Latest UCD Research Bulletin

Edited by Kevin Denny, UCD’s latest Research Bulletin is up here.


Low-cost funding

Minister Noonan’s comments today, as reported by the Irish Times, are worth noting:

Mr Noonan has indicated he may ultimately seek to use the euro zone’s bailout fund to refinance the cost of bailing out Anglo.

“The ECB would favour that because it would improve their collateral significantly,” Mr Noonan said. “But that would be of little use to Ireland unless we got the commitment to ongoing medium term low-cost funding from the ECB.”

I think this is very important (although I would say eurosystem rather than ECB in the last sentence).   Whatever you think of the Anglo/INBS bailout’s, as a financing mechanism the promissory notes/ELA are an excellent deal (with an ultimate interest rate to the State estimated at 1 percent after factoring in CBI profits that go to the Exchequer).   The problem is that we have to pay them down relatively quickly (creating large near-term funding needs as well as giving up a low interest rate), so we want to restructure to lengthen the term.   The ECB sees the arrangement as too close to monetary financing for comfort to begin with. 

There is a danager that restucturing — of whatever kind is on offer — becomes a political imperative.   One wrinkle is that the commitment to keep the ELA in place in a way that is consistent with even the current promissory note repayment schedule might be a bit shaky.  There might be a role for the EFSF/ESM to shore things up.   But any such restructuring must not lose sight of the extremely low interest rate we currently have.


Promissory note news roundup redux

A couple of days ago I was giving out that the proposed deal lacked nuance given the time spent trying to reduce the payment by the government to IBRC for the promissory notes which would, in turn, pay down the ELA issued by the Central Bank of Ireland. Now that news of the deal has come, with much scratching of heads and flowing of flow charts, for some reason, we can all agree that not very much has happened at all.

Really what’s just happened is the government has been given a loan by the Bank of Ireland for a year, after which the previous status quo reasserts itself. The ECB hasn’t budged in its position that Ireland must get the ELA written off quick smart. Bank of Ireland’s shareholders must be feeling ambivalent about the deal which sees their holdings of Irish debt increase, albeit for a short time. The taxpayer is still on the hook, of course. But the people I feel sorry for most are the journalists who have to explain what just happened[1]. My sense is that in the complex negotiations that went on, the ECB won, hands down.

To the roundup then. Karl Whelan is underwhelmed. FT’s Alphaville gets the story mostly straight, Constantin does a good job of spelling things out clearly, and the IrishTimes gets the story a bit muddled but mostly right.

[1] This is a lie.


The Fiscal Compact and Wider European Reform

I agree with Michael O’Sullivan (op-ed in today’s FT available here) that the Fiscal Compact should be debated in the context of a wider European reform agenda and that the Ireland should positively engage in the wider reform process.  My view is that the implementation of the Fiscal Compact raises the probability that other reforms will be delivered; his ultimate position on the referendum vote was not obvious from his article.

(The FT also carries an interesting analysis article on the lessons from Iceland here.)


Statement by Minister for Finance to the Dáil on 31st March Promissory Note Payment

Statement here.


HM Treasury and the Financial Crisis: Review

Read the critical review here and reflect on any lessons for the operation of the Irish department of finance.

Banking Crisis

IBRC Annual Report

The 2011 Annual Report for the Irish Bank Resolution Corporation has been released.  The Consolidated Income Statement and Consolidated Financial Position are reproduced below the fold though I would recommend looking at the relevant Note in the full report to get more insight on any particular figure.

Social conditions

2011 Census Results

Today the CSO begin their release of the detailed results (schedule) from last April’s Census with the publication of This is Ireland (Part 1)There is lots of information in the volume and here is just one table that reflects a point made in the press release.

I couldn’t see the equivalent 1996 numbers in a quick search and the category on “Being purchased from a Local Authority” was not used in the 2011 Census so the “Rented from Local Authority” figure is presumably the sum of earlier categories.  The “Rented from a Voluntary/Cooperative Body” first appeared in the 2006 Census and the initial number seems high. 

