Only 14+ billion deficit this year

lmimmfn

so far.......

Averaging it it should be 17billion by year end - http://www.rte.ie/news/2012/1102/exchequer-records-2-9bn-deficit-in-october-business.html

Apparently by October last year we were 22 billion in deficit( im presuming that included paying 3 billion to bond holders? )

In 2009 the deficit was 24.6 billion - http://www.finfacts.ie/irishfinancenews/article_1018749.shtml

So from 3.5 billion on average on savings/tax increases every year for 3 years( 10.5 billion ), we have reduced the deficit by 7.6 billion, and therefore we've increased spending to an extra 1 billion per year.

Is it just me or does the latest figure seem completely hopeless? every euro in tax hikes results in an extra 33% spend by the government thereby completely negating 1/3rd of the stress caused to workers./families

The European Fiscal Compact treaty that we voted on means we should get the deficit down to 3% of GDP. 2011 GDP was just under 160 billion - http://www.esri.ie/irish_economy/
So we have to get our deficit from 17 billion down to ~4.8 billion, when it took 3 years to reduce it by 30%, so we have to reduce it by another 72% to make the EU fiscal Compact treaty value of 4.8Billion.

A 12.8billion reduction on expenditure means savings of 19+ billion are required( at the current rate of reduction vs over expenditure ).

Please correct my figures if they are wrong, but is there any point to this whole austerity? people are on the brink yet from those figures we are nowhere near where we need to be to save the economy.

msg11

I don't know much on economies, much when this was voted in by us. I voted no, because I was thinking like yourself. How in the name of god are we to bring it down to 3% when we are running very high? Its fairly hopeless unless we start burning the bond holders, the list of whom is available online and it looks like ye don't want to **** them over cause they will supply the money when we return to the markets . So either we pay them back now get a good rating or don't paying them back and get a bad rating, we will end up paying them back.

lmimmfn

msg11 wrote: »

I don't know much on economies, much when this was voted in by us. I voted no, because I was thinking like yourself. How in the name of god are we to bring it down to 3% when we are running very high? Its fairly hopeless unless we start burning the bond holders, the list of whom is available online and it looks like ye don't want to **** them over cause they will supply the money when we return to the markets . So either we pay them back now get a good rating or don't paying them back and get a bad rating, we will end up paying them back.

its worse than that, the figures listed above are completely excluding bondholders and bonds maturing due to bank recapitalisation, if you include that we have an extra 6 billion to pay next year on top of the 17 billion deficit - whatever they dream up in the budget in December in taxes etc.

Nody

msg11 wrote: »

I don't know much on economies, much when this was voted in by us. I voted no, because I was thinking like yourself. How in the name of god are we to bring it down to 3% when we are running very high? Its fairly hopeless unless we start burning the bond holders, the list of whom is available online and it looks like ye don't want to **** them over cause they will supply the money when we return to the markets . So either we pay them back now get a good rating or don't paying them back and get a bad rating, we will end up paying them back.

The "list" that Indo posted is not even close to complete or true because of the second hand market and the fact most bond holders are not known (no not even to the government who pay the money out as it goes via clearing houses).

In addition the above has nothing to do with the bonds but the simple fact the Irish government spends a ton more money then it has and keeps on loaning to make up the difference. I'd love the burn holders to be burned because it would mean a crash course in economics 101 for people (hey what you mean we can't run a deficit budget anymore and my services are cut while taxes go up?!) which would hopefully shake up people and politics enough to start taking some responsibility on who they vote in and self educate themselves on basic economy...

Scofflaw

lmimmfn wrote: »

its worse than that, the figures listed above are completely excluding bondholders and bonds maturing due to bank recapitalisation, if you include that we have an extra 6 billion to pay next year on top of the 17 billion deficit - whatever they dream up in the budget in December in taxes etc.

