Archive for July, 2010

Shamrock Rovers 0 Juventus 2

By Michael Moore

Friday, July 30th, 2010

Is this really a moral victory for Ireland or is it once again just “the cracked looking-glass of a servant”?

NIRSA Report on Irish Property Market Planning

By Gregory Connor

Thursday, July 29th, 2010

A collection of researchers at the National Institute of Regional and Spatial Analysis (NIRSA), R. Kitchen, J. Gleeson, K. Keaveney, and C. O’ Callaghan, have written a powerful new report on Irish property market policy and land development planning policy, critically examining both policy errors during the 1993-2007 period, during the post-crash period post 2007 (including a critique of NAMA) and making suggestions for the future.  The link is here.

The report has a modern geographers’ perspective and is strongest when discussing zoning policy, development policy, and property-related tax policies, but there is still plenty of things for mainstream economics comments/discussion in the report.

The report makes clear to what a large extent post-1993 property-related government policy, right up until today, is driven by the interests of the property development industry.  Coincidentally (or not) this industry is one of the biggest funders of the dominant party in government during this long period.

I am not sure if I am the correct person to paste up this link, but perhaps others can provide useful comments and replies to comments.  (I do not claim to be a property researcher but to the extent that property is a risky portfolio asset it touches a little bit on my own research area.)

Costs of Doing Business in Ireland 2010

By The Irish Economy

Monday, July 26th, 2010

The recently published NCC study on the costs of doing business in Ireland can be found here.

Revisiting the NDP

By John McHale

Monday, July 26th, 2010

The government has released its revised National Development Plan for the period to 2016.   The documentation includes a short leaflet, Investing for Growth and Jobs: Infrastructure Investment Priorities 2010 – 2016.   With a bit of chutzpah, the document claims the 40 percent cut in capital spending as “stimulus” for the economy.   The emphasis is on new priorities and not on the overall cuts.   Fortunately, the Department of Finance has also released Infrastructure Investment Priorities 2010 – 2016: A Financial Framework, which makes a more sober case for the shift in strategy (see, in particular, Chapters 2 & 3).   The arguments of Colm McCarthy for just-in-time infrastructure provision (based on the time value of money) and more broadly for cost-benefit analysis – as championed on this site and elsewhere by Edgar Morgenroth – would appear to have been influential in the overall approach.   Of course, the precarious state of the public finances looms large behind the change in strategy.  (more…)

The EU’s Relaxed Approach to Bank Stress Testing

By Gregory Connor

Monday, July 26th, 2010

The newly released stress test of selected EU-area banks by the Committee of European Bank Supervisors (CEBS) is flawed in its methodology and the results are not a reliable indicator of EU bank sector soundness. A stress test should examine the impact on net portfolio value of extreme but plausible shocks to the key variates explaining net portfolio value.  The CEBS report states proudly and repeatedly that it uses extreme but plausible shocks, and this is true, but it ignores the key-variates criterion of a well-designed stress test.

(more…)

Oireachtas report on November floods

By Richard Tol

Monday, July 26th, 2010

The Oireachtas Joint Committee on the Environment etc published a report on the November floods while I was on holiday. It is interesting both for what it says and does not say.

The report is clear about responsibilities: There are too many agencies involved, and no one took the lead. The report argues that the Minister of the Environment should take charge.

The committee also laments the role played by the ESB, and underlines that perhaps it should have been involved in Cork’s flood management.

The report has a little gem: “The ESB made the point that they issued two warnings on Thursday, 19th November, which was unique. However, the significance of the two notifications wasn’t appreciated by the general public.” Perhaps that is because the general public did not understand that “higher than 300 m3/s” really meant 535 m3/s. Along the same lines, ESB apparently told the Lee Waterworks at 22:10 that 450 m3/s was being released, while the actual release had reached 546 m3/s by 21:50. The report does not make much of this, but it does call for further investigations.

