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Posts tagged ‘Finance’

“The Money Doctor – Finance Annual 2011″

sent in today by Liam

I strongly urge everyone to buy this book – it may keep you sane.              

“The Money Doctor – Finance Annual 2011 – the quick and easy way to fix your finances (John Lowe)
 
It may even educate Dail members to look after the country’s finances better!
 
At a minimum it’ll help them to look after their own finances better! (Ivor Callely and Frank Fahey take special note!!!)
 
Liam O’Mahony

Mary “You have been asleep at the wheel”

CIARÁN HANCOCK, Business Affairs Correspondent

The European Central Bank has told the Government that it has “serious concerns” about the Credit Institutions (Stabilisation) Bill, which gives the Minister for Finance sweeping powers to intervene in the banking sector.

In a seven-page opinion signed off by ECB president Jean-Claude Trichet, the Frankfurt-based institution raised concerns that the draft law is “insufficiently legally certain” on a number of critical issues for the euro system.

The ECB said the laws could usurp its rights over the collateral given as security for liquidity purposes to banks.

It also said “problems of legal uncertainty” related to the impact of the legislation on the rights of the Central Bank of Ireland, the ECB and “possibly” other central banks in the euro area.

President Mary McAleese has already convened a meeting of the Council of State for tomorrow to advise her on the emergency banking legislation. The President will then decide if she should refer the legislation to the Supreme Court to test its constitutionality.

Opposition parties have also raised concerns about the sweeping powers granted to the Minister for Finance in the Bill.

The warning from Mr Trichet reflects ECB fears of the risks involved in providing liquidity to Irish banks. The most recent data show Irish banks having €136 billion in loans outstanding from the ECB – a quarter of the total in the euro zone – and €45 billion in emergency liquidity assistance from the Irish Central Bank.

To obtain liquidity euro zone banks have to put up assets as collateral. The ECB’s concern is to ensure it always holds enough collateral of sufficient quality to minimise its exposure were some of the funds it provides not paid back.

The paper from Mr Trichet is the latest manifestation of the ECB’s worries about the risks it is carrying as it battles the euro zone’s mounting debt crisis.

Last week the ECB announced it would increase by €5 billion to €10.76 billion its subscribed capital as part of plans to shore up its financial strength. Since May the ECB has bought €72 billion in euro zone government bonds to stop its borrowing costs getting out of control.

Irish Government bonds are likely to comprise a large part of the total, although no details are given.

Mr Trichet also said he would have “appreciated” being consulted at an “earlier stage” on the draft legislation, which formed part of the recent bailout deal agreed by Ireland with the International Monetary Fund and the EU.

Minister for Finance Brian Lenihan made a request to the ECB for an opinion on December 10th. Mr Lenihan asked that it be delivered by December 17th. The opinion was posted on the ECB’s website last Friday. In the paper the ECB said that given time constraints it could not assess all of the “many constitutional, other legal and regulatory issues” in the Bill.

A Department of Finance spokesman said there was “no question of the Central Bank, ECB or any national central bank, as creditors to the guaranteed institutions, being exposed financially by the exercise of the Minister’s powers under the Bill”.

He said it was “inconceivable” that the Minister would make specific directions or implement specific asset transfers unless these were supported by the Central Bank.

The spokesman added that the consultation period was constrained as work on the bulk of the Bill only started at the end of November.

The ECB was sent a close-to-final draft on December 11th.

The emergency powers, which are set to last until the end of 2012, would allow the Minister for Finance to transfer assets and liabilities at Irish-owned institutions; appoint a special manager to take over the running of a bank; override the decisions of shareholders and directors; and make directions in relation to subordinated liabilities.

The ECB did welcome the “wider powers” the Bill would give the Government to resolve a financial crisis. But it said the Irish framework “may have to be adapted in the light of the forthcoming commission’s legislative proposals on a union crisis-management and banking resolution regime.

source:http://www.irishtimes.com/newspaper/breaking/2010/1220/breaking6.html?via=mr

Follow up http://www.independent.ie/opinion/letters/why-was-mcaleese-silent-in-hour-of-need-2475698.html

Comment:

Last week I and three other citizens were outside the Dail protesting against the Finance ministers proposals in the banking Bill we were of the opinion that this bill was in fact an attack on the Irish constitution as we believed that the minster was taking powers upon himself that Dail Eireann was only entitled too! The sad fact is he managed to get the three Amigos (Self interest in their own self-preservation so-called Independent TD’s) or better known as votes for sale brigade. Helped this Minster to attempt to bypass the Irish constitution .Over the weekend we hear the president was now querying the Bill .A bit late in the day for her to be waking up to the wholesale plunder of the Irish people’s wealth by the gangsters in the Dail

Why did she not query the NAMA bill and the Governments guarantee of the private banker’s debts?

