26/10/2011: Irish GNP projections under new US tax proposals

Much ignored by irish media so far, the US Congressional proposals to reform corporate tax system are gaining speed and have serious implications for Ireland. In the nutshell, today, US House Ways & Means Committee Chairman Dave Camp described some of his report proposals (see Bloomberg report here), which include:

• Lower corporate tax rate to 25 from 35%
• Exempting 95% of overseas earnings from US tax
• Introducing a tax holiday on repatriated profits

For US MNCs operating in Ireland this will serve as a powerful incentive to on-shore profits accumulated in Ireland. While the full impact is impossible to gauge - it is likely to be significant, running into 50% plus of retained earnings. 

This will, in turn, translate into higher Net Income Outflows from Ireland (see QNA) and thus directly depress our Gross National Product.

I run two scenarios - based on IMF WEO (September 2011) forecasts for Irish GDP, current account and Government expenditure and on historical data from CSO QNA. The baseline scenario assumed that MNCs will expatriate the same share of their profits relative to GDP as they have done before (3 year moving average). The first adjustment scenario adds a 10% uplift on the above scenario and expected growth in GDP to repatriation of profits. The second adjustment scenario adds a 25% uplift. The results are in the charts below.

Pretty dramatic. And this is for rather conservative assumption on increased outflows.

26/10/2011: ECB madness

Updated: includes latest data through September 2011:

ECB's past policy in a pic:

And he above madness is consistent with price stability mandate. No, I am not kidding - it was consistent with price stability mandate, even though it was killing weakening euro area economy...

In fact, price stability at 2% target for HICP would require current ECB rates to be in the neighborhood of 2.5-2.75%.

And note from the second chart below - of all major central banks, ECB is the only one to have raised rates since November 2010.

Let me provide a quote from the economist I rarely agree with: "The bitter truth is that it’s looking more and more as if the euro system is doomed. And the even more bitter truth is that given the way that system has been performing, Europe might be better off if it collapses sooner rather than later." Paul Krugman (source: here)

25/10/2011: Residential property prices: September

According to CSO Residential Property Prices index, September 2007 saw the historical peak in prices for overall RPPI at 130.5. Today's data shows that the index now stands at 72.8, implying that property prices have fallen nationwide by 44.2% on average since 4 years ago. Miserable news.

Now, September RPPI for all properties has fallen 1.49% mom and 14.25% yoy, exceeding (in terms of fall) analysts expectations for 13.4% decline. 12mo MA of monthly declines now stands at 1.27% and year-to-date average monthly decline is at 1.41%.

Relative to Nama's cut-off valuation date of November 30, 2009, factoring in average LTEV uplift of 10%, Nama residential properties-linked assets portfolio is now on average 29.52% under water. Factoring 5% burden-sharing (subordinated bonds), the downside is now 26.2% which means that Nama will need a lift-up of 35% on current values to break even.

For Houses, nationwide, RPPI fell to 76 in September from 77 in August a decline of 1.3% mom and 13.93% yoy. The index is now down 42.4% on peak of 132 achieved in September 2007. Apartments sub-index is down to 53.2 in September from 54.9 in August, with mom contraction of 3.1% - the sharpest monthly decline since March. Yoy the sub-index is down 19.03% and relative to the peak of 123.9 (February 2007) the sub-index is down 57.06%.

Nama holds loads of apartments, so applying the earlier assumptions on LTEV, Nama apartments-linked sub-portfolio is under water 36.9%, implying, net of subordinated bonds, a 33.9% decline in valuations to November 2009 cut-off date. This suggests an average required uplift in apartments prices of 55.12% for break-even.

Dublin properties prices are now 51.6% off their peak, with sub-index for Dublin declining to 65.1 in September from 66.5 in August - a drop of 2.11% mom and 15.56% yoy.

Annual forecasts, updated to include September figures, are below

24/10/2011: Euro CDS disaster Redux?

A picture (table) worth a 1,000 words...

via CMA.

24/10/2011: Euro area competitiveness indicators update

ECB posted updated Harmonized Competitiveness Indicators data for Q2 2011

Chart above shows that euro area HCI (unit labour cost adjusted) have deteriorated (higher values in the graphs reflect lower competitiveness) from 96.4 in Q1 2011 to 99.2 in Q2 2011. Q2 2011 reading was 2.5% above Q2 2010 reading, but 6% below Q2 2009 reading. Relative to Germany, euro area HCI(ulc) index now stands at 17.4% premium, reflecting relatively much stronger competitiveness of German economy.

