Tuesday, March 6, 2012

Presentation on Fiscal Compact

Here are the slides from a presentation I gave yesterday in UCC on the fiscal compact.  I hope to post the audio at some stage during the week which will provide more of an explanation of the simplifying assumptions used.


  1. Hi Seamus,

    Do you see any downside if Eurostat were to reclassify NAMA bonds (c€30bn) as part of General Government Debt?

  2. Hi Jag,

    I'm not sure there's a real downside if that were to happen. The liabilities exist regardless of whether they are in the GGD or not. One advantage to including them would be a small bit more openness on the actual figures.

    If they are included it would put Ireland's GGD well in excess of 120% of GDP. It would be interesting to see what would happen then. The last few weeks have all been about trying to get Greek debt to 120% of GDP in 2020. There was a bit of a song and dance made about the recent Finance Ministers Council which set out to bring the 2020 forecast down from 129.5% to the 120% threshold with lower interest rates, further PSI and profit-sharing by NCB's with their profits on Greek bonds.

    If the 120% of GDP for the GGD is such an important threshold (I don't believe is it) what will happen if the inclusion of NAMA on Ireland's balance sheet pushes the GGD up to around 130% of GDP for 2011 and a forecast peak of more than 140% by 2013/14? Would the Finance Ministers meet all night to bring it back down to 120% or will we start hearing caveats about "net debt", "offsetting assets" etc.?

    In my opinion any debt sustainability analysis is primarily driven by the interest rate, the inflation rate, the growth rate and the size of the primary balance that can be achieved. The absolute size of the debt only affects the last of these in that a larger debt makes it harder to run a primary surplus.

    Eurostat have already ruled twice that the NAMA SPV can be kept "off-balance sheet" for the purposes of the GGD. I don't think there has been any change in 2011 to suggest that this will not continue to be the case.

    It is more likely that there will be a change in relation to the liabilities of the IBRC. This was formed in 2011 with the merger of Anglo and INBS so the 2011 figures will be the first time that Eurostat will have ruled on the new entity, which to all intents and purposes is not a bank so is unlikely to be viewed as commercial. The consolidated liabilities of the IBRC would probably see around €20 billion added to the GGD (we are already covering a large share of their liabilities through the Promissory Notes).

    We will know this in a few weeks but I think it is far more likely that the IBRC will be added to the GGD rather than NAMA.

    It should be noted that the inclusion or exclusion of NAMA or the IBRC has no immediate impact on any the four factors listed above for debt sustainability (the interest, inflation and growth rate as well as the primary balance).

    They will have an impact if they run a loss that must be covered by the State but this is true whether they are in the GGD or not. If they required €10 billion of additional aid (which seems unlikely) and this was borrowed at 5% that would be an additional interest cost of €500 million per year. This is a big number but not one that is likely to tip an analysis of Irish debt sustainability one way or the other.

    1. @Jag

      I know you started the question with NAMA and I have drifted off into the IBRC, but I think that is the one that is more significant.

      Assume the IBRC has €48 billion of liabilities. We haven't seem a report from the IBRC so this is a bit of a guess but is likely to be in the ballpark. If the ruling is that these must be included in the GGD, then the GGD will increase by €48 billion.

      However, if the IBRC comes "on balance sheet" then any money that central government owes to the IBRC are excluded (i.e. the promissory notes). As both would now form part of the General Government it is the liabilities of the IBRC that matter, rather than liabilities between central government and the IBRC.

      So if there are €28 billion of Promissory Notes outstanding and the IBRC has €48 billion of liabilities the effect of the reclassification would be to increase the GGD by €48 billion minus €28 billion equal to €20 billion.

      So far, this doesn't mean a whole lot. However, once the IBRC comes "on balance sheet" it is not only debts between it and the central government that are removed by the GGD; transfers between the IBRC and central government would be excluded from the General Government Deficit.

      This would mean that the interest payments that are being made on the Promissory Notes would be excluded from the deficit. It was always difficult to accept that they should be included given that they were being made from one arm of the State to the other. The inclusion of the IBRC as part of "general government" would end this.

