Good News on the Economy from Europe but a Warning?

Paul Sweeney: There is some good news on the Irish economy from Eurostat. But hidden in the text is a warning to another member state, Luxembourg, that may threaten us in the next quarter, if the European statistical police, based in Luxembourg, find out how lavish and spendthrift the government has been, and intends to continue to be, with certain public assets.

Will Ireland Need a Second Bail Out?

Tom McDonnell: Willem Buiter of CitiGroup and formerly of the Bank of England's Monetary Policy Committee reckons that Ireland should negotiate a stand-by second bailout plan in the event it can’t re-access markets in 2013 on favourable terms. Inevitably the notion was attacked as 'ludicrous' by the Government and 'unhelpful' by the Commission. Words like 'fully funded' will bring a wry smile.

While Dan O'Brien argues it would be a mistake to pursue a second bailout at this time for strategic reasons, NamaWineLake, Colm McCarthy, David MacWilliams and Constantin Gurdgiev all argue that a second bailout is inevitable and desirable. I agree that a second bailout is inevitable. This bailout should be negotiated months before the State runs out of funding.

Ireland's debt maturity profile is here:


Coupled with the still gaping hole in the public finances (see page 15) and the unsustainable price (7.5%) for 10 year bonds (Bloomberg) it is clear that Ireland's funding position for 2014 is going to be very difficult.

A lot of course depends on developments in Europe, but on the balance of probability Ireland will enter a second programme of assistance in 2013. Because of the way it is structured, the current bailout mechanism (known as the EFSF) is not able to generate sufficient funds to undertake the level of bond purchases required to stabilise markets. The EFSF is inherently unstable because is is susceptible to a degenerative spiral in which less and less financially stable countries support increasing numbers of financially troubled countries - eventually the stable core simply cannot support the troubled periphery. The EFSF is already unravelling as part of a negative feedback loop and this process of unravelling will be accelerated by the recent downgrades. At any rate it is simply not feasible to expect countries like Italy and Spain to continue to support countries when they themselves are paying higher rates themselves to borrow.

The ESM (European Stability Mechanism) will replace the EFSF either in 2012 or in 2013, and if Ireland gets a second bailout it will be under the auspices of this mechanism. It is imperative that the design of the ESM differs from that of the EFSF. One option is to give the ESM a banking licence and access to ECB funding - and then allow it to buy sovereign debt directly and under defined protocols and conditions.

As part of dealing with the thorny issue of financing Ireland's debt burden, the Anglo promissory notes have understandably taken centre stage with Minister Noonan now promising that a technical paper on the issue is being prepared. Let us hope that the process will be transparent and evidence based and let us also hope that all advice and correspondence relating to the Anglo/INBS debt between the CBI/ECB to the Irish State will be released. The ECB has been notably intransigent on this point so far. The legacy of the Anglo debt is clearly a matter of grave national importance and its imposition on people living in Ireland was a scandalous transfer of wealth. The promissory note story and mechanism is variously explained here by the newly formed "Anglo: Not Our Debt" group, here by NAMA Wine Lake, here by Karl Whelan, here by politico and here by Seamus Coffey.

Ireland's medium-term debt sustainability is on a knife edge. The NTMA is forecasting a debt to GDP ratio of 119% in 2013 - equivalent to a debt to GNP ratio in excess of 140%. This places us firmly in the same ballpark as poor benighted Greece. Relief on the promissory note repayments is a way for all of the key parties to avoid a credit event in Ireland. Ideally this should involve write-down of the €30.6 billion principal but at the very least it should entail a five year holiday on repayments and an extension of the repayment schedule. Such a scenario would help give the economy a modicum of space to recover and offers the possibility that Ireland can manage its way out of the crisis. The alternative is to remain a ward of the official lenders for the forseeable future.

