Sunday, October 30, 2011

Where is our money?

The recent Maastricht Letter on Ireland’s financial position released by the Department of Finance shows that the government expects to have €24.8 billion of cash in working balances at the end of 2011, up from €18.7 billion at the end of 2010.  The increase is our cash balances is largely the result of frontloading of our borrowing from the EU/IMF package and the reduced cost to the State of this year’s bank recapitalisation programme.

The ESRI have recommended that “significant interest savings could be achieved by reducing the holdings of cash”.  This is on the basis that the interest cost of our debt is greater than the interest gain from our deposits.

So where are we keeping close to €25 billion of cash?  Here are deposits from Irish residents in all banks operating in Ireland.

Irish Resident Deposits in All Banks

Deposits from government in banks operating in Ireland were €2.8 billion in September 2011.  Of this, €2.4 billion was in the covered banks (AIB, BOI, PTSB), while €0.4 billion was in non-covered domestic banks (Ulster Bank etc.).  There were no deposits in other (IFSC) banks.

Deposits from government did rise to over €20 billion from April to June of this year, but that was the money set aside for the recapitalisation of the banks as we discussed here.  Since July, government deposits have returned to less than €3 billion.

So, if we are supposed to have almost €25 billion of cash at the end of the year where (or what) is it?  Do the NTMA have it?  Are they then included in the Financial Institutions or Private Sector deposits in the banks? Is the increase in cash balances of the State giving the false impression that deposits in Irish banks have stabilised?

As suggested by the ESRI it does seem costly to have a debt of €170 billion, while at the same time having  €25 billion in cash.

Monday, October 24, 2011

Presentation to UCC MBA Class

Last Friday I gave a session to UCC’s MBA class which looked at some recent data on the Irish Economy.  The session was built around the Y = C + I + G + (X – M) representation of the economy.  Here are the slides.


New Beginning Mortgage Proposal

We have previously looked at the mortgage proposal from the New Beginning group (here and here).  Revised details of the proposal have been circulated.  Following our previous analysis the key peace of information is that the interest rate on the example we worked through is 3.55% rather than the 4.29% that was assumed in the previous posts.

“Compound interest” is the answer attributed to Albert Einstein when apparently asked what he thought mankind’s greatest invention was.  Just three-quarters of a percentage point may seem like a small change but in a mortgage such a difference can have a massive effect.

Our initial assumption came from the fact that Ken’s repayment was given as €1,450 per month and that he had borrowed €315,000 over 35 years.  If you plug these into a mortgage calculator the required interest rate is 4.29%.  This was further supported when the starting payment of €840 was the interest-only payment on the non-shelved mortgage of €215,000 at 4.29%  but this appears to have been nothing more than a remarkable coincidence.

The updated information indicated that Ken’s actual mortgage payment is €1,387.61 per month rather than €1,450, that the interest rate is 3.55%.  It is still assumed the case that the €315,000 is to be paid off over 31 years.

If the interest rate was 4.29% it would take total payments of €570,000 to repay the full amount over 31 years under the conditions of a typical mortgage.  If the interest rate is 3.55% the same mortgage can be repaid with €520,000.

The New Beginning proposal is that Ken’s monthly payment be immediately reduced to €840 and that this is applied to a mortgage of €235,000.  Ken monthly payment increases by 3% per year and the €80,000 of the mortgage that is “shelved” is repaid in instalments beginning in year 10.

First up here is what happens to the €235,000 loan using the New Beginning figures.  The actual annual payment increase is 3.0595% rather than just 3% and this continues until the payments reach €1,135.48 from the start of year 11.

The €235,000 is paid off over the 31 year term of the loan (with eight months to spare).  This requires payments of just over €402,000.  Again it should be remembered that the loan can be paid off for less if a standard mortgage repayment schedule is applied.  However, in this case a typical mortgage of €235,000 at 3.55% over 31 years would require €388,000 of repayments.  The difference is only €14,000 and the benefit of the reduced payments early in the term is likely to be useful to someone who is having temporary difficulty in meeting their mortgage commitments now.

What about the €80,000 that was put on the shelf?

This is repaid in four short-term loans beginning from year ten.  These are five-year loans where some of the €80,000 is taken off the shelf and repaid at 3.55%.  The rest of the money stays on the shelf and no interest is charged.  The proposed repayment schedule is

Shelf Loans

Essentially Ken the borrower gets €80,000 interest free for ten years (cost €34,034 at 3.55%), €97,778  (equal to €80,000 + €34,034 – €16,256) interest free for a further five years (cost €18,961), €98,207 interest free for a further five years (cost €19,044), €96,124 interest free for a another five years (cost €18,640) and €90,679 interest free for ever more but the cost for the final six years of the mortgage is €17,584.

All told the bank has foregone €108,263 of payments over the 31 years of the mortgage.  The interest costs of this will continue into perpetuity.

All told the borrower will have made €402,000 of payments on the mortgage and €87,000 of payments on the shelved loans over the 31 years of the plan.  If this €489,000 had been used to repay a standard mortgage over the same time it would repay a mortgage of €296,000 at 3.55%, just €19,000 below the original loan of €315,000.

How much of the €315,000 if the New Beginning repayment schedule was applied to the full amount of the loan?   In this instance the repayments will be around €103,000 short of repaying the mortgage in full.

The benefit of the New Beginning scheme to the borrower is just over €100,000.  This can be shown as either the benefit of having borrowed money put “on the shelf” at no interest cost or the amount that would be left on the mortgage if the New Beginning repayment schedule was applied to the original loan.

It should also be remember that most of the benefit accrues to the borrower from having money borrowed from the bank for longer.  The total amount of repayments are very similar: €520,000 to repay a standard €315,000 mortgage at 3.55% over 31 years versus €489,000 to repay under the New Beginning split mortgage scheme.

The borrower gains around €30,000 from making lower repayments, but because more of the payments are made later the actual benefit is north of €100,000.  The power of interest rates is shown when compared to our previous analysis.  With an interest rate of 4.29% the benefit of the scheme was estimated at around €280,000 for Ken.

A truer measure of the benefit of the scheme to the borrower (and hence the cost to the bank) is just over €100,000.  The overall cost of implementing such a scheme depends on how many “Ken’s” there are.  For every 10,000 that enter the scheme the cost to be covered is €1 billion.

The scheme is not as off the wall as the original analysis indicated.  €100,000 is a lot of money but it may be a price worth paying as a solution to the current crisis.  The scheme has some merit and it could be adapted so that some of the costs incurred early in the term can be recouped with higher payments later in the term of the loan – 31 years is a long time.

Still, though if we are going to reduce the mortgage burden on some people why make it so complicated?   If we want to save someone €100,000 on their mortgage why not just reduce the balance upfront.  Ken would save €100,000 on repayments over 31 years if his current mortgage was simply reduced from €315,000 to €255,000 – it’s just debt forgiveness.

