IMF Staff Report on the Ireland Deal Post author By Philip Lane Post date December 17, 2010 The detailed IMF report is available here. Categories In Bailout Tags IMF report on Ireland 39 Comments on IMF Staff Report on the Ireland Deal ← The Consolidated Foreign Claims of the Irish Banks → Reputation 39 replies on “IMF Staff Report on the Ireland Deal” Restoring the banks to health http://www.youtube.com/watch?v=npjOSLCR2hE “pragmatic choices to achieve consolidation in a fair manner” While ignoring the bank bonds. “German and U.K. banks have the largest exposure to Ireland (€113 billion and €107 billion, respectively), followed by U.S. (€47 billion), French (€36 billion), and Belgian (€24 billion) banks. As a percent of home country banking system assets, banks from Belgium (2.2 percent), Germany (1.8 percent), and the U.K. (1.3 percent) are the most exposed. However, global banks’ direct exposure to Irish sovereign debt remains very limited.” This says it all i.e. This is a bank bail out pure and simple and the Irish people far from being bailed out are the ones doing the bailing – without ever being asked. At best this is immoral and at worst it is criminal – FF and Gormless’s crew ought to be ashamed and should never show their faces in public again. They should also forego all pensions etc as the rats are leaving the sinking ship with benefits intact. …spillovers from the largely enclave exports sector to the domestic economy will be limited because of their heavy reliance on imports, their tendency to employ capital intensive processes, and the sizeable repatriation of profits generated by multinational exporters… since much of Ireland’s exports are produced by multinationals, for which the value-added is to a large extent repatriated, factor income outflows will dampen the current account improvement…….. Enclave. How come they can say the word but we can’t ? Is it shameful to acknowlege we are an ex-colony with a dual economy ? From page 22 of the report: The planned consolidation over 2011–14, laid out in the authorities’ National Recovery Plan, is broadly appropriate. However, staff expects GDP growth outcomes to be weaker than those currently foreseen by the authorities and hence the deficit ratio to fall more slowly than envisaged under the plan. Reflecting this reality, the European Commission recently extended by one year the deadline for meeting the Stability and Growth Pact deficit threshold of 3 percent of GDP to 2015. This helps defer the authorities’ obligations to the Stability and Growth Pact. However, under staff’s current projections, achieving the new target is likely to need further measures in the medium term. [italics mine] So I take it that from the IMF’s perspective the austerity programme isn’t austere enough. IMF in support for social partnership shocker! p. 12 ‘Until recently, deep consolidation has been implemented in a remarkably socially-cohesive manner. This reflects a tradition of social partnership that has served well despite the difficult choices that have had to be made’ @Noel Madden “This says it all i.e. This is a bank bail out pure and simple and the Irish people far from being bailed out are the ones doing the bailing – without ever being asked. At best this is immoral and at worst it is criminal ” So why bail them out then? All you need to do is persuade the Irish electorate that the bail out won’t work. Then you will be able to dispense with the fantasy that nothing much needs to change. If you can unite enough Irish citizens to go along, then you can make significant across the board, Croke Park in the bin spending cuts along with tax rises to eliminate the STRUCTURAL near 20bn part of the deficit that has naff all to do with the banks. Three things would follow, amongst others, from that. First, you could write down the bank liabilities, shaft the bondholders and say no thanks I’ve a horse outside to the 5.8% as you are out of the bond market because you don’t need it. Second, you completely obliterate the cosey “relationships” that make so much that goes on in the country a fix. Third, the country would be competitive in cost terms with the parts of Europe that currently make it look stupidly expensive. If you are not willing to do that then just stop complaining and take the money to fund the status quo. Quote – ‘deep consolidation has been implemented in a remarkably socially cohesive manner’ =’govt fiscal incompetence along with their elite cronies losses have been socialised,ordinary citizens have been screwed in an optimum manner and they have not rioted or burned down the parliament – amazing’! @vinny So do something about it. see Noel Madden ref above. If you make it obvious to the outside world there is no way yoyu will do what would be required to forego the bail=out funds, then everyone knows you will take whatever is offered. You have NO negotiating position. The IMF foresees (p21 in the pdf) a 10.5% budget deficit to GDP in 2011, slightly higher than the European Commission, and 8.6% in 2012, lower (estimates before bank support factored in). And this where “Growth is expected to average 2.25% over 2011–14”. In 2015, the general government balance is 