The Economic Adjustment Programme for Ireland

The European Commission’s staff report on Ireland is available here.

Among the highlights:

  • Financing Sources (text page 38, table page 87)
  • Explanation of how PCAR2011 will differ from PCAR2010 in methodology (page 24)

47 thoughts on “The Economic Adjustment Programme for Ireland”

  1. A brief glance at their labour market section isn’t very convincing.

    However, for firms’ costs it is the absolute value of the minimum
    wage that matters.

    Erm, how about labour costs? The marginal cost of employment to a business is not the wage. Also the use of monthly min wage figures to highlight Ireland’s position is fairly dubious. A far better measure would be hourly labour costs, which would account for differences in PRSI across countries (in Ireland employers social contributions are relatively low).

  2. @ Karl

    re the question of where the ‘gap’ in the funding comes from:

    “Underlying this are assumptions of roll-over rates of maturing
    long-term debt of 0% until end-2011, 20% in 2012, and 80% in 2013.”

    Does that square the circle?

  3. P 19
    The key objective of the programme is to restore financial market confidence in the Irish economy’s banking sector and the sovereign.

  4. In one of the attached documents (pg50)…

    “Fourth, the banks will be required to securitise and/or sell asset portfolios or divisions with credit enhancement if needed, once the market normalises.”

    Deleveraging seems to be a key component being demanded. With the ECB/CB enabling a run of deposits, the loan to deposit ratio keeps getting worse. Offloading Irish risk will be extremely expensive (depending on eventual losses, using credit enhancement may be a little cheaper. Though given our sov. strength, upfront capital would probably be required for this rather than guarantees). Selling loans would require steep discounts – (at a guess) you’d be lucky to get 50% on a pool of tracker mortgages (AAA Ir RMBS spreads have been around 600bps).

    Does anyone know what amount of asset disposal is being demanded? Is it a fixed amount or based on loan to deposit ratio? How much time does this “once the market normalises” give us?

  5. Apart from an adjustment of the interest rate in the EU-IMF bailout terms, agreement with the European Commission and European Central Bank on defaulting on both sovereign debt and senior bank debt will not be forthcoming in the short-term.

    Basically, before reforms are implemented, as with Greece, the argument that we cannot sustain debt of say 130% of GDP, will not wash.

    If the EU-IMF reform programme is implemented, the then view of the IMF on growth prospects and the debt burden, would hopefully have some weight in Brussels and Frankfurt.

  6. @Michael H,

    I think you’re right about the need to puruse some serious structural refroms before any relief will be contemplated. It is clear that the Troika see that the non-tradable and sheltered sectors (both public and private) are imposing huge deadweight costs on the domestic economy. But I have the horrible feeling that they have a very limited understanding of the devious and quintessentially Irish mechanisms and arrangements that have been developed over a considerable period of time to faciliate this gouging of ordinary citizens. And they seem to have even less understanding of what will be required to remove these deadweight costs. Take, for example, the energy sector:

    “To increase competition in network industries, particularly gas and
    electricity, privatisation or revised corporate governance frameworks to encourage performance will be contemplated in these sectors, as it could be for other state-owned assets.”

    This suggests that they are locked into this blind belief in competition for the sake of competition. We have more than enough of this already and it is merely adding to the deadweight costs.

    The privatisation angle, though, is interesting – and on its own merits (quite separate from this guff about competition). A properly structured programme could eat into the debt/GDP ratio over a few years and hasten Ireland’s return to the market.

  7. @Ahura

    “Selling loans would require steep discounts – (at a guess) you’d be lucky to get 50% on a pool of tracker mortgages (AAA Ir RMBS spreads have been around 600bps).”

    FG are going to sell the trackers. Suggest you phone them with this estimate, quick!

  8. What is this non-sense about negotiating a default. We are insolvent. Talking to the EU won’t change that. We can’t simply agree with the EU not to be insolvent.

    All we can do is negotiate an orderly way to deal with it.

