The Exchequer Balance

The mid-year Exchequer Return released on Monday gives a somewhat noisy insight into the state of the public finances.  It is hard to draw exact conclusions about the behaviour of tax revenue and government expenditure because of the changes introduced in last December’s budget and the reporting of the relatively meaningless ‘net’ expenditure measure which was also affected by the Budget. 

Anyway, in this little poke into the figures we will just look at the Exchequer Balance which allows us to throw all these anomalies into the mix and focus on the final outcome.

Here are the cumulative Exchequer balances for the past five years.

At €10.8 billion, the Exchequer Deficit for the first six months of the year is better only than the €14.7 billion deficit recorded in 2009, but is worse than the €8.9 billion deficit recorded in 2010.  However, the Information Note which accompanies the returns tells us not to worry because:

The year-on-year increase in the deficit was primarily caused by the €3,085 million in non-voted capital expenditure Promissory Note payments to Anglo Irish Bank, INBS and EBS. Excluding these, the deficit fell by over €1 billion.

This is meaningless and should more appropriately be described as misleading.

Even though the deficit was nearly €2 billion higher than last year, if we engage in some make-believe and just forget about the €3 billion we spent on the Promissory Notes, “the deficit fell by over €1 billion”.  I think Aprés Match based a sketch around the idea of “the man who lent us the money forgetting the debt” so it must be on solid ground.

The Promissory Notes might cloud the deficit figures as they have already been included in the general government debt (GGD). However, the Information Note fails to mention the annual interest on the Promissory Notes which will be added to the debt.  I don’t know what the exact interest rate is, but any rate over 3% would more than offset the phantom €1 billion fall in the Exchequer deficit mentioned above.

By the half-way point of last year our debt interest costs had run to €2.18 billion and all had been met from the Exchequer Account.  The equivalent figure from the Exchequer Account for 2011 is €2.41 billion.  We are accumulating (expensive) debt at an alarming rate, yet our interest costs have apparently only risen 10.5% on the year. 

Here are our debt interest costs for the past five years from the Exchequer Account.

The 2011 expenditure on debt interest did a wonderful thing  in May – it fell.   Anyway, the standout feature is how low the blue 2011 line was in January and February.  It seems we paid virtually no debt interest in the first two months of the year.  Of course, this is not true and we actually paid about €0.8 billion in interest, but did so from something called the Capital Services Redemption Account (CSRA).  There is a substantial interest cost which did come from the Exchequer Account in 2010 but did not do so in 2011.  The interest figure given in the Exchequer Account is €0.8 billion lower than our actual interest expenditure.

A year-on-year comparison which says that “the deficit fell by over €1 billion” but can only do so by forgetting about the €3.1 billion Promissory Notes payment, ignoring €1 billion of accumulating interest which we will pay and omitting €0.8 billion of interest which we did pay does not stand up to any scrutiny.

Even if we do ignore the Promissory Notes the “improvement” in the Exchequer Deficit is around €200 million which is a small dent in the €18 billion deficit from last year.

Finally, we will look at the current account balance which isn’t affected by Promissory Notes or other capital expenditure changes.  This year central government expenditure will be around €68 billion, with around €60 billion of that in the current account.  With nearly 90% of expenditure coming through the current account it is important to track the changes here.

And changes there are none. At €7.2 billion, the current account deficit is exactly the same as it was in 2009, and while there does appear to be a €0.8 billion reduction on the €8.0 billion current account deficit recorded to this time last year, that is eroded when we add back in the €0.8 billion  interest paid from the CSRA.  The current account deficit isn’t budging.

To be fair this is what the DoF have forecast as they see last year’s €18.7 billion Exchequer deficit falling to €18.2 billion this year and hence the claims that the public finances are “on target”.  Maybe it’s time we moved the goalposts and aimed for “improving” rather than just “not getting worse”.

56 replies on “The Exchequer Balance”

I have no doubt that everything you wrote is correct, as it usually is. But, it is all far too complicated for simpletons like myself to understand. I suspect I am not the only one. To make it simpler, could you relate it to how much, if any, the H1 figures have deviated from target?

These were the targets laid out in Budget 2011 in December last:


2010 -18,755
2011 -17,670
2012 -15,105
2013 -11,025
2014 -6,550


2010 -50,115
2011 -15,180
2012 -12,330
2013 -10,155
2014 -5,210


2010 -31.9%
2011 -9.4%
2012 -7.3%
2013 -5.8%
2014 -2.8%

How far, and in which direction, are the H1 figures off those targets, especially the percentages of GDP ones?