This is highly inaccurate. The banks have cost us a lot of money, but are now costing us only in two ways - the repayment of the promissory notes and interest on the money we already put into them. The former doesn't increase our national debt (all the promissory notes having been booked onto the national debt at time of issue), and didn't add to the deficit this year (a bond having been used to pay the €3.1bn), while the latter is surprisingly small, at about €1.3bn so far this year - and from that one should subtract the payments from the banks to the State for the use of the State guarantee, which comes to about €0.9bn so far this year.

This continued obsession with "bank bonds", on the other hand, reflects a completely false belief that the government is putting money into paying the debts of the banks on an ongoing basis. This is entirely wrong - the government put money into the banks to ensure they had adequate capital ratios - they are meeting their debts (ie maturing bonds) by borrowing from the ECB to roll them over, and selling off assets to pay them down.

The narrative that makes our deficit about banks is designed to pretend that we are being forced to cut services to the poor in order to pay off gambling banksters. It is false - the bank bailout contributed a large sum to our national debt, but has very little to do with our deficit, or with our need to cut services/raise taxes - those things are the straightforward result of expensive services and inadequate taxation.

cordially,
Scofflaw

bbam

So if it's €14bln to be clawed back in spending over intake.
Would that mean we need 4 more budgets balancing an additional €3bln each time?

Hard to see it happening without slashing public services to awful levels.

maninasia

Well it's unlikely we will get down to balanced budgets anytime soon, I guess they are aiming to get within the 3% annual deficit limit.

Interest increases annually so that's why they are trying to hive off some of the bank debts, otherwise the numbers look impossible.

Another significant worry is that the banks need further capitalisation due to problems with their mortgage loan book.

Also the cuts get harder as you go along, so even if the amounts are nominally the same the pain and trouble starts to ratchet up quickly.

Bits_n_Bobs

The target agreed with the troika is 3% - not a balanced budget. It's very difficult to see how we will hit the agreed targets as the targets are predicated on levels of growth that will not be met.

To the best of my knowledge the 3billion note for Anglo that is due to be repaid next march will need to be drawn out of current expenditure and will therefore have an impact on the budget.

Last year through a bit of financial sleight of hand this payment was effectively long-fingered. Whether this will occur next march, or indeed whether Noonan et al get a deal on it beforehand, remains to be seen.

If neither of those occur the 3 billion payment - and Mr Scoffaw can correct me on this needs be - will have an impact on what the idiots in government spend money on or how much tax is collected.

Scofflaw

Bits_n_Bobs wrote: »

The target agreed with the troika is 3% - not a balanced budget. It's very difficult to see how we will hit the agreed targets as the targets are predicated on levels of growth that will not be met.

To the best of my knowledge the 3billion note for Anglo that is due to be repaid next march will need to be drawn out of current expenditure and will therefore have an impact on the budget.

Last year through a bit of financial sleight of hand this payment was effectively long-fingered. Whether this will occur next march, or indeed whether Noonan et al get a deal on it beforehand, remains to be seen.

If neither of those occur the 3 billion payment - and Mr Scoffaw can correct me on this needs be - will have an impact on what the idiots in government spend money on or how much tax is collected.

That's correct - if the payment can be rolled over, then what it will contribute to the deficit is the interest costs of borrowing to meet it, as per this year. If it has to be paid in cash, then it comes directly out of the Exchequer and contributes to the budget deficit.

And that illustrates a point, which is that it's quite common for people to mix up accounting conventions with real money in this debate. To be fair, people also do it in business quite a bit, and are surprised to find that the money they have in the bank bears little apparent relation to their balance sheet.

In the case of the promissory notes, for example, they don't cost us anything until they're paid off - that's the €3.1bn payment on March 31st each year - and they don't cost us that €3.1bn if we borrow to pay them. Nor, bizarrely, does such borrowing increase our national debt, because the promissory notes are already factored in full into the national debt - but borrowing to pay the notes does increase the interest payments on the national debt, and thereby the deficit, but by a very much smaller amount than a straight cash payment of the €3.1bn would. Paying them off with cash, on the other hand, reduces the national debt.