The report is silent on a number of things. It avoids questions of liability. It calls on the OPW to develop a flood warning system, but omits that crucial data are off-limits to the OPW and that the data exchange between Met Eireann and OPW is not perfect either. The report acknowledges that there too many agencies involved, but it does not name those that should be relieved from their duties.

The list of invitees to the hearings is interesting too: Only insiders were heard. Not at single independent expert was invited.

Competitiveness once more

By Kevin O’Rourke

Saturday, July 24th, 2010

A while ago, I pointed out on this site that a season ticket to Shamrock Rovers offered remarkably good value for money. Any of you who acted on my advice will now be in the happy position of being able to buy tickets for the Juventus game on Thursday.

Just saying.

Stress Tests

By John McHale

Saturday, July 24th, 2010

The results for the stress tests on 91 European banks were released yesterday evening.   A reasonably detailed description of the tests and results is available from the Committee of European Banking Supervisors’ (CEBS) website.   The results for AIB and BOI are available from the Irish Central Bank’s website.   As Michael Hennigan points out, the overall passing score was 84-7, and so the release of the results has not quite made the waves expected.   Both Irish banks passed with a bit to spare despite the relatively high Tier 1 target of 6 percent.   However, the results factored in capital raising plans to the end of the year, and the jury is still out on how much of the 7.4 bl. AIB can achieve without additional government help.  

Some analysis here: Irish Times; Irish Independent; Financial Times.

Fiscal Free Lunches

By John McHale

Friday, July 23rd, 2010

Karl Whelan makes a convincing case against the idea that a fiscal stimulus would lower the deficit (see Unpleasant Fiscal Arithmetic).    But there is another fiscal free lunch idea that I see as even more influential—and probably just as wrong.  This is the idea that discretionary fiscal contractions increase economic growth, which in turn reinforces the improvement in the deficit.   The key mechanisms behind what is sometimes called the “German view” are Ricardian-type expectations effects and a reduced risk premium on borrowing (the latter recently emphasised in ESRI Recovery Scenarios paper).    I doubt that there are many Irish economists who would claim to hold this view if pushed.  However, it seems to me to be implicit in the widely held view that a more front-loaded fiscal adjustment will speed economic recovery.  (more…)

Establishment of the Review Group on State Assets

By Edgar Morgenroth

Friday, July 23rd, 2010

As has been widely reported the Minister for Finance has established a Review Group on State Assets that is chaired by Colm McCarthy.

The terms of reference are:

  • To consider the potential for asset disposals in the public sector, including commercial state bodies, in view of the indebtedness of the State.
  • To draw up a list of possible asset disposals.
  • To assess how the use and disposition of such assets can best help restore growth and contribute to national investment priorities.
  • To review where appropriate, relevant investment and financing plans, commercial practices and regulatory requirements affecting the use of such assets in the national interest.
  • While most comments in the media have interpreted the focus on asset disposals to refer only to privatisation, it is perfectly possible that the various state companies hold assets that might not be essential for the efficient running of these businesses and thus could be disposed of without privatisation.

    In relation to privatisation it will be important not only to consider the short-run gain in funds through the sale of assets, but the longer-run impact on the competitiveness of the economy. Long-run considerations should include the loss of control of national strategic assets that would result from a sale. This might be addressed by keeping the key infrastructures such as networks in public ownership.

    In some cases it might also be useful to consider a long-term lease as an alternative to an outright sale of assets, which will also yield revenue up-front but avoids the ’selling off of family silver’. Joint ownership is another option.

    Looking through the list of assets to be reviewed it is hard to ignore the differences in ownership patterns with many other countries. Electricity generation, ports and airports are private in many countries.

    Mody on Institutional Change

    By Karl Whelan

    Friday, July 23rd, 2010

    Writing in today’s Irish Times, Ashoka Mody argues for the need to introduce a special resolution regime for banks as well as “fiscal benchmarks and supporting rules, along with a technical voice in the form of “fiscal councils” to evaluate budgetary risks.”

