Monthly Archives: July 2012

NAMA makes measly €12m pre-tax profit in 2011

phew… 12m eh. As close to zero given the size of the company as makes no difference…

NAMA Wine Lake


[The annual report is now available here]

NAMA is publishing its 2011 Annual Report today. The profit and loss account and balance sheet shouldn’t be much changed from the unaudited 2011 accounts published at the start of May 2012.

But they are.

The impairment provision for 2011 has increased by a staggering €467m from €800m to €1,267m. NAMA has decided that it can book a “tax credit” of €235m, something not apparently contemplated when the unaudited accounts were published, and NAMA seems to have “found” profit elsewhere of €185m. We wait for the publication of the report to look for further clues.

Overall NAMA is declaring an audited profit before the tax credit of €12m, and after tax of €247m. That compares with €200m in the unaudited accounts for both headings. Given that it is the State that is on the hook for the tax credit, you might…

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Recent parliamentary questions show Department of Finance is going to the dogs

NAMA Wine Lake

One of the key means by which the government of the day in Ireland is held to account, is provided by the parliamentary questioning (PQ) system where any deputy in the Dail can submit in writing any question of any minister, and they’re generally supposed to get a response in three working days. It’s a powerful tool in this democracy, but as was evidenced in this Government’s Programme for Government (extract above), it is a tool that could benefit from additional support.

Not all questions will get answers of course. Sometimes the information sought isn’t recorded any place, on occasions the information is too voluminous to collate and sometimes the information is commercially confidential. This blogpost will examine three finance parliamentary questions from the past week, to show that the Department of Finance is both stupid and mischievous.


What the Fianna Fail finance spokesperson Michael McGrath is after is…

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The crises in Irish pension provision

This is an extended version of an opinion piece published in the irish examiner. In 1908 David Lloyd George, the then chancellor of the exchequer in the United Kingdom of Great Britain and Ireland steered through, against some considerable opposition, a revolution in social welfare. The idea was simple and yet radical : that people in their old age, unable to work, should have a modest stipend and not be a burden on their families. Ireland of course benefited from this also, and over 170,000 pensioners obtained some pension, the 1908 act providing for means testing.

Since then pension provision has evolved massively. But in Ireland we face now not one but three interlinked pension problems. Pensions are in principle a fairly simple thing: you put aside a sum of money on which you can draw for future needs. The problem arises in that it is inherently an act of forecasting. Consider the elements involved. You need to first forecast how long after retirement you are likely to live. Then you need to forecast how much income you will need for each of these years. Then you need to forecast how much time there is until you retire, and by how much you expect each sum of money you put away to grow over that period. Each of these forecasts must be more or less on the button if the final equation is to be correct. (for more on the underlying equations see here ) Not surprisingly therefore pension planning is complex. Most people underprovide for their pension which means that a significant burden then lies on the state. The pensions board provides a pensions calculator which I suggest would horrify most when they plug in their details. The reality is that we are underfunded in al pension areas. Irish people are not very financially literate and we pay very high fees for pension fund management, much of which is based on asset levels not on actual performance. The pension issue in Ireland is complicated by the fact that we have a mixture of pay as you go pensions and traditional pension savings as noted above. And even within that there are shades. One split is on defined benefit (where at retirement you get a set % of your final or average lifetime salary) and the pension fund is supposed to have enough in the savings pot to meet this, while the other is defined contribution (where the pension is in effect determined by how much if any is in the savings pot). And then we have pay as you go pensions, in the public sphere, where pension payments are in effect paid out of current tax revenue. All these are in crisis.

In the realm of public sector pensions there was a report in 2008 by the comptroller and auditor general that looked at the future liability of the state for public sector pensions. This found that there was a “contingent liability” of some €100b. While that is a shocking amount of money, it must be placed in context. It does not mean that the state owes 100b. It does mean that, based on a certain set of forecasts (how many pensioners will live for how long and at what rate their pension needs will grow) that a sum of 100b would be needed if one wanted to at that time invest at a particular rate of return to obtain an income stream that would meet this. Its also important to note that this is a sum that would be required to meet the pension liabilities over 50 years. At present public sector pensions are paid for in the main out of current tax revenue. There was a national pension reserve fund, which was an excellent idea of Charlie McCreevy to set aside a fund that over time would build up and generate income to pay public sector pension liabilities. This fund alas has been poured into the bottomless pit of the Irish banks. When next we hear criticism of public sector pensions from the private sector it might be useful to note that the cure for the overhang was dissipated in private interests.

