Banking Crisis Social conditions

Brendan and Dermot Walsh on health and austerity

Dermot and Brendan Walsh have just published a provocative comment in the British Medical Journal on the link between health and austerity  [].

Momentary relief from the deliberations on Anglo!

The comment reads:

Ireland is – after Greece – the country where the post 2008 structural adjustment programme, aka austerity, has been proportionately most severe. Yet there are few indications that this has had a significant adverse effect on basis health indicators.

The crude death rate in 2012 was 6.3 per 1,000 compared with 6.4 in pre-austerity 2007. The suicide rate in 2012 was 12.8 per 100, 000 in 2012 compared with 13.2 in 2007. Admission rates for depressive disorders fell to 117 per 100, 000 in 2012 from 138 in 2007. The percentage distribution of self-assessed health status did not change between 2007 and 2010 (the latest available year).

Overall there is a striking lack of evidence that the major austerity programme implementd since 2007, and the concomitant trebling of the inemployment rate, has had a significant deleterious effect on the health of the Irish population. This evidence needs to be given due weight in international assessments of the impact of economic policies on public health.


A very Irish story

If we were to choose one reform to improve Irish governance, what would it be? I would probably start with our libel laws, which directly allow mediocre bullies to shut down legitimate discussion and dissent, and indirectly help promote a culture of groupthink. We need more information and more discussion in this country, not less. And the Independent has done us a huge favour by releasing the Anglo tapes.

The law can stifle the dissemination of information and debate in other ways as well. I’ve no idea why the DPP has asked the Indo to stop releasing more tapes, assuming that this Irish Times story is true. All the Irish Times tells us is that “it expressed concern about the potential consequences of the emergence of certain other information into the public domain.” No doubt the DPP has its reasons. But the cost to the general public both in Ireland and abroad is high, since we all need more information, not less, about how bankers behave in practice.


Bank of England

Mark Carney takes over as governor in a few days:  detailed FT profile/analysis is here.


National Accounts

The CSO have published the Q1 2013 Quarterly National Accounts.  GDP has contracted for three quarters in succession.  A decline in the net outflow of factor income led to a quarterly rise in GNP.  The Balance of Payments shows that there was a drop in the outflow of portfolio investment income on equity (though the impact this has on the seasonally adjusted national income figures is unclear).

Unsurprisingly, Consumption Expenditure fell in the quarter reflecting the pattern that has been obvious in recent Retail Sales Index releases.  The Investment figures are low and volatile and heavily influenced by the timing of purchases by aircraft leasing companies based here.  In real terms, Investment fell over 7% in the quarter.  Net expenditure by Government on goods and services was largely unchanged in the quarter.  All measures of domestic demand fell in the quarter.

In seasonally adjusted terms, real exports fell 3% in the quarter with a 1% drop in real imports.  The non-seasonally adjusted data in Annex 1 indicates a much greater drop in service exports compared to goods exports.

The National Income and Expenditure Accounts for 2012 have also been released.  The 2012 GDP growth figure has been revised down from +0.9% to +0.2%.  The GNP growth figure has been revised from +3.4% to +1.8%.

The Q1 2013 International Investment Position and External Debt figures have also been published.


Capital is Back: Wealth-Income Ratios in Rich Countries 1700-2010

This new paper by Piketty and Zucman is fascinating – it is here.


Nevin Institute: Summer 2013 QEO/QEF

The new releases from NERI are here and here.


DEW Economic Policy Conference 2013: Call for Papers

The Dublin Economics Workshop will hold its annual economic policy conference in Limerick on October 18-20. Stephen Kinsella is helping with local arrangements. 

Proposals for papers in any area of economic policy are invited and a brief summary should be forwarded, before August 20, to

Booking details and programme will be posted on this site in due course.

The Dublin Economics Workshop is kindly sponsored this year by Dublin Chamber of Commerce.


ESRI Budget Perspectives Conference

The ESRI budget perspectives conference is on this morning –  details here.

My talk will be based on this op-ed in today’s Irish Times.