    Mr. Mody is assistant director in the European department of the International Monetary Fund and has lead the IMF’s article for team that has visited Ireland in recent years. While Mody’s senior IMF status makes him worth listening to, it’s also worth noting that he has a considerable research record as an economist including this interesting work on the effects of budgetary institutions.

    Forestry policy and climate targets

    By Alan Matthews

    Thursday, July 22nd, 2010

    With the publication of the heads of the promised climate change bill now imminent, it is interesting to note that two Oireachtas Comittees, the Joint Committee on Climate Change and Energy Security and the Joint Committee on Agriculture, Fisheries and Food, have just published a report on the role of forests in future EU climate policy. The paper was written in the context of the Committees’ role in responding to EU proposals, in this case an EU Commission Green Paper on Protecting Forests against Climate Change.

    The report raises some important issues on the treatment of carbon sequestration by forests in the context of EU climate policy, where arguably Irish interests differ from the rest of the EU. Although its conclusions need further discussion, the report is a good example of how the Oireachtas can contribute to public debate and for this reason alone it should be welcomed. For the record, Andrew Doyle T.D. (FG)  was the rapporteur for both committees and he was assisted in preparing the report by EPS Consulting (formerly A&L Goodbody Consulting).

    (more…)

    Unpleasant Stimulus Arithmetic

    By Karl Whelan

    Thursday, July 22nd, 2010

    One by-product of Paul Krugman’s latest intervention on Ireland is that it will provide further ammunition for the many people who believe the government should abandon fiscal austerity and provide a stimulus package of new spending to boost the economy. Stimulus advocates believe that budget cuts are self-defeating and that, by contrast, a stimulus package will pay for itself and actually improve our budgetary situation.

    I know that the majority of Irish economists don’t agree with this idea but perhaps we’re not doing a very good job at communicating why, so here’s a brief explanation.

    (more…)

    Krugman and the ESRI

    By Karl Whelan

    Thursday, July 22nd, 2010

    Paul Krugman criticises the ESRI’s Recovery Scenarios paper:

    What the careless reader might miss, however, is the fact that the policy conclusions are not, in fact, derived from the analysis — they come out of thin air. The authors simply assert that more austerity now would lead to a lower risk premium and hence higher growth, based on no evidence I can see.

    This criticism appears to relate to the paragraph on page 41 of the report starting with “Recent experience ..”

    Two aspects of this criticism strike me as unfair.

    First, the assertion that Krugman refers to appears to be the following concluding sentence:

    It also raises the question as to whether a more rapid fiscal adjustment than currently planned would have a more beneficial outcome for the economy. 

    This seems to be pretty far from an assertion. Rather it flags this idea as something to consider. Krugman seems to be jumping on the ESRI for what it is little more than a speculative remark.

    Second, in relation to the “based on no evidence that I can see” comment, I’d note that the relevant paragraph contains the following sentence:

    This means that action to reduce borrowing, which would otherwise still be deflationary, could actually increase domestic activity if it produced a sufficient reduction in the risk premium (Alesina, 2010).

    Now I’m guessing that Krugman has no time for the analysis in Alesina, 2010 (and he may be correct in this assessment) but it’s still worth noting that the ESRI did cite evidence from a Harvard economist when making the supposed assertion.

    What seems to be happening here is that the ESRI-bashing is just a small element in Krugman’s greater campaign of opposing austerity in the US and Germany (with which I’m sympathetic.)  However, it’s worth recalling that last year, Krugman noted about Ireland that “there isn’t much disagreement about the need for fiscal austerity. As far as responding to the recession goes, Ireland appears to be really, truly without options” and referred to an “Irish-type fiscal straitjacket.”

    I’d be surprised if Krugman’s assessment of the bond market’s attitude to Ireland has changed much since then: The spread over bunds of the Irish ten-year bond was 282 basis points yesterday versus 293 the day Krugman’s Erin go Broke column was published.