    There are two situations when you are in a good position to negotiate debt write downs, when you are completely screwed (like now) or if you have a primary surplus and don’t need access to the bond markets.

  9. @Rory

    Ireland may be screwed as you say, but if you have hoodwinked the public into voting you into power on the basis of Croke Park, and the bailout being only about the banks, you are in no position to do other than access a credit line at whatever rate is charged.

    Do you think the public would be a tad surprised if a primary surplus was suddenly required?

  10. you are in no position to do other than access a credit line at whatever rate is charged.

    Well, if they continue with their supply side policies (in the paper they talk about increasing our potential output, ignoring the problem is with actual output) for demand side issues they’ll get little back.

    Someone has to take a hit. We can’t taken ours and can’t take more of a hit, and I’d prefer the banks bondholders take all that’s left. Then if the EU follow my plan they’ll get most of their money back.

  11. Grumpy,

    FF, FG, DOF, NTMA all know now that Ahura’s estiimate is broadly correct. That is why they do not want to sell off the tracker book or the UK book at firesale prices. They are all looking for a way of “warehousing” the exposure without selling at firseale prices. I supect the IMF is also worried that blowing yet another hole in the sovereign balance sheet is not that clever. However, nobody can figure out how you fund this. The IMF have been consulting wit the biggest brains in the city to try to solve this conundrum but no super clever ideas have thusfar emerged.

    The only guys that want to delever at the current price is the ECB and I preusme its agent in Dame St.

  12. @ Paul Hunt
    ”I have the horrible feeling that they have a very limited understanding of the devious and quintessentially Irish mechanisms and arrangements that have been developed over a considerable period of time to faciliate this gouging of ordinary citizens”

    Our guys make Sir Humphries look like Michael O’Leary

  13. I can’t help feeling that the senior civil service are concealing vital information that would have a huge bearing on the election and the sovereign solvency and bank solvency debate. They advised the government against a blanket bank guarantee. For years the government’s spinners said it was based on the best advice available and the senior civil service kept silent. Then more than two years later the truth emerged. What are they hiding this time?

  14. Take the NAMA box on page 14 with a pinch of salt

    “As of mid-January 2011, €71.3 billion had been transferred with an average discount of 58%. The transfer of the remaining €3.7 billion was expected to be completed by Q1 2011.”

    “remaining €3.7bn” should be €5bn for disputed transfers plus €12bn sub-€20m.

    The stats table is the same box is wrong also (including the ref to 20 Jan 2010 – should be 2011). Where it says €5<€20m. There are a peppering of other mistakes.

  15. @ Paul Hunt

    “It is clear that the Troika see that the non-tradable and sheltered sectors (both public and private) are imposing huge deadweight costs on the domestic economy. But I have the horrible feeling that they have a very limited understanding of the devious and quintessentially Irish mechanisms and arrangements that have been developed over a considerable period of time to faciliate this gouging of ordinary citizens. And they seem to have even less understanding of what will be required to remove these deadweight costs. ”

    I think that more or less nails the situation.

    Trouble is this is too many words for public consumption.

    What is required is demonisation of the AXIS OF CUSHINESS.

  16. @tull mcadoo

    I don’t think FG understand this – plus, their “fire sale prices” mantra is delusional. These are market prices, there is no short term market panic meaning the grown-ups can ignore the market because they know better.

    Nama functions as a speculative hoarder of property assets to prevent market discovery of clearing prices.

    The banks “agreement” to avoid repossessions functions to artificially prevent supply coming onto the market, in order to prevent market discovery of clearing prices – and consequent write-down of bank balance sheets.

    The truth is out there.

  17. @ Grumpy

    Spot on.

    It’s not that your stick is too short, it’s just the hole was deeper than you thought !

  18. A debt charter

    Economists need to ask themselves very simple questions .. such as what is the purpose of growth ?
    The educated classes of old be it in science or other areas had a broad classical education – in my best Anglo saxon I tell you now to wake the F$£k up and challenge this purposeful malicious autism.

