Updated version (00:42am September 22)
On June 23, 2009, ECB opened bidding for its first 12-month refinancing operation.
Back in May 2009, the ECB announced that it would double the maximum length of time it lends money from six months to a year and in June it set the rate for 12-months financing at 1%.
Last time it applied a longer term horizon, ECB placed 348.6 billion euros in December 2007.
So in the nutshell, 1.5% coupon on our bonds bound for ECB and bearing 6 months maturity is a rotten deal.
How rotten? If we were to issue bonds at the ECB own long term financing facility rate with 12 months maturity. The expected cost of total borrowing over 15 years inclusive of the expected costs of roll-overs and reflective of the expected yield curve for ECB rates will be around €15.4bn. In contrast, current structure of 1.5% pa coupon plus 6-months maturity is expected to yield total interest cost of ca €17.5-18.9bn. Then again, what’s €2.1-3.5bn for the Government that burns through €400mln in borrowing on a weekly basis?
What is interesting is why didn't ECB make a similar deal with the Irish Government, allowing it to issue lower coupon bonds or extend maturity of these bonds or both? One can only speculate, for ECB will never tell one way or the other, but I suspect the answer to this lies within the ECB statement that Nama should not overpay for assets it purchases.
Hmmm... Leni took his plan to the ECB men, saying we will buy €77bn worth of stuff, that includes €9bn of rolled up interest, and we will pay €54bn for it. The ECB men pulled out a calculator and extracted: [€54bn/(€77bn-€9bn)-1]*100%=20.6%. The ECB men stared at Leni in disbelief... "Herr Brian, yor ekonomi iz in truble? Djast less fan 21% dropp in yor properti praicez?" 'Oh," replied Brian Lenihan, "but Frank Fahey School of Economics says you'll give us free money!" And here the ECB men smelled a rat...
Otherwise why would the ECB, amidst quantitative easing exercise, impose sanction-level conditions on our bonds? 6-months paper and 1.5% is worse than what ECB gives money to commercial banks at. Much worse, folks.
Now, ECB is no stranger to being taken for a ride. What is telling is that ECB's reaction to 'abuses' in the past is very similar to its reaction to Nama to date.
Most recently, back in July 2008, both the Australian bank, Macquarie Group and the British building society Nationwide have used their Irish subsidiaries to upload hundreds of millions of dodgy ABS packages (in the case of Macquarie, €455mln was borrowed against the most ridiculous collateral –Australian car loans) at the ECB discount window.
On September 4, 2008, ECB’s President, Jean- Claude Trichet stated that he will make it more expensive for banks to borrow from the ECB against most asset-based securities, starting from February 1, 2009. Amidst the crisis gripping European markets at the time, ECB raised `haircut' on the securities it allows to be used as a collateral for 12-months borrowing from 2% to 12%. Additional 4.4% were to apply to paper with no immediate market price.
Note, Irish haircut on bad debts is in effect just below 21% - not that far off the haircuts applied by the ECB (16.4%) on lending backed by much more robust collateral (average European mortgage-securing assets - i.e prperty markets - are down single digits across the entire crisis) than dodgy Irish development projects (down 60-80% and some down 90% in value and falling). When ECB haircut on unsecured banks bonds is added, the total asset discount that ECB could have applied was in excess of 21%. But what is even more significant, the value of the underlying assets accepted by the ECB is supposed to be calculated as the market price less the haircut.
Again, this stands in contrast to Nama which is taking not senior bonds, but ordinary loans, and which is using farcical long-term-economic-value 'pricing', not current market prices. Despite this, Nama haircuts are just 20.6% (once rolled up interest is accounted for) on lower grade assets than the ECB would consider at its window…
No wonder they won’t let Ireland issue bonds with a coupon of 1% or less with 12-months maturity - as would be consistent with a rating on par or better than that for commercial banks. In effect, contrary to the assertions of Brian Lenihan, it is now clear that the 1.5% for 6-months paper deal is far from being endorsed by the ECB. Instead it is a reflection of ECB’s unease with the details of Nama plans. All in, the ECB is now applying nearly as strict terms to the Irish Government Nama bonds as it does to private sector bonds issued by less than thriving European banks.
In July 2008, before changes were announced, the ECB run two-tier pricing system, whereby haircuts of 0.5-5.5% applied to Government paper against the key ECB rate of 4.25%. Mortgage-backed securities – especially Spanish and Irish ones – incurred 18% haircut. Now, do the maths – the spread of 0.5-5.5% haircut on 4.25% lending rate implies the cost of capital of 5-10% for government bonds collateral and up to 24% for MBS. Since July 2008, Irish property markets have fallen by over 12%, so the same collateral rules, that were described by analysts as being loose back in 2008 would require a haircut of ca 27% at the very least, for 1-year long holding period. Again, Nama is implying a haircut of 20.6% on a 15-year holding period.
27% cut held over 1 year was a ‘loose’ condition that had to be drastically revised by the ECB, but 20.6% shave on 15-year holding is deemed by the Irish Government to be reasonable? Who do they think they are foolin?
Another interesting note: following the expression of it dissatisfaction with ‘loose’ borrowing by Spanish and Irish banks, the ECB started quietly talking to the banks urging them to fall in-line. Exactly the same has happened when the ECB issued its thinly veiled directive to Leni – ‘do not overpay for Nama assets’…
Monday, September 21, 2009
Saturday, September 19, 2009
Economics 19/09/2009: Nama, bondholders and shareholders
Setting aside, for now, the issue of who subsidises who in Nama, a quick note on opportunity cost of the undertaking when it comes to the structure of Irish Financial Services in general.
June 2009 paper from a group of US and Canadian researchers, published for the European Finance Association, 2009 meeting (here) provides an interesting read. The study delivers "...a comprehensive analysis of a new and increasingly important phenomenon: the simultaneous holding of both equity and debt claims of the same company by non-bank institutional investors (“dual holders”). The presence of dual holders offers a unique opportunity to assess the existence and magnitude of shareholder-creditor conflicts. We find that syndicated loans with dual holder participation have loan yield spreads that are 13-20 basis points lower than those without. The difference is even greater after controlling for the selection effect. Further investigation of dual holders’ investment horizons and changes in borrowers’ credit quality lends support to the hypothesis that incentive alignment between shareholders and creditors plays an important role in lowering loan yield spreads."
Without giving too much technical detail, the study effectively says that inducing greater share of bond holders to also hold equity (or vice versa) results in lower cost of credit to the firm.
Now, recall that my Nama3.0 or Nama Trust proposal (here) has, as one of the first conditions for taxpayer bailout, a full or partial conversion of Irish Banks' debt holders into equity holders. This would have achieved two positive outcomes simultaneously:
June 2009 paper from a group of US and Canadian researchers, published for the European Finance Association, 2009 meeting (here) provides an interesting read. The study delivers "...a comprehensive analysis of a new and increasingly important phenomenon: the simultaneous holding of both equity and debt claims of the same company by non-bank institutional investors (“dual holders”). The presence of dual holders offers a unique opportunity to assess the existence and magnitude of shareholder-creditor conflicts. We find that syndicated loans with dual holder participation have loan yield spreads that are 13-20 basis points lower than those without. The difference is even greater after controlling for the selection effect. Further investigation of dual holders’ investment horizons and changes in borrowers’ credit quality lends support to the hypothesis that incentive alignment between shareholders and creditors plays an important role in lowering loan yield spreads."
Without giving too much technical detail, the study effectively says that inducing greater share of bond holders to also hold equity (or vice versa) results in lower cost of credit to the firm.
Now, recall that my Nama3.0 or Nama Trust proposal (here) has, as one of the first conditions for taxpayer bailout, a full or partial conversion of Irish Banks' debt holders into equity holders. This would have achieved two positive outcomes simultaneously:
- reduce demand for taxpayer funds, while assuring that some private markets trading in banks' equity will remain post-Nama Trust implementation; and
- per above study, lead to a long term improvement in the cost of liquidity for Irish banks.
Friday, September 18, 2009
Economics 18/09/2009: An Illustration to the Idiot's Guide to Economics
Per chart below, average monthly bond spreads for Irish Government 10-years paper for the last 8 months.
We've read Brian Lenihan's lips and here is what he said:
August 2009 (here): "The proposal to establish a National Asset Management Agency has been widely supported internationally by bodies such as the IMF and the OECD and tellingly since
the announcement of the establishment of Nama in April, bond spreads above the German benchmark for Irish sovereign debt have halved, from almost 3 per cent over 10 year German Bonds to now just 1.5 per cent. Irish 10 year bond yields are now 4.8 per cent."
August 2009 (here): "Indeed, during May I had to undertake a tour of EU financial centres to correct misinformation that existed about Ireland. This tour had a positive impact and there has been a significant reduction in the spreads on the State’s borrowing."
Plenty more to be found in the same vein. So per chart above, we've read your lips, Minister and... they produce gibberish so far. As I have remarked on many occasions, Irish bond spreads decline was
And on a funny note (credit here)
and courtesy of bocktherobber :
We've read Brian Lenihan's lips and here is what he said:August 2009 (here): "The proposal to establish a National Asset Management Agency has been widely supported internationally by bodies such as the IMF and the OECD and tellingly since
the announcement of the establishment of Nama in April, bond spreads above the German benchmark for Irish sovereign debt have halved, from almost 3 per cent over 10 year German Bonds to now just 1.5 per cent. Irish 10 year bond yields are now 4.8 per cent."
August 2009 (here): "Indeed, during May I had to undertake a tour of EU financial centres to correct misinformation that existed about Ireland. This tour had a positive impact and there has been a significant reduction in the spreads on the State’s borrowing."
