Standard & Poor’s show… August 26, 2010
Posted by WorldbyStorm in Economy, Irish Politics.trackback
A number of thoughts strike me about the news yesterday that Standard & Poor’s have, with lamentable timing, downgraded the State credit rating from AA to AA minus.
First up what is the headline news ?
S&P’s move came as Irish 10-year bonds fell and German bunds surged, widening the so-called yield spread to a record and surpassing the level it reached before the European Union and IMF announced a rescue plan in May.
Now much of this is due to the Germans bunds rallying, but that’s no consolation to us, since this means that:
S&P cut the Republic’s rating from AA to AA minus, which means it believes that there is an increased risk that the State will not be able to meet its liabilities.
But what S&P taketh away with one hand they sort of kind of give back with the other:
However, AA minus means that the borrower has “very strong capacity to meet financial commitments”, according to the agency’s rating system.
Now, in general terms if I decide there’s an increased risk that you won’t repay loans to me or others it’s usually on foot of some issue with your capacity to meet financial commitments. If there’s one, there’s generally the other.
There’s not a lot of wriggle room there, now is there?
So I’m somewhat in awe of their capacity to say two seemingly contradictory things at the same time, and what’s more, act upon it by downgrading us. Clearly one is outweighed by the other.
But, given the rhetoric of the last two years as to our grievous predicament being a result of a public sector expenditure being out of control, that that indeed is the real problem which has to be addressed, what is it that has led to the latest downrating?
S&P based its calculations on a €50 billion estimate for bank recapitalisation, which the National Treasury Mangement Agency (NTMA), described as extreme, and Nama’s €40 billion liabilities.
Okay, fair enough. €100bn would give pause for thought – no doubt about it. And that dwarfs by far the cuts made in public expenditure even across the timeframe agreed by the Government and other institutions.
But perhaps the most depressing aspect of this is to be found in the following statement.
Yields on Irish and German government bonds were almost identical from the launch of the euro until early 2008. The decoupling since then has been driven by rising yields on Irish debt, which is viewed as being at growing risk of default, and falling yields on German debt. The euro zone’s largest economy appears particularly sound relative to peripheral countries, such as Ireland.
And those yields were driven in no small part by the credit rating, at the time more than satisfactory, awarded us by S&P and its ilk. Note that, this during a period when it was apparent to many of us that there were serious serious problems developing on a range of fronts from the housing boom to a near scandalously narrow tax base (and a fetish for low personal taxation so pervasive that the Labour Party in 2007 was bidding to undercut other political parties – and was applauded by the bien-pensants in the Irish media at the time for doing so). So if they, and indeed others, got it so dismally wrong then..?
By the way, useful to know who else is in the doghouse with us down at AA minus level…this dates from March, but nonetheless… comforting to know our investment risk is up there with China, Mexico, South Africa, and is that Chile I see before me?
On this very matter – and it’s back to Michael Taft who has a most concerning piece which one would hope shatter any remaining illusions as regards how long lasting the effects of this are going to be on our deficit (Conor on Dublin Opinion puts this into an European context here). Ten years to reach Maastricht compliance – at best. And people are surprised that the markets are nervous… (and let’s not forget as he notes – the ‘double Irish’ – on which topic he provides a useful link here… I was particularly interested in the quote from a Tea Party rep on the issue. Now if only they’d start looking at that sort of thing they might do some good).
They’re saying that AA-minus is a lower level of trustedness than AA, but still very trustworthy. It’s not contradictory
“So I’m somewhat in awe of their capacity to say two seemingly contradictory things at the same time, and what’s more, act upon it by downgrading us. Clearly one is outweighed by the other.”
You’re right Paul, it’s not an absolute contradiction, at least simply as a statement. The problem is though that reading the Irish Times I see the editorial argues that:
http://www.irishtimes.com/newspaper/opinion/2010/0826/1224277610064.html
“Unsurprisingly, it was not a change for the better. The mounting costs of the banking rescue, it believes, mean that Ireland has moved one step further from the solid ground of solvency.”
Or consider what they quote NTMA’s John Corrigan saying:
“On CNBC, a TV channel which is piped into every financial trading floor in the world, he protested that S&P’s measurement of Ireland’s public debt was not consistent with any international standard.”
In other words, as the IT notes, ‘it has consequences’, and they’re negative ones, hence my point about S&P acting only in relation to one aspect of the analysis they present us with i.e. increased risk that the state won’t be able to meet its liabilities/very strong capacity to meet financial commitments.
Or let me put it another way, and I think this is the import of what the IT editorial and Corrigan are implying, that the reality is that the state can meet its liabilities and any increased risk is so minimal as to be unworthy of acting upon.
