After years of living in the slow lane it appears broadband in Ireland is about to improve

By Will Goodbody, Science and Technology Correspondent  

@willgoodbody

When you see the long running campaign for better broadband, Ireland Offline, offering a hearty welcome to an announcement from Eircom, it’s a pretty clear indication that something positive has happened. And that was the vocal lobby group’s reaction yesterday to news that the Irish telco was ready to begin offering high speed broadband to up to 300,000 homes and businesses in the first phase of its fibre optic network rollout. For those potential customers who choose to avail of the service, it will mean access to up to 70Mbps up, and 20Mbps down, with a pledge of up to 100Mbps later this year as the technology evolves.

There are, of course, some “buts”. Rollout will continue over the next two years, eventually reaching 1.2 million homes and businesses. But even when it is complete there will likely remain many rural locations that will still not be able to avail of the faster network. For those that can access the network, it will mean a significant increase in speed. But because the fibre is only running to a roadside cabinet, not into homes and premises, distance from that cabinet will have a bearing on performance, as the last leg will still be over copper wire. Customers of other operators, whose services piggy back on the Eircom network, will benefit too. But this will be dependent on those operators rolling out their own service offerings.

All in all, though, it is hard to quibble with Ireland Offline’s claim that this is a positive development. But arguably the real story here is the fact that it has taken Eircom so long to get to this point. For years, Irish broadband users have had to make do with, for the most part, second rate broadband services. So much so that Eircom’s rivals, like UPC and Magnet for example, started building their own high speed networks long ago. Credit must be given to current Eircom management for seeing the light and driving the change. For too long, Eircom as the predominant telco in the Irish market, was so consumed with its own financial woes and burdened with debt, that it was unable to get it together sufficiently to upgrade its network to first world standards. The result was undoubtedly an avoidable constraint on the development of ecommerce and the digital economy here.

And the data bears this out. According to the most recent statistics from the European Commission, Ireland is the fourth worst performer when it comes to access to high speed broadband (10Mbps+). As a consequence, it is not surprising that high speed broadband penetration among households and businesses is low compared to many of our European peers. The proportion of next generation lines here as a percentage of overall broadband access is middle of the table, at 20%, compared to above 50% in countries like Romania and Belgium. As a result, the proportion of the population using next generation services here is tiny, at 6%.

Local statistics back that up, with this week’s Comreg Consumer Survey 2013, finding that just 16% of people here have a fixed line broadband speed above 10Mbps. Yet, 1 in every 5 was willing to pay more for faster fixed line broadband.

It’s a clear business opportunity, and one already being leveraged by the likes of UPC, which says it can now offer up to 150Mbps to 41% of homes here. While Magnet says its Fatpipe 70Mbps offering will be available to 250,000 homes by the end of the summer. With Sky already in the mix, and Vodafone announcing its high speed service on Monday, the market is becoming crowded and competitive. And all that is before the mobile operators begin offering 4G services later in the year.

So fasten your seatbelt and hang onto your modem. After way too many years of living in the slow lane, it appears broadband quality in Ireland is finally about to improve. 21^st century communications, here we (finally) come.

ESRI research has called into question the way growth is measured in Ireland

By Economics Correspondent Sean Whelan

Few in Ireland have really taken GDP to be a serious measure of the Irish economy, because of the very large impact that the activities of foreign owned multinationals have on the numbers.  GNP has always been regarded as a more relevant measure.

But now it seems we can’t rely on that either.

Or – for that matter – the balance of payments current account figure, which had been seen as a lead indicator of growing strength in the Irish economy over the past four years.

Earlier this week the ESRI published important new research by John Fitzgerald on the impact of re-domiciled PLCs on GNP and the balance of payments.

For more than a year the Central Statistics Office has been highlighting the distorting effect that these companies – which have moved their registered head office to Ireland for tax reasons, but which conduct little or no real activity here – have had on the GNP figure.

The CSO knew there was something not quite right, but couldn’t put their finger on it.

Prof Fitzgerald has drilled into the CSO data to shed light on the issue, and the findings aren’t at all pleasant.

The money held by these re-domiciled companies – around €7.4 billion last year, or 5.5% of GNP – is enough to distort the figures.