Forcing private debts on the nation is tantamount to treason why did she not open her mouth about that?? It’s a bit late in the day to be questioning this corrupt government. They are totally out of touch with the people and the president should have got involved a long time ago.Calling for a meeting of the Council of State to examine new laws covering the multi-billion euro bailout and the banks is I suppose a start, but a bit too late ,have your cosy chat by the fireside , the horse has bolted Mary !  “You have been asleep at the wheel”  

Ronan Lyons on “Ireland’s Economic Crisis”

Ronan Lyons has posted a new item, ‘Ireland’s Economic Crisis: What sort of hole
are we in and how do we get out?’

The full story of Ireland’s economic highs and lows over the past generation will no doubt be examined in many books for years to come. That’s no consolation, however, for people who are voting in a few weeks and who want to know where we are and what we need to do. They want to know which painful hits they should take, and which they shouldn’t. To know what to do next, we need to know how we got here and how bad things are, so this post aims to give a bare-bones outline of how Ireland dug itself into a hole, how deep the hole is and the kind of things we need to do to get back out of the hole.

Digging the hole: Five mistakes in Irish policy

Irish policymakers essentially made five major mistakes over the past fifteen years. The first four can be grouped largely under the heading of: “We just didn’t prepare for life in the eurozone”. While we prepared for entering into the eurozone, we didn’t prepare for when we were actually in the eurozone. Specifically, when you’re in a currency union, you don’t have your two main tools for stabilising the economy – interest rates and exchange rates.

You may wonder, then: why on earth would you enter a currency union? Those who took out mortgages in the 1980s can confirm that Ireland was plagued by high and volatile interest rates, something you escape in a large currency union. Secondly, having your own exchange rate means you can be picked on by the markets. So Ireland made a trade: we gave up our two primary tools for stabilising the economy, in return for life in a eurozone of low and stable interest rates and a stable currency.

But if you do that, your main tool for smoothing the ups and downs of the economic cycle becomes your fiscal policy – what the Government taxes and spends. You keep some gas in the tank, so to speak, so when a recession hits, you can crank up spending. Unfortunately, as the first two mistakes point out, it seems the Government is only learning that lesson now.

  1. Government Spending: Do you run your household finances according to the principle, “When I have money, I spend it – when I don’t, I won’t”? Almost certainly not, I would say. You borrow and save to smooth out your consumption over time. And what holds for a household is true for a country. The government, however adopted a principle of “Spend when we have it” in the late 1990s and total spending increased from €27bn in 1998 – increased spending by an average of 10% a year, until gross spending topped €76bn in 2008. Clearly, if you increase spending at that speed, the focus and quality of your spending is going to suffer.
  2. Taxation: At the same time, the way we were all taxed went bananas. A good tax system is one where your marginal rate of tax (i.e. the tax you pay on the next euro you earn) is similar to your average tax rate (what percentage of all your income is paid in tax). Unfortunately, the Irish system is all wrong. Thanks to overly generous tax-free credits, we have not only some of the highest marginal rates in the OECD, we also take very little tax off the majority of workers. For example, the middle earner in 2006 paid about 4% income tax. The OECD calculates an all-in tax on wages each year. In Ireland, it went from 10% to negative between 2001 and 2007. Everywhere else, it stayed about 20%. We all like to think of ourselves as over-taxed. We’re not.
  3. Building: I’m an economist – I love markets, I think they’re great ways of allocating resources. However, they’re not perfect. So if you have a really important market, it needs management and supervision. One such market the government failed to supervise was the housing market. For every 100 people living in the country, Ireland built 14 homes between 2000 and 2007, whereas most countries built about 3 in the same period. Government revenues from the property market increased from €3bn to €9bn as the bubble intensified, an important part of the puzzle of rising spending but a screwy tax system.
  4. Banking: Bubbles need a source of credit to happen in the first place and this happened by not controlling the single most important sector in the economy – the financial sector. Modern financial systems are based on long-term debts financed by short-term deposits, therefore they are inherently fragile and so need lots of babysitting. But during the boom years, it seems the babysitter asked the children how they would like to be babysat. The result? Lending by banks to Irish residents rose 450% in the decade to 2008, compared to a 30% increase in Germany and an increase of 100% in the Netherlands.
  5. The Guarantee: Heading into 2008, Ireland faced four problems: runaway public spending, a screwy tax system, and a housing market and a financial system that were effectively out of control. In late 2008, the global financial crisis started. It was then Government policy made its fifth mistake: the blanket guarantee of all bank liabilities. This effectively nationalised all banks overnight and made markets think there was no more risk holding Irish bank bonds than holding Irish national debt. However, all that unsustainable lending by banks means that holding Irish bank bonds should be a lot riskier than holding Irish debt.