It's important to realise that while borrowing to pay the promissory note repayment is an "accounting trick", it is also a meaningful one in cash terms - that is, if we borrow to pay it, the amount of cash the Exchequer account loses that year is very much smaller - and sufficiently smaller that it would take a long period of making interest payments to match the €3.1bn.

cordially,
Scofflaw

Cookie_Monster

Will the ever increasing interest on the borrowed cash not make it effectively impossible to balance the budget even if spending is (eventually) cut? given how slow the cuts are being made, the continual huge deficits and the likelihood of interest rates increasing surely we'll be looking at yearly interest payments in the billions before too long?

Scofflaw

Cookie_Monster wrote: »

Will the ever increasing interest on the borrowed cash not make it effectively impossible to balance the budget even if spending is (eventually) cut? given how slow the cuts are being made, the continual huge deficits and the likelihood of interest rates increasing surely we'll be looking at yearly interest payments in the billions before too long?

Do you mean if we keep borrowing to pay the promissory notes? Or if we miss interest payments? I'll assume the former, because we don't miss interest payments.

Given the schedule on which the notes are due to be repaid, I can't see the accumulating interest on the borrowings used to pay off the notes as being a major factor in our current difficulties. Whether they become a major issue in the future depends on growth.

cordially,
Scofflaw

Bullseye1

What does a 3% deficit equate to in billions with our current expenditure/tax intake?

Scofflaw

Bullseye1 wrote: »

What does a 3% deficit equate to in billions with our current expenditure/tax intake?

It's 3% of GDP, so it's a question of GDP rather than tax take - taking the NTMA's GDP projections would give a 3% deficit as €5.36bn in 2015.

As you can see from that page, though, the plan is to have a somewhat smaller 2015 deficit of 2.8%, or €5bn. If we assume rather lower GDP growth figures (say 0.5% per year) for the next couple of years, and the same deficit figures in euros, we wind up with a deficit of 3.1%.

cordially,
Scofflaw

Cookie_Monster

To go a step further why is the EU /IMF happy with a 3% deficit for all members rather than simply a balanced or surplus budget as a matter of course?

maninasia

To even get all eurozone members to come within a 3% deficit may be a miracle in itself. To ask them to balance budgets is simply impossible due to the social programs these countries are burdened with.

Cookie_Monster

maninasia wrote: »

To even get all eurozone members to come within a 3% deficit may be a miracle in itself. To ask them to balance budgets is simply impossible due to the social programs these countries are burdened with.

true enough but if they are not going to manage the 3% in most cases anyway why not move the target a little anyway? Might eventually get countries to make a bit more of an effort, not that i'm holding my breath on that.

maninasia

What happens is if you set it at 4% countries come in at 5%. The failings of democracy and human nature I am afraid.
And if you mean why not put it at 1%, well they have no chance of getting to that without huge upheaval.


I am not sure of the reason for choosing the magic number of 3% but I believe it is related to inflation. If inflation runs at 3% a year and you have economic growth of a few % a year then this helps to stop runaway compound interest effect.

Scofflaw

Cookie_Monster wrote: »

To go a step further why is the EU /IMF happy with a 3% deficit for all members rather than simply a balanced or surplus budget as a matter of course?

That is the overall aim - as per the Fiscal Treaty Article 3:

1. The Contracting Parties shall apply the following rules, in addition and without prejudice to the obligations derived from European Union law:

a) The budgetary position of the general government shall be balanced or in surplus.

...

e) In the event of significant observed deviations from the medium-term objective or the adjustment path towards it, a correction mechanism shall be triggered automatically. The mechanism shall include the obligation of the Contracting Party concerned to implement measures to correct the deviations over a defined period of time.

So deviations from the balanced/surplus position are subject to an internal (ie domestic) correction mechanism, which has to be written into national law.

However, the 3% deficit limit is what activates (in conjunction with a >60% GDP/debt ratio) an excessive deficit procedure, which one could consider an external correction mechanism, or at least one which is agreed with external parties.