Or alternatively the risk is so great from these extra liabilities, NAMA and recapitalisation that S&P shouldn’t attempt to sugar the pill with the ‘strong capacity’ statement.
It’s an interesting crack in the facade all the same when there’s a public criticism of the rating agencies by the NTMA.
Ok, we’re not quite at Hungarian levels of state support for national interests ahead of those of transnational capital, as recently discussed elsewhere on CLR.
we’re not quite at Hungarian levels of state support for national interests
No, not quite.
Indeed the way things are playing out it may well be that reality will soon dawn on transnational capital that we are broke and that we will never be in a position to repay the 100bn or more that has been so rashly flushed down the jax that is our banking sector.
No amount of servile lickspittlery from the traitors Lenny and Cowen is going to fix that and firesale liquidation of the semi-states is not going to raise enough to cover the debt either.
Investors who gambled on Irish debt since 2008 need to be told that they backed the wrong donkey. Can’t pay, won’t pay. All aboard the default express.
The total collapse of Irish capitalism is at hand and tragically the left are in disarray. It’s hard to predict how things will pan out.
reality will soon dawn on transnational capital that we are broke and that we will never be in a position to repay the 100bn or more
Repayment of national debt, does it ever happen? They’ll be happy if we just continue to service the debt. If it was repaid they’d have to find somewhere else to invest it after all, somewhere to give them as good a rate of return thay we’re paying.
I’m more intrigued by the possibility that national interests (government or public service) might become disenchanted with the rules of the game.
The thing is that we need them to continue lending to us, not that we’ll pay back the 100bn. That, as you note, will never happen, but it’s the re-financing and roll-over of debt that will be the problem from here on in.
If the bond markets get wary or refuse to lend, or start charging money-lender style interest rates, then we really are in trouble. 40% of public spending, 40% of my salary, 40% of social welfare spending, 40% of the costs of running every school and hospital in the country has to be borrowed from these f**kers. They seem to be getting nervous which ain’t good for the consensus. ‘Coc’ has correctly noted that the ‘end of Irish capitalism’ is at hand, let’s hope it’s not too catastrophic….
BTW does anyone know if they take into the NTMA’s Pension Fund reserves etc when compling a rating assessment?
The incurious media was full of reports of a successful €600m bond auction this morning. Smoke and mirrors, I suspect.
They didn’t speculate on the nature of the the purchasers.
My guess would be the Irish banks themselves who must be fighting tooth and nail to ensure the guarantee is maintained, and the ECB which indicates that the EU has not made up its mind / is incapable of making up its mind about the final resolution of the bad debts of moribund peripheral economies like that owned by our elite.
The average yield was 2% over 6 months, which certainly from the banks’ point of view would beat lending to businesses here.
Re the Tea Party taking notice of the Double Irish corporate tax avoidance scam.
Assuming this was closed off completely we have to be honest and admit that a good proportion of multinational jobs would be lost. A smart way to approach reform might be to close of the Dutch and Bermudan legs of the scam mentioned in the Bloomberg article and possibly share some of the resulting tax income with the US.
In order to lose the jobs, Pope, the jobs need to be there in the first place. According to Dr. Jim Stewart of TCD in a paper he wrote in 2006, there were over 400 treasury management firms in Ireland that year, and in a survey done of 41 of these firms, he found that in 2003 those 41 firms had a total gross value of 15 billion dollars, gross profits of 393 million dollars, and NO employees. None. That was a survey of 10 per cent of these companies, and not one employee found. These are the “brass-plate” companies we often hear about.
This the is nature of the scam. We’re not even getting decent lunchtime SPAR sandwiches and coffee purchases out of this.
IDA-supported companies employed around 136,000 people in 2009 – or 7.2 per cent of the workforce that year.
The international and financial services and software export sector – which includes the sector we’re talking about here – employed 58,590 – or 3.1 per cent of the workforce.
In 2009, exports rose by 5.5 per cent, whereas employment within IDA-supported companies FELL by 10.2 per cent.
With regard to multinationals and Ireland in general, in 2008 they paid approx 3 billion euro in Corporation Tax, on sales of 109.64 billion. That’s a tax rate of 2.5 per cent after all the benefits and avoidances kick in.
In 2008, the direct economic impact of IDA-assisted companies was 19.149 billion euro. That includes, wages, services, and locally-sourced materials. That equates to about 10.5 per cent of GDP, or 12.3 per cent of GNP.
Now, foreign companies account for 78 per cent of merchandise exports, and around 96 per cent of service exports.
