In its latest report, the Irish Fiscal Advisory Council (IFAC) has called on the government to stick to its intended path of fiscal consolidation and implement €2bn of adjustments in Budget 2015.
There are three reasons for this call: (i) to reduce risks to debt sustainability by putting the debt-to-GDP ratio on a firm downward path; (ii) to provide a reasonable probability of a sub-3% of GDP deficit in 2015 to facilitate an exit from the Excessive Deficit Procedure (EDP); and (iii) to protect Ireland’s credibility where following through on adjustment commitments are concerned.
The above is somewhat analogous to ‘The Maradona Theory of Interest Rates’ outlined by then Bank of England governor Mervyn King in 2005. This was based on the Argentinian maestro’s second goal against England in the 1986 World Cup, the build-up to which involved a 60 yard dash and five players left stranded in his wake – “The truly remarkable thing, however, is that, Maradona ran virtually in a straight line. How can you beat five players by running in a straight line? The answer is that the English defenders reacted to what they expected Maradona to do. Because they expected Maradona to move either left or right, he was able to go straight on”. Ahead of this autumn’s Budget we have seen the Minister for Finance float the idea of tax cuts, while the leadership contest underway in the junior coalition partner, Labour, has involved calls for an easing of austerity (translation: more flexibility on the expenditure front). In the background, however, the limited fiscal wriggle room – the government’s own forecasts show the deficit coming in right at the EDP limit of 2.9% of GDP next year – means that the government can be expected to continue in a straight line.
In other financial news:
Measures to cool the property market under consideration
The Irish Times reports today that the State’s advisory body on housing is considering a number of proposals to cool demand in the residential property market. With completions running at circa 25% of their long term average and meaningful new build activity likely to be at least two years away, measures to encourage prospective buyers to defer their decision are on the table. A savings incentive scheme for first time buyers, where monies put away would be exempt from the punitive (41%) DIRT rate and also benefit from “modest improvements in deposit rates compared to what is available on the market”, is one such suggestion, while another proposal includes the imposition of a maximum LTV of 80%. Whether these proposals are heeded is another matter. At the launch of the government’s recent Construction 2020 report, Ministers floated the idea of a mortgage insurance scheme for first time buyers in order to incentivise banks to provide 95% LTV mortgages, which suggests that cooling demand is not a priority on Merrion Street. Another consideration is that, following several years of sub-trend transactions, there is a cohort of prospective buyers waiting to get on the property ladder who will not be dissuaded from doing so in order to avail of a marginal improvement in effective deposit interest rates. As we have noted before, the most effective way to slow the upward momentum in prices is by increasing supply, through a combination of measures to improve the economics of new build and incentives to free up secondary supply.
Retro-recap saga drags on
An unnamed “senior EU source” has attracted acres of media coverage in the past 24 hours here, as they have dismissed Ireland’s chances of securing a retrospective recapitalisation of its banking sector. In comments laced with culinary metaphors – “It would be like trying to unscramble eggs” and “It would be like eating a pudding and then trying to put it back again” were two of his soundbytes – the official said that, for legal and political reasons, the potential for debt relief was becoming more remote with every passing month. The official noted that EU rules on recapitalisation are all forward-looking. Not that any of this should come as a surprise. For the past couple of years we have expressed scepticism that a policy of retrospectively recapitalising the Irish banking sector could be sold to the electorates of other European countries (ESM recaps must be unanimously backed by all of the Eurozone members), arguing that the government’s energies would be better expended on nursing the sector back to health and harvesting the proceeds from returning the banks to private ownership (note that the State has already booked a profit on its relationship with Bank of Ireland, while a partial privatisation of AIB appears likely next year).
NTMA to sell €500m of T-bills on Thursday
The NTMA will auction €500m of T-bills with a three month maturity on Thursday. This will be the third T-bill sale by the NTMA since the start of the year and the 14th since it returned to the T-bill space in July 2012. In each of these events the sales have raised €500m with issuance being of 3 months’ duration, so yesterday’s confirmation of the details of Thursday’s auction came as no surprise. The annualised yield over the past five auctions has averaged 20bps and we anticipate a similar result on Thursday. Given the NTMA’s robust funding position (at the end of May it had €20bn – equivalent to 13% of Irish GDP – of cash at hand, enough to meet funding needs to the end of 2015), we don’t expect to see any changes in the short-term to the current programme of limited T-bill issuance.
IOnformation provided by Investec Ireland www.investec.ie