As the press release highlights the big change is in the number of households renting which increased from 300,000 to almost 475,000 over five years.  It can also be seen that around 35% of households have a mortgage.  There were 290,000 vacant units on Census night.


Accounting Devices and Fiscal Illusions

A new IMF Staff Discussion Note addresses the scope for creative accounting in obscuring fiscal positions – available here.


Wording of the Proposed Constitutional Amendment

I am surprised the release of the wording of the proposed amendment to the Constitution has not received more attention today.   Stephen Collins reports on the wording in a piece on the inside pages of the Irish Times.   From the article:

The amendment will involve the insertion of the following subsection after subsection 9° of article 29.4 of the Constitution.

The new subsection 10° will state: “The State may ratify the Treaty on Stability, Co-ordination and Governance in the Economic and Monetary Union done at Brussels on the 2nd day of March 2012. No provision of this Constitution invalidates laws enacted, acts done or measures adopted by the State that are necessitated by the obligations of the State under that Treaty or prevents laws enacted, acts done or measures adopted by bodies competent under that Treaty from having the force of law in the State.”

I just heard the normally excellent Stephen Donnelly say on RTE’s Drivetime programme that the amendment will put detailed fiscal rules in the Constitution.   My reading is that the purpose of the amendment is to ensure that the proposed Fiscal Responsibility Act that will establish the rules is not in violation of the Constitution.   The amendment does not put fiscal rules in the Constitution. 

The draft of the Treaty is available here.  The next piece of crucial information will come with the publication of the proposed Fiscal Responsibility Bill.   The referendum to ratify the amendment will take place on Thursday, May 31.

Inequality Social conditions

2010 Survey of Income and Living Conditions

The CSO have now released the full results of the 2010 EU-SILC.  The report gives lots of detail on income and poverty in Ireland.  One graph immediately stood out.

Care has to be taken when interpreting this as different households are surveyed each year and the composition of the households in each decile will also change.  Detailed tables can be seen in the report which can be compared to those in the 2009 release.

When looking at the annual change by household composition the following can be seen.

The largest drops are seen for households with one adult aged under 65 and no children under 18, and “other households with children”.  Drops are also recorded for other categories.


China to the rescue?

Thanks to frequent commenter Eoin Bond for the heads up on this piece of news, which may well be very significant for Ireland. From the piece:

The National Treasury Management Agency has signed an agreement with a subsidiary of China’s sovereign wealth fund which would allow the Chinese agency to buy Irish Government bonds.

The agreement was signed after Taoiseach Enda Kenny’s meeting with the Chinese Prime Minister Wen Jia Bao. Ireland is scheduled to return to the bond market next year under the terms of the EU/IMF bail-out.

The official press release is here.


Launch of NERI

The Nevin Economic Research Institute has been launched – the website is here.


John Bruton on the Fiscal Compact

John Bruton’s speech from last night is here.


Promissory note news roundup

We have no deal yet on the 3.1 billion euro payment due on March 31st, but the government remains as hopeful as it was before the weekend that a deal will be struck. A legal challenge is being considered to the promissory notes by New Beginning founder David Hall, who is taking this case as an individual, not as a member of New Beginning. Finally, I’m a bit worried about the can-kicking plan’s lack of nuance.

Update: Governor Honohan expects we won’t have to pay the 3.1 billion at the end of the month.


Brian Cowen Speech

Former Taoiseach, Brian Cowen, delivered a speech at an event in Georgetown University in Washington last Wednesday.  His prepared remarks entitled “The Euro: From Crisis to Resolution?: Some Reflections from Ireland on the Road Thus Far” can be read here.


Financial Repression: Then and Now

Kirkegaard and Reinhart highlight how financial repression is often employed by highly-indebted governments in this vox article.

