26/9/2013: Fiscal Council Estimates of the Promissory Note Deal

So the Irish Fiscal Council published tonight "The Government’s Balance Sheet after the Crisis: A Comprehensive Perspective" paper authored by Sebastian Barnes and Diarmaid Smyth. 

The paper is good, interesting, but as always (not a criticism) is open to interpretations, questions and debate. One criticism - it is hard to wade through double-counting and incomplete reporting of the Government assets and charts nomenclature does not appear to correspond to the one used in the text. One simple table listing all assets with the estimated value attached and a column outlining core risks to valuations involved would have saved the authors pages and pages of poorly constructed material.

Overall, however, it is good to see the broader approach taken by the authors to the problem of fiscal sustainability of public finances in Ireland. We rarely observe such. And I will be blogging on this later.

But the very interesting bit relates to the final official estimates of the Promissory Notes deal. Keep in mind, here's my on-the-record estimate of the net benefit from the deal in the range of 4.5-6.3 billion euros over 40 years horizon with most of this accruing earlier on in the life span of the deal. Here's the record (see box-out at the end of the article: http://trueeconomics.blogspot.ie/2013/03/2332013-sunday-times-10032013.html).

So here are the Fiscal Council estimates:

Mid-range minimum sales of bonds scenario: net savings of EUR 5-7 billion. Accelerated sales scenario: mid-range estimate of EUR 2-3 billion. Base Case for Euribor+150 and Euribor +250 at minimum levels of sales of bonds: EUR4 billion and EUR7 billion. The difference to my estimate is immaterial since I am looking at a longer time horizon for my estimates than the model used by the Fiscal Council does.

Reminder - some other estimates of the net present value of the savings from the deal run into 19 billion euros… ahem!..

I am looking forward to studying the spreadsheet with the model included which the FC is promising to make available on their website.

11/2/2013: Bailout 3.0 and precedent research

Ireland Bail-out 3.0 (this time more benign than 1.0 - the original Troika lending arrangement, but less benign than 2.0 - the 2011 alteration to the terms of the Troika lending arrangement in the wake of Greek bailout 2.0... I know, one can wreck one's head on this forest of bailouts) has been heralded as a 'historic' achievement.

Here is the original (unedited) version of my paper from 2010 on

1. the necessity of such a deal, which makes me deem the deal to be net positive, and 
2. the volumes of relief that we need (well in excess of EUR4.3-6.9 billion NPV benefit my model estimates the deal will provide over 40 years duration) which makes me deem the deal to be insufficient in terms of relief provided.

Read, again... http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1985617

Note, the title of the book in which this featured as a chapter is What if Ireland Defaults.

7/2/2013: Trading Debt for Cash Flow Relief?

Muy thoughts (quick one between lecturing) on the deal:

As I understand it,

1. We have converted quasi-governmental debt into pure Government bond.
2. Maturity profile is very good - long dated, no restriction on NTMA raising funds at 20 year + 
3. We are gaining some cash flow improvements up front (where they matter most), but 
4. We are not getting a major write down on the debt overall. 
5. Deficit impact is one-off 500mln, that will be absorbed into improvement over 2014 Budget and that's it as it becomes 'repeated measure' equivalent in 2015 and after. 
6. So material saving to the economy is really 500mln and that is at the peak (2014-2015), after that the savings will decline, until finally, around ca 2020-2025 (needs more precise calculations here) the savings will become negative as we will be paying more in interest than we would have been paying before.
7. Additional second order effect is that improved bond markets profile is likely to result in slightly lower borrowing costs over time, but this impact is off-set by the reduced Central Bank revenues remittable back to the Exchequer. 

The deal is not putting any final closure to the Anglo or INBS 'odious' debt, but simply constitutes an extension of the debt. 

It can result in the lower real value of the debt over the period of time, assuming Ireland can issue bonds at negative real interest rates (bond coupons below inflation rate), which is unlikely. 

Neither is the deal reducing the debt overall, which means the deal has no effect on the adverse impact of debt drag on growth. The Government never asked for a debt writedown (reduction in the overall debt levels).

The deal is a net positive, but materially not significant enough.

Basic summary - as expected last night on VinB.