So, Ireland’s economic model is to have an export sector saturated with foreign investment which provides 2.8 billion in tax revenue, and 19.149 billion in wages and local service/produce purchases – which together equate to 12 per cent of GDP or 14.2 per cent of GNP.
We’re not borrowing to pay for social welfare, we’re borrowing to keep corporation tax at 2.8 billion euro, and to have one of the most open economies in the world produce an export sector that’s worth around 22 billion euro to an economy which on paper in 2008 had a GDP of 181 billion and an GNP of 154 billion.
Michael Burke has a very interesting post over on progressive economy where he argues that Ireland needs to become a proper open economy – that is, one that trades actual goods and services – instead of what we have today: a glorified exercise in international accounting.
http://www.progressive-economy.ie/2010/08/who-benefits-from-irelands-imbalance-of.html
That’s all great information Conor and thank you.
One point – what percentage of FDI factories / service / assembly plants can be described as ‘IDA assisted’. Surely the sector is bigger than that with some non-IDA assisted plant – or did they all get assistance?
That’s the very point which Bartley raised as well, and I’m afraid all I can offer is an estimated guess – that if you look at the overall figures for Corporation Tax, and the fugre put forward by IDA Ireland, the difference would lead you to believe that IDA-assisted covers most of FDI in Ireland.
But, I’m not sure. I’m going to have to find that out. I emailed IDA Ireland this morning, but as of yet no reply.
ok. I rang IDA Ireland and they are unsure as to what percentage of foreign-owned companies are their clients.
However, in 2008 foreign-owned companies accounted for approx. 78 per cent of all merchandise exports, and (according to Dan O’Brien) 96.5 per cent of all service exports. That means that in 2008, around 130.34 billion of the value of exports were produced by foreign companies, so with export value of 104.75 billion (of total sales of 109.64 billion), IDA assisted clients account for an ESTIMATED 80 per cent of the value of all foreign exports, and about 70 per cent of all exports.
In terms of employment, according to Forfás, direct foreign employment in Ireland in 2008 (full and part-time) was 167,145. This means that IDA-client companies account for an ESTIMATED 91 per cent of foreign-generated employment.
With regard to American companies, IDA Ireland told me that the American Chamber of Commerce should know how many American companies there are in Ireland. According to its website, there are 400, of which 369 (or 92 per cent) are IDA client companies.
A few nit picks:
approx 3 billion euro in Corporation Tax, on sales of 109.64 billion. That’s a tax rate of 2.5 per cent after all the benefits and avoidances kick in
To calculate the rate of tax you need to use the profits total, as opposed to the sales total, as the dominator. For many MNCs the former would be much closer to the latter than is normally the case for a real business, but certainly not equal overall.
Ireland’s economic model is to have an export sector saturated with foreign investment which provides 2.8 billion in tax revenue, and 19.149 billion in wages and local service/produce purchases
To get the actual tax revenue for the export sector, you should add the income/consumption taxes levied on the 19 billion to the corpo tax levied on the profits.
Lastly I\’m not sure how valid it is to use IDA-supported companies as your basis for calculation here. I would suspect the IDA also assists some real companies, while some brass-plates go unassisted.
Bartley, if I add the tax revenue from the 19 billion, isn’t that counting it twice? I mean, that’s redistribution you’re talking about, isn’t it?(some goes to government, some goes to mortgage payments, some goes into savings etc). The 19 billion includes 7.131 billion in payroll costs which, as payroll costs, and not just wages, includes PRSI contributions, no?
As far the tax rate – the 2.5 per cent is a very crude calculation I admit, but having said that it is surprisingly similar to the 2.4 per cent calculated by bloomberg in its article on the Double-Irish, and as cited by Michael Burke above.
Would you have figures / percentages for foreign investment companies based in Ireland which do not avail of IDA support? Is it 5 per cent, 50 per cent, one per cent?
As far as corporation tax goes, the entire amount collected was 3.9 billion in 2009. That includes Irish and non-Irish exports. The figure for IDA-assisted companies in 2009 was 2.8 billion (for 2006 to 2008, IDA Ireland states that corporation tax was approx. 3 billion each year.)
So how much of that 1.1 billion in Corporation tax collected in 2009 was from Irish export companies, and how much from foreign companies based in Ireland but not clients of IDA Ireland?
Export sales from Enterprise Ireland client companies was around 12.9 billion for 2009.
Just to add on to that, the figures for IDA-assisted companies may not include every single foreign company based in Ireland, but given the overall corporation tax take and the level of indigenous exports, I would say that in broad terms it’s fairly close to covering all those who are based here and pay some level of taxation.
