Department of Finance Presentations: January 2012

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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.

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28 Responses to “Department of Finance Presentations: January 2012”

  1. The Alchemist Says:

    @karl

    Can you or someone can shed some light on this question: when the government had money in the NPRF why did it not pay off the budget deficit rather than shove the money elsewhere?

    No doubt this has occurred to others but we were discussing overdrafts today and the issue broadened.

  2. Bunbury Says:

    Thank you Prof. Whelan for taking time to post this on this blog.

    Reading yesterday’s posts on the Finance Committee presentations thread I understand your frustration with some of the posts that are made. It is the easiest job in the world to criticise and particularly to do so anonymously. This blog now forms an important part of public discourse in Ireland and I think posters sometimes forget (and I plead guilty to this) that if economists didn’t spend some of their valuable time posting and moderating comments then we would have nothing to talk about or we would all have to come up with our own blog.

    That said, I still think this blog could be improved. It should really be called ‘Academic-economists.ie’ as it can be a bit too cosy and self reverential and could do with input from other disciplines such as business, marketing, law, property, taxation and others to give a wider perspective on the Irish economy.

    But I or others could come up with our own blog if we had the initiative but we haven’t so we have this blog to work with right now. I cannot be alone in now getting all my economic and current affairs information from blogs or websites such as this and I rarely, if ever, buy a newspaper now. The Irisheconomy blog has been an important ‘port of call’ for me since September 2010. I do appreciate the efforts of all involved and I get to read about specialist topics that would not be covered in the printed media. Keep up the good work. I will certainly be more mindful from now on of any comments I make on this or other sites.

  3. colm mccarthy Says:

    Alchemist: The NPRF is, and has been from its inception, a long/short hedge fund for the Exchequer, short bonds and long (mainly) equities. Countries without debt and unable to spend government revenues have been accumulating sovereign wealth funds, which are unleveraged. The NPRF is, and always was, 100% leveraged.

    It is, and has been, a ‘pension’ fund only in the sense that someone who borrowed €1 mill and bought equities or buy-to-let apartments could pretend that they had a pension fund.

    It appears to have earned roughly the cost of funds – hedge fund strategies shorting bonds and holding equities have not done well over the last decade or so. But the liquidation of the NPRF has permitted some deleveraging of the state balance sheet – the net debt was less than the gross debt by the amount in the fund.

    For a state with outstanding debt to keep the debt level higher in order to run a long equity position is a National Punt, not a pension fund in any commonly-understood sense. But ‘National Long/Short Hedge Fund’ does not appeal, PR-wise.

  4. Frank Galton Says:

    Anyone know why the Funding ppt slide “state support for funding measures” appears to draw a distinction between “guarantees provided by MoF as additional security” [to CBI] and “letters of comfort”?

  5. The Alchemist Says:

    @Colm Mccarthy

    Thanks. I didn’t realize it was a leverage fund. I assumed it was a piggy bank.

  6. James Says:

    Hi Guys, clearly a few well informed economic brains here- however- in the real economy where I work I can see a national destruction like a nightmare going on. Where the commentary has lost touch with human reality, where people are going hungry while they struggle to keep the mortgage, our politicians leaving the people with a stark choice – leave OR rebel. This is getting very serious very fast and I hope your choice readership can make a difference by going beyond acedemics and shaking the thinkers into reality.

  7. Joseph Ryan Says:

    @Colm McCarthy

    I am surprised to hear that the NPRF was a leveraged fund. By leveraged fund I assume you mean that if the NPRF got €1 billion from the State, it borrowed a further €1 billion and then invested €2 billion?
    I am disappointed also that the NPRF cash has been reduced below that of a safe reserve. We may need ‘running away’ money yet.

    @ Karl Whelan

    Well done on your efforts re the PN. Even if not successful it is well to know that somebody is prepared to fight the issue.
    Another issue you should consider taking up is the ‘extraordinary profit’ which will be made by the ECB on Irish bond purchases. To my mind this ‘profit’ should not go to the individual states so that they profit from the difficulties of distressed countries. The amount should be close to about €2 billion based on a reported ECB purchase of about €20 billion Irish bonds at an exceptional discount of ~10%.
    It is of course Mr Honohan that should be leading the charge on these issues. I doubt that he is.

    @James

    Working as I do in a glass company supplying the building sector, I fully understand your frustration. The real issue is jobs and the sheer disconnect between salaries and fees being paid out of State funds (in particular to NAMA service providers) while at the same time we get the duplicitous encouragements to become more competitive.
    The govt took in ~500 billion to fund a jobs initiative last May/June and will take this money each year for the ‘next three years’. Where are the jobs? The money of course will come in useful in paying bonanza payoffs to people that already have super pensions.

    Now we have another jobs document with ~200 and some action items.