Considering the charts above (note that the top chart reflects annualized data, while quarterly data is shown in the second chart above), Ireland retains its relatively uncompetitive position vis-a-vis all 'old' euro area countries. For larger economies:

• Germany's HCI(ulc) rose from 82.6 in Q1 2011 to 84.5 in Q2 2011, marking deterioration in competitiveness qoq. Year on year, index is not 3% higher, and the gains in competitiveness since 2009 have been virtually erased, as Q2 2011 index reading is just 0.3% below Q3 2009 reading. However, Germany remains the most competitive economy in the euro area in terms of HCI(ulc) index with own index reading currently 14.8% below euro area overall index.
• Spain's HCI(ulc) was virtually unchanged, rising from 107.3 in Q1 2011 to 107.4 in Q2 2011. Spain's competitiveness index has fallen (improved) by 2.0% yoy in Q2 2011 and is down 5.0% on same period 2009. Spain remains 8.3% less competitive than the euro area and 27.1% less competitive than Germany.
• France's HCI(ulc) deteriorated from 102.6 in Q1 2011 to 104.2 in Q2 2011, rising (deteriorating competitiveness) 1.8% yoy and 0.1% no Q2 2009. Relative to Germany, France is 23.3% less competitive in terms of HCI(ulc) and 5% less competitive than euro area.
• Italy's HCI deteriorated from 110.1 in Q1 2011 to 111.2 in Q2 2011, rising (deteriorating competitiveness) 1.65% yoy and improving (falling) 1% on Q2 2009. Relative to Germany, Italy's HCI is now at 31.6% premium (poorer competitiveness) and Italy is 12.1% less competitive than euro area average.

Smaller economies are charted above.

For Ireland, HCI(ulc) also posted deterioration in Q2 2011 rising from 113.2 in Q1 2011 to 113.8 in Q2 2011, marking decline in Ireland's competitiveness as measured by HCI. Ireland's competitiveness, however, improved yoy by 1.6% and is up on Q2 2009 level by 12.1%. Despite these gains, Ireland remains the least competitive 'old' euro area economy with Ireland's competitiveness gap of 34.7% compared to Germany and 14.7% compared to euro area.

As I have noted on numerous occasions before, much of the gains in our competitiveness in 2009 can be explained by the wholesale destruction of less competitive sectors: construction and domestic services (retail, security etc). The concern is that our future competitiveness gains will be compressed by the fact that from here on, we will need much harder to attain productivity growth in remaining sectors. So far, some nascent costs inflation in other economies have helped us to continue improving compared to euro area average. But in absolute terms, it is clear that since Q2 2010 we have lost momentum in gains in HCI(ulc) measures.

24/10/2011: New Orders for Industry: August data

Cheerful update today from the Eurostat on New Orders in Industrial Production series:

"In August 2011 compared with July 2011, the  euro area (EA17) industrial new orders index rose by 1.9%. In July the index dropped by 1.6%. In the EU27 new orders increased by 0.4% in August 2011, after a fall of 0.6% in July. Excluding ships, railway & aerospace equipment, for which changes tend to be more volatile, industrial new orders rose by 0.7% in the euro area and by 0.5% in the EU27. In August 2011 compared with August 2010, industrial new orders increased by 6.2% in the  euro area and by 6.5% in the  EU27. Total industry excluding ships, railway & aerospace equipment rose by 5.0% and 5.2% respectively."

Here are the details:

Start at the top: EU17 new orders index is now at 115.11 for August, up on 112.93 in July, down on 115.54 in May. The index is now back into the comfortable expansion territory, where it has been since April 2010. 

2008 average reading was 110.09, 2009 average was 86.99 and 2010 annual average was 102.2. So far - through August - 2011 average is 112.93 - not a bad result. But miracle it is not - reading of 100 is consistent with activity back in H1 2005, so in effect, through August 2011 we have achieved growth of 2.05% annualized in terms of volumes of output. Given that since then we had pretty hefty doses of inputs inflation and moderate gate prices inflation, the margins on the current activity have to be much lower than for pre-crisis years. Which means relatively robust improvements in volumes of industrial new orders are not necessarily implying robust value added growth in the sector.