In our case, the troika intervention has been given a goal which matches the criteria for ending an excessive deficit procedure, leaving the move from 3% deficit to a balanced position in our hands, which is as it's supposed to be under our treaty obligations. That may be complicated by the question of whether we still lack market access, of course, but currently it seems we won't.

cordially,
Scofflaw

Gurgle

maninasia wrote: »

I am not sure of the reason for choosing the magic number of 3% but I believe it is related to inflation. If inflation runs at 3% a year and you have economic growth of a few % a year then this helps to stop runaway compound interest effect.

As far as I understand it, the academics and bureaucrats have calculated that if the deficit is less than inflation every year we'll have eternal growth. :rolleyes:

Some of us are unfortunately stuck with the real world.

ardmacha

As far as I understand it, the academics and bureaucrats have calculated that if the deficit is less than inflation every year we'll have eternal growth

It is not a question of growth, it is a question of simple maths showing that your debt burden decreases

Gurgle

ardmacha wrote: »

It is not a question of growth, it is a question of simple maths showing that your debt burden decreases

if the deficit is less than inflation every year

The 'if' is the problem. Its easy for bureaucrats to set targets, not so easy when two targets directly counteract each other.

later12

Scofflaw wrote: »

The narrative that makes our deficit about banks is designed to pretend that we are being forced to cut services to the poor in order to pay off gambling banksters. It is false

It is false.

However, the other narrative, which you are perpetuating, and that is constantly perpetuated regardless of how many times its shortcomings are pointed out, is that the 'cost' of rescuing the domestic financial system is only the cost which is simplistically calculable; we must remember to include the cost of extending support which was notional and contingent, and the effect that this support had on the Irish economy.

Put simply, you are ignoring the effects of notional support to the value of €350 billion and the damage that this support, among others, contributed to the domestic economy. Markets, enterprise, banks, and consumers did not ignore it.

Although I think the alternative (not extending this support) would have been more damaging to the Irish economy, failure to mention this issue in summing up 'the cost of the banking rescue' is getting pretty tiresome, as I'm sure are the reminders as per the above.

Scofflaw

later12 wrote: »

It is false.

However, the other narrative, which you are perpetuating, and that is constantly perpetuated regardless of how many times its shortcomings are pointed out, is that the 'cost' of rescuing the domestic financial system is only the cost which is simplistically calculable; we must remember to include the cost of extending support which was notional and contingent, and the effect that this support had on the Irish economy.

Put simply, you are ignoring the effects of notional support to the value of €350 billion and the damage that this support, among others, contributed to the domestic economy. Markets, enterprise, banks, and consumers did not ignore it.

Although I think the alternative (not extending this support) would have been more damaging to the Irish economy, failure to mention this issue in summing up 'the cost of the banking rescue' is getting pretty tiresome, as I'm sure are the reminders as per the above.

No, I'd agree with you, but as you say, the cost of that support is not easily calculated. If you'd like to put a meaningful figure on it, or can point to someone who has done so, I'd be perfectly happy to include it in the costs of the bank bailout - although, as pointed out, that support has been charged for.

Nor am I trying to minimise the extent to which the bank bailout costs were a part of both our deficit and our national debt - I'm just seeking not to have them exaggerated in a narrative which effectively pins the entirety of Ireland's difficulties on that bailout. Like yourself, I think the costs of not offering support would most likely have exceeded the costs of not doing so, although the case made for the inclusion of Anglo remains largely the unsatisfactory one of the government being unable to clearly distinguish Anglo's problems from those of the other banks.

cordially,
Scofflaw

later12

Sure; there is no easy figure at which we can arrive. All I'm saying is that some note of the existence of a €352 billion guarantee needs to be stapled onto the €64 billion invoice which is most usually referenced as representing the cost of the bailout, being as the former was such a tremendous reputational liability.

That is not to say the cost was €352 billion, of course; I realize that itself is a figure which is open to gross misinterpretation.