Minister Noonan seems to be saying that the H1 figures are on line with these targets and seems confident that the IMF/EU will agree that they are on lone with these targets, even though he (the Minister) was not the one who set the target and, because he only came into office halfway through H1, would not be held responsible if they were off target. I really can’t think of any reason as to why he would say that, if it wasn’t the case.

The figure for tax revenue in H1 was about 115m short of target, but the figure for voted expenditure was about 320m short of target, implying that, taking these two items in isolation, the deficits are ahead of the above targets. But, of course, this might be counter-balanced if the other items, (i.e. all the interest, promissory notes etc etc, that you have gone into a welter of detail in explaining), are short of target. So, is that the case or not? I think relating everything to the targets set out in the budget is the best way of analysing the figures.

The fact that debt interest is wiping out any progress we have been making on reducing the primary deficit points us in an obvious direction:

Achieve a primary surplus as quickly as possible and then tell the Troika to get lost.


Do you know how the targets in 2012-2014 will be met? These are the years when the deficit is forecast to decrease as the targets indicate. But let’s just have a look at these targets.

As you rightfully, list the 2011 Exchequer Deficit target from December’s Budget was €17.7 billion. By April’s Stability Programme Update the target for the Exchequer Deficit had shifted to €18.2 billion. In just four months the target deteriorated by €0.5 billion. The June Exchequer Returns are “on target” with this now lower target but we have missed the Budget target. We are moving the goalposts away from where they need to be.

You give the 2013 Exchequer Deficit target of €11.0 billion from last December’s Budget. In April’s Stability Programme Update this had shifted to €13.4 billion. We now expect to miss the target you list by nearly €2.5 billion. That is “how far, and in what direction,” we expect to miss these targets.

This is why looking at “targets” is utterly useless. We need to look at reality. In reality the deficit is not falling. Can you tell us how it is going to fall to meet these targets?


It is hard to know how to incorporate NAMA into the Exchequer Return. NAMA has not placed any significant cash requirement on the Exchequer (bar a couple of hundred million that was subsequently repaid).

NAMA is more related to the total debt than the annual deficit. The treatment by the NTMA seems to be to value the NAMA assets at par. I suppose this is as good a guess as any as we have no idea what these assets will actually be worth.

NAMA has bought around €72 billion of loans for using the €31 billion of bonds it has created. How much money will it get back. We just don’t know. NAMA itself projects a profit of €1 billion. The NWL index from Namawinelake indicates that there needs to be blended 13% rise in property prices for NAMA just to break even.

NAMA will not have an impact on the Exchequer until the bonds issued have to be repaid. It hopes to have received enough money in repayments and asset sales to cover these repayments. This is the shadow NAMA casts on the Exchequer.

How much, if anything, will have to be paid? When will it have to be paid? Which arm of government will pay it? These are unknowns and I left them out of my analysis (the confusion from the Promissory Notes is enough to scupper the figures!) but it will probably be the medium term before NAMA has a direct effect on the Exchequer, though this uncertainty is having an immediate effect on our bond yields.


Two scenarios I think:

1) If Nama does not break even:

It pays interest at the 6-month Euribor rate (about 1.8% at the moment) on the senior Nama bonds (95% of tht total or 28bn)


the interest in the subordinated bonds (5% of the total or 2-3bn) at a rate linked to our 10-year Government Bonds

However it will only pay back the principle on the senior bonds.

2) If Nama does break even:

The same as above except it pays the principle on the subordinate debt on the

So potential:

Principle costs of 31bn

Interest costs of – 600m X 10 = 6bn (senior)
– 0.1 (say a 10% Gov Bond rate) X 3bn = 300m X 10 = 3bn

So roughly 40bn?

Thanks to NWL for my basic understanding.

A sisyphean like task me thinks.
Unless Irish residents own the majority of their own debt at interest rates equal to our superiors the deposits of Irish residents will slowly evaporate to near zero.
We are being scalped.( although non household private sector deposits is increasing , what is this?)
I must congratulate our European brethern on a job well done – although hunting livestock is not considered good sport by many.

lovely graph!

That kick upwards at the end of the year that continues to get smaller and smaller…. is that the sel-employed including the “sheltered professions”?

@Seamus Coffey

Let’s see how 2011 is going before worrying about 2012 and after.

