Will Ireland need a second bailout?

“the key objectives of policy must be to support domestic confidence and begin the process of restoring international confidence in our economy” – introduction to briefing notes given to Minister Noonan in March 2011

Will Irelandneed a second bailout? It will depend on domestic economic growth which in part depends on global economic growth, investor attitudes towards Europe and how interest rates charged by investors on any new bond issuances compare with rates from available bailout funds. With present official projections, it is hoped that by 2013 at latest, Ireland will be able to return to the sovereign bond market and obtain lending at interest rates which are comparable to those available from bailout funds, and thus not need a second bailout.

This week began with a “man with some slides”, the Citigroup chief economist Willem Buiter saying that Ireland should begin planning for the possibility of a second bailout; it’s worth repeating that – “Ireland should prepare for the possibility of needing a second bailout”. What domestic politicians and not a small number of media outlets heard was “we will probably/definitely need a second bailout”. Willem’s words ignited a wildfire of reporting and prompted political intervention, notably Minister for Finance, Michael Noonan saying the notion of Ireland needing second bailout was “ludicrous” and An Taoiseach Enda Kenny who was emphatic in replying to a question in London on Thursday when he “absolutely” ruled out a second bailout. And in Brussels, a spokesman for the European Commission described talk of a second bailout as “unhelpful”. I can’t help but recall the heavily redacted briefing notes given to Minister Noonan in March 2011 when he took up his new role – at the fore, the notes said “the key objectives of policy must be to support domestic confidence and begin the process of restoring international confidence in our economy”. Willem’s intervention is plainly an attack on that confidence in the eyes of our political leadership.

It should be said that Ireland will need to borrow money, regardless, beyond that available in the IMF/EU bailout. That is agreed by all, as our country will have a deficit at least until 2015 on current projections and we also have debt (sovereign bonds mostly) which will be maturing and we’ll need to repay the lenders. When we borrow from the bond market however, we don’t give the investors a say in how our country is governed. As we know, with a bailout on the other hand we have so-called conditionality, the IMF/EU call the shots in line with the bailout agreement. So the brouhaha during the week was not about whether Ireland needs to borrow more money – we already know we will – but about the source. And without meaning to insult anyone’s intelligence by stating the bleeding obvious, if we are unable to borrow from the bond market at rates comparable to those available from bailout sources, then we will tend to opt for a second bailout.

On Friday last the NTMA said it was planning to go back to non-bailout sources of funds in 2012 with a first phase a return to the Treasury Bill market – eg: 3 month duration – in mid year with a view to moving to longer term debt auctions late this year/early next year, subject to continued progress on the bailout programme and resolution of EuroZone crisis.Irelandis already borrowing small amounts with short durations but that is not done by auctions but by request. That’s what the NTMA said. What the media heard was “Irelandwill return to bond markets in 2012”. That’s not what the NTMA said, and it was careful to attach caveats.

Now we need funding for three main headings

(1) Day-to-day expenses of the State: we’re spending more on public sector and social welfare than we are taking in, in taxes. The resulting deficit needs to be funded from somewhere. We are working to get the deficit down and by 2015 to less than 3% of our GDP, which is seen as sustainable – that’s the official line. 2015 is four years away so who knows, but from this perspective, the absence of any growth stimulus as recommended by the ECB and many economists will make growth targets in 2013-2015 challenging.

(2) Bailing out the banks. A lot of this has already happened. But there is still nearly €3bn per annum for nearly 15 years that will need to be paid in cash for Anglo/INBS’s losses.

(3) To pay maturing debt. Even back in 2007,Irelandhad borrowings of about €40bn, and that has increased substantially since. These borrowings need to be repaid as they come due. So when we talk about a 10-year Irish bond, that is a bond issued to an investor for 10 years, we pay the investor interest on the bond each year and after 10 years, we redeem the bond, that is, we pay the investor the amount he originally gave us.

Of those three headings, (3) is pretty certain, (2) is based on stress testing in our banks and some say that the losses that might arise with mortgage defaults, loss-making tracker mortgages, legacy property lending which wasn’t transferred to NAMA may all mean that further bailout costs are incurred. (1) is probably the most uncertain, it depends on economic growth and the Government successfully bringing in measures to bring the deficit down. Based on current projectionsIrelandwill not need any more funding (or a second bailout) between now and the end of 2013. Could that change? Yes certainly, for example if our economy contracted 5% in 2012 and the deficit grew because of weak taxes and high social welfare payments, then yes we would need more funding before the end of 2013, but from this perspective that’s not considered likely.