Bartly, can you just confirm something for me? It was my understanding that when it comes to Corporation Tax “profit” means sales + capital gains. After what you said I was thrown by that as you seem to be saying that it is based on net profit after costs, expenses, etc. Now, not the most accurate thing I know, but I just googled and came across an explanation of corporation tax on, of all things, myhome,ie, and it seems to be saying that corporation tax is based on sales + capital gains.
http://www.myhome.ie/commercial/advice/help-guides/corporation-tax-in-ireland-2421
So, is corporation tax based on net profit or sales + capital gains?
Conor, surely corpo tax can only apply to profits, i.e. sales minus expenses plus capital gains (from asset disposals etc.) … otherwise a loss-making company would end up with a tax liability that it couldnt possibly pay. Maybe the myhome.ie thing was just badly phrased.
if I add the tax revenue from the 19 billion, isn’t that counting it twice?
Well if you want to calculate the total tax-take from that sector of the economy, i.e. the tax revenue we would lose if those foreign companies all decamp en masse, then I think you should include it.
Put simply … companies make profits, pay their workers, who spend their wages. The state can impose taxation in varying degrees on each of those money-flows. Our model is low-medium-high on profits, income and consumption respectively, while Germany\’s is high-medium-medium. Theres a strong argument that our model is sub-optimal, but in both cases its the total take that matters.
So how much of that 1.1 billion in Corporation tax collected in 2009 was from Irish export companies, and how much from foreign companies based in Ireland but not clients of IDA Ireland?
Dunno TBH.
But since the IDA is all about jobs, I suspect that the worst nameplate offenders (who create close to zero direct employment) are less likely to be IDA-assisted.
“the tax revenue we would lose if those foreign companies all decamp en masse, then I think you should include it.”
But I have included it. Employees PRSI is included in payroll, and PAYE is taken from wages. Do you not see that?
“surely corpo tax can only apply to profits, i.e. sales minus expenses plus capital gains (from asset disposals etc.)”
Ok. So you don’t know, then. I mean, it’s a fair assumption that you’re making, and I don’t want to nick-pick or anything, but if you don’t know you don’t know. IDA Ireland says that trading losses, excess losses, capital losses, can all be offset against corporation tax, as can plant and machiney, industrial buildings knocks 4 per cent off corporations tax liabiliy over 25 years, etc. But if trading losses inform profit anyway, why have them used to offset tax liability?
But hey, why am I asking you this, right?
“I suspect that the worst nameplate offenders (who create close to zero direct employment) are less likely to be IDA-assisted.”
Ok. Have you got anything else apart from suspicions to inform that?
But I have included it. Employees PRSI is included in payroll, and PAYE is taken from wages. Do you not see that?
You haven\’t included the payroll taxes in the your estimate of the total tax take from the export sector, that was the point.
Instead you only counted corpo tax in your \”provides 2.8 billion in tax revenue\” estimate.
Lumping in the PAYE/PRSI with the payroll total is akin to lumping the corpo tax into a profits total and then declaring the total tax take from the sector to be zero.
But hey, why am I asking you this, right?
So you calculated the tax rate against total sales instead of profits, yet I\’m the ignoramus about corporate tax?
Neat switch …
Have you got anything else apart from suspicions to inform that?
Do you think I\’m wrong about the IDA not prioritizing projects producing zero jobs?
But I didn´t set out to give the total tax take. I gave the corporation tax take of IDA-assisted companies, and then the figures for IDA-assisted companies’ total expenditure in the Irish economy. now, the resulting tax paid via PAYE and VAT is included in that, but you were making out that I needed to factor that in – but it already IS factored in, via the figures for total expenditure in the economy – wages, services, materials.
“Do you think I\’m wrong about the IDA not prioritizing projects producing zero jobs?”
Huh? I asked you for facts, not just suspicions, and all you’re giving me now is questions.
I mean, if you don’t know, that’s fair enough. But if you don’t have any facts or analysis to back up your assumptions and suspicions, then really, what’s the point?
“So you calculated the tax rate against total sales instead of profits, yet I\’m the ignoramus about corporate tax?”
Well, again, can you show me that corporation tax is not worked off total sales + capital gains?
I’m not saying you are wrong, or an ignoramus – and really, please don’t try insulting yourself and then putting that on my shoulders. I did not call you an ignoramus. You called yourself an ignoramus and then put it on me – what I AM saying is, can you give me some evidence please?
All I’m saying Bartley is, if you are saying I’m wrong, SHOW ME where I am wrong. Give me the evidence to show me that, so I am learn from that.