    Lets call a spade a spade. The government jobs initiatives so far have failed miserably.
    The jobs minister, whose view is that governments do not create jobs, has reduced the minimum wage and seems set on reducing manual and trade wage levels. He appears to show no urgency with professional fee claimants and cartels that have profited very well during this crisis.
    It almost seems as if the government has decided to save the professional classes and throw rest to the wolves.

  8. Libertyordebt Says:

    “Lets call a spade a spade. The government jobs initiatives so far have failed miserably.”
    Indeed…see brianmlucey.wordpress.com and examiner article today on that very issue.

  9. DOCM Says:

    @ All

    I posted these links on another thread but they are also pertinent here.

    http://tinyurl.com/7ub9d6g

    http://epp.eurostat.ec.europa.eu/cache/ITY_PUBLIC/2-27012011-AP/EN/2-27012011-AP-EN.PDF

  10. colm mccarthy Says:

    Joseph Ryan:

    The NPRF did not literally leverage, the alternative was to pay down debt rather than buy equities, with each extra €1 of equities matched by an extra €1 of debt. Think of the state balance sheet in the round!

  11. Paul Hunt Says:

    @Colm McCarthy,

    “Think of the state balance sheet in the round!”

    I see you’re addressing another aspect of this advice in today’s Sindo:
    http://www.independent.ie/national-news/forgiveness-is-a-virtue-not-needed-by-many-3024305.html

    I’ve raised it here previously- and more than once – and I know it’s damnably difficult to do it properly, but have you come across any evidence that the DoF is even thinking about generating a proper set of government accounts that would include a balance sheet? Is it possible for people outside the government-machine to do something ‘quick and dirty’ that would present what is known reasonably precisely and present rough orders of magnitude for other elements that might be difficult to quantify?

    It would obviously be useful to demonstrate the hard balance sheet constraints to those who persist in believing a ‘free lunch’ is available somewhere from someone, but it would also catalog the assets the state’s liabilities are financing.

    I’m not directing this at you as if you have some specific responsibility, but surely we have enough trained economists in the academic arena who could put a bit of effort in this area and do the state some service.

  12. DOCM Says:

    @ Colm McCarthy

    To quote from your article, which is, as usual, agenda setting;

    “There is no capacity, in the banks or the Exchequer, for some elaborate debt-forgiveness programme. Since you cannot get blood from a stone, it is desirable to streamline the personal insolvency arrangements so as to recognise this reality.

    But no incentives should be created which encourage those who can pay to disguise themselves as stones”.

    Indeed!

    Could not the same logic be applied with regard to “easing Ireland’s debt burden”?

    What the Eurostat items I have posted above underline is that many countries, inside and outside the Euro Area have had to stand in the “bearna baoil”, to take Minister Varadkar’s description, to save their banks but the “bearna” in Ireland’s case is the biggest because we had the biggest bust.

    The conundrum is that we have to get to the point of proving that the country is a stone when it is evident that this is far from being the case.

    Do we actually want to put ourselves in that situation? That is the question!

  13. colm mccarthy Says:

    Paul Hunt: Governments do not, as a rule, do balance sheets properly, or at all. Hence unquantified contingent and deferred liabilities, dodgy depreciation provisions etc. Doing what you suggest is well beyond the resources available to humble university types. Here’s a piece from the ESRI QEC of 2002:

    http://irserver.ucd.ie/dspace/bitstream/10197/561/3/mccarthyc_article_pub_005.pdf

  14. Joseph Ryan Says:

    @Colm McCarthy
    re NPRF
    Thanks for that clarification. I understand the point you are making.

  15. Paul Hunt Says:

    Thanks, Colm. It must be frustrating when you have identified the problems and what needed to be done to resolve them so precisely and so long ago – and yet nothing of any significance or substance has been done.

    I take your point about academic research resources in this area, but I was thinking along the lines of some sort of public pedagogic tool that might help to dispel some of the naive and self-serving notions that frequently gain currency.

    However, in relation to doing this ‘properly’, is it not something the IFAC should be charged and resourced to do?

  16. Joseph Ryan Says:

    @Colm McCarthy

    from your article
    “There is no capacity, in the banks or the Exchequer, for some elaborate debt-forgiveness programme.”

    It is hard to disagree with any of the points made in your article but the fact is that the banks have been specifically capitalised for expected mortgage losses. I do not know the exact amounts.

    But the banks do not appear to be making any overt effort to ‘finalise’ cases using these reserves. As with all reserves there is a tendency to make the provision but hope that the dreaded event never materialises.
    The State however should point out that this portion of the recapitalization, which was specifically designated in respect of mortgage losses, must be accounted for in full and returned if not used. They should not be siphoned off to cover losses on ‘buy to let’, SME, mini Johnny Ronans or whatever.

