The departure of Patrick honohan from the central bank caps a week where the Irish public saw the true reality of central bank independence. Continue reading
There is an interesting opinion piece in the Irish Times today, by Michael Noonan, the finance minister. It is being spun as “were going to get our money back from the banks”. This is not the first or second time of course we have heard that we are going to get the money back, and it will not be the last. We need to take enormous caution when interpreting what politicians say, especially when they talk about banks, and especially when they talk about banks in the run-up to an election. Continue reading
It’s little wonder that the Irish government has not pressed harder against the European central banks approach to the Irish banking crisis. The reality seems to be that both are very similar, in at least one key characteristic. Both seem unable to accept that a mistake, once made, should be acknowledged as such, and that this does not have to represent a humiliating climbdown but rather evidence of a learning organisation. Continue reading
This is an expanded version of a comment piece published in the Irish Examiner 15 November 2013.
The decision of government to exit the bailout ‘clean’ is a curates egg. The good element, and it is an unalloyed good, is that this signals that the worst of the effects of the noughties credit binge on the macrofinances of the state are trul behind us; that the catastrophic bank guarantee has washed through; and that we are capable of contemplating standing on our own two feet again. However, there are downsides.
The context of this is that we are now going to have to go to the markets for money. And we need a lot of money. In 2014-2017 we face up to €30b of government bonds to be repaid. These will be rolled over, which means that we need to borrow that much before we borrow a penny more for any deficits. Exchequer borrowing requirements of upwards of€20b are also required. Thus we will have to borrow approx. 12.5b per annum on average just to stand still. And do it on our own. So what are the downsides?
First, we close off options when we do this. Options have value. A major part of the value of an option comes from not exercising it. Determining that we will exit clean removes any chance that we have of a transition. Should the world economic situation worsen and drag up our borrowing costs, should a major bailout of Irish banks be required , should any unforeseen event come to pass that requires us to seek assistance, this will be a new game. Having gotten away , having to go back would in all likelihood result in harsher conditionality than a tapering off.
Second, there is the cost of debt. We pay an approximate interest rate of 3-3.5% on our existing debt. That is just about the level at which we might now be able to borrow, assuming we can do so. A very large part of the driving down of the interest rates on peripheral country debt is down to the ECB stance. For how will this stance prevail? For how long will rates stay low ; if and when rates rise then so too will the costs. Thus we are likely to see these costs of borrowing of the required 50b rising above the cost of repayment at present. This will result in added strain on the government finances
Third, we face conditionality in any case. We are signed up to a variety of EU level agreements that require us to be overseen. If we are to be overseen then it would be as well to get as much as we can for it, including some cheap cash.
Fourth, we have a poor historical record of managing the economy, over decades. Mass emigration is back, removing the potential pressure value that in most countries causes revolution and evolution of the political system. With no external stick to beat the domestic elites there is a significant danger that they will revert to the bad old ways pdq.
Fifth, much good work in reforming closed shops and technocratic regulatory improvements has been undertaken over the last few years, but all at the behest of the troika. With no external oversight this will cease. We have seen the remarkable resilience of the legal and medical professions, for example, to meaningful change, even with the piper trying to call a tune. What hope a domestic piper?
Moreover, the banks remain, rotting away and poisoning the national flow of funds. Irish SMEs in particular remain under strain, as evidenced by the ECB Access to Finance survey published this week. In a remarkable display of lack of confidence the government have contracted with a German development bank to work towards restoring credit flow. This does not auger well for the health of the pillar banks
Sixth, without any oversight beyond the Six and Two pack, we are on our own. We have given up a tool that could, potentially, have stablised our economy in the event that things go swimmingly and we decide to revert to our bad habits of “when I have it I spend it”
Seventh, we are stating that we are back in business, hale and hearty. Although I never believed it was likely, this makes it even more vanishingly unlikely that we will get any monies from anyone to repay the monies placed in the shattered pillar banks. Why would anyone give us money when we are fine?
Eight, we are no longer eligible for the ECB OMT programme. While the markets shrugged their shoulders at this on announcement, the OMT cannot now protect our bond yields. We have seen how swiftly sentiment can move against a country and we are willingly exposing ourselves to that volatility
The government have decided to jump without a parachute. Lets hope for all our sakes that there is a nice soft landing…. Now where have we heard that before?
After the “nationalisation needed” oped the then economic advisor to the Minister for Finance penned a rebuttal. This is the re-rebuttal, published in the Irish Times April 27 2009
DR ALAN Ahearne argues (April 24th) that nationalisation of the banks is inappropriate and perhaps dangerous. As a senior adviser to the Department of Finance, his views presumably reflect official thinking and so bear analysis.