Plenty more to be found in the same vein. So per chart above, we've read your lips, Minister and... they produce gibberish so far. As I have remarked on many occasions, Irish bond spreads decline was
- in line with other countries (and in particular - with APIIGS);
- had more to do with the global change in appetite for risk and little-to-nothing to do with Minister Lenihan's decisions or policies;
- lastly, per chart above, while Minister Lenihan was trying to sell his disastrous policies to the nation on the back of declining bond spreads, Ireland has moved from the already dubiously distinctive position of being the second most screwed up economy in the Eurozone after Greece prior to May 2009 to being the worst economy in the Eurozone in terms of its bonds spreads over German bund since Minister Lenihan (per above quote) undertook his courageous road show to Europe.
And on a funny note (credit here)
and courtesy of bocktherobber :
Economics 18/09/2009: hard numbers for our delusional leaders
Retail sales for July gotta be hard read for our delusional leaders (here).
Per CSO release today: "The volume of retail sales (i.e. excluding price effects) decreased by 15.0% in July 2009 compared to July 2008. There was a monthly increase of 0.2%... partially explained by the increase in new motor sales in July 2008 that coincided with the introduction of the new VRT system." Ex Motor Trades retail sales decreased by 6.2% in July 2009 compared to July 2008 and fell -0.7% in monthly terms. Things are getting worse once again, after a short reprieve of June.
A good summary above (from Ulster Bank economics team). Food, Bars and Other Goods improved in monthly series, everything else is tanking. But all three categories of 'improved' goods are about people staying at home instead of leaving for a vacation, so here we go - have a sandwich and a pint instead of a break - Lenihanomics at work.
Few charts below (back to my favorite hobby):
It is worth noting that, of course, changes in our retail sales = changes in our VAT receipts. This said, can you spot where the 'No New Taxes' Lenihan's statement yesterday can be supported here?
Economics 18/09/2009: Idiot's guide to the Galaxy
One of my favorite books in the Universe, The Hitchhiker's Guide to the Galaxy has been surpassed, if only momentarily, by a publisher in Ireland producing this superb Idiots' Guide to Science and Economics. Behold, the front page of today's Indo:
Of course, Mary Coughlan's theory of Relativised Evolution or Evolutionised Relativity and the absolutely unfortunate nature of the venue at which she managed to live up to her well-deserved name 'Calamity Coughlan' are straight out of the chapter 'National Embarrassment Exemplified'. It is a serious public blemish on an otherwise worthy event of IDA launching a serious campaign to attract more FDI into Ireland that I wrote about before (here). No need to detail much here, Indo's article speaks volumes, one can wonder now as to what evolutionary process can lead to the emergence of the species so ignorant of basic knowledge as Mrs Coughlan. One note worth making - the fiasco perfectly exemplifies Kevin Meyers' excellent argument in the same paper today (I might not agree with it myself, but Mrs Coughlan has made his case iron-clad).
But Brian Lenihan's lack of grasp of simple realities of public finances and economics is as breathtaking as Mrs Coughlan's lack of basic erudition. After weeks of being fed drivel of FF backbenchers' and hacks' version of economic ("Nama bonds are not debt", "We will get cheap money from ECB", "ECB supports us" etc), it seems our own Finance Minister got convinced that there is such a thing as a Free Lunch. Per Indo's article here, Lenihan "gave his firmest pledge yet that there would be no tax hikes in the December Budget. And Mr Lenihan challenged anyone who doubted him to "watch my lips"... Mr Lenihan said he was committed to introducing a carbon tax... But he gave his clearest indication yet that the Government would not bring in a property or water tax this year. "I am not aware of any other (new tax hikes)," he said.
Ok, three Indo reporters (including senior ones) failed to actually query the details of this statement the Minister made. But the very fact that Lenihan actually said what he did is a testament to the fact that this Government has no real financial brains in the Cabinet at the time of fiscal and financial crises. None at all.
Per statement itself, Minister Lenihan obviously does not consider introduction of the Carbon tax to be a new tax. Presumably, he lived so long outside the real world, in the world of chauffeur driven Mercs and vast taxpayer-paid perks that he might be under the impression that Carbon tax already exists, so 'introducing' it will not constitute an imposition of a new charge on taxpayers.
The Minister also indicated that he has seen no other tax proposals (other than the Carbon Tax and Property Tax). Has he read his own Commission for Taxation voluminous report? Or has it escaped his field of view as the Lisbon Treaty volume had escaped Brian Cowen's view earlier?
Finally, the Minister has to be living in the surreal world where a €20bn-plus shortfall between tax receipts and liabilities can be covered by something other than taxes. Indo's journos refer to the possibility of €4bn savings on the expenditure side as the means for avoiding new taxes. Have they done a simple sum ever before? Has Minister Lenihan done a simple sum ever before?
Even if the Government does deliver on €4bn in savings, and even if part-year measures announced in April 2009 budget continue through the full year 2010, the entire savings will not be able to cover a quarter of the fiscal spending gap. If the Government commits to fully ending all capital expenditure in 2010 and if the economy grows by 5% in 2010, the expected fiscal gap will still be in excess of €8bn in 2010.
This money will have to be borrowed in the international markets. The roll-over of a vast sea of short-term debt issued in 2008-2009 will have to happen. Is Minister Lenihan really buying the idea that these state liabilities - some €30bn worth already accumulated, plus Nama's €54bn expected plus the ones awaiting NTMA's printing press on the back of long term unemployment increases into foreseeable future can be 'deflated' away at the current rates of spending and taxation without raising new taxes?
Well, only in the world where Einstein authored On the Origin of Species, perhaps?
Of course, Mary Coughlan's theory of Relativised Evolution or Evolutionised Relativity and the absolutely unfortunate nature of the venue at which she managed to live up to her well-deserved name 'Calamity Coughlan' are straight out of the chapter 'National Embarrassment Exemplified'. It is a serious public blemish on an otherwise worthy event of IDA launching a serious campaign to attract more FDI into Ireland that I wrote about before (here). No need to detail much here, Indo's article speaks volumes, one can wonder now as to what evolutionary process can lead to the emergence of the species so ignorant of basic knowledge as Mrs Coughlan. One note worth making - the fiasco perfectly exemplifies Kevin Meyers' excellent argument in the same paper today (I might not agree with it myself, but Mrs Coughlan has made his case iron-clad).But Brian Lenihan's lack of grasp of simple realities of public finances and economics is as breathtaking as Mrs Coughlan's lack of basic erudition. After weeks of being fed drivel of FF backbenchers' and hacks' version of economic ("Nama bonds are not debt", "We will get cheap money from ECB", "ECB supports us" etc), it seems our own Finance Minister got convinced that there is such a thing as a Free Lunch. Per Indo's article here, Lenihan "gave his firmest pledge yet that there would be no tax hikes in the December Budget. And Mr Lenihan challenged anyone who doubted him to "watch my lips"... Mr Lenihan said he was committed to introducing a carbon tax... But he gave his clearest indication yet that the Government would not bring in a property or water tax this year. "I am not aware of any other (new tax hikes)," he said.
Ok, three Indo reporters (including senior ones) failed to actually query the details of this statement the Minister made. But the very fact that Lenihan actually said what he did is a testament to the fact that this Government has no real financial brains in the Cabinet at the time of fiscal and financial crises. None at all.
Per statement itself, Minister Lenihan obviously does not consider introduction of the Carbon tax to be a new tax. Presumably, he lived so long outside the real world, in the world of chauffeur driven Mercs and vast taxpayer-paid perks that he might be under the impression that Carbon tax already exists, so 'introducing' it will not constitute an imposition of a new charge on taxpayers.
The Minister also indicated that he has seen no other tax proposals (other than the Carbon Tax and Property Tax). Has he read his own Commission for Taxation voluminous report? Or has it escaped his field of view as the Lisbon Treaty volume had escaped Brian Cowen's view earlier?
Finally, the Minister has to be living in the surreal world where a €20bn-plus shortfall between tax receipts and liabilities can be covered by something other than taxes. Indo's journos refer to the possibility of €4bn savings on the expenditure side as the means for avoiding new taxes. Have they done a simple sum ever before? Has Minister Lenihan done a simple sum ever before?
Even if the Government does deliver on €4bn in savings, and even if part-year measures announced in April 2009 budget continue through the full year 2010, the entire savings will not be able to cover a quarter of the fiscal spending gap. If the Government commits to fully ending all capital expenditure in 2010 and if the economy grows by 5% in 2010, the expected fiscal gap will still be in excess of €8bn in 2010.
This money will have to be borrowed in the international markets. The roll-over of a vast sea of short-term debt issued in 2008-2009 will have to happen. Is Minister Lenihan really buying the idea that these state liabilities - some €30bn worth already accumulated, plus Nama's €54bn expected plus the ones awaiting NTMA's printing press on the back of long term unemployment increases into foreseeable future can be 'deflated' away at the current rates of spending and taxation without raising new taxes?
Well, only in the world where Einstein authored On the Origin of Species, perhaps?
Wednesday, September 16, 2009
Irish Economy: a longer view
Yesterday I was asked to give a quick talk to the Marketing Institute - at a lovely breakfast gathering - on my view of Ireland's economic prospects. Here are the notes from my speech:
First, 'we are where we are'...
Fiscal problem - the real crisis:
Economy's problems: dead end in sight?
Alternatives to a slump: Doing the right thing
Reform public sector and policymaking: Introduce separation of payer and provider in public services. Let the state pay for access to service while we, the private sector, provide such services – growth opportunity space is converting some 20-25% of our GDP into world class competitive services and growing them by adding non-public customers.
Examples:
- Medical tourism
- Education
- Legal domiciling
- Logistics and distribution services
- Outsourced sales
- Marketing and advertising outsourcing?
Reduce the size of public sector and use this reduction to cut taxes on personal income at the upper margins. This introduces proper incentives for investment in Human Capital. It also feeds growing education sector that is actually productive.
Eliminate reliance on outsourcing bodies (Quangoes, FAS, Forfas and Social Partnership) in setting public policies. Rebate savings to taxpayers, but also force more direct democratic interactions between people and policies. Require that best practice analysis and economic feasibility (including environmental and social impact assessment) must be performed for any Government ‘investment’ – this improves quality of investment and returns.
Ireland as Western Hong Kong model
Make public procurement and salaries and wages costs transparent – publish them on the web.
