Escaping the lion

The news that Italian bank Unicredit is insisting that Ireland rather than Italy is the ‘I’ in PIGS should hardly come as a surprise. All the PIIGS are at it these days: thus Emilio Botin of Santander is quoted in the FT as saying that “Comparing Spain to Greece is like comparing Real Madrid to Alcoyano”. (Alcoyano is apparently a club in the Spanish second division.) And we have been busily distancing ourselves from everyone else as well.

All this is understandable. As Ken Rogoff puts it,

There is an old joke about two men who are trapped by a lion in the jungle after a plane crash. When the first of them starts putting on his sneakers, the other asks why. The first answers: “I am getting ready to make a run for it.” But you cannot outrun a lion, says the other man, to which the first replies: “I don’t have to outrun the lion. I just have to outrun you.”

However, one of the big lessons of history is that lions rarely make do with just one snack: when defaults come, they come in waves. The 1930s is a good case in point.

Europe needs solidarity, not finger pointing.

Property Scheme Tax Incentives

One of the major issues that I think needs to be addressed this year is the role played by tax expenditures in our budgetary system. Reports such as this one by TASC have pointed to closing off tax expenditures as having an important role to play in closing the budget deficit. Chapter 8 of the Commission on Taxation report does a pretty good job of listing many of these tax reliefs and recommends shutting many of them off. There are serious discussions worth having in relation to many of these reliefs, such as those for pensions, but I don’t have the time to get into these issues now.

Interestingly, one particularly controversial type of relief that the Commission report does not examine is property incentive schemes; the report argued that since the decision had been taken to close off these schemes on their completion, they should not be examined. Information on the cost of these schemes was, however, reported to the Dail by Minister Lenihan last November in response to a parliamentary question from Joan Burton. The link to this answer is here but I know not to trust links to the Oireachtas website so I’ve also put up the answer as a Word document here.

The total amount of tax revenue lost from these schemes in 2007 was €435 million. I suspect this is smaller than some people might have expected, given the widespread nature of claims that the very richest in society are managing to pay almost no tax through their extensive use of these schemes.

Still, it is a decent amount of money. It would be interesting to know what these schemes are expected to cost this year and next and whether they can legally be closed. I suspect they can. Another interesting question is whether many of the individuals that availed of these schemes are now bankrupt and wouldn’t be able to pay any tax.

The Sovereign Debt of Euro Area Countries

The Economist carries an extensive article on this subject – you can read it here.

Mortgage Modifications

As posted earlier, Brian Lucey has a timely article in today’s Irish Times on the government’s plan to perhaps have a plan to help people who can’t pay their mortgage.

Brian makes a number of important points on this issue (moral hazard, fairness of helping those who took out excessive mortgage, limited capacity of these banks to take further losses leaving it back on the hard-pressed Irish taxpayer, bankruptcy reform).  I was going to post a comment on it but the thread’s already really long and I wrote too many words, so I’ll put this on the front page instead.

I’d like to add to Brian’s points by discussing a stylized example in which a mortgage modification plan could work in the sense of easing the difficulties of current owners without costing the bank or taxpayer anything. Then I’ll note how the conditions of the stylized example won’t necessarily hold in many cases.

Continue reading “Mortgage Modifications”

New Responsibilities for NTMA

A busy day, with lots going on. But I think it’s worth flagging this story about new responsibilities for the NTMA.

The move is understood to be aimed at creating a sharper focus on the State’s financial interest in the banks, while leaving Mr Lenihan and the Government to address broader economic and social concerns.

It may also serve to alleviate European Commission concerns about political interference in day-to-day financial decisions being made by institutions receiving support from the State.

The main functions being delegated include discussions with the so-called covered institutions about their capital needs, as well as discussions in relation to “realignment or restructuring” within the banking sector.

The NTMA will also be delegated with the Minister’s powers in relation to the management of the State’s shareholdings in credit institutions, and some remaining functions under the State guarantee scheme.

It will also be delegated functions in relation to the giving of advice on banking matters generally, including issues relating to crisis prevention, management and resolution.

The distancing of the managing of the state’s control in banks that may soon be partly or fully nationalised is a good idea. The rest of the announcement I’m more puzzled by. I would have thought that the capital needs of the banks was an issue for the Central Bank to discuss with the covered institutions rather than the NTMA.

More generally, I can’t imagine there are too many countries that use their government bond issuance office for “advice on banking matters generally, including issues relating to crisis prevention, management and resolution” so I’m not sure why we are.

Constantin Gurdgiev discusses the annoucement here. He argues that there is a conflict of interest between obtaining the best return for NAMA and obtaining the best return on the government’s bank shares, presumably in relation to the pricing of the assets to be transferred.  Of course, if the government owns both the banks and NAMA, this conflict of interest would more of an ecumenical intra-NTMA matter.