Meanwhile, German new orders have shrunk in August 2011 from 122.4 in July to 120.9 in August. Month on month German new orders are down 8.04% and year on year activity is down 13.34%. This marks the lowest reading since April 2011.

 Of the big players:

• France posted an increase in new orders index to 102.90 in August from 100.1 in July. France's 2011 average to-date is 100.43, well ahead of 2010 average of 90.93 and 2009 average of 84.31. France's new orders index averaged 100.06 in 2008.
• Spain posted a surprising improvement in August to 96.43 from 93.85 in July and yoy rise of 2.0%. Spain's 2008 average was 102.93, 2009 average of 81.57 and 2010 average of 89.61. For 8 moths through August 2011, Spain's new orders index averaged 94.27.
• Italy;s new orders index hit 117.21 - very robust increase of 6.14% mom from 110.56 in July. Italy's new orders index is now averaging 113.58 for eight months of 2011, up on 2010 annual average of 103.09, 2009 average of 89.75 and 2008 average of 104.59. It's worth noting that Italy exemplifies the fallacy of 'exports-led growth' argument - the country has posted very robust recovery in its significant and highly exports-oriented industrial sector, and yet it also posted virtually no growth over the last 2 years.

Other countries are illustrated below.

 So on the net, industrial production new orders signal some bounce back from the troughs of the slowdown in early summer 2011, but this can be immaterial for the wider Euro area economic growth and a temporary improvement. September and October data will be more crucial, signaling into early 2012.

24/10/2011: Some interesting links

Couple of interesting links on various topics of the crisis:

Fist, my most recent post for The Globe & Mail EconomicsLab: Europe’s (non) bailout plan predictable in its absurdity

Second, a very good graphic from NYTime on debt-default interlinks globally: Chart 1 and an interactive version here.

Third, some interesting points on global yield curves here.

And lastly, a good summary of contagion dynamics from the zerohedge blog which roughly outlines the scenario that I presented on Friday, October 14th, at the American Bar Association meeting in Dublin - that of the inevitable destruction of the euro as we know it (either in composition or in its totality) - here. 

24/10/2011: Budget 2012 - doing the right thing right

This is the unedited version of my article in Sunday Times (October 23, 2011).

As the Troika gives another ‘thumbs up’ to our fiscal policies, the reality check on our medium term fiscal objectives suggests that the real cuts are yet to come.

Staring into the barrel of the next budget, the Irish nation is now slowly, but surely coming around to the realization that the medicines for our twin malaise of unsustainable debt and deficit to-date not only failed to cure the disease, but instead made it virtually incurable.

Now the fourth year into the austerity, per latest figures, Irish budget deficits for H1 2011 remain stuck above 13% of the country GDP. Taken against the more realistic metric, GNP, the shortfall between Exchequer spending and revenue is running at ca 17.6%. Even per Stability Programme Update, current expenditure – stripping out banks measures and capital investment, for 2011 is expected to run ahead of the 2010 levels.

Austerity, to-date, has been visible solely in capital investment cut backs and tax increases on personal incomes of the households. The rest of the ‘savings’ are really a game of shells – shifting expenditure from one side of the balance sheet to the other. In medical terminology, courtesy of the Irish Government choices of policy tools, our economy is now like a body consuming itself from the inside.

Quarterly National Accounts clearly show that Gross Fixed Capital formation in the economy is no longer sufficient to cover amortization and depreciation on private and public capital stocks accumulated between 2004 and 2008.

Meanwhile, in nine month through September this year, income tax alone accounted for 38.4% of the entire Government tax revenues, up from 28.4% for the same period of 2007.

Taking out tax increases, Irish Government austerity has delivered no real, long-term changes to-date. Neither public sector pensions, nor numbers employed, nor public wages paid relative to comparable grades in the private sector have seen much of a change worth talking about.

Adding more injury to the economy, tax increases have been concentrated at the top of earnings distribution, creating in effect the unsustainable environment where by our exports-oriented, higher value-added economy is being starved of the main input into its activity – human capital.

In 2009, Irish residents earning ca €58,000 and above, faced an average income and social security tax burden of 39.9% - ahead of the OECD average of 39.4%. The OECD average tax calculations do not adjust for the fact that whilst in Ireland income tax and social security levies and charges yield no tax-specific benefits, in other countries, social security charges include payments into private pensions and insurance funds. After Budgets 2010 and 2011, and adjusting for private pensions and health insurance contributions, this figure has most likely risen to above 45%.

