First estimates of the costs of the climate bill

As another sign of the rushed introduction of the climate bill, the first estimates of the costs of the climate bill are published in a newspaper. O Gallachoir’s estimates are based on a model which is still under active development (rather than on a model which has been vetted and peer-reviewed — this is due to the starting date of the modelling project). Note that UCC is way ahead of the ESRI here: We still have to figure out how to estimate the economic impacts of targets this deep; the measures included in our model are not sufficient. The regulatory impact assessment has no cost estimates.

So, we are essentially asked to sign up to something we do not understand.

UPDATE: The IFA argues, rightly, that it is peculiar to introduce the climate bill next Wednesday when the public consultation is still ongoing. This reminds me of the waste bill, also imminent, for which the results of consultation are still not made public. Which is the party again that “believe[s] […] in a political system that is transparent“? (Hint: click the link.)

EU Commission Document on Bank Resolution Framework

The European Commission has released a “working document” that “seeks views on the technical details of a possible EU framework for the management of failing credit institutions and an appropriate class of investment firms.” There’s a press release here and an FAQ here.

The document contains a lot of sensible proposals that would lead to a common future European approach to dealing with failing banks, in contrast to the chaotic and disorganised approach that was seen during 2008-2009.

There’s plenty in the document worth discussing but, given the particular focus of this blog, it is clear that the most interesting aspect of the document is the annex starting on page 86 titled “Debt writedown as an additional resolution tool”.  It’s worth reading in whole but here’s the basic idea:

Thus, to provide additional flexibility and to ensure that any write down power is sufficient to deliver the policy objectives, this consultation outlines two possible models for additional write down powers. Building on the minimum powers above, the first ‘comprehensive’ approach aims to make a broad range of senior creditors face the real risk associated with bank failure. The second ‘targeted’ approach aims to create a more focused tool for resolving in particular, institutions which have been assessed as likely to prove difficult to resolve with traditional resolution tools at a time of fast moving idiosyncratic or systemic crisis.

Resolution authorities could be given a statutory power, exercisable when an institution meets the trigger conditions for entry into resolution, to write off all equity, and either write off subordinated debt or convert it into an equity claim. However, in some cases this will not be sufficient to ensure that an institution in difficulty returns to viability so as to maintain market and creditor confidence when the markets next open. (For example, RBS’ balance sheet at the end of 2007 contained £38bn in subordinated liabilities, while losses before tax in 2008 amd 2009 amounted to around £43bn.

As is de rigeur these days the Commission argues that “Such a power would only apply to new debt issued (or existing debt contracts renewed or rolled over) after entry into force of the power.”  In other words, existing European senior bank debt cannot take a haircut in this way.

However, the problem with this argument, as well its sovereign cousin (the idea that only post-2013 sovereign debt will be open to restructuring) is that it is subject to what economists call time inconsistency. As described by Wikipedia, “time inconsistency describes a situation where a decision-maker’s preferences change over time in such a way that what is preferred at one point in time is inconsistent with what is preferred at another point in time.”

Today, Europe has lots of troubled banks and some troubled sovereigns. Ideally, the powers that  be would like financial markets to not worry about being defaulted on and to keep lending to these banks and sovereigns. No agreed EU resolution regime for banks or sovereigns is in place, so the authorities would like to reassure current lenders that they will be safe when such a regime is put in place and that it is future lenders who will take the hit.

However, when the future arrives, it becomes the present and future senior bank bond investors will consider a regime in which only they are subject to a resolution regime involving selective haircuts as totally unacceptable.

The time-inconsistency of the current sovereign debt proposals are clearly recognised by sovereign bond markets, which are pricing current Irish and Greek government bonds at yields that clearly indicate the likelihood of default. For banks that are already in trouble, it seems unlikely that these proposals will really comfort bond investors that they are genuinely safe from getting haircut by a future resolution regime.

Scrapping the Seanad is a Big Political Reform

Since the emergence at the weekend of unanimity amongst political parties that the Seanad should go, contrarian commentators have been forced to argue that this is not a ‘real’ political reform, what we need is fundamental change, etc etc.

The move to a unicameral parliament is a pretty big change, and for the better. This is what I wrote for today’s Farmers Journal.

 

The decision of the Labour Party to support Fine Gael’s plan to scrap the Seanad pretty much seals the fate of Ireland’s experiment with a two-chamber parliamentary system. Fianna Fail and the Greens have also, however belatedly, come to the same conclusion, and all the main political parties are now signed up to this particular political reform. The Seanad costs around €25 million per annum directly, and An Bord Snip suggested, in July 2009, that its time was up. The direct saving however is not the full cost of the second chamber.

