Author: Karl Whelan

Mortgage Arrears: December 2010

The latest quarterly report on mortgage arrears from the Central Bank is available here. The report shows a continuation of the steady increase in the fraction of mortgages that are more than 90 days in arrears. This fraction rose from 5.1% in September to 5.7% in December, in line with the previous increases over the past year.

For the first time, the Bank are also publishing statistics on how many mortgages have been restructured and the nature of these restructurings. In addition to the 44,508 mortgage accounts that were in arrears for more than 90 days, there are 35,205 mortgages that have been restructured but which are classified as performing and not in arrears.

Money and Banking Statistics: January 2011

The Central Bank has released the Money and Banking statistics for January here.

In a helpful development, the Bank are now publishing statistics for the six banks covered by the Government guarantee (ELG) scheme. The statistics are published both on a gross assets and liabilities basis and also on a consolidated basis, which net out all intra-bank transactions. For example, the gross balance sheets show assets of €623 billion in December. However, once intra-bank transactions are netted out, the consolidated assets are €455 billion.

Unfortunately, the new Table A.4.2. for the covered banks shows a pretty grim story in relation to deposit outflows. In contrast to some reports, deposit outflows from the covered banks in January were about €18.5 billion, about the same as the rate recorded in December.

Update: A contact from the Central Bank has been in touch with me about the calculation above on deposit outflows. As noted above, the Bank are releasing monthly figures on a gross unconsolidated basis and quarterly figures on a consolidated basis. The €18.5 billion figure that I cited is, as usual, from the gross unconsolidated figures. However, I have been informed by the Central Bank that approximately 75% of the decline in deposits reported inn Table A.4.2, is due to intra-group activities in the banks concerned, so that deposit outflows from the system in January were in fact considerably smaller than in December. I’m happy to pass on this as it is useful information. Still, it suggests that the next logical step is for the Bank to release the consolidated balance sheet on a monthly basis.

More Black Holes? The Curious Case of the Missing €700 Million

The basis for the debates about fiscal policy in the election has been the Four Year Plan agreed with the EU and the IMF. This plan outlined measures that cumulated to have a €15 billion effect on the level of the deficit by 2014.

It is widely believed that the timing of the adjustment in this plan involved €6 billion in adjustment in 2011 and €9 billion in further adjustments over 2012-2014. In fact, this is not the case. The widely-cited €6 billion figure in relation to the current year’s budget includes €700 million in temporary measures due to once-off asset sales.

Thus, looking at page 19 of the Four Year Plan, we see that the adjustments planned for future years are €3.6 billion in 2012 and €3.1 billion in 2013 and 2014. This adds up to €9.8 billion. (I’m guessing there is some rounding going on here so that additional adjustments over €9 billion don’t appear to add up to the €700 million in once-off measures for 2011.)

Coming back to the election campaign, Fine Gael say their figures are from the Department of Finance, so they are presumably using the Four Year Plan figures. And they are aiming for the same 2.8% deficit that Fianna Fail are. This means that will also need to make €9.8 billion in adjustments. However, going to the back of Fine Gael’s budget document, one finds €6.444 in spending adjustments and €2.441 billion in tax measures, for a combined €8.9 billion.

So, on the face of it, Fine Gael’s proposed adjustment is about €900 million too low to achieve their targeted budget deficit, even if one accepts the Department of Finance growth rates. If this figure is added to FG’s tax measures, you would get €3.3 billion in additional taxes over 2012-2014, just €300 million lower than in the Four Year Plan. (I’d also note that €750 million of FG’s spending savings are actually due to transferring water provision to private firms that will collect these funds in water charges—these are spending savings that will feel like tax increases.)

During the campaign, Brian Lenihan has raised the issue of FG treating the current temporary asset sale measures as though they are permanent. However, this appears to be another case of glasshouses and stones. The Fianna Fail manifesto now claims that 2011 will see €5.9 billion in permanent deficit-reducing measures and only €110 in once-off other measures. And the FF manifesto now promises a figure for tax increases over 2012-2014 that is €650 million less than in the four year plan.

All of this raises a few questions: Have €600 million in once-off revenue raising measures been abandoned? If so, what are the permanent revenue raising measures that have been put in place to make up for them? If there are still €700 million in temporary measures in place, as Brian Lenihan seems to believe, then why are these not accounted for in Fine Gael’s plans or, indeed, those of his own party?

