Slí Eile: The next time you hear a politician or economist saying that our current public borrowing deficit ‘has nothing to do with NAMA’ show them the Red Card as follows:
Department of Finance Press Release 2 October 2009
It reads:
At end-September 2009, the Exchequer deficit is €20,158 million, compared to €9,404 million at end-September last year. The year-on-year deterioration in the deficit of some €10.8 billion is primarily explained by a decline in tax receipts of €4.8 billion, the €4 billion payment to Anglo Irish Bank and €1.7 billion in respect of the frontloading of the annual contribution to the National Pensions Reserve Fund (NPRF).
Non-voted capital expenditure at end-September was €7,026 million. This compares to €1,270 million in the same period of last year. The year-on-year increase is due to the payment of €4 billion to Anglo Irish Bank in 2009 and the increase of €1.7 billion in the payment to the NPRF (a total of €3 billion has been paid to the NPRF in 2009 as part of the bank recapitalisation programme, at this stage last year some €1.3 billion had been transferred to the NPRF).
In plain English what this means is that the infamous €400m a week that we are borrowing is associated with payments to Anglo-Irish and the collapse in tax receipts (which in turn is greatly exacerbated by the bursting of the banks-induced property bubble over the decade to 2008).
The astonishing conclusion to be drawn is that the €4bn payment to the zombie Anglo – a bank that is very unlikely to serve a useful social role by way of lending ever again – earlier this year matches exactly the estimated ‘fiscal adjustment’ proposed in the December 2010. So, welfare recipients, children waiting for CF treatment, public sector workers etc are directly paying money to a zombie bank. And that’s not all. We have another major bank or two waiting in the wings for fresh recapitalistion and possible State takeover if that doesn’t work (which it probably will not in the case of AIB).
The other interesting twist to this sorry tale is that Eurostat have just ruled that money borrowed by the commercial banks from the European Central Bank will not be counted as national debt. This is off-balance sheet borrowing on a massive scale (up to €54bn in bond issues used as collateral by the commercial banks in exchange for capital from the ECB) which will not be counted in that terrifying figure of €400 million a week paraded, daily, in the media.
So, there is one solution for the banks (borrow up to 33% of annual GDP and divert €4bn of precious tax payer money as ‘cash for trash’) and one solution for the rest of us who use public services (must cut back to level of taxes available we are told).
There are three fundamental problems with this strategy and mindset:
1 It is completely unethical to condemn this generation and the next to a massive bail out of bankers, some developers (more than we thought judging by the proposed seed of repayment in the NAMA business plan) and a few politicians who would rather face the electorate later rather than sooner.
2 The clumsy and reckless NAMA solution (described less charitably by Joseph Stiglitz) is very unlikely to achieve its aim of cleaning bank sheets and freeing up credit
3 Deflation won’t work – with an additional deflationary shock in store this December – retail sales in the domestic market together with tax receipts from income and consumption are likely to continue falling and pressure on welfare payments will mount (even if rates are cut) because more and more people will require medical cards, ‘back-to-school’ allowances and other services.
For every person made unemployed as a result of fiscal contraction there is a direct financial cost of some €20,000 per annum in addition to other costs associated with health, housing and education public spending. Not to mention the profound impact on personal and community health and well-being – especially for a new generation that expected more than the Celtic Tiger could promise.
Instead of wage cuts we need to hold the real value of wages for most workers – to do otherwise is to add to the deflationary spiral;
Instead of cuts in welfare to the old, the sick and those not in the labour force we need cuts in welfare to those big cats who played – recklessly – by the rules of capitalism only to be compensated, rewarded and bailed out by Government in a massive exercise of risk-socialisation (essentially Government has nationalised risk in the banking sector and privitised most of the gains to be had from any partial recovery in asset prices in the future).
Instead of cuts in public expenditure we need redirection of spending from unfair subsidies and waste to areas of greatest need (early childhood, social housing and community health services)
Instead of retrenchment in public services we need to expansion to prepare Ireland for the eventual upswing
Instead of no hope and no-other-way mindsets we need to let loose a new wave of entrepreneurs, thinkers and leaders in the public, private and voluntary sectors less oriented to short-term gain, position or income/profit maximisation.
10 comments:
Good article. Do you know if anyone has begun to think about how a new government could possibly dismantle this Frankenstein piece of so-called legislation in the future?
Ok, so the 4 billion payment to Anglo is the same magnitude of the fiscal correction proposed for this year. That in itself means nothing. To tie the two so closely, as you attempt to do, is completely disingenous.