The data being sent to IMF and EU bodies should be public

Nat O'Connor: The latest IMF report on Ireland has an important annex: Annex 1. Provision of data (pages 81-82), which gives a list of "indicators and reports" that "shall be made available to the staff of the European Commission, the ECB and the IMF by the Irish authorities on a regular basis." A unit within the Department of Finance will "coordinate and collect" the relevant "data and information". (It is an update on a list that formed part of the original agreement with the IMF and EU bodies; pages 33-34 here).

A lot of this data is very valuable for understanding and analysing the Irish economy and the effects of Irish Government policy. It is reasonable for the IMF, EC and ECB to seek this data to monitor Ireland's ability to repay the money we borrowed from them. Indeed, it is valuable to have their expertise on what data is required to monitor our economy and national debt. However, now that this data is being collected, it should as a matter of course be made publicly available within Ireland as well.

For clarity, the entire Annex is repeated at the end of this post. There are 22 sets of data referred to: F1 to F11 are from the Departments of Finance and PER; N1 to N5 are from the NTMA; and C1 to C6 are from the Central Bank.

First of all, it should be noted that some of this data is already available, but the majority of it is not. Secondly, it is not clear that all of the required information will exist at the time when it is supposed to be submitted. Thirdly, it should be acknowledged that there may, in a limited number of cases, be legitimate reasons for not publicly releasing some of these datasets. For general principles on what might be legitimate reasons for not releasing data, I would refer to the guidelines given in the Freedom of Information Act 1997. However, just because the release of some information can be blocked, does not mean that it should be. Certainly, any refusal to publish a dataset should be explained by the relevant Minister to the Oireachtas.

Conversly, as part of the Government's announced reform of the national Budget process, it may well be their intention to publish this sort of data. Its release would certainly help the Oireachtas to hold the Government to account. Access to this data would also probably be necessary for the new Fiscal Advisory Council to be effective.

F6 is an example of good practice in relation to the budget. It requires the publication of revenue and expenditure plans for the next four years. This original requirement helped open up the Budget process and multi-annual budget planning will hopefully become standard practice even once the agreement with the IMF and EU concludes.

Much of the data being required refers to the national debt. The sustainability of Ireland's debt is crucial to whether or not the economy can recover, or whether a prolonged period of stagnation - or indeed some form of default - is inevitable. There are periods in the history of most states when political discourse is dominated by the debt and the deficit. This is certainly the case in Ireland today. There is a pressing need to ensure that this discussion is grounded in accurate facts and figures, and does not lead to wrong information being spread in public.

The implication of F10 is worrying. The data required here is "Assessment report of the management of activation policies and on the outcome of job seekers' search activities and participation in labour market programmes." One one level that is useful data. However, it is not balanced by other data in the list, and may give a distorted picture of the Irish economy. Labour activation is to be welcomed, but priority should be given to ensuring that jobs exist in the first place, before putting pressure on people who are unemployed.

The Government has signalled that we will make use of our crisis by improving our systems of oversight and scrutiny, to make sure that a similar crisis does not happen again. An important step in that direction would be the regular release of these datasets, on a single website, in machine readable format, at the same time (if not before) they are sent to the IMF and EU bodies. For example, the website of the Fiscal Advisory Council could be used for this purpose.

The extent of the national crisis requires the Government to repeatedly ask the public's patience and understanding for the difficult decisions it has to make. But confidence in those decisions is eroded when access to the relevant data on the economy and national debt is denied. Genuine reform of economic and budgetary policy should begin with a new openness in relation to data, including the full set of data currently being sent to the IMF and EU bodies.

...

Annex 1. Provision of data
During the programme, the following indicators and reports shall be made available to the staff of the European Commission, the ECB and the IMF by the Irish authorities on a regular basis. The External Programme Compliance Unit (EPCU) of the Department of Finance will coordinate and collect data and information and forward to all external programme partners.

