The Great Fiscal Shell Game. The Recession Diaries – April 22nd

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The only enjoyable aspect of Eurostat’s decision to reclassify the Anglo-Irish Bank subsidy as a liability on the General Government Balance/Debt is to watch the Government’s hands move even faster in an increasingly vain attempt to prevent us from seeing under which shell the real deficit is hidden. But they must be getting tired; and eventually we’ll glimpse it.

In short, the Government keeps two sets of books: one for the EU which determines our General Government Balance (GGB or annual deficit) and our General Government Debt (GGD or overall debt) for the purposes of the Maastricht guidelines; GGB must be kept below -3 percent and our GGD must be kept below 60 percent of GDP). That’s one set of books – the other is for us. There’s nothing shady about this – there are a number of expenditure items that don’t appear on the EU books (e.g. payments into the Pension Fund), while there is revenue that appears on the EU books but not on our own (e.g. Social Insurance Fund surplus).

As a rule, expenditures in the form of bank recapitalisations don’t count in the EU books as they are considered equity investments. For instance, recapping Bank of Ireland through equity purchases should, in theory, be recouped. The Government had hoped that recapping Anglo-Irish would also be considered as an equity purchase and, therefore, not appear on the books they keep for the EU. Eurostat put paid to that. The money flowing into Anglo-Irish, according to Eurostat, could not realistically be considered an equity investment. Instead, it is now considered a straight-forward capital transfer. This transfer now appears on both sets of books.

Does this make any difference to the bottom-line? In one sense it is merely a re-aligning statistical methodology with economic reality. At the end of the day, regardless of whether the capital transfer to Anglo-Irish appears on the EU books or not, it certainly will weigh down the economy’s books. This is money that has to be borrowed on the bond market. These borrowings will have to be serviced. For every €1 billion we borrow, we increase our debt servicing costs by €45 million at current rates. If the Government transfers the maximum amount – €22 billion – this debt servicing cost will rise to nearly €1 billion a year. It doesn’t matter whether the debt appears on this book or that; it will be a very real item on the current budget.

How will Eurostat’s reclassification impact on the Maastricht guidelines and the Government’s target of reducing the annual deficit to below -3 percent by 2014? Be prepared to receive two new words into the popular economic debate: the ‘headline’ deficit and the ‘underlying’ deficit. The Government will make this distinction to downplay the official (for EU purposes) GGB, or annual deficit, level.

For instance, prior to the reclassification, the Government estimated the GGB to be -11.7 percent. After today, it is 14.3 percent. The Government will claim that the former is the true, or ‘underlying’ figure; while the latter, the ‘headline’ figure, is merely the product of a one-off – in this case, the one-off capital transfer to Anglo-Irish.

The problem with this is that there may be considerably more one-offs in regards to Anglo-Irish. Philip Lane points out that such transfers will count on the EU books at the time of the commitment. While the Government may drip-feed the capital transfers into Anglo-Irish over a number of years through promissory notes, it will nonetheless be recorded in the year the decision is made. So if the Government commits €8 billion, it will be recorded immediately.

Still, the Government will hope to have done with these commitments so that by 2014, no such liability for the purpose of determining that year’s GGB, or annual deficit will arise. In that sense, they hope the ‘underlying’ reading will prevail.

But there is no such distinction when it comes to calculating our GGD, or overall debt. This will be a permanent feature. The Government had hoped to keep the GGD below 80 percent of GDP. If they have to hand over the full €22 billion to Anglo-Irish, the GGD will balloon to over 91 percent. Both the optics and the reality of that ballooning debt will not be good.

And here is where the Government is on a slippery slope. This reclassification will invite further scrutiny and this kind of scrutiny rarely has a favourable conclusion. Regardless of Eurostat rules, investors into our debt will start examining NAMA’s impact and may start their own mental reclassifications.

Further scrutiny may be made of the Government’s credibility in regard to their strategy. Already, the EU Commission has recently given a thumbs-down in its update on their excessive deficit procedure against Ireland. They have concluded that (a) the Government’s growth projections are too optimistic (and if this is the case, unemployment, tax revenue and the deficit will all go south); (b) the Government’s future fiscal consolidation plans are too vague; and (c) even if the Government somehow manages to hit their targets, they will still have to make more fiscal adjustments than planned for.

