The Central Bank have been publishing data on mortgage arrears for some time now. On Friday, the Bank released some very useful additional analysis in the form of a paper by Anne McGuinness (press release here.) The paper provides new information on the extent of negative equity and also on buy-to-let mortgages, which are not covered in the Bank’s usual quarterly arrears figures.
Category: Banking Crisis
The Irish Times ran a series on water services in Ireland.
The first article is perhaps the most interesting. It leaks the yet-to-be-published report on the water sector by PWC. PWC will apparently be fairly critical of the current system, which nicely fits with the plans by the Minister for a radical overhaul. There will be more investment in water infrastructure. There will be a water regulator. Word on the street has that the Commission for Energy Regulation will have its mandate extended to water (but not to transport). There will be national water utility. Bord Gais, Bord na Mona and the National Roads Authority are bidding to run Irish Water. Only Bord Gais has experience in mass retail.
The piece discusses the transfer of Shannon water to Dublin, but the Minister disappears from the story at that point. I would think that we first want to promote water conservation and fix the leaks.
The piece is silent on the future role of the county councils in water. If Irish Water runs the show, what will happen to the water infrastructure owned by the county councils? What will happen to the civil servants who run this?
Another article wonders what will happen to the private water schemes. Will they be nationalized? Will households with a private well and a septic tank have to pay the water charges? That would be grossly unfair.
The inspection fees for septic tanks are unfair too. Us city folk poo for free — or rather, waste water services are covered from general tax revenues. That is, septic tank owners pay for urban waste water, but city dwellers do not pay for rural waste water.
The second main piece is on drinking water quality, the problems with which are typically overlooked even though they are serious.
The third main article is on water meters. It is summarized in an editorial, and repeats a number of points I made in August. My main concern is the plan for the centralized roll out of water meters. I think that it makes more sense to have people install their own meters and let these meters use the same communication network as the smart electricity and gas meters. See the discussion here.
Conor Pope cites 1000 euro per household per year. I said that. If we maintain the current spending on water (incl. investment), if we keep the business rates for water as they are, and if we exempt those on private schemes from the water charges, then full cost recovery (as required by EU legislation) implies an annual charge of 500 euro per household per year.
On tonight’s edition of The Frontline on RTE, Gavin Blessing, Head of Bond Research at Collins Stewart made some comments about repayments of ELA liabilities by the IBRC (i.e. Anglo-INBS) that I’d like to elaborate on. Gavin pointed out that IBRC’s major liabilities are to the Central Bank of Ireland. Indeed, I estimate that IBRC now owes about €42 billion in ELA to the Central Bank.
Gavin then followed this up by saying that we would be “burning ourselves” if we cancelled these payments to the Central Bank. This is a complicated business and I fully understand Gavin Blessing expressing the situation in this way. However, I would like to emphasise that it is my understanding that there is no offsetting financial gain to the Irish state from the IBRC’s repayment of Emergency Liquidity Assistance to the Central Bank.
The details are below but I can summarise this issue as follows: Channelling taxpayer funds towards repayment of ELA is equivalent to burning public money.
Let me start by describing the information communicated by a central bank balance sheet, such as this one for the Central Bank of Ireland. Central banks could create money by following Milton Friedman’s analogy and dropping it from a helicopter. However, helicopter drops are neither efficient nor fair. So the long-standing tradition has been for central banks to issue money by acquiring assets via open market operations.
Central bank balance sheets thus show you the assets that a central bank has accumulated via its money issuance. At some point in time, somebody decided it was a good idea to place the money that was issued to acquire these assets on the “liability” side of this balance sheet. I’m not sure this was such a great idea as central bank balance sheets can cause a lot of confusion. Suffice to say, however, these liabilities are somewhat theoretical. If someone brings a banknote to the Central Bank, the only thing they can exchange it for is other banknotes that the cost the Bank almost nothing to print.
That over with, the accounting treatment for Central Bank’s issuance of ELA can be described as follows.
1. The Central Bank provided ELA by crediting, for example, Anglo’s reserve account that it holds with the Central Bank. This was just the Central Bank creating electronic money out of nowhere and this new money was counted as a liability on the Bank’s balance sheet. In particular, this shows up in “Other Liabilities” on the CBI’s balance sheet.