Prof Fitzgerald’s analysis says these inflows had the effect of reducing the recorded amount of profit outflows by multinationals based in Ireland, which had the effect of raising both the GNP figure and the balance of payments current account surplus.

Working back to 2009, when these inflows started – apparently prompted by concerns over the possible direction of the UK tax regime – Prof Fitzgerald finds the economic contraction in 2009 was deeper than officially recorded, and that GNP contracted in 2010, rather than the 1% expansion recorded in the official statistics.

It also impacted last year’s figures, which officially show GNP expanded by 3.5%, but the ESRI analysis says the real expansion was just over 2%.

The impact on the balance of payments surplus is more dramatic.

A surplus on the balance of payments indicates that a country is saving more than it is spending or investing. Usually large surpluses are not sustained, and eventually lead to increased domestic demand as these savings are reduced and spent in the domestic economy.

However Prof Fitzgerald’s research suggests that rather than running a current account surplus of 6% of GNP / 5% of GDP -the real number is less than 1%.  This implies there will be less of a bounce for the domestic economy, as there is not as high a level of savings to be released as future domestic spending as previously thought.

If GNP is smaller than thought, and GNP is a truer measure of the tax base of the economy that is available to support the national debt, then the debt/GNP ratio is worse than thought too.

And as an extra kicker, GNP’s close relative Gross National Income (GNP plus the inflow of profits from multinationals) is the one used to calculate a member states contribution to the EU budget.  And the effect of the re-domiciled PLCs is to inflate GNI – so we have been paying more to the EU than we should have.

But it’s the balance of payments figure that is really depressing.

Professor Philip Lane at Trinity College is quoted in the Financial Times responding to the report by saying “The reality is that the Irish economy’s competitiveness and its ability to pay down its debt is vastly exaggerated in the official figures.”

Writing on theirisheconomy.ie, Prof Lane says:

“…. the Irish national accounts now features two unusual elements:

(a) the large-scale operations of the affiliates of foreign multinationals mean that there is a large gap between GDP and GNI due to the high recorded profits of these firms. Moreover, the high import content of the exports of these firms means that there are analytical issues in understanding the dynamics of valued added in Ireland. To the extent that transfer pricing means that true imports are understated as a means to boost recorded profits, it also means that the trade surplus is overstated (but one-for-one net factor income is understated, so the current account is unchanged)

 (b) the more recent feature is the impact of re-domiciled firms which are counted as Irish firms, since the headquarters are here and even though these have virtually zero domestic activities and the ownership is entirely foreign. As shown in John’s note, this sharply alters the interpretation of the GNI data – but has no impact on the GDP data (which relates to domestic production). It also sharply alters the interpretation of the current account data, which is a key variable in the European Commission’s “macroeconomic imbalances” scorecard.

 So – both GDP and GNI data need to be handled with care. In particular, the traditional short cut of interpreting GNI as a better measure of true domestic activity is not wise – it is an income measure, not an activity measure.”

Davy Stockbrokers’ chief economist Conall Mac Coille has the following take on the ESRI research:

“The 5% current account surplus has been often used as a critical summary statistic of Ireland’s success in rebalancing the economy. The news that the balance, stripping out accounting distortions, is close to 0.5% of GDP will take some of the gloss off Ireland’s export-led recovery story. However, even excluding these distortions, there has been a sharp improvement in the deficit since 2009, up 3% from -2.5% in 2009. And the measurement problem has no bearing on the pace of household saving and debt reduction. So the underlying trends in the Irish economy have not changed. Nonetheless, the revelation that Ireland’s current account surplus may be overstated by 4.5% of nominal GDP illustrates a worrying trend, with volatility in the national accounts  and balance of payments driven by tax accounting strategies.

While point (b) of Philip’s piece has been highlighted by John Fitzgerald, it was the re-appearance of a Google executive before a British Parliamentary committee this week that shone the spotlight once again on the matters raised in point (a): the €30 billion outflow to foreign owned multinationals from their Irish operations that accounts for the gap between GDP (€163 billion) and GNP (€133 billion) last year.

Matt Brittin, Google’s vice president for sales and operations for Northern Europe, got beaten up by the British Commons’ Public Accounts Committee, with much talk of “smoke and mirrors accounting” and “doing evil” over the way it sells advertising in the UK, but books all the transactions from its EMEA headquarters in Dublin.