But the big uncertainty is whether or not the interest rates demanded by lenders in bond markets will be low enough by the end of 2013, so that we are able to return to the bond markets. If interest rates remain elevated compared with rates available from bailout funds, the IMF and the European funds, then yes,Irelandwill need look at bailout options. That seems obvious, right? But this is what caused all the bother during the week.

It is certainly the case that Ireland’s notional cost of borrowing has declined considerably in the last six months, and at the close of business Friday, the notional interest rate on our bonds redeemable in 2020 was 7.84%, that compares with 14%-plus in July 2011 – however most of the decline happened last August in the wake of the EU summit in July which saw our bailout interest rates reduced. However it is still considerably higher than the 3.7% average interest rate which now applies to our bailout.  On the other hand, funds from a bailout diminish our sovereignty and it may be preferable to obtain funding on the open market, even if rates are higher there. How much is the sovereignty premium worth? At least 300 basis points or 3% it seems in the case ofItaly which has in recent weeks been paying 7% for relatively small amounts of long term funding. Others suggest that anything above 6% is unsustainable. What are the chances of our funding costs falling from 7.84% to 7% or 6% in 2013?

Too early to say in an such a fast-changing environment; in the short term it looks unlikely as we lurch from one crisis to another in the EuroZone. We can certainly hope that rates demanded by the open market will come down to what is judged a sustainable level. And that is probably why Willem’s comments attracted such robust political responses – Minister Noonan and An Taoiseach have absorbed the advice given in their briefing notes in 2011, and by dismissing talk of a second bailout believe they are “instilling domestic confidence and restoring international confidence” whereas entertaining the notion of a second bailout is seen as doing the opposite – undermining confidence. But as France, like many others before, has found, no matter how much you attack the messenger/commentator, markets, ratings agencies and economies will tend to pursue their own paths.

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A poem for the January blues

Regular commenter and poet, “sf ca writer” has penned an original work for which the has given permission to reproduce on here; it might come as a welcome counterpoint to the economic depression and its effect on society as we face into a new year.

The Brick

I found a brick
in a field near my home
on a truck
with no wheels, the kid who stole them
long gone
in Australia, his mom
sad at them gone, her son, his dad, both in one year.

So I took the brick to my garden
my interest-only, underwater, negative equity garden
where it floated like an island on torrents of my despair.
The beating rain
rain that washes away
leaving only clean and forgotten
washing my brick in my garden.
Rolling to a stream where once was a monk
kneeling and praying in chains
and the pain and Irish rain
taking away what is sane
what is right what is fair what is normal.

In my artic-proof raingear,
I survey my brick
on it I place a flag
with my name and my face
my country of defiance
come get me NAMA, tax man, Department of Finance.
Step into my garden…. I dare you.

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The pigtroughery of Irish politicians hidden in transparency backwoods

When Paul Gogarty (who? former Green Party TD who brought the bawling baby to that news conference) stood up in the Dail in December 2009 – pictured here in full voice – and uttered those peculiar words “with all due respect, in the most unparliamentary language, fuck you Deputy Stagg. Fuck you”, it was a revelation that the expletive was not one of those words banned in the chamber. Nor is the interjection “Hey!” which was immediately used by the lease Ceann Comhairle (equivalent to Speaker or chairman in other parliaments) as in “Hey! Excuse me, Deputy Gogarty, that is most unparliamentary language”. Nor indeed is the word “screwed” which Deputy Gogarty used a moment later when he said “the point is, we are screwed as a country because of the wrongdoing of others” None of these words apparently appear on an 83-page Dail document called “Salient Rulings of the Chair” – I say “apparently” because the document is not available online or indeed in hardcopy to the public, but somehow TDs are expected to know about its contents. It does reportedly forbid the use of the following words when addressing fellow TDs : “brat”, “buffoon”, “chancer”, “communist”, “corner boy”, “coward”, “fascist”, “fatty”, “gurrier”, “guttersnipe”, “handbagging”, “hypocrite”, “rat”, “scumbag”, “scurrilous speaker” or “yahoo” The refusal of the Oireachtas to make public this document is a small yet curious indicator of the secrecy which still surrounds our very expensive national parliament.