His arguments are in response to an earlier piece (April 17th) signed by 20 academic specialists in finance, wherein we urged nationalisation of the systemically-important elements of the Irish banking system. This would, we argued, provide a superior outcome for the taxpayer than a National Asset Management Agency (Nama)-only solution, and indeed could work in conjunction with a mini-Nama if desired. It is interesting that essentially the same arguments made by us have been articulated by Paul Krugman, a Nobel laureate for economics, and the International Monetary Funf (IMF).
Dr Ahearne s arguments are wrong. In forming this response I have spoken to many of the signatories of the April 17th article, and while I speak here only for myself I believe my views are representative.
Dr Ahearne makes five arguments: that nationalised banks would not get funding; that nationalising would be a stain on our economic reputation; that Nama is better for the taxpayer than nationalising; that nationalised banking systems retard economic growth; and that nationalisation is a one-way street.
It is worth noting that throughout the article Dr Ahearne represents the April 17th article as arguing for the entirety of the system to be nationalised. This is incorrect and represents a partial and surprising misreading as we suggested nationalising only those banks that were of systemic-importance.
Dr Ahearne suggests investors would surely give the Irish market a wide berth in the future not just in the banking sector if the State undertook such an extreme step .
Yet the decision to guarantee all liabilities of the banks, seen from the perspective of bondholders expectations on repayment, was de facto nationalisation, making the taxpayer responsible for all repayment.
The cost for the State in terms of its borrowing has been significant. Taking the important banks into State ownership now would reduce the contingent liability and thus reduce costs of funding. Perhaps Dr Ahearne is concerned that the markets would equate nationalisation with expropriation but this manifestly cannot be the case if fair value is paid.
That this fair value may be close to zero is another issue. The Minister on Budget night in discussing the allocation of losses across bank capital base and the taxpayer appeared to confuse inter-bank borrowings (the normal day-to-day borrowings all banks engage in to smooth out liquidity peaks and troughs) with capital borrowings (money lent to banks and which form part of the tier two capital required to be held as a buffer against losses).
Dr Ahearne now suggests that nationalised banks will not be able to secure access to the inter-bank market. A number of issues arise here. First, the excessive growth and over-reliance of banks on this source of funding was a key contributor to the Irish banks problem and, therefore, were there to be a reduction in same it would be welcomed.
Second, Dr Ahearne states it is naive to think that providers of funds do not differentiate between banks with a market presence and nationalised banks .
Again, this argument is hard to understand.
First, there is simply no evidence that state-owned financial institutions face greater problems than non-state-owned in sourcing inter-bank funding. Second, it is clear and has been admitted to by at least one bank covered by the guarantee the Irish Nationwide Building Society that the only way they can continue to source funding in this market is under the umbrella of the State. A nationalisation provides a far sturdier umbrella than a revocable guarantee.
Finally, large funders prefer to fund, on a short or long-term, entities that are backed by sovereigns (who have recourse to taxation to repay) than lower-rated speculative plays such as poorly-capitalised banks.
On the issue of Nama versus nationalisation on the taxpayer, Dr Ahearne confuses at least two distinct issues. The existing ownership which he lauds as providing an upside for the taxpayer is utterly separate from the Nama.
Second, while Nama provides for a further injection of equity capital, this will occur down the line when perhaps bank shares have recovered somewhat and thus be more expensive for the taxpayer. A benefit of nationalisation is that it would cost now merely EUR 2 billion to totally purchase the equity of the systemically-important banks. How paying EUR 2 billion for 100 per cent can be inferior to paying EUR 7 billion for 25 per cent is a mathematical conundrum. In essence, nationalisation now takes the entirety of the upside into the hands of the taxpayer.
The extent of recapitalisation that will be required is essentially the same under Nama as under nationalisation and will have to come from the State. It is a mystery as to why the Department of Finance considers that the suppliers of capital and the holders of the downside risk the taxpayer should not be also compensated with the upside potential.
Finally, on retardation of growth, the studies alluded to by Dr Ahearne relate to nationalisation of entire financial systems in developing countries. The concern is that nationalisation leads to politicisation of lending. It is a sign of a lack of faith in the political system as a whole that a senior adviser to Government can in effect muse that it cannot be trusted, for such is the logical outcome of his concerns. However, were the State to nationalise the systemically-important Irish-owned, guarantee-covered banks that would still leave significant competition from non-State owned.
