Tag Archives: IMF

Plan B needed, times three, for the dangers ahead

This is an extended and linked version of an Irish Examiner oped published 24 November 2012

Irish governments over the years , and especially in the last few, have not exactly shown themselves to be shining examples when it comes to contingency planning. Time and again we have seen plans advanced which when they fall apart reveal that little or no obvious alternatives were in place, or if in place paid any heed to. The most egregious example is of course the creation of that vortex of wealth destruction that is IBRC, where despite alternatives being presented to cabinet a bullheaded politicized decision was taken which shot the economy in the head although the full damage took time to be realized.

In planning one plans for the worst and hope for the best. And some things that are planned for, or should be planned for, are what one might call grey swans – low probability high impact events. It is unlikely for example that we will see a tsunami hit Ireland but if it did we would be best advised to have plans in place. Mind you, in a country where the effect of releasing millions of gallons of water from a dam into a flooded river already bursting at its banks downstream seemed not to be planned in an integrated fashion one wonders…

Three major events, none of which one hopes will happen, are now beginning to make themselves felt on the economic stage. It is probably too much to hope that the system which gave us the so far abysmal performance on legacy bank debt can plan for these but at least the public at large might want to think on them. The three main possibilities are the effective removal of our tax shelter for MNC profits, the sundering of the EU via Britain huffing off, and a hard landing in china.

Take the latter : one of the safety valves which we have relied on for a long time is the ability of friendly countries not economically screwed up to take our surplus labour, either legally or to turn an effective blind eye. With over 80 thousand persons per annum emigrating not all are going to the UK, many (possibly as many as 20k) going to Australia and upwards of 6k to Canada. Both Australia and Canada are very dependent on the worldwide commodity boom fostered in large part by the expansion in the Chinese economy. And as the Chinese economy is faltering so too is business sentiment in these countries turning. With uncertainty about the future path of the chinese economy and the knock-on effects on these importers of Irish labor, what is the contingency plan should we have to absorb tens of thousands additional jobseekers?

A further blow could come from the deepening rift emerging between an increasingly euro skeptical UK and a Europe/Eurozone that sees greater integration (sometime, on the cheap ideally) as the only hope of longterm survival. Although not nearly as dominant as in the 1950s and 1960s the reality is that the UK is our largest market – our economies are intertwined. 11% of UK exports go to Ireland, and they source about 7% of their imports from us. Meanwhile. 33% of our imports and 16% of our exports go to the UK. When one looks at the situation excluding chemicals the export dominance of the UK is even starker. There seems to be in the UK a belief that they can selectively withdraw from large parts of the EU, ditching what is known as the Acquis, the body of laws that govern conduct and ensure harmonization. Faced with an intransigent UK and an exasperated EU, the prospects for a nasty split are while low growing. A UK out of the EU would pose massive challenges to Ireland – it would be fundamental decisions to either follow them, and forever accept that we are economically a region of the UK, or to stay with the EU (and be a region thereof). A UK out of the EU would one suspects be treated quite vindictively by the EU and in the shortterm face massive trade barriers. How we would deal with that scenario is no doubt the subject of a detailed think-tank in government…no doubt…

Allied to that and doubled down from the US we see a ratcheting up of the pressure on the tax front. Irish based MNCs are on the face of it the most productive entities in the world making profit per employee four times the EU average. It strains credulity to imagine that at least some of this booked profit does not arise from creative tax inspired planning. MNC’s can plan in such a way that the dell PC’s manufactured in Poland appear as Irish exports…There is a worldwide revolt against corporations and high net worth individuals engaging in legal but costly tax planning. We have seen companies grilled in the UK parliament; the French have simply taken the situation into their own hands and sent tax bills to MNC’s; and the issue of tax harmonization vi the common consolidated tax base has not gone away Meanwhile the US Senate has described Ireland as a tax haven and Microsoft has been used an example of aggressive tax planning in the US debate on clamping down on same. With global scrutiny now on Ireland, with the EU determined to srive forward on tax harmonization, what plans are in place, if any, to determine the fallout were our MNC friendly tax system to come under threat