The company has faced similar, though less colourful, scrutiny in Germany and France (which even contemplated a Google Law to capture some of the revenue raised in France that is declared in Ireland).

And lurking in the background is the big one – the United States – where the Obama administration seems committed to a reform of Corporation Taxes to encourage companies to bring their earnings (and the jobs they generate) back to America.

Remember, the Americans are only beginning their fiscal consolidation process to deal with a debt and deficit situation that’s considerably worse than Europe’s.

But the row over where Google pays its taxes has highlighted another problem with Irish economic statistics – the export figures.

Since 2008 we have been hearing that exports will be the engine of Irish recovery in the Great Recession, and on the surface that has been the case – helped by the recession-proof nature of pharmaceutical exports.

But now, as predicted, the impact of the “patent cliff” – the expiry of patent protection for some high profile “blockbuster” drugs means a reduction in the volume and value of merchandise exports.

This has been offset by the rise of services exports, particularly computer services.  Indeed last year the value of services exports surpassed the value of physical goods exports for the first time.

This trend continued in the first quarter of this year, according to the Irish Exporters Association, with merchandise exports down almost 10%, and services exports up 8%.

It is certainly bad news to see the decline in exports of physical goods – both from the patent cliff and from the effects of the recession in the euro zone (and this is happening despite our supposed gains in productivity – though the Central Bank has long ago cast doubt on those statistics – it attributes most of the gain in productivity to the mass redundancies in the “low productivity” construction sector, which makes the rest of the economy look better).

However should we not also be concerned that the major part of our exports are now reliant on activity that appears to be driven primarily by tax laws here and internationally?

Michael Hennigan of the Finfacts website – a longstanding critic of the distorting effect of tax planning by multinationals on official Irish economic statistics – puts it more trenchantly in this comment on Prof Lane’s Irisheconomy.ie post:

“Google’s global web revenues grew by 29% and 21% in 2011 and 2012 respectively and in 2011, 45% of the total was booked in Ireland. Google Ireland reported revenues of €12.4 billion in 2011; payroll costs were €218 million; corporate tax in Ireland on trading activities was €3 million; total tax charged at €22.2 million including foreign withholding tax. When the Google Ireland’s 2012 accounts will be published this year, they will show revenues of at least €15 billion or 41% of Irish computer services in 2012.

Google, Microsoft, Apple, and commercial aviation leasing, employing about 6,500, account for 52% of Irish services exports.

Up to half of the services exports total of €90 billion in 2012 may be effectively fake i.e. unrelated to Irish economic activity.”

So if GNP, GNI, GDP, productivity and service export figures can’t be relied on to accurately describe the Irish economy, what can?

by Business Editor David Murphy

The rule book regarding what a euro zone country is permitted to do to fix its banks has been entirely rewritten

Critics have argued Europe has been making up the answers to the banking crisis as it went along in an amateurish fashion.

The evidence to back up that criticism is getting stronger by the day.

The rule book regarding what a country is permitted to do to fix its banks has been entirely rewritten. That raises deep questions about the €62 billion pumped into Irish banks and about future recapitalisations which are on the cards.

In the case of the Cypriot calamity, bank bondholders were wiped out and depositors with over €100,000 in two of the island’s banks are now facing losses of between 60% and 100%.

Initially, EU officials said the draconian solution was a “once off” event to address the symptoms of Nicosia’s casino banking system which was allegedly bulging with hot Russian money.

The head of the euro zone’s finance ministers group, the gaff-prone Jeroen Dijsselbloem, subsequently said Cyprus was a “template” for future banking solutions.

Under Ireland’s presidency of the EU, Finance Minister Michael Noonan is trying to agree a formal process for dealing with failing banks by next month.

ECB board member Joerg Asmussen said: “We want to establish a clear pecking order. First shareholders have to be burned, then all junior bank bondholders, then unsecured senior bank bondholders and uninsured depositors at the very end.”

Not all countries are in agreement, however, and the debate regarding hitting depositors would mean people with savings over €100,000 could be in the line of fire. For over borrowed countries with weak banks (ie: Ireland) this is particularly worrying because there is nothing to stop a flight of large depositors.