Exercise: Discuss the various proposals in Ireland that might be classified by these authors as financial repression.


The Self-Defeating Fiscal Adjustment Debate in a Depressed Economy

The paper “Fiscal Policy in a Depressed Economy” by Delong and Summers (from the BPEA conference linked to by Philip) is hugely relevant to the Irish fiscal policy debate.   While the paper ranges more widely, it provides a useful framework for thinking about the question of whether fiscal adjustment could actually be self defeating in terms of lowering “long-run debt financing burdens” in a depressed economy with interest rates constrained by a zero nominal lower bound.   Indeed, the analysis would seem to have even more general relevance for a small economy within a large monetary union, where the nominal policy interest rate is effectively a given.    A key message is that “hysteresis effects” – whereby today’s output level could have long-lasting effects on future output – could make higher deficit spending today pay for itself over the longer term.   In such a world, a slower pace of deficit reduction need not have an adverse impact on creditworthiness. 

There is a kicker on page 40, however, that is very relevant to the Irish debate. 

There remains the question, on which our analysis is mute, of whether temporary fiscal stimulus is inconsistent with a perception of long run fiscal consolidation. There is no necessary inconsistency. There is experience with temporary expansions, and also with phased-in long-run deficit reductions (e.g. The 1983 Social Security bipartisan agreement of the Greenspan Commission). But it is possible that short run fiscal expansion undercuts the credibility of long-run fiscal consolidation. It is also possible that, in a world with limited political energy and substantial procedural blockages, that effort towards one objective compromises the other.  On the other hand, as Cottarelli (2012) warns, if countries that have committed themselves to short-term deficit reduction as a down payment on a move to long-term sustainability find that “if growth slows more than expected… [they are] inclined to preserve their short-term plans through additional tightening, even if hurts growth more” then: “my bottom line:… unless you have to, you shouldn’t.” His fear is that fiscal austerity will be counterproductive because “interest rates could actually rise [even] as the deficit falls” if “growth falls enough as a result of a fiscal tightening.”

We do not see a good way to address this issue analytically or empirically. Clearly, the risks of short run fiscal stimulus having adverse effects on long-run credibility will be greater in settings where government debt already carries a significant risk premium. Clearly, it will be larger when there is evidence that deficit fears are impacting on stock market valuations and on investment decisions. But even in the absence of such evidence, there is always the risk that market psychology can change suddenly.

The Cottarelli VOX piece is available here.   See here for a related and much discussed blog post by Olivier Blanchard.  This post by Simon Wren-Lewis is also complementary. 

I would be interested in people’s views. 


European Commission Bloggers Conference

The European Commission Representation in Ireland is supporting a special one day conference in Galway for social media practitioners entitled “Challenges facing the Irish Economy “.

When: Saturday 24th March at 11.00 am, with registration from 10.30 am

Where: Aras Moyola Building, National University of Ireland, Galway

This conference is aimed particularly at social media practitioners and will bring together journalists, academics, politicians, and business people with an interest in web-based technologies to look at some of the complex issues facing Ireland’s economy.

The internet is a powerful tool in communicating the economic challenges Ireland is currently facing. Social media and special web based tools all have a role to play in communication between the public and key decision makers. The general public has become much more economically-literate and informed since the beginning of the crisis – how much of this can we put down to increased accessibility of economists and their ideas online? And has it changed how academics and the world of politics interact?

These and other questions will be put on the table and some well-known economists have kindly agreed to kick off the discussions:

Professor John McHale
Professor and Head of Economics at the National University of Ireland, Galway

Presentation Slides 

Dr Aidan Kane
Lecturer in economics at the National University of Ireland, Galway

Presentation Slides

Seamus Coffey
Lecturer in economics at the University College Cork

Presentation Slides

Ronan Lyons
Economist at, DPhil candidate at Balliol College, Oxford & adjunct lecturer at Trinity College, Dublin

Presentation Slides

Margaret E. Ward, financial journalist and author will host the conference.


