Today the ESRI has published a research bulletin summarising a paper entitled: The Macro-economic Impact of Changing the Rate of Corporation Tax by Thomas Conefrey (Central Bank of Ireland) and John FitzGerald (ESRI).
This paper considers the impact of changes in the rate of corporation tax in Ireland affecting the business and financial services sector. A model is estimated that relates services exports and output to world activity, competitiveness and the rate of corporation tax. This model indicates that a reduction in the rate of corporation tax in the 1990s stimulated exports and, even allowing for profit repatriations by foreign firms and replacement of lost tax revenue, it resulted in an increase in domestic output. The increase in profitability suggests that some of the increased output involved relocation of profits to Ireland by multinational firms.
The Research Bulletin is available here.
Today the ESRI has published a research bulletin summarising a paper entitled: THE BANKING SECTOR AND RECOVERY IN THE EU ECONOMY By Ray Barrell (NIESR), Tatiana Fic (NIESR), John Fitz Gerald (ESRI), Ali Orazgani (NIESR) and Rachel Whitworth (NIESR)
This paper considers how banks within Europe have become larger and more international as Europe has moved towards a unified financial services market, but this trend has been reversed since the crisis. In order to establish the effect of these structural changes on output in Europe, we use a micro data set to investigate the impact of size (as measured by asset size) on banks’ net interest margins. We show that larger banks offer lower borrowing costs for firms, which raises sustainable output. We then use NiGEM to look at the impact of banks becoming smaller and moving back into their home territory. We investigate the impacts on output according to country size, showing that the effects are generally larger in small countries, and also larger in economies that are more dependent on bank finance for their business investment decisions.
The Research Bulletin is available here.
The full version of the article is available at a fee here.
From today’s Irish Times,
Debt-forgiveness scheme not a realistic option, says Hayes
THE GOVERNMENT is set to resist growing calls for a debt forgiveness scheme for homeowners in mortgage distress.
Minister of State for Finance Brian Hayes said yesterday a proposal to write off up to €6 billion in personal mortgage debt was not a realistic option.
A spokesman for Minister for Finance Michael Noonan also indicated such a scheme was highly unlikely …. Mr Hayes, however, said there were “two huge problems” with the proposal.
“With any debt forgiveness, it will raise questions of fairness for people paying 100 per cent of their mortgages who are not getting any help from the State. It’s a huge issue for that group, who are already straddled with huge mortgages and who have not sought debt forgiveness.
“Secondly, the Government has put huge store behind the two pillar banks. To introduce debt forgiveness totalling €6 billion at a time when the Government is bringing those banks out of the A&E wards would be very difficult to justify,” he said.
These comments strike me as odd when one considers the underlying policy towards the Irish banks set out in the Financial Measures Programme (FMP) report, released last March and compiled with extensive (and expensive!) input from international consultants.
When Mr. Hayes talks about the “huge store behind the two pillar banks” I’m guessing he’s referring to the money being used to recapitalise them. Well, the recapitalisation requirements for these banks were dictated by the findings of the FMP report.
The report estimates total lifetime losses on the €74.4 billion owner-occupied mortgage portfolio for AIB\BoI\EBS\ILP at €5.7 billion in their base case and €10.2 billion in the stress scenario. These loss estimates were then used to come up with the capital requirements for each bank, most of which has been met by putting public money into the banks.
For those who say that they don’t think that their money should be used to help write down other people’s mortgage debt, there’s bad news and good news. The bad news is that it’s already happened. The taxpayer injections from the NPRF are covering mortgage debts that won’t be paid back. The good news is also that it’s already happened, i.e. implementing a debt relief programme won’t involve any additional costs to taxpayers over and above those already announced.
What this means is that the banks are sitting on mortgage losses that will be around €6 billion even if the economy recovers in line with the government’s projections. This €6 billion represents debt that simply will not be paid back and taxpayer funds have already been injected to cover these losses. At present, however, the banks are preferring to write these losses off as slowly as possible. But whether the day of writing down is put off some more or whether the banks actively engage in a write-down programme, these losses are being incurred.
Brian Hayes may believe that the “extend and pretend” approach currently being adopted, while failing to resolve the debt nightmares of many citizens, is at least beneficial for the health of the Irish banks. I don’t believe this to be correct.
A number of international financiers that I have spoken to recently have expressed serious disappointment at the slow speed with which Ireland is moving to write down mortgage debt. Their attitude is that they could deal with the Irish banks if they could see evidence that mortgage losses will indeed be limited to about €6 billion. However, at present, they do not see any “workout model” in place for dealing with Irish mortgage debt. In the absence of seeing how such a model will operate, they will continue to be nervous about the size of the unexploded “mortgage bomb.”
What this means is that it will be beneficial for both the banks and their distressed customers to get on with implemented a well-designed debt relief programme. Indeed, prior to the comments from Brian Hayes and Mr. Noonan’s spokesman, I was under the impression that the government would implement such a policy. Certainly, the public statements of Jonathan McMahon, head of banking supervision at the Central Bank, indicate a preference for the banks to get on with writing down with bad loans.