Introduce Land Value Tax – infrastructure returns, reduced speculative holdings of land.
Abandon national spatial strategies – focus on Dublin, Cork, Galway and Limerick. This simply reflects the reality of where growth will be concentrated.
Reform immigration policies: we will still depend on inflow of talented foreigners, but we must incentivise these flows:
Hope is in a short supply, treat it carefully. We need some serious drastic changes and these will have to take place at the head of the table.
First, 'we are where we are'...
Fiscal problem - the real crisis:
- 2013= Euro 131bn or 91% of 2009 GNP, Euro 47,640 per adult person in debt. We will be spending 21.1% of our 2009 tax revenue servicing this debt – these are DofF projections-based estimates without Nama.
- With Nama up to 204bn in 2013, 140% of 2009 GNP or 74,200 euro per adult person. We will be spending 33% of our 2009 tax revenue on servicing the debt.
- In effect, Ireland’s debt servicing charge alone will be bigger than the entire health and social welfare bill today.
- It pays for three things - services (some we need, others we can do without), social welfare (mostly excessive in levels) and public sector wages and pensions (absurdly excessive burden). Not a hell of a lot for the loot they collect.
- Credit conditions will remain very tight in the country so old model of credit-fueled growth is out of the window.
- Households spending will be down, savings will rise, but capital will outflow abroad as banks lending abroad will increase.
- There will be net emigration out of Ireland and inward migration into Dublin.
- Higher taxes are here to stay.
- Opportunities will be limited on public and private sectors sides.
- Irish businesses will be locked in a zero sum game where domestic growth of one company will require domestic losses in another.
- The net cost is likely to be staggering – ca €6,000-12,000 per working-age adult person under benign assumptions.
- Economic cost will be even higher due to zombie banks, zombie developers.
- Even if Nama improves credit supply (doubtful for several reasons) it will destroy credit demand (no deleveraging is possible for the households).
- Investment will be limited to firms with international markets exposure, which means business models will have to change.
- We will be exporting brighter younger people, to be replaced by marginally brighter than the remaining Irish workers younger foreigners from the fringes of Europe and outside the EU – this means our business models will have to change. New consumers will spend minimum in Ireland and will expatriate more cash out in fear of immigration policy reversals and rising nationalism.
- Public sector will remain unreformed, if slightly demoralized, by failed efforts of introducing small reforms. Which means our business models will have to change for all those who relied on public contracts.
Economy's problems: dead end in sight?
- What is our ‘next big thing’? Do you know? I can’t see one.
- Is it ‘knowledge economy’? Not likely – late to the races, high taxes, wrong taxes, power rests with entrenched Social Partners (older, non-productive, fearful of competition). We over-rely on Government sponsored research. Private sector in Ireland is adaptive, not creative, which means it does not want to waste money on longer-term research projects.
- Knowledge economy will be happening in only a few bright spots: international finance will be back (can you leverage anything to get into this field?); few internationally traded services (TCD, UCD in education, some smaller education players; may be some private medicine, though unlikely; legal and tax services – but only domiciling into Ireland. One big and growing bright spot might be in MNCs shifting more into traded services areas (IBM model for some, start-up Googlelites, Facebookers etc).
- Domestic economy will see decline of the Irish Brands – we will be more Anglocized in terms of our consumption patterns, especially if Northern Ireland continues to open up to business.
- Is the future a ‘Green economy’? well, sort of – only with much fewer wind mills and other traditional ‘green’ production firms. Instead, there is room for using our countryside much smarter than we’ve been doing so far – tourism, smart and recovery health tourism and work-and-play tourism have some future, if we can clean up our act on bungalow blitz and passage rights with farmers. Also, smaller boutique producers of ‘green’ agricultural products have a future. But these are all small fry to sustain real growth. Spirit of Ireland is a good initiative, but will it fly or will ESB cronies shut it down?
- On house prices and property prices: peak to trough fall of 50-60% on average. Equilibrium, or long-run prices should be at 3.5-4 times average income. This roughly means 210-240,000 per house. This will be our long-time average. Trough will undershoot this target, so we can see 200,000 tested.
- Indigenous firms will not be looking at higher margin activities, e.g strategy and market expansion at home.
- Companies will be retooling to grow abroad.
- Europe will continue pursuing regulated markets model – can we get any value out of this? Not likely – loads of competitors closer to the feeding trough and loss of our own agility can spell a disaster for out incoming FDI.
- What do businesses need to grow in this environment – step out of the shell of ‘we are Irish, we are European’ and go for ‘we can bring you into Europe, help you grow in here and keep you as a happy client’ – don’t forget to translate this into Chinese?
Alternatives to a slump: Doing the right thing
Reform public sector and policymaking: Introduce separation of payer and provider in public services. Let the state pay for access to service while we, the private sector, provide such services – growth opportunity space is converting some 20-25% of our GDP into world class competitive services and growing them by adding non-public customers.
Examples:
- Medical tourism
- Education
- Legal domiciling
- Logistics and distribution services
- Outsourced sales
- Marketing and advertising outsourcing?
Reduce the size of public sector and use this reduction to cut taxes on personal income at the upper margins. This introduces proper incentives for investment in Human Capital. It also feeds growing education sector that is actually productive.
Eliminate reliance on outsourcing bodies (Quangoes, FAS, Forfas and Social Partnership) in setting public policies. Rebate savings to taxpayers, but also force more direct democratic interactions between people and policies. Require that best practice analysis and economic feasibility (including environmental and social impact assessment) must be performed for any Government ‘investment’ – this improves quality of investment and returns.
Ireland as Western Hong Kong model
Make public procurement and salaries and wages costs transparent – publish them on the web.
Introduce Land Value Tax – infrastructure returns, reduced speculative holdings of land.
Abandon national spatial strategies – focus on Dublin, Cork, Galway and Limerick. This simply reflects the reality of where growth will be concentrated.
Reform immigration policies: we will still depend on inflow of talented foreigners, but we must incentivise these flows:
- Create a meaningful Green Card – giving people full rights (save for voting) and allowing them to travel visa-free across the EU (Schengen plus UK). Green Card should be issued for 1 year, then 3 years, then permanent.
- Allow no access to welfare of any kind for the first 5 years of residence for all foreign nationals. Sign bilateral agreements with other EU states whereby Irish Government will as EU states to pay for their citizens’ access to social welfare and unemployment assistance and in exchange Ireland will assume provision of those services for Irish citizens abroad.
- Have language and educational/experience – tested system of admissions (not a sole route for entry, but one of them).
- Streamline citizenship naturalization to reduce red tape. Access to naturalization should be allowed on the points system basis – number of years in residence in Ireland, having Irish family members, employment type etc should add points and speed up both naturalization eligibility and the processing time to naturalization.
- We must allow those who try and fail to get up back on their feet, so personal and business bankruptcy restrictions should apply for 1 year at most, the record of bankruptcy should apply only for 3 years. It should be fully cleared after 3 years.
- Stop the idiotic practice of pursuing people personal assets in collection of mortgage arrears.
- Directorship disqualifications must be reduced to cases of clear abuse.
- Link regulators pay and pensions to their performance in office – assessable by the independent review board. If we pay them well, they should perform well.
- Reduce the number of regulators – does a small-town economy really need a Taxi Regulator? a SMS Regulator? and so on.
- Most of reform will come from abroad – EU, G20, Basle III. Most of these reform will be painful and costly – Nama Squared?
- Domestic reforms must include:
- Breaking a cozy ‘Old Boys’ cartel between banks and other elites. Sadly – we have no record of doing this even after all the banking scandals of the past;
- Introducing more competitive domestic banking by reducing market shares of Irish banks – sadly, we have no record of doing this either;
- Using Nama to bring more transparency into Irish banking – sadly, we are doing the opposite.
Hope is in a short supply, treat it carefully. We need some serious drastic changes and these will have to take place at the head of the table.
Economics 16/09/2009: IDA's latest news... breaking
I will blog on Nama latest figures tomorrow afternoon, so stay tuned, but for now - a piece of better news:
IDA will be launching a new campaign promoting Ireland as investment destination in the USofA. The campaign was prelaunched tonight for bloggers in advance of the official launch. It is impressive in scope (all top notch business media on top of the reliables – Airport ads etc – plus a bit more serious effort to build online presence) and relatively mild in message (more below). So mild, it seems to be slightly underwhelming.
Fair play to Barry O’Leary (Chief IDAologist) and his crew and campaign designers (McConnells) for actually braving the small crowd of usually unruly and unpredictable, often cranky and always suspicious bloggers. Trevor Holmes – IDA’s chief communicatologist, aka PR man – was actually very good in answering pointed stuff and taking a bit of a role of really giving us (the bloggers) some of our own medicine.
So the launch itself was a brave change of heart from the usually rather closed organization like IDA.
Let’s get to the substance.
Corporate brand advertising that is people-centric can be corny. Country brand advertising based on ‘Invest not in dollars, but people’ stuff is a bit corny and old. IDA used to do the same back in the 1970s and 80s, so what’s the BIG IDEA this time around?
Ok, on their web banners they have Facebook chieftain talking about what the company found in Ireland. Guess what – it is European workforce (same is the 1980s ads) and it is not Irish (novelty factor on the 1980s), but the one speaking 48 languages with native skill. You might as well be in London for that.
Microsoft’s Head is talking about how IDA is number one conduit for companies into Irish Government. I though that sort of ‘facilitation’ – important as it is to the companies – is not exactly something we want to highlight as a major selling point, at least not publicly in the airports. Children might conjure the imagery of Bertie Ahearne ‘facilitation’ at a football game somewhere in the UK, or our regulatory authorities engaging in banking sector ‘facilitations’ signing off on intra-banks deposits flows of slightly unusual variety. All fresh in the media minds internationally.
