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The rhetoric of national bankruptcy. The actuality of national borrowing. July 30, 2009

Posted by WorldbyStorm in Economy, Irish Politics.
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Fintan O’Toole makes some good points in the Irish Times this week. Got to admit I’ve slowly come around to his viewpoint on the National Pension Reserve Fund, a viewpoint which is shared by McCarthy (and again, note how hegemony operates. Near everything in the public discourse on these matters relates back to the alpha and omega that is McCarthy). Both argue that payments should be stopped into the NPRF. The reasons?

From the time the McCarthy group on public spending was established last autumn, there was one absolutely obvious candidate for the chop: the 1 per cent of GNP that we’re paying every year into the National Pension Reserve Fund (NPRF). This is a no-brainer. It’s not just that we’re putting about €1.7 billion annually into a black hole. It’s that we’re now borrowing that €1.7 billion at high interest rates. The analogy with going to the money lender to get the money to bet at the bookies is pretty exact. For anyone who is not so far gone in idiocy as to be actually wearing cap and bells, there really is no argument here.

And O’Toole continues:

Last year, the return on our investment in the NPRF was minus 30 per cent – almost a third of the money disappeared. The overall return on the billions we’ve put into the fund since it was established by law in 2000 is 0.6 per cent. We’d have done better if we’d simply put the money into a post office savings account.

This is so appalling a waste that it’s almost laughable… Actually, if they had invested in the PO in the form of saving bonds you’d get 10% interest after 3 years and with savings certificates 21% interest after 5 years… okay, I’m kidding. But only slightly (and isn’t that an echo of the PwC report on Pensions released on Monday which argued that pension fund managers should – and I paraphrase – stop playing the market when investing funds and put such monies into ‘safer’ government bonds etc).

And O’Toole, rightly, has kind words for McCarthy.

If the McCarthy group was to have any credibility at all, it was always going to recommend that we stop throwing good money after bad, particularly since the NPRF is not counted as part of the General Government Balance, and therefore doesn’t affect our borrowing limits.

The McCarthy report duly obliges: “These payments were affordable when the budget was generally in balance but the Group considers they should be suspended as the State is in effect borrowing to finance the purchase of financial instruments.”

And O’Toole notes something very very important there.

If we were to stop the NPRF payments of €1.7 billion we’d already be over half the way there to preventing the cuts recommended by McCarthy and supported by the ESRI at the weekend, where the younger FitzGerald argued for €2.5 billion to be removed from public expenditure.

Now, as I’ve noted here previously, I actually find some elements of McCarthy to be eminently sensible, more than might perhaps be expected – for example I can live with the public pensions reform he suggests, a reform of some allowances and certain work operations is long overdue, the creation of a single employment market within the PS is an excellent idea, and I’d even go further than he and his in terms of tax reliefs, etc – and I have no problem at all with a state undertaking periodic reviews of expenditure, so I’m willing to accept that there are cost savings and efficiencies to be discovered hither and yon. Not as many though as advertised. And not necessarily in the places that certain cheerleaders of slash and burn would have us believe.

Given that though, stopping, even for a limited period, the NPRF payments would at the very least allow those savings and efficiencies to be made in an atmosphere which was less charged, less ‘hurry hurry’ and more reflective. It would even, whisper it, allow for some elements of savings to be diverted to some form of fiscal stimulus.

But, almost inexplicably, as O’Toole also notes:

There’s just one problem. Knowing that the McCarthy report was going to recommend that the NPRF payments be suspended, you would assume that the Department of Finance held off on handing over this year’s money. Astonishingly, it not only made this year’s payment early, it has also handed over most of next year’s as well. The department, presumably with the full approval of the Government, has deliberately sabotaged the most obvious and least contestable recommendation of the McCarthy report.

The National Treasury Management Agency’s report last week confirms the receipt of “€3 billion from a frontloading of the Exchequer contributions to the Fund for 2009 and 2010”. Knowing, at it must have done, that McCarthy (or anyone else with a stim of wit) would insist that we stop borrowing money to put into a fund that lost a third of its value last year, the Government decided to “frontload” the payments. It didn’t just borrow for this year’s trip to the bookies, but for next year’s as well.

Odd that. O’Toole believes it is simple if ‘breathtaking’ hypocrisy. I can’t help wondering whether this is oversight (hardly unlikely given the mess this lot have walked us into), or ideologically driven… in other words the calculation is that it is necessary for the ‘pain’ to be inflicted and seen to be inflicted. I think it’s more likely to be the latter than the former.