As we said above the borrower also benefits from the reduced payments early in the term so the reduction will be less, probably to around €275,000.  So we could follow the New Beginning repayment scheme or just knock €40,000 off the mortgage now.  There is no difference.

Wednesday, October 19, 2011

‘New Beginning’ Mortgage Proposal – it’s just debt forgiveness

New Beginning appeared in front of the Dáil Finance Committee today.  It will be early next week before the transcript is released.  From the details I have heard, the New Beginning mortgage proposal was compared to one of the Split Mortgage proposals in the Keane Report.

It is not clear that a fully worked example of the proposal was presented.  The best example I have seen remains “Ken” as shown in a recent episode of The Frontline.   Here is the description as provided by Pat Kenny that was part of a previous post on this topic.

“He borrowed €315,000 [..] Currently his full payment is €1,450 but if it was interest only and he did a deal with the bank that would be €917.  If some of the interest was deferred, which the banks will do, to 66.66%, that would bring it down to €605.”

“But under the New Beginnings (sic) solution Ken would pay 35% of his monthly net income.  That would be €840, which is more than the deferred interest payment. But that would be equivalent of paying a mortgage worth €235,000.  Now the payment would then gradually increase by 3% a year over ten years.”

“In the meantime, the balance, that is €80,000.  That is placed on the shelf.  No payment on that shelf money for ten years at all, and it doesn’t accrue interest.”

“After ten years it comes into play and his repayment would have increased to, a maximum, a maximum ever, of €1,572.  And the whole mortgage would be paid off in 31 years which is already the agreed term of the mortgage.”

Now there are three winners in all of this.  The lender would stand to lose €225,000 today if he just walked away and handed back the keys.  This way it’s all paid except the interest on €80,000 for ten years.  He has the satisfaction of paying out his mortgage. And thirdly, the State would not have to house Ken if he had nowhere to go and he becomes a functioning spender in the economy.”

“So it’s win, win, win.”

What I want to do here is work through the numbers of the New Beginning plan.  We are not given the interest rate but the current repayment implies a rate of 4.29% and that is what we will use here.  As per the description we will apply the repayments to €235,000 and “shelve” €80,000.

The starting repayment of €840 is the interest only repayment on a loan of €235,000 at 4.29%.  The payment increases by 3% per year thus allowing some of the capital to be repaid.  Here is what happens to the €235,000 over the first ten years.

Mortgage Payments

After ten years nearly €116,000 of payments have been made but interest has consumed €99,000, leaving a reduction in the outstanding balance of less than €17,000.  In the first ten years the balance has fallen from €235,000 to just over €218,000.

At the start of year 11 we are told that the €80,000 that was shelved “comes into play” and we are told the repayment increases “to a maximum” of €1,572.  Both of these are subject to interpretation.  Initially I will assume that the €80,000 is added to the balance at the start of year 11 and that the repayment increases immediately to €1,572.

We now have 21 years to repay a loan of €298,105.80 with a monthly payment of €1,572.  If we again use an interest rate of 4.29% how far will this get us?

Mortgage Payments(2)

After 31 years and with almost €512,000 of payments there is still nearly €92,000 owing on the mortgage.  Ken still has a bit to go until he has his mortgage paid off.  And this is also with the benefit of having paid no interest on €80,000 for the first ten years.  The compound interest on that money for ten years is €41,273.

If this interest was considered deferred rather than written off and was added to the outstanding balance at the start of year 11, then €339,379 would have to be repaid with monthly repayments of €1,572 over the next 21 years.  What would be left after 21 years in this case? Answer: €193,085.  Table here.

One of the key principles of the New Beginning plan is that the borrower repays 35% of the their net disposable income.  As pointed out in the comments the jump in year 11 to €1,572 would actually be 49% of net income with the assumed 3% annual growth rate from year 1.

What happens if we limit the monthly repayments to 35% of net disposable income but continue to increase them by 3% per year?  To help make this a simpler calculation the €80,000 that is placed on the shelf is ignored in the following table.

As before the payments start at €840 and rise by 3% per year.  This continues for 22 years by which time the payments have reached €1,563 per month.  From year 23 onwards the payments are capped at €1,572.

Mortgage Payments(4)

This looks good.  Here we can see that the mortgage is fully paid off four months into the 30th year.  The plan works!  However, there is always a ‘but’.  In this instance it is “but what happened to the €80,000?”  In the above table no payment is made on the €80,000 that is shelved. 

There is still €80,000 of the original mortgage to be repaid.  If that has been sitting on the shelf for 30 years accumulating interest it would be a huge sum.  In fact, if compounded at 4.29% over 30 years, the €80,000 would have become €282,000.   Calculated here.  Who is going to pay that?

The New Beginning plan can pay off Ken’s mortgage but only if €80,000 of debt is written off now.  The New Beginning plan combines debt forgiveness and then a graduated payment mortgage to pay off the remaining balance.

As the final table here shows New Beginning have a plan that will result in a mortgage being repaid.  On a typical mortgage of €315,000 over 31 years at 4.29%, a borrower would repay about €570,000.  As we can see in the table above the New Beginning plan has the mortgage paid off with payments of around €459,000.

It is worth noting that a typical €235,000 30-year mortgage at 4.29% can be paid off with monthly payments of €1,143 and a total cost of €388,000.  If Ken could get his mortgage reduced to €235,000 he should ignore the New Beginning “35% of disposable income” principle and repay his mortgage in the usual fashion.  This would save him a further €71,000.

The benefit to the borrower of the New Beginning plan is not the new repayment schedule they are trying to introduce.  That actually costs the borrower money.  A benefit only arises in the New Beginning plan because €80,000 of the debt plus interest is not paid at all.  

On a cash payments basis Ken is better off by €111,000 under the New Beginning plan compared to his existing mortgage (€459,000 versus €570,000 ).  As we will see below the actual benefit is much greater as Ken also benefits from a greatly decelerated capital repayment schedule.  He has the money borrowed from the bank for longer but has to pay less for it.

In the description of the plan given by Pat Kenny it is said that:

“This way it’s all paid except the interest on €80,000 for ten years.”

That is not true.  There is no interest ever paid on the €80,000, and the €80,000 itself is never paid off under the repayment plan that is presented. 

To see the full benefit for Ken we must apply the €840 + 3% repayment schedule (up to €1,572) to the original mortgage of €315,000.  To do that I combined results from the previous calculator with this calculator, which produced this repayment schedule.