Funnily, when I asked the guys if they can ‘facilitate’ a financial funds management company with speeding up regulatory clearance to trade in Ireland, they immediately stressed that Ireland is not that sort of a country… Innocent me, I couldn’t see much wrong with helping companies to file papers at the FR office, especially when the same FR office got so facilitative of the banks in the recent past… Oh, but IDA can help with preparing documents and reasoning to be brought to the FR “to make the case for…” Hmmmm. Ok.
“Talents, scope and depth, languages spoken, diversity… and foremost Irishness…” are the themes. Judge for yourselves if this really confuses Ireland with a D2 - D4 (Googleland, language schools and TCD/UCD) cluster.
‘Natural creativity and curiosity of Irish’ themes. I know, it sounds bad. But do trust me, the ads are well designed and speak modern, clear and crisp language as are online materials - McConnells delivered again. IDA opened up their closed doors a bit here too with online campaign aiming to be more interactive with target audiences. Cuddos to McConnells Digital on that one - hard client to get to smile, but smiling is what IDA are doing with some parts of the campaign and it is good to see the Big Boys of Ireland Inc getting a little of confidence back. On the net, a good balance of simple messages, simple imagery and compelling arguments.
But there are few things that troubled me and some other bloggers.
One question I did ask Barry O’Leary was “IDA campaign is going to court Human Capital-intensive businesses for whom the costs of skilled labour and key talent are the main line of spending. Our Government officials will be talking about how we are doing the necessary things to restore economic growth and confidence. Are you concerned that this is the same Government that raised taxes on labour income impacting ‘knowledge’ economy’s future returns to human capital here?” The response I got suggested that yes, the IDA are concerned about the erosion of competitiveness (I presume that does include erosion of our competitiveness in ability to attract highly paid talent). So “tax increases are a concern, but [not too much as IDA prefer for the] …focus to remain on total offering and proposition of Ireland across different value chain segments”.
Is then IDA feeling boxed by the Government perverse policies and are searching to offset the cost of income tax and payroll costs with other concessions? Most likely.
Barry didn't mention if the ‘competitiveness’ concern also covers corporate tax. After all, given the hole Mr Cowen got this country into fiscally, and given that our households are already struggling under the massive burden of Nama and public sector wage bills and welfare rolls, what can be done next to ‘improve’ our fiscal situation other than start dipping into corporate Ireland’s pockets. Indirect taxes will rise for businesses and, quite possibly, there will be a push for higher corporate tax rate too.
A birdie told me that the Government has already discussed (at not a full Cabinet level, though, and I stress that is a tip-off that I am yet to fully confirm) a chance of raising a special corporate tax surcharge on domestic firms, but that they were told that this won’t fly with EU. Don’t worry – most likely, they’ll try again.
Barry was talking some good facts, though, and made a serious pitch as to why we need to get Ireland Inc back into raising the FDI game – something that has been hard to get (although IDA did achieve good progress this year against all odds) in the first 6-8 months of this year. I agree with him fully – and I must add that IDA and EI are about the only two agencies in town that are still doing their jobs (I am sure improvements can be made in both, but hey, in the age of FAS, Forfas, HSE, and the rest of public sector, at least IDA and EI give us some return for money).
When it comes to target businesses, again, there was no BIG NEW THEME – IDA is going after reliable favorites: life sciences (pharma, biopharma and medical devices), ICT&IT, global services (SCM, technical support, financial & shared services). Not a hell of a lot of ‘innovation’ stuff? True, but they are looking at the “Innovation sector: IT&ICT primarily, Hewlet Packard, Intel, IBM, etc; life sciences area (pharma, biopharm, medical devices), international financial services, globally traded business services – digital media, etc and old engineering portfolio.”
So everything flies. A true picture of diversity? I’ve asked the guys: “Loads of smaller companies would probably like to enter European markets through Ireland. What are you doing for them?” It is a loaded question and Trevor Holmes was good answering it – to the point: “can help with limited pilot, test beds”. Better than nothing, but, honestly, not much. The mandate, you see, is still about bringing Big Sharks in, not the smaller Barracudas.
There was a hint of something yet to come – Trevor mentioned that the IDA are working on several new ideas as to how they can facilitate incubation of smaller promising start ups willing to settle in Ireland. That’s the stuff I would love to find out more about. Some years ago I mentioned the idea of incubator for Ireland-bound startups in financial services in a conversation to Barry O’Leary. May be finally the idea has sunk in? Alas, no details were given.
Per Barry O’Leary: “Competition globally for FDI – OECD says it is down globally 30% in 2009, and more competitors in the market – margin squeeze on both ends.” Fair point and the timing of this campaign is spot on too – the US market is about to go into new investment cycle, and we should be ahead of the curve (although the IDA team failed to actually identify this as an opportunity explicitly when they were probed by the bloggers). “We are competitive in combined development and manufacturing, but not in manufacturing alone”. Another good point, and backed by the evidence on what IDA has been bringing into the country over the last year.
Final point – per Barry O’Leary – is that “Strategic review of IDA is 6-8 weeks before conclusion looking at changes and adaptations to such new product offerings in Ireland as smaller digital media companies…”
Looking forward to hearing more on that one.
IDA will be launching a new campaign promoting Ireland as investment destination in the USofA. The campaign was prelaunched tonight for bloggers in advance of the official launch. It is impressive in scope (all top notch business media on top of the reliables – Airport ads etc – plus a bit more serious effort to build online presence) and relatively mild in message (more below). So mild, it seems to be slightly underwhelming.
Fair play to Barry O’Leary (Chief IDAologist) and his crew and campaign designers (McConnells) for actually braving the small crowd of usually unruly and unpredictable, often cranky and always suspicious bloggers. Trevor Holmes – IDA’s chief communicatologist, aka PR man – was actually very good in answering pointed stuff and taking a bit of a role of really giving us (the bloggers) some of our own medicine.
So the launch itself was a brave change of heart from the usually rather closed organization like IDA.
Let’s get to the substance.
Corporate brand advertising that is people-centric can be corny. Country brand advertising based on ‘Invest not in dollars, but people’ stuff is a bit corny and old. IDA used to do the same back in the 1970s and 80s, so what’s the BIG IDEA this time around?
Ok, on their web banners they have Facebook chieftain talking about what the company found in Ireland. Guess what – it is European workforce (same is the 1980s ads) and it is not Irish (novelty factor on the 1980s), but the one speaking 48 languages with native skill. You might as well be in London for that.
Microsoft’s Head is talking about how IDA is number one conduit for companies into Irish Government. I though that sort of ‘facilitation’ – important as it is to the companies – is not exactly something we want to highlight as a major selling point, at least not publicly in the airports. Children might conjure the imagery of Bertie Ahearne ‘facilitation’ at a football game somewhere in the UK, or our regulatory authorities engaging in banking sector ‘facilitations’ signing off on intra-banks deposits flows of slightly unusual variety. All fresh in the media minds internationally.
Funnily, when I asked the guys if they can ‘facilitate’ a financial funds management company with speeding up regulatory clearance to trade in Ireland, they immediately stressed that Ireland is not that sort of a country… Innocent me, I couldn’t see much wrong with helping companies to file papers at the FR office, especially when the same FR office got so facilitative of the banks in the recent past… Oh, but IDA can help with preparing documents and reasoning to be brought to the FR “to make the case for…” Hmmmm. Ok.
“Talents, scope and depth, languages spoken, diversity… and foremost Irishness…” are the themes. Judge for yourselves if this really confuses Ireland with a D2 - D4 (Googleland, language schools and TCD/UCD) cluster.
‘Natural creativity and curiosity of Irish’ themes. I know, it sounds bad. But do trust me, the ads are well designed and speak modern, clear and crisp language as are online materials - McConnells delivered again. IDA opened up their closed doors a bit here too with online campaign aiming to be more interactive with target audiences. Cuddos to McConnells Digital on that one - hard client to get to smile, but smiling is what IDA are doing with some parts of the campaign and it is good to see the Big Boys of Ireland Inc getting a little of confidence back. On the net, a good balance of simple messages, simple imagery and compelling arguments.
But there are few things that troubled me and some other bloggers.
- Are these ads truthful: IDA referred in presentation to IMI research that allegedly proves these directly. I am not sure – would have to see this piece of research to believe it. But the campaign itself does not mention any research. So you are invited to find out for yourself and herein opens a world of our low achievement in the areas of science, relatively average achievements in education and an abysmal record on early and continued education.
- The ads mention Ireland’s promise in Green energy (not as a distant future, but as current reality). In a country with ESB plants belching smokestacks and heavy reliance on oil to generate one of the most expensive power supplies in Europe, this sounds slightly funny. To be truthful, we had Airtricity – an international success story, but it barely had any significant investments in Ireland proper, preferring to do business in… you’ve guessed it – UsofA. And UK. So who’s ‘greener’?
- On the same day of the IDA blogger launch, I was speaking to the National Advisory Science Council about my view as to why our R&D and science policies (core innovation inputs) might be in trouble. Innovation Ireland, my eye.
- Funnily, me recalls seeing in Fortune and Forbes ads for Azerbaijan and Kazakhstan as places where you too can invest not in dollars but in people and innovation... not exactly in same words, but the same message.
One question I did ask Barry O’Leary was “IDA campaign is going to court Human Capital-intensive businesses for whom the costs of skilled labour and key talent are the main line of spending. Our Government officials will be talking about how we are doing the necessary things to restore economic growth and confidence. Are you concerned that this is the same Government that raised taxes on labour income impacting ‘knowledge’ economy’s future returns to human capital here?” The response I got suggested that yes, the IDA are concerned about the erosion of competitiveness (I presume that does include erosion of our competitiveness in ability to attract highly paid talent). So “tax increases are a concern, but [not too much as IDA prefer for the] …focus to remain on total offering and proposition of Ireland across different value chain segments”.
Is then IDA feeling boxed by the Government perverse policies and are searching to offset the cost of income tax and payroll costs with other concessions? Most likely.