Scofflaw

later12 wrote: »

Sure; there is no easy figure at which we can arrive. All I'm saying is that some note of the existence of a €352 billion guarantee needs to be stapled onto the €64 billion invoice which is most usually referenced as representing the cost of the bailout, being as the former was such a tremendous reputational liability.

That is not to say the cost was €352 billion, of course; I realize that itself is a figure which is open to gross misinterpretation.

It's a major reason for not quoting it every time - people latch onto such figures and don't let them go again easily.

I'm not sure how one would go about factoring the costs of the guarantee(s) themselves - any suggestions, even? I know what they cost the banks, but would that bear any relation to the costs to the Irish economy?

cordially,
Scofflaw

lmimmfn

Scofflaw wrote: »

This is highly inaccurate. The banks have cost us a lot of money, but are now costing us only in two ways - the repayment of the promissory notes and interest on the money we already put into them. The former doesn't increase our national debt (all the promissory notes having been booked onto the national debt at time of issue), and didn't add to the deficit this year (a bond having been used to pay the €3.1bn), while the latter is surprisingly small, at about €1.3bn so far this year - and from that one should subtract the payments from the banks to the State for the use of the State guarantee, which comes to about €0.9bn so far this year.

This continued obsession with "bank bonds", on the other hand, reflects a completely false belief that the government is putting money into paying the debts of the banks on an ongoing basis. This is entirely wrong - the government put money into the banks to ensure they had adequate capital ratios - they are meeting their debts (ie maturing bonds) by borrowing from the ECB to roll them over, and selling off assets to pay them down.

The narrative that makes our deficit about banks is designed to pretend that we are being forced to cut services to the poor in order to pay off gambling banksters. It is false - the bank bailout contributed a large sum to our national debt, but has very little to do with our deficit, or with our need to cut services/raise taxes - those things are the straightforward result of expensive services and inadequate taxation.

cordially,
Scofflaw

Thanks for clarifying, very much appreciated, however factoring in costs of bonds into our budget doesnt negate the fact that theyre still owing and does increase our costs( it still has to be payed ). I agree completely on the media overhype behind 'a deal on the banks' etc.

At the end of the day fancy accounting doesnt sort the issue with everything thats in NAMA or the maturing bonds, but back to the original point of the fact that we are making next to no progress on our defecit. For every 1 euro added in taxes/spending cuts only 50 cent is reduced from the deficit. To me that is absolutely insane considering where we are supposed to be at in a few years time( new EU rules on deficit etc etc )

Idbatterim

To me that is absolutely insane considering where we are supposed to be at in a few years time( new EU rules on deficit etc etc )

I agree, I think its economically reckless, FF went mad when we had the cash. Even worse though, FG and Labor are continuing down the FF path and spending it when we dont have it... Goes to show you, just say whatever it takes to get into power, because if you dont, the other party will! & if you dont get into power, you wont have to back up your "promises"! I agree that the bank debt is over hyped and a smoke screen to an extent, let focus on what its on our power now, rather than what ifs and fortune...

Scofflaw

lmimmfn wrote: »

Thanks for clarifying, very much appreciated, however factoring in costs of bonds into our budget doesnt negate the fact that theyre still owing and does increase our costs( it still has to be payed ). I agree completely on the media overhype behind 'a deal on the banks' etc.

Just to be sure - if when you say they're "still owing" and "increase our costs" you mean the bonds issued by, and being repaid by, the guaranteed banks, the point is that they're not being paid by the State, and, from the point of the view of the budget, are not "still owed" by the State and do not "still have to be paid" by the State.

Bank bonds are not being paid by the State. They never have been.

As later12 says, there are costs associated with the State having guaranteed them through the CIFS 2008 guarantee, and with continuing to offer State guarantees through the Eligible Liabilities Guarantee, but those costs aren't directly quantifiable, and the banks do pay for the use of those guarantees - and I would presume, thinking further about it, that the payments made by the banks for those guarantees have to reflect the market cost of providing them, since otherwise that would constitute a state subsidy of the banks. What is definite is that people listing out the banks bonds maturing, as several websites do - as if the State paid those bonds and that's where our money is going - are absolutely talking through their rear ends, with a megaphone.

cordially,
Scofflaw

lmimmfn

Scofflaw wrote: »

Just to be sure - if when you say they're "still owing" and "increase our costs" you mean the bonds issued by, and being repaid by, the guaranteed banks, the point is that they're not being paid by the State, and, from the point of the view of the budget, are not "still owed" by the State and do not "still have to be paid" by the State.

