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Archive for April 7th, 2011

Three briefing documents have been released this evening. The first two documents are quite short and rendered effectively shorter by the amount of redaction. The third document is lengthy.

(1) Kevin Cardiff, the €228,000-plus a year secretary general of the Department of Finance, gives his view on the strategic challenges. To the fore is instilling domestic confidence in the economy followed by “begin [ing] the process of restoring international confidence”. The only un-redacted bold text is the following “it is essential that policies recognise our dependency on the ECB and the implications this has for our room to manoeuvre and capacity for independent action”. In terms of the new government’s commitment to giving us the news, good or bad, it is perhaps surprising that we have not had confirmed that “the domestic side of the economy may well be weaker this year than thought” though it seems that the exports are performing better than thought. It is interesting that about a third of the document has been redacted.

(2) A briefing on the banking position from second secretary at the Department of Finance, Ann Nolan on 9th March, 2011. This claims that €80bn of loans has so far been removed from the banks to NAMA which is at odds with the NAMA statement that some €72bn of loans has been acquired. We find out a little more about what Minister Noonan described as the €7bn placed in the banks in February 2011 which “ye [the media] didn’t pick up”

The NAMA for sub-€20m loan exposures at AIB and Bank of Ireland has been 100% redacted.

(3) A 253-page document providing presentations for each of the individual departments comprising the Department of Finance. I am still studying this but in the context of NAMA, property and the banks.

(a) The “Confidential side letter dated 9th December 2010” is referred to again in the context of the EU/IMF bailout. We are told that one of the terms it contained related to the lowering of Stamp Duty.

(b) The House Price Database would have been included in Budget 2011 if it weren’t for “time pressures”. There seems to be an intention to model the HPD on what is available in “the UK and some US states”

(c) There is to be a €100 property tax in 2012 and a property valued tax thereafter. The Commission on Taxation (?) is not keen on a Site Valuation Tax because it is “rarely used for tax collection in other jurisdictions”

(d) An informal decision on the 31st Jan 2011 Anglo and INBS restructuring plans is expected “in a few weeks”

(e) Much of the NAMA briefing between pages 92-96 is redacted and there is no real new information.

(f) The Central Bank of Ireland now has 1,200 staff (!) of which just over half work in Financial Regulation.

(g) From page 123 to 130 there’s a who’s-who of the boards of the covered financial institutions including the year in which they joined the boards. Looks almost like a hit-list.

(h) With respect to the wider economy the document reminds us the CPI inflation assumption for 2011 was 1.5%. CPI inflation is already us 1.6% to the end of March 2011 compared with end December 2010 (index of 122.2 cf 120.3).

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As expected it has just been confirmed that the ECB is raising its main refinancing operations rate from an historic low of 1%, where it has rested for the past 23 months since May 2009, to 1.25%. The general betting is that further rate rises will be implemented in the coming months. Why? Although it mightn’t feel like it in Ireland, or indeed Greece or Portugal, Europe on an aggregate basis is recovering from the 2007-8 financial crisis. This is what the February 2011 European Commission forecast was for the main EU economies.

Whilst our GDP in Ireland fell by 1% last year – making it three successive years of drops totalling 12% off peak GDP in 2007 – Germany’s economy roared ahead with GDP growth of 3.6% in 2010. Our government might officially say the outlook is for 1.75% GDP growth in 2011, but the EU thinks it will be 0.9% and even the upbeat Morgan Stanley-produced “Ireland – a Time to Buy” analyst note on Monday this week anticipates GDP growth in 2011 of just 0.8%. Mind you, our inflation has been picking up in recent months but is still just 0.9% on a HICP basis in February 2011 , the lowest in Europe (that is, using the inflation measure which excludes mortgage interest – factor that in and you get the Irish CPI  in February 2011 of 2.2%).

So the reason the ECB is raising rates now is to cater to the bigger economies in Europe, and that’s how the euro works. Arguably we are in the present state of distress because of the application of the same principle in the early 2000s when Germany was experiencing sluggish growth and Ireland was continuing to experience Celtic Tiger growth in GDP and inflation. If we had our own currency, there might have been a better chance of increasing interest rates to cool demand but because we were out of sync with Germany, that didn’t happen. Of course we have benefited from membership of a common currency in the sense that our old currency, the punt, was hardly seen as a significant currency and we have cut down exchange rate risks and cost. And political controls might have been exerted in the 2000s to curb the growth in credit. Still, on days like this, you would wonder if the bargain to join the euro was worth it.

Ireland has 785,000-odd mortgages of which an estimated 400,000 are tracker mortgages so today’s announcement will have an almost immediate and widespread effect. If your tracker is ECB + 1.5%, then on a €250,000 mortgage, your repayments, simply calculated, are likely to increase by €50 per month (€250,000/12 * [2.75%-2.5%]). Minister for Finance, Michael Noonan will no longer be able to comfort us with the mantra about the ECB providing €100bn liquidity to our banks at 1%. The prospect of even higher interest rates in the EuroZone will also tend to strengthen the euro with sterling (at 0.874 this morning), and the UK is our main trading partner. A minor bright spot is that strengthening  the euro against the US dollar (at 1.427 this morning) might reduce our €7bn annual oil import bill but the impact of any minor fluctuations with exchange rates on the price of oil is likely to be dwarfed by global events. NAMA’s interest costs will rise but it is understood the agency is hedged to 3% so there may be no significant effect. So it is hard to see how the rate increase today will benefit the Irish economy at all.

The stress tests being undertaken at present by the European Banking Authority use a baseline projection of interest rates of 1.5% in 2011 and 1.8% in 2012. The betting is that today’s rise will be followed by further rises in the months ahead. And whilst we have may have become used to low interest rates, remember the longer term rate on the euro has been close to 4%. Remember this?

UPDATE (1): 7th April, 2011. The president of the ECB, Jean-Claude Trichet has given a press conference at the ECB in Frankfurt-am-Main which is available here. Plainly the focus of the ECB’s interest rate setting policy is to maintain price inflation at under but close to 2% over the medium term. There has not been an agreement to a series of interest rate rises but observers should note the guiding mandate of the ECB. No agreement on medium term facility for Ireland. No agreement on date by which Ireland must inject €24bn into its banks.

UPDATE (2): 7th April, 2011. The latest HICP (Harmonised Index of Consumer Prices – excludes mortgage interest) statistics from Eurostat shows that Europe does indeed have a pressing problem in the context of the ECB’s primarily role to maintain price stability. Ireland has the lowest inflation in the EU (Norway and Switzerland are of course not EU members). And only three EU member states have annual HICP inflation below the 2% target, Ireland (1.2%), Sweden (1.2%), France (1.8%) and the Czech Republic (1.9%) and 16 members have inflation over 3%.  It also seems inevitable that further rises will follow though the official EU forecasts are for average rates of 1.5% in 2011 and 1.8% in 2012.

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