    It is a difficult area with a lot of human suffering involved for those genuinely affected. To my mind it seems that the decision to leave the resolution of this to the banks is going nowhere fast, while the banks sit on the money provided.

  17. Paul Hunt Says:

    It never ceases to amaze me that, for most macroeconomists and across the political spectrum – with emphases varying with self-serving or ideological preferences, economic growth will only come from:
    an increase in C, or I or G or X or a reduction in M (or reductions in S or T to increase some of these) or a combination of some or all.

    I work on the basis that sustainable economic growth only comes from increases in productive, allocative and dynamic efficiency.

    I suppose that’s where I’ve being going wrong.

  18. DOCM Says:

    @ All

    In deciding the point where the Irish stone no longer has blood in it, the Delphic response of Draghi at his recent press briefing may be noted.

    “Question: First of all, in the event that the ECB does make some kind of arrangement for Greece, would you see that as being something done exclusively for Greece, or could it also be extended to other programme countries like Ireland, and would it be in the interests of a country like Ireland to try to get relief on its sovereign bonds holdings?

    Second, you recently had a meeting with the Irish Finance Minister Michael Noonan about addressing the cost of the Anglo-Irish bank bonds. Can you tell us if you are optimistic that there will be a successful resolution to that, and if Ireland has the ECB’s support on that issue?

    Draghi: We had a meeting with Minister Noonan and we reviewed the progress that the Government is actually making. In spite of the enormous challenges it is facing, the Irish Government ought to be praised for the constant progress that it is making in its reforms.

    Regarding your first question, we have already mentioned that Greece is unique and we don’t want to repeat the experience. As I have not yet said what the ECB is going to do about Greece, it is a very difficult question to answer”.

    We now know what the ECB has done with regard to Greece; it has swapped its bonds for new ones identical other than their serial numbers to take it out of any loss-making scenario and has stated the obvious; that EA governments are free to use the profit it will make, when this materialises (re-sold or held to maturity, as I believe the jargon has it?) and which returns to them.

  19. DOCM Says:

    @ All

    The full transcript.

    http://www.ecb.int/press/pressconf/2012/html/is120209.en.html

  20. Brian Woods Snr Says:

    @ James: “This is getting very serious very fast and I hope your choice readership can make a difference by going beyond acedemics and shaking the thinkers into reality.”

    James,the ‘thinkers’, I think, already recognise reality. Its the a-thinkers who do not – they are in effect lying to themselves. And make no mistake about this, our legislators will do (almost) everything they can to remain in power. The very notion that they would do the ‘wrong’ thing (save a least one Irish family from destruction) – is risible. Someone on another thread used the term -and I can understand why, ‘causalties of economic war’.

    Well those casulaties are human beings: The many hundreds of shareholders in Irish banks who have lost their savings, spluttering their indignation at AGMs. The tens of thousands of unemployed – visible only at the impersonal hatches in Nutgrove or Cumberland Street in Dún Laoghaire or Greendale. The many sick lying on trollies waiting for treatment. The increasing numbers of the homeless lying in dank doorways. Traumatized children watching their parents shout obscenities at each other because they have not enough income to buy the family necessaries. Its a sad, miserble, obscene litany – unseen and unheeded.

    And then you have that Gobshitess Burton! And unctious commentators wittering on about ensuring that impoverished homeowners in negative equity and with an unpayable mortgage shall be treated like putative witches. Dunk them deep; if they float their innocent. If not, “Tuff shit!”

    What we need are leaders with courage and political bottle. Not the not the invertebrate slime we are cursed with.

  21. DOCM Says:

    @ Paul Hunt

    On the information gap, this link may be enligthening!

    http://epp.eurostat.ec.europa.eu/portal/page/portal/government_finance_statistics/excessive_deficit/supplementary_tables_financial_turmoil

    It is also worth recalling that Eurostat (a directorate of the Commission) was only given the powers by the Member States in 2009 that it is now using to call a a spade a spade i.e. long after the horse had bolted.

    P.S. Faulting the institutions of the EU for failing to do what the Member States – including Ireland – have not empowered them to do, using the existing treaties, is a popular pastime but serves very little useful purpose.

  22. tullmcadoo Says:

    Joseph Ryan,

    “To my mind it seems that the decision to leave the resolution of this to the banks is going nowhere fast, while the banks sit on the money provided”

    Who else would you rather have do this messy exercise. Some quango staffed with the representatives of the usual suspects who dole l out taxpayers money to their pals.
    One should also scotch the notion that there is a budget for debt forgiveness which can be allocated on some basis to those in most need or (most Likely) with the best connections. There is a capital buffer in case of default. It does not have to be “spent”.
    If it is not spent it can be returned to i) shareholders (a.k.a the taxpayer) or b) used to leverage lending to other agents.