Ref.
Report
Frequency

To be provided by the Department of Finance in consultation with the Department of Public Expenditure and Reform as appropriate

F.1
Monthly data on adherence to budget targets (Exchequer statement, details on Exchequer revenues and expenditure with information on Social Insurance Fund to follow as soon as practicable).
Monthly, 10 days after the end of each month

F.2
Updated monthly report on the Exchequer Balance and General Government Balance outlook for the remainder of the year which shows transition from the Exchequer Balance to the General Government Balance (using presentation in Table 1 and Table 2A of the EDP notification).
Monthly, 20 days after the end of each month

F.3
Quarterly data on main revenue and expenditure items of local Government.
Quarterly, 90 days after the end of each quarter

F.4
Quarterly data on the public service wage bill, number of employees and average wage (using the presentation of the Pay and Pension Bill with further details on pay and pension costs of local authorities).
Quarterly, 30 days after the end of each quarter

F.5
Quarterly data on general Government accounts, and general Government debt as per the relevant EU regulations on statistics.
Quarterly accrual data, 90 days after the end of each quarter

F.6
Updated annual plans of the general Government balance and its breakdown into revenue and expenditure components for the current year and the following four years, using presentation in the stability programme's standard table on general Government budgetary prospects.
30 days after EDP Notifications

F.7
Data on short- and medium- /long-term debt falling due (all instruments) over the next 36 months (interest and amortisation) for Non-Commercial State Agencies
Quarterly , 30 working days after the end of each quarter

F.8
Data on short- and medium- /long-term debt falling due (all instruments) over the next 36 months (interest and amortisation) for local authorities
Quarterly, 30 working days after the end of each quarter

F.9
Data on short- and medium- /long-term debt falling due (all instruments) over the next 36 months for State- owned commercial enterprises (interest and amortisation)
Quarterly, 30 working days after the end of each quarter

F.10
Assessment report of the management of activation policies and on the outcome of job seekers' search activities and participation in labour market programmes.
Quarterly, 30 working days after the end of each quarter.

F.11
Report on progress achieved towards interim PLAR targets and actual and planned asset disposals.
Quarterly, 10 working days after the end of each quarter.

To be provided by the NTMA

N.1
Monthly information on the Government's cash position with indication of sources as well of number of days covered
Monthly, three working days after the end of each Month

N.2
Data on below-the-line financing for central Government.
Monthly, no later than 15 days after the end of each month

N.3
Data on public debt and new guarantees issued by central Government to public enterprises and the private sector.
Monthly, 30 working days after the end of each month

N.4
Data on short-, medium- and long-term debt falling due (all instruments) over the next 36 months (interest and amortisation) for central Government.
Monthly , 30 working days after the end of each month

N.5
Updated estimates of financial sources (bonds issuance, other financing sources) for the banking and Government sectors in the next 12 months
Monthly, 30 working days after the end of each month

To be provided by the Central Bank of Ireland

C.1
The Central Bank of Ireland’s balance sheet.
Weekly, next working day

C.2
Individual maturity profiles (amortisation only) for each of the domestic banks will be provided as of the last Friday of each month.
Monthly, 30 working days after each month end.

C.3
Detailed financial and regulatory information (consolidated data) on domestic individual Irish banks and the banking sector in total especially regarding profitability (P&L), balance sheet, asset quality, regulatory capital; PLAR funding plan forecasts
Quarterly, 35 working days after the end of each quarter

C.4
Detailed information on deposits for the last Friday of each month.
Monthly, 30 working days after each month end.

C.5
Data on liabilities covered under the ELG Scheme for each of the Covered Institutions.
Monthly, 30 working days after each month end.

C.6
Deleveraging committee minutes and deleveraging sales progress sheets, detailing pricing, quantum, and other relevant result metrics.
Monthly, reflecting committee meetings held each month

Ireland's 'Inability to Pay' 5.8 Percent

Nat O'Connor: The interest rate on the EFSF loan is to be 5.8 per cent (on average). Can Ireland afford this?