And this would appear to be borne out by the rhetoric over our borrowing situation. For those of you who missed it the Irish Times editorial on Monday was most instructive

FOUR MONTHS ago the most pressing question in some quarters was whether Ireland could continue to borrow to finance a soaring budget deficit that was slipping further out of control. The answer was that it could do so with increased difficulty and at a higher financial cost. Foreign lenders sought ever-higher returns to compensate for the greater risks associated with a shrinking Irish economy – which may contract by 2 per cent in the three years to 2010.

Note the ‘some quarters’ formulation. I’ll return to that in a moment.

In March, the yield difference – or spread – between Irish and German ten-year bonds had touched a record high. Ireland, as a sovereign borrower, was paying far more than Germany to issue government debt – almost 3 percentage points more – even though both countries share a common currency, the euro.

Now, you may be less surprised at such a spread despite the ‘sharing of a common currency’ the ‘euro’ (for those of us asleep under a rock for the past decade). The Republic of Ireland and the Federal Republic of Germany. One exiting an economic boom/bubble, the other the powerhouse of Europe. Compare and contrast.

That yield gap has since narrowed, and the differential is now closer to 2 percentage points. As Ireland’s borrowing premium has declined, so too has the annual cost of servicing the national debt, which represents some welcome news for taxpayers.

Indeed.

What is the reason for the sharp turnaround? Certainly, international investor sentiment towards Ireland has improved greatly in recent months, despite the loss of the country’s triple-A credit rating in March. Michael Somers, chief executive of the National Treasury Management Agency (NTMA), which borrows for the government and manages the national debt, has detected a noticeable shift in attitude by international investors, plainly impressed by the Government’s plan to stabilise the public finances by 2013. In financial markets, however, sentiment is notoriously fickle.

Never.

Fears of debt default, and suggestions that Ireland might be forced to seek sanctuary with the International Monetary Fund (IMF) may well have seemed greatly exaggerated, given Ireland’s low level of government debt. Nevertheless, at times of great financial and economic uncertainty, markets may be moved as much by sentiment as by more fundamental concerns. The success in changing a negative international perception of the Irish economy into a much more positive one, as measured by a reduction in borrowing costs, does represent a considerable achievement. It helps achieve stabilisation of the public finances, which is the foundation for economic recovery. The Government can take some credit for what Dr Somers has described as the “huge change in general sentiment towards Ireland”. Finance Minister Brian Lenihan impressed international investors needing further reassurance about Ireland’s creditworthiness during his recent tour of major financial centres.

Note that ‘may well have seemed’ in the first sentence of that paragraph. Again, I’ll return to that. Note also the acceptance of the essential irrationality of market ‘sentiment’ at certain points. And then… cue the pain!

That said, as Dr Somers has warned, international investor sentiment could also quickly change for the worse. A second rejection by voters of the Lisbon Treaty would prove greatly damaging in international markers. So too would any sign the Government lacks the political will to meet the tough budget targets required to stabilise the public finances. Much of the renewed confidence of international investors in the Irish economy is now based on the Government being able to keep its word, and deliver the tough medicine it has promised – regardless of the political consequences.

Right. Okay. So to assuage market ‘sentiment’ we have to ‘deliver tough medicine’ although the reasons for the tough medicine appear less pressing and the options available to ameliorate the treatment are rapidly coming into focus. Maybe it’s me but that doesn’t sound like governing, it sounds like punishment.

Now let’s see why such an air of fear might have been generated… let’s look at one Dan O’Brien writing in the… er… Irish Times in March…

IRELAND IS rapidly moving towards the abyss of national bankruptcy. The Government’s response, with its forthcoming budget and other measures, must be proportionate to the dangers.

It is difficult now to overstate the magnitude of the crisis in Ireland’s public finances. One in four euro spent is being borrowed. The gap between revenue and expenditure is widening with each passing month. Public debt is exploding. So are debt servicing costs. In January and February alone, €175 million was spent paying interest, up a staggering 64 per cent on the same period in 2008.

Most of this money left the country. This haemorrhaging will not only continue, but will gush with ever greater force unless every possible measure to staunch it is taken with all due haste.

O’Brien made something of a cottage industry of pieces about ‘national bankruptcy during March and April this year.

How about Stephen Collins writing in the… ahem… Irish Times also in March…

DELIVERING A budget on April 7th that is tough enough to save the country from bankruptcy is an awesome responsibility for Brian Cowen and his Government, but it could also be a liberating experience to throw all political caution to the winds and stake everything on one bold move.

The Government’s problem since last summer is that it has been too slow to face up to the truly staggering scale of the problem with the public finances.

International capital markets have lost confidence in the Government’s ability to deal with the public finances, and the April budget is the last chance to restore it.

While it is true to say that no government, anywhere, has managed to get to grips with the combination of a banking crisis and the economic downturn, the fact of the matter is that the Irish response is regarded as one of the worst in the developed world.

