Central Bank 2010 Annual Report

The Central Bank’s annual report for 2010 was released today. Continuing his valiant service, Lorcan has read the report so we don’t have to. For those ELA-philes out there, Lorcan spotted the following lovely sentence:

In addition, the Bank received formal comfort from the Minister for Finance such that any shortfall on the liquidation of collateral is made good.

Anyone care to speculate on the legal value of “formal comfort”? For instance, relative to the guarantees passed in to law under ELG scheme, how does a formal comfort compare?

Noonan on the EU-IMF Bailout

Listening to the News at One on RTE Radio One, I heard Minister for Finance Michael Noonan dismissing comments over the weekend from Minister Leo Varadkar that Ireland would probably have to seek a second bailout as it would not be able to return to the markets. That’s fair enough, one would expect a Minister for Finance to say the current programme is going to work and Varadkar was clearly off message.  However, it worries me that Noonan’s comments completely misrepresent the true picture in relation to Ireland’s funding situation.

Noonan said (I’m paraphrasing here but the audio links will be available later) that the EU and IMF are providing enough money “to carry us forward in all eventualities” and that the deal runs through Two-Thirteen (which I take means 2013). Noonan indicated that while there was a plan to return to borrowing from the markets in, yes, Two-Twelve, that this wasn’t actually necessary. The clear implication from these comments is that Ireland would not have to request a new deal until after 2013 if at that point market funding cannot be located.

This is not an accurate representation of the EU-IMF deal. Here‘s the European Commission’s report on Ireland, released in February. The last page shows the financing needs. It is clear that the EU and the IMF are not providing enough money to get us through the end of 2013. Indeed, the EU and IMF funds probably only get us to early 2013 (this was clear before the Commission’s report) and that market financing is required. So if we cannot obtain this market funding, we will have to request a new deal from the EU and IMF.

It’s reasonable to expect bluster from our Minister for Finance but we should at least expect him to show a clear understanding of the parameters of the state’s financing needs.

Update: Here is the updated European Commission programme document from this month. Financing needs are discussed on page 22. They differ a bit from the February document but the key point is the same. The programme calls for €14 billion in market financing in 2013 to fund the state.

Dublin Kapuscinski Lecture – ‘Climate Change and Development’

The Dublin Kapuscinski Lecture – ‘Climate Change and Development’ on 31st May 2011 at 1700-1900 in the UCD John Hume Global Ireland Institute. R.S.V.P. to Jean.Brennan@ucd.ie 

Website: http://ec.europa.eu/development/services/events/kapuscinski

The series is named after Ryszard Kapuscinski, a Polish reporter and writer who was a “Voice of the Poor” in his famous reportages and books covering the developing world.  The lecture series is organized jointly by the European Commission, the United Nations Development Programme and partner universities, in this case TCD and UCD.   Ms Barbara Nolan, Director of the European Commission’s Representation in Ireland will open the Dublin Kapuscinski Lecture 2011 on ‘Climate Change and Development’.

 Professor Dirk Messner, German Development Institute, will deliver the keynote lecture.  The global development panorama is changing dramatically. The challenges of security and poverty are more interwoven than ever before. Yet, two thirds of the global poor people are now living in middle income countries like China, India and Brazil. What does this new global poverty map imply for European development policies? Development trends are also embedded in an overall global development challenge: – climate change. The world needs to learn to decouple wealth creation from burning fossil fuels. A great transformation to a global low carbon economy is necessary during the decades to come in order to avoid major and dangerous changes in the Earths system. What do these global shifts imply for Europe s role in the world? Europe needs to define its global interests. And it needs to be part of a global governance strategy to shape global development trends.”

 A panel discussion will follow, chaired by Prof. Patrick Paul Walsh (UCD Chair of International Development Studies). Panellists include Francis Jacobs, (Head of the European Parliament Office in Ireland), Cliona Sharkey,  (Trócaire, Environmental Justice Policy Officer), Tara Shine,  (Head of Research and Development, Mary Robinson Climate Justice Foundation, Joseph K.Assan, (TCD-UCD MDP Lecturer in Development Practice) and  Frank Convery ,  (UCD Earth Sciences Institute).

 The lecture series offers citizens of the European Union an unprecedented opportunity to learn and discuss development, and issues related to development cooperation.









Daniel Gros: External versus domestic debt in the euro crisis

In recent articles, Daniel Gros has emphasised the importance of a country’s financial wealth for its solvency.     He further develops his controversial arguments in this VOX piece, with particular emphasis on the distinction between external and domestic debt.  An extract:

In a monetary union, the usual assumption that public debt is riskless is not valid. Countries like Greece don’t have access the ultimate option of printing money. In this sense, the public debt of Eurozone countries resembles that of emerging markets (Corsetti 2010). 

The crux of the importance of external debt lies in the fact that even Eurozone nations retain full sovereignty over the taxation of their citizens. The logic is somewhat subtle and best explained by an extreme example that makes the point extremely clear. Suppose a nation’s entire debt is held by one man and the nation faces a debt crisis. If this bond holder is a resident of the nation, the government could impose a tax on him equal to, say, 50% of the value of his government bond holdings. Using this new tax revenue, the government could pay down its debt by 50%. Of course this would be an outrageous expropriation and make it harder to issue debt in the future, but it would not be a default.

By contrast, suppose the sole bond holder where a foreign citizen living abroad. In this case, the government could no longer freely tax the individual. Governments do not have a free hand in taxing non-citizens; they are bound by existing treaties and international norms. 

The baseline point is that as long as Eurozone members retain full taxing powers, they can always service their domestic debts, even without access to the printing press. For example, governments could reduce the value of public debt held by residents by some form of lump-sum tax, such as a wealth tax. The government could just pass a law that forces every holder of a government bond to pay a tax equivalent to 50% of the face value of the bond.2 The value of public debt would thus be halved, much in the same way as it would be if the government ordered the central bank to double the money supply, which would presumably lead to a doubling of prices. 

This is why, I believe, it is foreign debt that constitutes the underlying problem for the solvency of a sovereign, even in the Eurozone. 

Of course, we have recently seen a tentative move towards wealth taxation with the (temporary) levy on pension assets.   Dominic Coyle does not mince his words in criticising the new tax in this Irish Times piece from Monday.