IMF: Ireland and Automatic Stabilizers

The new IMF press release is available here.  An important segment is

At the same time, the challenges Ireland faces have intensified since the outset of the program, with growth expected to ease to about ½ percent in 2012 owing to a slowing in trading partner activity. The Irish authorities have responded by raising the fiscal consolidation effort adopted in Budget 2012, and the budget remains on track to meet an unchanged general government deficit target of 8.6 percent of GDP. If growth should weaken further, the automatic stabilizers should be allowed to operate to help avoid jeopardizing the fragile recovery.

This point has also been raised in this blog’s discussion of the new Fiscal Compact. If the government implements €X of discretionary fiscal adjustments in a given year T, the realised deficit/GDP ratio in year T will also depend on what type of (positive or negative) cyclical shocks affect GDP in year T  (in addition to the direct impact of fiscal policy on GDP).   Just as positive cyclical shocks would deliver an ‘over-performance’ in terms of the deficit/GDP ratio, so negative cyclical shocks would deliver an ‘under-performance’.  The spirit of the Fiscal Compact is that such deviations should average out to zero over time, rather than being eliminated within-the-year through mini-budgets.

In the current Irish case, there are some extra considerations:

  • spending/revenue plans for this year might include some implicit contingency funds, so that the 8.6 percent target can be attained even in the event of an under-shooting of GDP
  • given the downside risk, the government might have explicitly planned a larger fiscal adjustment, with the consequence that that the 8.6 target could be met even in the event of an under-shooting of GDP

2012 TINA Award Winner: Laura Noonan

One of the most depressing aspects of the Irish banking crisis has been the consistent insistence of most of our financial journalists that any action that ran counter to government policy would result in disaster. There was simply no alternative.

I remember countless reports that nationalising any more banks after Anglo would result in torrents of frogs and locusts in the streets of Ireland. Today we have many economic problems but I doubt if the nationalised status of AIB and ILP would make the top ten.

I remember, time and again, journalistic reports that you couldn’t nationalise a bank because the ECB couldn’t lend to such a bank because of the monetary financing clause. Only this was blatantly false.

Even more common was the insistence that if any senior bank bond was defaulted on, the Irish people would be reduced begging in streets for scraps for a millennium. Of course, Brian Lenihan ended his period as Minister for Finance looking to get haircuts applied to senior bank bonds and Michael Noonan spent most of 2011 arguing that this was the right thing to do.

It’s early days yet, but the status of runaway favourite for the 2012 “TINA Award” must go to the Irish Independent’s Laura Noonan for her appearance on last night’s Vincent Browne show. Despite Michael Noonan’s consistent statement of his hope that the promissory note could be renegotiated, Laura insisted that There Simply Was No Alternative to making the €3.1 billion on March 31.

Among the reasons why we “Had to Make this Payment” were:

  • Eurostat have insisted on it (yes, Eurostat, who knew they were the real powers behind the throne, huh?)
  • Failing to make the €3.1 billion payment would, via some mysterious process, trigger the need to pay the full €28 billion that was outstanding on the notes.
  • Failing to make the €3.1 billion payment would also trigger the need to pay all of Anglo’s outstanding bonds.
  • And all of AIB’s guaranteed bonds.
  • And all of Bank of Ireland’s guaranteed bonds.
  • I think the frogs and locusts appeared again at some point.

Anyway, exciting stuff. All complete nonsense of course. There is nothing preventing the note being restructured in any number of ways, provided the ECB Governing Council are willing to go along with it. And none of Laura’s appalling vistas are remotely relevant.

I guess the more interesting question is whether Laura is passing along what she’s been told by DoF spinners or whether she came up with this exciting stuff all on her own.

Those interested in checking out this Olympic-level TINA performance can check it out here (in particular, after 26 minutes in.)

Update: Laura has written to me to say the following: “A few points of fact: I never said that the Government could not restructure the pro note, in fact I said repeatedly that efforts were under way to restructure the pro note, and that they were progressing well. I said that the pro note repayment for this March would have to be made, with the benefit of more airtime I’d have qualified that it will have to be made unless the pro note is restructured before then. I did not say that there was no alternative to make the pro note payment every year to maturity – the whole point of the restructuring is that the pro note payment schedule would be changed.”

So I’m happy to say that Laura was only saying that the March 31 payment had to be made and that failure to do so would trigger these consequences. I have edited the post to remove any implication that Laura said  the note couldn’t be renegotiated at some point in the future.

An Integrated Framework for Financial Positions and Flows on a From-Whom-to-Whom Basis: Concepts, Status, and Prospects

The interpretation of sectoral debt data is a major issue in understanding the Irish economy – this new IMF WP should be helpful.

Summary: The global crisis of 2008 highlighted the need to understand financial interconnectedness among the various sectors of an economy and between them and their counterparties in the rest of the world. However, application of this kind of analysis has been hampered by the lack of adequate data. This paper sets the background for promoting internationally coordinated efforts for compiling and disseminating data on sectoral financial positions and flows on a from-whom-to-whom basis within the framework of the System of National Accounts. It draws on actual experiences in compiling these kinds of data and provides guidelines for their development in the future.