4.8% (the EC – with the Irish government – is targeting 3% GDP). The WSJ is running this story “IMF: Irish Budget Cuts Aren’t Enough” http://online.wsj.com/article/SB10001424052748704034804576025432820474982.html although the article and the Staff Report (cf Carolus Galviensis above) also carry suggestions that fiscal plans are appropriate. The Irish authorities argue (p52) that “the root of the problem is a domestic banking system”. Yet under the IMF’s macro scenario, the gross financing need is $46bn in 2011, rising to $50bn in 2012, $54bn in 2013, $57bn in 2014 and $40bn in 2014, after $93bn equivalent in 2010 (see underlying hypotheses p48). Public external debt service, in % of General Government Revenues, is above 50% in 2011 and 2012 (p97 in the pdf). At the same time, Total External Debt, net of IFSC bank liabilities, is seen as almost 800% of GDP in 2010, up from 700% a year previous, with the total public sector debt up over a half in the year (p90 in the pdf). As the IMF says, “Ireland’s total external and private external debts as ratios of GDP are the highest among recent exceptional access cases”. The IMF concludes (p99 in the pdf) “There are significant risks to the program that could affect Ireland’s capacity to repay the Fund”, although “the Fund’s preferred creditor status” serves “to mitigate the financial risks to the Fund”. Fast forward a year. Just imagine we are at the end of 2011, and that the IMF macro forecast is actually realised. Imagine the fresh calls for further measures to consolidate the budget deficit under the new government, to make progress on lowering the budget deficit under 10% of GDP the following year. Section 27 (p23 in the pdf) “Debt dynamics would improve if the recapitalization requirement remains contained.” And Section 28. “The sovereign’s obligations will also be lower if the debt owed by banks is restructured.” So “where a bank has lost substantial value—and, indeed, insolvent—the debt holders should share in the losses. Further such action is contemplated for banks that have received substantial state assistance, and would help reduce the need for fresh injections of capital by the government.” It seems to me that this argument of the IMF has wide application. These views might appear common sense to many. But where it counts? Annex 1 details the required provision of data. Can we expect this to be made public in the interests of monitoring and transparency? @Ciaran O’Hagen ‘and Section 28. “The sovereign’s obligations will also be lower if the debt owed by banks is restructured.” So “where a bank has lost substantial value—and, indeed, insolvent—the debt holders should share in the losses. Further such action is contemplated for banks that have received substantial state assistance, and would help reduce the need for fresh injections of capital by the government.” Is this confirmation that the IMF is advocating restructuring of all bank debt. It seems seniors are not protected’ @ceteris paribus IMF far too diplomatic to make use of the ‘prescriptive’ here – popped off the table by ECB/EC before it could even spell itself out – but as any pragmatist (Kantian, American, or otherwise) can easily figure out – restructuring of banking system debt has to be central to any moving on. The present position represents an insult, and call to arms, of any self-respecting local serfs and democrats – of whichever denomination – throughout Europe who are being walked on by the Systems of Money and Power. Response to Washington: You’ll be back (-; @ ceteris paribus Mr. Chopra in the WSJ article said, in relation to the banks, “That is the common view at this point,” he said. “It’s the view that in consultation with European Union partners, we have adopted.” And “While the Irish correlations with the U.K. and U.S. markets have not been notable recently, a disorderly eruption of financial pressures in Ireland could have wider implications”. Make from that – and much more – what you will. CDS on AIB seniors have reacted negatively to today’s news. @DE Seniors in Irish Banks and disciples of David Begg (inclusive of the untouchable professions) off down the barbers pronto, and you might just have a realistic chance of renegotiation. BCA Research reported this week (in their 2011 Outlook) that: “Ireland’s sovereign debt risks would have abated if bondholders had been forced to take a haircut on their positions, because this would have given the government more resources to repay creditors. Apparently the IMF realised this, but failed to presuade EU officials.” We have been rolled over by our EU “colleagues” (to use Brian Cowen’s word). @Cormac et al. Ireland’s sovereign debt risks would have abated if bondholders had been forced to take a haircut on their positions, because this would have given the government more resources to repay creditors. Apparently the IMF realised this, but failed to presuade EU officials. In the Dail this week Minister Lenihan stated a number of times that it was not realistic to haircut the seniors without ECB support – essentially calling out the ECB as the guilty party. There is no mention of senior debt in the MoU or any EU Commission, Ecofin or EU