Moody’s on Promissory Notes

Eamon Quinn reports on an interview with a Moody’s analyst here.


Central Bank: Macro-Financial Review

The staff of Financial Stability Division of the Central Bank has put together a review of the macro-financial risks facing Ireland – it is available here.

The Macro-Financial Review provides a systematic overview of macro-financial conditions in Ireland and forms part of the Bank’s internal discussions about financial stability.

It is clear that, despite the exceptional scale of policy interventions domestically and significant progress in the stabilisation and restructuring of the financial system, its transition to a fully normal mode of functioning is not yet complete.   In addition, there are risks which remain.   This Review assembles some of the material which is kept under surveillance by the Financial Stability Division of the Central Bank.   Naturally, the downside risks are focussed upon, but it is worth recalling that better-than-expected outcomes are also possible.

Policymakers are, of course, aware of these risks and, in addition to the extensive measures already taken, will continue to address and respond to the challenges posed by them on an on-going basis.  The Review does not attempt to discuss or evaluate the overall policy measures that are in effect and currently under review to mitigate known risks.

While the document has been reviewed by the Bank’s Financial Stability Committee, the views expressed are those of the staff of the Financial Stability Division, which is responsible for its preparation.

It is made available to the public to heighten awareness of the current condition of the financial sector.   It is hoped that by publishing it, the Central Bank will help decision-makers in the financial sector correctly evaluate risks and ensure that the risk management tools are appropriate and adequate.


BPEA Spring 2012 Conference

The Brookings Papers on Economic Activity is a major venue for new research in applied macroeconomics and finance. The conference papers are here.  I can recommend Jay Shambaugh’s paper on the euro crisis, while the papers by DeLong/Summers, Stock/Watson and Dynan are all also directly relevant.


Ireland’s debt burden: The many stages of grief

The Economist reports here.


Eurovision and the Euro Crisis

The Montenegro entry addresses the crisis: video here; lyrics here.


Latin Scholarship, FT Alphaville and Promissory Notes

Here is the FT Alphaville take on the promissory notes saga, along with a nice selection of Latin expressions.


New CSO GDP/BOP data

The national accounts release is here; the BOP release is here.

  • 2011 real GDP growth is +0.7%
  • But 2011 nominal GDP growth is less at +0.3% (deflation still an issue for GDP deflator)
  • 2011 real GNP shrank by -2.5%
  • Q4 data sees small fall in GDP, larger fall for GNP.
  • Small current account surplus for 2011
  • Cumulative errors and omissions in BOP for 2010-2011 of euro 19.5 billion

Quarterly National Accounts

The Q4 2011 Quarterly National Accounts have been published by the CSO.  The –1.9% seasonally adjusted drop in real GDP in Q3 has been revised to –1.1% and the first estimate for Q4 is a fall of 0.2%.  Although many will claim we never exited, Ireland is technically back in a recession for the first time since the end of 2009.  Real GNP fell 2.2% in the quarter.

Looking at the individual components in real terms there was a small rise in consumption and a jump of 14% in investment (though from a very low base).  Government consumption declined in all four quarters in 2011.  The final quarter also saw a 1.1% drop in export volumes.

The preliminary annual figures for 2011 show that real growth in the year is estimated to be 0.7%.  These figures are subject to revision (as was significantly seen with the 2009 figures) and it will be June before the final figures are available.

For all our Maastricht Criteria junkies nominal GDP for 2011 is estimated to be €156,438 million, a rise of 0.3%.  This is slightly above the budget day forecast of €155,250 million.  Nominal GNP fell 3.4% in the year and is estimated to be €123,879 million for the year, primarily because the outflow of net factor income rose to €32,559 million from €27,785 million in 2010.