“If they saw the enormity of it upfront . . . they might decide they have a choice”

The Irish Independent carries the story of recorded conversations in 2008 between Anglo Irish executives. The tone of the calls is really shocking, leading to widespread domestic opprobrium. The international reaction has been split. Jamie Smyth in the FT makes the case for a banking inquiry, while Sam Cage at Reuters pushes the party political angle. Listening to the tapes, it’s hard not to get very annoyed. Here from the FT article is an excerpt of the conversation. The bankers are discussing how best to extract the maximum monies from the State.

“The strategy here is you pull them in, you get them to write a big cheque and they have to keep – they have to support their money,” Mr Bowe said in the recorded call, when explaining why the bank had asked Ireland’s Central Bank to provide €7bn in aid when, in fact, he believed Anglo Irish required much more.

“If they saw the enormity of it upfront . . . they might decide they have a choice,” said Mr Bowe. “They might say the cost to the taxpayer is too high.”

They might have indeed.

The Anglo tapes, in one sense, describe nothing new: we already knew bankers were aware of the possible losses at Anglo, and mislead senior policy makers in 2008 as to the extent of the losses. What we didn’t know—and still don’t—is how common this reprehensible behavior was across our banking system.

Anglo is the bad boy of Irish banking, but readers should remember it was bailed out with money borrowed by the State at ECB rates. AIB, which swallowed almost as much capital as Anglo, did so at a much higher relative cost to the taxpayer in terms of cost of capital. Were executives at AIB, Bank of Ireland, and other banks, similarly aware of possible losses in their banks around the same time as these tapes were made? If so, did they deliberately mislead officials when meeting them over a possible bank guarantee? Were any officials within the Department of Finance, or the Department of the Taoiseach, similarly aware of a divergence between what the banks were saying around this time?

These and other questions have not been answered. We have had three reports into what happened in the lead up to the collapse, each giving possible reasons for why the banking collapse happened. Each report has been excellent within its limited terms of reference. Despite these reports, we have not had any satisfactory answers to simple questions revolving around a central theme: who knew what, and when?


Andrew Crockett Memorial Lecture by Raghu Rajan



Tax Conference

The Department of Finance organised a conference on taxation earlier this week.

The conference materials are here;  the opening speech by Michael Noonan is here.


Economic and Social Review: Summer 2013 issue

available here.  Includes two policy essays:

The Small Public Service Vehicle Market in Ireland:Regulation and the Recession

Paul K. Gorecki

ESR Vol 44#2 page 247

Growth and Adjustment Challenges for the Euro Area

Philip R. Lane

ESR Vol 44#2 page 273


Mortgage Arrears Q1 2013

It is a little later than usual but the first quarter mortgage arrears statistics have been published by the Financial Regulator.

There is one additional element in today’s release which is in relation to restructured mortgages.

A total stock of 79,689 PDH mortgage accounts were categorised as restructured at end-March 2013. This reflects an increase of 1.8 per cent from the stock of restructured accounts reported at end-December 2012. Of the total stock recorded at end-March, 53 per cent were not in arrears. Restructured accounts in arrears include accounts that were in arrears prior to restructuring where the arrears balance has not yet been eliminated, as well as accounts that are in arrears on the current restructuring arrangement. New data collected this quarter indicate that 76 per cent of restructured PDH accounts were deemed to be meeting the terms of their arrangement. This means that the borrower is, at a minimum, meeting the agreed monthly repayments according to the restructure arrangement. Meeting the terms of the arrangement should not be interpreted as a measure of sustainability, as not all restructure types represent longer-term sustainable solutions.

The 76% figure is broadly in line with statements made by representatives of AIB and BOI to the Oireachtas Finance Committee last Autumn. 

AIB: “Between 69% and 70% of our 33,700 customers who are in forbearance are affording the new restructured loans we have put them into.”

BOI: “Some 86% of those customers who are subject to forbearance or restructuring are fully meeting the revised arrangements.”

If the restructure is a payment moratorium or a payment less than interest-only then meeting the terms of the restructure is not an indication of long-term sustainability as stated in today’s release.