Barry didn't mention if the ‘competitiveness’ concern also covers corporate tax. After all, given the hole Mr Cowen got this country into fiscally, and given that our households are already struggling under the massive burden of Nama and public sector wage bills and welfare rolls, what can be done next to ‘improve’ our fiscal situation other than start dipping into corporate Ireland’s pockets. Indirect taxes will rise for businesses and, quite possibly, there will be a push for higher corporate tax rate too.
A birdie told me that the Government has already discussed (at not a full Cabinet level, though, and I stress that is a tip-off that I am yet to fully confirm) a chance of raising a special corporate tax surcharge on domestic firms, but that they were told that this won’t fly with EU. Don’t worry – most likely, they’ll try again.
Barry was talking some good facts, though, and made a serious pitch as to why we need to get Ireland Inc back into raising the FDI game – something that has been hard to get (although IDA did achieve good progress this year against all odds) in the first 6-8 months of this year. I agree with him fully – and I must add that IDA and EI are about the only two agencies in town that are still doing their jobs (I am sure improvements can be made in both, but hey, in the age of FAS, Forfas, HSE, and the rest of public sector, at least IDA and EI give us some return for money).
When it comes to target businesses, again, there was no BIG NEW THEME – IDA is going after reliable favorites: life sciences (pharma, biopharma and medical devices), ICT&IT, global services (SCM, technical support, financial & shared services). Not a hell of a lot of ‘innovation’ stuff? True, but they are looking at the “Innovation sector: IT&ICT primarily, Hewlet Packard, Intel, IBM, etc; life sciences area (pharma, biopharm, medical devices), international financial services, globally traded business services – digital media, etc and old engineering portfolio.”
So everything flies. A true picture of diversity? I’ve asked the guys: “Loads of smaller companies would probably like to enter European markets through Ireland. What are you doing for them?” It is a loaded question and Trevor Holmes was good answering it – to the point: “can help with limited pilot, test beds”. Better than nothing, but, honestly, not much. The mandate, you see, is still about bringing Big Sharks in, not the smaller Barracudas.
There was a hint of something yet to come – Trevor mentioned that the IDA are working on several new ideas as to how they can facilitate incubation of smaller promising start ups willing to settle in Ireland. That’s the stuff I would love to find out more about. Some years ago I mentioned the idea of incubator for Ireland-bound startups in financial services in a conversation to Barry O’Leary. May be finally the idea has sunk in? Alas, no details were given.
Per Barry O’Leary: “Competition globally for FDI – OECD says it is down globally 30% in 2009, and more competitors in the market – margin squeeze on both ends.” Fair point and the timing of this campaign is spot on too – the US market is about to go into new investment cycle, and we should be ahead of the curve (although the IDA team failed to actually identify this as an opportunity explicitly when they were probed by the bloggers). “We are competitive in combined development and manufacturing, but not in manufacturing alone”. Another good point, and backed by the evidence on what IDA has been bringing into the country over the last year.
Final point – per Barry O’Leary – is that “Strategic review of IDA is 6-8 weeks before conclusion looking at changes and adaptations to such new product offerings in Ireland as smaller digital media companies…”
Looking forward to hearing more on that one.
Tuesday, September 15, 2009
Economics 15/09/2009: Why there is no hope...
This is, to put it in PMD's words, why there is no hope for long term growth in Ireland (here).
Throughout the years of Celtic Tiger, the Social Partnership presided over:
The self-appointed guardians of the public interest - our NGOs and trade unions - had their leadership firmly at the trough which was filled by the Government with the taxpayers cash. It is their signatures that grace every Partnership Agreement. It is their leaders who enjoyed FAS hospitality on the state body board. Their counterparts on employers' side, at the very least, had a better taste of not pretending to stand in for the little man's interest.
Now that the pipeline is dry, the Partnership unravelled. Yet, instead of fighting the legacy of the clientilist, anti-democratic, corporatist reminders of the 1930s, our 'Opposition' parties prefer to advocate the continuation of the political order that assured the current crisis.
Irony? It would be, if not for the lack of alternatives at a voting booth.
Future growth, especially future sustainable growth, will have to rely on freeing economy from the shackles of the policy making exercise that is conducted by those who add no value through their labor and are reliant only on state transfers (of money via subsidies or customers via restricted access) to stay in business. It is that simple, folks. Public sector, FAS, Forfas, all of our Departments add no real value to either productivity growth in this country or to the productive capacity of this country in general. At the very best, they can provide support. Companies are not run by their administrative assistants they are run by entrepreneurs and key personnel at the coalface of productive processes. Neither are economies.
Until the entire political class of Ireland understands it (and thus accepts the logical proposition that follows from it, namely that the Social Partnership is a problem, not a solution), my forecast for Ireland's long term growth will remain 0-1%pa. Good luck sustaining Brian Cowen's salary on this...
Throughout the years of Celtic Tiger, the Social Partnership presided over:
- The planning system and spatial development strategies that assured the current crisis in property markets and locked tens of thousands of Irish residents in the 'commuter belt' - slaves to cars, spending hours on the roads, and now also facing punitive taxes (here);
- The tax system that created all the incentives for generation of the housing and credit bubble in the economy as it benefited the political, unions and 'Social Pillar' partners at a cost of gross mismanagement and even abuses of public trust;
- The system of governance and policy formation that made FAS, Benchmarking and the likes of HSE inevitable outcomes of paucity and culture of entitlement that exemplify Ireland;
- Vast transfers of wealth from the private sector taxpayers to public sector and political classes via ESOTs, privatization payoffs and exclusive employment contracts that are the legacy of the state in former state enterprises;
- Inchydoney Accord, Bertie Ahearn's 'Socialism' and Brian Cowen profligate spending in the budgets of 2005-2008 all were the direct corollaries of the unaccountable and feudal system of economic policy formation that relied on this cronyist 'Good Old Boys Club' operating behind the closed doors - the princely court at which the Bearded Men of the Social Pillar/Unions were outnumbering 3:1 the business representatives and at which the taxpayer was represented by the economic pie being sliced and served;
- Retarded competition in the domestic markets that benefited the clients of the state, and so on.
The self-appointed guardians of the public interest - our NGOs and trade unions - had their leadership firmly at the trough which was filled by the Government with the taxpayers cash. It is their signatures that grace every Partnership Agreement. It is their leaders who enjoyed FAS hospitality on the state body board. Their counterparts on employers' side, at the very least, had a better taste of not pretending to stand in for the little man's interest.
Now that the pipeline is dry, the Partnership unravelled. Yet, instead of fighting the legacy of the clientilist, anti-democratic, corporatist reminders of the 1930s, our 'Opposition' parties prefer to advocate the continuation of the political order that assured the current crisis.
Irony? It would be, if not for the lack of alternatives at a voting booth.
Future growth, especially future sustainable growth, will have to rely on freeing economy from the shackles of the policy making exercise that is conducted by those who add no value through their labor and are reliant only on state transfers (of money via subsidies or customers via restricted access) to stay in business. It is that simple, folks. Public sector, FAS, Forfas, all of our Departments add no real value to either productivity growth in this country or to the productive capacity of this country in general. At the very best, they can provide support. Companies are not run by their administrative assistants they are run by entrepreneurs and key personnel at the coalface of productive processes. Neither are economies.
Until the entire political class of Ireland understands it (and thus accepts the logical proposition that follows from it, namely that the Social Partnership is a problem, not a solution), my forecast for Ireland's long term growth will remain 0-1%pa. Good luck sustaining Brian Cowen's salary on this...
Saturday, September 12, 2009
Economics 12/09/2009: More NAMA lies exposed
One interesting observation on Nama and a quick follow up to the developing story on ECB alleged unwillingness to deal with nationalized banks.
We, on the critics of Nama side, have expended much gunpowder arguing that there is a natural, legally binding order of rights contained in each asset class held by investors in and lenders to the banks. This order requires that first to take the hit in any balance sheet adjustment will be the shareholders. Then the subordinated debt holders and lastly the secured debt holders. This argument is used by myself and others to show that taxpayer must be last in the firing line - after all of the above take their dose of bitter medicine.
Yet in all of this excitement we forgot the humble contractors. Now, many of the loans Nama will buy into will be written against properties on which some work has been performed in the recent past, or is even ongoing today. The problem is, our heroic developers in many cases have not paid their bills to the contractors providing this work. As far as I can understand, these unpaid contractors are the holders of the priority right on repayment in the case of liquidation of the development firm - ahead of the bank holding lien on the property.
Of course, Nama can go and tell the larger contractors that, look guys, you forget your claims on work done, write it off as a loss on your taxes and we will look after you when time comes to finish the properties. Smaller contractors will be simply told to get lost - suing the state (Nama) is a very expensive business for them. This is dandy in the banana republic we live in. But estimated (rumored) 30% of the properties Nama will claim under loans purchases will be outside this state - in countries like the USA, UK, France, Germany, Bulgaria, Romania. Nama has no sway there and their courts are not going to toe Brian Lenihan's line of National Interest. So in these countries, the unpaid or underpaid contractors can seize the properties ahead of Nama, leaving Nama with loans devoid of collateral.
This should be fun to watch as our legal eagles from Nama fly over to, say,
Now to the issue of ECB. Several of us - again from the Nama critics or sceptics - have done some digging on the issue. What my colleagues now firmly claim is that per their sources, there is a mandate on the ECB to actually treat publicly owned banks in exactly the same way as privately held banks so as not privilege the former over the latter.
Here is what I have found:
Per ECB own research paper The European Central Bank: History, Role and Functions written by Hanspeter K Scheller (link to it here) (Second revised edition, 2006), Annex I provides excerpts from the Treaty Establishing the European Community, Part 3 Community Policies, Title VII: Economic and monetary policy, Chapter 1 "Economic Policy":
"Article 101
1. Overdraft facilities or any other type of credit facility with the ECB or with the central banks of the Member States (hereinafter referred to as ‘national central banks’) in favour of Community institutions or bodies, central governments, regional, local or other public authorities, other bodies governed by public law, or public undertakings of Member States shall be prohibited, as shall the purchase directly from them by the ECB or national central banks of debt instruments.
