Author: John McHale

A Tough Half Year for AIB

“The six months to June 2010 was a very difficult period for AIB and its customers.”  So begins management’s overview of AIB’s interim results for 2010—and it’s hard to disagree.   Bank watchers were looking for news in three main areas: impairments on non-NAMA bound loans, operating profits, and progress on asset disposals.   Today’s release managed to disappoint on all three. 

Provisions for impairment were €2.3 bl. (including €1.2 bl. for loans “identified for potential transfer to NAMA”).   Operating profit before provisions fell 46 percent from the same period last year, with significant falls in the net interest margin.   And Colm Doherty was not especially forthcoming on how well the disposals of Polish, UK and US assets are going, although his presentation to analysts did give the sense that AIB were being forced into a fire sale in poor market conditions—hardly encouraging. 

Other “news” included the (inevitable) plan to follow BOI in raising the rate on variable-rate mortgages by about half a percentage point, and the (sensible) call to extend the guarantee on both shorter- and longer-term liabilities given the continuing difficult funding environment. 

The interim report is available here.   Colm Doherty’s presentation and Q&A is available here. 

Revisiting the NDP

The government has released its revised National Development Plan for the period to 2016.   The documentation includes a short leaflet, Investing for Growth and Jobs: Infrastructure Investment Priorities 2010 – 2016.   With a bit of chutzpah, the document claims the 40 percent cut in capital spending as “stimulus” for the economy.   The emphasis is on new priorities and not on the overall cuts.   Fortunately, the Department of Finance has also released Infrastructure Investment Priorities 2010 – 2016: A Financial Framework, which makes a more sober case for the shift in strategy (see, in particular, Chapters 2 & 3).   The arguments of Colm McCarthy for just-in-time infrastructure provision (based on the time value of money) and more broadly for cost-benefit analysis – as championed on this site and elsewhere by Edgar Morgenroth – would appear to have been influential in the overall approach.   Of course, the precarious state of the public finances looms large behind the change in strategy. 

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Stress Tests

The results for the stress tests on 91 European banks were released yesterday evening.   A reasonably detailed description of the tests and results is available from the Committee of European Banking Supervisors’ (CEBS) website.   The results for AIB and BOI are available from the Irish Central Bank’s website.   As Michael Hennigan points out, the overall passing score was 84-7, and so the release of the results has not quite made the waves expected.   Both Irish banks passed with a bit to spare despite the relatively high Tier 1 target of 6 percent.   However, the results factored in capital raising plans to the end of the year, and the jury is still out on how much of the €7.4 bl. AIB can achieve without additional government help.  

Some analysis here: Irish Times; Irish Independent; Financial Times.

Fiscal Free Lunches

Karl Whelan makes a convincing case against the idea that a fiscal stimulus would lower the deficit (see Unpleasant Fiscal Arithmetic).    But there is another fiscal free lunch idea that I see as even more influential—and probably just as wrong.  This is the idea that discretionary fiscal contractions increase economic growth, which in turn reinforces the improvement in the deficit.   The key mechanisms behind what is sometimes called the “German view” are Ricardian-type expectations effects and a reduced risk premium on borrowing (the latter recently emphasised in ESRI Recovery Scenarios paper).    I doubt that there are many Irish economists who would claim to hold this view if pushed.  However, it seems to me to be implicit in the widely held view that a more front-loaded fiscal adjustment will speed economic recovery. 

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Capital Spending

Scaling back capital spending has been a central plank of the Government’s fiscal adjustment strategy.  Nominal voted capital spending is set to fall from €7.2 bl. in 2009, to €6.5 bl. this year, to a planned €5.5 bl. in 2011.  However, based on an examination of the project pipeline, the Construction Industry Federation believes that the procyclical cutback in spending will be considerably more severe, and conclude that “the Government’s ability to achieve its own spending targets in 2011 and 2012 is now in serious question”.

The Taoiseach defended his Government’s capital spending plans at the IBEC President’s Dinner last evening.   In response, it is interesting to see both Lee Crawford, the incoming IBEC president, and David Begg argue vigorously for more protection of capital spending in side–by-side opinion pieces in today’s Irish Times.   Unfortunately, in arguing for investment to support domestic demand, neither addresses the likelihood of a national creditworthiness/domestic demand trade off.    This is just as limited a view as held by those who focus only on bond market constraints and ignore the demand implications of austerity plans. 

I hope there will be more debate on the appropriate current-capital mix of adjustment measures in the coming months — though I can’t say I’m optimistic.   It would be a pity if we end up following the path of least political resistance.