The interest-only payment on €315,000 at 4.29% is €1,126.12.  By starting at €840, the monthly repayment would be below the monthly interest amount so the balance on the mortgage would actually be increasing.  In fact, the monthly repayment would not get above the monthly interest amount until the start of year 14, by which time the balance due would be €343,000.  After this the balance would begin to fall as the payment continues to rise by 3% per annum.  By year 22 the payment would again have reached the cap of €1,572.

After 30 years the amount owing on the mortgage would be €274,000.  The balance on the mortgage would have fallen by €41,000, yet €461,000 of repayments would have been made.  In fact to repay the remaining balance of €274,000, the monthly payment 0f €1,572 would have to be continued for another 22 years and a half years. 

If Ken applied the New Beginning repayment plan to his current €315,000 mortgage it would take 53 years to repay it. He would have to make €894,000 of payments, and would have a total interest bill of €576,000.  See fairly large table here.

Ken is presented with this repayment plan on the show.  As we have seen over 30 years this would see about €40,000 paid off if applied to his current €315,000 mortgage, but pays the mortgage down to zero if applied using the modifications (i.e. debt forgiveness) of the New Beginning scheme.  When he is asked for his reaction he said:

I’m very impressed. [..]  It seems like an excellent solution.  I didn’t do honours maths in the Leaving, but if the figures add up, it looks very good.”

Of course it looks very good for Ken but the figures don’t add up.  Someone else is making around €111,000 of mortgage payments he should be making.   Over the 30 years of the mortgage the scheme is worth about €280,000 to Ken.  We have worked out this two ways:

  1. €80,000 compounded at 4.29% for 30 years is €282,000
  2. If the €840 + 3% repayment schedule is applied to the €315,000 mortgage for 30 years at 4.29%, there will be €274,000 outstanding after 30 years.  Under the New Beginning scheme the balance is zero.

If Ken can’t meet his mortgage repayments something needs to be done (and also remember that in his case his father signed as guarantor on the loan) but this New Beginning plan is not a “new way of paying a mortgage” in which everyone wins.  It’s just debt forgiveness.  Ken gets €80,000 or 25% of his mortgage written down right from the start.

If this is a representative case and the same reduction was applied to 80% of the €17.5 billion of mortgages which are in arrears or have already been restructured then the upfront cost would be nearly €3.5 billion.  If the other 20% of loans see half the mortgage written off through debt resolution the bill would be a further €1.8 billion.  This €5.3 billion might be lower than some other debt forgiveness schemes, but it is still debt forgiveness.

The New Beginning plan can only work if each borrower’s mortgage is reduced so that the interest-only payment is equal to 35% of their net disposable income and the balance written off.  It then depends on the borrower’s net disposable income rising by 3% per year.  Finally, it needs an interest rate that does not rise above the initial level.  If any of these is absent the plan cannot work and the mortgage cannot be repaid.

New Beginning deserve great praise for the work they are doing in providing legal services and support to borrowers facing legal proceedings.  The benefits of this are huge and easy to see.  The benefits of the mortgage solution they propose are much harder to find.

Irish Bond Yields

We have frequently looked at the Irish government bond 10-year yield as calculated by Bloomberg.  This measures has now been discontinued and has not been updated since the 10th of October.  It has replaced by an Irish government bond 9-year yield

To calculate a 10-year yield requires that a bond mature in proximity to October 2021.  As we can see from the Daily Outstanding Bonds Report from the NTMA we can see that there is an Irish government bond maturing in October 2020 and nothing then until March 2025.

Outstanding Bonds 19-10-11

The new nine-year yield is very similar to the previous ten-year yield and the movements are practically the same.  Here is the nine-year yield for the past three months.

Bond Yields 3M to 19-10-2011

The sudden, and largely unexplained, drop that took place towards the end of September has now been fully relinquished.  Yields are now back to around 8.5% which is where they were for the month in the run-up to the recent fall.

Monday, October 17, 2011

‘New Beginning’ Mortgage Proposal

Ireland’s mortgage crisis rumbles slowly on.  Last week the Keane Report was published but it merely presented a list of possible measures that could be introduced rather than detail how an actual solution will be implemented.

On the Monday of that week The Frontline on RTE devoted an entire episode to the issue of property prices, mortgage debt, negative equity and arrears.  In this show a proposal was made by the New Beginning group that aimed to be a way out of the crisis for “80% of those in difficulty”.  This was also raised in a discussion on Primetime later in the week and formed the basis of an article in yesterday’s Sunday Business Post: A modest proposal to ease the pain of mortgage debt

In all three cases the proposed plan appears to be the same but it is very hard to determine exactly what the proposal is with the details provided.  There are always some key elements missing. 

The best example appears to be on The Frontline when Pat Kenny asks Ross McGuire of New Beginning "what did you have in mind?” about 27 minutes into the show.  This is what he said.

“We think this applies to about 80% of distressed mortgages.  There is a 20% group that it won’t apply to, but it applies to the vast majority.  What we would do is we would begin with a figure.  [..] People should be asked to pay about 35% of their net disposable income. [..] If your disposable income is €1,000, €350 is the most you are going to pay on mortgage repayments.”

“We take that figure and they we can work out the kind of mortgage that you can pay over whatever term it is.  And using our maths and our systems it is possible in fact with a restructuring of the mortgage to pay the full amount over the term of the mortgage as originally set out.”

“How could that possibly be? And it’s just quite simple.  Initially, in the current style mortgage your first payment is the most expensive because you pay capital and you pay the interest in the whole lot and your last payment is the cheapest because you have got very little interest to pay.  And we simply flatline that.”

“So if someone is able to pay interest only, or even less, we can say to that person “pay that; be willing to grow that a little bit as years go by; and you can pay your entire mortgage off”.

Whoa. We better stop there.  What he is on about? Mortgage payments don’t go down during the lifetime of a mortgage.  Baring interest rate changes they stay exactly the same.  There is nothing to “flatline” using “maths and systems”. 

A mortgage is designed so that the same amount is repaid each month.  In the show an example used of someone who has a €315,000 mortgage to be repaid over 35 years.  The monthly payment is €1,450 so this implies an interest rate of 4.29%. (Calculated using this excellent mortgage calculator.) 

Anyway, if the interest rate is 4.29% the monthly payment will be €1,450.  It doesn’t matter whether it is the first month or the last month, the payment will be €1,450 (as long as the interest rate is 4.29%).   I have no idea what is going on when New Beginning talk about flatlining.  Mortgage payments are flat.

What does change is the amount of each repayment that goes on capital and interest.  At the start, most of the repayment goes on interest, but as the capital is paid down, the interest portion of the repayment gets smaller and smaller.  But again note that the repayment stays exactly the same.  I am saying that a lot because if someone who is running a group to help mortgage holders in arrears does not know it, there may be a lot of people who do not know it.