Bank bonds are not being paid by the State. They never have been.

As later12 says, there are costs associated with the State having guaranteed them through the CIFS 2008 guarantee, and with continuing to offer State guarantees through the Eligible Liabilities Guarantee, but those costs aren't directly quantifiable, and the banks do pay for the use of those guarantees - and I would presume, thinking further about it, that the payments made by the banks for those guarantees have to reflect the market cost of providing them, since otherwise that would constitute a state subsidy of the banks. What is definite is that people listing out the banks bonds maturing, as several websites do - as if the State paid those bonds and that's where our money is going - are absolutely talking through their rear ends, with a megaphone.

cordially,
Scofflaw

I know what youre saying, but isint it really just accounting practice? the banks owe the money, but the banks are owned by the state and therefore the state guarantees the bonds and if need be subsidises the banks where necessary via extra bailout.
Ok i agree there are semi functional Banks like BOI which are trying to ween themselves off the state guarantee and therefore save on the cost of subscribing to it, but the fact that most banks are in state hands ties the bonds to the state( indirectly but.... ).

Scofflaw

lmimmfn wrote: »

I know what youre saying, but isint it really just accounting practice? the banks owe the money, but the banks are owned by the state and therefore the state guarantees the bonds and if need be subsidises the banks where necessary via extra bailout.
Ok i agree there are semi functional Banks like BOI which are trying to ween themselves off the state guarantee and therefore save on the cost of subscribing to it, but the fact that most banks are in state hands ties the bonds to the state( indirectly but.... ).

No, it's rather more than accounting practice, because there really is no direct link between current bond payments and the State's recapitalisation of the banks. Indeed, there isn't a strong one between the bank bonds and the recapitalisations to date, because the majority of the money that fled the banks and required their recapitalisation was never bonds in the first place - it was first and foremost deposits that went. The bonds, on the contrary, couldn't actually disappear elsewhere before maturity.

At the beginning of 2008, for example, the covered banks had €355bn in deposits and €120bn in issued bonds. At the point of the guarantee in September 2008, they had €417bn in deposits and €97bn in bonds. January 2010, they had €423bn deposits, €97bn in bonds. After the famous "wall of debt" in September 2010, just after the expiry of the guarantee, the banks had €394bn in deposits, €68bn in bonds. The media story at the time was about the €30bn in bonds that had to be repaid - the €30bn in deposits that had also fled was largely ignored. And come the time of the bailout, bonds had fallen only by another €3bn, but deposits had fallen by another €38bn. Over the next year, bonds fell another €9bn, deposits by €90bn to €262bn.

The reasons the banks needed capital injections were the loss of value of their assets (the writedowns on non-performing loans) and the repayment of deposits and bonds. The non-performing loans were crystallised in NAMA, which paid the banks about €35bn for about €70bn nominal value of loans, so the banks lost about €35bn there in assets. During the same period they had to repay about €42bn in bonds, and €158bn in deposits. And all deposits have been honoured in full, as have the senior bonds, whereas junior bonds have been haircut for savings of about €16bn.

So the real story here is about deposit flight from the guaranteed banks. It's a major reason for the guarantee, and for the bad feeling it caused in other EU countries, because the guarantee sucked in about €40-60bn of deposits from other countries' banks, at a time when they, like the Irish banks, were already suffering deposit flight.

Coming back to the current bond repayments, though - they're largely not repayments, but rollovers. So far this year the covered banks have paid off about €9bn in bonds, a figure which doesn't match the 'bond repayments' you can find on 'bond watch' websites, because while the total value of bonds has been paid down, a far greater value of bonds have been rolled over. And the banks have, again, repaid far more in deposits over the same period - €35.6bn.