First, we need to make our fiscal correction anyway. It's a shame you focussed on the 4 billion to anglo and not the fact that the deficit to September (to September, not even a full year) is 20 billion in total. Ok, take out the anglo figure and project for the full year and clearly our day to day current position is completely unsustainable. That is why the fiscal adjustment is essential - nothing to do with Anglo.
Second. Yes, there are serious questions about injecting Capital into Anglo. There are alternatives - but no simple ones. The left has cried for nationalisation of the big banks. OK then, we have already nationalised Anglo, now what? Let it collapse after buying it? Wind it down? how? One way or another, without capital Anglo has liabilities which need to be met or defaulted on? Which is it to be? Default? What are the consequences of that? What about its substanial deposits? Many of these are ordinary savers, county council accounts, or other business accounts. Let them sink? How is that either fair or economically sensible?
Yes, the bank bailout has increased the cost of our borrowing and added to our burden of debt. But let's get back to plain speaking: it does not lie at the core of our chronic fiscal problem which is a child of terrible economic management during an unsustainable and reckless boom period. Question the way in which the banks are bailed out by all means. But if you argue that they shouldn't be saved, you need to deal with the consequences. And please stop attempting to hide our terrible medium term fiscal outlook behind the bank rescue.
I don't think there's any denying that whatever fiscal medicine we need to take would be less if it weren't for all the money we're borrowing to prop up the financial sector. I don't understand how anyone can honestly think they're completely seperate - it's all money, it's all borrowed and it's all on the state's balance sheet, so if sovereign solvency is the issue and fiscal retrenchment is the solution then it's all equally to blame. (Note, however, that money pumped into the bank is hopefully a once-off whereas the things likely to get cut - social welfare, public sector pay etc. - are recurring costs, so €4bn saved in 2010 is €8bn in 2011 and so on.)
But you don't tell us what is to be done with Anglo - it's nationalised and even if it weren't it's covered by the guarentee, like it or not. I presume the state, as owner, has limited liability, just as private shareholders do, so legally at least default should be an option. Is this your position - don't put any more money into Anglo, default instead (and hope it's not seen as sovereign default)?
@Tomaltach @James Conran
You raise important and challenging questions.
The context for this discussion is an extraordinary claim made by some commentators who should know better. Take for example the following written by Colm McCarthy on 16 August:
""A particularly mischievous impression being propagated is that the budget deficit, likely to be about €20 billion in the current year, is in part a reflection of financial assistance already extended to the banks. This is simply untrue; the deficit is the gap between rising government spending under the usual headings and collapsing tax revenues. The amounts injected to date into the banks have come from the National Pension Reserve Fund, not from the budget. The fiscal gap is too wide and needs to be bridged, banks or no banks.""
http://www.thepost.ie/post/text/story.asp?document_id=43744&category_name=&version=print
This is simply not the case as the Department of Finance Exchequer Statement of 2 October clearly shows.
You say that the tie the two so closely is ‘completely disingenuous’. I would respond by saying that, rather, to disassociate the two is disingenuous. The fact is, that in the absence of this massive one-off transfer to Anglo-Irish our borrowing would be less by €4bn in the 12 months ending September 2009. In other words, we are told that there is no alternative to an adjustment of €4bn in the budget. However, if the Anglo transfer had not gone ahead then, logically, the adjustment could be less by €4bn or – alternatively the period of adjustment could be less by one year.
Your point that Anglo is now a done deal and that we are stuck with it poses a good question. It should have been sent to the wall as some official sources advised at the time but this advice was not taken and we are where we are. What you can’t ignore is that some €28bn of estimated loan transfer to NAMA is from Anglo – a lot of trash much of it with no obvious social value at this point (when will the examination of the books be known?). Why are we putting €4bn into Anglo and not into proper public health services? Where are our priorities? OK that money is now lost for 2009. My point is that it could have been used for other purposes and, as a matter of act, the Irish taxpayer is bailing out a bad bank and that – coincidentally the size of the injection this year happens to equal the hugely deflationary adjustment to be made in some weeks time.
Anyone who placed savings at, or lent to, Anglo should be compensated where there is an overriding need. But, why beggar this generation and the next with €28bn debt and a €4bn capital transfer this year? And for what purpose? It is immoral.
I agree with you that ‘the core of our chronic fiscal problem’ is a ‘child of terrible economic management during an unsustainable.'
Re nationalisation - there are different views on this (see for example this website). Many very conservative economists back nationalisation for different reasons.
On the other hand some commentators like Terry McDonagh argues for a separation of toxic assets in a legacy bank and good assets in a (state) bank. He also said recently that NAMA is not TOGIT (the only game in town). There is just a tiny chance at this stage that some honourable backbencher will pull the plug. But, the chances of this are 1:10,000 now I think.
