some of the modifications to the original plan were featured in my article in Business&Finance in November).

Here is a bold, but a realistic proposal for moving the Government beyond its current position of playing catch up with deteriorating fundamentals. The Exchequer should:

• Announce a 10% reduction across the entire budget and an up to 60% cut on the discretionary non-capital spending under the NDP, generating ca €12-15bn in savings. The cut should include a 100% suspension of all overseas assistance until the time the economy returns to its long-term growth path of ca 2.5-3%.
• Cut, permanently, 10% of the public sector employment (effecting back office staff alone), saving ca €1bnpa after the costs of the measure are factored in.
• Freeze pensions indexation in the public sector for 2008-2015 and make mandatory a 50% contribution to all pensions plans written in the public sector, generating ca €1-2bn in savings.
• Stop the unfunded contributions to the NPRF, saving some €1.5bn per annum.
  

Combining all the savings, the Government should be able to :

• Bring 2009-2010 deficits to within the Eurozone limits; and
• Supply temporary tax refunds of ca €5,000pa per household in 2009-2010 ring-fenced for pensions plans and mortgages funding only.
  

The resulting capital injection of ca €7.5bn pa will be able to:

1. de-leverage the households (amounting, by the end of 2010 to a ca 25% reduction in the total households’ debt), improving consumer sentiment and re-starting housing markets;
2. help recapitalize the banks and improve their loans to capital ratios more efficiently than a debt buy-back, a nationalization, a direct injection of capital from the Exchequer or a debt guarantee.
   

It will result in a sizeable (ca 5% of the entire economy) annual stimulus, without triggering inflationary pressures associated with the Santa-like Government subsidies or consumption incentives.

This proposal implies no burden on the future generations, as the entire stimulus will be paid from the existent fiscal overhang and the set-aside public funds, with the public pensions covered by the contributory schemes.

Lastly, to achieve a morally justifiable and economically stimulative recapitalization of the banks, the plan would require Irish institutions receiving any additional public financing to issue call options on ordinary shares with a strike price set at the date of the deposit and maturity of 5 years. These shares should be distributed to all Irish households on the flat-rate basis.

Thus, assuming the need for additional capital injections of €6-9bn in the Irish financial institutions through 2010 (over and above the €7.5bn pa injected through mortgages repayments and pensions re-capitalizations), Irish households will be in the possession of options with a face value of €4,000-6,000 per household, thus increasing their financial reserves. At the time of maturity, assuming options are in the money, the Exchequer will avail of a special 50% rate of CGT on these particular instruments. Assuming that share prices appreciation of 40% between 2009 and 2014, the CGT returns to the Exchequer will yield ca €1.8bn, ex dividend payments.

The Oligarch of the Upper Merrion Street

Flip-Flop-Flip Brian
On October 23, 2008, just two and a half months ago, Minister for Finance has gone out of his way to explain that the State investment in the banks was the 'very final option' he was willing to take. On that date, Anglo’s shares were trading at €1.80 or almost 90% down on their historic high. Flip! Brian's jacket of being 'conservative with taxpayers' money' came undone!

Fast forward 2 months ahead – on December 15, 2008, announcing the rescue plan for Irish banks, Mr Lenihan has flopped the ‘very final option’ into an actual policy. By that date, Anglo’s shares moved to €0.36 or 80% below their October 23 level, yet still the ‘very final option’ was to involve no more than a 3/4 stake in Anglo with no voting rights for the Exchequer. The fig leaf of decorum of being only 1/4 true to his October statement was all that was left of a respectable Exchequer.

Today, Brian ‘The Flipper’ Lenihan has completely reneged on his October-December claims. The state is now poised to take the entire Anglo – toxic and healthy assets, workforce and physical capital alike. Flip! The fig leaf is sailing across the Upper Mount Street - its new Bank-owning Oligarch is now fully exposed as Minister whose words must be read between the lines.

Details? Go straight to the consequences!
Whatever the deal price might be the main point of this performance by the Government has been totally lost in the media to date. The nationalization of the Anglo Irish Bank is simply wrong. Full stop.

Let me focus on this point:

Irish Exchequer has no business taking money from the working families at this time of need (or at any time indeed) to rescue a handful of large development deals and bail out a party of investors. No financial stability emergency, no amount of bad loans on the books, no balance sheet analysis can ever justify the Exchequer using ordinary peoples' cash to buy assets into its own ownership.

If the Anglo needed capital, the Exchequer should have placed money with the institution, collect the shares in return to the current value of the money deposited and then immediately disburse the shares to those who are paying for them – the people.

And I do not mean some collective People – aka the public sector who will reap most of the benefit of any future recovery in Anglo’s fortunes, but the people whose cash 'The Flipper' has so princely pledged to Anglo’s creditors.

To be morally justifiable, the nationalization of the Anglo Irish Bank should:
(1) involve a rigorous investment case analysis carried out by an international assessor with NO connection to Ireland, the Anglo Irish Bank or any other party to the transaction before any announcement of the takeover was made; and
(2) if allowed to proceed, be carried out as a voucher nationalization scheme, with all new Anglo Irish Bank’s shares (underlying the State liquidity injection) being distributed uniformly amongst all households in Ireland.

We've paid for them, Mr Lenihan, in case you've failed to notice!