As you so correctly say, when the FG/Lab government came in, they shortly after revised the FF targets set in December. So, the ones below replace the ones I gave above, which were the FF ones.


2011 -18,165
2012 -17,040
2013 -13,405
2014 -9,495
2015 -6,885


2011 -15,665
2012 -13,905
2013 -12,130
2014 -8,130
2015 -5,035

% of GDP

2011 -10.0%
2012 -8.6%
2013 -7.2%
2014 -4.7%
2015 -2.8%

You seem to have answered the main question I was asking, namely how is the government deficit faring so far in 2011, as compared with the targets. That is the most important thing to know at this stage. You seem to be saying (and apologies if I am misunderstanding what you are saying) is that they are indeed on target for 2011 (using the new FG/Lab targets).

So, as of H1, the government is on target for a deficit of 10% of GDP in 2011. In 2010, it was 12% of GDP. So, it is improving, by 2% in a single year, which is greater than the improvement required in the plan for 2012, 2013 and 2015. I don’t think that it is correct to make a distinction between ‘on target’ and ‘improving’ if the target itself is for improvement. It would be different if the target was for no change.

One can certainly argue that the plan should be for a faster rate of improvement. I wouldn’t disagree with that. But, it can not be disputed that the improvement that looks like occurring in the first year of the plan is quite substantial and is in line with the current plan targets.

Just for the record, the UK budget deficit was 11.7% of GDP in 2010/11 and their target for 2011/12 is 9.6% (they work in a financial year that starts in April), which are virtually identical to Ireland’s budget deficit and budget deficit target for the same the periods (April 2010 to March 2011 and April 2011 to March 2012). However, unlike Ireland, in the first two months of this financial year (2011/12), the UK deficit was actually worse than the year before, and indeed was at an all-time high, and the UK’s NIESR (their equivalent of ESRI) has forecast that the UK will fail to meet its targets. What we should be looking at is why the UK, which has roughly the same budget deficit and budget deficit targets as Ireland, but which has a much worse balance-of-payments than Ireland, which has much higher inflation than Ireland, which has a much lower savings rate than Ireland, and which has (as we know only since last Thursday) much lower population growth than Ireland, is able to (a) stay a lot more calm than Ireland about the whole thing (b) borrow at much lower interest rates than Ireland, indeed at negative interest rates, and, after that, look at whether or not there is a connection between (a) and (b).

@ Seamus

You’re absolutely right that saying “forget about the promissory notes” has a touch of the “apart from that Mrs. Lincoln” about it since it is going to be a recurring €3.1 billion payment for years to come.

On the question of interest on the promissory notes, the story is fairly mind-numbing.

For accounting purposes (based on “accrual accounting”) the promissory note debt was booked on the GGD last year and only the annual interest on the note counts for GGD from here on.

However, the cash payments follow a completely different pattern. The interest is effectively deferred, so we are paying €3.1 billion a year and then smaller payments in 2024 and 2025. Basically we are paying down the principal first and then paying off the accrued interest.

But (warning: extra tedious complexity ahead) — the government negotiated with itself so that the actual interest charge that would get counted on the GGB would be zero in 2011 and 2012, making this up with higher interest charges in later years.

Because this interest is really being rolled up, we essentially gave ourselves a holiday from an interest payment that we’re not actually making. The purpose of this was to reduce the amount of adjustment the government had to make to meet certain GGB targets in 2011 and 2012.

So this year there is no interest charge on the GGB and there will never be any additional exchequer charges over the €3.1 billion payments — instead the payments will just go on for longer than 10 years.

Clear as mud I know.

The current account deficit isn’t budging.

I’d like to emphasise this point.

The current account deficit isn’t budging.

The current account deficit isn’t budging.

The current account deficit isn’t budging.

Everyone should hopefully now be on the same page. If not, please compare the graphs for 2009,210, and 2011 which aren’t affected by Promissory Notes or capital expenditure changes.

The previous government, and now the existing government have effectively done nothing to stem the bleeding in the government’s accounts. This should be entirely unsurprising to anyone who has been paying attention. The government has refused to increase income taxes (excepting the USC–which decreased them at higher bands), has refused to make serious cutbacks, and has insisted on paying for huge bonuses, pension, and company cars for employees in state agencies and state owned banks and companies. The Irish State will not cut its spending, and it will not increase its income; so what do people think will have changed in the last three years?