We did, stating: If nationalised the taxpayer stands to get a return on their equity investment after the banks have been sold into private hands in a few years time, and this would substantially reduce the underlying cost to the taxpayer.
Such an opportunity could involve a voucher-style reprivatisation of the banks and also ignores the fact that Nama is set up explicitly to act for a medium-term.
No country facing economic problems of this magnitude has come out of recession until the banking system has been healed. The Department of Finance believes that starting this can wait. I do not. Waiting until Nama gets rolling, then waiting more until (if) its legal challenges have been overcome, is in effect writing an invitation to the IMF to write a prescription and our euro zone colleagues to force it upon us.
Brian M Lucey is associate professor of finance at the school of business studies, Trinity College
This is a version of a column published in the Irish Examiner
It must be dangerous to be a bird in Dublin these days. The government that promised transparency has instead adopted a kite-flying approach. The kites pop up, and like modern day Benjamin Franklins the government minister hangs on as it drifts into the storm, and then gauges the lightening. Occasionally they get singed, sometimes they escape, and withdraw for another day. And its not just the government. Every other aspect of social partnership is busy with economic bals and fiscal paper and silk, constructing and testing kites. In the best Japanese tradition, and as we are heading towards a Japanese style lost decade why not, we even see kite wars. Some kites are saw edged and designed to cut down others. Some kites get smashed down and then amended get relaunched.
IBEC have joined in this pleasant pastime recently, with their proposal that public sector increments be paused. The saving from this would be approximately 1b per annum it appears. The problem with such increments is that they are generally paid regardless – one is on a salary scale along which one advances by dint of survival. In a modern managerial environment that doesn’t make a lot of sense – there is little incentive to excel, and little disincentive to slack. Of course, we have know this for decades and for a long time it suited IBEC as a member of social partnership to allow this to go on. Peace at any price was the seeming mantra. Cutting a billion euro from the state budget is eminently justifiable in the context of borrowing a billion. However, throughout the crisis the argument on cutting public sector wages has been notable for a lamentable lack of follow on argument. Cutting X does not save X. At the most basic it saves less than X due to the fact that yes, public sector wages are subject to tax. So 0.7X might be the after tax savings. And then there is the knock-on effect…
we have seen recent estimation from the IMF of these effects. In economics the effect of changing one item on another is known as a multiplier. The assumed and conventional multiplier for government expenditure was in the region of 0.5-0.7. This would imply that cutting X would in the end result in a fall in overall economic output of 0.5 – 0.7X. In other words, cutting wages would not have the overall effect of reducing the economic cake by the same amount as the wage cut. This may now need to be revisited in the light of the IMF world economic outlook report which suggested that far from being less than 1 (implying that cutting public sector pay would result in a small fall in output) these shortterm multipliers may be significantly greater than 1. In other words, cutting X will result in a decline of 1.5 X– 1.9X .
Whatever the attraction from a government accounting perspective of cutting the short and medium term effects on the rest of the economy would be significant and negative. In the Irish case the effects are complicated by the GNP/GDP issue – while GDP can be growing or contracting slowly the GNP component can be falling more rapidly. Thus we cannot say with confidence that based on the IMF analysis the multiplier is too small we can take it that some very significant work on same needs to be done, pronto, by a combined ESRI-DFinance-C Bank team to ascertain the best evidence. In that context, we might want to hold fire on accelerating the pace of consolidation
IBEC have not, to my knowledge, come up with a comprehensive set of implementable performance metrics – that to be fair is not their job – but one must applaud their desire to save a billion. However, why stop at a billion? Why not save three times that much, and harm nobody? Part of the problem with cutting government expenditure is that it gets recycled into the economy. It is rare to have government expenditure which is totally isolated from the economy, and yet we have such.
Each year the government spends 3.1b feeding the IBRC (anglo/inbs) black hole. This year in a cunning plan instead of real money they issued a bond to the beast. The borrowed or tax derived money, you will recall, is given to the Central Bank of Ireland who then destroy it. As far as I can ascertain IBEC have not expressed concern about that, except in so far as the technicalities of the bond v cash 2012 payment impacted on government aggregates. It is abundantly clear that there is little appetite in the ECB for a deal on this money. At the very best we might replace this promissory note (which is not government debt) with a 40y bond. At worst we will be stuck with the full repayment schedule. It would cause nothing but the closure of IBRC and a technical temporary accounting headache for the Central Bank if the government were to announce that in framing the 2013 budget they were not going to make the March 2013 (or any subsequent payment). The ECB would be unhappy but I guess we can live with that. What they would not be able to do is to “cut us off” from liquidity. It would be nice if IBEC were to advocate saving 3.1b but then again IBRC is a member firm of IBEC. This money does not get spent in the Irish or European economies. It vanishes. We borrow it, and we destroy it. Why not…not borrow it.?