Lacking competitively priced access to early education, childcare, healthcare and transport services taken for granted in other European member states, Ireland has now lost its competitive edge in attracting, retaining and developing skills needed for successful growth of our core modern sectors: research-intensive pharma, biotech and ICT, and skills-intensive international financial and legal services, business analytics and creative industries.

All of this means two things for the forthcoming Budget 2012 and for the medium term budgetary framework. Firstly, to restore Irish public finances back to health, the next four budgets will require dramatic cuts in the current public spending. Second, there is no room for new tax revenue measures.

Any further increases in taxation even at the lower end of the earnings spectrum will increase effective tax burden on highly skilled workers. This will act to further undermine our economy’s competitiveness in the core growth areas of the skills and knowledge-intensive sectors.

The problem is not a trivial one. Currently, there are between 3,500 and 5,000 vacancies in the ICT sector alone that cannot be filled by indigenous and multinational employers in Ireland. Despite the fact that ICT workers have the highest private sector average earnings of all sub-sectors in Ireland and enjoy average earnings almost 20% above their EU counterparts, companies cannot fill these vacancies. The reason is simple – we are not competitive, compared to our European counterparts, when it comes to the value for money that our after-tax earnings provide.

And this problem is not restricted to ICT sector. In the last two months at least seven internationally competitive researchers previously working in top Irish universities and institutes have packed their bags and moved overseas, leaving highly paid positions to seek better value for money and career opportunities abroad.

The next Budget must, therefore, address the problem of current spending overhang by cutting into the most painful areas of spending: social welfare, education, health and public sector employment bills.

Education-related spending has remained constant over the years of this crisis, accounting for ca 18% of the total budgetary allocations in the nine months through September 2008 and in the same period of 2011. Department of Health share of total expenditure has risen from 27.9% in 2008 to 30% in the nine months through September 2011. Social Protection share rose from 19% in 2008 to over 30% so far this year. Combined, three top spending heads accounted for almost 79% of the total voted expenditure by the State in 2011 to-date. Year on year, for the period of nine months through September 2011, there has been zero change in Education spending, a 10% increase in Health spending and a 4% increase in Social Protection.

Any serious effort at fiscal austerity requires much more dramatic cuts in these three departments.

Combined deficit reduction measures between 2012 and 2015, envisioned by the agreement with the Troika add up to €11.8 billion. Last week, the Fiscal Council has correctly proposed revising this figure up to €15.8 billion, to be delivered with €4.4 billion adjustment in 2012 and €3.7-3.9 billion every year thereafter. In my view, the measures are not front-loaded enough. In my view, Ireland’s economy will require €5.0-5.5 billion adjustment in deficits in 2012 and 2013, followed by €3.5 billion in cuts in 2014 and a €2 billion or less cut in 2015 to the total target for deficits reduction of €16-16.5 billion.

Such frontloading of cuts is required to control for the risk of further economic slowdown in 2012-2015, with 1% reduction in nominal growth rate potentially leading to a debt/GDP ratio deterioration to above 120% and even more dramatic decline in debt sustainability as measured against GNP. Frontloading is also need to provide a buffer against the expected increases in interest rates in post-2013 environment. Current inflation rates and growth dynamics within the euro area imply optimal ECB rates in excess of 2.5%. 2012-2015 period is likely to see significant increases in ECB rates, leading to an uplift in overall debt financing burden for companies and households in Ireland. With Ireland’s private sectors debt well in excess of the majority of our euro area counterparts, imposing more austerity in later period of fiscal adjustment can risk coinciding with the period of reduced private debt affordability and lead to a simultaneous adverse shocks to growth. Lastly, frontloaded cuts will act to rebalance future growth expectations for 2014-2015, helping to restore some investment activity in the economy.

Of the above measures, only about €3.5-3.7 billion can be expected to come from increased tax revenues driven by organic growth in economic activity not new taxes. No more than €1.2-1.5 billion more in savings can be generated by cutting deeper into capital expenditure. This means that the Government must find some €11-12 billion in current spending cuts over the next four years. Spread across current weights of specific top spending heads, this implies cuts of €2 billion in Education, and ca €3.3 billion in Health and Social Protection, each. Much of these cuts will have to come from involuntary redundancies and possibly cuts to indexation awarded previously for existent public sector pensions.

