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Archive for May 10th, 2011

You’d have to have sympathy for this government which is increasingly straitjacketed by the bailout deal with the IMF/EU. As promised, there was the unveiling of a jobs initiative today (available here) which

(1) Reduces employers’ PRSI on low paid workers and is intended to deliver a competitive boost. You’ll recall the minimum wage was cut in January from €8.65 per hour to €7.65 per hour to boost competitiveness in line with commitments given in the IMF/EU Memorandum of Understanding. The incoming government promised to reverse this cut but has now cut employers’ PRSI so the cost of employing someone on the minimum wage is effectively cut by €1 per hour compared with last year. PRSI was also abolished on payments in shares. If we’re more competitive, there should be more investment which should boost employment.

(2) VAT will be reduced on certain tourist and “real” economy services (restaurants, hairdressing) with the intention of reducing prices by 4% and boosting demand and consequently employment.

(3) Air passenger tax will be abolished on condition the airlines get more bums on seats and the hope is that tourism and visitor numbers will increase which will boost demand and consequently employment.

(4) There is a range of training, education and internship projects which will help deliver a better trained workforce, better able to secure employment and will hopefully attract investment and consequently boost employment.

(5) There will be a range of labour intensive capital projects for which €135m of new money is being made available.

The above are a commendable set of measures. Set against unemployment of 300,000 representing 14.6% of the workforce, it is debatable whether these measures will make a significant dent in that army of unemployed. But, as we are straitjacketed by the IMF/EU bailout deal, the above measures which will cost the best part of €2bn will need to be balanced with income found elsewhere.

And the government is finding that revenue through raiding the private pensions of the citizens. A 0.6% levy is to be imposed on the pension assets of Irish residents. This will contribute €470m per year for the next four years. Again, you would have to have sympathy for the government but at the same time, this seems like a massively unfair charge which is estimated to cost €500 per pension per year. Some of the cost will be borne by pensioners in receipt of pensions, others who are not yet drawing the pension will see the value of their pension pot reduced.

There is a generally accepted principle with any tax that it should be timely, efficient to collect and fair. This levy meets the first two criteria which are quite objective. But when our president earns more than the US president – USD $418,000 compared to USD $400,000 at today’s exchange rate applying to €292,500 – and with correspondingly high salaries throughout the upper echelons of our public sector, it is hard to see how the pension levy meets that third (subjective) criterion. Lastly let’s remind ourselves of the bondholdings in the State-guaranteed banks (though most of the bonds themselves are not guaranteed).

(Click to enlarge)

UPDATE (1): 11th May, 2011. There has been a predictably critical response to the pension levy from the pension industry. The Irish Independent cites various representatives of the industry and we have claims that the levy will mean “an average of €500 a year coming out of the pension savings of 750,000 people”.  It seems clear at this stage that this levy will not affect public sector workers. However it is unclear how it will affect spending by those in receipt of reduced pensions as that will tend to reduce demand for goods and services which will tend to reduce employment.  Of the 750,000 people with private pensions, it is not clear how many are actually of pensionable age and how much this levy will take out of the real economy. Bizarrely, Enda Kenny has claimed that the pension industry can soften the effect of the 0.6% levy by reducing its administration costs which would surely mean less employment in the industry.

UPDATE (2): 11th May, 2011 Parallels are being drawn today between our own government’s proposed action and the actions of Argentina in 2008. And we have some closer-to-home examples of tampering with private pensions in Hungary , Poland, Bulgaria andLithuania which have all been aimed at bringing private pensions back under state control, generally so that the state can use the funds to pay running costs of the state.

In Ireland we doing something different, we’re expropriating 2.4% of all private pensions over a four year period. There would appear to be some €80bn in private pensions (if 0.6% = €470m). And this move to impose a levy for four years at a rate of 0.6% of the fund’s value is worrying. The government has denied that it is the thin end of the wedge and that a levy will be applied to savings or that the pension levy will be increased or its 4-year term extended.

Argentina has had two raids on its private pension funds in the past decade. In 2001 the state confiscated USD $3.2bn in a last ditch (and unsuccessful) attempt to stave off default and then in 2008 the Argentinian state nationalised some USD $30bn of funds managed by private pension providers to help compensate for a shortfall in tax receipts.

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So says today’s Irish Independent citing a NAMA spokesperson. There might be some that would say the agency “would say that, wouldn’t it?”. The newspaper goes on to report that two developers understood to be in the NAMA Top 10, Joe O’Reilly and Michael O’Flynn have “signed-off” on their business plans with NAMA. And that of the NAMA Top 30, “11 have now signed a memorandum of understanding”.

According to the agency itself last week, of the Top 30,

(1) 16 had signed memoranda of understanding

(2) two were close to signing a memorandum of understanding

(3) seven had been subjected to foreclosure proceedings (NAMA didn’t identify the seven but the view on here is that they are Liam Carroll, Bernard McNamara, Derek Quinlan, Paddy Kelly, Ray Grehan, Paddy Shovlin and David Courtney/Jerry O’Reilly (Radora)) NAMA has acted against a lot of other developers but I don’t think that Jim Mansfield or Capel Developments, for examples, are in the Top 30, but because NAMA hasn’t provided confirmation, this is little more than informed speculation

(4) five hadn’t signed memoranda of understanding and might face enforcement proceedings

Newspaper reporting subsequently speculated that two of the five developers might face enforcement action this week, that is, by Friday 13th May, 2011. The NAMA spokesman told the Independent today that although a developer might sign a memorandum of understanding “it didn’t mean the agency wouldn’t move against them and appoint a receiver if they failed to honour the terms of those agreements”. The view on here is that there more than a little of the “hanging a corpse at the crossroads to deter criminals” in NAMA’s approach.

Despite all of the above, it is unclear whether NAMA has in fact finalized any agreement with any developer. Remember that there are three documents which comprise an agreement, according to the NAMA CEO, Brendan McDonagh

(1) Memorandum of Understanding

(2) Heads of Terms

(3) Final Agreement

And each of these three documents needs to be signed by

(1) NAMA

(2) the developer

(3) potentially, the developer’s wife

Yesterday was the first year anniversary of the completion of the transfer of Tranche 1 comprising the Top 10 developers who owe an average of €1.6bn; the average owed by the Top 30 is €0.9bn so these are very big enterprises for sure and the business plan is vastly more complex than when you’re looking for a €10k loan from the bank for some office equipment. That said, if it was known in 2009 when NAMA was being conceived that it would be the middle of 2011 when the first plans were agreed, there would have been incredulity or outrage – it is high time for NAMA to have concluded agreements.

UPDATE: 11th May, 2011. The Irish Times today writes that it “has learned” that Sean Mulryan of Ballymore fame has “reached agreement with NAMA on a business plan in recent days”. That would bring to three, the number of developers that have been identified in newspaper reporting as having entered into agreements. There are two curious aspects to the Irish Times report – firstly, the newspaper doesn’t confirm if Sean Mulryan has signed all three documents that comprise agreement or whether NAMA has also signed those documents and secondly, the newspaper repeats the Irish Independent claim yesterday that 12 developers had signed memoranda of understanding whereas NAMA last week said that 16 had. Maybe the Irish Times is just copying the Independent without checking the detail but it is curious because if the Irish Times and Independent were both correct, then that would indicate NAMA wasn’t being completely truthful last week.

UPDATE: 15th May, 2011. The Galway News citing the Sunday Times claims that developer John Lally and his companies Lalco and Sova Properties have signed a memorandum of understanding with NAMA. It’s not clear if John is a Top 30 developer and there doesn’t appear to be any comment from NAMA.

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