So. The problem it seems with greece is not its unsustainable 150% debt to GDP ratio, or the habit many of its wealthier citizens have of being creative with tax. No …. its that they are lazy olive botherers who simply dont work hard enough. That lazy stereotype, a trope of the crisis, comes round every while. The greeks are simply lazy.This we know to be true (sic) as the germans, sorry, the Troika, demand that they work harder, perhaps six days a week 13h per day. No, really.
Well, no, not really.
First, lets see where the money went – it didnt go to keep the average greek in the lap of luxury.
So. Maybe they should work harder, after all, as we in ireland know , bondholders must be paid off. It sounds better in Finnish….
Well, they do kinda work hard. Harder than, ooh, say, Germany. Or Ireland. (data from http://stats.oecd.org/
Well, maybe its because its too hard to fire people in Greece . After all, the Troika have suggested that greece deregulate its labour market and are especially worried about unemployment becoming structural (because perhaps in addition to greek workers being unifireable they are more comfortable on the dole). Hmm.. higher numbers = more restrictive in the chart below..
As for the incentive to say on the dole once you have gotten there…lets see. A very recent (german) research study published just a few months ago (Pfeifer, 2012 International Journal of Social Welfare , V21) says this about Greece
Depicting European UB and SA systems with indicators of expenditure, generosity, problem pressure and social rights yielded a classiﬁcation that partly corresponds to earlier typologies. We found Scandinavian type welfare states with very generous provision and relatively high spending in both areas (Denmark and The Netherlands), and we also identiﬁed a core group of two southern European countries with scarce beneﬁts and extremely low spending (Italy and Greece).
Well, if its not the lazyness, what is it (apart from the tax…)
Greece is simply not terribly productive. Its about half as productive as Ireland and 2/3 as productive as Germany.
Now, there are reasons to why that is the case but thats for another blogpost. Lets just note that productivity is a function of capital and labour. Clearly the problem in greece is not so much that they work too little, its that they are not somehow transmuting that via interactions with capital (which can be physical, social, human etc) into output.
Back to debt. Greek debt is unrepayable. Everybody knows that and the present posturing is only delaying the inevitable. Countries default, and get debt written off. Germany, amongst the Eurozone members, has been proportionally the largest beneficiary of debt write-off, with debts close to 400% of GDP being written off one way and another, allowing it to reenter the economic and political life of europe after WW2 with an effective clean slate. Eaten bread is soon forgotten it seems.
It’s not clear that it does. I’m not sure it’s a seismic (Enda Kenny) or massive (Eamonn Gilmore) deal. And it happened because of Spanish and Italian pressure.
So far as we can see at present there are three parts to this. The Spanish banks will be recapped directly from the EFSF and later the ESM (assuming there is one…) which will not have formal super senior status but will be more like the IMF and have quasi senior status. The ECB will get an enhanced supervisory role. Crucially for Ireland the deal also suggests that similar cases will be treated similarly. But there is no explicit retrospection.
We have spent, in very rough terms, 30b on Anglo promissory notes, 20b from the then National Pension Reserve Fund in direct bank recaps and about 12-14b more in other recaps, bailouts etc which forms part of the explicit borrowing now subsumed under the troika bailout..
We will not get that 20b back. It’s gone. We might, but it’s not clear, get a deal on the prom notes, but the mood music is that at best this quasi state debt will be converted to very much state debt albeit repayable in a manner that costs less per annum than the 3b cost of prom note redemption. We might or might not get a deal on the 12b, but there is no “Irish state bond for recapping banks” out that can be redeemed. So this would have to be dealt with as part of a general state debt not bank debt deal, which seems not to be o n the cards.
It’s a soda stream not a champagne moment.
As I write there are suggestions that spain will seek a banking only assistance of some €100b.
Is that going to be enough? Look at the following graphs… Bear in mind
a) Ireland is approx 1/8 the size of spain
b) Ireland has to date spent €63b on its banking bailout.
Spanish Private Sector growth (from the Eurostat macro instability website) . total accumulation is not massively different for the banks.
Second comparative house prices (from Ecowin) , rebased to 2000. Again, note that the trajectories are similar, with however the crucial element that spain has not begun the steep declines that have been the cause of the irish banks going pop.
Will 100b, or some 8% of Spanish GDP be enough given the similar trajectories to a country which has seen some 30%+ of GDP vaporised?