If management is doing things right, and leadership is doing the right things, as Peter Drucker remarked, Ireland’s Government has no choice but exercise both in the forthcoming Budget.

Box out:

The latest European Commission proposals for banning credit ratings changes for euro countries applying for EFSF or IMF rescue funds is the embodiment of the complete detachment of the European leadership from the realities of financial markets. Instead of dealing with the pressing issues of spreading contagion, the EU Commission has largely remained in its usual modus operandi since the beginning of the sovereign debt crisis, seeking new and ever-more elaborate means for raising new taxes, banning markets activities that actually act to increase markets transparency and efficiency, such as short-selling and independent ratings, while issuing vast encycliae on economic growth, invariably based on some new subsidies, state supports and other markets distortions. As with other ‘measures’, the latest proposal can backfire spectacularly. Rating agencies, only recently burned by their own failures to properly assess risks of complex securitized products relating to the US mortgage loans, have been rebuilding their reputations by re-asserting independence and pushing stronger ratings discipline through. In the presence of the ban, off-shored rating functions will be more likely to more severely downgrade euro area sovereigns seeking emergency funding, just to show the markets their own models robustness. Someone should tell the EU Commission that spitting into the hurricane wind might not be such a good idea.

23/10/2011: Economic Freedom of the World 2011

Couple of weeks ago, Ireland's Open Republic Institute and Canada's Fraser Institute published annual Economic Freedom of the World Index - the most comprehensive and academically credible index of institutional quality of economic environments around the world. Unlike other similar indices, EFW uses latest comprable available data for all countries in the index and undertakes detailed assessment of the largest number of criteria in arriving at its final rankings.

The results for Ireland are not good. As well as for Europe overall.

No EU countries in top 5 ranks, only one EU country in top 10 and no Euro area country in top 10. In top 20 ranked countries group, there are only 3 Euro area core EU countries, with 3 more Central and Eastern European states. Ireland ranks only 25th in the world - an extremely poor performance, given that last year we were ranked 11th and in 2009 index we were ranked 9th.

Overall, chart below shows historical trend for Ireland:

We are now ranked back in the position that is consistent with economic environment-determining institutions quality that is worse than the entire 1980s!

Charts below summarize the sources of our underperformance:

The data above refers to performance parameters for 2009. Since then, Irish economic conditions and policies have deteriorated substantially so we can expect further downgrades in the index.

23/10/2011: Ireland-Russia Trade for July 2011

Another data update - for bilateral Russia-Ireland trade flows. It's been some time since I looked at these series (CSO reports the data monthly with 1 month delay on overall trade flows data).

July 2011 exports to Russia rose from €37.3mln in June to €48.8mln. Year on year, exports to Russia are up 53.5%. Imports from Russia in July 2011 stood at €4.4mln, up on €2.5mln in June and down from €6.4mln in July 2010. Imports are now down 31.3% year on year.

Trade balance with Russia rose to €44.4mln in July 2011, up 74.8% yoy.

Annual forecasts for Ireland-Russia trade are looking solid.

For seven months through July 2011, Irish trade balance with Russia was €241.6mln, up on €122mln for the same period in 2010. In contrast, Irish trade balance with Brazil was €54.2mln in 7 months through July 2011, down from €66.5mln in same period 2010. Irish trade balance with China was -€91.5mln in January-July 2011, a major deterioration on €75.3 trade surplus in the first seven months of 2010. Irish trade balance with India posted a deficit of -€89.9mln for the first seven months of 2011, compared to -€80.5mln in the same period of 2010.

Over first seven months of 2011, Ireland's trade surplus with Russia was larger than our trade surplus with Canada (€158.7mln), Malaysia (€140.3mln), Mexico (€178.3mln), Singapore (€145mln - note that Singapore acts as a major entry point for global trade to the broader South-East Asia), South Africa (€99.3mln) and Turkey (€138.8mln). 

Of all BRIC countries, Russia was the only country that delivered improved trade surplus for Ireland.

23/10/2011: Ireland's External Trade data: August 2011

Catching up on some data releases missed last week (lecturing marathon of MSc in TCD, plus UCD MiM - great students, great honor to mentor). First up - trade data.

Seasonally adjusted exports rose 10.24% mom to €7,767mln in August. Annual increase in exports was 2.25% yoy on seasonally adjusted basis. Relative to August 2009, this year exports rose 15.76%. Overall, additional exports yoy were €170.8mln compared to August 2010 and 1,057.5mln on August 2009.