Anyway, of the first payment of €1,450 about €1,126 goes to pay interest and €324 goes to pay down the capital.  By the start of the tenth year, the repayment is still €1,450 but the interest bill has fallen to €953 with €497 now going against the capital.  By the 20th year the interest has fallen to €687 and the capital payment is now greater at €763.  By the 30th year the interest is €280 and the capital is €1,170.  This continues until the very last payment which is €10 interest and €1,440 capital.  At all times the payment is €1,450.  Here it is graphically.

Mortgage Repayments

For each of the 420 months of the mortgage the payment is exactly the same, but every month the interest/capital composition is different with the interest amount always declining and the capital amount always increasing.  Interest rate changes may provide occasional resets and lower or higher payments but the principle of falling interest and rising capital amounts then continues.

Here are two screenshots which gives the details provided for the example used in the show.  You can listen to the description from about 28:40 in the show.

Mortgage Proposal (1) Mortgage Proposal (2)

Here is how Pat Kenny (rather than New Beginning) described the proposal using figures based on the current situation of a member of the audience .

“He borrowed €315,000 [..] Currently his full payment is €1,450 but if it was interest only and he did a deal with the bank that would be €917.  If some of the interest was deferred, which the banks will do, to 66.66%, that would bring it down to €605.”

“But under the New Beginnings (sic) solution Ken would pay 35% of his monthly net income.  That would be €840, which is more than the deferred interest payment. But that would be equivalent of paying a mortgage worth €235,000.  Now the payment would then gradually increase by 3% a year over ten years.”

“In the meantime, the balance, that is €80,000.  That is placed on the shelf.  No payment on that shelf money for ten years at all, and it doesn’t accrue interest.”

“After ten years it comes into play and his repayment would have increased to, a maximum, a maximum ever, of €1,572.  And the whole mortgage would be paid off in 31 years which is already the agreed term of the mortgage.”

Now there are three winners in all of this.  The lender would stand to lose €225,000 today if he just walked away and handed back the keys.  This way it’s all paid except the interest on €80,000 for ten years.  He has the satisfaction of paying out his mortgage. And thirdly, the State would not have to house Ken if he had nowhere to go and he becomes a functioning spender in the economy.”

“So it’s win, win, win.”

This example is missing some details and we have to make some assumptions.  First it is assumed that the €315,000 loan will be paid off over 31 years.  The interest rate used in the calculations is not provided which is disappointing but again appears to be 4.29%.

Anyway in a typical mortgage of €315,000 at 4.29% over 31 years the borrower would repay about €570,000 (€315,000 capital and €255,000 interest). 

Under the New Beginning proposal it seems that the borrower will pay €840 for the first year and this will “increase by 3% a year for ten years”.   A payment of €840 is not the “equivalent of paying a mortgage worth €235,000”.  €840 is the interest-only payment on a mortgage of €235,000.  The person is not repaying the mortgage at all!

It is suggested that the payment would rise above the interest-only level by 3% a year for ten years.  This would put the monthly payment at €1,096 by year ten.  Thus over the first ten years €115,556 of mortgage payments would have been made.

After ten years the payment increases to “a maximum of” €1,572 for the next 21 years.   I’m not sure what the phrase “a maximum of” implies but if the €1,572 was paid each month for 21 years then €396,144 of payments would be made. 

In total, over the 31 years of the mortgage there would be payments of just under €512,000 made under the New Beginning plan.   The New Beginning plan is at least €58,000 short in order for the mortgage to be fully repaid.  

It is likely that it is short by much more as the capital owed is decreasing by much less in the reduced payment period of the New Beginning proposal so the amount of interest that should be charged is greater than would be charged on a traditional mortgage.  In fact, in the early years when the payment begins at €840 the balance on the mortgage (and hence the interest to be charged) is actually increasing.  The interest-only payment on €315,000 at 4.29% is €1,126 so when paying €840 a month the balance on the mortgage will be increasing and the interest to be paid will be rising not falling as under a typical mortgage.

I am not necessarily against this plan of reducing the mortgage payment to €840 and then slowly increasing it to €1,096 over ten years and moving it to €1,572 from year 11 like in this example, but let’s accept it for what it is.  The mortgage holder is being let off the hook for at least €58,000 of repayments.  The Sunday Piece Post article says:

Does that involve debt forgiveness? By any rational standard, it does not. All it involves is the bank forgoing some income and profit. There is no capital implication for the lender’s balance sheet and no negative consequence for the taxpayer. The bank is repaid in full and the borrower owns his home.

Of course it is debt forgiveness.  The Frontline and the article go off on a tangent about some sort of “shelved balance” which is “warehoused” on which no interest accrues.  This is just a deflection. 

If someone borrows €315,000 at 4.29% over 31 years the total amount that must be repaid to the bank under a typical mortgage is €570,000.  Under the New Beginning plan the borrower repays €512,000 on the same loan, and as they are making reduced capital payments (and in the early years none at all) they should actually be paying more the  €570,000.  The bank is likely to be losing out on €80,000 of payments under this plan.

Here are the two repayment schedules compared.  It is not difficult to see that the area under the red line for the first ten years is greater than the area above the red line for the next 21 years.  This difference is the cost of granting this proposal to a mortgage holder.

Mortgage Repayments(2)

I am not necessarily against this type of plan and something like it will have a role to play in resolving our mortgage crisis.  There are four types of borrowers who are in arrears.

  1. Borrowers who are in temporary difficulty but will be able to get back on track pretty quickly without any assistance.
  2. Borrowers who are in temporary difficulty but will need some forbearance for a limited period in order to see them through such as term extensions or interest-only periods.
  3. Borrowers who are in difficulty but will be able to get back on track at some point in the future but need more assistance than that offered by a term extension or interest-only period.
  4. Borrowers who are in difficulty and will never be able to get back on track.  These unsustainable mortgages need to be terminated.

The Central Bank have shown that 44% of mortgages that go into arrears of 90 days or more return to performing mortgages over time (slide 24).   These will not have benefitted from anything like the New Beginning proposal.

The New Beginning proposal may be appropriate for the third category above which could be about one-half of those who get into difficulty.  A proposal like this is unlikely to be of any benefit for those in the fourth category who have unsustainable mortgages. 

There may be 20,000 unsustainable mortgages in Ireland.  These mortgages need to be ended and if the size of the mortgage exceeds the value of the house by an average of 150,000 then there is a €3 billion shortfall that needs to be addressed.  In my view these mortgages should be ended with the borrower ceding ownership of the house while at the same time getting any shortfall written off after making nominal payments for a period of three to five years so they truly can make a new beginning.  The €3 billion lost on these mortgages will never be repaid and must be faced up to.