These issues may never come to fruition. But a mature open debate on them, without calls for green jersey wearing or not talking down the economy or other such guff is required. We were illserved keeping our heads in the sand in the boom years and should learn the lesson that open debate is vital.

short term multipliers…what the government is doing

With all the broughahah about the real level of fiscal multipliers, one might imagine that the Irish government, with the ESRI, central bank, and dept of finance at its disposal, not to mention lots of academics who would do it if asked, would be working to establish urgently what the real situation is for Ireland. after all, the level and sign of these beasts matters for government policy.

Wouldn’t you?….

DÁIL QUESTION

NO 204

To ask the Minister for Finance if any analyses are being undertaken in view of the IMF World Economic Outlook note on multipliers to establish the short-term multiplier for Government spending..

– Thomas Pringle.

* For WRITTEN answer on Tuesday, 6th November, 2012
Ref No: 47386/12

REPLY

Minister for Finance ( Mr Noonan) : At the outset, I want to stress that the Government’s key objective of supporting economic growth that delivers jobs remains to the forefront in framing fiscal and economic policy. Fiscal consolidation reduces the fiscal deficit and increases investor confidence which in turn lowers the cost of borrowing and helps to put public debt on a declining path.

Having said that I fully recognise that there will be a short term reduction in output before these medium term benefits are realised. So it is a difficult balancing act between the need for consolidation on the one hand and the need to support the emerging recovery on the other. There is, I think it is fair to say, an acknowledgement among many commentators that we in Government are getting this balance right.

The recent IMF World Economic Outlook suggests that the average size of fiscal multipliers (the effect of consolidation on growth) across countries may have been underestimated in recent years. More recently, senior IMF staff tasked with monitoring developments in Ireland pointed to the multiplicity of factors at play in acting as a dampener on growth and acknowledged that there was no convincing evidence that the fiscal multiplier for Ireland was underestimated compared with that assumed under the programme.

Ireland is a small, open economy with imports accounting for over three quarters of GDP. This means that a considerable amount of consolidation leaks out through reduced demand in countries we import from. We can already see this in the Balance of Payments figure, which shows the current account moving from a deficit of -5.7% of GDP in 2008 to a surplus of 1.1% in 2011.

Fiscal multipliers vary according to the fiscal instruments used, and the impact on aggregate demand as a result of expenditure changes can differ from tax changes. I would reiterate the Government’s cognisance of this and its commitment to implementing consolidation in as growth-friendly a manner as possible.

In order to correct our excessive deficit and minimise the cost to the taxpayer through sustaining investor confidence and keeping the cost of borrowing as low as possible, Ireland is committed to implementing further consolidation over the next three years. Evidence of the rewards associated with this approach is already visible through the lowering of bond yields since early summer and the successful return of the NTMA to the debt market.

So, no. They aren’t. But look, we’re exporting loads….

IBEC and IBRC and the IMF

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.?

 

Euro deal saves Ireland? Maybe…

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.

How much money will spain actually need?

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?

Europe needs leadership but from where?

This is an expanded and updated version of a column published in the Irish Examiner
With the passing of the fiscal compact the government now find themselves in a position t once easy and difficult. It is easy in that the parameters of fiscal policy for the next number of years are set out, if not for the next decade. It is hard in that the implementation of these policies is going to result in wrenching adjustments to all aspects of irish life. In 2013-15 expenditure will fall by €2.25b, €2.0b and €1.0b, while tax increases (and these will be coming from an anemic economy) will 1.25b, 1,1b and 0.7b. Despite the ULA and related calling the referendum an austerity referendum, such terminology disguises the fact that there are at least in principle two different kind of adjustments to be made. First, we are still running a primary deficit, defined as government spending less interest payments still being more than government income. Bringing this into broad balance is going to be a sine qua non for accessing regular market bond financing. Second, and only then, we need to consider the issues facing us from the fiscal compact. As has been explained in great detail over the last number of months so long as any nominal growth emerges and so long as government net spending does not run out of control the parameters of the compact can be met

