Category: Fiscal Policy

State Gains from “Error”

Fairly amazing story

The general Government debt is to be written down by 2.3 per cent, or €3.6 billion, following the detection of an accounting error.

The Department of Finance said the National Treasury Management Agency (NTMA) had notified it of a double count brought about a change in its relationship with the Housing Finance Authority.

Does this mean we can cancel the €3.6 billion budgetary adjustment? (Just kidding).  Now if only we could correct the “error” of supplying the IBRC with €31 billion in promissory notes, we’d be saved.

How Would a Greek-Style Haircut Affect Ireland?

Someone asked me today how a Greek-style haircut for private bondholders would impact on the Irish debt situation if applied here. Without any claim that this is a prediction for what could happen to Ireland, or a policy recommendation, here are the calculations.

While the figure grabbing the headlines is the 50%-60% haircut for private holders of Greek sovereign bonds, it appears that the bonds bought by the ECB will not be written down, nor will the IMF loans. FT Alphaville discuss a UBS report that calculates that a 50% haircut for private bondholders actually implies a 22% reduction in total debt.

In Ireland’s case, the latest EU Commission report estimates (page eight) that our year-end general government debt will be €172.5 billion or about 110 percent of GDP. The report also estimates that by the end of this year, we will owe €38.2 billion to the EU and IMF.  (Table 4 on page 23).

We don’t know how much Irish sovereign debt the ECB own but it’s believed to be a large amount. I do remember a report from Barclay’s claiming they owned €18 billion by June 2010. Let’s say ECB owns €22 billion of Irish debt (that’s just a guess, I really don’t know). Combine that with €38 billion from EU-IMF and you have €60 billion in debt that wouldn’t be getting a haircut. Better guesses of ECB holdings of Irish sovereign debt are welcome.

Now apply a 50% haircut to the remaining €92.5 billion of our debt and you reduce the debt by €46.25 billion, or 29 percent of GDP, getting the debt ratio down to 81 percent. (Of course, we’d still be running large deficits, so it would start increasing again.)

So that’s the answer. Perhaps worth noting, however, is that an alternative method of writing down Ireland’s debt by close to 30 percent of GDP without haircutting private bondholders at all would be to have Anglo’s ELA debt to the Central Bank of Ireland written off.

According to its interim report Anglo owed €28.1 billion in ELA at the end of 2010 but this had risen to €38.1 billion by the end of June. This is because Anglo transferred €12.2 billion in NAMA senior bonds to AIB in February to back the deposits that were being moved out of the bank.

On July 1, Anglo was merged with Irish Nationwide Building Society (INBS) to form what is now called the Irish Bank Resolution Corporation (IBRC). As of the end of 2010, INBS had €7.3 billion in loans from the ECB. However, €3.7 billion of this was backed by NAMA bonds and other assets that were transferred to Irish Life and Permanent. INBS has been in receipt of ELA since February to replace this lost funding. While this has been admitted by a Department of Finance official (see this story) the exact figure has not been released. I assume it is about €4 billion.

So my estimate is that the IBRC now owes about €42 billion in Emergency Liquidity Assistance to the Central Bank of Ireland. If the European authorities ever decide they like the idea of haircuts for Irish debt, it would be fair to ask which of a fifty percent haircut or a write-off of ELA would be more likely to damage Ireland’s reputation or cause financial market contagion.

Income Tax Rates

I’d be interested to know the source of the figures cited in this article by Vincent Browne on income tax rates paid by higher earners. It certainly isn’t the last Revenue Commissioners statistical release on tax payments by income distribution, which relate to 2009. Anyway, it’s interesting to compare the figures reported in the article with the tax payments generated by plugging in the same salaries into this useful online tax calculator.

Cycle to Work

I was struck by the amount of press coverage of the Cycle to Work scheme (C2W). The Irish Bicycle Business Association (IBBA, which seems to have no website) launched a report (which cannot be found online) praising the virtues of C2W.

The report in the Irish Times is brief. 90,000 bikes have been sold since the scheme was introduced. There is no estimate of how many bikes would have been sold without C2W. The IBBA spokesperson claimed that “cycling journeys have increased by more than 50 per cent”, which may or may not be due to C2W, and may not be true as Irish data on travel and transport are sparse. The Dublin Canal Crossing counts (h/t Ossian Smyth) surely do not support a 50% increase.

RTE, BusinessWorld and the Irish Examiner add that 50 new bicycle shops have been established, and 767 new jobs created. They note the increase in the number of bike-based charitable events. And they cite the example of Temple Street Children’s University Hospital, which apparently has kept excellent records of how its employees travel to work.

SiliconRepublic has the most extensive story. It cites a LSE study that shows the commuting by bike improves your health. Such studies are plagued by endogeneity: Are cycling people fit, or do fit people cycle? McNabola et al. (2008) show, for Dublin, that cyclists (who breathe differently) are particularly exposed to PM2.5 and VOC.

The Irish Independent interviewed a bike shop owner. He notes that, since C2W, people buy more expensive bikes and that the success of his business is due to C2W.

C2W is a subsidy on the purchase of a new bicycle. You would indeed expect that people would then buy more and more expensive bikes, which is good for bike shop owners. C2W was one of the first policies introduced by then-Minister Eamon Ryan, who once owned a bike shop (see here).

C2W is unrelated to the use of the bike. Even without the C2W, bicycles beat cars on cost. I find it hard to believe that C2W has induced many to cycle to work instead, but I am aware that there no data to support this.

Feasta Conference: National Strategies for Dealing with Ireland’s Debt Crisis

Feasta (The Foundation for the Economics of Sustainability) are holding an interesting conference on Thursday and Friday of this week titled National Strategies for Dealing with Ireland’s Debt Crisis: Exploring the Options. The webpage for the conference is here and the conference programme is here.