What the banks are actually doing, then, is on the one hand covering the repayment of bonds and deposits - but primarily deposits - by 'deleveraging', which is to say disposing of assets and putting that money towards reducing their total liabilities, while on the other hand keeping the majority of their liabilities rolling over by borrowing from the ECB and the eurosystem, which is why they owe the ECB about €60bn and the CBI another €40bn.

The money the State put into the banks, however, is not used for repayment or for rollovers. It is used for collateral to borrow from the ECB and CBI (the promissory notes, for example, can only be used for CBI borrowing), and to allow the banks to continue to trade as solvent banks which meet the 'capital adequacy ratios' required by law - that is, for a bank to be solvent it is required to keep sufficient capital to meet a defined proportion of its debts, but it should not actually have to use that capital. In fact, the Irish banks are now amongst the best capitalised banks in the world, for all the good that does.

The result of all this complexity (sorry!) is to almost completely divorce the banks' bond repayments from the capital the State put into them - it is there to allow the banks to continue trading, and to allow the banks to borrow what they need to keep their debt piles ticking over, but the actual paying down of the banks' debts is being handled internally by the banks themselves, with no government funds going to repay those debts. And, again, most of what is being paid down in bank debt is not bonds but deposits.

Why doesn't the media/opposition latch onto the massive repayment of deposits, which dwarfs bond repayments? Two reasons - first, there's no political advantage in doing so, because ordinary people are depositors (even if they probably don't own the majority of deposits), and second, because talking about the flight of deposits from a bank is highly likely to make that flight worse. There is, therefore, a shroud of silence over the issue, but it's really the story of the crisis in the Irish banks perhaps more than any other issue.

So, to answer your question directly - no, the repayment of bank bonds doesn't involve any extra bailout by the government.

cordially,
Scofflaw

rumour

Scofflaw wrote: »

those things are the straightforward result of expensive services and inadequate taxation.

Inadequate taxation?, thats a political philosophy not a reality, perhaps it is plain and simple reckless spending by government, which is distinct from an expensive service.

ardmacha

Inadequate taxation?, thats a political philosophy not a reality

Of course it is a reality. Ireland lacks things like property taxes that are almost universal in developed countries and has low income taxes on a large part of the population.

PRAF

Scofflaw wrote: »

No, it's rather more than accounting practice, because there really is no direct link between current bond payments and the State's recapitalisation of the banks. Indeed, there isn't a strong one between the bank bonds and the recapitalisations to date, because the majority of the money that fled the banks and required their recapitalisation was never bonds in the first place - it was first and foremost deposits that went. The bonds, on the contrary, couldn't actually disappear elsewhere before maturity.

At the beginning of 2008, for example, the covered banks had €355bn in deposits and €120bn in issued bonds. At the point of the guarantee in September 2008, they had €417bn in deposits and €97bn in bonds. January 2010, they had €423bn deposits, €97bn in bonds. After the famous "wall of debt" in September 2010, just after the expiry of the guarantee, the banks had €394bn in deposits, €68bn in bonds. The media story at the time was about the €30bn in bonds that had to be repaid - the €30bn in deposits that had also fled was largely ignored. And come the time of the bailout, bonds had fallen only by another €3bn, but deposits had fallen by another €38bn. Over the next year, bonds fell another €9bn, deposits by €90bn to €262bn.

The reasons the banks needed capital injections were the loss of value of their assets (the writedowns on non-performing loans) and the repayment of deposits and bonds. The non-performing loans were crystallised in NAMA, which paid the banks about €35bn for about €70bn nominal value of loans, so the banks lost about €35bn there in assets. During the same period they had to repay about €42bn in bonds, and €158bn in deposits. And all deposits have been honoured in full, as have the senior bonds, whereas junior bonds have been haircut for savings of about €16bn.