2. Paragraph 1 shall not apply to publicly owned credit institutions which, in the context of the supply of reserves by central banks, shall be given the same treatment by national central banks and the ECB as private credit institutions."
Emphasis is mine. This clearly states that the pro-Nama supporters are simply wrong in claiming that the ECB will treat nationalized banks or Trust-owned banks any different from the privately held banks.
Further quoting from the same ECB publication:
"Article 21 Operations with public entities
21.1. In accordance with Article 101 of this Treaty, overdrafts or any other type of credit facility with the ECB or with the national central banks in favour of Community institutions or bodies, central governments, regional, local or other public authorities, other bodies governed by public law, or public undertakings of Member States shall be prohibited, as shall the purchase directly from them by the ECB or national central banks of debt instruments.
21.2. The ECB and national central banks may act as fiscal agents for the entities referred to in Article 21.1.
21.3. The provisions of this Article shall not apply to publicly owned credit institutions which, in the context of the supply of reserves by central banks, shall be given the same treatment by national central banks and the ECB as private credit institutions."
So the same stands. Now, last year, the ECB issued clarification on Article 101 prohibitions of financing (here) which actually stresses that this prohibition (restricting Central Banks from providing ‘overdraft facilities or any other type of credit facilities with the ECB or with the central banks of the Member States … in favour of …public authorities, other bodies governed by public law, or public undertakings' and Article 21.1 of the ECB Statute that mirrors this provision):
Here is another interesting factoid. Chart below clearly shows that many European countries operate state owned banks. In Germany, for example the market share of state-owned banks is in excess of 40%.
Source: http://ssrn.com/abstract=1360698
Are pro-Nama advocates saying that these banks have no access to ECB's discount window as well? Or will ECB treat them somehow differently from the nationalized Irish banks? If the latter is true, should this be kept hidden from the Lisbon Treaty debate? (Now, personally, I do not believe Irish banks, if nationalized, will have any trouble in raising funding either via ECB or via private markets, so the above question is a rhetorical one).
Now, logic of Article 1 as stated above, actually suggests that the ECB will have harder time allowing Nama - a state-owned non-credit institution explicitly prohibited from obtaining financing from the ECB - to swap its own bonds for ECB's cash than it would allow state-owned bank - a credit institution explicitly allowed to obtain such funding from ECB - to do so. ECB's own paper and legal opinions are confirming, therefore that it is Nama, not the nationalized banks, that would have much harder time getting support from the ECB!
We, on the critics of Nama side, have expended much gunpowder arguing that there is a natural, legally binding order of rights contained in each asset class held by investors in and lenders to the banks. This order requires that first to take the hit in any balance sheet adjustment will be the shareholders. Then the subordinated debt holders and lastly the secured debt holders. This argument is used by myself and others to show that taxpayer must be last in the firing line - after all of the above take their dose of bitter medicine.
Yet in all of this excitement we forgot the humble contractors. Now, many of the loans Nama will buy into will be written against properties on which some work has been performed in the recent past, or is even ongoing today. The problem is, our heroic developers in many cases have not paid their bills to the contractors providing this work. As far as I can understand, these unpaid contractors are the holders of the priority right on repayment in the case of liquidation of the development firm - ahead of the bank holding lien on the property.
Of course, Nama can go and tell the larger contractors that, look guys, you forget your claims on work done, write it off as a loss on your taxes and we will look after you when time comes to finish the properties. Smaller contractors will be simply told to get lost - suing the state (Nama) is a very expensive business for them. This is dandy in the banana republic we live in. But estimated (rumored) 30% of the properties Nama will claim under loans purchases will be outside this state - in countries like the USA, UK, France, Germany, Bulgaria, Romania. Nama has no sway there and their courts are not going to toe Brian Lenihan's line of National Interest. So in these countries, the unpaid or underpaid contractors can seize the properties ahead of Nama, leaving Nama with loans devoid of collateral.
This should be fun to watch as our legal eagles from Nama fly over to, say,
- Newcastle to fight the UK system that treats people supplying work as real corporate citizens with real rights; or
- Plovdiv to fight Bulgarian courts, where a leather-jacketed Petar would have to explain to them that if you owe money to his cousin, you either should leave now and forget about that unfinished apartment complex 'with amazing views of the local dump' or risk never seeing your own little 4-bed in Howth ever again.
Now to the issue of ECB. Several of us - again from the Nama critics or sceptics - have done some digging on the issue. What my colleagues now firmly claim is that per their sources, there is a mandate on the ECB to actually treat publicly owned banks in exactly the same way as privately held banks so as not privilege the former over the latter.
Here is what I have found:
Per ECB own research paper The European Central Bank: History, Role and Functions written by Hanspeter K Scheller (link to it here) (Second revised edition, 2006), Annex I provides excerpts from the Treaty Establishing the European Community, Part 3 Community Policies, Title VII: Economic and monetary policy, Chapter 1 "Economic Policy":
"Article 101
1. Overdraft facilities or any other type of credit facility with the ECB or with the central banks of the Member States (hereinafter referred to as ‘national central banks’) in favour of Community institutions or bodies, central governments, regional, local or other public authorities, other bodies governed by public law, or public undertakings of Member States shall be prohibited, as shall the purchase directly from them by the ECB or national central banks of debt instruments.
2. Paragraph 1 shall not apply to publicly owned credit institutions which, in the context of the supply of reserves by central banks, shall be given the same treatment by national central banks and the ECB as private credit institutions."
Emphasis is mine. This clearly states that the pro-Nama supporters are simply wrong in claiming that the ECB will treat nationalized banks or Trust-owned banks any different from the privately held banks.
Further quoting from the same ECB publication:
"Article 21 Operations with public entities
21.1. In accordance with Article 101 of this Treaty, overdrafts or any other type of credit facility with the ECB or with the national central banks in favour of Community institutions or bodies, central governments, regional, local or other public authorities, other bodies governed by public law, or public undertakings of Member States shall be prohibited, as shall the purchase directly from them by the ECB or national central banks of debt instruments.
21.2. The ECB and national central banks may act as fiscal agents for the entities referred to in Article 21.1.
21.3. The provisions of this Article shall not apply to publicly owned credit institutions which, in the context of the supply of reserves by central banks, shall be given the same treatment by national central banks and the ECB as private credit institutions."
So the same stands. Now, last year, the ECB issued clarification on Article 101 prohibitions of financing (here) which actually stresses that this prohibition (restricting Central Banks from providing ‘overdraft facilities or any other type of credit facilities with the ECB or with the central banks of the Member States … in favour of …public authorities, other bodies governed by public law, or public undertakings' and Article 21.1 of the ECB Statute that mirrors this provision):
- also applies to any financing of the public sector’s obligations vis-à-vis third parties (so technically, either Nama as a state-own undertaking cannot borrow in the future from the ECB via debt issuance of its own - which will imply that Nama own bonds will have to be priced for sale in private markets only, implying horrific cost to the taxpayers of financing Nama work-out, or nationalized banks will have exactly the same access to the ECB lending in the future as Nama will) and
- crucially, that in dealing with publicly owned credit institutions there is no restriction of Article 1 under the ECB statues.
Here is another interesting factoid. Chart below clearly shows that many European countries operate state owned banks. In Germany, for example the market share of state-owned banks is in excess of 40%.
Source: http://ssrn.com/abstract=1360698Are pro-Nama advocates saying that these banks have no access to ECB's discount window as well? Or will ECB treat them somehow differently from the nationalized Irish banks? If the latter is true, should this be kept hidden from the Lisbon Treaty debate? (Now, personally, I do not believe Irish banks, if nationalized, will have any trouble in raising funding either via ECB or via private markets, so the above question is a rhetorical one).
Now, logic of Article 1 as stated above, actually suggests that the ECB will have harder time allowing Nama - a state-owned non-credit institution explicitly prohibited from obtaining financing from the ECB - to swap its own bonds for ECB's cash than it would allow state-owned bank - a credit institution explicitly allowed to obtain such funding from ECB - to do so. ECB's own paper and legal opinions are confirming, therefore that it is Nama, not the nationalized banks, that would have much harder time getting support from the ECB!
Economics 12/09/2009: ECB, repos and Nama
It has not became customary for the Government and public officials to provide 'expert commentary' on Nama that in effect attempts to deflect substantive criticism by making unarguable, non-falsifiable assertions on Nama that can neither be confirmed, nor rejected, yes sound plausibly informed.
The latest such 'argument' against Nama critics floated in political circles - opposition parties, FF backbenchers etc - is that, per DofF, ECB will not be willing to take repo bond off nationalized banks.
What does this mean? In the lingo of Nama-supporters, this means that if we nationalize banks (either via a direct nationalization or via equity purchases post-Nama), the nationalized banks will not be able to use Nama bonds (or any other repurchase agreements paper) to swap with ECB for cash. The threat then is that the nationalized banks will have no access to a liquidity window at ECB and will not be able to operate.
Is this a serious threat? If true, it is a serious concern, because in our 'confident' economy of Ireland Inc, a combination of severe recession and Brian Cowen's economic (taxation) policies have effectively assured that no deposit-based lending can take place, so our banks are now fully reliant for funding on ECB and interbank markets.
But is it true? This we do not know and we cannot know, for DofF will neither confirm of deny they are saying this. And furthermore, they will never actually show the ECB statement confirming or denying it.
So what can we conclude about this threat?
Two things, really:
The latest such 'argument' against Nama critics floated in political circles - opposition parties, FF backbenchers etc - is that, per DofF, ECB will not be willing to take repo bond off nationalized banks.
What does this mean? In the lingo of Nama-supporters, this means that if we nationalize banks (either via a direct nationalization or via equity purchases post-Nama), the nationalized banks will not be able to use Nama bonds (or any other repurchase agreements paper) to swap with ECB for cash. The threat then is that the nationalized banks will have no access to a liquidity window at ECB and will not be able to operate.
Is this a serious threat? If true, it is a serious concern, because in our 'confident' economy of Ireland Inc, a combination of severe recession and Brian Cowen's economic (taxation) policies have effectively assured that no deposit-based lending can take place, so our banks are now fully reliant for funding on ECB and interbank markets.