    So while kicking around a little research institute his readers have never heard of may seem to provide a nice example-de-jour of crazy people advocating Herbert Hoover economics, in truth it’s likely that even Paul Krugman doesn’t really believe Ireland is in a position to abandon austerity.

    Budget 2011 (ctd)

    By Richard Tol

    Thursday, July 22nd, 2010

    My prediction earlier this week is now supported by the Times (and again in more detail) and Independent.

    I would agree that the focus should be spending cuts rather than tax increases.

    However, I would also argue that taxes need to be reformed too. Particularly, I would use the revenues of property taxes and water charges to reduce income taxes — as that would help to price Ireland back into the export and FDI markets.

    I have also called for privatisation of particular state companies and agencies (ESB, CIE, DAA, Bord Bia, RTE, etc). This would only improve the public balance sheet if the market would pay a higher price than the current book value — that is, if a private operator thinks she can improve efficiency. However, privatisation would, in the longer run, improve domestic competition and reduce the costs of energy and transport.

    These things will not happen soon as the necessary preparations are slow at best. Some have taken this as me criticising the civil service, particularly the DoF. That would be incorrect. Reform is complex and requires careful consideration — and DoF has its own budget cuts and hiring ban; endless complaints from other departments; the EU and IMF; and NAMA to cope with.

    Nevertheless, you should never let a good crisis go to waste — and the public sector should be reformed as well as cut in size.

    How housing slumps end

    By Kevin O’Rourke

    Wednesday, July 21st, 2010

    Agustín Bénétrix, Barry Eichengreen and I have a piece over at Vox looking at the end of house price collapses. Historical patterns don’t suggest that Irish residential prices will stop falling any time soon; the best way to ensure that they do is to let them adjust downwards as speedily as possible.

    Update: in light of a recent article in the Sunday Tribune, I should clarify that nowhere in the Vox piece do we present estimates of the extent to which house prices will decline in Ireland. When asked by the journalist in question how far they would have to fall, I replied that I agreed with Morgan Kelly’s analysis, or words to that effect. When pressed as to what that meant, I gave the figure mentioned in the Sunday Tribune. I am always happy to cite and give credit to Morgan’s work in this area, but I am not happy to be presented as an independent source of analysis on the subject, much less to be described as a “leading housing researcher”.

    There. That feels better.

    Recovery Secnarios for Ireland: An Update

    By John Fitz Gerald

    Wednesday, July 21st, 2010

    For those who are interested, our article on the above topic is available here.


    No Frank, NAMA is Not Being Funded by the ECB

    By Karl Whelan

    Tuesday, July 20th, 2010

    On RTE radio this morning (on Today with Pat Kenny with, em, Myles Dungan) Fianna Fail TD Frank Fahey said:

    I stand by what I said about NAMA from the very beginning. NAMA is being funded … the bonds are being funded by the European Central Bank.

    Now I know that language is a flexible thing and perhaps philosophy graduates could spend all night debating what the meaning of “being funded” is. But, I would suggest that the only reasonable interpretation of this statement is that it implies NAMA are receiving funds from the ECB.

    This is not at all true. The ECB has no direct relationship with NAMA at all. NAMA bonds can be used by the banks that have received them as collateral for loans from the ECB but that’s it, that’s the full extent of the ECB’s involvement in relation to NAMA. Furthermore, AIB and BoI executives told the Oireachtas last year that they had no particular plans to use the bonds in this fashion.

    The NAMA bonds are fully backed by the Irish government. They are a liability of the Irish state, albeit one entered into at the same time that it acquired some property assets that may or may not yield enough to pay off the bonds.

    It is long past time for government politicians to stop misleading the Irish public that NAMA somehow involves the state getting money from the ECB. I would plead with any journalist interviewing Deputy Fahey or any other commentator making this claim in the future to point out to them that it has no grounding in fact.