So the real story here is about deposit flight from the guaranteed banks. It's a major reason for the guarantee, and for the bad feeling it caused in other EU countries, because the guarantee sucked in about €40-60bn of deposits from other countries' banks, at a time when they, like the Irish banks, were already suffering deposit flight.

Coming back to the current bond repayments, though - they're largely not repayments, but rollovers. So far this year the covered banks have paid off about €9bn in bonds, a figure which doesn't match the 'bond repayments' you can find on 'bond watch' websites, because while the total value of bonds has been paid down, a far greater value of bonds have been rolled over. And the banks have, again, repaid far more in deposits over the same period - €35.6bn.

What the banks are actually doing, then, is on the one hand covering the repayment of bonds and deposits - but primarily deposits - by 'deleveraging', which is to say disposing of assets and putting that money towards reducing their total liabilities, while on the other hand keeping the majority of their liabilities rolling over by borrowing from the ECB and the eurosystem, which is why they owe the ECB about €60bn and the CBI another €40bn.

The money the State put into the banks, however, is not used for repayment or for rollovers. It is used for collateral to borrow from the ECB and CBI (the promissory notes, for example, can only be used for CBI borrowing), and to allow the banks to continue to trade as solvent banks which meet the 'capital adequacy ratios' required by law - that is, for a bank to be solvent it is required to keep sufficient capital to meet a defined proportion of its debts, but it should not actually have to use that capital. In fact, the Irish banks are now amongst the best capitalised banks in the world, for all the good that does.

The result of all this complexity (sorry!) is to almost completely divorce the banks' bond repayments from the capital the State put into them - it is there to allow the banks to continue trading, and to allow the banks to borrow what they need to keep their debt piles ticking over, but the actual paying down of the banks' debts is being handled internally by the banks themselves, with no government funds going to repay those debts. And, again, most of what is being paid down in bank debt is not bonds but deposits.

Why doesn't the media/opposition latch onto the massive repayment of deposits, which dwarfs bond repayments? Two reasons - first, there's no political advantage in doing so, because ordinary people are depositors (even if they probably don't own the majority of deposits), and second, because talking about the flight of deposits from a bank is highly likely to make that flight worse. There is, therefore, a shroud of silence over the issue, but it's really the story of the crisis in the Irish banks perhaps more than any other issue.

So, to answer your question directly - no, the repayment of bank bonds doesn't involve any extra bailout by the government.

cordially,
Scofflaw

I've just had the misfortune of reading about the same topic on politics.ie and then the pleasure (well pleasure may be over stating it ) of reading this. Very informative post, even if I don't have the economic background to fully understand all of it!

I'm still of the opinion that we need to kick start the domestic economy in order to close this deficit. My plan to do so would be to:

1. Get a better deal on the debt. I don't particularly care about the details but the costs of the real cash repayments of interest / capital need to be drastically reduced ASAP so that we bring our govt borrowing down to sustainable levels
2. Force the banks to start recognising the futility of getting blood from a stone. They simply have to start doing debt reduction, debt for equity swaps, etc. on a meaningful scale. If this eats into their capital so be it. They are over capitalised right now anyway. Less householder debt = more householder spending = more jobs = better economy = more taxes
3. End the Croke Park deal. This has been a disaster IMO. It protects the insiders to the detriment of young people and is actually hurting the economy.

By the way, I'll never venture into politics.ie again. Just a bunch of hacks having a pop at each other and selectively quoting their own statistics just to point score on eachother.

Good loser

Exceptional post no.30 above Scofflaw. I needed that.

Those tossers in Ballyhea should read it too.

And Mary Lou and Stephen Donnelly and RBB and Joe Higgins and Fintan O Toole and all the others.

On the other hand it wouldn't suit them to know. But what about our journalists?

lmimmfn

@Scofflaw - you single handedly provided one of the most comprehensive and informative bits of information regarding the banks/bonds/deposits and leveraging information and also how the media has handled it.

Its an absolutely excellent post, i commend you, and thanks for the post, its highly informative. Thanks for that.