2. On the other side of the balance sheet, the money that Anglo then owed back to the CBI as a result of the ELA is counted as an interest-bearing asset for the CBI.
Now consider the repayment of part of the ELA by the IBRC. For example, consider repayments funded by IBRC’s annual receipt of €3.1 billion in promissory note payments. One could imagine two possibilities for what happens next.
One possibility is that the following happens. A €3.1 billion repayment gets taken in by the CBI who can then, for example, buy German bonds with it and ultimately use the interest payments on these to pay money back the government when they make profits. In this case, the amount of money created from the original operation doesn’t change and the Central Bank’s ELA asset gradually turns over time into other, more tangible, financial assets. It is likely that this is what Gavin Blessing thinks is happening.
The alternative possibility is less attractive. The Central Bank takes in the €3.1 billion repayment and then deducts this from the value of its ELA asset. On the liability side it reduces “other liabilities”—the idea is that taking in this €3.1 billion is effectively siphoning off part of the money that was created in the original ELA operation. In this case, no new securities are purchased by the Bank. The €3.1 billion is effectively being burned.
The available evidence indicates that the latter, less attractive, mechanism is what occurs.
Earlier this year, the Irish government deposited a large amount of money in the Irish banks; this money was later converted from a deposit liability into equity when the banks were recapitalised. When the banks obtained these funds, they reduced their ELA debts to the Central Bank of Ireland.
A quick look at the Central Bank’s balance sheet shows that “other assets” (which we know is mainly ELA) are down by €17 billion since February. Other liabilities are also down by €19 billion. There is no sign of any jump in the Central Bank’s holdings of other securities as a result of the ELA repayments. There is no hidden positive story at the end of the ELA rainbow.
So why repay it at all? Well, if we don’t repay this money, the Central Bank’s ELA operation will have been equivalent to flying a helicopter over the IBRC, dropping €40 billion and not asking for it back. A jolly good wheeze for the bondholders and depositors who got paid back but possibly not a good precedent for the Euro area. If every Euro area country could do that with their troubled banks, there would be no banking problems but there would probably be a decent amount of inflation.
So our European partners would consider failure to repay ELA to be bad form. But that still seems to leave the pace of repayment, and the funding of this repayment, as very much an open question. In the meantime, let’s not kid ourselves about hidden benefits from these payments.
Ireland’s rail gauge, the distance between two load bearing rails that make up a single railway line, has a strange history. The standard gauge is 4ft 8inches. Ireland’s is 5ft 3inches. During the 1800s, each new railway line chose its own gauge, and in 1845/6, a commission was set up to essentially split the difference, meaning that Ireland has one of the most unique (and uniquely expensive) rail gauge systems in the world.
Splitting the difference might work to get an issue through a committee, but it does not often help in solving practical problems.
In a similar vein, Ireland’s medium term fiscal plan has been published. The document is here. Looks like the government has not taken the ‘front loading of pain’ approach advocated by some commentators, nor the avoidance of austerity championed by others, and gone for a 3.8 billion euro, ahem, adjustment, this year.
I leave it up to commenters to judge the merits to this approach. The document makes for interesting reading. Chapter 4 in particular is an analysis of the debt position (and sustainability, obviously) of the State.
The talking point about repayment of Anglo bonds not costing the taxpayer any money had received a sufficiently wide rollout that it was clear that this was something government politicians were being told was a good thing to say. Via Constantin, here is a note from the Department of Finance apparently distributed to government TDs.
The note tells the politicians that “It is important to state that the redemption of the bond will be made by the IBRC. It will not be funded by the Exchequer.”
Is it really important to state that? Why? So someone sitting at home might think that we’ve stumbled upon some money that eases the burden of paying the bonds, even though the US assets were being sold at a loss? So they might forget that the alternative to using the money to pay off the bonds is to return it to the exchequer?
Anglo has lost all of its equity capital multiple times over and has been continually recapitalised by the state. Money is fungible. All resources being used to pay off the bonds are state resources.
This talking point doesn’t work. Time to give it a rest. Please.