Council document (i.e. hitting seniors is neither required nor prohibited) so it would seem that the ECB basically said they would stop funding Irish banks if any seniors were hit. In the weeks before and during the bailout negotiations the press was full of stories about how the ECB were about to exit from the emergency liquidity measures, and then in the week after the MoU was signed these measures were extended and all talk of exit strategies ceased. Also in the Dail this week all the opposition parties said that they would hit the unguaranteed seniors. I imagine there will be a few tense meetings in Frankfurt after the new government takes power. Trichet made a recent speech where he called for a number of the things that Germany has already abandoned (e.g. automatic sanctions, removal of voting rights etc) and he wanted all sorts of ‘scorecards’ to be used so that these automatic sanctions would be triggered. This shows how hawkish the ECB are, since they are still calling for measures that have been shelved as politically unacceptable. Essentially the ECB are chartered to act in the interests of the banks, and only deviate from this under great duress in the face of a combined German/French position. I would say there is no chance that Ireland alone can force the ECB to change course, unless Ecofin intervene and force the issue. The problem with an ‘independent’ EU central bank is that it is under no obligation to act in the interests of EU citizens or taxpayers, only to keep inflation under control and to avoid financial instability at all costs (e.g. by forcing governments to repay private debt). Two of the six members of the ECB governing board will be replaced in 2011. It is possible that a coordinated effort by a group of member states could select less hawkish members. However what is really needed is a rechartering of the ECB, to be required to take unemployment and growth into its decision making process (as the Federal Reserve is required to do, for example). I would say there is no chance of this happening. The impact of hitting the unguaranteed seniors (about €20bn outstanding), a worthy cause though it is, needs to be put in perspective. In reality it won’t make a huge difference. A 50% haircut would save €10bn. Look at the gross government debt trajectory using the IMF data over the 6 years 2010-2015 (figures in €bn). Note these are my calculations based on IMF data, not a direct copy of an IMF table entry. 156 -> 180 -> 197 -> 212 -> 220 -> 230 So even a €10bn saving is less than 5% of the total debt outstanding from 2013 on. Not a game changer. The annual interest payments look like (again my calculations based on IMF data) in €bn 4.7 -> 6.0 -> 7.2 -> 10.4 -> 11.2 -> 11.8 Debt servicing costs would in addition need to include principal repayments (e.g. for promissory notes), so this is approaching 100% of the income tax raised. It is around 2013 onwards when the debt servicing burden really starts to kick in and that is when the next major crisis will occur in my opinion. The new 2013 rules for bond issuance will guarantee that Ireland will pay a premium on new debt, and the debt servicing projections for 2014 – 2020 will be frightening. It is only in 2015 that any IMF principal needs to be paid back (though interest is paid every year before that). I presume the EU loans have similar debt servicing profile. “Exports will continue to lead the recovery helped by improved competitiveness and world trade growth. However, spillovers from the largely enclave exports sector to the domestic economy will be limited because of their heavy reliance on imports, their tendency to employ capitalintensive processes, and the sizeable repatriation of profits generated by multinational exporters. But to the extent that the domestic sector participates in the export recovery—and signs of this are emerging as traditional sectors exports are picking up—the spillover to domestic demand could be greater.” Much of the above is flat-out untrue. The multinational sector has very substantial spillovers into the domestic economy through pay that is spent in the domestic economy (and taxes on that pay), and throiugh local sourcing – particularly of services, but also of some goods. Spillovers from multinationals are among the main drivers of domestic economy activity, a fact that should be obvious to anyone economically literate now that our banks are no longer borrowing a net €40bn to €50bn a year from overseas to finance construction froth. That said, while the IMF’s comments on the existing local impact of multinational exports are completely off the wall, they contain a considerable amount of truth for the incremental growth in exports we are now seeing. While exports are growing strongly, and this is being reflected in the natonal accounts by an improved GDP performance, this is not feeding through into increased domestic economy spillovers. As far as it is possible to tell from QNHS data, employment is probably still falling in multinationals, so the main route through which spillovers into the domestic economy occurs is not operating. The share of GDP accounted for by multinational exports is rising rapidly, which