Update: From comment exchanges with FG officials below, I now see that I had missed that FG’s €8.8 billion omitted €1.2 billion in adjustments that occur in future years as a consequence of decisions taken in the 2011 budget. This additional €1.2 billion splits equally between spending cuts and tax increases. I don’t much like the way FG have presented the figures or calculated the tax\spend mix. Still, I’m going to score this one for FG and against Brian Lenihan.

The Fine Gael “Black Hole”?

I was accused yesterday in the comments of being biased against Fine Gael and for Labour. However, today I’m going to have to wave the yellow card at Labour for their role in the ongoing rumble about fiscal plans, specifically the supposed €5 billion “black hole” (e.g. here and here) in Fine Gael’s budgetary plans.

The issue relates to the following statement on page 29 of European Commission’s report on Ireland:

If the consolidation to reduce the deficit to 3% of GDP needed to be achieved by 2014, this would risk choking the recovery and further weakening the banking sector, possibly resulting in additional budgetary costs. The necessary additional budgetary effort in 2011-14 would amount to around €4 ½ to €5 bn, according to the Commission services forecast.

Fine Gael’s plans use what they call “the Department of Finance’s forecasts”, which presumably means the growth projections in the four-year plan (though it would be nice if they said that and produced a table being explicit about how their growth assumptions and other spending and tax promises translate into deficit ratios.) Based on this, they project reaching a deficit of 2.8% in 2014, just like the Four Year Plan.

Since FG are promising to deliver a deficit below 3% in 2014, does the Commission’s statement mean there is a €5 billion “black hole” in FG’s plans? Well, no. The additional adjustments that the Commission believe would be necessary to reach the 3% target stem from the Commission’s lower forecasts for the growth rate of nominal GDP. The Commission projects an average growth rate of 3.1% for nominal GDP over 2011-2014, compared with 3.9% in the Four Year Plan (and 3.85% in Labour’s projections.)

This means lower GDP and higher deficits in 2014 than are projected by the government and FG. However, FG are explicit that they will not introduce additional cuts to meet the 3% target in 2014:

We will review the pace and timeframe of the fiscal adjustment with the EU and IMF on an annual basis to take into account developments in the real economy. Should growth rates disappoint, we will continue with the same level of fiscal adjustment, but will avail of the extra year to reduce the deficit to under 3% of GDP offered by the EU-IMF Programme of Support.

Of course, it’s questionable whether the 3% target can be achieved by 2015 either and the IMF, freed from the strictures of having to pretend the Stability and Growth Pact matters, forecast that it won’t be.

Anyway, the black hole business is unfair to FG and the truth is that the differences between the overall stance of fiscal policy being proposed by FG and Labour are fairly small. FG planning to implement €9 billion in adjustments over the next three years, while Labour are planning to implement €7 billion. One can debate whether a slightly slower pace of adjustment is a better idea but the fact remains that policy will be severely contractionary whichever party gets its way.

When looking for black holes in the Fine Gael plan, one would be better off focusing on whether the promised efficiency improvements can really generate the predicting savings on the spending side.

Gormley On the Guarantee: The McWilliams Option

John Gormley on tonight’s Vincent Browne show:

Gormley: We had already discussed it for about a week on and off, we had discussed this. Some people, and I took the view too, that maybe nationalisation was the way forward. You have to remember the context.

Vincent Browne: You didn’t think that you as leader of the party that was in coalition government with Fianna Fail, you didn’t think that maybe you should get out of bed and go in to the Department of Finance where these discussions were going on.

Gormley: No because we had already discussed it Vincent. That’s the whole point

Vincent Browne: You went back to bed?

Gormley: Well, of course. I said “What is the option?” I remember speaking to Brian Lenihan and said “What option are we going for?” In fact, I can tell you what the exact words I used were “Are we going for the David McWilliams option?” That’s what I said on that particular evening. And he said yes. And as far as I was concerned that was the best option as I understood it at that time.

Vincent Browne: Because David McWilliams told you.

Gormley: Well, he is a person that I think a lot of people have respect for and we had discussed it. When I had mentioned nationalisation, he said “no, that’s not a good option at all.”

Vincent Browne: How come there was a bill presented to Brian Lenihan and Brian Cowen that night? There was a bill already drafted for the nationalisation of Anglo Irish Bank. How come that happened if nationalisation wasn’t on the table over the previous weeks or months?

Gormley: Well, that’s an interesting point because it’s the one that I have gone for myself, so I suppose the Department of Finance had just put that one in, just in case we didn’t decide for the guarantee.

The McWilliams Option might sound like a Robert Ludlum thriller. Unfortunately, this wasn’t fiction. This is a senior cabinet minister’s description of how the most important economic policy decision in the history of the state was made.