Pillar of Salt? Two reactions to the BOI Report

David McWilliams is out of the blocks describing the latest report from Bank of Ireland in less than stellar terms:

The report shows that only 14 per cent of Bank of Ireland’s total owner-occupier mortgage book is in such a healthy situation. When we examine its buy-to-let portfolio, we see that only 6 per cent of these mortgages are in such a healthy situation. In total, 12 per cent of mortgage holders have a ratio of less than 50 per cent.

Seamus Coffey has a longer study of the report. From his piece:

In total, the loan-to-value of BOI’s owner-occupied loan book is estimated to be a rather convenient looking 100%.  The negative equity of the €10,567 million of loans with LTVs of greater than 100% is estimated to be €2,474 million.  The aggregate loan-to-value of the loans in negative equity is 131%.  On the other hand the aggregate loan-to-value of loans not in negative equity is 81%.  Finally, here is the spread of arrears and impairment across the different LTVs.

Unsurprisingly, arrears and impairment are more likely amongst those loans that are in negative equity though almost one-third of those in arrears are not in negative equity.  The portion of the loan book that has a loan-to-value of more than 181% has arrears of 15.5% by loan balance compared to just 4.8% for all loans which are not in negative equity.

Overall, not great news. However, Seamus continues:

If the €2,474 million of negative equity on mortgages in BOI’s owner-occupied Irish mortgage book then, being 18.4% of the total market, this would imply that the level of negative equity in the residential mortgage market is around €13,500 million.  As BOI’s loan book is better performing better than the rest of the market, and also has loans from before 2002 that newer entrants to the market do not have, this is likely to be an estimate from the lower range.

Worth discussing on this site: if Bank of Ireland is the least worst bank we have, and the bank’s own estimates don’t look that credible, what does this mean for the banking system as a whole?

Eviction in Ireland in 2012: I stopped the sheriff

This is very much the business end of the mortgage arrears and/or debt forgiveness debate (which Seamus looked at in an earlier post).

It seems that a number of groups have gotten together to stop the enforcement of eviction orders, and in at least one case, two days ago, they were at least temporarily successful. NamaWineLake has the details. Be sure to watch the video as well.

What’s fascinating from watching the video is how reasonable everyone is, given the obvious tensions in the air. There is a discussion, and a withdrawal from the property of the authorities who came to serve a notice to quit. The circumstances of the borrower in question are also highlighted in a linked piece.

Gas interconnection

In December, I blogged about the peculiar pricing rules for the gas interconnector with Scotland. (The current rules would grant substantial market power to importers of LNG.

The CER has been aware of this for a while, and has now published a draft decision. The proposal boils down to the following elements:

  1. The interconnector will be moved, legally, from offshore to onshore. It remains to be seen that this would satisfy the European Commission, which is not happy either about the current regime.
  2. Interconnector capacity will be auctioned.
  3. There is a reserve price for the auction.
  4. The reserve price is the long-run marginal cost.
  5. If the auction do not cover the costs of the pipe-formerly-known-as-the-interconnector, the difference will be split over ALL gas suppliers.

Shannon LNG is understandably cross. They publicly fume about point 5, which will impose a cost on them that rises as they are more successful, but privately they must have hoped that the rules would not change. While I have argued that the rules should change, the current proposal can easily be spun as the regulator protecting a state-owned company from a private competitor.

Point 4 is worrying too. In the decision document, the CER goes back and forth between OPEX for the reserve price and OPEX+CAPEX. In the end, they opt for OPEX+CAPEX. Essentially, they propose to perpetually reward Bord Gais for what increasingly looks like a bad investment decision in the past.

Nothing has been set in stone yet. Let us hope that the CER will reconsider.

“We are not Iceland!”

Indeed. Today sees Iceland(!)’s sovereign debt return to the rim of investible as Fitch upped their rating of Iceland(!)’s debt to BBB- but stable. In other Icelandic news it looks as if a debt forgiveness programme mooted in 2009 is going ahead, their top civil servant in their department of finance is in prison, and, delving into the Icelandic stats a little the nation’s GDP is looking pretty healthy, too.

This OECD background paper gives an overview of the crisis and the Icelandic authority’s response to it.

So: we are not Iceland!

Can Irish Potatoes Save the World Economy?

For no other reason than it has an interesting title.

Can Irish Potatoes Save the World Economy?

A recent trend, a  move back to the way things used to be, might be the best news for Ireland and the world. A bloated worldwide market of institutional products, produced for their economy rather than quality, shipped hither and to in order that some profit, has put our one world economy into a tailspin. Meanwhile, it just may be, you and your next door neighbor are once again, the only ones capable of picking up the pieces.

Over in Ireland, some local hotels, business people, and organizations are showing us all how.

On of the countries hit hardest by this Great Recession, Ireland,  is of particular interest to me. My folks sailed over to America from Kilkenny back when, but this is not the main reason for my concern over the emerald Isle. Besides an affinity for Ireland, there’s another really good reason to pay attention to the Irish. If there’s anybody on Earth that can show us how to get past hard economic times, it’s Ireland. Rain or shine the Irish always seem to come out okay. Part of the reason being, I believe, Ireland is at its heart a local community first.