But is it true? This we do not know and we cannot know, for DofF will neither confirm of deny they are saying this. And furthermore, they will never actually show the ECB statement confirming or denying it.
So what can we conclude about this threat?
Two things, really:
- The latest DofF threat is bogus in its nature, for there are plenty proposals out there for repairing Nama that do not involve nationalization. If ECB is willing to support privately held banks (as opposed to plcs) and since ECB's definition of a 'supported' bank does not have a limit on how large share of public ownership can be as long as the bank remain private to some extent, then my proposal for Nama 3.0 or Nama Trust will work just fine. The alleged DofF 'fear' is misplaced and it is being floated out there simply to deflect public attention away from viable alternatives to Nama.
- The latest claim is also bogus in terms of its logic. Suppose the ECB refuses to swap repos coming through a nationalized bank from Ireland. Since nationalization covers the entire domestic banking sector in Ireland, the ECB then refuses to take any bonds from any of the Irish banks, making the entire system of Irish banking illiquid. Now, Ireland is a Eurozone country. This act by ECB will force at least one Eurozone country into a combined liquidity and solvency meltdown. What do you think will be the expected effect on the Euro? Oh, yes, it will overnight become a twin to the Zimbabwean currency. Will the ECB agree to destroy its own reputation, monetary system and currency only to avoid repurchase operations with a more stable and less risky (post-nationalization) banking system of its member state?
Friday, September 11, 2009
Economics 11/09/2009: Nama gets some deserved bashing
Brilliant Nama analysis from DKM (available here). Please, do read the whole thing!
Few quotes and comments (emphases are my throughout):
On recovery sources:
“The best that Irish policy makers can do is cheer on the signs of recovery in the Euro area and in the US. Recovery in our main export markets – although far from certain – is likely to be the only source of real green shoots next year.”
And this is not because our banks can’t function without a bailout. It is because our economy has been demolished and demoralized by the public policy that wastes taxpayers cash in tens of billions and taxes Irish workers into consumption growth oblivion. Will Nama solve it or make it better? No. Nama will take tens of billions more out of taxpayers hands and put the money into banks. Banks can do the following with the cash that is surplus on their capital reserves:
1) Lend out to Irish – already heavily leveraged businesses, earning a rate of return on these loans of 3-4%pa at best (they currently earn around 2-3% on their past loans); or
2) Buy European corporate bonds yielding 5-7% pa (blue chips).
Anyone’s guess what they will do with cash? For DKM it is a no-brainer: “Certainly it is hard to see the reconstruction of the banking system through the creation of NAMA contributing much to short-term recovery in the economy. Indeed, it could be argued that there is a very real danger that the operation of NAMA, subject as it is bound to be to the political whims of the moment, could have a prolonged negative impact on construction capital spending in the economy for years to come.”
“It is a racing certainty that the 2010 Budget … will involve substantial cuts in government spending, especially capital spending, and increases in taxes and charges. This reduction in public spending will take place against a background of highly depressed private demand which shows few signs of picking up. ...justified by the need to curtail public borrowing for the sake of future generations (and for the sake of the interest rate margins Ireland has to pay over German borrowing costs). Yet at the same time the Government is proposing to borrow massive amounts – which could be more than all the existing government debt outstanding – in order to become the virtual monopoly developer of land and property in the State for the next decade. It is as if public policy is being determined by the mad offspring of Hugo Chavez and Margaret Thatcher.”
Well, Thatcher reference is overdone - Brian Cowen has shown no ability to deliver any serious cuts in public spending so far. Plus Thatcher actually lowered tax burden. Nonetheless, amazingly, this simple reality of an inherent unresolvable contradiction between two policies pursued by the Government did not occur to that brilliant legal (i.e logic-trained) mind of Brian Lenihan. How?
“Enduring economic hardship now so that the State can become the sole lender to the property sector is a difficult sell.” Yes, folks, ‘Nama will work’ slogan is equivalent to ‘Speculative development and investments will work’ slogan. And we learned a thing or two about the latter one, haven’t we?
“The concept of NAMA was born out of a report by Dr. Peter Bacon, an economist turned property developer.” A pearl!
On Nama effectiveness in terms of credit flow restoration:
“The most likely use of the funds supplied by the NAMA purchases will be to reduce reliance on overseas funding especially funding in the wholesale money markets. In effect the balance sheets of Irish banks will shrink as assets are transferred to NAMA and foreign liabilities repaid. This may lead to a more sustainable banking system but will not lead to an expansion in credit.”
But have they – Leni, Coweee, Ah!Earn & Co – listened to any suggestions for bettering Nama? “The official response to the criticisms of the original NAMA proposals has been ad hoc, indicating that policy is being made on the hoof.”
“The question of the bank valuation of a property related loan versus a “market” value becomes more acute when it is realised that NAMA proposes to acquire performing loans… …It will be difficult for NAMA to pay less than the value of the loan to the bank from which the loan is acquired without substantial risk of litigation. Even if the management of banks is cowed by the scale of the public shareholding in the bank there would be no such constraint on private shareholders especially bondholders who face losses due to the acquisition by NAMA of assets at too low a price.”
Now, Brian Lenihan has absolutely no understanding of either finance or economics. Fine. No one is holding it against him personally. But he is a lawyer! Can he not see this argument coming?
“Defenders of NAMA have pointed out that it is a requirement of the EC that the long run economic value be paid for the loans. … this requirement is designed to prevent national governments from over-paying for loans and so subsidizing domestic banks at the expense of competing banks located in other jurisdictions. In any event it now appears that NAMA will not be paying the long run economic value for loans acquired from the banks.”
“The most recent suggestion is that the banks will receive part of the consideration in the form of a bond whose value will depend on the recovery rate of NAMA. This risk sharing sounds attractive but it begs the question as to how the bonds will be accounted for on the banks’ balance sheets.” This is exactly what I’ve been warning about in my recent blog post (here).
“The more enthusiastic supporters of NAMA have begun to sound like stockbrokers promoting an IPO. [Well, it is an IPO for them, for absent Nama, real value of banks shares is near nil – they are insolvent!] NAMA, it is asserted, will be profitable. On analysis, some part of its profit will arise from arbitraging the yield curve. By borrowing short – through the issue of floating rate bonds to the banks – and by lending long through the acquisition of longer term property debt NAMA can make a profit. [Again, do you think this is a way forward after the current crisis lessons on maturity mismatch risks?]
"It is open to the NTMA to make a similar profit by issuing similar short dated securities and
investing the proceeds in long dated German government securities." [Brilliant! In effect, having Nama is like having a state-run hedge fund. We have truly arrived to Alice in Wonderland.]
“NAMA is also expected to make a profit because when the loans are repaid (or the security underlying the loans realised) the proceeds will exceed the original cost. If one assumes that what is ultimately realised is the long term economic value of the assets then NAMA can only make a profit by paying less than the long term economic value.” [And hence we have another contradiction: pay LTEV and you can’t get profit if your estimation of LTEV was correct. There is no free lunch, folks!]
In fact Nama has to realise the underlying properties or close the loans at
"In the case of the windfall tax the distant sounds of belatedly closing stable doors can be heard. And, of course, the best way to depress any recovery in future property values is to impose a high tax on appreciation". [So the Greens’ proposal is like shooting your leg off while running] "The requirement that NAMA responds to social and political demands highlights all too clearly the dangers of creating a state-owned virtual monopoly presence in development land and property.”
“The Government has rightly warned of the dangers – mainly in terms of price discovery – of a wholly nationalized banking sector. It does not appear to have the same concerns about a similar nationalization of property development.” Another brilliant point.
“Our best guess is that a recovery in investment in development related construction will be some distance off and some of the longer term economic growth projections which have not taken account of the radically changed institutional environment caused by NAMA are too optimistic.”
This is correct, and I will be revisiting my longer term forecasts for Irish economy to reflect Nama costs explicitly in days ahead, so stay tuned.
PS: Per earlier reader/follower request:
List of foreign ‘stars’ who criticised Nama:
Mr Bo Lundgren (a man with real experience handling major bank crisis)
ZEW President, Professor Wolfgang Franz
Robert Engel (Nobel Prize, Financial Econometrics)
Paul Krugman (Nobel Prize)
Professor Roberto Rigobon (MIT)
Professor Michael Goldstein (Babson College)
Domestically - at least 46 economists and finance specialists (many are finance specialists)
On pro-Nama academic side: one Alan Ahearne - an economist with no finance experience
Few quotes and comments (emphases are my throughout):
On recovery sources:
“The best that Irish policy makers can do is cheer on the signs of recovery in the Euro area and in the US. Recovery in our main export markets – although far from certain – is likely to be the only source of real green shoots next year.”
And this is not because our banks can’t function without a bailout. It is because our economy has been demolished and demoralized by the public policy that wastes taxpayers cash in tens of billions and taxes Irish workers into consumption growth oblivion. Will Nama solve it or make it better? No. Nama will take tens of billions more out of taxpayers hands and put the money into banks. Banks can do the following with the cash that is surplus on their capital reserves:
1) Lend out to Irish – already heavily leveraged businesses, earning a rate of return on these loans of 3-4%pa at best (they currently earn around 2-3% on their past loans); or
2) Buy European corporate bonds yielding 5-7% pa (blue chips).
Anyone’s guess what they will do with cash? For DKM it is a no-brainer: “Certainly it is hard to see the reconstruction of the banking system through the creation of NAMA contributing much to short-term recovery in the economy. Indeed, it could be argued that there is a very real danger that the operation of NAMA, subject as it is bound to be to the political whims of the moment, could have a prolonged negative impact on construction capital spending in the economy for years to come.”