How to deal with the existing public sector pension bill is a problem, but at least the government have taken steps (reduced entitlements, longer waiting times to benefits, increased contributions) for new entrants. That is not enough for the critics of public sector pension provision however, who (quite rightly) draw attention to the overhand, and then complain about the existing pension provisions without suggesting realitic reforms. Absent simply writing down existing legal provisions (a dangerous route) there is little that can be done in the shortterm to reduce the bill. In any case, reducing the existing pension bill will do nothing to increase the pension pots of anyone who has suffered losses.

we also have, as I have noted before, the issue of the unfunded liability of the noncontributory pensions. Public sector pension costs are circa €4b per annum. Non contributory pensions (old age mainly) are c €1b, and the state also subvents (tops up) the social insurance fund (which is the fund into which PRSI etc is paid and out of which contributory pensions etc are paid) by nearly €2b. Thus it would be fair to say that applying the same logic to these as to the public sector pension issue we face a state overhang of between €25 and €75b. However, we hear very little of this. The perception is that we are a very young population – this is true but the % of the population over 65 here is 18% compared to a OECD average of 23%. Yet we spend only 3.6% GDP on pension provision compared to over 7% on average. We face a massive change in the next 30 years in our population pyramidand we need to begin to save for this. (here is a link to an OECD population pyramid , in Excel format). State old age pensions have remained untouched over the crisis – the ghost of Ernest Blythe hangs long over the state.

In the private sector we have seen the massive destruction of wealth and pension funds have not been spared. Up to 80% of defined benefit schemes are estimated to be in deficit. We have seen the closing to new entrants of defined benefit schemes, and where such schemes do exist we have seen cases such as Waterford crystal where the fund was not able to provide its warranted requirements. A further complication here is that the government has refused to implement EU requirements for a pension protection fund (which would of course involve a levy). The UK government also refused and was forced to implement same only after a long legal battle. Thus in addition to the public sector pension overhang the government face a large bill, possibly running into the hudreds of billions should, as expected, the European court rule that it was in breach of its requirement to have put a pension protection fund in place. The last thing the Irish state needs now is additional financial strain but it is highly likely that that will be forthcoming.

For those that choose defined contribution funds there has been a horrific loss of value over the last number of years. That said, the indications are that Irish households are holding increased financial assets, and the declines in pension fund reserves are not nearly as large as the declines in domestic financial asset values. Irish household wealth has fallen but stripping out the house value falls this is not significant. That is important as it suggests, along with other trends in savings that whether by a sense of fear or a sense of requirement Irish people can increase savings levels. If the government can, through imaginative means increase savings they will have done a good days work.

Thoughts on public sector sickpay

So the labour court has agreed that the government can adjust and cut the sick leave allowances of 300,000 public servants. The old “allowance” was 7 uncertified sick days per a mum and this will now be reduced to the same per 24 months. Also the time on full pay will be cut from 6 to 3 months and same for half pay.
We’re told that the total sick pay bill comes to €500m (out of €14,000m) and that thus this will save €250m. The reforms are welcome but will they in fact save that? It seems to me several issues need to be noted. First, of the total the vast majority was for certified sick days only some €60m being for uncertified sick days. So we might save 30m here IF and only IF people were malingering and taking sikies to which they were not entitled.
Second, when people go from full to 1/2 pay (as they will do now more swiftly) they will in many cases get some social welfare. So while the sick pay element of aome €440m will fall the social welfare bill will rise by an unspecified amount. Some data on that would be nice.
Third, much gloating and pointing has been evident from the usual suspects on this issue. The typical cry is “lookit – all them lazy gits in the public sector on the sick”. One wonders what the comparative figures are for comparable private sector posts? Perhaps 3.5% of the overall budget is not unusual? Or Maybe it is. Comparable data again would be nice.
Fourth we need to compare like with like. A breakdown of this pay bill by sector would help. Defense and policing are inherently physical jobs where the chance of serious injury (and thus sick pay) is significant. Health sector frontline workers face similar issues with the added exposure to all sort of sicknesses. Again, a higher level of sickness than the workforce at large is inevitable.
The changes are welcome but let’s not get carried away either with the levels of sick pay or the savings. Not that that will stop those for whom the public sector represents a bottomless pit of sloth…