The number of early arrears (less than 90 days) fell very slightly in the quarter.  The was also small drops in the bounded categories between 90 and 180 days and between 180 and 360 days.  This suggests a slow-down in the number of cases falling into arrears but the number of long-term arrears cases continues to rise.  To convert mortgage accounts to households note that there is an average of around 1.27 mortgage accounts per household in the series.

The total stock of residential mortgage debt continues to fall.  It was €118.6 billion when the series began in September 2009 and now stands at €109.9 billion.  Over the same period the total amount of arrears has increased by €1.5 billion.  The proportion of debt in arrears of 90 days or more now stands at 16.5%.


ESM direct bank recapitalisation instrument

Nearly 12 months ago a Euro Area Summit Statement declared that:

When an effective single supervisory mechanism is established, involving the ECB, for banks in the euro area the ESM could, following a regular decision, have the possibility to recapitalize banks directly.

Yesterday’s Eurogroup meeting examined this issue.  The statement is here.  The final sentence is:

The potential retroactive application of the instrument should be decided on a case-by-case basis and by mutual agreement.


Ireland: Tenth Review Under the Extended Arrangement

The new IMF country report is here.


Reminder: DEW Meeting, Land-Use Regulation in the United Kingdom

The Irish planning and land-use system is very similar to the set-up in the UK. There is a re-think under way across the water and one of the main contributors will be visiting;

Speaker: Christian Hilber (LSE)

Topic: The British System of Land-Use Regulation: Key Features and (unintended) Economic Consequences 

Date and Time: Friday June 28th at 5.30 pm

Venue: Davy Stockbrokers, 5th. floor, 49, Dawson St., Dublin 2.

Admission is free but you are requested to book – email

The Workshop is kindly sponsored this year by Dublin Chamber of Commerce.


From Gavin Kostick: Fishamble Presents ‘Guaranteed!’ by Colin Murphy

Gavin writes:

Fishamble: The New Play Company are presenting a new play. ‘Guaranteed!’, by Colin Murphy which dramatises the events leading up to and the night of the 2008 bank guarantee. You can read about it here

Colin is a journalist, documentary maker and researcher. People may know his columns from the Independent. In 2011 Fishamble launched ‘Tiny Plays for Ireland‘ with the Irish Times.

One of the plays that came in was Colin’s mini version of the guarantee. He came up to us afterwards and said he reckoned he could do a much more substantial work based on primary, secondary and interview sources. We said let’s go for it and Colin has done a fantastic job – he’s really put the work in.

We had a reading of it a couple of weeks ago and every scene that was
questioned Colin supported from a wide range of first hand interviews.

Colin has been scrupulously fair in not imposing hindsight on the people involved, so you get what it feels like to be in the room trying to make decisions in real time with the information you have. It’s funny too, in a tragic sort of way.

All the shows will be followed by discussion and we have a great line-up of various people on different nights with whom many readers will be familiar, including Kieran Allen, Suzy Byrne, Sarah Carey, Donal Donovan, Constantin Gurdgiev, Brian Lucey, Jim Power and many more. Bloggers are of course welcome to chip in with their insights.

The production has a great director, cast and crew. We’ve kept the prices down to and austerity friendly e10/11 and we’re doing it in a pop-up, script in hand way, which we hope reflects the idea of real people wading through the records trying to make sense of what happened.

I’ll be chairing a number of the discussions, so please feel free to stick in questions I should ask in the comments below.


Joint ESRI/Geary Institute Research Seminar: “Do Initial Endowments Matter only Initially? Birth Weight, Parental Investments and School Achievement”

Venue: The ESRI, Whitaker Square, Sir John Rogerson’s Quay, Dublin 2

Date: 20/06/2013
Time: 4pm

Speaker: Prashant Bharadwaj, University of California, San Diego.

This paper investigates the role of initial health endowments on school achievement in early childhood through adolescence. Using birth weight as a proxy for childhood endowments, we investigate this link using twins and siblings fixed effects estimators. We collected birth weight and basic demographic data on all twins and siblings born in Chile between 1992-2000 and match these births to administrative school records between 2002-2008. Twins effects reveal that a 10% increase in birth weight improves performance in math by nearly 0.05 standard deviations in 1st grade.