Now, to be fair to the current government, they haven’t been in office very long yet to change things–though time is pushing on. While they are making certain changes and cutbacks, their policies appear to be a continuation of FFs plan to get the people who can least afford it to pay for the current mess. The USC is still in place, there have been substantial cutbacks in front-line services, hospital services are now to be axed wholesale, etc, etc.

Now cruel as it is, this policy would have some merit if it was actually going to work. Unfortunately as the figures reveal, the less wealthy have been squeezed dry and they’re just not going to be able to pay for everything. So the government must, simply, follow the basic procedures of financial husbandry if the state is ever to see the black again.

So, the government must now:
a) Increase income tax. This is by now, inevitable.
b) Make massive cutback and layoffs in the public sector.(It would help if they dealt the the bonuses and super salaries first though)
c) Balance the books to enough of a degree that once the banking debt is defaulted on, the state will have no trouble getting financing.

I’m aware that this is the “Morgan Kelly” option. However, I fear it is now the Only Option.

@ bazza

“Achieve a primary surplus as quickly as possible and then tell the Troika to get lost.”

This was also the gross error in Morgan Kelly’s argument, which I don’t remember anyone pointing out. Achieving a primary surplus does not mean that we are free of the debt markets. We will still have massive roll-overs of debt to manage, not to mention interest.

It really is a software failure in humans that we cant act to curb the impact of excesses on our lives. We see in individuals, communities, countries and globally. There is no other answer to our situation than to slash the deficit and run a surplus to reduce debt accumulation. No need for eclectic equations or complicated routines to avoid realities simple stuff. We should all be out there demanding this. Society will suffer but the acceleration the current fixed path will mean less debt and a quicker turn around – why cant this happen? If spending fall prices will fall, no net affect, qulaity of life is approx similar but debt accumulation slows

From what I can see the €1bn improvement (ex promissory notes) has come mainly from two main sources neither of which indicate an improvement in the underlying economy or the state’s finances
• €450m reduction in voted capital expenditure. Capital expenditure is 8% behind profile. and now makes up only 6% of net voted expenditure which effectively amounts to little more than care and maintenance of the capital infrastructure.
• There is €595m in income under “non tax revenue” from the Bank Guarantee, at this stage last year it was zero. It didn’t hit the exchequer statement until October 2010 (see last year’s statements attached). This is artificially boosting the position at this stage of the year.
• 9% of receipts are now “non tax revenue”, essentially income from the guarantee (which drives the banks nearer the edge) and the surplus from the Central Bank. For comparative purposes this was 2% in 2008 (maybe we have found a replacement for stamp duty??). What happens if / when the Central bank finds the collateral it has received for its emergency lending to banks is worthless and it is forced to take a huge write-down.

@Kevin Barrett
This year some 2bn in Health Levy income is now part of the general exchequer rather than netted off the Health budget. Health is planning to spend 1 bn of this (thus the apparent increase in Health spending).

Bullet dodging? Food for thought for the “Oh everyone’s certain Ireland will be junked in the next 24 hours” group…

“July 6 (Bloomberg) — Moody’s Investors Service said today that it continues to “differentiate significantly in terms of the credit profile” in the ratings assigned to peripheral European countries. The rating company commented in an e-mailed response to Bloomberg News request for comment.

“Moody’s focuses its analysis on each country’s economic strength, fiscal plan and medium-term debt trajectory,” the ratings company said in the e-mail. “As reflected in the different ratings assigned to European periphery countries, we continue to differentiate significantly in terms of the credit profile. Ireland’s government debt rating is Baa3, with a negative outlook.”

Whilst this debate on the actual figures is very welcome, I think there should be another debate on the quality of the information. To my mind the information on current expenditure in particular, has been lacking in useful detail.

I don’t believe this is because the government ‘hides’ it, rather instead that it doesn’t have said information in a useful format. I think a debate on what information _should_ be in the public accounts would be useful.