    Congrats to Colm McCarthy for calling a “spade” a …… shovel” in his own concise and laconic way.

  23. The Alchemist Says:

    @Colm McC

    Back to the NPRF again.

    It’s discretionary portfolio seems to have a value of 14 billion at the end of 2011. So my question is why that been cashed out in part and used to pay down the deficit? Am I missing something?

    The return was 1.6% for the year I gather. Not stellar. Diverting the cash to pay off the deficit seems not unreasonable.

  24. Joseph Ryan Says:

    @Tull

    “Who else would you rather have do this messy exercise. Some quango staffed with the representatives of the usual suspects..”

    Is this not what the covered banks are at this point?
    The banks were allocated billions to deal with issue of mortgage ‘defaults’. Most people would consider that being more than 180 days in arrears constitutes ‘default’. Why is this issue not being dealt with?
    For all I know the banks are writing off debt millionaires, TDS, over leveraged and not so over leveraged bank executives and bank staff.

    I am aware of very well off people who are in difficulty in some of their business but are hoping and manouvering to get debts written off. I expect that some will succeed. I have zero confidence that the ‘write-offs’, and there will be ‘write-offs’, will go to those who cannot pay as distinct from those who can but use all kinds of means to get out under the wire.

    The banks got money to deal with this issue.
    They should account for this money or hand it back.

  25. Mickey Hickey Says:

    The property market, banking, and mortgage markets ran amok under the watchful eye of the Dept’ of Finance, Central Bank and Regulators. Surely we cannot expect competence to be displayed by the same people that oversaw the multiple failures of oversight and regulation that we have experienced. Has anything at all been done to rectify the faults. For example does the Financial Regulator still report to the Head of the Central bank. I see Euro 5 to 10 million contracts being let for road works. How widespread is this? In the past this has meant an election in the coming year. The same time worn tactics are being used and the outcome is predictable.

    The Realism of Assumptions Does Matter:
    Why Keynes-Minsky Theory Must Replace Efficient Market Theory as the Guide to Financial Regulation Policy
    James Crotty

    Burton Malkiel said the following:
    What I do not argue is that market pricing is always perfect. After the fact, we know that markets have made egregious mistakes, as I think occurred during the recent internet “bubble.” Nor do I deny that psychological factors influence security prices. But I am convinced that Benjamin Graham (1965) was correct in suggesting that while the stock market in the short run may be a voting machine, in the long run it is a weighing mechanism. True value will win in the end. (2003, pp. 5-6, emphasis added)

    Link:

    http://www.peri.umass.edu/fileadmin/pdf/working_papers/working_papers_251-300/WP255.pdf

  26. colm mccarthy Says:

    Alchemist: It is best to think of it this way: the state has ended up with huge debts, because of deficits and bank rescue costs. Assets are being realised, notably NPRF assets, maybe state commercial assets in due course. Attributing a particular asset disposal to a particular purpose is beside the point: they all help to deleverage the overstretched balance sheet.

  27. Bond. Eoin Bond... Says:

    @ Alchemist

    of the 14bn or so, 9bn is the investments (no sniggering at the back!) into AIB and BOI. Unfortunately, they cannot use the current market cap of AIB for revaluation purposes on the NPRF cash…

  28. Brian O' Hanlon Says:

    Karl,

    I just finished reading your Irish Times article on Europe this evening, while waiting at a Chinese take away. Takes for linking to the Oireachtas hearing video with Mr. Kinsella, Mr. McHale and company. I’m due to submit my first ever atrocious academic paper for an economics subject, in the next week, and I was hoping to tie in your Irish Times article. But I’ve noticed, that with economics paper writing, it is like the horse race in the final straight. I left all my research work too late, and fill pages worth. But I fear my fuel tanks are no a little low, to make the last break for the post. I’ll have to learn to structure my race better.

    Anyhow, I just wanted to compliment you on your Irish Times article, and having studied the series of London School of Economics lectures given by Paul Krugman, in relation to deficit spending by government, in order to reduce the extent to which we impoverish ourselves in the future – I thought that you explained things fairly well – in terms of Ireland, and fiscal policy. I’d also like to comment, on Howard Davies and David Green’s recent work, Global Financial Regulation – The Essential Guide. I was just wondering if you were familiar with this work at all. And if not, I can more than recommend it.

    Of course, they are talking a lot about the Bank of England, and the FSA, and how to combine together monetary policy, with macro-prudential regulation. But the main thrust of what Davies and Green are talking about, is to break away from the idea of one agency, one instrument. That, monetarism and macro-prudential tools could work together well as a combination. I was wondering if you have thought about this, and if you could consider an Irish Economy blog post on it at some stage. What I mean is, it is not a case of simply having more tools, if we cannot also combine them intelligently.

    Must dash. Regards, BOH.

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