can be seen starting to happen for multinational-dominated sectors in the annual national accounts, and for industry generally i(which is dominated by multinationals) in the 2010 quarterly national accounts. This rising share is changing the composition of GDP in important ways. The increase in GDP is not associated with a significant increase in employment in the areas generating it, or in areas where past maultinational growth generated spillovers. As it is not generating jobs, it is not meaningfully increasing the tax-generating potential of the economy, and is doing nothing to underpin the property market. This process is turning GDP growth into an increasingly meaningless indicator for the Irish economy. We could have 5% or 10% GDP growth next year, and unless the composition of the growth was different to the composition we are now seeing, it would not do Ireland a blind bit of good. ‘ Within the context of a comprehensive reorganisation and downsizing of the banking sector the strategy will identify the appropriate path to ensure that the banking system will operate without the need of further State support. The Irish authorities are committed to divest the participations in the banks acquired during the crisis within the shortest timeframe possible which is compatible with financial stability and public finance considerations’ p74 pdf The Irish authorities stood aside, as advised, and allowed banks to wreck the economy and the state. The EC priority is to limit contagion, because we still represent a sizeable risk. Too big for our boots. The objective, from an IMF/EC perspective is to break the linkages between Irish and core EZ banks, by each and every means. When the contagion risk has been been engineered out, EC interest in the Irish financial system will naturally wane. The MNCs have their own arrangements, and a shrinking, more isolated domestic Irish economy will have to accept whatever utility banking is on offer. Insofar as we get employment growth in the domestic economy, it will be of the McJobs variety. The new ‘global’ bank owners will implement on-line services, flexible contracts, outsourced supports, and shed thousands of full time staff. Many provincial towns will have the guts knocked out of them. Creative destruction, per Schumpeter, or just destruction ? @grumpy +1 You will always be in a weak position borrowing money if you need the money… the solution to that weakness is not to beat the lender, it is to not need the money… @ Bee Cee Tee I certainly do not disdain 100,000 jobs, including some very high end ones. Now would I suggest that we are the worse for our liaison with the MNCs. It’s all learning and by God we need more of it. The problem, however, is just as you put it. ‘This (MNC export) process is turning GDP growth into an increasingly meaningless indicator for the Irish economy’ My layman’s questions are: 1 What part of the recorded increase in exports is simply a transfer pricing phenomenon ? That is to say, is there any real economic activity at all behind it ? 2 Even where there there is real activity, all prices are internal company prices, and the products are often inscrutable, patent protected, and high tech. How much of declared export value of the service or product is an accounting figure arbitrarily allocated by the MNC for tax-related reasons ? MNCs are mostly monopolies and monopsonies. That’s all about price adminstration. 4 Do cost centres within MNCs represent genuine internal markets or are they simply tax-efficient accounting units ? I am thinking of the kinds of balancing mechanisms used in the Soviet plans, for which see the interesting works of Alec Nove. The Berlin Wall may be gone, but there are lots of other walls. The MNC is an economic world of its own, and it”s far from the orthodox theory of the firm. 3 Have we had all the employment and the spillovers we are going to get from the MNCs ? The gap bewteen domestic and MNC sectors has always been, and remains, enormous. It’s a product of our colonial history as an agrarian breadbasket for Britain. Belfast was out only real industrial town and we lost that. Now we have no peasants to industrialise. We don’t have the cybernetic local infrastructure, like say German regions, which can appropriate and truly localise the MNC activity. That’s probably one of the reasons, apart from langauge and tax rate, that they come here. Their trade secrets are safe. . It’s one thing to produce skilled individuals who can participate, as individuals, in the MNC structures, or provide niche services to them. As a nation, we we can only dream about reaching that level of economic activity. You can’t walk before you crawl. Meanwhile, even our handful of native global-level corporations tend to move their employment elsewhere but keep Irish domicile for corpo tax purposes. That’s business. Cormac, Hogan, We took the soup to both bail out the European banks and the domestic public sector. The alternative course of action would have meant 15billion of cuts in public sector pay and jobs along with cuts in trasfer payments to the middle classes and subsidies to doemstic contruction sector through the PCP. NO FF minister was