The Tin Ear of Dr Sinn

One of the great masterpieces of world literature is Gunther Grass’ The Tin Drum, cataloging how Germany fell into the abyss of madness. The eponymous drum is pounded upon by Oskar, who survives the horrors of war and gains fame only eventually to be consigned to a secure institution. Its as much a discussion of the perils of taking oneself too seriously as it is on the perils of taking others so. Modern Germans labour, unfairly it may be, under the yoke of the dreadful history of their great grandparents. And yet, outside Germany we are often more reluctant than perhaps is helpful to accept that that is part of their (and our) shared history and that the context therefore is unavoidable. We are all too much at times like the Noel Coward song…Here in Ireland we are all too aware of the context of the past, and while at times it can be a massive evasion “blame the brits” sort of awareness, it at least exists. Its not therefore too much to suggest that others might want to cultivate this awareness in their speech.

Dr Hans Werner Sinn has waged an increasingly lonely campaign to convince anyone, everyone, that Germany stands in massive danger, that German capital is being starved and German money sucked to the periphery through the Target 2 interbank settlement system. Despite devastating critiques of this view by amongst others Karl Whelan Dr Sinn holds fast to the notion that it’s a massive danger. It’s not, unless and until the euro zone breaks up and even then it’s much more an accounting exercise than a real issue. As head of the ifo , the major german economic think tank, Sinn is a major player in the German economic and political sphere. Topflight german magazine Der Speigel has a fantastic takedown of Dr Sinn, which portrays him as an intellectual bully, a man possessed of absolute certainty (in a world where most economists have at least rid themselves of that) and obsessed with publicity and the media, a man whose views have remained slow to evolve.

Yet, he remains a most influential man. And bearing his media savvy and his acknowledged influence in that regard one of his statements quoted in Der Speigel makes one wonder. He has long regarded the bailouts of the periphery as dangerous. He now states “Our children will be forced to go to southern Europe and get our money back” . This is to my mind and ear inflammatory stuff, by a man who knows or perhaps now we see does not but should know his history and his geopolitics. At best its crass bluster, at worst can be read as a oblique reminder of the invasion and occupation of Greece and  Italy in WW2. One hopes that this time the children of Germany will be armed with lawyers writs and bond calculators.  It is similar to the head of the ESRI musing on the usefulness of ANFO in bond negotiations when in the financial district of London (riffing on the IRA Bishopsgate and Canary Wharf bombings) . The euro crisis has done enough harm to intra-euro national solidarity. People of influence should know enough to not fuel this any further. Its a pity that the certainties of Dr Sinn do not extend to a knowledge of the past context and present realities.

Take part in an experiment, help a student, maybe win €100

If you have a free morning on Wednesday 11 July and want to help a masters student and perhaps win €100 into the bargain, then come along to the Maxwell Theatre 10-13h.
The experiment consists of a number of rounds of trading shares with periodic news updates coming during the trading. The objective is to look at some issues in gender, confidence and trading and will form part of the masters dissertation of a MSc Finance student, Kiril. The Maxwell is in the Hamilton building in TCD

Revisiting the Croke Park Agreement on Public Sector Pay

This is an extended version of a column published in the Irish Examiner 7 July 2012.