We exploit repeated observations on twin pairs to show that the effect of birth weight is a persistent effect that does not deteriorate as children advance through grade 8. Siblings fixed effects estimators between grades 1 through 8 show a birth weight effect that declines as children age, but the decline is less among siblings closer together in age than among siblings who are further apart. OLS estimators also show a steady decline in the birth weight effect as children age: birth weight has a large effect in grade 1, but this effect diminishes significantly by grade 8.

Using data from a unique survey that asks both parents and children about parental investments relating to school work, we suggest parental investments as a plausible mechanism for the observed patterns in twins and siblings fixed effects estimators, and OLS. While parental investments are negatively correlated with birth weight, we find evidence of no differential care (by birth weight) within twin pairs; however, within siblings pairs and across families in general, the lower birth weight child appears to receive greater investments. Thus, it appears that parental investments that compensate for lower initial endowments can lessen the impact of birth weight on later life outcomes.


Prashant Bharadwaj is an Assistant Professor in the Department of Economics at the University of California, San Diego. His research interests are in development and labor economics, focusing on the interactions between early childhood health, gender and education.

All welcome. No booking required.


IMF Completes Tenth Review Under the Extended Fund Facility Arrangement for Ireland and Approves €0.95 Billion Disbursement


Economic history Economic Performance Economics Political economy

Lessons from the 1950s?

The institutional innovations over the deep crisis of the 1950s gave birth to the modern Irish economy. I analysed the process in this article  in the Irish Independent last week.  Brendan Keenan re edited it slightly to highlight his interpretation of what I was saying. One of the fascinating things about writing anything is how it takes on a life of its own in readers’ minds.   (“And the word was made flesh and dwelt among us”).  Edna Longley once destroyed the meaning of something I had written by aggressive editing; fortunately no such problems arise with Brendan.  I wrote a similar piece for, a new site developed by a group of young historians.  Though I disagree with much of what Bryce Evans has to say on Lemass, I found his interpretation of what I had written illuminating: “it makes the case very convincingly for expertise offered as a basis for policy-making being more robustly based on both independence and breadth of opinion.”


Update on Banking Union

Interesting WSJ article on the current negotations here.

Asmussen speech here.


Latvia and the Euro: A Bet with No Upside

Ashok Mody writes here.


Conference: Health Systems in the Era of Austerity

The current economic crisis has led to large reductions in public health budgets in Ireland and across the EU.

Already stressed health systems are under huge pressure to maintain safe services and to do more with less. At the same time, they are expected to meet more complex, growing health needs while improving and reforming service delivery.

The economic crisis provides a unique opportunity to examine how different health systems are faring in recessionary times, and to draw out lessons for policy coming from cross country comparisons.

‘Health systems in the Era of Austerity’ is a joint ESRI/TCD conference, held at the ESRI on Tuesday June 18th 2013.

A panel of Irish and international experts will examine national and international experiences, drawing on TCD research on the resilience of the Irish health system and on a joint ESRI/TCD/WHO ‘rapid response’ report on health system responses to the economic crisis. Contrasting lessons from Spain, Estonia and the wider WHO Europe region will also be presented.

Link to conference programme here.




Revised MOU


Capital for the Future

The World Bank has produced a new report on global trends in saving and investment over the next 20 years – lots of interesting material here.


Youth Unemployment

Daniel Gros writes here.


Response to Shay Begorrah

With advance apologies for a too self-referential post, I think it might be useful to put my response to commenter Shay Begorrah from Tuesday’s thread on the front page.   Shay clearly sees me as an unabashed fiscal hawk, where more deficit reduction (and more expenditure-focused deficit reduction) is always better.   As this is not at all my view, and given my official role through the fiscal council, it might be worthwhile to explain my actual view a bit. 

