Author: Karl Whelan

Ghost Estate Report

From the Department of the Environment “Mr Michael Finneran, T.D., Minister for Housing and Local Services, and Mr. Ciarán Cuffe, T.D., Minister of State, with Special Responsibility for Planning, Sustainable Transport & Horticulture’, today (21 October, 2010) published a National Housing Development Survey.”

In other words, the Ghost Estate report has been published. For reasons best known to themselves, the DoE has only released a summary (link to a Word document here) so far. Is it so difficult to generate a PDF and stick it on the website?

Anglo SubDebt Buyback Offer Announced

Anglo Irish Bank have announced buyback offers for their subordinated bonds. The holders of the €1.5 billion in dated subordinated notes have been offered 20c on the euro, so this will cost the bank €300 million. The holders of the undated perpetual preferred securities (about €700 million outstanding according to page 56 of Anglo’s interim report) are being offered 5c on the euro, at a cost of about €35 million.

It appears that those signing up for the offers also have to vote to give the bank “the right to redeem all, but not some only, of the Existing Notes of each Series at an amount equal to €0.01 per €1,000.” In other words, if a majority of the bondholders acccept the deals on offer, then those who don’t accept will get essentially nothing.

It is disappointing that there has been no statement explaining this decision on the Department of Finance website. With €335 million of taxpayer funds being offered, the public should get a full explanation of why this is money well spent.

Promissory Notes: We Need A Powerpoint Presentation!

Okay, here’s a real treat for all our fans of all things promissory-note related. A classic Burton-Lenihan exchange in the Dail today. My favourite bit:

Deputy Joan Burton: We need a PowerPoint presentation on this.

Deputy Brian Lenihan: We do not.

Deputy Jim O’Keeffe: We need lots of money for this.

Full text below the fold.

Continue reading “Promissory Notes: We Need A Powerpoint Presentation!”

New European Treaty?

I don’t have time to write about this in detail now but reports that Germany and France are pushing forward with the idea of an amendment to the Lisbon Treaty are an important development (news story here and a nice article by Arthur Beesley here). Apparently they want to use a new Treaty to formalise the sovereign bailout fund that is currently set to expire in 2013 and to formalise sanctions for states that break new EU budget rules.

These announcements appear to hijack what was an ongoing process involving the Commission and a task force chaired by EU President Herman van Rompuy. This process had just arrived at this package of significant reforms, which the accompanying press release had emphasised were “compatible with the existing Treaty of Lisbon”.

I’m pretty unenthusiastic about this. I don’t see why Treaty reform is required to formalise a sovereign bailout fund, when the thing is currently up and running without any Treaty change. The political sanctions element doesn’t strike me as desirable. And the whole idea seems to underestimate the complete lack of appetite of the European public for more Treaties and referenda.

Given that this would require a referendum in Ireland and what would be on offer would be the possibility of political sanctions for Ireland, one might imagine the people who worried about us potentially losing a Commissioner under Lisbon might also get a bit excited.

Budget Calculation Update: Promissory Note Interest Payments

It was always going to be unlikely that the process of briefings for opposition parties would be kept secret. However, with what appears to be authoritative and pretty detailed information all over today’s Irish Independent, it may just be best if the Department of Finance publicly released the briefing information it provided to the opposition politicians yesterday.

One of the more mysterious aspects of the budgetary finances is the magic promissory notes. By my count, we will have issued about €30 billion of these by the end of the year: About €25 billion to Anglo and about €5 billion to INBS.

In this post earlier today, I pointed out that while the principal payments on these notes didn’t count against the general government deficit (because these will all be registered as part of this year’s deficit) they will still be part of our ongoing financing requirement in the coming years.

I didn’t write earlier about interest payments on these notes (the figures I was writing about were just my guess about the annual principal payments). One reason I didn’t discuss interest payments is that I wasn’t sure there were any: They could just be zero coupon bonds. However, it looks as though they are not. On Prime Time this evening, Joan Burton and government junior minister Billy Kelleher agreed that the annual interest cost of the promissory notes was going to be €1.5 billion. With €30 billion or so in notes issued, it now appears that the notes have an interest rate of 5%.

Now, as far as I know (and I’m happy to be corrected) these promissory note interest payments of €1.5 billion a year will count against the general government deficit.

Here I’ve updated the calculations from my Irish Taxation Institute presentation to incorporate the “if the promissory notes pay 5%” scenario. The bottom line?  If one adjusts last year’s budget projections for (a) New projections from the Central Bank for nominal GDP (b) A projected decline in revenue of €1 billion (c) €1.5 billion in promissory note interest payments, then the starting point for this year’s budget prior to any adjustments would be a deficit of €22.5 billion or 13.9% of GDP.

Note that even if one didn’t factor in negative effects of fiscal adjustments on GDP, then with a Central Bank GDP projection of €162 billion, hitting the original deficit target for 2011 of 10% of GDP would require adjustments of €6.3 billion (162*0.039). Factoring in the contractionary impact of budget cuts on GDP, it would likely take €7 billion in adjustments to get to a 10% target.

As I say, these calculations are based on a 5% interest rate on the promissory notes. My interpretation from Minister Kelleher’s apparent confirmation of Burton’s comments is that this is the correct rate. However, I think it’s time for the government to fully clarify the terms of these notes as soon as possible.