There may be around 50,000 households who need assistance like that offered by the New Beginning proposal.  This will allow them to maintain ownership of the home and eventually get back to making repayments on their mortgage.  This scheme is not free and will have a cost.  If the average cost per household is €80,000 then the cost of implementing this scheme for 50,000 households will be €4 billion.  This is not cheap and this proposal should not be viewed as a “win, win, win”.

A full proposal will outline how entry to the scheme is to be assessed.  It may also be possible to modify the scheme so that some of the costs incurred in the ten years of subsidised repayments can be recouped later in the life of the mortgage.  A suggestion that might be able to achieve this was previously outlined here.

Saturday, October 15, 2011

Deficit targets and the €3.6 billion budget ‘adjustment’

Recent days have seen some debate on the fiscal adjustment to be introduced in December’s budget.  The use of the word adjustment has become standard when referring to expenditure cuts and tax increases.  Maybe we’re cutting back on the number of words we’re using as well.

Anyway, The Four-Year National Recovery Plan which formed the basis for the Memorandum of Understanding agreed with the IMF was the first time the €3.6 billion adjustment for 2012 was introduced.  This was on the basis of reducing the General Government Deficit to 8.6% of GDP in 2012.

In recent days the Independent Fiscal Advisory Council in its first report advocated a €4 billion adjustment (and as high as €4.4 billion to fully eliminate the deficit by 2015). The ESRI have also come out in favour of a larger adjustment, which is also supported by Philip Lane and the Central Bank.  Today the OECD joined the growing chorus.

Before getting into the detail of the adjustment, let’s first consider the target we are aiming for.  The common belief is that under the EU/IMF deal we are targeting a General Government Deficit in 2012 of 8.6% of GDP as laid out in the National Recovery Plan.  This is not (and never has been) the case.  The budget target set for us by the IMF is in terms of the primary exchequer deficit.  See point 4 on page 57 (pdf) of the Third Review.

4. The performance criteria are set on the exchequer primary balance (the exchequer balance excluding net debt interest payments in the service of the National Debt).

The target for the end of June 2012 is a primary exchequer deficit of no more than €7.4 billion.  An end of year target for 2012 is not yet set.  The June 2011 primary exchequer deficit was €8.4 billion which was well below the target of €10.1 billion.  (See table 2 on pdf page 54 of the review).

It is clear that a General Government Deficit (GGD) target and a Primary Exchequer Deficit (PED) target are related, but they are not the same.  The GGD includes interest expenditure but the PED does not.   The reduced interest rates on our EU loans will make reaching an 8.6% GGD target easier but will have no impact on ensuring that the PED is below €7.4 billion in June of next year.  It should also be noted that this target is not fixed and is subject to change by the IMF based on performance.

Hitting the 8.6% GGD target for 2012 does not guarantee meeting the PED target set out by the IMF.  The debate seems fixed by the 8.6% target but the actual goalpost is a little to the side of that.

Anyway, lets turn to the €3.6 billion adjustment.  One important thing to note is that the adjustment for 2012 includes the carryover from measures introduced in the 2011 Budget.

Last year’s Budget  announced €6 billion of adjustments.  However as a result of implementation and other lags the full effect of these will not be felt in 2011.  In the Budget measures document you can see a difference between the 2011 effect and the full year effect.

The tax measures introduced had a 2011 effect of €1,434 million but a full year effect of €2,596.  This gap is implausibly wide and is largely explained by the fact that the 2011 effect of the introduction of the Universal Social Charge was assumed to be zero but the full year effect was given as €420 million.  Still it is likely that there is around €0.6 billion of tax increases to be achieved simply by allowing last year’s changes to continue for the full year in 2012.

For current expenditure last year’s Budget included measures which had a 2011 effect of €2,192 million.  The full year (2014) effect of these measures was assumed to be €2,709 million. This time, it is likely that there is around €0.4 billion of expenditure cuts to be achieved by simply allowing last year’s changes to continue for the full year in 2012.

Although the planned adjustment for 2012 is set at €3.6 billion, Michael Noonan can achieve €1 billion of that by just sitting down as soon as he is called to speak by the Ceann Comhairle on Budget day.

So where will the rest come from?  There will be continued cutting of the capital budget.  The Four-Year Plan outlines that there will be a further €0.4 billion cut here in 2012.   As this will be achieved through the delay or cancellation of capital projects, the victims of the cuts to capital expenditure are unknown, even to themselves.

Thus there is €2.2 billion of the adjustment remaining.  Again, looking to the Four Year Plan (which it must be remembered was drafted and published before official IMF intervention in Ireland was announced) it appears that this will made up of €1.3 billion of cuts to current expenditure and €0.9 billion of increases in tax revenue.

It has already been announced that a €100 household charge will be introduced.  This will raise about €160 million or one-sixth of the total required. 

Although, the exact details will not be released until the Budget we can use the proposals in the Four-Year Plan to provide some guidance.  (See page 138 of the pdf which also gives details of the €600 million of carryovers from last year’s Budget.)

Tax Measures

If the Budget sticks to the details of the Four Year Plan we can expect Income Tax to increase by €10 per week on average and the Excise Duty on a litre of petrol to rise by about 3 cent.

If we can get through the remaining €1.3 billion of current expenditure cuts, this mightn’t be too bad at all.  The Four-Year Plan is less prescriptive when it comes to expenditure cuts but we can infer the following from Table 4.1 (see pdf page 62) and remember that this includes €400 million of carryover from the measures announced last year. (Some outline details of the expenditure carryover can be seen on page 54 as “additional impacts from 2011”.)

Expenditure Measures

The pay savings are due to be achieved through headcount restrictions and efficiency gains as prescribed in the Croke Park Agreement, while other expenditures includes “Subsidies, Grants and other schemes, Procurement”.  The planned adjustment for the Social Protection budget is €600 million.  Last year, almost €900 million of cuts were introduced in this area. 

About €50 million of the planned €600 million will come from carryover effect of last year’s measures. It is clear there is substantial cuts planned for the Social Protection budget.  Although the make up of these is unknown, it has been suggested that around one-quarter will be achieved with changes to the rent supplement scheme.

Michael Noonan has indicated that the actual adjustment to be introduced in the Budget will be €4 billion rather than €3.6 billion.  Where is the extra €400 million going to come from?  Well, it seems that the ‘welfare budget could see €1 bn cuts’ with “about half the potential welfare savings from a new clampdown on fraud”. 

It seems likely that the upcoming Budget will have around €4 billion of adjustment (although Pat Rabitte thinks “€3.6 billion is enough”).   Here is how the €4 billion will probably be constituted.

Budget Adjustments

Will this bring the masses out onto the streets? Not likely.  There will be some pain, but there will not be the same outcry that greeted last year’s budget.  In fact, this looks set to be the most benign budget of the ongoing adjustment process.