    As long as these moneylenders have acedemic credibility they can bullshit to infinity.
    The concentration on a inherently plastic currency above the physical economy is pretty frightening – its almost as if Ireland was but a entry on a balance sheet – maybe it is ?
    We will sacrifice what is left of our dignity to pay off overvalued debt that is inherently fluid in nature.
    Meanwhile the remaining assets of the state will go for a song and when the time is right they will inflate and our efforts will be for nought.

    Please I am begging the patrician elements of Irish society to bite the hand that feeds you , history will not be kind to you if you fail this test – then again maybe the history presented to future students may be somewhat , shall we say doctored.
    Anyway spring is coming soon – maybe its time for a rebirth of sorts.

    Who will take up the sword ?
    http://www.youtube.com/watch?v=NOqlV4Le9Tk

  19. @ Eoin

    Page 41 of the PDF file: “The Irish government does not need to tap international bond markets until the second half of 2012, but will gradually return to the markets thereafter.”

  20. Morgan Stanley’s London-based economists say that calls for a default on the debt in the Eurozone periphery tend to be based on a partial analysis, which just focuses on debt sustainability, but does not look at the consequences of debt restructuring across the whole capital structure to grasp the costs and benefits that a rational government will take into account in its decisions.

    Reasonable point, methinks.

    Ireland is unique among the debt-challenged nations, in terms of its overwhelming dependence on foreign firms, including a successful offshore financial centre.

    I’m not saying that people shouldn’t make a case for default but they should consider the different angles.

    Eurozone Sovereign Debt Crisis: European Central Bank returns to bond markets to buy Portuguese debt

    http://www.finfacts.ie/irishfinancenews/article_1021614.shtml

  21. @ Michael Hennigan

    It doesn’t matter what the consequences of restructuring are. We are insolvent, now. Restructuring is inevitable, and agreeing with the EU that we are not insolvent does not change the facts.

  22. Trichet has argued in the past that reginal disparities in the US are as great as in the Eurozone.

    The US is a transfer union – – of sorts!

    Gillian Tett says in the FT today that although gross domestic product across the US declined by 2.1 per cent in 2009, for example, some areas such as North Dakota, Alaska and Wyoming reported growth above 3 per cent – while Michigan and Nevada reported declines of more than 5 per cent.

    @ Rory O’Farrell

    I accept that we are insolvent and that is why there is an EU-IMF bailout but it does not inevitably follow that there would be a default.

    It is likely of course.

  23. @KC: “Economists need to ask themselves very simple questions .. such as what is the purpose of growth ?”

    Spot on. I would add: Please define and explain what you mean by growth;

    Q: What is economic growth?
    Q: How do you define it?
    Q: How do you quantify it?
    Q: What are the essential nutrients for growth?
    Q: Are these nutrients virtual or real?
    Q: When will economic growth cease, andwhy?

    Not sure we will get meaningful answers. Maybe. We’ll see.

    @ MH: Precient comment Michael. However the math is agin us. Its not a question of IF, but WHEN: Sooner is better (that a personal value judgement). It will send a very nasty signal to lenders: You must be real careful who you lend to. They appear to have (with the connivance of legislators) abandoned prudence. Best they hold their noses and swallow fast.

    The other side of the above issue is that govs will have to exercise much greater prudence in their fiscal behaviours. That’s known as reform. Care to bet on it?

    BpW

  24. @Michael Hennigan
    “I accept that we are insolvent and that is why there is an EU-IMF bailout but it does not inevitably follow that there would be a default.”

    If you accept that we are insolvent now how will borrowing another €62.5bn from the EU/IMF change our insolvency predicament over the long-term?