Some of the mistakes that were made have somewhat international roots. I don’t subscribe for a minute to the “It was all fine until Lehman collapsed” story. But internationally, the “Great Moderation” – the period of very smooth economic growth in the 1990s and 2000s – tricked lots of countries into thinking they didn’t really need to regulate their banks.

However, much of the blame lies at home. With the banks, the lack of regulation here was worse than elsewhere, if the scale of bank lending is anything to go by. On building, no other country had the boom in new homes we did. And Ireland’s system of social partnership meant that Ireland’s entire public finances were run by two Departments, Finance and An Taoiseach, and the trade unions. Running a €50bn organisation with such an incredibly centralised power systems greatly increases the chance of the everything going screwy.

How deep is the hole?

The €85bn package from the IMF/EU shows the scale of the problem. That’s slightly more than half the size of the Irish economy – so certainly very large, but not beyond imagination. €10bn is for bank capital, with a further €25bn as an emergency fund for the banks. Adding the €30bn or so put into banks already, the total bill for the banks looks like being about €60bn.

The bank bailout is a huge amount of money. But it is only about half the size of the government’s deficit between 2008 and 2015. This is a very important point: public spending cuts and tax increases are essentially nothing to do with the banks. We need spending cuts and tax increases to correct the problems we have made since the 1990s. We could shave bondholders until they’re bald but that wouldn’t change the need for €15bn in savings over the next five years.

So, as voters, when thinking about Ireland’s mess, we should be very angry about the banks, but we should be about twice as angry about how the Government managed its spending and taxation. Unfortunately, this means being in favour of spending cuts and tax increases. 2010s-Ireland will have to pay for the excesses that all of us who were around in 2000s-Ireland enjoyed.

How do we get out of this hole?

Putting things right means closing our deficit and making sure we never make the same mistakes again. So when politicians come to the door, you should ask them whether they have detailed plans in the following three areas:

  1. Reducing and decentralising public sector expenditure: as a first step, whatever Government is in place will need to reduce public sector spending by about €10bn over the coming five years. About €2bn each will have to come from social welfare, public sector pay, investment in infrastructure and almost €4bn will have to come from healthcare, where the odd situation exists that Ireland, by far the EU15’s youngest country spends significantly more per capita on healthcare than any of its peers. A long-term strategy, though, must tackle the reason public spending was able to get so out of control in the first place: public sector organisations got money from an indeterminate central pot and therefore did not have to manage their budgets. Giving public sector organisations responsibility for managing their finances, and their people, must be the solution to sustainable long-term public spending.
  2. Sorting out the tax system: over the next five years, the government’s revenues will have to rise from €50bn to about €56bn. While this sounds complicated, in reality it only really needs three things: (1) reducing tax credits back into line with countries like France and Germany, (2) introducing a property tax, and (3) ensuring fairness by bringing in a flat income tax of 33% on earnings over €250,000, not unlike the Swiss scheme. For example, on income taxes, if tax credits had increased with inflation since 1997, they would currently allow us to earn about €6,500 tax-free, similar to France and Germany. Instead, we can earn almost three times that, without paying any income tax. On property taxes, Ireland is an anomaly among developed countries for not having an annual property tax. We know the consequences of this to our cost.
  3. Managing important markets: the other two failings of the boom years – not managing the building and banking sectors – must also be addressed. Excessive lending and excessive building are not concerns at the moment, for very different reasons, but the next Government will be putting in place the systems on which our future banking and building sectors will be built. Regulation needs to be effective without being burdensome. It’s a tightrope but we can learn from other countries.

Don’t listen to those who try to tell you simple ideological solutions. One you often hear is that what has happened is the result of “blind right-wing ideology”: simply put, no “right-winger” worth their salt would ever have let government spending go so wildly out of control. Instead, fifteen years too late, we need to adapt to life in the eurozone, manage our most important markets and make sure this never happens again.

source http://www.ronanlyons.com/2010/11/30/irelands-economic-crisis-what-sort-of-hole-are-we-in-and-how-do-we-get-out/

“A Guarantee Too Far”

 

“The Irish Economy Collapses As A Result Of The Global Financial Crisis.”

