His article is here.
Year: 2010
Patrick Honohan’s address to the SUERF conference (Dublin), “Banks and the Budget: Lessons from Europe”, is available here.
While the address contained important observations on the interaction between the budgetary and banking crises, I expect it is his comments on the fiscal adjustment programme that will make most news:
I have recently been looking more closely though at the multi-year prospects for the budget. Of course it can be said, if the economy stays close to the track originally envisaged, the deficit would come close to 3 per cent by 2014. But as the IMF and others have noted, the real economy, the price level and also interest rates on Government borrowing, have evolved in a less favorable way. Servicing of the additional debt related to bank restructuring is also a negative factor.
Some explicit reprogramming of the budgetary profile for the coming years is clearly necessary soon if debt dynamics are to be convincingly convergent. Recent movements in the yield spread on Government debt – both for Ireland and for some other countries – readily demonstrate the costs that can result unless international lenders remain convinced that the budget is going to be kept on a convergent path, as indeed the Government is committed to ensuring.
During the 1980s Ireland paid a high price in terms of borrowing costs because the markets feared much steeper exchange rate depreciation than actually occurred. An equilibrium of pessimism, with the economy struggling, and investors requiring a risk premium that imposed additional costs on the taxpayer, displaced what could have been an equilibrium of self-fulfilling optimism. It is important now to re-set the fiscal path to ensure a virtuous cycle of lower borrowing rates contributing to even faster fiscal adjustment and a lower overall cost of the adjustment to society at large.
While there has been an international debate on this matter for larger countries, there seems to me to be no question, for Ireland and for other small financially-stressed sovereigns, but that national growth is best served by ensuring that the public finances are convincingly on a convergent path: the impact on funding costs and confidence surely more than offsets any short-term adverse impact on domestic demand from lower net public spending.
The Sunday Business Post reports the government intends to launch a buyback from Anglo bondholders (available here).
The government is expected to launch a bond buyback for Anglo Irish Bank in the coming weeks, as part of a restructuring plan agreed with the EU Commission.
The buyback, which will reduce the bill for taxpayers, will offer some bondholders in the new Anglo asset recovery vehicle the option of a bond, or a term deposit, in the new funding bank at a significant discount.
In the discussion of buybacks, or “negotiating with bondholders”, it sometimes seems to be forgotten that the only way these negotiations succeed is that there is a credible threat that losses will be directly imposed on bondholders. One particularly strange example was when the Minister for Finance took credit for the earlier round of Anglo subordinated debt buybacks, even though these buybacks only took place because of the lack of credibility of the government’s policy of protecting bondholders. The main reason the bondholders were willing to accept the buyback must have been the risk of a change of government.
A good cop, bad cop routine may be going on at the moment, with the opposition parties being quite explicit about their intentions. The Post reports,
Last week, Fine Gael leader Enda Kenny wrote to the EU competition commission saying there was, in his party’s view, “no sound legal or economic case for the Irish taxpayer to repay bond investors in Anglo Irish Bank following the expiry of the guarantee”.
The letter made it clear that he was referring to those bondholders who invested before the September 2008 guarantee, both subordinated and senior debt holders.
In considering what the threat point in buyback negotiations should be, I have also been surprised by the lack of curiosity about the details of the proposed Anglo split. Most commentators have been content to repeat the mantra about the need for certainty on the cost and timing of resolving Anglo.
It will take some time before these uncertainties can be resolved. But surely we should be told now exactly how the mechanics of the split will work. What will be the value of the claim that the funding bank will hold on the recovery bank? Will this bond be guaranteed? How will capital be divided between the two entities?
On the last question, a number of reports make the point that the funding bank will only need light capitalisation given that it won’t be making new loans. This strikes me as a strange claim. The main purpose of capital is to protect depositors from losses. Surely a key objective of the split is to protect depositors so that they are willing to keep their funds in the funding bank, potentially weakening the need for guarantees of deposits or the bond issued by the recovery bank. On the other hand, if the goal is to encourage the bondholders to accept buybacks, shouldn’t the recovery bank be capitalised as lightly as possible? Some harder questioning about the mechanics of the split seems warranted.
Donal O’Mahony provides a robust defence of Ireland’s creditworthiness in today’s Irish Times (article here; supporting Davy Research Report here). Dan O’Brien is more worried. While it is always worth some pause when second guessing the market’s average judgement, I’m inclined to agree with O’Mahony: I believe Ireland can avoid default, should avoid default, and will avoid default.
It is a pity he spoils things a bit with the straw man that many politicians and academics are advocating default.
In truth, foreign misrepresentation of the Irish story is being partly fuelled by domestic coverage. Given the clarion calls of many opposition politicians and academics for a default of Irish liabilities as a legitimate policy “solution”, the self-fuelling impression conveyed abroad is one of heightened insolvency risk.
I don’t see this chorus. Both Fine Gael and Labour were quite explicit this week that Ireland should not default. Even if the reporting is sometimes confused, the bright line between defaulting on sovereign debt/guarantees and allowing non-guaranteed investors in failed companies to bear losses is now well accepted.
The Comptroller and Auditor General released a special report on the resource management and performance of Irish universities.
The report is 161 pages long. One part attracted a lot of attention: pay (here, here, here and here). The solution is rather simple: Introduce a special tax, rated at 100%, for unauthorized payments.
The report is not just about pay, though. The title has “performance” and Appendix C is supposedly all about that, but it is not. It is a qualitative assessment of the procedures in place and planned. All is fine if there is a committee to discuss it and a report going forward. Measuring academic performance is not the core task of the C&AG, but they could have hired a consultant. The report does lament that the universities are so bad at collecting data (about themselves) that any quantitative assessment of value for money would be impossible.
The report also describes resource allocation, which is by and large driven by the number of students. Quantity over quality.
The scale of the system is telling too. There are 27 institutes of higher education in the Republic. Seven universities have a total of 100,000 students. When I joined Hamburg U, we had 40,000 students (and one university president), but we merged with a neighbouring IT to gain economies of scale.