The planned adjustment for 2013 is €3.1 billion but the carryover effects will only be €0.3 billion.  Net of carryover effects and a social welfare fraud clampdown the adjustment for 2012 (€2.6 billion) will be lower than the planned adjustment for 2013 (€2.8 billion).  

Of course, this all depends on how we perform in meeting the Primary Exchequer Deficit targets laid out by the IMF but no one seems to be talking about them.

Thursday, October 13, 2011

Core inflation rises slightly

Overall annual inflation from September’s Consumer Price Index shows a jump from 2.2% in August to 2.6% in September.  If we look at the 85% of the index that excludes mortgage interest and energy products the increase was from 0.3% to 0.4%.

Core Inflation September 2011

Although the headline rate of inflation is 2.6%, the majority is provided by two categories that make up 15% of the index.  Both energy products and mortgage interest contributed 1.1 percentage points to overall rate, leaving 0.4 percentage points for the remaining 85% of the index.

Here are the contributions for all categories in the CPI.

Contributions to CPI Inflation

Wednesday, October 12, 2011

Mortgage Arrears – The Scale of the Problem

The Keane Report is just the latest of a series of reports to reject the idea that a blanket debt forgiveness scheme is the solution to the massive mortgage problem that exists in Ireland.  The reports are right; debt forgiveness is not a feasible solution.  Debt forgiven is not debt forgotten and any debt forgiveness scheme would simply transfer the liability from one group (existing mortgage holders) to another group (everyone else).

The latest statistics from the Financial Regulator show there is 777,321 mortgage accounts in Ireland with a  total balance outstanding on them of €115 billion and an average balance of €148,000.  We do not know exactly how many households this covers as some homes may have two (or more) mortgage accounts linked to them because of split mortgages, top-up mortgages and other.

We will get an accurate picture of this when the Census 2011 results are processed by the Central Statistics Office over the next year.  Figures from the 2006 Census indicated that around 40% of households were in owner-occupied homes that had a mortgage outstanding while 35% of households owned their home outright.  The remaining 25% of household were mainly in Local Authority or private rented accommodation.

These figures will have changed as the property boom continued through 2006 and 2007 but it still the case that fewer than one household in two actually has a mortgage.  Half of Irish households have no mortgage debt.

It is also true that not all households with mortgages are in difficulty.  The latest arrears statistics show that there are 55,700 mortgage accounts in arrears of 90 days or more.  These accounts relate to the mortgages of 45,000 households.  This is about 2.5% of the total number of households in Ireland. 

There is €10.8 billion owed on these accounts or an average of €240,000 per household in arrears.  The total amount of arrears owed is €950 million or €21,000 per household.  It is at these households that solutions to the mortgage crisis needs to be targeted with a distinction between households who are in temporary difficulty and will be able to get back on track and households who have unsustainable mortgages that will never be repaid. 

There are also an additional 32,000 households that have had their mortgage restructured which has kept them out of arrears.  These include reduced payments, interest only and term extensions.  It is not clear how successful these measures will be in keeping households out of arrears.

Over the past few years almost 70,000 mortgage accounts have been restructured by the banks.  Many of these have subsequently fallen into arrears but it does show that the banks are willing to engage with borrowers when approached.  These loans have been restructured on a individual basis which shows that the banks have the ability to undertake a case-by-case analysis of troubled mortgages.

It is also important to remember that 90% of mortgage accounts are not in arrears and have not been restructured.  The majority of these are being paid according to the terms of the original mortgage contract and there is the likelihood that some households are actually overpaying on their mortgage.

In September 2009 there was €119 billion owed on residential mortgages in Ireland.  By June 2011 this had dropped to €115 billion.  Although the property market has slowed considerably there was still around €4 billion of new mortgage lending during this period.  All told, there has been capital repayments of around €8 billion on mortgages in Ireland since September 2009 for a repayment rate of around €5 billion per annum.   Most households with mortgages are meeting their commitments and are paying down the capital owed on the loan.

An important issue is the lender used by those who are in arrears.  About two-thirds of the Irish residential mortgage market is made up of loans from the ‘covered’ banks; AIB, Bank of Ireland, PTSB and INBS.  One-third of loans are in non-covered banks such as Ulster Bank, National Irish Bank and Bank of Scotland as well as sub-prime lenders such as Start Mortgages.

While the State has full or partial ownership of the covered banks it only has regulator control over the other banks.  While the covered banks make up two-thirds of the mortgage market they only account for half of the mortgage accounts in arrears.  Half of all arrears are in other banks over which we have no direct control and importantly are not liable for the losses they incur.

Although it is clear that that Irish banks operated to a failed banking model some of the other lenders in the market were even more aggressive.  It was Bank of Scotland who introduced cheap tracker and 100% mortgages to Ireland.  Start Mortgages offered loans to borrowers who were refused loans by the mainstream banks.  It is not surprising the arrears, and hence potential losses, are higher in these banks.

We have provided substantial recapitalisation funds to meet losses in the covered banks.  If a scheme is introduced that forces banks to write-down a huge swathe of mortgages the State will have to provide funds to the non-Irish banks forced to participate.

There are going to be cases where the mortgage will never be repaid regardless of what forbearance measures are introduced.  It is hard to know how many such households there are but a figure of around 20,000 is possible.  These are cases where people have borrowed well in excess of their means and will never be in a position to repay the loan.

Research by the Money, Advice and Budgeting Service (MABS) suggest that two-thirds of clients who present to them with mortgage arrears have  temporary difficulties, with the remaining one-third in a position where the loan will never be repaid.

There are currently 45,000 households in mortgages arrears.  If we assume that one-third of those are unsustainable and allow 5,000 for a further deterioration then a figure of 20,000 unsustainable mortgages is plausible.  This ties in with estimates from New Beginnings.  This is a huge figure and represents 1.2% of all Irish households.

Tuesday, October 11, 2011

Bond Yields rise – rapidly

The 10-year yield on Irish government bonds as calculated by Bloomberg went back over 8% today.  It is pretty clear that there was some change about half-way through the trading day that saw the yields jump to 8.4%.  Yields fell back slightly later in the day and ended at 8.2%.

Bond Yields 1D 11-10-11

What caused the jump?  Hard to know.  There was no news or additional information on the Irish economy released today.  Yields of other PIIGS didn’t show the same jump.

When the drop under 8% occurred a fortnight ago we felt it might be temporary and that seems to how it has turned out.  There was no good news that could have been used to explain the drop from 8.2% to 7.9% on the 28th of September and likewise there is no bad news to explain today’s rise from 7.8% back to 8.2%.

Trading on Irish government bonds is relatively thin but we do know that the covered banks have been purchasers in recent months. The latest Money, Credit and Banking Statistics (Table 4.2) show that their holding of Irish government increased from €9.6 billion in July to €11.3 billion in August.  The covered banks now hold one-eighth of the total stock of Irish government bonds.