    Moody’s “Negative to Stable” Comment Refers to the Rating Not the Economy

    By Karl Whelan

    Tuesday, July 20th, 2010

    I have heard various RTE reporters state in three different reports that despite yesterday’s ratings downgrade, the good news is that Moody’s changed their “outlook for the Irish economy” from “negative to stable”. I know the vast majority of our readers know that this is incorrect. But, just in case anyone has been mislead by this, here’s where Moody’s use the phrase stable:

    On 19 July 2010, Moody’s announced its decision to downgrade Ireland’s government bond ratings by one notch to Aa2 from Aa1. Moody’s has changed the outlook on the ratings to stable from negative as we view the upside and downside risks as evenly balanced at the current rating level.

    So, you can see that it is the outlook for the rating that has been changed from negative to stable. Having downgraded the debt, they’re saying they’re not anticipating further downgrades now. In relation to the economy, Moody’s said the following:

    The Department of Finance has based its debt projections in the SPU on the expectation of growth rates exceeding 4% in the period 2012 to 2014. For the reasons mentioned above, we believe these forecasts to be optimistic and instead expect real growth to range from 2% to 3% from 2011 onwards.

    So, for what it’s worth, Moody’s are more pessimistic on growth in the Irish economy than the government.

    Budget 2011

    By Richard Tol

    Tuesday, July 20th, 2010

    In an earlier post, I wrote about postponement of water charges and property taxes — partly because proper preparations started too late and have not progressed fast enough. The same is true for privatisation and, it emerged today, for child benefits. It looks increasingly likely that there will be €3 bln worth of spending cuts in the 2011 budget.

    NAMA Tranche 2 Transferred

    By Karl Whelan

    Monday, July 19th, 2010

    Details here. Mysteriously, there are no Anglo loans being transferred yet in this tranche. We’re told “Loans will be acquired from the remaining institution – Anglo Irish Bank – over the coming weeks after all necessary due diligence material has been received and evaluated.” It does seem deeply odd that the bank that NAMA is supposedly having the greatest difficulty processing information from is one that is fully owned by the state. An alternative intepretation offered by Jagdip is that the delay relates to EU State Aid nexus.

    The discounts on these loans are higher than the first tranche. I don’t think, however, that I can agree with Brian Woods II that this raises the potential profit for NAMA. The new tranche reflects new information on valuations not available when the business plan was put together, though unlike the first tranche, no valuation estimates have been provided. So, in this case, the lower prices paid likely also reflect a lower long-term economic value. It would, of course. be nice to see NAMA re-issue the business plan after each tranche but it ain’t gonna happen.

    Moody’s Downgrades Irish Sovereign Debt

    By Karl Whelan

    Monday, July 19th, 2010

    Moody’s have downgraded Irish sovereign debt again, this time to Aa2 “blaming banking liabilities, weak growth prospects and a substantial increase in the debt to GDP ratio.”

    The FT’s Alphaville people are inclined to blame it on Dan Boyle for his comments to the Sunday Tribune (reported internationally with an interesting headline by Reuters.) I think the FT people are pulling our legs a little attributing such importance to Dan. However, the comments did seem a little strange.

    The bond market reaction has been fairly muted, with the ten year sovereign yield ticking up only a few points. However, yields at 5.5 percent are hardly satisfactory. If sustained over a long period, interest rates of this type would make it very difficult to stabilise the fiscal debt.

    RTE and the new Dutch cabinet

    By Richard Tol

    Monday, July 19th, 2010

    Yesterday morning and again this morning, there was an item on RTE Radio 1 claiming that Geert Wilders’ Freedom Party (PVV) is about to join the Government of the Netherlands. This is not true. As the negotations stand, the new cabinet will be formed by VVD (right or centre), PvdA (left of centre), D66 (left of centre) and Greens. The PVV would be the largest opposition party.