  Currently the Irish economy is in freefall following the collapse of the real estate market that had expanded ten fold in the decade from 1997 – 2007. The reasons for this “Celtic Tiger” boom are many but in the main reasons it arose are due to the following:

 

  1. A.    Ireland’s entry into the Euro allowed Irish banks access to unparalleled pools of cheap credit.
  2. B.     Ireland then had a low cost base.
  3. C.    Ireland had an unusually well educated workforce.
  4. D.    The integration of Europe brought many foreign companies to Ireland.
  5. E.     We introduced a most favourable corporate tax structure for international transfer pricing.
  6. F.     Wage rates rose at unprecedented levels due to job growth and a new liberal taxation policy.
  7. G.    The “originate to distribute” banking model increased banking liquidity to unprecedented levels.
  8. H.    “Social Partnership” brought industrial peace after many decades of instability.
  9. I.       The Northern Ireland “troubles” were finally resolved and the country had true peace which had eluded it for over four decades. These troubles had artificially repressed the country financially. The arrival of peace engendered a new positive attitude and an economic outburst.

 

 

            Due to a lack of government regulatory control and strategic foresight taxes from an unsustainable property base were used to fund a bureaucracy that is now overpaid and over extended  and is in severe danger of bankrupting the country for generations. As with many western democracies the executive system is proving incapable of making the tough choices necessary to stabilise the destructive spiral of debt interest compounding on debt principal.

 

            However, apart from the reality of supporting a burgeoning government and semi-state bureaucracy, the Irish government made a particularly disastrous mistake in the autumn of 2008 when the financial catastrophe first broke. In a mid-night crisis meeting, at Farmleigh (the former mansion of the Guinness family which now serves as a luxury bolt-hole for Irish elites)  the department of finance cajoled the ruling Fianna Fail party in power into not only guaranteeing banking deposits but also guaranteeing all bank bondholders. Thus far, two years on, for one lone particular financial institution called “Anglo Irish Bank,” the bill for this “guarantee too far” is now 36 billion Euros and rising. No other government in Christendom has provided such a windfall to the privileged bondholder elite. Under this guarantee as bonds mature the holders are being paid off, in full, instead of for cents on the dollar. As long as this guarantee remains in place the country will continue to be fleeced. As a result of this largess the price on Irish government borrowings has rocketed to 6.6% almost twice the German bund rate. This situation is making a mockery of the concept of a “common Euro currency”. Increasingly the Euro is being seen as an exchange rate mechanism rather than as a true currency.

 

            As with Portugal and Greece in Ireland the economic situation on the ground is becoming desperate. The main banks are basically insolvent and unable to lend. Capital expenditure by the government departments has stagnated. Taxes are rising to pay for the bloated interest charge on ballooning foreign borrowings. Business cash flow has collapsed and credit is non existent. Many enterprises now no longer accept cheques and insist on cash or payment through credit or debit cards. Money has become very scarce. It is the greatest crisis the country has faced since the 1921 Irish War of Independence. Unfortunately the media has failed to highlight this reality and many politicians and banking executives act as if this crisis is just a normal credit cycle event. They actually believe that soon Ireland will return to the boom years. They plead that all we have to do is wait the situation out. This type of complacency is preventing party leaders from taking the radical actions necessary and as each month passes the government borrows an additional 2.6 billion just to fund day to day expenses. Soon government borrowings will be over 100% of GDP and with exploding interest charges, increasingly taxes are simply being used to pay off foreign bondholders. Increased taxes are contracting the economy further and so the death spiral of debt is squeezing the life out of day to day commerce. Business is collapsing under a deflationary depression while bureaucracy is being sustained through misguided political policy. Ireland has become a socialist nightmare over-night.

 

What Ireland now faces is a highly competitive, low cost, low credit, web-interconnected, transnational and level-taxation based environment. Ireland must grow up and move on. It is time for fresh ideas and fresh action. It is time for leadership, courage and vision. It is time for affective sound bites to be replaced by effective strategic and tactical practicality. Hopefully the Irish people will wake up from their consensus trance and force the political elite to stop bailing out corrupt banking institutions and start to cut its public expenditure budgets. Enterprise not bureaucracy must be championed and its educated young workforce given hope rather than an emigration ticket. Whether this wake-up call will be headed is anybody’s guess. Increasingly the trend in Euroland is for Brussels to call the shots over local “sovereign” parliaments. In this crisis this development has turned out not to be beneficial. Local politicians have thus opted to pass the buck rather than courageously face up to the challenges. However, in Ireland it would appear an end game is shaping up. There is a limit to the level of borrowing the country can run up particularly with exploding interest costs. Should the Irish political system continue to prove itself incapable of restructuring its bloated public service expenditure it is inevitable that at some stage the IMF, probably through the auspices of the European Central Bank, will wade in and directly instruct the Irish Department of Finance to act. From my point of view the sooner this happens the better because it is only then that people will realise that the bottom is in. It is then and only then that confidence will be restored to the wonderful Emerald Isle.

This article was sent to me a few minutes ago and is an excellent follow up on my previous points in my earlier posting

Thanks to Chris at wealthbuilder.ie

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