You cannot have effecient trade when the money supply is declining – what exactly did the Troika promise the Irish goverment when it came out of the chip shop ?
It must have been something very special…………
Maybe not – I guess the Irish will drop their pants for anything these days or indeed past days as the Irish have form in the submission department.
Eamonn Gilmore stated we are dealing with a complex situation.
The magicians may endeavour to make the magic trick appear complex but at their core all Magic tricks are simple……..
Shadow banking debt is incorporated into sovergin debt – tax increases to pay the new interest and indeed new capital sum which is quite strange.
This payment of capital sums extracts the real money supply ( goverment money) in a more violent manner.
Deposits decline , synthetic wealth declines.
Nothing complex about this whatsoever.
If credit production effectivally stops then interest on goverment money should stop yes ?….. not in Ireland I am afraid.
Otherwise the process is a mere extraction device.
As I have said many times this rewilding of the periphery is only a attempt albeit effective one of keeping the price of Gold into its little box – (since the first Greek crsis of Spring 2010 – Euro gold although very volotile has not moved much above its max) it serves no real productive economic function.
If they could not extract the capital rather then just a piece of the growth from the PIGS the opportunity cost for holding paper rather then Gold would explode.
They must destroy the peripheral economies so that their Euros will maintain significant value.
In many ways this process is similar to Volkers destruction of the American physical economy so that the Dollar could maintain its artificial value.
Why the west gives power of Governance to the priesthood who cannot create wealth in any form is beyond my comprehension.

Trying to maintain the price of paper after the event (hyperinflation of credit) will only result in the export of productive capacity elsewhere.

The concern has to be that the deficit is only budgeted to fall some €500m on last year despite all the negative measures of the last budget. If there is fudging with the figures it may even be worse.

Next year’s target drop doesn’t exactly look ambitious either. The drop from 2012 to 2013 and then 2013 to 2014 look like the ones that will see a serious step change in taxation or spending.

As someone in business both for myself and advising other businesses the problem is we want to know what is coming down the track before making any decisions about keeping going or expanding and it doesn’t look like we’re going to see that for quite some time.



Although not directly relevant to the cost of our debt, our 10-year bond closed at 12.4% today, a record and up a record 90 basis points on the day. No doubt, we are being hammered on the shirt-tails of Portugal’s downgrade – by the way if you want a laugh, catch the replay of RTE Six One News with Portugese Barroso barking at the moon about Moody’s downgrade of his country with Polish PM Donald Tusk seated beside him sniggering – but fact is the markets are unconvinced we can return for market funding.

It is remarkable how our bonds have moved along with Portugal’s today whilst Spain’s is subdued. So the markets seem to differentiate between Spain and Ireland, but not between Ireland and Portugal.

Off topic and back to Target2…
“For banks in economies that hitherto had a history of external payments deficits and currency depreciation, the introduction of the euro brought with it a new and specific risk. Previously domestic currency used to buy imports would be returned to domestic banks when, in simple terms, importers sold the currency and exporters picked it up through the foreign exchange market, at an exchange rate which (ex capital flows) equalised the two amounts. In contrast, funds to the value of the deficit are now permanently lost to the domestic banking system’s private sector deposit base. The new reality is that external payments deficits constitute a funding threat to domestically focused banks. The resulting funding deficit is, in large measure and in current circumstances, met by the ECB. We would question whether this is sustainable and indeed to what extent such funding can meaningfully be regarded as temporary.”

I often hear about our ‘bond prices’ but I’m curious to understand volumes in secondary trading. Are they high ? How much of the issue is in play (e.g. perhaps most subscribers hold the bond until maturity) ?

The reason I ask this is that in the secondary equity markets it is often a small, or fixed proportion, of the stock which is traded frequently – and high frequency traders tend to move on ‘smaller’ pieces of information. However for equity markets, getting quality information on trading patterns/stock in play was tough…wondering what the story is with secondary bond markets.

You are trying to extricate Irish money supply from that of the rest of the eurozone. It is quite easy to be poor and stay poor in an currency union. Just as Alabama.

Money supply in the eurozone is growing…

@Brian Woods II
I may be a idiot but I ain’t like David – I don’t see the goodness in anything – it all stinks.
I don’t see what is so complex about what I am saying.
Credit has been hyper inflated – we now have a real negative return in the west due to credit hyperinflation.
All this money is sitting on the sidelines.
The Priesthood must prevent large & bit players from getting into the Prisoner dilemma box by offering juicy interest rates.
This extracts capital from the plebs as their credit deposits are subtracted to pay the big players.
If the Big players did not have this structured option they would run to Gold.
Wheres the complexity here ?
The Churches just do not want anyone to defect.