Civil servants spend a considerable amount of time dealing with queries (they call them ‘reps’, short for representations) from Senators, many of whom see themselves as trainee TDs and engage in clinics and general messenger services for voters in whatever constituency they have their eye on. Ministers must attend the Seanad regularly in addition to making themselves available for questioning in the Dail. This eats into the time ministers can devote to running the country, and while Dail accountability is essential, the demands of the Seanad on ministerial diaries is substantial and very hard to justify. I recall spending several hours with senior officials some years back waiting for a minister detained in the Seanad who apologised profusely and predicted, quite accurately, that not a syllable of the Seanad proceedings which detained him would make it into the parliamentary reports in the newspapers the following day. In addition to the direct saving of €25 million per annum, there should be further savings in civil service personnel and a reduction in the time-wasting demands on ministers.

Under the current Irish system, we have 166 TDs and 60 Senators, for a total of 226 national parliamentarians. This is rather a lot for a small country, and most countries of our size make do with a single-chamber parliament. The public seem quite happy to let the Seanad go and there have also been calls for a reduction in the number of TDs. Bord Snip did not feel that a major reduction in the size of the Dail was advisable, although the number does not have to be 166. Cutting numbers saves only the direct costs: scrapping the second chamber in its entirety provides opportunities to make all sorts of indirect savings as well.

There have been numerous distinguished Seanad members over the years, including some of those elected from the university panels. But there have also been legions of defeated TDs and wannabe TDs, leading one wag to describe the Seanad as a mixture of creche and retirement home. There is nothing to stop the better class of senator to welcome the inevitable and run for the Dail. I can think of a few I might even vote for! But the occasional emergence of good contributors in the Seanad cannot conceal the overall mediocrity that has been its hallmark. The Irish Times managed to disagree with itself last weekend on the following crucial issue: how many reports have been prepared over the years (the first was in 1928) on the reform of the Seanad? Harry McGee thinks there have been twelve, Noel Whelan plumped for thirteen. I recall, as a student in the late 1960s, attending a discussion group called Tuarim, whose leading lights included Tom Barrington, Barry Desmond and Garret FitzGerald. One spirited debate was about , you guessed it, reforming the Seanad. Any institution still searching for a meaningful role seventy four years after its re-creation in current form needs to be scrapped.  

Of course scrapping the Seanad is not a political reform programme on its own. It is essential that the Dail becomes a more effective chamber and that a better balance be restored between executive and legislative branches of government. But scrapping the Seanad will help both directly and indirectly. Those with ambitions to serve in national politics will now have no option but to shoot for the Dail, which should make that a better chamber. The politicians need to restore credibility as a group, and the public will see abolition as evidence of serious intent to reform, at the cost of some cushy numbers for the political class. This will help when the time comes to face the music on local government reform, through eliminating the excessive number of local councils, and on reforming the public service, where numerous useless quangoes survive.  

End-Year Exchequer Returns

The end-year numbers are out: the statement is here.

Poolbeg again

In the Netherlands, if a government falls, it continues on as a caretaker government until the new government is formed. Any member of parliament can declare as controversial a particular piece of legislation and regulation, and the caretaker government cannot make any decisions on these subjects. If it tries nonetheless, the senate will block this — and if it doesn’t, the queen will.

Ireland is different. Just prior to electoral defeat, a number of initiatives are being rushed through. There should be checks and balances to prevent this sort of thing. I’ll return to the climate bill later this week.

Poolbeg is back in the news. Although the public consultation on waste policy is still so recent that the department has yet to publish the submissions (at least one of which raised fairly fundamental concerns), if the Irish Times is to believed, new legislation will be introduced this month that would give the Minister of the Environment the power to set punitive levies on incineration and landfill.

Instead, waste levies should reflect the externalities of waste disposal. The maximum incineration levy is much higher than the two available estimates of the external cost of incineration.

The draft waste policy was far from ready. Instead of rushing through immature legislation, the government should have the grace to pass this dossier to the next government. ATMs will continue to work.

UPDATE: The story heats up again. See Times, Independent, and Independent again (with a reference to the EER2010).

UPDATE2: The Times claims that the bill will be published today (Jan 7). At 8.44 am, the submissions to the public consultation are still not online.