    Waste policy

    By Richard Tol

    Sunday, July 18th, 2010

    One of the themes in the discussion about the Poolbeg incinerator is that it is perfectly in line with the official waste policy of the Department of the Environment while being firmly opposed by the Minister of the Environment. The Minister has now submitted a new Statement of Waste Policy for consultation.

    The Statement is rather short, 26 pages (with only 13 pages devoted to policy measures), and not very specific in most places and often ambiguous if not muddled. Presumably, this means that the new waste policy is still some years into the future, and may not be ready during the term of the 30th Dail Eireann.

    The Statement is firmly based on the Eunomia report, and does not even acknowledge the existence of the Gorecki report.

    The first four policy measures aim to strengthen the role of the state, the counties, and the private sector (at whose expense, one wonders); to decrease costs and increase quality (always a great plan); and to achieve cost-efficacy by imposing additional constraints (a mathematical nonsense).

    There is a proposal for the separate collection of six, perhaps seven streams of household waste: clothes and perhaps glass would collected at the kerbside (in lieu of the current bring banks); paper, aluminum, and plastic would be separated at sources (instead of mixed); and brown bins (for food waste) would be rolled out nationwide.

    There is to be an arbitrary cap on residual waste (black bins), with financial penalties for counties that do not meet these targets (on average). County councils may respond by tacitly encouraging people to stuff their waste in green, brown, yellow, red, blue and purple bins instead. (There will be a tax credit cq supplemental benefit for the colourblind.)

    The Statement reiterates the plan to raise landfill levies by 150% between now and 2012. As there is an EU-imposed cap on landfill, a system of tradeable permits would have been a better choice of instrument.

    The Statement invokes the polluter pays principle and calls for an (unspecified) incineration levy that is unrelated to its emissions. There will be another attempt to declare incineration ash to be hazardous waste (it is not). In a separate proposal, there will be an arbitrary cap on incineration.

    There will be arbitrary targets for recycling, but no policies to ensure that these are met.

    Producers will carry a greater share of the cost of waste management. Newspapers and magazines are mentioned as an example.

    There will be an awareness campaign to convince people to waste less.

    And plenty of jobs will be created, innovation stimulated, and we will all become terribly rich.

    On the one hand, the proposal is an improvement as the Minister now follows the proper procedures of a parliamentary democracy, and some of the hare-brained ideas in the international review have been dropped. On the other hand, the Statement itself is weak. Little thought has gone into costs, incentives and practicalities. The Statement strictly follows the green dogma of the waste hierarchy, a lexicographic ordering of options for waste disposal.

    There is also an opportunity missed. The current Irish waste policy is sound (at least on paper). The main exception is household waste collection, with duplication of services and private operators competing with public operators-cum-regulators. The International Review recommended that this be replaced with a system of auctioned concessions, one of the few recommendations that it shared with the Gorecki report. The Statement did not adopt this recommendation, offering only vague language.

    Incineration (N+2)

    By Richard Tol

    Sunday, July 18th, 2010

    The Competition Authority has rejected complaints that the contract between Dublin City Council and Covanta/Dong is in breach of competition law. See Examiner, Indo, Times and RTE. The last two articles give substantial space to the IWMA’s view that is not really what the Competition Authority said, but it did. The Poolbeg incinerator affects the market for waste disposal directly and the market for waste collection indirectly, but not in an illegal or unfair way. The Competition Authority ruled correctly.

    RTE also reports that Minister Gormley wants a word with the Competition Authority, which is peculiar as the CA does not answer to DEHLG.

    The IWMA is now pursuing a complaint with the EU that the take-or-pay contract between DCC and C/D constitutes an unfair state subsidy. The evidence is again against the IWMA. Long-term contracts are perfectly legal. The IWMA will have to show that the DCC overpaid, and deliberately so.

    The press also report estimates of the cost of abandoning the Poolbeg incinerator at this stage: Hundreds of millions of euro. See Indo and Herald. That number corresponds to my own back of the envelope calculations for the total of landfill fines, money already spent on Poolbeg, contract buy-out, and the extra cost of the alternative disposal methods.