Irish money supply is seperate from the other Eurozone countries – Irish Goverment paper is seperate from Spanish paper and so on.
Although Euro cash is for the first time non govermental money.
Alabama does not pay sovergin debt.
Is money supply Growing faster then bank credit supply ? – it certainly has not over this last decade or so , that is why we have a debt crsis.
I have proposed a solution that will keep the value of the Euro by transferring credit deposits to goverment money while defaulting on all shadow bank debt.(effectivally giving these shadow actors mortgage paper in a all cash market)
The Euro masters solution is to crush the physical economy with debt to faciltate the transfer of wealth.
I prefer the former solution but alas it is unlikely to happen

Whatever about the 10 year bond movements, the 2 year looked very scary today, up almost 250bps on the day.

There is no liquidity in Irish , Greek or Portugal now. Dealing spreads in short dated bonds are 1 – 2 points wide. If you want to short the periphery, you now have to do it through Spain & Italy.

Excellent post, good to have you on board.

My summary of the situation is

1. We are on target but we lowered the targets to “adjust” to reality after 3 months.

2. The deficit is “better” than 2010 if we ignore that pesky €3.1bn in promissory notes.

3. We are doing better because we are taking an interest holiday on accrued interest payable to Anglo of circa €1.8bn. Is the only purpose of this accouting sleight of hand to make the 2011 and 2012 deficit look better?

4. How is the Capital Services Redemption Account (CSRA) funded? When did we put money into it?

5. We aren’t really getting anywhere on reducing the deficit, just doing enough to prevent the mounting interest costs (those we decided not to defer) from making the deficit get worse


Your point re the failure to reduce the deficit is well made. No amount of financial fudging can disguise that failure. The way they pulled the interest payment from the CSRRA would put one in mind of the Bull McCabe going to the various tincans and shoeboxes for the money to buy ‘his’ field.

Another way of looking at this is to look at the total voted expenditure, current and capital, over the past four years at end of June.
2008 22.7 billion
2009 22.9 billion
2010 21.5 billion
2011 21.5 billion.
(If my figures are correct).
Not much reduction there.

Now consider the impact that a few sensible decisions made in 2008 would havve made on the above.
Freeze all salary increments. Approx €500 million pa. €2billion in 4years.
Above €50,000 take the three top points off all salary scales and reduce pay accordingly. Saving??

What would really make an impact on the chart would be to put up the figure for 2012 whcih I understand is going to be somewhere around 17 billion.

One thing is crystal clear from all of this is that there is a fantastic gravy train still rolling every day for tens of thousands of people.

Meantime the Dept of Social Welfare is unable to process payments fo people out of work for up to 13 weeks. But thats ok because like the previous Minister o’Keefe said ‘most people know who their welfare officer is’.

I wonder if Joan Burton had to wait 13 weeks for her new Ministerial salary.
I doubt it.

Sorry for the triple post.

Has anyone worked out whether the real cost of Anglo is the €30bn notional value of promissory notes or the €45bn we will have pay them including interest?

“Irish money supply is seperate from the other Eurozone countries – Irish Goverment paper is seperate from Spanish paper and so on.”
Sovereign bonds are neutral to money supply – they are sold, not created.

“Is money supply Growing faster then bank credit supply ?”
Bank credit supply *is* money supply. It is a debt based currency (a currency based on obligations).

Fiscal austerity cannot work under these circumstances – the ECB base is now static to falling
They should at the very least double or triple the Euro cash withen the Eurozone.
They are being intellectually dishonest at best.
Lesson No 1 : Tax does not produce more money to service interest , it merely transfers money from one holder (typically a deposit account) to another (holder of a sovergin bond)

Goverment money is the money supply – it is money without leverage ( ie its value is based on the ability of a state to tax)
Bank credit is a loan to a bank – it is not money until it becomes cash or maybe overnight deposits or a sovergin bond
Goverment deficit of 3% or whatever is when a bank creates this money and loans it to the goverment – the bank receives interest which effectivally is a transfer of money via tax to the coupon holder.
When a goverment cannot raise any more tax and yet its money supply is falling thus reducing efficient commerce it typically relies on its parent CB to produce high powered money.

M3 is effectivally bank credit.
I am talking about money baby.
The consolidated ECB balance sheet has not been doing anything dramatic recently – staying just under 2 trillion for a while now.

You prove my point – for the debt crisis to end bank credit must collapse relative to base money.

@Desmond B

Not sure what you are getting at.

Sometimes the market makers move to protect their book and the fact there is little trading can just indicate they have guessed trader’s next moves before they deal.

When the spreads are wide, if you look at a “10 year bond” you have to consider what the price is. It is common to quote these at the bid rather than mid price – so journalists might report the yield went up a lot when what really happened was uncertainty increased and the mm s kept their books flat by widening.