It’s the silly season, when the politicians are if not quite dusting down their buckets and spades at least leafing idly through brochures and considering where to spend the break. There is little to concern some politicians, apart from banking scandals, banking meltdowns, dail expense scandals, rising unemployment, the lack of Irish membership of CERN, climate change induced extreme weather and the chances of getting a deal from the EU on our debt. So, not unnaturally, some commentators and politicians have begun murmuring that we should “Revisit Croke Park”. As a Kerry man that something I wholeheartedly agree with but as a commentator and analyst there is something dark and dense in the undergrowth of the statement. Warning : this post contains facts, which can cause nervousness, spluttering and in extreme cases change of mind. If you are allergic to facts, please step away from the screen with your mind closed.

Lets recap: the croke park agreement of early 2010 (which has saved nigh on 1.5b in costs to date) in effect represented the final flowering of social partnership. Social partnership, which had massive benefits in its early stages, was started in a time of massive economic crisis so its not surprising that its apogee would be reached in similar times. It guaranteed no further wage cuts for public sector employees in exchange for not just industrial peace but an impressive sounding set of changes to work practices and approaches with the aim of not just saving money but improving service. This , lets not forget, came after the 2009 pay cuts which averaged 7%.

The FF led governments having run up massive spending (and being reelected time and again, by one assumes private and public sector workers alike, despite the more crackebrained mutterings that the public sector vote en bloc for Labour) , the state has for the last while been retrenching. A large part of this has been on the capital side , which may or may not be a problem – see the presentations by Colm McCarthy and Seamus Coffey on this issue. In addition, public sector pay has been hit. It is astonishing when one asks people what percentage of government spending is accounted for by the pay bill – estimates range usually from 50% to 90%. The true figure is considerably less than that. So what about pay?

An all too tiresome mantra repeated in the “debate” is that while private sector wages have fallen public sector wages have not This is simply incorrect, as for the most part the phenomena of “downward nominal wage rigidity” operates in the private sector- adjustments there have been mainly by reduction in headcount (unemployment) rather than wages or even hours worked. This is the case, substantively, even in areas such as construction, hardest hit by the crash. The latest (q3 2011) CSO data show that across most sectors nominal wages in q3 2011 were higher than q1 2008. A notable exception? Public administration, down 3%. Note also that this data excludes the public sector pension levy, a further reduction if not in gross pay then for sure in take home pay. The issue of unfunded pension liabilities is also often trotted out as being “over 100b”, a figure which arises from a C&AG 2009 report. It is regrettable, although not surprising given the volume of work of the C&AG that there has not been a revisiting of this although this has not stopped some from asserting that the unfunded liability is “over 200b“.

We never however hear much of the other unfunded pension liability, that for the old age non contributory pension. When a private sector employee or other person doesnt make any or enough contributions to the Social Insurance Fund (which is zeroed out) they still get a pension. This has been a cornerstone of modern western social provision since 1908. It is apparently however beyond the pale to critique these unfunded pensions while the unfunded (but employment related) pensions of state employees are fair game. Of course, the grey lobby used their spare time and threat of vote power to show muscle in 2008. Some commentators believe that public sector workers gain both their non contributory and their employment pensions, rather than in fact the lower being offset against the higher. There has undoubtedly been a deferment of rational public sector pension planning over the years but that element at least has been addressed now with enhanced contributions and extended time to pension entitlement. The issue of whether or not a government can cut a pension to which someone is legally entitled is a whole other ball of wax. Some sensible steps have been taken but it will be decades before the state finances see these flowing through. Of course, there was a nicely growing pension pot there for the provision of state employee pensions but this was flushed down the Anglo drain (Anglo, lets recall, was a private company).

Also of note are hours worked; a not uncommon meme of the “debate” is the laziness of public sector workers. Again the same CSO data suggest that this is not quite the case (no doubt some now will point to the fact that the data are available only through Q3 2011 as evidence of that very laziness). Again only two sectors show a meaningful increase in average weekly hours worked in Q3 2011 v Q1 2008, Electricity, water supply and waste management (up 3%) and Public Administration (up 5%). But then facts have never stood in the way of a good argument in Ireland where policy based evidence is sought rather than evidence based policy being made. The evidence, as of late 2011 is that PS workers are working longer hours for lower pay than in 2008. No doubt many will say “bully for them” but facts are facts, and while a debate on the effectiveness or efficiency of the service is one thing to ignore basic structural elements is quite another.