While Ireland was told in 2011 that it could not wipe out senior bondholders by the ECB, now Mr Asmussen says this is acceptable. This marks an enormous policy change.
In Ireland most of the bank recapitalisation has already happened. The Central Bank says in the medium term new accountancy rules may mean banks would need more capital.

Others argue that a requirement for new funds could happen sooner as a result of the continuing mortgage crisis. Another stress test, which is likely later this year, will give a reliable answer to that question.

But where will the money come from? Ireland has bailed out bondholders, which the ECB now says it is acceptable to burn. When the blanket bank guarantee was introduced in 2008 there were unsecured bonds of €85 billion in the financial system now there is less than €1 billion of senior unsecured and unguaranteed debt. That means there are no more bondholders upon which losses can be imposed.

Deposits of large corporations have left the system and don’t show any sign of returning. There is €155 billion of deposits in the banks. Of that, €54 billion are savers with sums in excess of €100,000. That means those depositors could feel under threat if amounts over €100,000 can be burned in the euro zone.

Last June the European Council raised the possibility of the European Stability Mechanism being used to recapitalise banks. Germany and some other countries have been trying to back out of this promise.

But now that Europe is making up policies to fix banking problems as it goes along, Ireland has an opportunity to ensure it can use the ESM to recapitalise the banks. The horrible alternative is to tap the taxpayer once again or hit depositors over €100,000.

Not to worry though. Europe will have a plan.

Bank of Ireland is taking a different approach to split mortgages

By Business Editor David Murphy

Bank of Ireland chief executive Richie Boucher is on collision course with the Central Bank over mortgage arrears.

The issue revolves around his bank’s treatment of customers who are being offered split mortgages.

The idea behind these products is straight-forward; half of a mortgage is put on ice while the home-owner repays the other half.

If, after 20 years, the customer pays off half the mortgage – call it ‘Part A’ – then the bank and client can see if some, or all, of the remaining ‘Part B’ can be repaid.

However if the home-owner is retiring on a reduced income and has no chance of repaying ‘Part B’, then it could be written off.

This all sounds fine in theory; the practical problem is that the banks are treating the ‘Part B’ differently.

AIB is applying no interest, Permanent TSB is charging 1% but Bank of Ireland is levying full interest.

This has a significant impact on what remains after ‘Part A’ is paid off.

Take the example of a customer who is in arrears and has a €400,000 mortgage.

If the bank splits the debt into two loans of €200,000, with Bank of Ireland ‘Part B’ would grow in size from €200,000 to €450,000 over 25 years at an average interest rate of 5%. But in the case of an AIB the loan would remain at €200,000.

This anomaly has not been missed on the Central Bank, which is expected to address the issue with Bank of Ireland.

Speaking generally, Financial Regulator Matthew Elderfield said: “We will have dialogue with the banks if we think the split mortgages are not being done on sustainable terms.”

Compared to other Irish lenders, mortgage arrears at Bank of Ireland are not the worst at just under 10% (Permanent TSB’s rate is 16%). But Bank of Ireland’s figure is terrible compared to other countries.

British lender Lloyds has an arrears rate of 2.3%.

The fact Bank of Ireland is trying to charge full interest on split mortgages means its so called “solution” to the arrears crisis is next to useless.

That raises the question of how seriously Richie Boucher is taking the home loans crisis.

Governor Honohan hopes Irish banks will get private funding for capital requirements in the future

By Sean Whelan, Economics Correspondent

Will the Irish banks need more capital?

Yes they will, says the governor of the Central Bank, Patrick Honohan.

He is sure because the new Basel 3 international banking rules change the classification of what counts as bank capital, and this will need more money – about €6 billion I hear.

That may not be a serious issue, for reasons outlined below.

But what about the known-unknown – the risk of more losses emerging in the mortgage and SME lending books of the banks?

That question can only be answered by running another stress test on the banks, and it looks like that is going to happen in the autumn. If the stress test reveals a new capital hole, it could do big damage to the Irish recovery story.

But first, let’s deal with the capital we know the banks will need, and why it’s not such a big deal.

The Basel 3 rules set higher targets for how much capital banks need to hold, and what counts as capital.

A big impact here in Ireland will be the ending of the bank’s ability to classify tax losses as part of their capital base.