Wednesday, October 5, 2011

Promissory Notes to “cost” €85 billion by 2031

The average interest rate of the €31 billion of Promissory Notes given to Anglo and INBS is around 6%.  Although we have access to EU/IMF funds at around 4% until the end of 2013 it is likely that if we emerge from the EU/IMF programme our long-term borrowing rate will be around 5%.  To gauge the cost of the Promissory Notes we will initially ignore the annual payments, interest coupons and cash borrowings and just assume that the €31 billion had been borrowed at an average rate of 5.5%.

If €31 billion is borrowed at 5.5% over a period of 20 years the final cost will be over €85 billion if all the interest is rolled up. 

As we look set to be borrowing to make the annual capital and interest payments this will be cost of the Promissory Notes given to Anglo and INBS over the next 20 years.  Even if we do return to budget surpluses, the money used to meet the Promissory Notes obligations could be used to repay our other debt at similar interest rates so the opportunity cost is largely the same. 

The Promissory Notes are going to cost €85 billion by 2031.  This is the nominal or future value cost of the Promissory Notes.  The real or present value remains the €31 billion that was provided for in 2010.  It is also likely that while €85 billion will leave the Exchequer because of the Promissory Notes, a good deal of this will actually work its way back to the Exchequer.

On the 4th of November 2010 the Department of Finance issued an Information Note on the Accounting Treatment of the €30.6 billion of Promissory Notes provided to Anglo and INBS.  As all of the Notes had not been issued the Department had to use assumed rates for the total amount.  It seems their assumptions were a little optimistic.

Revised figures were released in an answer to a recent Parliamentary Question to Minister for Finance, Michael Noonan from Sinn Fein Finance Spokesman, Pearse Doherty.  The question and answer can be seen here.

Using the numbers provided in the answer we can determine the full cost to 2031 of the Promissory Notes given to Anglo and INBS.  This cost is made up of four elements with the interest elements calculated to 2031.

  1. The cost of paying the capital amount on the Promissory Notes, €30.6 billion.
  2. The cost of the cumulative interest due on the Promissory Notes, €16.8 billion
  3. The cumulative interest cost of the €3.1 billion annual cash payments, €28.5 billion
  4. The cumulative interest cost of interest paid on borrowings to make the annual payments, €9.4 billion

The PQ from Pearse Doherty asks for all of these but detail on the latter two was omitted in the answer.   The first two are the money going into Anglo and INBS.  Mike Anysley has suggested we will get a small amount of this back.  We covered that here.

Initial estimates of #3 were provided in the Department’s initial Information Note.  This suggested that the cumulative interest on the cash payments would be €18.5 billion by 2025.  

Updated estimates using the recent figures were calculated, and kindly provided, by Tom McDonnell of TASC.  These estimate that the annual cash payments of €3.1 billion will generate €28.5 billion of interest by 2031 using a 4.7% long-term interest rate.

As long as we are running overall deficits this €28.5 billion of interest will itself be paid by borrowed money.  This borrowing will cost, or at least have an opportunity cost of around €9.4 billion by 2031.  This spiral could continue!

By 2031 the full cost of the Promissory Notes will be the sum of these: €85.3 billion, and it will be still rising.

In 2032 there will be €2.2 billion of interest due on the money borrowed to make the €47.4 billion cumulative annual payments made to finally pay off the Promissory Notes.  There will also be €1.3 billion of interest due on the €28.5 billion interest bill that the borrowing for these annual payments will have generated.  In 2031, the Promissory Notes will be gone but their legacy will last much longer.

It is impossible to know what the real cost of €85 billion will be in 2031 terms, but whatever growth and inflation takes place between now and then the cost of these Promissory Notes is still going to be truly horrendous.  In 2011 though, the cost is €30.6 billion and that is what should be used when using present value figures.

Over the next few weeks it is likely we will hear of attempts by the government to “restructure” the Promissory Notes.  This will focus on changing the interest rate charged on and extending the term of the Promissory Notes.  This will reduce the amount of interest we pay to Anglo, but will also reduce the “capital surplus” to be returned to the State referred to by Mike Aynsley above. 

It is also important to realise what happens to these interest payments. In 2013 the Exchequer will pay about €1.8 billion of interest to Anglo and INBS as a result of the Promissory Notes. This forms part of the €85 billion figure used above.

However the banks used the Promissory Notes to get actual cash from the Central Bank. Anglo and INBS must pay the Central Bank interest for the use of this facility. It is not clear what this will be precisely but given the numbers involved it will be well in excess of €1 billion.

This money is the profit the Central Bank makes for providing this liquidity to the banks. Each March the surplus from the Central Bank is paid over to the Exchequer. A lot of the interest payments will be returned which doesn’t reduce the cost of the Promissory Notes but does reduce the cost of the bank recapitalisation.

The lower interest rate will mean that there will be less interest doing the circle from the Exchequer to Anglo to the Central Bank and back to the Exchequer. The longer term means we will have longer to repay the €30.6 billion but we will still have to repay €30.6 billion.

There will be some benefit from reduced repayments in the medium term. This is useful now as we are in a difficult position with the public finances. Lower cash payments now ease the funding pressure we are under but we will have to repay the €30.6 billion eventually.

There is no saving to the State of changing the interest rate charged on the Promissory Notes.  Anglo is fully state-owned.  If we give it more money than it needs we get some back.  If we give it a lower amount we get less back.  The net effect is essentially zero but some minor saving could be made through timing issues.

The restructuring that will take place will reduce the €85 billion cost of the Promissory Notes but it will not save us money. If reducing the €85 billion will not save money it is incorrect to say that the cost of the recapitalisation is €85 billion. The cost is €30.6 billion and only reducing that will save money.

If we are going to save on the Promissory Notes it will need something more than tinkering with how we are moving money from one arm of the State to the other.

Tax returns flatter to deceive

The Department of Finance have released the September Exchequer Return which provides details for the first three quarters of the year.  The relevant documents are:

As per usual we will focus on the tax figures in the Exchequer Statement as most of the expenditure figures are based on the rather meaningless “net expenditure” concept.  The general reaction to the tax figures has been rather positive.  Here are the relevant stories from two of the broadsheets.

I must say that I cannot see the justification for greeting the figures in such glowing terms.  The headline figure is positive as the table here shows but when we work through the detail the sheen washes off somewhat.

Cumulative Tax Revenue to September

Tax revenue is now almost €2 billion up on last year, which is supportive of the positive view given above.  Monthly tax revenue in 2011 has been ahead of 2010 for each of the nine months to date.

Monthly Tax Revenues to September

The three noteworthy months are April, July and September.  Tax revenues in April and July were higher this year because of earlier than expected receipts of DIRT tax.  This was expected in October so we can expect some drop back then.  In July there was also a bump in Corporation Tax due to timing issues.   The reason for the September increase will be explained below.

