Yesterday the Irish government announced that it will be holding a referendum on the latest European Union plans for a fiscal compact. However there is already a consensus building that in the words of 1066 and all that this is a good thing and the vote should be yes. Even in announcing the vote the Irish Taiosearch told everybody this.
I believe it is in Ireland’s national interest that this treaty be approved
No doubt most of the Irish political class and media will fall behind this plan. However as their decisions,such as the 2008 guarantee of Ireland’s banks, have so far been nothing short of disastrous if anything that alone should tempt people to vote no! The book “Ship of Fools” chose its title well.
An Elephant in the room
This is the issue of no votes on European issues in Ireland. Irish voters rejected the Nice referendum in 2001. It was passed following a re-run in October 2002. The Lisbon referendum was rejected in 2008, before also being passed a year later.
However I do not think that they should give up trying and this time they are much less likely to be forced to vote again as an Irish yes vote may not be required as only 12 of the 17 Euro states need to approve it.
What is the fiscal compact?
It is a similar concept to the Growth and Stability Pact of 1997. If you are thinking about the sanity of repeating something that failed you are already on the right track! Indeed the rule now is that a “balanced budget” is required rather than the previous maximum deficit of 3% of Gross Domestic Product. Although this being the Euro zone they do not consider a budget to be balanced at zero.
This will be achieved if the annual structural government deficit does not exceed 0.5% of nominal GDP
And also if you do exceed the target you will be fined which will mean that you go further over the target! The March Hare would love that bit but I can already see Alice’s brow frowning at the illogic.
Er can Ireland achieve the target anyway?
I think that there is a danger of the March Hare dominating this debate. If Alice were here now she would point out the latest forecasts from Economic and Social Research Institute. They tell us that as a percentage of her Gross Domestic Product her fiscal deficit was 31.3% in 2010, 10.1% in 2011 and will be 8.6% this year and 7.5% in 2013. You may have spotted that none of these are anywhere near 0.5%!
Even worse the progression towards the target is rather slow and if there are any “surprises” may not happen at all. Indeed it relies entirely on Ireland being able to export which is a laudable but risky matter to rely on. If we look at Ireland’s own economy then private consumption is expected to fall by 1.8% this year and 1% in 2013 and public expenditure is planned to fall by 2.5% this year and 2% in 2013.
In the meantime according to the same set of figures Ireland’s general government debt is expected to be 115% of Gross Domestic Product this year and 120% next. At this point one might recall that in the Greek bailout 120% was seen as a threshold which it implied was one between solvency and not.
So problem one is that Ireland is voting on something which in any realistic horizon looks unachievable.
Actually it is worse that you think
Ireland made much of its “Celtic Tiger” reputation by offering low and sometimes zero taxes to international companies. The figurehead of this is her relatively low Corporation Tax rate of 12.5%. The problem for using Gross Domestic Product as a measure is that if she were to try to tax these companies they would be likely to leave and indeed we could see something of an exodus. Accordingly her ability to tax her economy is represented more accurately by her Gross National Product and if we look at 2010 we see that it was approximately 83% of her GDP.
So the problem is worse than it initially looks.
Ireland is not the poster boy for austerity that many claim it is. In some areas she has done well as she is an exporter and has for example run an annual trade surplus since 1984. This means that she has strengths that Portugal and Greece for example do not. However here latest economic growth figures tell a tale too.
Comparing Q3 2011 with the same quarter one year earlier, GDP at constant prices registered a decrease of 0.1 per cent while GNP was 4.2 per cent lower.
However they may be a fly in the exporting argument to some extent as how much of this is due to companies which are in effect non-domiciled as described above?
We saw the pattern of weak domestic consumption reinforced by the latest retail sales numbers.
The volume of retail sales (i.e. excluding price effects) decreased by 3.7% in January 2012 when compared with December 2011 and there was an annual decrease of -0.8%.
Whilst industrial production had done well ( on an index base of 2005=100 it is at 113.8) there are more worrying recent signs.
On an annual basis production for December 2011 decreased by 4.1% when compared with December 2010. The seasonally adjusted volume of industrial production for Manufacturing Industries for the three month period October 2011 to December 2011 was 1.4% lower than in the preceding three month period.
So as you can see the Irish economy is in better shape than either Portugal or Greece and with her trade surplus does not need a devaluation but what as I demonstrate below she does need is a debt haircut or to put it another way she needs to change her policy with her banks.
The likely prospect for Ireland’s banks
This is entwined with her housing market as the main driver in the collapse of Ireland’s banks was the rise and then fall of her construction and housing sectors. If we take a look at property prices we see something which is not only grim but shows some signs of getting even worse. From her Central Statistics Office.
In the year to January, residential property prices at a national level, fell by 17.4%. This compares with an annual rate of decline of 16.7% in December and a decline of 10.7% recorded in the twelve months to January 2011.
Residential property prices fell by 1.9% in the month of January. This compares with a decline of 1.7% recorded in December and a decline of 1.1% in January of last year.
Overall, the national index is 48% lower than its highest level in 2007.
I think that we can call that a crash! And there is no sign of a bottom yet. Now think about the state of the mortgage books of Ireland’s banks. They must be going from bad to worse or perhaps more accurately from very poor to even worse. Let us take a look at the mortgage book of Bank of Ireland and these are figures calculated by David McWilliams in the Sunday Business Post.
Bank of Ireland’s mortgage lending book is €27 thousand million…….Of this figure, €15,384 million euro of loans are in negative equity.
11 per cent of all of the Bank of Ireland’s owner-occupied homes are worth less than half what people paid for them
By now surely it would have been provided against and dealt with look at the scale of damage to Ireland’s sovereign finances. Er no.
The management of Bank of Ireland has set aside €1,000 million on a loan book where €15,384 million of the loans are in negative equity.
This has been a constant theme in the collapse of Irish banks who if we are being nice to them have behaved time and time again like the March Hare. If we are not being nice then we would say that they have continually deliberately misled people and misrepresented their situation. As you can see from the above that tactic appears to be on-going.
It is another type of can-kicking as if a mortgage is being paid then you can argue there is no problem but of course the banks position is much safer if it has a customer with equity. Also such a strategy will work if the economy and housing market improves and as we see the former is struggling whilst the latter is getting worse.
Even worse bank bond holders are still being paid
On February 20th Allied Irish Bank paid out on one of its bonds the sum of just over 900 million Euros. As it has no money this is in essence a transfer from the Irish taxpayer to the relevant bondholders. According to the website Bondwatch Irish banks and hence her taxpayers will pay out some 2.6 billion Euros over the next month on similar bonds and its estimates going forwards are.
2013 17.4 billion Euros
2014 5.9 billion Euros
2015 11.6 billion Euros
Now let us take a look at the size of her bailout package 67.5 billion Euros if you exclude her own National Pension Reserve Fund. Can you see what am I thinking?
Ireland should vote no and completely change course on her strategy for her banks. For a start she should negotiate a deal where bank bondholders do not get full repayment and you could make a case for no repayment at all. After all those in charge now need to explain exactly in what circumstances these bonds would not be repaid.
A no vote would be a good first step in this renegotiation otherwise Ireland will run the risk of always being at time t with economic nirvana promised for time t+1. In short saying no to the fiscal compact is the beginning of saying yes to her people and no to her banks. So as Dawn Penn put it.