Year: 2010

Stress Tests

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

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. 

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Establishment of the Review Group on State Assets

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

    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

    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).

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