In short, this reclassification by Eurostat could prompt an opening up of Pandora’s deflationary box. Independent forecasters are already predicting lower-growth and higher debt than the Government is doing – and that’s without today’s decision.

So the Government has no choice but to keep up this glorified shell game -continually reassuring all of us that nothing has changed. But it has. It is. It will.

And don’t forget – shell games are just a confidence trick. If you play along, you will lose.

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9 Responses

  1. Robert

    April 24, 2010 6:01 pm

    Well, hundreds of thousands of people in this country ‘played along’ and took part in the ‘property game’.
    Now games are only games if the rules are known and they are based on notions of fairplay. But when the game is full of scams, and cheats, its no longer a game, its a confidence trick. And really the whole sorry story is but a tale of one big confidence trick. The only problem peoples homes are people lives, and peoples lives are not commodities. In the the housing game, if you have been fouled, it aint so easy to pick ur-self up. One thing for sure, like any game if the rules aint fair your gona have a hard time getting players. Its that old saying ‘fool me once shame on you, fool me twice shame on me’. Well this government have played foul lomg enough, they have been caught at ‘slights of hand’, they have been rumbled, and thier time will come when they will have to answer for thier actons.
    Yep I think I can hear the IMF coming over the Hill of Tara, they’ve just stopped for a moment to survey Dick Roache’s actions in relation to the M3 slicing through the scacred vally’s.

    Cheers.

  2. Pope Epopt

    April 24, 2010 9:39 pm

    @Robert

    I think the game here is to devastate the economy as per IMF ideology before they even get here.

    I don’t really know why. Perhaps it’s a Catholic thing.

  3. donagh

    April 25, 2010 10:50 pm

    I don’t really know why. Perhaps it’s a Catholic thing

    Leaving aside the Catholic thing for the moment, as I’m not 100% sure what you mean, is it true that you don’t know why? Even to the point of hazarding a guess?

  4. Robert

    April 25, 2010 11:37 pm

    My spelling is a bit dodgy, how & ever, the Hill of Tara existed long before the Catholic thing.
    The point is that really are in a mess, & I think that the Ministers actions in signing the approval for the ‘go-ahead’ on his last day in office (and in such a way that the decision could not be reversed), to put a motor way through this part of the country was and is symptomatic of the way this government ‘does buisness’.

    With regards the IMF, GDP , GVA & all the economic stuff, I was reading in the Sunday Observor about GDP and I fail to understand how it is that our GDP per capita is $51,128 6th highest in the world, the UK’s GDP per Capita is $35,728 21st in the world and yet we are in the same boat (sinking boat that is) as Portugal, GDP $20,655 Greece $30,305 Spain $31,142 in oterowrds The PIGS.

    Am I missing something here or are we in this wee country working bloody hard punching well above our weight, for very little return? Are we producing all this ‘product’ to service government incompetence and finacial mis-management. Am I wrong? Am I being too simplistic? Does it matter? Who cares?
    Help!!

    Cheers.

  5. Pope Epopt

    April 26, 2010 2:41 pm

    Hi Donagh,

    Weary attempt at humour.

    Well, on one level, sure I think I understand why, it’s our ruling class, with their world-beating combination of viciousness and stupidity, innit?

    But perhaps there’s something in the Catholicism. We wouldn’t feel masochistically comfortable if the country wasn’t a SNAFU vale of tears, wouldn’t we now?

    Or have I been inadvertently exposed to Joe Duffy one too many times?

  6. Donagh

    April 26, 2010 3:39 pm

    I don’t think stupidity has anything to do with it. Viciousness, yes, but it comes from not caring about the economic cost to the real economy, which can appear stupid to the ordinary person but is rather an illustration of the whole class dimension behind this crisis.

    I hadn’t read Harry McGee’s report on the now defunct Advisory Forum on Financial Legislation when I made the point:
    http://www.irishtimes.com/newspaper/ireland/2010/0426/1224269093343.html

    But it goes along with why the government should choose ‘devastate the economy as per IMF ideology’.