Professor Morgan Kelly of UCD wrote an opinion piece on 8 November 2010, where he spelled out his analysis that the Irish economy has passed the point of no return. His analysis hinged on the fact that the cost of the bank bailout in Ireland has been too expensive. He concluded his article by saying he could think of “no solutions”.

When it comes to the banking situation, Professor Kelly may indeed be right. The burden of servicing the bank bailout may be possible on a year-on-year basis, and even this is not sure, but the real task is to pay back that debt. Faced with this stark reality, there may be no option but to consider the renegotiation and partial write-down of that debt – which emanates from private sector decisions. Lenders should fully face the consequences that bad investments are meant to face in a capitalist, free market economy (as they are not shy about taking all the rewards in good times). In this case, that means a major write-down for the bank bondholders, as an alternative to several generations of Irish people struggling to pay back billions.

Professor Kelly’s prognosis must also cause us to consider – in an empirical and analytical way – the even more daunting political possibility of further default, of sovereign debt.

In terms of this kind of analysis, however pessimistic he may have felt, Professor Kelly did remind us of a “simple rule” that economists use to gauge whether national debt levels are sustainable or not: “If the interest rate on a country’s debt is lower than the sum of its growth rate and inflation rate, the ratio of debt to national income will shrink through time.”

The ratio in question is that nominal growth plus the 'primary budget balance' (as a percentage of GDP) must be higher than the rate of interest. Nominal growth is real GDP growth plus the GDP deflator - i.e. the effect of inflation. And the primary budget balance is the Government's balance.

Put more simply, nominal growth plus the Government's balance (surplus or deficit) must exceed debt interest payments. This is a long-term trend indicator. Obviously, if the Government has a surplus (more revenue than spending), it can absorb a couple of years of low growth. But as we have a deficit, a couple of years of low growth mean that we have to tax more or cut spending just to pay the debt interest and in addition to other taxes and cuts, which are to close the deficit. In the long-term we can't tax or cut forever, so we need to ensure our debt levels are sustainable. 'Manageable' if you prefer. And if our debt payments are not sustainable, we are just sinking further and have no hope of paying off the debt itself.

As a 'thought experiment', we can do a simple analysis using this formula, to see whether it is in fact possible for Ireland to overcome the debt mountain, if the right economic policies are pursued.

Note: to avoid confusion, debt interest is now being examined in two different ways. There is the rate charged on a particular bond or loan (such as the 5.8 per cent on the €85 billion loan) But we are also expressing debt interest for the year in question, which is the interest payments as a percentage of the total national debt.

We have nominal GDP figures from the Department of Finance and CSO for the past (e.g. CSO National Accounts), and we can use these to illustrate whether Ireland's debt was on a sustainable path.

It looks like 2007 was the last year where nominal growth exceeded debt servicing costs. In that year, real GDP grew by 5.6 per cent and the GDP deflator was 1.1 per cent; total 6.7. The interest cost of paying back our debt in 2007 was relatively. The debt was only €38 billion then, so debt repayments at were clearly smaller than 6.7 per cent of GDP. We had a surplus that could be used to pay off part of the national debt (shown here). That is, Ireland was in a sustainable position to pay the national debt.

Then came the recession. 2008's real GDP growth was -3.5, with a deflator of -1.5; total -5 per cent. Ireland's annual cost of paying debt interest was relatively low at this point. National debt was still low (at €38 billion) and repayments were €2.1 billion. But any level of payments obviously exceeded the negative nominal growth. The debt is never unsustainable during a year of negative growth, and so adds to the deficit.

2009 was worse. It was another year of negative nominal growth (-11.6). The debt was unsustainable in that year too. Similarly, the continued decline in 2010 (-2.9) makes it the third year in a row where servicing the interest on the national debt is significantly higher than nominal GDP growth. So debt servicing is adding to the deficit in these years.

If this is sounds too complex, David McWilliams also explains growth versus debt payments about halfway down this article.