    Commentators are increasingly worked up. See, for example, Hogan, Indo, and today’s Sunday Times.

    UPDATE: More in the Irish Times of today. Minister Gormley reiterates the misconceptions that the Poolbeg incinerator will only burn waste that is collected by public operators; and that the proposed landfill levy will guarantee that the landfill target will be me (Curtis et al. disagree). Minister Gormley also seems to say that Ireland would not face EU fines if it does not meet its landfill targets — which would be untrue — but perhaps he thinks that there are alternative ways to meet the target — which is unlikely: A double-dip depression and accelerated emigration might do it.

    Post-Guarantee Events at Anglo

    By Colm McCarthy

    Saturday, July 17th, 2010

    Karl Whelan has posted on this question, querying the non-removal of Anglo management after the guarantee at end-September 2008. One rather strange manouevre has been commented on by Cliff Taylor in the Sunday Business Post (I can’t locate the piece: Cliff writes a lot, for an editor).

    What appears to have happened is this. In May 2008, Anglo borrowed in Yen to finance an asset position in £ Sterling, and ran the position uncovered. There was some tax angle. Yen interest rates were well below sterling rates. By end-September, the Yen/Sterling exchange rate had moved adversely but not disastrously. But the movement accelerated and the deal was unwound at substantial cost a few months later. The following is from Anglo’s 2009 accounts, page 62.

    Included within foreign exchange contracts is the impact of a non-trading Japanese Yen financing arrangement, which was first

    entered into in May 2008 and ended during December 2008 and January 2009. The financing arrangement was intended to

    reduce the Group’s overall net cost of funding and was structured in a manner which was anticipated to result in no net after

    tax loss for the Group arising from currency fluctuations. In the six months to 31 March 2009 the arrangement resulted in a pretax

    loss of €181m but an after tax benefit of €17m. However, due to the significant operating losses incurred by the Group in

    the nine months to 31 December 2009, €97m of taxation benefit has not been recognised resulting in a pre-tax loss for the

    fifteen month period to 31 December 2009 of €181m (30 September 2008: €31m) and an after tax cost of €80m

    (30 September 2008: gain of €6m). The potential benefit of these losses carried forward is a component of unrecognised

    deferred tax assets in note 35.

     

     

     

    Not being an accountant, I am unable to translate this into English, but it looks like an uncovered foreign exchange carry-trade punt that went wrong. Of the €181m hit, €150m occurred after end-September 2008, at which point there could have been no plausible expectation of profits to shelter, assuming that the tax angle is, or was, serious. Thus Anglo would appear to have run a naked forex position post the guarantee, and dropped €150 m in the process. No doubt there is a more detailed explanation to be given, but it sure looks like gambling for redemption. On October 5th. 2008, I wrote the following in a piece in the SBP:

      ’All six of the domestic banks have been given an identical vote of confidence and none has been allowed to fail. This is both unjust and potentially costly, since any bank close to insolvency now has an incentive to throw more dice, without capital at risk’.

    The Commission of Inquiry will have a long agenda, but this costly Anglo forex manouevre deserves a slot somewhere.

    Serious Questions about Post-Guarantee Anglo Policy

    By Karl Whelan

    Saturday, July 17th, 2010

    The documents released yesterday show that the government were aware in September 2008 that, at least under stress scenarios, Anglo Irish Bank was going to be insolvent. (more…)

    David Murphy: Hindsight Says Guarantee the Right Option

    By Karl Whelan

    Friday, July 16th, 2010

    On the day that we found out that, contrary to the mantra of “everything was done on the basis of the best possible advice” the Irish government failed to follow the expert advice it received from Merrill Lynch when it decided to introduce a blanket guarantee, the state broadcaster brought on David Murphy to explain the implications. Viewers of the Six-One news were treated to the following exchange:

    Sharon ni Bheolain: So with the benefit of hindsight and knowing now what we do know particularly about the value of those assets underpinning the loans, can we say that the blanket guarantee was the wrong way to go or is that an oversimplification?