  25. I skimmed the report and didn’t pick up any sense that the rapporteurs grasped the significant gap between public and private sector wages (terms and conditions). The public sector is more attractive (look at the people ‘driving’ the Smart Economy – are they in the private or public sector?) than the private sector. It has been like that forever in Ireland – excepting the professions – but was hidden in the bubble years by the confusion about the boundaries separating income, credit access and wealth. It is dismaying to read such reports and not find the Croke Park flayed. And if someone can explain to me how any sensible adjustment can occur with very significant public sector redundancies I am all ears.

  26. Gremlins calling. Last line should read:

    “And if someone can explain to me how any sensible adjustment can occur without very significant public sector redundancies I am all ears.

  27. My solution would be to decouple the banking sector, and this would allow debt writedowns of individuals homeowners and businesses across the economy. The debt overhang prevents a ‘simulated devaluation’ as with a genuine devaluation the debt would also be reduced. (I wouldn’t have gone for the simulated devaluation strategy in the first place, but if its to work the debt must also be devalued.) This has the effect of keeping mortgage costs high, slowing adjustment in the property market (slowing the decline of rents), plus all the private sector adjustment that is required is tagged onto government debt. There are also public sector charges that are preventing a simulated devaluation (eg hospital fees, rates etc etc), but again, these aren’t being reduced because the government is using the money to support the banks.

    The only way borrowing more money can prevent debt write-downs is if we are offered the money at a close to zero interest rate. But the NPV of such a loan would be the equivalent of giving us free money anyway, and would not be much different from a write-off (though it may save face for the people who made bad decisions).

    We simply have to decouple the banking sector. It would be better if it was done orderly with EU help, but the EU must be informed, in no uncertain terms, that it will happen anyway. Not because we are playing hardball or are tough negotiators, but because we simply don’t have the capacity to cover government debt plus banking losses.

  28. @KW

    Re Page 41 of the PDF file and going back to the market in 2012

    They gave it their best shot. Another big dose of capital into the banks and enough money for groceries for 3 years and everyone involved said it would would work. And how could it not work? Olli Rehn was sure of it.
    The yields never fell. Maybe it could have worked in April.

    So it’s an interesting document if you wanted to present a course on failure and the dangers of procrastination.

  29. @ Dreaded_Estate /Rory O’Farrell

    It depends on growth but it is difficult to be optimistic.

    Public debt @ 125% of GDP in 1987 was a better position to be in than now as private debt is also a problem.

    In 1991, EU grant receipts more than offset all the debt servicing cost and of course thee was big potential in the FDI area.

    As to the banks now, they will fail if a funds flow is not available.

  30. @ MH

    The banks are dependent on a life support machine – can you see the patient recovering? Can you see the ECB keeping the machine on until 2013?

  31. @ Karl W

    “The Irish government does not need to tap international bond markets until the second half of 2012, but will gradually return to the markets thereafter.”

    That is extremely useful information. Generally it is a touch tricky to forecast what generic European sov yields might be 2 or 3 yrs ahead of time, never mind that of a particular state. Knowing that Irish sov medium term yields will be consistently below 5.8% in 2012 and 2013 means we now know the rest of the periphery is extremely unlikely to have funding difficulties at that point. It also means that we now know that all the talk of a potential bubble bursting in China is wrong, that unemployment in the US is not going to bounce back up from 9%, and that stock markets generally are going to be a lot, lot higher, JtO is right, etc,etc.

    No need to waste time on yet more analysis.

    Enda is clearly going to be a very successful Tea Shop.

  32. @grumpy,

    Thank you. It appears that our new paymasters want to see us doing something to help ourselves before they’ll contemplate any meaningful relief. Most of the deadweight cost arises from inefficiencies in structure, financing and market organisation and operation. Many people focus on pay levels and profit gouging, but these are just symptoms and, on their own, do not contribute significantly to the deadweight costs. Indeed protecting pay levels and allowing for a bit of profit gouging may be the necessary quid pro quo to provide the incentives – or to minimise the resistance – to implementing the structural and organisational changes required. (And the narrow focus on pay and profits generates a public v. private conflict that is ultimately self-defeating.)