It may make sense to classify tax losses as part of a bank’s capital structure from an accountancy point of view, but not if there’s a liquidity or solvency issue, as you can’t sell a tax loss on a failed business.

And as the capital structure of a bank is supposed to absorb losses, something that has no resale value is useless.

My understanding is that this change – when it finally comes in, sometime around the end of the decade – will require about €6 billion in real capital for the banks.

This doesn’t automatically mean the taxpayer is on the hook for this amount.

Remember, the ending of the ELG guarantee in March will save the banks up to €1 billion a year (when the covered liabilities are fully run off).

This is money they have been paying to the Government over the past few years, which they now get to keep. Over the next five or six years this could take care of a large chunk of the extra capital required by the Basel 3 changes.

Then there is the banks own internal drive for profitability. Once they start making profits again they can use them to shore up capital (AIB say this could be next year, Davy stockbrokers think it could be the same for Bank of Ireland, PTSB looks like taking considerably longer).

And then there are market sources – investors from the private sector buying into the banks. This is what Governor Honohan seemed to be pinning a lot of hope on, when asked about the bank’s capital needs at the Central Bank’s annual report news conference.

He said strengthening banks capital positions was a multi-year process, and that if at the end of it they haven’t got the banks into a position to attract private investment, then they will have failed in their project.

He also said the target was a percentage of capital, not a cash amount.

His views were expressed after questions on the timing of the next bank stress test (known as PCAR in central bank jargon).

The Troika have been pushing for a test in the early autumn, to have a clearer view on the situation in the banks before the bailout programme ends. The Government wants to run the Irish stress test at the same time that the European Banking Authority, the EBA, does a general stress test on all European Banks.

That was supposed to be in the late autumn, but is now pushed out to next spring, complicated by moves to set up a single bank regulator.

This delay may force the Governments hand, leading them reluctantly to agree to an Irish only stress test in the autumn.

That will leave the Irish banks exposed to the full glare of international scrutiny, whereas being part of the crowd in the EBA test, the Irish banks would be less vulnerable to a savaging from the market wolf-pack.

This is what the governor said:

“We know they (the banks) will need more capital by 2019 because of a number of changes in what is measured as capital between now and 2019, when Basel 3 comes into effect…… in an ideal situation that capital will come from private investors as is happening all over Europe and all over the world, where private capital is being pushed up all through the system.

“Now our banks obviously are still in repair/recovery mode – although Bank of Ireland did get private investment in the last year or so, but it may not be the exact moment to expect large amounts of private capital to go in – so what the PCAR will clarify is just at what point over the next six years additional capital strengthening will be needed – definitely some will be needed – but the PCAR will tell us if there will be some losses in the years ahead, when they move in, and when that capital will be required, and hopefully we will have brought sufficient credibility back to the Irish banking system so that they can add to their capital.

“You know people think ‘oh capital – isn’t that just a black hole’ – it’s not: capital is what people invest in bank shares to get return from them. That is the normal thing – in the middle of a crisis you see the capital eroding , so building capital to the higher levels required by Basel 3 is something where you’re attracting investors in the expectation of a return”.

In other words, if the banks are profitable, private investment will come, and the taxpayer won’t have to cough up more.

In the benign scenario, a growing economy helps to cure a lot of the distressed loans, aided by a swift but not too costly restructuring process, leading to profitable banks surfing on and helping to power a resurgent economy.

But the less rosy scenarios projects a miserable grind, in a stalling economy, leading to higher levels of distressed loans and not enough capital to restructure them in the banks, and none available from the state.

That’s why the stress test will be important in determining whether the banks – which got us into the bailout programme in the first place – are in good enough shape to let us get out of the bailout cleanly.

No wonder the Troika want another peek inside the banks before signing off on the end of the programme.

But dig deeper and the future looks bleak.

The stores are remaining open while the search begins for a buyer. The receiver says that most of the stores are profitable. Unlike many other retailers the company is not overburdened with debt.

However, this is a receivership not an examinership.

With the latter there would be more grounds for hope. Xtra-vision was restructured two years ago and now is in trouble again.

According to a study by Grant Thornton and Retail Ireland, 73% of audio visual content was purchased online last year.

But in 2015 that figure is expected to rise to 90%.

Over the past eight months the trend of consumers downloading or streaming content rather than buying it from a shop has accelerated rapidly.