    Actually it would need lots of elaboration, but basically, all the decisions that the government have made regarding the budget and the economy on the whole are based around the interests of the banks. All this stuff about bringing down the deficit, austerity, attacking the public sector, competitiveness, bringing wages down across the whole economy is based on the idea that every available cent must be put into the banking sector (include or esp the country’s ability to borrow) and to do so with as little interference in the running of the banks as possible.

    The reason for this I would argue is because the banks themselves do not care about the real economy (Paul Krugman makes the same point about Wall St in his latest column), and thinking in the IMF of screw societal interests we just want our money back is the same as the Irish banks. Except in the case of the Irish banks, its screw societial interests we just want money to protect our shareholders and keep afloat.

    When it came to banking regulation the banks were able to make up the rules. (from the IT piece):

    The subgroups charged with drafting the proposed legislation were also dominated by the private sector. An internal Finance memo from January 2007 said that its expectation was that the private sector would provide expert personnel whose pay would be resourced by the industry itself.
    Of the 19 members of the drafting subgroups, only five came from the government side: two from the Financial Regulator’s office; and three from Finance. The others were lawyers and regulatory experts drawn from private law firms and banks including Merrill Lynch, Arthur Cox, AL Goodbody, McCann Fitzgerald, Educational Building Society, Bank of Ireland, Mason, Hayes and Curran, Davy and the Irish Stock Exchange.

    Stephen Collins was very funny on Saturday when he was complaining that the ‘elites’ like Richie Boucher etc were really not getting it, and that if the needed austerity measures are going to be accepted by the wider public that they’d have to stop feathering their own nests. Of course, Collins is foolish enough to believe that austerity measures are somehow supposed to help the economy recover, when in fact they’re doing the opposite. He doesn’t realise that the ‘rational’ behind this strategy comes from the very people he says ‘don’t get it’.

    He also says its selfishness and stupity.

    But perhaps there’s something in the Catholicism. We wouldn’t feel masochistically comfortable if the country wasn’t a SNAFU vale of tears, wouldn’t we now?

    That falls for the line that the Irish people are taking it. Buys in to Brian Lenihan’s comment that if they tried it in France there’d be riots. It also presumes that its all over, that the Irish people are taking it. It’s not, and apart from what the Irish Times says, they may not yet.

  7. Pope Epopt

    April 26, 2010 4:59 pm

    Sorry, but I do think our ruling class has been pretty uniquely incompetent/stupid (at least in the Western European context). A little more diversity of investment and opinion, a greater feeling for PR (some more scapegoats and show trials to distract from systemic failure), and they could be in a much better place than they are now.

    It’s not over, by any means, but I’m not convinced it’s pressure from below that’s going to stop the increasingly nakedly parasitic posture the banks, or more accurately, the entire FIRE (Finance, Insurance & Real Estate) complex is adopting. I’d put my money on a rolling and infectious sovereign default in the EU and spreading outwards. The creditor nations are not happy with bailing the first ‘profligate’ country out. Never mind the second, and then the third. That’s when the whole crisis will become a lot sharper, IMHO.

    After all, Iceland got their change of government only after a systemic collapse.

  8. Donagh

    April 26, 2010 9:48 pm

    So they could still maintain the situation in their interests without being so naked about it and by being so foolish they are undermining their own position? Perhaps. It certainly is stupid, but considering the power of banks, not only here but right across this globalised capitalist world, it seems that the system itself is stupid. It is staggering that with each passing revelation that we are standing by while the gov continues to pump money in to Anglo Irish Bank. It’s nuts that there are those who can claim that its impossible to do otherwise.

    I’d put my money on a rolling and infectious sovereign default in the EU and spreading outwards.

    I think that is definitely the more likely scenario. I had the same notion myself, although I have no particular expertise of course.

  9. Robert

    April 27, 2010 12:30 am

    …now lads come-on, what are the chances of a popular uprising against untramelled capatilism in this country…no chance…sure catch the copy-cat Dragons on RTE, entrupurneurs…rumphing along with the help of Long Black Coat one man super-duper crimfighter Paul Williams, now reporting exclusivly for the Irish News of The World will come to the rescue…
    News of The World, the biggest selling news paper in the country, Gerry F888ing Ryan… most listened to radio show…there’s your answer lads…come on now…what chance have we