What should a well-designed mortgage write-down programme look like? Brian Hayes raises the issue of fairness as if nobody has ever thought about this before. In truth, a lot of thought and effort has gone into dealing with personal debt problems around the world and there is a lot to learn from. We’ve also been discussing it on this site for a long time, e.g. this post I wrote eighteen months ago.
A well-designed programme needs to deal with mortgages on a case-by-case basis. In some cases, this can involve modifications of mortgages in bilateral deals between banks and their customers. In some cases, those who get modified mortgages will get to stay in their homes. In other cases, they will not.
In more serious cases, a process of negotiations between debtors and their creditors will be required, i.e. a personal bankruptcy procedure. The revised EU-IMF programme from April (page 15) contains a commitment to introduce a revised personal bankruptcy regime as well as a new non-judicial debt settlement and enforcement system. It claimed then that discussions were ongoing and would be completed shortly.
In light of the EU-IMF commitments on debt regimes, the stress test results and recapitalisation, and the stated approach of the Central Bank, I think the comments from Mr. Hayes about the inability to write down €6 billion in mortgage debt are unfortunate.
Let’s hope there is more progress being made on this issue than these narrow-minded comments suggest.
My op-ed in yesterday’s Sunday Times (behind pay wall) expands on last week’s post. Here’s my version of the text:
The proposed reform of waste collection is a step in the right direction. Incineration is needed to meet our EU obligations. A few waste companies will lose money, but other companies and households will be better off.
The Department of the Environment is now moving to change the regulation of waste collection from “competition in the market” to “competition for the market”. Competition in the market does little for lower fees as few households shop around for the cheapest waste collector. Economies of density is another other reason to welcome this move. In my street, we have three bins (black, green, brown) and four companies collecting bins. Every fourth Monday, no less than 12 waste trucks drive up our road to the delight of the children and the annoyance of drivers. Three trucks (one company) could do the same work for a fraction of the cost, as they would spend less time driving and more time collecting waste.
That company would have a local monopoly. Monopolies charge more than competitive companies, but there would be cost savings for households too. Monopoly power is easily checked in this case. Waste collection concessions should be tendered, and granted to the company that guarantees the lowest fees for households. Such concessions should be renewed regularly, say every two years, to keep up competitive pressure.
The proposed change in regulation is a change for the good, therefore. It follows the recommendations in a number of reports, including the International Review of Waste Management Policy, commissioned by the previous Minister, and the Gorecki report of the ESRI.
A level-headed change in waste management is welcome in itself. The previous Minister openly campaigned against government waste policy, but did not change it. This was a source of much confusion and agitation. Investment and renewal in the waste sector ground to a halt. It can now start again.
The most urgent problem is that the European Union has put a cap on the amount of waste that can be landfilled. That cap has been in force for over a year now, but the government has yet to formulate a coherent plan on how to meet the target.
Incineration will be part of the solution. The proposed change in the rules for waste collection has been interpreted as a move to favour incineration. That is nonsense. The markets for waste collection and waste disposal are separate. Some people seem to think that waste collection and disposal must be done by the same company, but there is neither a legal nor an economic reason for this.
A number of Irish waste collectors have diversified into waste disposal, focusing on methods that curried political favour before the last election. Returns in waste collection are not great. Waste disposal looked more lucrative with the EU cap on landfill. That changed with the prospect of a large incinerator in Poolbeg. Incineration is, after landfill, the cheapest way to (legally) dispose of waste. Irish waste disposal companies have complained loudly about incineration – because they know they cannot compete. Waste collectors would be fools not to send their waste for incineration.
The Poolbeg incinerator is not without its faults. There would be few environmental or health concerns if it is properly run, but it is not sure that the Environmental Protection Agency has sharp enough teeth to stand up to a large, multinational company. The incinerator is financed through a mechanism that is, as far as I know, unique to Ireland. If the incinerator turns a profit, the spoils go to the shareholders. If it turns a loss, the taxpayer makes good the difference. The Poolbeg incinerator shares this peculiar model of privatizing gains and socializing losses with, among others, toll roads, renewable energy, and of course banks.
This does mean that the incinerator can charge lower fees if it needs to increase its market share. The Minister decided not to impose a levy on incineration. As there are small external costs from incineration, this is an implicit subsidy. The incinerator will therefore be a fierce competitor in the waste disposal market. Irish waste companies are right to be worried.
At the same time, the reform of waste collection is good news for them. Profit margins should be better if local monopolies are sold through a competitive tendering process.
The tender process should be well organized. That would be a task for the county councils. A number of county councils still run their own waste collection business. It is hard to see that tenders of private companies would get a fair hearing. The tendering should therefore be outsourced to an independent body or the public waste collection businesses should be privatized. The Commission for Utilities Regulation should oversee the tendering.
[UPDATE: See new CEPR paper; h/t Constantin Gurdgiev]
But if the new regulations are properly implemented, households and small companies should benefit. The government is working to reduce the costs of waste collection and waste disposal. Many things can still go wrong, but there is movement in the right direction.