In a statement, the company said the decline of its movie rental business had been more noticeable in areas where broadband coverage has improved.

Xtra-vision also blamed illegal downloading. But the company does not have a facility to stream movies online, so even if all the downloads were legal, Xtra-vision would still lose out.

The company employs just over 1,000 people, three quarters of whom work in the Republic. The next few weeks will decide their fate.

British politicians hired legal experts to probe bank failures

By Sean Whelan, Economics Correspondent

So it looks like Matthew Elderfield is off to Lloyds Bank in London.

There is certainly a big job to be done in repairing the regulatory side there, if the recent UK Houses of Parliament report into its Halifax – Bank of Scotland (HBOS) unit is anything to go by.

Entitled “An accident waiting to happen”, the report doesn’t hold back in its conclusions, describing HBOS growth strategy as “a manual for failed banking” (the title of the concluding chapter).

It also draws the conclusion that “prudential supervisors cannot rely on financial markets to do their work for them”.

And most stark of all, for an Irish reader, is the committee’s conclusion of its investigation of the groups Irish operations that “the losses at HBOS were relatively greater than those of the other major Irish banking groups”.

Apart from Anglo Irish, naturally. More of this later.

But first, a note on the HOW of this report. One of the reason we are told that the there has been no open inquiry into the bank failures here, that results in a report that names names in the way the UK reports do, is that the public voted down a constitutional amendment that was considered necessary to allow Oireachtas committees to investigate.

One of the big objections from many quarters was that most TDs are not trained in cross examination –because they are not barristers – so they would be incapable (according to the wig-wearing classes) of conducting a proper investigation.

And even if they found information, they wouldn’t have the smarts to understand it.

Exactly the same criticisms could be levelled at British (or indeed any other democratically-elected-by-a-broad-franchise) parliamentarians.

So what did the Brits do? They went and hired some barristers to conduct the investigation. And some banking experts to crunch the numbers and supply expert analysis and truth control. Simple.

The report notes that there were “a number of unusual features in the way we have carried out our work”.

It appointed Counsel – David Quest and Rory Philips QC and three other colleagues from their Chambers – the first use of Counsel by a committee of this kind.

The committee staff gathered a much larger amount of paper than would be usual for such a committee, including confidential correspondence between HBOS and its regulator, the FSA.

It established a panel to undertake the initial phase of the investigation, holding eight meetings over the course of a month and hearing from 16 witnesses including HBOS staff, directors and regulators – a broader level of inquiry than normally available to parliamentary committees.

Two of the hearings were anonymous – one of them was an FSA staffer below director level.

The Panel was led by Lord Turnbull – a former Cabinet Secretary and head of the Treasury (and one time private secretary to the Prime Minster, Margaret Thatcher).

He is also a director of some big league UK companies, including Prudential and British Land.

Finally the committee “deployed some high quality bank analysts as staff to assess the evidence on what happened and to provide advice”.

Once the Panel completed its work, all the full committee had to do was hear evidence from three people – Sir James Crosby, Chief executive of HBOS from its creation to 2006 – Andy Hornby, its second and last CEO, and Lord Stevenson of Coddenham, chairman of HBOS throughout its short existence.

Counsel also took a lead role in the examination of those witnesses.

The resulting report is a short-ish (100 page), sharp shocker.

It is presented as a case study, separate but complimentary to a longer forthcoming report on all the UK banking failures. It also sets out instructions for the regulator, the FSA, to follow in compiling its own report on what happened at HBOS.

Is there any reason why the Oireachtas cannot follow this model to perform a similar exercise on AIB or PTSB or Bank of Ireland?

Anyway, back to the conclusions of the report on HBOS Ireland.

Throughout the 1990s Bank of Scotland had grown on the back of asset-led expansion, funded increasingly from wholesale market funding rather than a deposit base, which takes time to grow.

It used this model to expand in England, and then in Ireland.

Then at the start of the new century, it merged with former building society Halifax. That gave it assets of £275 billion at the end of 2001, making it bigger than Lloyds and three quarters the size of Barclays and RBS.

A return on equity target set by CEO Crosby of 20% by 2004 (from a then 17%) required a very rapid expansion of assets, which had to be financed by wholesale funding.