If you really want to you can read the whole thing.


At the time of the first Greek bail-out in May 2010, several commentators felt that there should have been a default, haircut, PSI, roll-your-own euphemism. It seems this view was shared at the IMF but not at the ECB and not by EU decision-makers so extend-and-pretend won the day. That deal has come unstuck, as predicted. This story in today’s Sunday Telegraph looks like it has decent sources:
The debt sustainainability analysis in the last IMF report on Greece looked like a triumph of hope over experience. The Telegraph is reporting new troika calculations that Greece faces, in 2020, and after a large haircut, a second bailout and eight further years of austerity, an exit debt ratio of 129% of GDP.
The Bundesfinanzministerium, according to the paper, is preparing for an endgame earlier than 2020. Perhaps they have seen Becket’s play:
‘Ever tried. Ever failed. No matter. Try Again. Fail again. Fail better.’

Department of Finance Presentations: January 2012

Following on from the NTMA’s slidefest from a few days ago, here’s an interesting set of presentations that have just been released (apparently without a press release explaining who they were originally presented to but I think you can guess). There are presentations on Mortgage Arrears, SME Lending, Deleveraging, Funding, and a Banking Report Card. Enjoy.

Mortgage Arrears Update

The Central Bank have published the Q4 2011 update of the mortgage arrears series with the data for the full year also available.  The update shows that 9.2% of mortgage accounts, and more importantly 12.3% of mortgages by value, are in arrears of 90 days or more.

The total amount of owner-occupied mortgages in Ireland is now €113.5 billion, down from €118.7 billion when this series began in September 2009.  This reflects the very slow uptake of new mortgages and also the continued repayments on many mortgages which are not in arrears.

In fact, in the final three months of the year the stock of mortgages fell from €114.4 billion to €113.5 billion, for a reduction of €935 million.  Since September 2009, the amount of arrears owing on mortgages more than 3 monthly payments in arrears has increased from €354 million to €1,117 million. 

At the end of 2010 the Central Bank estimated that about 50% of the arrears were in the covered banks, 40% in the non-covered banks and 10% in other or sub-prime lenders.  It is not clear what has happened to these proportions over the last 12 months.

The rate at which mortgages are falling into arrears does not appear to be slowing.  Any slowdown would first be seen in the 90 to 180 day category but there is no sign of this. The continued entries into this category would be offset by the 6,700 who moved into the 180 day plus category (and a small number who may have exited arrears) but there was still have an increase of 1,200.

External Trade Statistics

The (merchandise) trade statistics released by the CSO today showed that exports fell in December (here).  “From a November high of €8,252m, seasonally adjusted exports decreased by 9% to €7,503m in December… A substantial part of the decline in the value of exports was due to a high value product in the Chemicals and related products sector coming off patent in December”. 

This is the beginning of the “bad news (for Ireland) from big pharma” that I posted on back in December.   

Briefing Paper for Oireachtas Finance Committee

I’m appearing at the Oireachtas Finance Committee this afternoon, along with Brian Lucey and Stephen Kinsella, to discuss ELA and promissory notes. Here‘s a copy of a briefing paper I have provided to the committee and here are my opening remarks.

I’m told that the meeting can be watched live online at this link by choosing Committee 4 and also on UPC channel 801.

Cost-effective Eurozone firewalls and the buyback boondoggle

John McHale has a recent thread on the probability of a Greek default.  In this thread I want to consider a different but related question.  Only some of the promised Greek bailout funds are intended for funding Greek government expenditures; the rest of the funds are intended to pay back outstanding Greek sovereign bonds. Conditional upon a Greek default, how should the bond-payback-earmarked Greek bailout funds be spent by the Eurozone?  Let X denote the total sum of Eurozone bailout funds intended for Greece, Y the amount earmarked for Greek government expenditures, and Z the funds available to pay back Greek bondholders.  Define a disorderly Greek default as one in which a private sector involvement (PSI) agreement is not in place or is inoperative. My question is:

In the event of a disorderly Greek default, how should the EU spend Z?

There is a historical precedent for massive wastage of taxpayer funds in analogous situations. Bulow and Rogoff call it the “buyback boondoggle.” The buyback boondoggle refers to the tendency of fiscally-distressed states to demonstrate their newfound fiscal discipline by handing over large quantities of taxpayer funds to outstanding bondholders, even when there is no fiscal benefit in doing so. In reality, the payment of funds to existing bondholders by states in fiscal distress can actually lower rather than raise the future borrowing prospects of the state (see the paper above and this related paper).    

Continue reading “Cost-effective Eurozone firewalls and the buyback boondoggle”

Dublin is the 8th best place in the world for students

at least, according to the latest ranking by QS.

They’re quiet about the method, but if you click on any of the cities, you will find what matters to them: Good universities, international mix, local employment, cost of living and fees, and quality of living.

As far as I know, this is the first such ranking so it is too early to tell whether Dublin’s high rank will increase the influx of foreign students.