The HFT stuff is frankly mindless – literally. There is a real danger though that the “liquidity” (not relevant to peripheral bond markets obviously) can allow a consistent directional bias to overwhelm more thoughtful investment. The algos work until they don’t, then you fish around for new ones that seem to work. If the big 3 or 4 firms are using very similar ones ……

This aspect is something of little relevance to PIIGS bonds.

@ Jagdip

today actually got a bit out of control, the Moodys rating cut was way more aggressive than anyone had seen coming. Add in quiet summer markets and you have a receipe for a collapse in peripheral sentiment.

Portugal CDS was up 170bps, Ireland 105bps, Spain 30bps and Italy about 24bps. That equates to around +22%, +15%, +11%, +11% on the day, so Portugal is the outlier on the ratings action, Ireland is feared to be next in line for similar treatment, and contagion is feeding through to Spain and Italy. Moodys coming out with something saying that Ireland is in fact not quite the certainty to get downgraded would help sooth some frayed nerves out there. The Moodys cut today wasn’t a reaction to Portugal’s problems, it was a reaction to the EU’s too-clever-by-half solution. The spat between the ratings agencies and the EU has the potential to get very ugly, very quickly.

it seems to me that traders are trying to call the ECB bluff to refuse to accept sovs downgraded to junk. I am sure Trichet will have to weasel out of that. It was insane to outsource decision on collatoral to the RAs.

It is always useful to keep the big picture in mind when looking at the targets. Here are the planned total expenditures for 2011-2015, (in €bn, derived from the most recent SPU)

71 -> 71 -> 71 -> 70 -> 69

Hence the government is not trying to reduce the total expenditure amount, just trying to keep it flat. (Actual expenditure will be about €3bn more due to the promissory notes)

Here are the planned interest payments on the public debt

5.9 -> 7.6 -> 10.2 -> 11.0 -> 11.3

So there will a switch away from spending on public sector pay/services etc. to spending on debt servicing. There’s a sharp ramp up in 2012-2013.

Here are the planned revenues

55 -> 56 -> 59 -> 62 -> 64

Significant increases here, some due to expected growth, some due to more taxes, fees etc.

An interesting graph would be one where expectations of future growth for the next five years, in a given year, were all mapped together, for the last few years. It always seems that official expectations of future growth in years t+1 and t+2 are being revised down (e.g. in the 2009 SPU growth in 2011 was estimated at 5.6%) as each year passes, i.e. significant growth is always 2+ years away. If plotted the size of any such systematic “near-term over-optimistic” factor could be quantified, and I suspect this is already included in the models used by market participants.

While the market rates are unpleasant, it is hard to argue that they are irrational, especially given the political milieu in which all major decisions are made.

@Dreaded Estates
The two year look scary all right. Yield rose 18.82% today to 15.3%. the graph on Bloomberg says it all. In March yield was about 5% and has been on a relentless upward trajectory since. Bailout mark 11 is looking increasingly likely as are sovereign haircuts.

Off topic but interesting…
Greeks adapting Croke Park solution…

“The minister in charge of overseeing an overhaul of the bloated public sector on Wednesday avoided stating outright that mass layoffs are on the cards, noting that the dismissal of civil servants would be a last resort and that efforts would be made to keep staff facing redundancy on a “labor reserve” list.

All other options will be exhausted before any decision is made regarding layoffs, said Dimitris Reppas who heads the new Ministry for Administrative Reform and e-Governance.

@ceteris paribus
“Bailout mark 11”
Flip! I missed about nine of them.

@Bryan G
So many corners turned… 4 I reckon…

When analyzing equity price movements it’s always interesting to know the time horizon of the investors. The judgements of ‘frequent traders’ vs ‘infrequent traders’ mean different things. Which is why I’m interested in understanding secondary bond trading volumes, as well as stock in play.

For example if say 90% of an issue has had no secondary trading, that indicates the significance of pricing information (of the 10% market) is lower than might first be thought.

@Desmond B

I’m not sure the volume as % of issue is as significant as the fact ot otherwise that the ammount traded makes arbitrage possible – any rat hole will be run through.

Also the fact there might be zero trades – as long as trades would have been possible (spreads) – is consistent with the quotes being reflective of the opinions of potential traders.

Many holders of lots of bonds are for regulatory capital. Big holdings, little analysis.

Please google :


Darda gives a excellent interview where he claims that the ECB is “sabotaging fiscal policey” in my opinion to bail out shadow players.

