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.
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.
This analysis piece in the FT provides an interesting overview of the role of SWFs during the crisis (including Ireland’s NPRF).
This new IMF paper studies fiscal adjustment in the wake of banking crises. One empirical finding is that large fiscal gap require increases in revenue in addition to expenditure cuts.
Summary: This paper analyzes the experience of 99 advanced and developing economies in restoring fiscal sustainability during 1980 – 2008 after banking crises, which led to large accumulation of public debt. It finds that successful debt reductions have relied chiefly on generation of large primary surpluses in post-crisis years through current expenditure cuts. These savings have been accompanied by growth-promoting measures and a supportive monetary policy stance. While these results are consistent with the existing literature, the paper finds that revenue-raising measures increased the likelihood of successful consolidation in countries that faced large adjustment needs after the crisis. This reflects the fall in effectiveness of spending cuts when deficit reduction needs are large independent of initial tax ratios.
Stephen Collins writes in today’s Irish Times that “Fine Gael also had the courage to support the bank guarantee which, despite the Anglo shambles, was in principle the right thing to do as the governor of the Central Bank, Patrick Honohan, has repeatedly said.”
The guarantee was perhaps the most momentous policy decision in the history of the state. Unfortunately, the standard of commentary on this decision from prominent media columnists has, in general, been pretty lamentable. Here, Mr. Collins repeats a talking point that has been rolled out repeatedly by government TDs. Well, repetition of a talking point doesn’t make it true.
As I’ve noted here and elsewhere, there is a world of difference between Honohan’s support for a guarantee and the idea that he supported the guarantee that was actually put in place.
And again contrary to a widely repeated talking point, Honohan’s primary objection to the form of the guarantee was not the inclusion of subordinated debt but rather the inclusion of almost all existing long-term bonds. He argued that this inclusion “complicated eventual loss allocation and resolution options” and that it “pre-judged that all losses in any bank becoming insolvent during the guarantee period – beyond those absorbed by some of the providers of capital – would fall on the State.” In other words, it worsened the cost of what Collins calls “the Anglo shambles.”
These comments were consistent with Honohan’s previously-expressed opinions on this issue, as shown for example in this article published in the Economic and Social Review in 2009, published a few months before he was appointed Governor.
No public indication has been given that the authorities gave serious consideration to less systemically scene-shifting – and less costly – solutions. For example, they might have provided specific state guarantees for new borrowings or injections of preference or ordinary shares – approaches that were widely adopted across Europe and the US in the following weeks.
Footnote 15, placed after the word “costly” in the above paragraph, reads as follows:
Blanket guarantees are among the “accommodating” approaches to crisis policy shown by Honohan and Klingebiel (2003) to have added considerably to the fiscal costs of banking crises around the world.
The working paper version of this 2003 publication is available here.
We also know now from the documents released by the PAC, that the form of the guarantee that was given was not recommended by the government’s own advisors Merrill Lynch, nor is there evidence that senior civil servants were recommending this approach either. So, at this point, the last refuge for those who want to argue that the government’s approach on September 30 was the right decision is this misleading Honohan-supports-it talking point.
For what it’s worth, also, I think one could argue just as strongly that it was Labour who showed more courage in objecting to the guarantee: Indeed, to this day, Labour are still getting flak from government politicians and commentators like Collins for failing to fall in line with the consensus to support the guarantee. Moreover, my understanding of Fine Gael’s position at this point is that they consider themselves to have been essentially misled by the government into supporting the guarantee.