Looking forward, the four-year plan gives a table of numbers we need to make the same calculations for 2011-2014. Table A.3.1: Debt-Deficit Dynamics – The Baseline Scenario (p.107).

But the European Economic Forecast (29 Nov 2010) gives less optimistic forecasts of Irish growth than the Government's four-year plan.

The following table puts these figures together:

In 2011, Ireland will begin to draw down funds from the €85 billion loan. Our national debt interest rates will not suddenly shoot up to 5.8 per cent, because only a part of our national debt will come from this source. The larger part will be existing debts, which are at a total average fixed interest rate of considerably less. As we draw down more and more of the €85 billion, the annual interest rate will rise towards 5 per cent or more.

Not only has the interest rate risen, but it is 5 per cent of a larger debt, estimated at 102 per cent of GDP in 2011 (in the Government's four-year plan, p.108). 5 per cent of c. €160 billion (GDP in 2011) is €8 billion in debt servicing costs.

To cut a long story short, Ireland's debt is not viable in 2011. We will continue to have to tax and cut to find the money to pay the debt interest.

As the table shows, the situation in 2012 and 2013 is also poor, with debt interest payments adding to the deficit and national debt, even as we try to bring tax revenue and other spending into line with one another.

The four-year plan's growth figures show Ireland's debt becoming sustainable in 2014. On the face of it, this makes sense. Taxation and spending will (in theory) be brought into line with one another. However, debt interest will take up a large part of the spending - squeezing out health, education, welfare, capital and other spending.

The numbers add up, but are the numbers sound?

The EU's growth predictions for 2011 and 2012 are more sobre. If they represent a trendline of more modest growth, than the debt will still be unsustainable in 2014, and possibly for years to come. And every year that the debt interest is too much, it adds to the national debt and future years (higher) debt interest payments.

Over the same years, the fixation on the deficit, without serious investment in growth, will lead to a weakened economy.

To add insult to injury, the ECB's central mission is to keep inflation low. A dose of inflation would do no harm to Ireland right now, as long as that included wage inflation across the board. If the cost of living and wages both rose by 10 per cent, there would be no major change for most people - except that our debts would have shrunk relative to our earnings. Unfortunately, the monetary policy lever to bring about inflation is quantitative easing (printing money), which the ECB controls. There is a downside of course, savings would also decline relative to prices and incomes.

Alternatively, another bubble in the economy is not a good idea; slower, steadier growth is what's needed. And a high inflation component isn't likely, because the ECB won't let it happen.

The Government is holding out the possibility of a return to the bond markets to borrow money at less than 5.8 per cent, as soon as we can. But the financial institutions who lend to states can do a more sophisticated analysis than I have just done. They see the unsustainability of the level of debt; and so bond yields are likely to remain stubbornly high.

As TASC has continued to point out, there is a sympathetic relationship between economic growth and the bond markets. If the Government can lay out a credible strategy to restore the Irish economy to a growth trajectory, then the bond markets in turn will have more confidence that Ireland will be able to pay back its debts and yields will lower accordingly. The Government's strategy of austerity has not, to date, included a growth plan. They have simply focused on the deficit, without enough attention to the wider economy – which at the end of the day is the 'engine' that provides both tax revenue and overall GDP.

So, measures to boost growth would seem to be an obvious requirement. Except that the terms of the €85 billion loan limit our options by sacrificing most of the pension reserve fund.


In the absence of pan-European co-ordination on emergency monetary policy measures, which may be ultimately required to save the euro, Ireland has to take major decisions on its own. Only a combination of radically restructuring our national debt (i.e. defaulting on the banks' debt) and a jobs strategy with serious money invested in it (e.g. the NPRF) will generate the growth that is required to have the ability to pay our already high national debt (not including the bank debt).

The €85 billion deal, at 5.8 per cent, is too expensive. Didn't the Government put new 'inability to pay' clauses into the four-year plan?