    And taking this further, in line with some discussion here and on other threads, about the focus on indentifying marketable assets in the banking system that may be realised at better than fire-sale prices, our paymasters will also require us to look at marketable state assets. They, unsurprisingly, want to see the colour of our money before they’ll put their money where our mouths are.

    But this gets us into a Catch 22 situation. Without seeking to realise some state and banking assets, relief may not be as generous or as timely as we would like to secure economic recovery, but realisation may not generate the values we would like because buyers are uncertain about the prospects for economic recovery and their ability to secure a risk-related return and full recovery of thier investments.

    Unortunately, it’s for us to make the first step to break this Catch 22. Investor confidence will return when we are seen to be taking some hard decisions. This exercise is further complicated in relation to state assets because the restructuring that is required to generate sustainable benefits for consumers may diminish the market value of the underlying assets.

    But these hard decisions can’t be postponed and the sooner we see the State Asset and Liabilities Review Group’s report the better.

    In any event, it seems the sovereign bond market has roused itself from its post Xmas slumber and is going to force the pace.

  33. @the alchemist

    Indeed, it looks like Croke Park is To-Big-to-Fail.

    My judgement can’t be up to much. Since it (or the failure to use the unforeseen economic circumstances escape clause) was a significant part of my reasoning for expecting the IMF to arrive, I find it difficult to imagine how the IMF can leave with it still in place – and we now know for certain that the IMF will not be needed really beyond mid 2012.

    Good job nobody listened to me!

  34. @ seafóid

    On the state of the banks, the concept of a black hole comes to mind.

    Can Quinn ever repay his €3bn? What is being doe with his foreign assets in recovering markets.

    When is NAMA going to sell its prime London properties and so on.

    Everything seems to continue to happen in slow-motion.

    Samuel Beckett: “Where I am, I don’t know, I’ll never know, in the silence you don’t know, you must go on, I can’t go on, I’ll go on.”

  35. Croke Park and the banks are 2 separate issues. They both have to be addressed but until the banks are neutered how can anything happen to CP ? What is the point of throwing another 50bn into the banks ? That is what the unions will ask.

  36. @PH: I am reluctant to take issue with you: My personal comments on some of yours above.

    “Most of the deadweight cost arises from inefficiencies in structure, financing and market organisation and operation.”

    Yes indeed. But reform is merely a virtual construct at present. When it is ‘made flesh’, expect lots of moans, wringing of hands and rendering of garments. Prof M Kelly was very keen on Regression to Mean. Now I know what he really meant.

    “… but realisation may not generate the values we would like because buyers are uncertain about the prospects for economic recovery and their ability to secure a risk-related return and full recovery of their investments.”

    Well informed ‘gamblers’ can now afford to be Risk Acceptors. See below.

    Investments? I would now classify all lendings, commercial and soverign as unmitigated gambles – with our (the taxpayer) money. With p =1.01 that we lose! Wolves 1: Sheeple 0.

    “the restructuring that is required to generate sustainable benefits for consumers may diminish the market value of the underlying assets.

    Not, ‘may diminish’, but ‘will’. Consequences follow.

    Anyone advocating the sale of ‘state assets’ had better articulate exactly the consequences for the citizens of the state of such action. I’m sure they will not. We will be subjected to another sustained blast of unconscienable, incoherent, babblespeak to herd the taxpaying sheeple into the correct corner of the pen.

    BpW

  37. seafoid

    The argument is politically lost or rather, as I predicted, never happened – too many PS voters = too much power to alienate in the run up to an election.

    To the Kind Strangers this means:

    Croke Park = Transparent and non-negotiable requirement to borrow at whatever Rate we say + you can forget about not paying back some of the senior debt your banks owe to our banks unless, until , and to the extent it suits us + you will do whatever we demand regarding European fiscal integration;

    Rate = the maximum that does not absolutely collapse the economy or cause riots, or at or whim generally.

