Governor Honohan made a speech last night on this topic: the text is here.
This blog began on December 2nd 2008. Many thanks to all contributors and commentators for building this site into a useful forum for the analysis and discussion of topics relating to the Irish economy (and beyond).
I have been sceptical all along about the government’s decision to use €7 billion of public money to purchase preference shares in AIB and BOI earlier this year at a time when the combined market value of these banks had reached a low point of about €1 billion.
When I appeared before the Oireachtas Committee on Finance and the Public Sector in May, I argued that the Irish banks would not have the resources to pay back these preference shares and that they would end up being converted into ordinary shares.
My recent presentation to the Labour Party also argued that the government’s preference shares were most likely going to be converted to ordinary shares, thus foregoing the automatic eight percent annual divided associated with these preference shares.
AIB’s statement in relation to its negotiations with the EU Commission brings us close to this event.
There has been extensive discussion on this blog and elsewhere as to the cyclical/structural split in the Irish deficit, likely to be 14 -15% of GNP this year, and roughly the same in 2010 if the December 9 budget achieves the €4 billion adjustment to which the government is committed.
A portion of the deficit will be eliminated as the tax/GNP ratio is restored in a recovery, whenever it comes. But most commentators seem to be agreed that the structural component dominates, and will endure indefinitely at well above anything the Stability and Growth Pact, or lenders, will permit.
So permanent measures are needed to deal with this permanent component of the deficit. I don’t wish to start a debate about how big this component is – let’s pretend we all agree that it is, say, 9% of GNP. Government revenue needs to be raised, or spending reduced, by 9% of GNP over a period of years through specific, and permanent, policy actions.
This evening’s news reports suggest that a portion of the public payroll adjustment is to be achieved through a manouvre involving unpaid leave for public servants, which would achieve a cash saving in 2010. Twenty days out of c. 220, if that is the formula, would yield a big cut, perhaps most of the entire €1.3 billion being sought from this expenditure heading. But to qualify as a contribution to eliminating the 9% of GNP structural deficit, it would need to be forever. And if it is compulsory, and forever, it is a pay cut. An awkward pay cut to implement and monitor, and entailing a commensurate reduction in employee time input, to which there must be output costs.
If it is compulsory, but only for 2010, it is of no value in the context of fiscal consolidation. The government might as well place a temporary surcharge for a year on some item of tax revenue, and it all has to be done again, from scratch, the following year.
Winston Churchill remarked once:
‘It is not always enough to do our best. Sometimes we have to do what’s required.’
Moritz Schularick and Alan Taylor have written a working paper looking at long run trends in money, credit and financial crises. They summarize the paper here. Several of the papers referenced at the end are worth checking out as well.
Now that the worst seems to be over, it is time to start thinking about the next flood. Today’s piece in the Independent is a small start.
The lead story on the NYT website asks where the next debt blowup may take place: you can read the article here.