One final thought – could some philanthropist sponsor an Art Project known as the 21st Century folly centered on the skeleton frame of the Anglo-Irish bank on the Dublin Quays? Artists could be invited to contribute ideas and works of art to model this present monstrosity and turn it into a sign for future generations – NEVER AGAIN!
"Anyone who placed savings at, or lent to, Anglo should be compensated where there is an overriding need. But, why beggar this generation and the next with €28bn debt and a €4bn capital transfer this year? And for what purpose? It is immoral."
Not sure what "an overriding need" is. Do you mean "where the depositor/lender is worthy" or "if doing otherwise would damage our borrowing capacity in international markets"? If the latter then I think there's a serious debate to be had as to what would hurt us more in theose markets - a default by a government-owned bank (hasn't this already happened with Bradford & Bingley in UK?) or honoring the same bank's debts in a spirit of gay legerdemain... I think the new Central Bank governor once wrote something on irisheconomy.ie to the effect that a state committed to paying all and only the debts it was strictly liable for could be more creditworthy in the eyes of the markets than one taking on debts willy nilly that it wasn't strictly obliged to pay (e.g. Anglo's).
By the way, he €28bn figure is wrong since that was the book value of the Namafied Anglo loans. We don't know what the real figure is since we haven't got the level of discount for individual institutions selling loans to NAMA, but it's likely to be closer to €20bn than €28bn. This is still a lot of course - but so is the €8bn difference!
It is certainly outrageous that this is the pass we have come to, but I'm not sure you can call something "immoral" unless you also advocate doing something different, i.e. if pumping money into Anglo is immoral then you are presumably in favour of not pumping money into Anglo, thus of letting Anglo default.
@James Conran Thank you for your comments. One way to progress this discussion is to know more about Anglo-Irish Bank's balance sheets. As a nationalised bank it has assumed all previous liabilities including various types of bonds. That's the downside with nationalising 'lame ducks' (instead of allowing them lie down and down by the plain rules of capitalism). Socialising rotten assets and a bunch of black-hole debts leaves citizens vulnerable to the disappearing blakc hold syndrome (cif Goldman Sachs).
Joseph Stiglitz has proposed, as a general approach, a list of descending hits starting with shareholders and then bondholders. Does anyone know what Anglo's profile of liabilities looks like? On the matter of €4bn going to recapitalise Anglo - were other options considered by the relevant authorities? What costs arise from this and other actions? Was there 'really no other way?' Why has this gigantic transfer of public assets gone with relatively little news coverage?
Who is to say that this is the end of the matter and that further injections are not required? Are we the citizens of Ireland not being held ransom to a relatively small cohort of speculators who caused the crash in Anglo and whose behaviour is cited as needing appeasement to 'assure the markets'. this gross unfairness is causing major anger. And if left unchecked it could induce hard-pressed taxpayers to embrace socialism!
"Why has this gigantic transfer of public assets gone with relatively little news coverage?"
This we can agree on. I think the focus on the three Anglo scandals (director's loans, Sean Quinn's shares, ILP's loan/deposit), the personalities involved and the slow criminal justice investigations has distracted from the hugely consequential issue of how exactly to deal with the now nationalised bank. As ever the lack of transparency is amazing.
Sadly or otherwise I see no sign that taxpayers are turning to socialism, howerver defined. If anything the Bertie/FF fudge of left and right has been greatly weakened (ideologically though perhaps not in policy terms). But arguably in Ireland at least more people are falling on the right hand side of the ideological divide than on the left, even as Labour scores record poll ratings.
We shouldn't assume that just because the facts have (as we see it) refuted the right, the left will triumph. The far-right was after all the primary winner from the political/economic turmoil of the interwar period.
@James Conran I would not take issue with anything you have said in your last Comment (above). I would only add that the real danger of a the current deflationary punishment (allied to the most scandalous bank bailout in Irish history) is that it will drive not insignificant groups in the population to the political extremes - whether left or right. My own personal view is that a strong, united and cohesive political alliance somewhere to the left of cenre to defeat the attempt to make a whole generation pay for the enormous mistakes of the last decades. That said, many people are not convinced that 'the left' have a convincing programme or track record of delivering what people rightly expect. There is a huge deficit right now in terms of clear, worked-out, tested policies and courageous leadership to take on the cosy Dublin Consensus.
And so far we have only talked about the non voted capital budget. The voted capital budget is around another 7 billion. It's supposed to represent our investment in the future and so might be worth having. But it has never been parsed and challenged a la McCarthy. The two together (voted and non voted) amount to at least 11 Billion, or not far off 60% of the deficit. And of course neither the voted capital nor the Anglo bail out nor the NPRF payments have to be made every year. We/they choose to do it.
Post a Comment