The report states “the fastest growth took place in Ireland, where HBOS aspired to become “the number one business bank during 2005”, with the overall strategic goal of becoming “the fourth largest full service Irish bank by 2009”.

The committee says the Irish unit followed the same route as the UK bank, concentrating on property and construction.

“As in the UK, loan growth continued in 2008, in Ireland at a rate of 8 percent which Colin Matthew (CEO International Division) attributed to the draw-down of existing facilities, the inability to sell down and the residential property pipeline”.

It goes on in paragraph 36:

“In Ireland, estimated impairments between 2008 and 2011 totalled £10.9 billion (€13 bn), equivalent to 36% of the loan book at the end of 2008… All leading Irish banks incurred significant impairments as a result of the Irish recession. However, the losses at HBOS as a proportion of loans were greater than those of all but one of the major Irish banking groups”.

The Committee lists impairments at the end of 2011 as Anglo Irish 48.3%, HBOS 35.5%, AIB 22.1%, Danske 17.9%, Ulster 17.5%, BoI 9.4%, KBC 6.7% and ILP 6.1%.

Sir James Crosby and Andy Hornby, the two former CEO’s defended their Irish strategy, leading the Committee to conclude “the repeated reference in evidence to us by former senior executives to the problems of the Irish economy suggests almost wilful blindness to the weakness of the portfolio flowing from their own strategy”.

Colin Matthew said that with the benefit of hindsight the “principal weakness” in the approach the (international) Division followed was that “the expansion plans were wrongly timed”, but he defended other aspects of the Division’s strategy.

The Committee concluded that “the evidence from those two countries (the other was Australia, where HBOS lost £3.5/€4.2 billion in a growing economy) clearly suggests that HBOS had significantly worse asset quality than other banks”.

It says “the risk function in HBOS was a cardinal area of weakness in the bank. The degradation of the risk function was an important factor in explaining why the high-risk activities of the Corporate, International and Treasury Divisions were not properly analysed or checked at the highest levels within the bank.”

In paragraph 65 it states baldly “The weakness of group risk in HBOS were a matter of design, not accident. Responsibility for this lies with Sir James Crosby, who as chief executive until 2005 was responsible for that design, and Andy Hornby, who failed to address the matter, and particularly with Lord Stevenson as Chairman throughout the period in question”.

British taxpayers, who bailed out Lloyds HBOS to the tune of £20.5 billion (€24.3 bn), have been given a clear account of why they have had to pay for this bank, and who was to blame.

We know the how, why and who of the failure of one of the key banks in the Irish bank fiasco. Irish taxpayers are entitled to the same level of clarity on the banks they have had to bailout.

The HBOS report shows exactly how this can be done.

Barroso's message on austerity has not changed much

By Sean Whelan, Economics Correspondent

“The Commission does not believe that cutbacks are the solution to Europe’s challenges. But, yes, sound public finances are an essential part of sustainable growth”.
- Jose Manuel Barroso, Friends of Europe Roundtable, October 2011

“For some, the main consideration is the need for stability. For others, it is growth. I say we need both.”
- Jose Manuel Barroso, State of the Union Speech, November 2011

“I believe those who want to over simplify the situation putting it as a kind of an option between austerity and growth are completely wrong. We need sound fiscal policy. We need deeper reform for competitiveness and we need investment, namely with a social dimension.”
- Jose Manuel Barroso, Q&A session, European Think Tank event, April 2013

Spot the difference? Me neither.

Some people think what Barroso said at a policy wonk event in Brussels this week represents a sea change in Troika thinking on austerity.

The policy has reached its limits, we are told – implying that there can be no more of it, which implies further that there must be some kind of big fiscal stimulus, a reversal of policy in the bailout states for a start.

It fits with the other economic noise out there – the Ashoka Mody interview on Morning Ireland, The Rogoff and Reinhart embarrassment over debt/growth research. And the IMF ninth review of the Irish programme, which called on the EU to give more debt relief to Ireland by using the ESM to take over the pillar banks.

But are we just seeing and hearing what we want to, and ignoring the bits we don’t like?

Are we then blending these selected highlights into a narrative that comforts us, because it implies changed external circumstances that mean we won’t have to confront difficult internal situations like the Croke Park 2 votes?