This is not to deny that there is an issue. As a country we are broke. Not only is income falling but we are not really wealthy. A short trip to the continent shows the difference between wealth and income. Comparing public transport or services in Amsterdam to Dublin is not chalk and cheese, its a flashlight to a h-bomb. The public sector wage (as opposed to wage and pension) bill in total is something of the order of €14b. This is a very large amount of money and is coincidentally almost the same size as the borrowing requirement. In classic style what is called the fallacy of conjugation is applied to then suggest that “we are borrowing to pay the wages of (overpaid, lazy) public servants”, with the implied solution of not paying and thus not borrowing left dangling like an unwanted participle at the end of a sentence, like. “borrowing to keep the streets safe and the sick healed” doesn’t have quite the same emotive punch and may suggest worrying Keynesian or even social (or socialist?) tendencies.

We can and almost certainly must cut the wage bill, as we must cut all costs, including those in the sheltered private sectors from whence hail many of those crying for cuts in the public side. At the heart of the debate on public sector wages is a confusion about how to cut the bill. We can do this in one of three ways : we can reduce headcount, we can reduce (again) the nominal wages of those employed or we can do both. In fact headcount is being reduced. Since 2008 numbers have fallen by nearly 10%, with some public expenditure vote groups cut by nearly 1/3. The largest single number of employees is in the health area, down by nearly 10% from 2008. Interestingly one of the largest increase in staff numbers has been in the Transport vote, whose minister has been one of the most prominent in calling for a reconsideration of Croke Park. Presumably the increased staff numbers in transport will any day now be reflected in increased public transport quality and services.

Cutting wage levels (again) will fall disproportionally on the lower paid, as that is where the larger numbers are. The data in the chart are from an answer to a question asked of the Minister for Public Expenditure and Reform in January 2012 . Cutting the nominal wage level seems to be the preferred option of those advocating a revisiting although it would be refreshingly honest if they simply came out and said “cut public wage levels”. But where? 60% of wages are paid to those earning less than 55k, 25% to those earning less than 35k.

To make meaningful cuts (say gross 3b per annum) cannot realistically be done if we wish to exclude the lower paid from same. And this ignores the evidence that in fact any wedge between public and private sector is greater at the lower level than at the top. In addition, there are problems that are never mentioned as even existing when the advocates of “revisiting croke park”. The most glaring omission is the knock-on effects. Lets leave aside that many seem to misunderstand that the wage bill is measured in gross terms and that cutting wages in gross terms by X leads to a reduction in the net government expenditure by X(1-T) where T is the marginal tax take. There are other issues that never seem to be aired

Cutting wages reduces spending power. That this is hard to understand is hard to understand. The largest single contribution to Irish national income is consumption, and massive shocks in wages to 300k consumers will almost certainly reduce consumption further, thereby weakening more the economy. This will not be accepted by the kind of commentator who suggested to me, in all seriousness, that cutting public sector workers wages would merely result in less shopping trips to New York but for most sentient commentators it should be self evident.

In addition, it is reasonable to assume that public sector workers are as likely as private to have mortgages, and as we know the mortgage torpedoes are slamming into the hulks of the (nationalized) Irish banks. Increasing the losses there will result in further losses for the taxpayer. And by reducing the overall tax take from the public sector the losses will shift further to the private sector.