During 2009 and the first half of 2010, the main thrust of my fiscal policy posts on IrishEconomy was that the fiscal adjustment was too frontloaded (see, e.g., here).    At the time I assumed that Ireland’s credtiworthiness was reasonably robust.   I underestimated how fragile Ireland’s creditworthiness  was in the context of monetary union with an underdeveloped lender of last resort to governments.   My basic approach to fiscal policy is Keynesian.   But since the middle of 2010 it has been clear to me that fiscal policy must steer a difficult course between supporting demand and sustaining the borrowing capacity of the State.   Not least, the latter is essential to ensure that the fiscal adjustment can be phased in any sort of reasonable way, and thus to sustain the essential protections and services of the welfare state. 

The idea that there is a trade off between demand and creditworthiness is challenged from both right and left.   From the right, the idea of an expansionary fiscal contraction is invoked: discretionary deficit reduction would then increase demand, further enhancing the deficit reduction.   I do not read the available evidence as supporting this contention (see, e.g., the important work from the IMF).   From the left, the idea of self- defeating austerity is invoked.   This comes in different forms: discretionary deficit reduction does not actually reduce the deficit; discretionary deficit reduction does not reduce debt to GDP ratio; and discretionary deficit reduction does not improve creditworthiness.    I do not believe that such self-defeating effects are borne out by the Irish experience (see Box C, p. 46 here).  

Another thrust (obsession?) of my more recent posts has been the critical importance to more robust creditworthiness of strengthening the crisis resolution mechanisms – and more narrowly the fiscal lender of last resort function – for the euro zone.   The political economy of such developments must been seen in the context of weak solidarity between what is an association of nation states, where there is a reluctance to risk transfers and a fear of moral hazard.  While I believe the aggregate fiscal stance of the euro zone has been significantly too tight from an optimal fiscal policy perspective, the strengthening of fiscal rules must also be viewed in terms of the political economy of strengthening the LOLR function.   The fiscal compact, for example, must be seen in this light. 

Finally, on the relative measures of expenditure- and tax-based adjustments, my prior belief around 2009 based on the literature was that expenditure-based adjustments were less contractionary than the tax-based alternative.  (Of course, in deciding on the mix of adjustments, other factors besides the macro effects – such as fairness – are important.)  From the more recent evidence, I have become much less convinced of the macroeconomic superiority of expenditure-based adjustments.   This issue was discussed in the first fiscal council report in October 2011 (see Box 4.1, p. 36, here; a more general review of the multiplier literature is given in Appendix E, p. 93, here).   The inconclusiveness of the evidence is the reason that the council has focused on an overall deficit multiplier in our analysis.


Introductory statement by the ECB in the proceedings before the Federal Constitutional Court



Corsetti and Dedola: Is the euro a foreign currency to member states?

Giancarlo Corsetti and Luca Dedola have a really good VoxEU piece on how cooperation between the central bank and the fiscal authority can avoid the “bad equilibrium” problem for sovereign debt.   The paper on which the Vox article is based is available here; Paul Krugman discusses it here.  

Although the initial focus is on a country with control over its own “printing press”, they also examine how it could work in a monetary union.   I won’t try to summarize the subtle analysis, but the key is how the difference between the interest rates on sovereign debt and central bank reserves can be used to lower the cost of funding below the level that triggers the bad equilibrium.   In contrast to claims that potential central bank intervention has to be unlimited, a central finding is that limited central bank intervention may be sufficient to avoid a bad equilibrium. 

In regard to how it might work in a monetary union, a sting in the tail comes in the last sentence of their closing paragraph.  

The analysis here bears key lessons for the current debate on sovereign default in a monetary union:

·        Countries in a monetary union could indeed be more vulnerable to debt crises, to the extent that the common central bank cannot count on the joint support of national fiscal authorities;

·        The common central bank, however, still has the power to engineer successful interventions.

In doing so, it will have to weigh the benefits and costs of providing a backstop to countries exposed to debt crises, possibly drawing on seignorage accruing to all countries in the union.

“[D]rawing on the seignorage accruing to all countries in the union” raises the familiar political-economy of-transfer-risk problem that has complicated the task of stabilising stressed euro zone sovereign debt markets.