Author: Karl Whelan

NAMA, EU Guidelines and Pricing of Assets

My previous post discussed the price that our new National Asset Management Agency (NAMA) could pay for impaired loans from the perspective of how much of a loss relative to book value the banks could take under the assumption that the government didn’t invest more than its €7 billion planned re-capitalisation. The answer was that the discount from book value would have to pretty small relative to the figures being widely quoted for likely losses.

Admittedly, this was a bit of an around-the-houses way of warming up to the NAMA discussion and Patrick was completely correct in his comment that the key sentence in the speech was

If the crystallisation of losses at any institution requires additional capital the State will insist on participation by way of ordinary shares in the relevant institution.

Continue reading “NAMA, EU Guidelines and Pricing of Assets”

NAMA and Pricing the Bad Property Loans

I have examined the government’s banking proposals and will have more to say later about their substance. However, before discussing the details, I’d like to focus on some figures that will help shed light on a question that I’ve already heard many times today—how much will our National Asset Management Agency (NAMA) pay for the bad assets of our major banks?

Continue reading “NAMA and Pricing the Bad Property Loans”

Budget Deficit Target About Right

While there is a lot of detail to absorb and plenty of issues to debate, internal consistency demands that I welcome the Minister’s budget deficit target for this year of 10.75%.  I argued a few weeks ago that when considering whether the government was sticking to the plan it had sent to Brussels in January, it was best not to focus on the target of a 9.5% budget deficit for the year as a whole but on whether the measures taken would, if implemented over a whole year, put us on a 9.5% pace.  Based on current information, I think the budget does this.

Last week’s Exchequer Returns indicated that we were on path of a deficit of 12.75% this year without further corrective action.  On a full-year basis, this would require an adjustment of 3.25% to get to a 9.5% deficit.  Assuming that the corrective actions taken in this budget would have only 60% of their full year effect during 2009, then these measures would reduce this year’s deficit by (0.6)(3.25)% = 1.95%, which would imply a budget deficit for 2009 of 10.8%.  As such, I would interpret the government’s actions today as putting them back on track with the plan sent to Brussels in January.

Another welcome element of the budgetary figures was that the GDP projection of -8% were more realistic than the -6.75% mentioned in last week’s Exchequer Returns.  Both the QNAs and the recent unemployment data point towards a GDP decline for this year of at least the 8% now projected by the government.

I’m still reading over the governments plans for the banks and will post my thoughts later.

Update: I should probably have also pointed out that it is perhaps a bit disappointing that the targets for 2010-2012 have slipped a bit since January. But then again, these relatively small adjustments should be seen as realistic in the face of the govenment’s projections of -8% and -3% GDP growth for 2009 and 2010, compared with projections of -4.5% and -1.1% in January.

The Banks: It’s About Allocation of Losses

With an announcement coming from the government on Tuesday, I think the best that can be hoped for at this point concerning our banking problems is some sort of “kicking to touch” in which the Minister announces that further time is being taken to consider the available options. If this is indeed the case, then we are going to need a much better-informed debate about these options over the next few weeks than has been served up in recent months by the Irish media.

There are a number of possible ways that the government can solve the problems with our leading banks. However, the various plans being discussed differ greatly in terms of (a) How the losses associated with bad property loans are allocated between the taxpayer and bank shareholders and (b) Who owns and controls the cleaned-up banks. If the media were serving the public well, there would have been an extensive discussion of these issues. Unfortunately, this has not been the case.

As an example, consider today’s column in the Irish Times by John McManus. Note that my point here is not to pick on McManus, who I consider to be an excellent journalist often willing to be tough on the government on business issues, but to illustrate the weakness of the coverage from even our leading journalists.

Continue reading “The Banks: It’s About Allocation of Losses”

Public Sector Pay Cuts

Speaking on today’s News at One, George Lee pointed to informal evidence from the Central Bank of average wage cuts in the private sector of 8%.  He then immediately noted that this raised the question of why there had been no wage cuts in the public sector.  (About 3.20 minutes in.)  George has a well-deserved reputation as an excellent economics reporter, perhaps the best of his kind on these islands, but this statement was unfair and unhelpful.   The pension levy is a wage cut.  It reduced the taxable income of public servants by an average of 7.5%, thus putting public sector workers exactly in line with the private sector figures that George is quoting.

As a public servant myself, I am conscious of the need to be careful when making statements about public sector pay.  However, the bottom line has to be this.  What is useful here is fair analysis of the full compensation package for public servants (including pension packages and the effect of levies) in comparison with the private sector—and the Irish economics profession has provided research of exactly this type.  What is not useful is analysis in which a pay cut is real if it happens in the private sector but not real if it happens in the public sector just because someone chooses to call it a levy.

I expect here that I will get a flood of comments linking the pension levy to the generosity of public sector pay packages.  But this would miss the point I’m making.  There is no link between this levy and public sector pensions.  The only real implication of the levy for public sector workers was to reduce their take-home pay.  Perhaps this step was needed (and perhaps more is needed) but let’s not pretend it didn’t happen.