This chart shows the performance of the eight tax heads for the year to date.

Cumulative Tax Revenues to September

We can see that the “increase” in tax revenue is down to Income Tax and Stamp Duty.  VAT, Corporation Tax, Excise Duty, CGT and CAT are all lower than they were last year.

Income Tax in the Exchequer Account might be up nearly €1.9 billion on last year but it must be noted that the government is not collecting €1.9 billion of extra revenue as a lot of this is simply a reclassification. 

In the last December’s Budget the Income and Health Levies were replaced by the Universal Social Charge (USC).  While the Income Levy was included under Income Tax in 2010, the Health Levy was actually an “appropriation-in-aid” for the Department of Health and Children and did not enter the Exchequer Account. 

Money raised by the Health Levy went directly to the Department of Health.   In 2010, the Health Levy generated €2,018 million in revenue.  It is likely that at least  €1.2 billion of that would have been collected by September.  Under the USC this money now enters the Exchequer Account.   A substantial portion of the increase in Income Tax is due to this reclassification.  Tax revenue is “up” because we are now calling an existing revenue stream tax.

Once account is taken for these issues and the tax credit and tax band changes introduced in the Budget it is probably that Income Tax is performing just like the other five main tax headings – i.e. worse than last year.

The other tax showing an increase is Stamp Duty.  This again is not the positive sign the bare numbers would suggest.  Stamp Duty is only up because the €457 million collected as a result of the Pension Levy introduced in May’s “Jobs Initiative” is included here.  If we compare like-for-like Stamp Duty revenue is performing just like every other tax – i.e. worse than last year.

Monthly Tax Revenues for September

The key increases are Income Tax and Stamp Duty which as we know are largely the result of a reclassification and a levy that was only announced in May.  The apparent poor performance of Excise Duty is explained in the Information Note:

However, it should be noted that this is not a true reflection of the position as there was a delay in the transfer of some €112 million in receipts from this source proper to September into the Exchequer account. These receipts were not received in time to benefit the end-September figures. 

Although VAT is lower than last year no mention is given of the rate reduction for certain goods from 13.5% to 9.0%.  This could explain up to half of the drop in monthly VAT revenue seen in September as this measure was expected to cost €120 million in 2011.

A similar pattern emerges if we look at tax revenues in the third quarter.

Quarterly Tax Revenues for Q3 2011

Take out the effects of the reclassification (Income Tax) and the Pension Levy (Stamp Duty) and it is hard to see how these tax returns are “good news”.  Also remember that any bump in tax revenue as a result of the Pension Levy will be offset by the expenditure increases also announced in the “Jobs Initiative” which was ‘budgetary neutral’. 

In fact it was expected that the Pension Levy would raise €470 million; €457 million was collected.  What odds that the expenditure measures will be over budget?

Coverage of the Exchequer Returns seems to give inordinate attention to whether tax revenue is “on target”.  The 2011 revenue targets were released by the Department of Finance back in February and have not been updated since.

Tax Forecasts to September

Tax revenue is €160 million ahead of forecast, but this forecast was made before the government expected to collect €470 million from a 0.6% levy on private pension funds.  With other changes announced in the “Jobs Initiative” it is likely that by September tax revenue should be around €300 million greater than was forecast in February.  If this is included tax revenue is actually “below profile”.  This is clear if we look at the profiles of the individual tax headings.

Tax Forecasts to September 2

The only significant increases are for Income Tax and Stamp Duty.  Stamp Duty is €384 million ahead of profile but this does not account for the €457 million collected from the Pension Levy – Stamp Duty revenues are below forecast levels.

Income Tax is ahead of profile but this is primarily because of timing issues due to DIRT and this is helpfully explained in the Department’s Information Note:

Income tax is €147 million (1.6%) above target. Excluding the beneficial impact of earlier than expected DIRT payments in April and July, which were originally profiled for collection in October, income tax is just 0.9% below target after nine months of the year. Given the very large target set in the Budget and the introduction of such significant revenue raising measures, this is an encouraging performance.

The last sentence is staggering.  It is “encouraging” that Income Tax revenue is “just 0.9% below target”.  The author of the note is definitely one who believes that the class is half full.

Monthly Tax Forecasts to September

Aside from April and July which had bumps due to DIRT receipts, monthly tax revenues have been below the DoF forecasts for seven of the nine months so far this year.  Incredibly, tax revenue for September was €44 million below target even though €457 million of Stamp Duty was not included when the forecast was made.  What did they miss?  Almost everything.

Monthly Tax Forecasts for September

In September three-quarters of the tax heads came in below forecast.  Stamp Duty was up €256 million but this was only because €457 million was collected in a Pension Levy which did not exist when the forecast was made.  In reality Stamp Duty on the original levies was more than €200 million lower than the forecast revenue of €360 million.  The only "good news” in the September figures relative to the D0F forecast was that €16 million more was collected in Income Tax.  Everything else was in the red.

If we exclude the €1.2 billion added to tax revenue because of the reclassification of the Health Levy into the Universal Social Charge and the €0.5 billion collected as part of the Pension Levy then it is likely that tax revenue is running pretty close to last year’s levels even with the revenue raising measures introduced in last December’s budget.  It is also likely that tax revenue is running below forecast if the forecasts had been updated for the tax changes introduced in May’s “Jobs Initiative”. 

At best I would consider these a fair set of Exchequer Returns.  Tax revenue appears to have flattened out but “good news” based on tax buoyancy remains absent.

Monday, October 3, 2011

Deposits in Irish Banks

The level of deposits in the Irish banking system paints a pretty alarming picture.

Total Deposits

The collapse after the end of the initial “blanket” guarantee has been staggering with total deposits dropping from €894 billion in August 2010 to €579 billion in August 2011.  The lead story from Saturday’s Irish Times was that “Overseas deposits at Irish banks increase significantly”.  The article itself is correct but there is little justification for the headline as can be seen in the following graph.  This issue was pointed out by Prof. Karl Whelan over on

Total Deposits by Origin

It is also important to remember that this is all banks operating in Ireland.  From an Irish perspective the key portion of the Irish banking system is the six banks covered by the State guarantee (of which five have now been nationalised).  Deposits in these banks have fallen from €408 billion to €263 billion in the past year.  The did rise by €1.5 billion in August but that is hardly “significant”.

Total Deposits by Origin in Covered Banks

At best, it can be said that deposits in the covered banks have stabilised, and in particular for non-Irish resident deposits.  The trend for Irish resident deposits in the covered banks remains down.

A short presentation going through 17 slides showing different measures of deposits in the Irish banking system (including central bank deposits) is available below the fold.