      One way to look at this is the payments we were making to the NPRF during the good times. These were counted as expenditure in the Exchequer Account but they had no impact on the General Government position as we were just transferring the money between different arms of the State. The assets we had built up in the NPRF did not reduce the General Government Debt and the annual payments we made to the NPRF did not affect the General Government Deficit.

      So, if (and it is still only if) the IBRC becomes part of General Government, the debts that central government owes to the IBRC (the promissory notes) would not be counted in the General Government Debt and the transfers central government makes to the IBRC (the interest payments) would not be included in the General Government Deficit.

      From 2013 there is due to be about €1.8 billion added to the General Government Deficit because of interest due on the Promissory Notes. This could be around 1.2% of GDP and will decline by about .1% of GDP each year.

      Would I be willing to accept a 13% of GDP increase in the General Government Debt in return for a reduction of 1% of GDP in the General Government Deficit for each year from 2013? You bet!

      That would make getting under the 3% of GDP limit by 2015 that bit easier. Why are we making it harder to achieve this target because of money we are paying to ourselves?

      This is a bit of a "technical discussion" about "technical things" but it may be something we hear more of in the coming weeks.

  3. Thanks for that Seamus

    I think the jury is still out on NAMA’s profitability, personally I think there’s a greater than 50% chance of the Agency breaking even by 2020, but it’s arguable.

    If NAMA bonds were added to GGD *and* NAMA were to break even in the next nine years, then would that not help Ireland in its compliance with the terms of the Fiscal Compact if NAMA is repaying an average of 11% of debt per annum (100% divided by 9 years) and the requirement (and I know this is a simplistic interpretation of what is in the Compact) is 5% - in other words, NAMA’s overperformance in debt repayment could lessen the rigidity of requirements in respect of debt generally.

    BTW, I didn’t realise that Eurostat had ruled on NAMA twice. There was the preliminary view in October 2009 http://epp.eurostat.ec.europa.eu/portal/page/portal/government_finance_statistics/documents/Irish_letter_19_10_2009.pdf
    but I wasn’t aware of a subsequent ruling.

  4. Hi Jag,

    Ireland won't be subject to the numerical requirement of the debt brake until 2018 at the earliest so the impact of NAMA on Ireland's GGD performance would not be for long if NAMA is wound down by 2020.

    I assumed two rulings on NAMA because Eurostat has accepted and published the 2009 and 2010 general government debt figures for Ireland from the CSO. It might be a bit strong to consider them rulings; it might be better to say Eurostat has adopted its October 2009 ruling twice.

  5. Hi Seamus,

    How does the prospect of all tracker debt being shifted of the bank's books onto the IBRC fit in?

    1. This is an interesting development and not one I had given much credence to until Michael Noonan's appearance on The Week in Politics. If it does happen the IBRC would need funding for all these tracker mortgages and hence its liabilities would increase.

      AIB(+EBS), BOI and PSTB have about €75 billion of mortgages. Assuming that 50% of these are trackers that gives a total pool of €37.5 billion that could be transferred to the IBRC.
      This would be about 24% of GDP.

      If the trackers are transferred is likely that IBRC would not be eligible to be counted as part of general government as it would have some notional commercial standing.

      I'm not sure what can be achieved by this. The trackers will still exists and the losses on them will still arise. Why would taking the trackers off the banks' balance sheets not have exactly the same effect that taking the developer loans off them did? Nothing!

      The banks have been recapitalised for losses on their mortgage books. They can (or should) be able to absorb the losses. It would help achieve deleveraging targets and would improve the optics of the banks (though the losses we are on the hook for would be unchanged).

      We need to focus on achieving some real savings of the ELA/Promissory Notes. Getting side-tracked into mortgages is only muddying the waters. The biggest problems we face in the mortgage market are mortgage arrears and, in particular, unsustainable mortgages. If we are going to do something in the mortgage market lets tackle those.