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It is not the first time but the estimated 10-year yield on Irish government bonds has again fallen below 3 per cent.  Here is a snap-shot of the yield curve this morning from this site.

The reasons for these historically low rates can be bounced around but it would be more useful if we could actually take advantage of them.  Ireland has an enormous public debt but the structure of it is such that very little is close to maturing and in need of rolling over.  In the EZ17 Ireland has a very low refinancing need (Latvia is excluded).

At the end of December the blended interest rate on the €22.5 billion of IMF loans that Ireland has accessed was 4.16 per cent.  These loans have a weighted average life of 7.3 years.  The above table gives an indicative rate of under 2 per cent for Irish government debt of equivalent maturity.  Two per cent of €22.5 billion is €450 million.

Replacing the official IMF loans with private funding seems attractive but the IMF loans cannot be repaid early without also triggering early repayment clauses in the €45 billion of EFSM, EFSF and bilateral loans from EU countries.  The details of these clauses are in this PQ answer.

Compared to the IMF loans, the EU loans have lower interest rates and much longer maturities.  Repaying them early would not be prudent given the uncertainties and possible unknowns that remain.  However, raising money now for loans which begin amortising next year anyway would only raise the funding target of the NTMA to the average EU levels (in GDP terms) as shown in the chart.  On the other hand it is not clear what impact such an action would have on interest rates but a significant impact would seem unlikely.

There are reasons on several sides for keeping the IMF as part of the ongoing Troika supervision of Ireland but are there €450 million worth of them?

The OECD’s unit working on the Base Erosion and Profit Shifting (BEPS) project have been releasing documents based on the points in the Action Plan published last year.  The full set is here.

Yesterday, a discussion document for Action Point 1: Taxing the Digital Economy was published.  It is a very wide-ranging document.  One of the notable suggestions are the proposals to allow/force the greater taxation of companies selling digital products in their “market jurisdictions”.  This primarily arises from the ability of such companies to circumvent the existing rules on permanent establishment because of the intangible nature of the product.

The proposal is not a move to formulary apportionment. The document puts forward proposals to alter the existing source principle of corporation tax to try and ensure that more/some of the profits earned by these companies are attributed to the country of their customers using changes to PE rules.  Other proposals include the new concept of a “virtual” permanent establishment, the creation of a withholding tax on digital transactions and the use of consumption tax options.

There is a lot in the document and some extracts summarising the problems the OECD group are trying to tackle in this area are below the fold.  Whether there will be any effective solutions by the end of the process remains to be seen.

On the 28th of March at the Aviva conference centre, a conference looking at what’s next for Ireland will take place in the context of Ireland’s new economic governance rules. The programme is here. The conference is organised by the European Commission and the Dublin Chamber of Commerce.

I have blogged before on the potential applications of behavioural economics to public policy in Ireland. A lot of attention has been given to policies that change individual behaviour in potentially welfare promoting directions (See Tim Harford’s summary of this in the FT). An interesting question is the implications of moving to a model of consumers with bounded rationality and self-control for regulation and competition policy. A number of recent documents in the UK and US are relevant for this.

This excellent FCA occasional paper examines the potential implications of behavioural economics for financial regulation. It should be noted that “nudging” is a subset of the policies that might follow behavioural market tests. Many of the potential policies discussed in this document are hard interventions rather than soft nudges. They also extend across regulators. For example, on page 45 they outline recent moves by Ofcom to ban autorenewal of internet contracts and OFT to ban certain types of gym membership contracts.

In some senses a more radical document by Barr, Mullainathan and Shafir from 2008 outlines a new approach to consumer regulation based partly on the notion of “sticky defaults” whereby firms would be required to default people into the most desirable option based on their characteristics and only move them if they make choices following being provided with clear information. Such models are discussed in relation to two markets fraught with behavioural bias and consumer exploitation, namely credit cards and mortgages. The document also sets out proposals for changing the incentives of brokers.

Far from the collection of isolated “nudges” that forms much of the public debate around behavioural economics, what has unfolded in recent years is a body of theoretical and empirical work that simply gives better predictions and foundations for regulation than what preceded. There are clearly many insights in this literature that have implications for Irish regulators and are worth debating further.

Examples of the applied questions raised by the recent literature include:

Should credit card variable and teaser rates be banned or at least taken out of the regular offers made to consumers?

Should mortgage providers be forced to disclose better deals available to their customers?

Should pay-day lenders be granted full access to the Irish market? If so, how do you regulate them?

Should autoenrolment proceed in Ireland, what provisions should be put in place so that companies do not exploit naïve consumers by charging fees well in excess of regular rates?

Do behavioural biases prevent annuities markets from functioning optimally?

Clearly, many of the above questions are more than just empirical questions or issues of economic theory. They also relate to political issues and wider issues of freedom of choice. Policies such as pension autoenrolment have proved quite popular as they are, in some sense, a win-win in encouraging savings among non-traditional savers and providing extra customers for financial providers. However many of the above policies are likely to be far more contested by interest groups and it will be good to have an open debate on their merits.

Notes:

A reading list from my research blog here.

A short blogpost I prepared summarising the FCA document with some other readings on regulatory and consumer exploitation issues.

Pete Lunn at ESRI has written about policy implications in a number of documents (see recent OECD review paper here).

I got the chance to read this book over the last few days – it is definitely a “must read” and a major achievement.  The Free Exchange blog is running a “book club” for this book – the various entries are here.