Promissory Notes and Deficits

After the announcement that the €4 billion used to recapitalise Anglo Irish Bank last year has to be included in the General Government Deficit, I was surprised to see speculation on this blog and elsewhere that the €8.3 billion in promissory notes issued this year might not count towards the deficit. Yesterday in the Dail, Brian Lenihan made it clear that this full amount was being added to the general government debt:

The recapitalisation of €8.3 billion by issuing a promissory note has been recorded as increasing Ireland’s general Government debt by that full amount in 2010 and, pending the agreement of the restructuring plan, it is appropriate not to include it in the deficit measurement until the matter can be reviewed on foot of any decision made by the European Commission on the plan.

So, the full amount has been added to the stock of debt but we are awaiting a decision on whether it adds to the deficit.

Personally, I like my stock-flow identities to add up, so I can’t see any reason why the full amount wouldn’t be added to the deficit. Perhaps others who understand the statistical issues better than me could explain how these additions to the debt—which are clearly “non-financial transactions” as defined by Eurostat—will not be counted as part of the general government deficit.

Latest EPA projections

The EPA has released its latest forecasts for the emissions of greenhouse gases up to 2020. It confirms that Ireland will not need to buy additional CO2 permits on the international market. We may even have too many, but the NTMA is not allow to sell any excess for reasons that entirely escape me. The EPA also confirms that Ireland is unlikely to meet its 2020 target (although Greece may lend a helping hand) even in the “optimistic” scenario, which assumes that emissions fall if there is a government report that tells them to.

Harney on Health Funding

With so many major macro and financial stories filling the headlines, it can be easy to forget about the major microeconomic issues that need to be considered when thinking about how to deliver as high a level of public services as is possible with less resources.

Minister for Health, Mary Harney’s op-ed discussing various proposals for reform of funding and delivery of health services (such as this proposal from the Adelaide Hospital Society and Fine Gael’s Fair Care proposal) is worth reading carefully to understand the government’s position on this key area of public spending.

Ireland’s Exposure to Greek Debt

On today’s RTE radio News at One, Sean Whelan reported that Irish banks have exposure of about €7 billion to Greek debt, that restructuring of Greek sovereign debt could lead to a fifty percent write-down of Greek debt and that because the Irish government are supporting the banks, the contribution of €450 million by the Irish government to the Greek bailout needed to be placed against the possibility of a potential loss of €3.5 billion for the banks.

Much of this is correct but it is perhaps worth clarifying what we know about Irish bank holdings of Greek debt. First, I’m guessing that Sean Whelan is quoting from figures released from the BIS which show that Irish banks hold $8.6 billion in Greek debt.  At an exchange rate of €1 = $1.31, this translates into €6.6 billion, so Sean Whelan’s figure is about right.

However, a few caveats about this are required. First, it appears that these figures relate to all Greek debt not just government debt.

Second, I believe the definition of Irish banks here include Irish outlets of non-Irish banks (such as various IFSC institutions) which are not receiving assistance from the Irish government.

Third, the figures available for the major Irish bank holdings of government bonds show that it is essentially impossible that these banks are holding such large quantities of Greek government debt. Greece’s rating was downgraded to BBB+ on December 16, this rules out AIB holding much Greek debt. The banks report their holdings of government bonds by ratings and they hold almost no government bonds with low rating (e.g. AIB only €109 million of these holdings were below A rating, Anglo have only €132 million).

So, to conclude, financial institutions in Ireland hold about €7 billion in Greek debt but we don’t know how much of this is Greek sovereign debt. We do know that the banks that are receiving assistance from the Irish government do not hold much Greek sovereign debt. For these reasons, the direct cost to the banks receiving assistance of a Greek restructuring would be a lot less than the €450 million figure cited for our direct contribution.

Keeping in mind that the caveats above are not accounted for, this post from the Peterson Institute is still worth reading.

Update: The Minister for Finance has now confirmed that Irish bank exposure to Greek sovereign debt is negligible relative to the size of their balance sheets–less than €40 million apparently.

Lenihan Open to Wind-Down of Anglo

Brian Lenihan has told the Dail that he is now open to the idea of winding down Anglo. This is perhaps speculative but Matt Cooper from Today FM has reported that he is hearing from sources that the European Commission is not happy with the restucturing plan for Anglo that has been provided. If true, then these two events are perhaps linked.