    David Murphy: I think in hindsight the guarantee probably was the right way to go and that’s exactly the conclusion that Patrick Honohan came to in his recent reports on the banks. The question though is “did they guaranteed too much?” and they did include subordinated debt in the guarantee. That was something that Merrill Lynch warned against. Merrill Lynch did make a number of warnings about introducing the guarantee. It said that Europe won’t be happy and that was right. It said that there will be a negative knock-on consequence for borrowing money in financial markets and that was right too. But it looks as if the government probably did choose the right option finally.

    David reckons Patrick Honohan says that with hindsight the guarantee issued was the right way go. Let me turn the microphone over to Governor Honohan:

    the extent of the cover provided (including to outstanding long-term bonds) can – even without the benefit of hindsight – be criticised inasmuch as it complicated and narrowed the eventual resolution options for the failing institutions and increased the State‘s potential share of the losses.

    As I have discussed here before, Honohan’s arguments in favour of some sort of guarantee do not in any way mean his report backed the full blanket guarantee that was introduced. Rather than backing the guarantee with the benefit of hindsight, he opposes it even without this benefit!

    So the only argument David Murphy can produce to defend the blanket guarantee is the claim that someone who opposed it (albeit in diplomatic language) was exactly in favour of it. Perhaps David had another argument and I have missed it.

    More seriously, I heard An Taoiseach on the radio today defending the decision to introduce the blanket guarantee on the grounds that this was required to keep access to funding open for the Irish banks. Again, I’d defer to Governor Honohan, who argued in his report that the inclusion in the guarantee of existing long-term bonds “was not necessary in order to protect the immediate liquidity position. These investments were in effect locked-in.”

    So, let’s recap. The government did not, in fact, follow the best possible advice that it paid for when introducing a blanket guarantee. Governor Honohan is not an advocate of blanket guarantees. And blanket guarantees are not necessary to deal with short-term liquidity problems.

    Still, at least the government has David Murphy’s support.

    Central Bank and NTMA Annual Reports

    By Karl Whelan

    Friday, July 16th, 2010

    The Central Bank have released their annual report (press statements from Governor Honohan here and from Chairman of the Regulator Jim Farrell here).  The NTMA has also released its annual report here and its mid-year business review here.

    Documents Relating to Bank Guarantee

    By Karl Whelan

    Friday, July 16th, 2010

    The Oireachtas Public Accounts Committee has placed a number of documents online that were given to it by the Department of Finance in relation to the government’s deliberations prior to its decision to issue a guarantee on the liabilities of the Irish banks in September 2008. The documents can be found here. Section A has the most relevant but there’s also some interesting stuff in Section B, which has material from a joint Finance\Central Bank Standing Group on Financial Stability.

    Update: There’s a lot of material in the documents and I haven’t looked at it all. However, thus far, my impression is that while the documents are useful in shedding light on the extent of the government’s lack of understanding of the scale of the solvency problem in the banks, they are not very useful in explaining why the government decided to issue such a blanket guarantee.

    Take a look at document 5 from part A. This contains notes from a meeting on Friday September 26 involving the Minister for Finance and representatives from the Central Bank, Financial Regulator, Department of Finance and the government’s advisers, Merrill Lynch. The notes state: “On a blanket guarantee for all banks — ML felt could be a mistake and hit national rating and allow poorer banks to continue.”

    Moving on a couple of days to document 3 from part A, a blanket guarantee is one of the options presented to the government by Merrill Lynch on Sunday, September 28. However, the note questions the credibility of this approach, again mentions the implications for sovereign debt ratings and also points to a negative reaction for other European countries. The document is a bit inconclusive but the blanket guarantee still does not appear to be the preferred option of the govenment’s advisers.

    Then on September 29, the government decided to introduce an almost-blanket guarantee. These documents do not make it clear why this decision was taken.