Of more interest than parliamentary protocol though, is the cost of the place. During the week, we learned that Independent TDs received €42,000 per year on top of their €92,000 basic salary. Remember that €42,000 per year would pay the household charge for 420 households which typically have 2.7 people each inIreland and given the 20% exemption rate for ghost estates and those in receipt of mortgage supplement, €42,000 would pay the household charge for well over 1,000 people.

In addition they get paid a so-called Parliamentary Standard Allowance of up to €27,000 per annum (unvouched, meaning TDs can claim the allowance without submitting receipts) and in the past when vouched expenses, which seem to average about €4-5,000 per month, have been disclosed they have included training courses and even college degree course.. It is not exactly clear how much TDs’ pension benefits are worth and how much it would cost to buy them in the private sector. It is not clear how expenses for constituency offices and assistants are handled and we certainly know very little about friends and relatives employed by TDs, We also learned during the week that TDs were able to send 200,000 2011 Christmas cards from the Dail using cards custom-printed at a cost of €10,000 plus probably over €100,000 for envelopes and postage. Ah sure what mammy wouldn’t appreciate receiving a Christmas card showing how well their nearest and dearest were doing having bagged the life of an Irish TD. This was a relatively small sum, but I recall that in the expenses scandal in our neighbour’s parliament, it was the can of dog food and Mars bar that was claimed on expenses that incited as much outrage as  the plasma TVs and home improvements.

But the gravy train doesn’t stop there. Once a year we get a listing of the Register of Members Interests. This shows the headings under which other income is earned by the TD, though not the amount. So we learn for 2010 that “other income” included that for speaking engagements, property rental, accountancy, farming, auctioneering, architectural services, legal services, directorships of commercial companies, funeral services, insurance and financial services, newspaper column-writing, plant hire, road haulage, hardware stores, pubs and bars. Ned O’Keeffe declared occupational income from “growing grass” but that was probably in a livestock agricultural context. Where do they get the time you might ask, isn’t the job of public representative demanding enough? And on top of that, those on leave of absence from public sector jobs may not receive “remuneration” from their original role, but they do receive pension entitlements, and some TDs even get ministerial pensions and severances. But three things about the Republic’s register of interests – one, it doesn’t show the amount of income earned outside the Dail, two, it doesn’t show hospitality though it is supposed to show travel facilities and gifts and three, it is produced once a year three months after the year end. In Northern Ireland, a similar register is updated almost monthly and contrast the information given in Northern Ireland with that in the transparency backwoods of the Republic – income details, hospitality and even family members benefiting from their position.

Of course in Northern Ireland they also give details of pension arrangements for its Members of the Legislative Assembly (MLAs). Anyone care to guess what someone in the private sector would pay in the Republic to get a pension package similar to a TD’s? And in the North, they also show you what each MLA is costing you.

During the week, the TD Sean Fleming referred to senators’ allowances as “the best kept secret in a long number of years”. For a country with an ample presence of political journalists, you might ask why this is so. Indeed you might ask why there isn’t reporting of TDs’ other income, pension benefits, expenses, hiring of relatives and other allowances. Or is it because our journalists have for the most part changed careers and become stenographers?

For a country in receipt of a colossal IMF/EU bailout and for which many decisions need comply with a bailout Memorandum of Understanding, a small neutral conventionally-powered country with one TD per 30,000 people, a country with 14% unemployment, debt:GDPN rising to 120%, these salaries and allowances and perks look obscene. There was an open letter on here last week to the British prime minister which was tongue-in-cheek and was intended to highlight the country’s subordination by our neighbour who is bailing us out, to highlight some very high salaries in the higher echelons of the law enforcement/judicial/legislative sectors with poor laws on the ground and an abundance of law-breaking. It was also intended to highlight commercial distortions in our economy which has yet to be allowed naturally adjust to the economic collapse. So the letter was tongue-in-cheek, but I wonder is it time for having well-placed questions asked in our neighbour’s parliament about the pigtroughery in this country which is massively insolvent and which faces a vista of a further three years of ever more constricting austerity? After all, not all British MPs were supportive of bailing out any EuroZone country.

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