I mean, this is what I said:
“Ireland’s economic model is to have an export sector saturated with foreign investment which provides 2.8 billion in tax revenue, and 19.149 billion in wages and local service/produce purchases – which together equate to 12 per cent of GDP or 14.2 per cent of GNP.”
Followed by:
“We’re not borrowing to pay for social welfare, we’re borrowing to keep corporation tax at 2.8 billion euro, and to have one of the most open economies in the world produce an export sector that’s worth around 22 billion euro to an economy which on paper in 2008 had a GDP of 181 billion and an GNP of 154 billion.”
I never said total tax. How can you nitpick against something I never said?
And again, please show me where corporation tax is worked off net profit, not total sales + capital gains minus the various generous tax relief schemes.
I’m not saying you are wrong, and I am not saying you are an ignoramus. I’m just saying, show me the facts so I can learn from it.
But if all you have is suspicions and vague assumptions, well, if I wanted suspicions and vague assumptions about Ireland I’d just watch TV3.
Here is how the Revenue put it:
What is Corporation Tax charged on?
All profits (income and gains), wherever arising, of the companies.
The link above was mangled for some reason …
http://www.revenue.ie/en/tax/ct/basis-charge.html
Yeah but there seems to be something about the definition of profit. I mean, it’s saying income, right? Not income minus costs and expenses. It’s not saying net profit either. It’s saying income and gains, and then lists a robust number of corporation tax exemptions and expense claims.
The other thing is, I’m not asking for a quote from a website. I need an interpretation here. In other words,
“All profits (income and gains), wherever arising, of the companies.”
Well, what does that mean?
Because there’s a difference between let’s say sales of €100 on which you’re charged 12.5 per cent corporation tax, or €12.50, from which you can then deduct the various exemptions and claims – and a profit of €20 on €100 sales, from which you are then charged 12.5 per cent corporation tax – or €2.50 – from which you can then deduct the various exemptions and claims.
Which one is it?
Here is my interpretation …
I dont think profit is ever used as a synonym for revenue (the €100 sales in your illustration).
Typically in company reports, income connotes revenue minus the cost of sales and other direct expenses.
Then further deductions may be allowed (or not) such as depreciation/amortization, interest, past loses, R&D costs etc.
So in your illustration, these further deductions would be offset against the €20 operating profit, not the €2.50 gross tax liability. Say these deductions reduce the taxable profit to €15, then the tax liability ends up as €1.87.
ok! Thanks Bartley. I’ll keep that in mind.
One last thing Bartley, the figures posted by IDA Ireland related to the economic impact of IDA supported companies.
When they list the value of sales as €109.640 billion, is this going to be the value of sales minus the cost of sales and other direct expenses?
In other words, if it is typical to list the value of sales as sale minus cost of sales and other direct expenses, then wouldn’t that be what IDA Ireland would have done in their annual reports? Or would they have listed the value of sales “as is” shall we say, with cost of sales and direct expenses still included in the overall figure?
The link to the annual reports is below.
http://www.idaireland.com/news-media/publications/annual-reports/
if it is typical to list the value of sales as sale minus cost of sales and other direct expenses
Well its typical in a corporate annual report to state both the revenue and income, i.e. the total sales and also that number minus cost of sales and direct expenses.
But remember that company directors have a fiduciary duty to shareholders and are also bound by regulatory requirements, so company reports tend to be carefully and precisely phrased.
Whereas the annual report of an agency like the IDA is more like a marketing brochure, so the likelihood is they would present the numbers in the best possible light. Which would mean using sales to connote total revenue as opposed to net income.
cheers for that. I’ll email them and ask them, probably the simplest way.
‘But remember that company directors have a fiduciary duty to shareholders and are also bound by regulatory requirements, so company reports tend to be carefully and precisely phrased.”
Not really connected but I hope that they do not have the same directors as say Anglo-Irish’
Todays Guardian saw us as close to Greece again.
I see that the New York Times has called a spade a spade. Particularly like this part:
“Ireland’s gross domestic product did grow in the first quarter of 2010, but that was not the good news that many news media and officials claimed.
This misunderstanding stems from Ireland’s success as a tax haven. Many years ago, Ireland cut corporate taxes to attract business. This created one of Europe’s most impressive tax havens — it is possible to set up a corporation in Ireland, channel sales through that head office (with some highly complicated links to offshore tax havens in order to avoid paying Irish tax) and then pay a minuscule corporate profits tax. Ireland boasts a large industry of foreign “tax minimizers” that do this, but these tax minimizers hardly employ any people. Nearly one-quarter of Irish G.D.P. comes from the profits of these ghost corporations.”
http: //economix.blogs.nytimes.com/2010/09/02/ in-ireland-dangers-still-loom/