The 2011 Balance of Payments has also been published.  As expected there is a small surplus on the current account.  This surplus of €127 million compares to a surplus of €761 million in 2010 but remains a marked improvement on the deficits of €10 billion recorded in 2007 and 2008.

Lots more detail in the releases to be discussed.


Tiny Plays for Ireland – Guest Post by Gavin Kostick

Gavin Kostick writes:

Last September Philip Lane was kind enough to let me announce the launch of Fishamble: The New Play Company’s “Tiny Plays for Ireland” on the blog.

The call for submissions with The Irish Times resulted in over 1,700 entries – a word count of over a million. The Irish Times tell us it is the largest creative writing response they have ever hard.

I read the lot, so I had in my mind for a while there a snapshot of the concerns, hopes, fears of the Irish Times reading public at least.

The response and the quality was so overwhelming, Fishamble decided to do two productions of two complete sets of plays. You can read more about the process here.

The first production is now up and running at Project Arts Centre, and the early reviews are in.

The whole project was, in part, influenced by this blog and the comments section, where different characters, voices and perspectives jostle with each other.

Posters, readers and commenters might be particularly interested in coming on the nights of either 28th or 30th of March when I’ll be chairing a free post-show discussion on issues arising from the plays and you might meet the odd person familiar from the blog. Please feel free to say hello.

The show really is selling out (full each night so far) so book in advance here.

Perhaps the kindest comment after the show so far was words to the effect of “it’s like an attempt to take the pulse of the Irish nation – I’m pleased to see we still have one.”


Promissory note restructuring

This is breaking that Prof. Honohan will seek leave from the ECB to not repay part of the promissory note worth 3.1 billion due at the end of this month. This is good news in the short run (and something Karl, Brian and I spoke at length about recently at the Oireachtas)

From the piece:

The Minister for Finance Michael Noonan confirmed in the Dáil this evening that negotiations were taking place with the ECB about settling the promissory note by delivery of an Irish government bond.

The concession may facilitate a longer-term effort to cut the cost of Ireland’s banking rescue, which helped tip the nation into an international bailout in 2010.

The immediate questions are:

1. What interest rate(s) will be charged on this(these) bond(s) and at what maturity(ies)?

2. What will fund the asset side of the balance sheet of the IBRC?

3. It looks to me like the promissory notes are going to be funded by the EFSF, or some other funding structure, but specifically what funding structure at the EU level will the bond use?

Update: RTE’s David Murphy reported on Twitter that the government are proposing to pay off the note with a bond which matures in 2025. If ECB says yes, the government gets 13 year delay on the €3bn payment.

Update2: Karl has the text of Minister Noonan’s speech on his blog now.


Non-Financial Corporate Debt (updated)

The excess level of debt in Ireland gets a frequent airing.  Frequent reference is made to graphs like the following published by McKinsey.

Ireland has an excessive level of debt but it is the figures attributed to the financial and non-financial corporate sectors that push us into the stratosphere.

Outside of some coverage issues in relation to the general government debt, there is relatively broad agreement about the excessive debt levels in the household and government sectors.

On the issue of Non-Financial Corporate Debt there was a useful session of the Joint Oireachtas Committee on Finance on the 7th of March.  The committee heard from Michael Connolly from the CSO and Joe McNeill led a group from the Central Bank. 

The transcript of the debate is here, and the intended text of the opening presentations as well as the slides used by Joe McNeill are here.  Michael Connolly also used slides but I have not seen them.  I will add a link if someone has it.

The debate meanders at times and a couple of misperceptions are persisted with by some of the Members but there are many useful contributions from the witnesses.  A couple of quotes are provided  below the fold but there was much more discussed.

The conclusion is straightforward.  The non-financial corporate debt burden is not as large as dramatic graphs similar to that above like to indicate.

UPDATE: Michael Connolly has kindly provided the slides he submitted to the Committee.  Slides 7 to 13 are particularly relevant and are very useful contributions on this issue.