going to do that, no Labour minister would agree either and few FG ministers would even comtemplate it. Much better to maintain high levels of taxation on the middle classes in the private sector to keep the show on the road. @Philip / other official contributors Garret FitzGerald has a positive article in the Irish Times today. He references the fact that researchers form abroad reference negative coverage in electronic media (whoever they might be!) too much. GF further references Euroframe as the authoritative joint voice of the European institutions. Perhaps a post linking GF’s article and the Euroframe statements/reports here would be useful to counteract those miscreants in the electronic media. linky link http://www.irishtimes.com/newspaper/opinion/2010/1218/1224285830365.html @Paul, I think you are being too pessimistic. MNCs have had strong positive spillovers into the domestic economy in the past, and there is no fundamental reason why they should not do so again. It’s just that at the margin they are not doing it right now. And many of them are well rooted in the Irish economy, using copious amounts of local services and some local manufacturers. There may be a gap with Germany in that respect, but it is not of an order of magnitude in scale. We have to get back to a position where MNCs want to put more jobs here. We are doing pretty much everything we can on everything except costs, so we have to tackle costs. Unfortunately, the Government seems to be trying to stall on that right now. The same prescription works for indigenous exports too. @zhou: I thought about linking to this article earlier, but then thought: why bother? I find it strange that people want to fight about this stuff when we are out of the capital markets anyway (and GF’s real agenda here is too obvious to be worth pointing out). We shall see what we shall see. The practical issue worth fighting about right now that might make a little bit of difference is the remaining unguaranteed bank debt, which will very soon be all gone. Once it is all gone, we may be looking at far less palatable options. All references to GDP are practically meaningless in an Irish context. They tell us more about the global situation than our own. GDP growth is welcome as it has benefit to the employees, and suppliers. Employee wages, taxes both corporate and employee also benefit the wider economy. But unfortunately, it has been hijacked by the defined benefit sector to over reward themselves. And given the natural state of all organizations is to grow or die…. the defined benefit sector grew very aggressively in the false boom. On performance and on their contribution to the economy and society, the employees of the multinationals and exporters in Ireland should be the top earners in the country; they all do worthwhile work and bring in real money from abroad to fund the country. Instead they, on average, earn considerably less than the various defined benefit mafias who ran the country into the ground under the guise of social partnership. @Zhou. GF says that indigenous industry has had growth of 6% in Sept / Oct. I don’t know where that data is coming from but why is this growth not reflected in increased income tax. Growth of that order should have led to increased overtime, less short-tine working and therefore increased income tax in October and November month on month returns. Did it? If so maybe he is correct but if not I doubt the validity of the stats. As far as I was aware the Nov tax returns were remarkable for a corp tax increase only. @KO’R Apart from preparing people for more of the same under FG, I am not sure what agenda GF may be pursuing. @Joseph Ryan The continued decimation in income for people in other sectors would more than off-set increases in manufacturing. I would question GF’s suggestion that manufacturing will get us out of this though. I would have though services, agriculture and food would be far more important. @zhou In terms of employment, services are far less labour intensive. In addition, they are generally higher skilled (particularly if they are for export). Manufacturing, particularly light engineering (I reckon) are a potential growth area. While the skills of construction are not directly transferrable, perhaps the mindset is. Getting added value for the economy out of low/wrong skilled employees is what is going to required for the economy to boom on exports. Otherwise, we’ll continue to have a small number of people supporting the rest of the economy. The knowledge economy is, for most people, bunkum. @tull You don’t need to tell me that. I’ve been banging on about it for a good few years… still, at least I can be comforted that the anomaly of the self-employed paying more tax than the employed is going to be removed by that nice Mr. McGrath. Instead, the self-employed will go back to their traditional role of paying lots more tax… ‘Because neither the rating agencies who evaluate our debt situation, nor the actual bond buyers themselves, are equipped to do serious research into the economic condition of smaller euro zone countries like Ireland, these agencies are vulnerable to the tide of negativity that they pick up second-hand from some of our own media.’ What planet is Garret living on? Does he seriously expect us to believe that the big three rating agencies are incapable of analysing our dire predicament. Whatever about bond buyers the rating agencies are well equipped to figure out that we cannot absorb the losses generated by the banks. We may dislike these agencies but in the real world they are capable of sinking us. As an economist Garret must know that the level of debt projected is unsustainable. Bryan G has extrapolated the numbers from IMF data above and if accurate are truly frightening. Growth alone will not solve this and Garret should know this and not write rubbish as quoted. @ceteris Dem puur rating agencies can only rely on what they read here. Everything else is lies, er, secret, something like that. I mean, it’s not as if there is a statistical agency for the country that produces figures. Or a debt management agency that produces both gross and net debt figures. And as for the DoF and the banks, shure that’s really complicated stuff. How could them fellows understand it all. Aren’t we a small yoke of no importance, where would they even know to start? @Hogan Exactly. It is this kind of nonsense that has us, nearly three years later, facing ruin. That such a supposedly eminent economist should be so naive demonstrates that outside expertise was and continues to be required. Lenihan Cowen et al for two years dished out this rubbish whilst others were derided for opposing NAMA and the bank strategy. You would expect better from GF. At least Mr. Chopra is a realist and won’t buy this c**p. @ Bee Cee Tee Thanks for that. I’d love to believe it. Do yuo know any studies comparing the linkages within German and Irish economies ? I remember a Schwab organic farmer, who told me that the business next door made aircraft parts. Hoch techinks and hoch business connections. ‘We have to get back to a position where MNCs want to put more jobs here’ Its’ a genuine question whether the MNC presence here is centred around real economic activity, or around accounting activities, with jobs as a by the by. Maybe they have put in enough jobs to provide sufficient cover for their transfer pricing needs. The only way that question can be answered is by way of specifics. Given our deference to commercial secrecy, the necessary info is rather hard to come by. We deferred to the banks too, until it was too late. @Paul, I’m not aware of comparative studies, but I would point you to one particular type of high value linkage. The pharmacutical industry makes heavy use of the services of Irish engineering consultancies, which have been able to leverage the experience to export their services. I give that as an interesting example. There are plenty of other types of linkage too. @ BeeCee Tee Fair enough, but that is surely a niche. We have all too many unemployed, including professionals. Not much prospects, as employees or sub-contractors, in the MNC sector for most. …fascinating… one cannot argue with pretty much any of the IMF line of thinking, and it strikes me as about the most objective analysis carried out to date also their prognostications on hte economy seem quite credible one of the most amazing things that hits you from the tax revenue table in the middle of the report is how over-dependent we were -and remain – on VAT as a source of tax revenue eg in final years of boom it accounted for more revenue than income tax !! and even going forward it will still comprise a hefty chunk of our tax base this is madness….. underlines need to significantly increase taxes for middle and upper income earners PS teh lenihan and honohan letter….it s actually rather funny to behold !! (although both men are totally exempt from criticism…) the gravity of the situation only hits home when one reads this ‘begging letter’ to the washington saviour…! long live the IMF ?! Looking at the ‘spillovers’ from the export industry could be enlightening: My assumption is that the ‘spillovers’ are seen as costs & as such any and all increase in ‘spillovers’ to be justified by some benefit. If there is a benefit for the exporter then the spillover might happen, unless the benefits could be gotten cheaper somewhere else…. Costs were controlled in the bubble years (which is difficult) & now costs will be controlled in an economy in recession (which is easy). Unless there is a lot of new investment it appears that the ‘spillovers’ will remain at current levels or possibly reduced (in absolute terms) as the conditions for cost controls are improving. Irelands attractiveness as a place to invest in is going to decide its future. Is Ireland so good that it will attract that much job-creating investment in a stable or growing industry? (Which industry would that be?) Ireland as a place to live? Increased taxation, government is sponsoring a price floor on one of the biggest after tax costs (housing) & high unemployment (leading to a downward pressure on wages). Better hope for a very quick uptake in employment or else the emigration will increase further and the bet on recovery in the property market will turn out to be a very bad bet. Comments are closed.