The latest report of the Independent Fiscal Advisory Council can be read here.
Category: Uncategorized
The CSO released its Q4 2011 data on Ireland’ international balance sheet last week. Putting together the full-year data for 2011, Ireland’s net external position fell by 11.3 percent of GDP in spite of the small current account surplus.
In order to fully understand the sources of this measured decline, it would to good to know more about the relative contributions of valuation changes and data revisions to the 6.8 percent of GDP “stock-flow adjustment” component of the net decline and also possible explanations for the 4.5 percent of GDP “net errors and omissions” that drive a large wedge between the small current account surplus and large measured net capital inflows. (Unrecorded capital flight must be part of the explanation, which would suggest that the decline in the overall net position is overstated.)
Seamus has an introduction to this quarter’s DAFT report on asking prices for property across the country. This report is compiled by Ronan Lyons. The introduction is worth a read, with a key piece being:
A house in a particular estate may have sold for €350,000 because one bank was willing to lend one purchaser the money for such a transaction. The other banks provided similar mortgages to other buyers on the basis that the first transaction provided the “market value”.
The price reflects the amount of money that someone is willing to pay for a good. Value reflects the benefits that a good can offer. In most cases, these are the same but this does not have hold. Residential property provides accommodation service. As a result of the madness of the boom, we now have thousands of households paying a price for accommodation far in excess of the value they are receiving.
This reality must be addressed and the burden of the mortgage debt is largely a function of the actions
of the banks so they must offer what ever forbearance is necessary to assist households. The banks must also realise that there are thousands of homeowners who will never be able to repay the huge loans they issued to them. It is very difficult to gauge the number of unsustainable residential mortgages that need to be ended but it could be anywhere between 15,000 and 30,000. These are households who are in deep mortgage arrears and negative equity and have little prospects of recovery.The banks must face up to losses that exist on these loans. The homeowners must accept that they will never be in a position to repay the loan and that by surrendering the property they will be able to make a fresh start. Households with unsustainable mortgages must be allowed to do so.
The European Commission has published its new set of policy options here. There is now a four-week consultation period with key stakeholders.
Speaking at the European Parliament on March 24, 2010, former European Central Bank President Jean Claude Trichet held up Ireland as the poster child for fiscal austerity in 2010 and 2011. While trying to push through similar austerity measures in Greece and Portugal, Mr. Trichet endorsed Ireland’s approach to austerity, saying:
“Greece has a role model and that role model is Ireland”.
Some months later, Jurgen Stark agreed with him. We’re the bailout role models.
When the ratings agency Moody’s downgraded Ireland’s credit rating to junk status in July 2011, they explained what was need to change the ratings again:
“upward pressure on the rating could develop if the government’s continued success in achieving its fiscal consolidation targets, supported by a resumption of sustained economic growth, is able to reverse the current debt dynamics, thereby sustainably improving the Irish government’s financial strength”.
Ireland is repeatedly described as a perfect example of a housing boom and bust, a perfect example of a small open economy, a perfect example of how to implement austerity measures, and a perfect example of how a country can manage it’s way through a crisis.
In what other way are we an example?
We are on the road to recovery, we are told, and we are told that are European partners are helping us in this regard. This is certainly true–the European authorities have prevented large scale austerity by loaning us tons of cash, but their cash, like all loans, comes with a price. And that price seems to be that we are held up as both cautionary and salutary example.
Bundesbank Chair Jens Weidman recently said that:
“the impression cannot arise that the ban on monetary financing can be circumvented here…if this is a normal, reasonable market process, then I have no problem with it. Otherwise, it looks difficult to me.”
The impression. After the EU/IMF bailout the fear was the punitive interest rate that Ireland was paying for its loans was designed to scare other European nations considering entering bailout programmes. Loads of people brought this up at the time of the bailout, but here’s Morgan Kelly:
…the sole purpose of the Irish bailout was to frighten the Spanish into line with a vivid demonstration that EU rescues are not for the faint-hearted.
Now we are told the impression must not be given that monetary financing is a route out of funding difficulties. The ECB statement after Minister Noonan’s announcement of the promissory note deal Ireland’s ELA experience mustn’t be repeated across the Euro area is proof positive that no deal on the promissory note repayment schedule will be forthcoming from them:
It is very important that the Irish state will honour the 3.06 billion euro amortisation of the promissory notes. This will reduce the emergency liquidity assistance which IBRC receives from the central bank of Ireland and thus the Eurosystem.
We certainly expect that also in the future the promissory notes will be served according to the schedule to which the government has committed itself.
But at the same time the impression must still be given that Ireland is working its way through its problems. If it doesn’t then how can we be an example to others?