A further issue which rarely is raised is one of equity and quality. Lets leave aside that the only way the government found in the past to cut nominal wage levels and not get into constitutional hot water was to pass legislation, which is vanishing unlikely to happen in a government coalition involving a labour party which is in any case going to get hammered at the next election. Cutting contracts in mid contract is not good policy. Its commonly stated that as tax revenue is back to 2003/2004 levels so too should public sector wages be rebated to the same level (which would amount to a cut of approximately 20% on a per capita basis, gross, with all the consequences noted above). This would perhaps be feasible if all other costs were reduced by the approximatly 25% they have risen since 2003-4 but such is not possible. The only way to do that would be for the state to impose price controls, something that will not happen. Beyond that again one has to wonder if interfering in contracts is a good idea. While contracts are never inviolable, they should only be altered by government fiat under extreme circumstances. And, we are told by government and Troika that the bailout and related plans are on track, so there would seem to be little prima facia case for same. If the state can, for fiscal convenience, alter contracts for one group then why not for another? This sort of action would open a route which would cast doubt on the efficacy of the rule of law. Contract law is really important to economic development, but its effect is highly non linear – in other words small changes have big effects.

Will we have to reduce the overall public sector pay bill? We will. Will this best be achieved by cutting nominal wage levels? Highly unlikely. Will the dreary codeworded dance continue absent a rational debate? Certainly. Will this contribution to the debate be seen by some as mere special pleading and regardless of any facts indeed be dismissed as inherently wrong merely because it’s author works in the public sector? Equally certain. Will there be an acknowledgement from the commentatoriat that we have fewer public sectors getting paid less working longer hours while delivering essentially the same level of service? The words of James Gogarty on receipts come to mind..

The enduring (but not endearing) mystery of Dublin airport buses

There are many mysteries in life; how they get the figs into the fig roll, why cork people consider themselves superior to Kerry people, the reason for evil. A bigger mystery is why at Dublin airport the buses for the long term car parks do not serve the new terminal two which cost nearly €400m euro and which serves not just the flagship Aer Lingus carrier but also the transatlantic long haul.
Instead, the buses remain where they always were, at terminal one. So you walk the fairly short distance and get your bus. Which is fine when the weather is clement, but not so fine in the not-infrequent rain.

20120703-075303.jpg A truly customer focused airport would have the buses serve both, which could be done by simply havin them parked at the angle between the two terminals.

Iv emailed Dublin Airport Authority on this (and on some other issues) over the years but no response. The website doesn't even have a “customer feedback” section as far as I can see. What's the deal?



Tell us, Jean-Claude.. About that letter?

The Public Accounts Committee of the Irish parliament is unique in its committees in that it has the power to compel witnesses to attend. They can sit there and say nothing but at least they must attend. As has been widely presumed, the committee is, it appears, to hold hearings into That Night, when the government decided to guarantee the banks (and in doing so killed the economy). I suspect that the findings of the PAC will reflect much more cockup and much less consipracy than many have suspected (feared? secretly hoped for?).

The headlines are that we will get the “full” story of the night. I doubt that we will, absent the appearance of Jean Claude Trichet, then Chairman of the ECB .   The ex (and late) Finance Minister, Brian Lenihan had always contended that he was, in effect, instructed by JCT to “save your banks” . There is in existence a letter from the ECB dated 19 November which, it appears, overrides and enhances the (foolish but) democratic wishes of the Irish Parliament which passed the guarantee scheme on 5 October and which was given effect by ministerial order on 20 October. This letter appears to be one that gives effect to the “save your banks” message of Trichet. Despite a number of requests ( see here, and here as examples ) over the years this letter has never been made public.  Apparently the contents are so explosive that they would “would undermine the protection of the public interest as regards the monetary policy of the union and as regards the stability of the financial system in a member state” .

Really? Unless the letter is signed in blood by Count Dracula and  Cthulu  on behalf of the Illuminati-Reptilian coalition, I doubt that 4 years on it would cause much more than a rueful shaking of heads. The letter probably makes dire noises about contagion and the stability of the European Financial System, and some soothing words along the lines of “just do this and we will all be grand, this is temporary”. It is much more likely to be embarrasing to the ECB (calling the consequences of the guarantee and severity of the problem wrong and hectoring a small nation), the Dept of Finance (this calling coming in part from their briefing of the same ECB) and the then government (naievly trusting in our friends in europe instead of a Palmerstonian interest based policy) than it is to rock the foundations of Euro area monetary policy (if we still have one other than reflexive hooverian austerity enhancing tightening). Sunlight is the best disinfectant so let it in.