Seasonally adjusted imports were up 6.23% mom to €4,068mln, annual imports rate of growth in August 2011 was 5.71% and relative to August 2009 imports are up 13.45%. Year on year imports are up €219.6mln, which implies that trade surplus is down €48.8mln on 2010.

Trade surplus rose 14.71% mom to €3,698.5mln on seasonally adjusted basis. Trade surplus in August was 1.3% below (-€48.8 mln) August 2010 level and €575.2mln (+18.4%) above August 2009 level.

On an unadjusted basis, trade surplus of €3,251mln in August 2011 was virtually unchanged from the 2010 figure of €3,221mln.

Volume indices of trade - reported with 1 month lag - showed that in July 2011 exporting activity fell to 466.3 against 532.2 in June 2011, and July 2011 reading was below comparable reading for 2010 (494.3) and July 2009 (469.5).

Imports intensity of Irish exports rose to 190.91 in August - up 3.8% on July 2011 and down 3.3% on August 2010. The intensity is up 2.0% on August 2009 and remains well above historical average of 155.3 reflecting the overall increasing share of MNCs in our exports.

Terms of trade have improved in July (also reported with 1 month lag) from 78.2 in June to 76.9 in July 2011. This compares to 86.2 in July 2010 and 86.6 in July 2009, showing overall easing in exchange rates pressures over 2011 compared to 2009 and 2010.

Per CSO, based on final data for seven months through July 2011, Irish exports rose 4% to €54,258mln compared to 2010, driven by:

• Medical and pharmaceutical products +11% or €1,599mln 
• Organic chemicals +8% or €925mln
• Exports of Computer equipment declined by 10% or €261mln and 
• Telecommunications and sound equipment fell by 25% or €124mln

Based on data through August, my forecast for 2011 external trade is:

• Imports up to €49,068mln in 2011 from €45,772mln in 2010
• Exports up to €92,356mln in 2011 from €89,260mln in 2010
• Trade surplus down to €43,271 in 2011 from €43,488mln in 2010.

16/10/2011: Negative Equity and Debt Restructuring

This is unedited version of my article in Irish Mail on Sunday (October 16):

This week, we finally learned the official figure for what it would cost to address one of the biggest problems facing this country.

According to the Keane Report - or the Inter-Departmental Mortgage Arrears Working Group Report - writing off negative equity for all Irish mortgages will cost “in the region of €14 billion”. Doing the same just for mortgages taken out between 2006 and 2008 would require some €10 billion.

These numbers are truly staggering, not because of they are so high, but the opposite: because they contrast the State’s unwillingness to help ordinary Irish families caught in the gravest economic crisis we have ever faced with the relatively low cost it would take to do so.

Let me explain.

Firstly, the figure of €14billion itself is a gross overestimate of the true cost of dealing with negative equity. This is because this figure appears to include not just owner-occupiers but also people with buy-to-let loans in his sums.

Secondly, the real amount required to get rid of negative equity where it matters most – for ordinary first-time buyers - is lower still. For example the scheme could be set up in a sliding scale based on value of house compared to average house prices. This would reduce the final cost of the scheme and help those who need it most - moderate income and younger-age households.

In other words, a realistic and effective debt cancellation scheme can be priced at closer to €6-8 billion instead of the €10-14 billion estimated in the report.

In its simplest form it would work like this: say you bought a house for €300,000, with a mortgage of €250,000, and it is now worth just €150,000. The government, or the bank using the recapitalisation funds they have received, would pay off the €100,000 difference.

By doing this your monthly payments would be less, and you could now sell up to pay off the debt or move house, and in the meantime the extra money you have to spend could go back into the economy.

The scheme could even be set up so that write downs would be smaller on houses with above average values so as to prioritise young and low-earning families. In the above example, if the house was purchased for, say €500,000 and is no worth half that amount, the bank would write-off, say, €200,000, leaving the household with residual negative equity of €50,000. This would still improve affordability, but will also cut the overall cost of the scheme.

So why did the report completely rule this out? It was very clear on this topic: “a blanket debt or negative equity forgiveness scheme would not be an effective use of State resources and would not solve the problem,’ it says.

But it goes further, claiming that “the primary driver of mortgage arrears is affordability, not negative equity. While a write-down of negative equity would help mortgage holders in arrears, in many cases it is unlikely to create an affordable mortgage”.