“It is a racing certainty that the 2010 Budget … will involve substantial cuts in government spending, especially capital spending, and increases in taxes and charges. This reduction in public spending will take place against a background of highly depressed private demand which shows few signs of picking up. ...justified by the need to curtail public borrowing for the sake of future generations (and for the sake of the interest rate margins Ireland has to pay over German borrowing costs). Yet at the same time the Government is proposing to borrow massive amounts – which could be more than all the existing government debt outstanding – in order to become the virtual monopoly developer of land and property in the State for the next decade. It is as if public policy is being determined by the mad offspring of Hugo Chavez and Margaret Thatcher.”
Well, Thatcher reference is overdone - Brian Cowen has shown no ability to deliver any serious cuts in public spending so far. Plus Thatcher actually lowered tax burden. Nonetheless, amazingly, this simple reality of an inherent unresolvable contradiction between two policies pursued by the Government did not occur to that brilliant legal (i.e logic-trained) mind of Brian Lenihan. How?
“Enduring economic hardship now so that the State can become the sole lender to the property sector is a difficult sell.” Yes, folks, ‘Nama will work’ slogan is equivalent to ‘Speculative development and investments will work’ slogan. And we learned a thing or two about the latter one, haven’t we?
“The concept of NAMA was born out of a report by Dr. Peter Bacon, an economist turned property developer.” A pearl!
On Nama effectiveness in terms of credit flow restoration:
“The most likely use of the funds supplied by the NAMA purchases will be to reduce reliance on overseas funding especially funding in the wholesale money markets. In effect the balance sheets of Irish banks will shrink as assets are transferred to NAMA and foreign liabilities repaid. This may lead to a more sustainable banking system but will not lead to an expansion in credit.”
But have they – Leni, Coweee, Ah!Earn & Co – listened to any suggestions for bettering Nama? “The official response to the criticisms of the original NAMA proposals has been ad hoc, indicating that policy is being made on the hoof.”
“The question of the bank valuation of a property related loan versus a “market” value becomes more acute when it is realised that NAMA proposes to acquire performing loans… …It will be difficult for NAMA to pay less than the value of the loan to the bank from which the loan is acquired without substantial risk of litigation. Even if the management of banks is cowed by the scale of the public shareholding in the bank there would be no such constraint on private shareholders especially bondholders who face losses due to the acquisition by NAMA of assets at too low a price.”
Now, Brian Lenihan has absolutely no understanding of either finance or economics. Fine. No one is holding it against him personally. But he is a lawyer! Can he not see this argument coming?
“Defenders of NAMA have pointed out that it is a requirement of the EC that the long run economic value be paid for the loans. … this requirement is designed to prevent national governments from over-paying for loans and so subsidizing domestic banks at the expense of competing banks located in other jurisdictions. In any event it now appears that NAMA will not be paying the long run economic value for loans acquired from the banks.”
“The most recent suggestion is that the banks will receive part of the consideration in the form of a bond whose value will depend on the recovery rate of NAMA. This risk sharing sounds attractive but it begs the question as to how the bonds will be accounted for on the banks’ balance sheets.” This is exactly what I’ve been warning about in my recent blog post (here).
“The more enthusiastic supporters of NAMA have begun to sound like stockbrokers promoting an IPO. [Well, it is an IPO for them, for absent Nama, real value of banks shares is near nil – they are insolvent!] NAMA, it is asserted, will be profitable. On analysis, some part of its profit will arise from arbitraging the yield curve. By borrowing short – through the issue of floating rate bonds to the banks – and by lending long through the acquisition of longer term property debt NAMA can make a profit. [Again, do you think this is a way forward after the current crisis lessons on maturity mismatch risks?]
"It is open to the NTMA to make a similar profit by issuing similar short dated securities and
investing the proceeds in long dated German government securities." [Brilliant! In effect, having Nama is like having a state-run hedge fund. We have truly arrived to Alice in Wonderland.]
“NAMA is also expected to make a profit because when the loans are repaid (or the security underlying the loans realised) the proceeds will exceed the original cost. If one assumes that what is ultimately realised is the long term economic value of the assets then NAMA can only make a profit by paying less than the long term economic value.” [And hence we have another contradiction: pay LTEV and you can’t get profit if your estimation of LTEV was correct. There is no free lunch, folks!]
In fact Nama has to realise the underlying properties or close the loans at
- (price paid today = LTEV) +
- (inflation cumulated over the holding period) +
- (the cost of borrowing over this horizon) +
- (the cost of administering the loans by the banks and Nama) --
- (cash flow during the holding period)
"In the case of the windfall tax the distant sounds of belatedly closing stable doors can be heard. And, of course, the best way to depress any recovery in future property values is to impose a high tax on appreciation". [So the Greens’ proposal is like shooting your leg off while running] "The requirement that NAMA responds to social and political demands highlights all too clearly the dangers of creating a state-owned virtual monopoly presence in development land and property.”
“The Government has rightly warned of the dangers – mainly in terms of price discovery – of a wholly nationalized banking sector. It does not appear to have the same concerns about a similar nationalization of property development.” Another brilliant point.
“Our best guess is that a recovery in investment in development related construction will be some distance off and some of the longer term economic growth projections which have not taken account of the radically changed institutional environment caused by NAMA are too optimistic.”
This is correct, and I will be revisiting my longer term forecasts for Irish economy to reflect Nama costs explicitly in days ahead, so stay tuned.
PS: Per earlier reader/follower request:
List of foreign ‘stars’ who criticised Nama:
Mr Bo Lundgren (a man with real experience handling major bank crisis)
ZEW President, Professor Wolfgang Franz
Robert Engel (Nobel Prize, Financial Econometrics)
Paul Krugman (Nobel Prize)
Professor Roberto Rigobon (MIT)
Professor Michael Goldstein (Babson College)
Domestically - at least 46 economists and finance specialists (many are finance specialists)
On pro-Nama academic side: one Alan Ahearne - an economist with no finance experience
Thursday, September 10, 2009
Economics 10/09/2009: Greens' 'proposal' might lead to lingering capital problems post-Nama
Oliver Gilvarry of Dolmen - a clear supporter of Nama As Is proposal in today's note: "The tax will be 80% of the profits gained from the increase in land value following a re-zoning decision. The impact of risk sharing in NAMA will be to reduce the liquidity generated by the banks on the sale of loans to NAMA. It could also reduce the capital relief banks will experience from the transfer of loans as a certain amount of capital may have to be put aside for the subordinated NAMA bonds they will receive unlike the other NAMA bonds."
This is exactly the point I made yesterday (here). The Greens' helping hand can just as well cost the taxpayers when the banks come begging to Leni again... post-Nama.
And this bring us to Mr Cowen's performance on today's Prime Time. Hmmm - the Gods gotta be laughing somewhere in ancient Rome's temples. Mr Cowen now wants to bring living standards back to 2007 peak levels by taxing us to death, issuing more debt against our future incomes than was ever issued in this country history before, spending like a drunken sailor, not reforming public sector pay and pensions, running vast deficits and... hold your breath... restoring credit and liquidity flows with a Nama-style undertaking?
You can almost see this working in theory, can't you.
You can't? Well, to be honest neither can I. Here is why, quickly:
Nama is about working out bad loans written against bad assets. It is, therefore, an investment undertaking with a life-span of decades. Liquidity provision is a short-term undertaking aiming to increase money supply in the economy that is free to move across the economy.
Nama bonds will not provide such a 'liquidity event' for three reasons:
Finally, Cowen refused to step in to offer even a momentary protection to ordinary households when he was asked if mortgage defaulters will be protected. Mr Cowen has made it now record-clear that his Government is unconcerned about consumers, taxpayers and ordinary entrepreneurs. It is banks who must be rescued.
The more they (Leni, Ahearne, Cowen - oh, and why not call Mary Coughlan out of her retirement to pedal Nama-cakes too) dig, the deeper is the hole... after all they did dig Brian Cowen out of his hole where he resided for some 5 months post April Budget and back into the RTE studios - twice within the span of 5 days last...
This is exactly the point I made yesterday (here). The Greens' helping hand can just as well cost the taxpayers when the banks come begging to Leni again... post-Nama.
And this bring us to Mr Cowen's performance on today's Prime Time. Hmmm - the Gods gotta be laughing somewhere in ancient Rome's temples. Mr Cowen now wants to bring living standards back to 2007 peak levels by taxing us to death, issuing more debt against our future incomes than was ever issued in this country history before, spending like a drunken sailor, not reforming public sector pay and pensions, running vast deficits and... hold your breath... restoring credit and liquidity flows with a Nama-style undertaking?
You can almost see this working in theory, can't you.
You can't? Well, to be honest neither can I. Here is why, quickly:
Nama is about working out bad loans written against bad assets. It is, therefore, an investment undertaking with a life-span of decades. Liquidity provision is a short-term undertaking aiming to increase money supply in the economy that is free to move across the economy.
Nama bonds will not provide such a 'liquidity event' for three reasons:
- As an investment undertaking Nama will need credit of its own to work through the loans and underlying assets, so to assume that banks will simply lend-out the €60bn pot of cash they will get from Nama automatically assumes that the cost of working out Nama loans will be financed through some other sources. Is Brian Cowen actually envisioning another issue of debt to finance this undertaking?
- As an undertaking to repair balance sheets of the banks, Nama will fund capital base, not lending funds on banks books. In other words, for banks with an average 173% loans to deposits ratio, any cash they can get will have to be locked in a vault. Nama funds cannot be disbursed in new loans.
- The Greens have just shaved off a large chunk of the 'liquidity' pool through their 'risk sharing' gizmo.
Finally, Cowen refused to step in to offer even a momentary protection to ordinary households when he was asked if mortgage defaulters will be protected. Mr Cowen has made it now record-clear that his Government is unconcerned about consumers, taxpayers and ordinary entrepreneurs. It is banks who must be rescued.
The more they (Leni, Ahearne, Cowen - oh, and why not call Mary Coughlan out of her retirement to pedal Nama-cakes too) dig, the deeper is the hole... after all they did dig Brian Cowen out of his hole where he resided for some 5 months post April Budget and back into the RTE studios - twice within the span of 5 days last...
Subscribe to:
Posts (Atom)