That is reflected in the fact that it is costing Ireland more than any other European Union country to raise borrowing.

Huge cuts in welfare rates as well as in the pay and pensions of public servants would automatically follow intervention by the European Central Bank or the International Monetary Fund. That is why the controversy over the public sector pension levy is so futile. In the scheme of things the measure is relatively mild and reasonably fair. While it understandable that the people affected don’t like it, they must know that it is necessary in order to avoid far worse.

And how about this… taken from an… ouch… editorial … in the Irish Times in March…

They had fed the fires of a massive public borrowing and spending spree for five years. Now that foreign lending has dried up; the property bubble has deflated and exchequer revenues are some €18 billion in deficit, Ministers refused to acknowledge that they are part of that past. Any semblance of an apology, even an acknowledgment of possible mistakes, did not rate in their political vocabulary. The prospects for an all-party political recovery plan and emergency tax-cutting measures are remote with such amnesia.

In a way that’s the worst of the lot (and by the way that’s a, I believe, representative sample in terms of that sort of rhetoric in the IT during that period, albeit these are the most exaggerated examples) since it’s factually incorrect that in March 2009 foreign lending had dried up. On Wednesday 24th of March the IT reported that NTMA had sold €1 billion in long-term bonds at auction. A week or so later it raised €1.5 billion in T-bills. And in January the NTMA borrowed €6 billion.

Indeed so far this year, as noted in the Irish Times last week…

…the NTMA has raised €22.7 billion from the bond markets out of total borrowing requirement for the State of €25 billion. For further bond auctions are planning between now and November.

Now in fairness let me also note that fear wasn’t restricted to the usual suspects of the right… what about this from the… erm…Irish Times again, this time Vincent Browne who in February wrote under the heading “Leading us all to castrophe” (I love a snappy heading… I really do):

An economist friend said the other night: “We are ruined.” He was referring not just to Brian Lenihan’s extraordinary remarks on Sunday night, but to the potentially catastrophic mess the Government has made of the public-service pensions levy.

It seems now that either the Government would have to back down, as they were forced to do over several of the budget measures, or there will be strikes in the public sector.

Either way, my economist friend believed, we would be unable to borrow the money we need to keep the show on the road. Therefore ruin.

Ruin. Every little bit helps, as the saying goes.

Now there is a counter argument that might go, look we’ve had an emergency budget and now we’ve had a report. The government has given tokenistic assurances of its intention to deal with this matter. The situation was dreadful, or potentially could have been dreadful if nothing were done. No doubt there is an element of truth in that, but… the appetite for Irish bonds was strong throughout the earlier part of the year well before a sniff of Budget 2. The McCarthy report is as of yet entirely unimplemented, although one national cultural institution, I know of has a meeting with the Dept. of Finance imminently as regards it’s future survival – so in some areas the groundwork is being done to see what is feasible and what is not. And there was never at any point from any serious voices on left or right a sense that nothing should be done. The debate has focussed on the strategies out of this situation, and the severity of it, not a belief that there is no situation to address at all.

Look back at the Irish Times editorial…Fears of debt default, and suggestions that Ireland might be forced to seek sanctuary with the International Monetary Fund (IMF) may well have seemed greatly exaggerated, given Ireland’s low level of government debt.

But even at the time there were alternative voices arguing that they were then greatly exaggerated, but these voices were given remarkably little prominence. You think I mean left-wing voices? Think again. For example, what of this unusual piece in the Irish Times from February 2009 by Charles Dumas of Lombard Street Research (LSR, and economic consultancy in the UK, was founded by economist Tim Congden, a British monetarist, no friend of fiscal irresponsibility him) which argued that “Ireland is not a basket case”.

And Ireland’s financial problem? Would that we all had such problems! Ireland has virtually no net government debt. The banking sector is indeed large. Total deposits on the broadest definition are about 130 per cent of GDP. Suppose the financial sector needs to be recapitalised at one-fifth of this balance sheet (an extreme assumption). Then Irish debt would rise by less than a quarter of national income, depending on the actual losses emerging, and would remain well below most other countries, including all the major Europeans. Meanwhile, the widening of Government bond spreads against German bunds must be seen against the falling absolute level of the latter. Current Irish 10-year yields are an affordable 5½ per cent. They look a much better risk-adjusted bet for investors than Germany’s debt at just over 3¼ per cent.

It’s odd how that particular viewpoint hasn’t been more widely articulated, despite it being much much closer to the truth of the matter both then and now.