  38. @ Grumpy

    I think the political equations are all going to change when the full horror of the situation is understood by the average voter. Watching various FF videos recently it is clear that a lot of people are living in la la land. I don’t think whoever wins this election will be in power for the full 5 years either. The implications of the failure of the political system haven’t come through yet. Cowen signed CP but how good is his word now? Plus I don’t think the outsiders understand the dynamics. It is a dialogue of the deaf. With Lenihan translating.

  39. @BpW,

    You seem to believe that that the capitalist system has no redeeming features. I’m trying to make, probably ineffectually, a slightly more subtle point. And it is that, even if assets are sold at a price less than might conceivably be achieveable, the present value of the benefits to citizens and the economy of the lower prices for the services generated by these assets and of the benefits in terms of reduced net sovereign debt are likely to far outweigh any perceived reduction in the sale proceeds. And this is likely to be the case even if the purchaser make returns that are deemed to be excessive. And, in any event, these returns will be constrained in the regulated sectors.

  40. The discussion about Ireland’s competitiveness seem to be based on an assumption that I believe to be false:

    The export/FDI did not allow wages to increase in line with the boom-economy. If they had then they’d be uncompetitive & no longer making profits. Since they are still around & still making profits my contention is that (with few exceptions – senior managers) the wages paid are still competitive. Growth in employment in this area did not happen & instead happened outside of Ireland. The reason for that was high wage demands & high cost of property for any expansion. Now with high unemployment & a crash (slow-moving as it is) in property-prices Ireland is once again competitive in attracting investment.

    The assumption that export/FDI were stupid enough to allow themselves to become unprofitable is ludicrous. They didn’t do what the Irish government did & try to expand during a boom.

    Irish economic governance can at best be seen as poor & the future economic governance looks to continue that trend.
    -Who can seriously believe that credit will start to flow when debt-forgiveness is constantly argued?
    -Who can seriously believe that government will cut the deficit when new pet-projects with no economic benefit is being proposed by a possible governing party?

    Ireland want foreigners to take it on faith that reforms will happen. Foreigners took it on faith that Ireland was well governed. Once bitten, twice shy -> Reform before aid.

  41. @Jesper,

    “Ireland want foreigners to take it on faith that reforms will happen. Foreigners took it on faith that Ireland was well governed. Once bitten, twice shy -> Reform before aid.”

    +1

    This is the reality all the political factions are trying to conceal – and many voters are content for it to be concealed.

    But the end-game may be closer than we think…see most recent post.

  42. @ Rory O’Farrell

    ‘We simply have to decouple the banking sector. It would be better if it was done orderly with EU help, but the EU must be informed, in no uncertain terms, that it will happen anyway. Not because we are playing hardball or are tough negotiators, but because we simply don’t have the capacity to cover government debt plus banking losses.’

    Spot on.

    I would start from we believe the Irish taxpayer owes nothing of the bank debts and has no responsibility for insuring the bondholders as a backstop. But, we are willing to listen to you at one percent per point if we can justify our ‘investment against bond owned’ in return for guarantees of liquidity and reformation of the banking structure.

    What is in it for us (taxpayers)?

    How do you think that would ‘fly’ as a starter?

    Our politicians are talking themselves into a position they have not planned for and I doubt they have the negotiating skills to deliver a realistic solution – thats what really scares me.

    If I have learnt anything it is that there is no prevailing wisdom for any circumstance – only a workable solution.

  43. @ PH: Thanks for comment.

    I hope I am not as jaundiced as I sometimes (or may oftentimes) appear. Now and again I get kinda mad at the utter mess that legislators leave in their wakes. The ‘banket guarantee’ is a very salient case in point.

    If this is a measure of their intellectual engagement with a very significant issue – then my expectation of their ability to drive reforms, which will directly affect themselves, is close to zero. I hope for a pleasant suprise.

    BpW

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