In recent months there has been a slight glimmer of good news for the government in terms of taxation. Income tax has shown strong growth, up 12% over the year (although that figure is somewhat distorted by changes in the way various taxes are allocated to headings). What is problematic is that expenditure is still rising, but this is largely driven by health and social welfare. In a deep recession it is unrealistic to expect these government functions to shrink. Nor might we want to cut too deep. We are not good in this country at realising the essential nonlinearity of much of the relationship between government expenditure and output. Put simply we have a pretty decent health and education system. Small, or even medium increases in expenditure are inherently unlikely to result in a proportional increase in output. The same cannot necessarily be said on the downside – a quality system requires constant high levels of quality inputs, and it is easy for the system to begin to fail with slight reductions in the quality or quantity of inputs. And the pressure will be to shrink. Despite the tax take rising unemployment remains stubbornly high, and the domestic economy has flatlined, as is evident from retail sales and the labour force both shrinking. Any measured growth in the economy for the next few years will only come from the high-tech low-job export sector.

The future of Ireland therefore is crucially dependent on the future of the European economy, both the eurozone and others. this future is now clearly resting on the shoulders of the ECB, shoulders that are being shrugged as if the crisis was nothing to do with it. Right now the epicentre of the crisis has moved to spain. Although spain has a reasonable debt-gdp level of about 80%, there are concerns about its banking system. In particular, there is grave uncertainty about the level of losses in its banks. It is the uncertainty about the level combined with the near certainty that the Spanish taxpayer will end up footing the bill that has spooked the markets. Spanish banks may be broke, but the ECB will not allow them to fail. Nor will they allow bondholders to be burned. A promissory note a la Anglo solution would allow Spanish banks to ease their liquidity problems, as might any euro area lending solution. It would not solve their solvency. So long as the ECB continues to (even with euro inflation low) to obsess about inflation it will not allow monetization via promissory notes. The ECB’s most recent meeting showed how it is now paralyzed by irrational fears of inflation, where they refused to cut interest rates. Paul Krugman has recently echoed the fears of many, that the ECB are repeating the mistakes of the 1930’s. History we are told repeats itself twice : it is our misfortune to be in the first such repetition, which we recall is tragedy.

To solve the euro crisis and the irish crisis will require coordinated movements. Banks must be allowed to fail, and senior bondholders must be forced to take losses. The disruption to financial markets that that will cause is less than will be caused if the euro breaks and in any case the ECB’s insistence on a sovereign-bank linkage has caused untold damage. That will assist in cleaning the Spanish quagmire. Existing bank recapitalisation in Ireland and the bulk of greek debt should be converted to a longterm low interest rate loan, on condition that we adhere to good governance standards. But most of all Europe needs leadership from a patently unwilling germany. Germany is an export led economy, and by definition therefore requires a strong market for its products. The shortterm political win of truculent arrogance will result in a longterm loss of incalculable dimensions. European leaders must make it clear to germany, which is now beginning to show signs of deterioration in its economic state, that mutual adjustment in the eurozone requires both sides to move. This is no longer economics, it is high international politics, a game in which we Irish have little experience or evident competence.

Proximity and distance

A powerful, erudite and timely polemic

Ireland after NAMA

This crisis is inherently spatial. Where should the axe fall? Where will sovereignty be located? What shape should society take now, or in the future? However, these questions of ‘whereness’ or spatial form are by no means the only spatial issues we need to consider. There are also all sorts of issues to do with proximity and distance. Take a story in today’s Irish Times. Christine Lagarde has been in Latvia telling the people there that their austerity has been worth it; that toughing it out is for the best. And in the process she’s telling everyone else – people far from Latvia, such as people here in Ireland – to look at their example and get on with the suffering.

Lagarde can easily say such things. She hasn’t (although please correct me if I’m wrong) had to endure much austerity in the last few years. Like her fellow IMF…

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