But is there any surprise when the Irish Times on Michael Somers, head of the NTMA’s, presentation of its report for 2008 is headlined:

State interest repayments to soar

That sounds awful, doesn’t it…

The cost of repaying interest on Irish national debt will rise from 3.8 per cent of tax revenues in 2008 to 18.7 per cent in 2013, according to the State’s debt manager, the National Treasury Management Agency (NTMA).

Hold on though…

In its annual report for 2008, the NTMA said the sharp increase in borrowing requirements is due to the deficit in the Government finance. It says while the burden of interest repayments will increase “it will be no greater than the levels experienced in the mid-1990s”.

And…

Chief executive of the NTMA, Dr Michael Somers said the market sentiment had improved significantly in recent months and that there was increased demand for Irish Government debt.

“This week alone we had an auction of bonds for €1 billion we had cover for somewhere between €3 and €4 million demanded and the yields that we paid were significantly below what we had been paying earlier in the year,” he said on RTE radio this afternoon.

Indeed…

Mr Somers said there had never been any question that the State would not repay what was borrowed. Part of the reason for the change in sentiment was the fact that the NTMA has kept a “huge mountain” of €25 billion in cash available meaning it can easily meet any repayment demands.

Well, that is good news. Although wouldn’t it be nice to see the Government think about how it could fund some degree of a fiscal stimulus given that fact? Even just a little, a bit, something, anything.

A second factor was that even now, Ireland’s debt to GDP ration was relatively low relative to other euro member states.

Wait… isn’t that the letter to the spirit of what Dumas said way back when? And not just Dumas.

But, note the discrepancy between the headline and the contents of the story. Once the Irish Times was a fairly staid, relatively sober creature. Never as left-wing, or even liberal, as it liked to think itself, but dependable for all that. And now?

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Comments»

1. Michael Taft - July 30, 2009

And don’t be surprised when the same people who argued that the bond markets were on the verge of freezing up, that investors would turn their backs on us, that we wouldn’t be able to sell our debt (cue: state can’t pay public sector employees, social welfare payments, chaos in the streets, Iceland squared) – these same people will be invited on to current affairs programmes and asked to write op-eds, providing us with more of their insight, their wisdom, without a question raised about their earlier analysis (except for sites like here).

The same people who cheered on the tax cuts of the late 1990s and early 2000s – who, in essence argued for pro-cyclical policies – are the same people who are urgning the government to pursue deflationary policies; in essence, pro-cyclical policies.

The debate trundles on – informed commentary stumbles.

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2. EWI - July 30, 2009

Odd that. O’Toole believes it is simple if ‘breathtaking’ hypocrisy. I can’t help wondering whether this is oversight (hardly unlikely given the mess this lot have walked us into), or ideologically driven… in other words the calculation is that it is necessary for the ‘pain’ to be inflicted and seen to be inflicted. I think it’s more likely to be the latter than the former.

I’d say to rather ‘follow the money’. Given the muttering of the last few years by business sector advocates about investing the pensions money here rather than abroad, just where is the NPRF pumping this money to? (The cynic in me says to look at CRH first on that list…)

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3. Damian O'Broin - July 30, 2009

*wonders if there’s an emoticon that means shakes head in despair and wishes he lived in a different country*

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4. Damian O'Broin - July 30, 2009

Excellent post WbS, even if it’s nearly as depressing as the weather.

EWI – very good point. I think you could be right

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5. Pavement Trauma - July 30, 2009

By the by: I think the “Now that foreign lending has dried up; the property bubble has deflated” comment was more of a reference to foreign lending to our banks rather than to the government (back when there was still a distinction between the two).

More generally there is an element of hindsight being 20:20 vision here. In the early part of this year it was damn scary. Nobody knew what was going to happen with Irish debt – the range of possible outcomes was simply enormous – as no one could say what way the international debt markets were going to do. I would agree certain people definitely over-egged the likelihood (and time frame) of default.

I believe the probability of being forced into defaulting on our debt this year or next is tiny but much beyond that, who can say with certainty?

Lastly I would agree that borrowing at the current rates to invest in the NPRF does not make much sense.

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6. WorldbyStorm - July 30, 2009

PT, you might have a point there, albeit the IT piece isn’t clear itself and couches the phrase in a nest of government borrowing/expenditure text.

I’m not sure though it’s absolute hindsight. Here during that period, and over on Notes, as you know, we were fairly sceptical of the more extreme pronouncements during that period.

Echoing your last point it’s interesting to wonder what we could do about it, if anything.

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7. Tim Buktu - August 1, 2009
8. Clearly didn’t get the memo, that Garret FitzGerald/Fine Gael spat… « The Cedar Lounge Revolution - September 2, 2009

[...] there have been more recent examples of people resiling from the ‘hands of the IMF’ [...]

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