I believe this rejection betrays the overall lack of understanding by our senior civil service officials of the problems we face.

The Irish economy is suffering primarily from three things. The biggest is excessive household debt.

While this would be bad enough, it is exacerbated by two additional factors. The cost of the government’s policy of bailing out our banks, which is being paid for with higher taxes on ordinary working households. And the rising cost of mortgagesdue to aggressive drive by Irish banks to improve their profit margins at the expense of the most vulnerable mortgage holders - those with adjustable rate mortgages who cannot protest. Both contribute to mortgages defaults.

By saying that cancelling negative equity will not be a magic bullet solution to the problem of the defaulting mortgages, the report is simply referencing the smaller problem of mortgage affordability to evade addressing the effects of the much larger crisis facing us.

Negative equity is the single most egregious and damaging segment of the debt problem faced by Irish families.

It is the most egregious because it was caused not by reckless borrowing, but by reckless lending by the banks - actively supported at the time by the Irish Government.

The problem of negative equity is the result of state policy in the first place, and it is up to the state to rectify it.

And contrary to the assertion of the report and Government claims, we do have the funds to deal with negative equity. Freeing these funds to help ordinary families is just a matter of priorities for the Government and the state-controlled banks.

To-date, the Irish Government has injected €63 billion worth of taxpayers’ funds into Irish banks.

Various other commitments, and the banks’ own state-guaranteed borrowings from the Central Bank bring the total cost of keeping our banking sector working to a gross figure of about €125 billion.

Yet while they have saved the banks, all of these measures have acted to increase, rather than reduce, the level of debt being carried by the households of this country.

In addition to their own household borrowings like credit cards or credit union loans, mortgages-holders are now in effect liable both for banks’ debts and their losses on property development and investment.

In contrast, even at Keane’s upper estimates, the cost of paying off negative equity liabilities for household mortgages would require just one ninth of the funds we have made available to the banks.

Last July the Government injected some €19 billion worth of capital into Irish banks. This capital is provided to cover potential future losses on loans. This included €9.5 billion, which was the estimated worst-case scenario for losses on residential mortgages. It also included another €8.9 billion to cover remaining expected losses on commercial property.

If some of these funds were used instead to restructure negative equity mortgages on family homes it would do two things for the banks.

Firstly, because the banks would now have securities as valuable as the mortgages they have given, a mortgage default would not be such a threat in terms of losses. This then reduces the bank’s need for further capital.

Secondly, the writedown of the mortgages will prevent defaults in the first place, at least for some families.

This implies that prioritising how that money is used to help mortgages rather than losses on commercial property loans, will be a more effective way to improve their balance sheets.

And it’s not like the money is not there. Our banking system currently has surplus capital available. Since August this year, our ‘pillar’ banks, instead of helping the struggling households, have used taxpayers funds to quietly buy high-yield Irish Government bonds.

Some €3 billion worth of Government debt was bought by the banks using our money in order to beef up their own profits. Don’t tell us that the banks cannot afford negative equity restructuring when they clearly can afford buying junk bonds in the markets to book higher profits.

And the farcical nature of Irish government responses to the mortgages and personal debt crises continues.

The Keane report ruled out increasing tax relief on mortgage interest finance for first time buyers during the boom, 2004-2008. Why? Because the estimated cost each year would have been €120 million.

Yet, come November, the very same state will pay in full the unguaranteed and unsecured €737 million debt of the bankrupt zombie Anglo. Between Anglo and INBS, the state has also committed to repaying in full €2.4 billion more of similar bonds in 2012.

Instead of repaying un-guaranteed bondholders, the Government should use the funds available to the banks to cancel commercial property-related losses on banks books, freeing the capital injected for this purpose in July this year to restructure negative equity mortgages.

Earlier this year, I proposed that Irish Government impose an obligatory restructuring of all mortgages to achieve a maximum Loan-to-Value ratio of 110%.

This would reduce the problem of ‘moral hazard’ because households with greater borrowings will still be left with more debt than their more prudent counterparts. But it would also reduce the overall debt burden faced by our families, freeing them to return to active economic and social life, helping to restart the Irish economy. Based on the Keane Report’s own estimates of the cost of such a scheme we have more than enough money to make this choice.

All we need is the will - the will to free hundreds of thousands of Irish families from the negative equity jail that was built by reckless banks which lent the money with explicit approval of the previous Governments.