The euro system needs much more cash – debates on interest rates & fiscal policey while important completly miss the point in my opinion.
Unlike the US we are a currency user rather then a issurer and that vulnerability is being exploited ruthlessly by shadowy monetory miscreants.
The Euro system is the most extremely banked currency ever created – it is nothing like a Gold standard as is so often stated.
While there are fiscal rules that can of course be conviently broken when our banker friends get into trouble the ability to create cash is entirely withen the euro masters hands – they can pump & dump at will.

The upside at least is that Irish savers even on the high street looking for non-advised fixed rate bonds are getting a great deal more interest than UK counterparts – and certainly from this side of the sea realistically no-one’s drawing comparisons with Portugal or Greece, whilst UK savers are largely unable to find inflation-beating savings rates without going down the advised investment bond route.

@ Rich

Vested intrests

@ Bryan G

Brilliant post.

The confidence fairies are still in charge in the Dept of Finance.
As you say, every year since 2007 when the Dept of finance releases something with figures going out a few years, years one and two have some sense of reality because they give themselves achievable targets but after that the numbers look soooo suspect.
Even in 2009 the 2008 figures looked like a work of fiction
According to your figures in 2012 debt repayments will be up 2.7 billion spending will be flat (so actual spending down 2.7) and revenue up 1 billion.
So at a time that the government is taking 2.7 billion out of the economy it is going to bring in an extra billion revenue by increasing taxes. So fairly steep tax increases must be planned
Then the next year 2013 debt repayments go up another 2.6 billion spending is flat (so actual spending down a further 2.6 billion) but revenue is up a further 3 billion.
So even though you would think the economy would have contracted due to lower spending in 2012 and any tax increases would be offset at least somewhat by the that contraction the government thinks it will take in 3 billion extra revenue.

@Seamus Coffee
Great post.
Are you moving any closer to the default is looking inevitable group?

@ anyone
I asked a while ago about another big payment issue we have apart from Nama losses and promissory notes. Repaying the Bail out loans of 67 billion. William Buiter in a city group report I read seemed to believe that those repayments would start and be fairly hefty in 2014? Is that correct?

The new IMF chiefs advise to Greece to be more like Ireland (the best bold boy in the class) That one could come back and bite her in the ass.

Michael Noonans comments regarding the size of the required budget cuts for next Decembers budget being more than the agreed 3.6 billion looks like the start of this figure getting progressively worse. He said we also needed to hit a Deficit target of 8.6% of GDP (RTE reported GNP but this is an error I am guessing) should be taken very seriously, especially as they have been made so early. 8.6% of 160 bill is 13.76 billion. After 6 months we are at 11 billion. Ouch!

Why was March such a dismal month for tax take? This accords with the anecdotal evidence I have heard from business people. Many were putting it down to people saving for the bank holiday. Surely that does not explain it?


‘After 6 months we are at 11 billion’

Irresistable force meets immovable object. The autumn season is going to expose the weaknesses in our government, and other EC governments. This is the holiday season, and the MoU is being followed, but the market pressure is more and more relentless. It’s not just Roscommon that is facing the chop.

I guess the big players in the capital markets have effectively taken the peripherals as hostages, and are holding us out over the balcony. I don’t follow all the Dork’s MMT-influenced theories, but he rightly sees that we are going steadily deeper into the woods.

Does Seamus (or anyone) know where the monthly non-exchequer income/expenditure accounts are published? Without these we are missing more than a quarter of all expenditure and a larger proportion of national income. Without this data can we determine the direction of govt finances?

And, as budget affecting items can wander from exchequer to non-exchequer category from year to year, I can’t see how any insight can be drawn from comparing these figures with previous years. Also, I can’t find where the IMF/EU MoU required monthly progress reports are published.

Unless robust growth does take off in the domestic economy (a thing to be most sincerely desired) the numbers look pretty grim. We’re years in and still declining, still coming with vague and uncertain plans.

Given the size of the bills we’re building up the concern I’d have as an investor in anything in Ireland is that if I invest, how much of the can am I going to have to carry?

We’re looking at two important curves….the net debt and the growth.

If the debt continues to grow then it’ll scare growth away. Unless growth appears soon the debt will overwhelm the state finances.

I know we all know this, but it’s still worth saying. Where will domestic growth come from?

JtO would have us believe it’s there all the time. Others that the economy – or the part of it that’s left – is winding to a halt under the increasing load.

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