Understandable, as the commission cites adjustment fatigue as one of the three big risks to the Irish a bailout programme. The IMF issued the same warning the very day Croke Park was voted down by the unions.

Let’s have a closer look at the Barroso “U-turn” on austerity.

In the Q& A session he was asked about people losing faith in the EU institutions’ ability to take action to deal with the crisis and, as you would expect, he defended the Commission and said decisions are made by member states, who after all were the ones who messed up in the first place.

“Now, having said this, I know this will also not respond to the concerns of the unemployed citizen in Greece or Portugal or many other countries we could quote. That is why I also think that we are reaching the limits of the current policies.

“The current policies are of course appropriate in terms of reducing the biggest challenge that we have today which is the challenge of unsustainable debt, public and private, the need to deleverage, the need to put Europe on a sound footing so that Europe can be more competitive and can have growth again, but growth that is sustainable, because what we have learned, and this is for me the biggest lesson of the crisis, and I think a lesson that we have not yet all completely drawn, is that growth based on debt is not sustainable.

“Growth based on unsustainable public or private debt is artificial growth and what we need is to have growth that is sustainable, namely based on increased competitiveness in Europe. This is what we need. This is the greatest lesson to draw from the crisis.”

“So while this policy is fundamentally right, I think it has reached its limits in many aspects, because a policy to be successful not only has to be properly designed. It has to have the minimum of political and social support.

“I know that there are some technocratic advisors who tell us what is the perfect model to respond to a situation, but when we ask how we implement it, they say that is not my business. This cannot happen at European level. We need to have a policy that is right. At the same time we need to have the ways, the means of its implementation and its acceptance, the acceptability, political and social.

“This is where I think we have not done everything right, responding directly to your question. We have not been able collectively, the European institutions, the Member States, to explain really what was at stake and to build the necessary support.”

So they haven’t explained themselves properly. Again, what’s new?

But this stuff isn’t easy – and if your personal finances are being hammered by the recession/tax rises/spending cuts/property crash do you really give a fig about the co-ordination and timing of fiscal consolidation policies in the European Union?

Of course you don’t – and there’s no reason you should. But the communication of the big ideas around how to handle the crisis has been lousy by pretty much all the key actors, starting with national government, but extending to the Commission and the ECB as well.

The IMF, with more practice and no pesky political interference, have been a bit more skilful, but all could benefit from a joined up, dumbed-down, constantly repeated message about the need for both consolidation in some countries as a matter of urgency (Ireland among them) and the need for pro- growth measures, including spending actual money, in other countries.

Except that not all governments are signed up to this master plan for economic salvation (yes Germany, we are talking about you). Or if they are, they’re not saying, especially this close to a general election (though in most countries, governments tend to cut loose with the spending in the lead in to elections – in Germany they just seem to cut).

But back to Barroso. He insists the bird never flew on the one wing of austerity….

“ The Commission has never and will never propose a policy that is only based on the correction of the deficits. This is certainly a difficult policy to implement, because we believe that without correcting the imbalances in public finances, we will not have confidence and without confidence, we have no investment. And without investment there is now growth. But our response to the crisis, our policy proposals, has always been a comprehensive response. It is the structural reforms for competitiveness,”

“Politically and socially, one policy that is only seen as austerity is of course not sustainable. That is why we need to combine the indispensable, I underline indispensable, correction of the disequilibria in public finances, namely huge deficits, huge public debt, fiscal rigour, this is indispensable, we need to complement this with proper measures for growth, including short term measures for growth, because we know that some of those reforms take time to produce effect. “

“Now, this is indispensable, but it has to be complemented by a stronger emphasis on growth and growth measures in the shorter term. We have been saying this, but we should say it louder and clearer. If not, even if the policy of correction of the deficit is basically correct, we can always discuss the fine-tuning, the rhythm or the pace, but that will not be sustainable politically and socially.”

And when confronted with the “austerity isn’t working” question/slogan, Barroso reached for the poster child.

“You said this policy is not producing results. I am sorry, we have to see that case by case. Ireland is going back to growth, it has positive growth. It is one of the very few countries that has positive growth today in Europe and they have been implementing one of the toughest programmes of adjustment and they are also already now in positive territory in terms of employment. So, can you say that the programme is not working? It is a painful programme certainly, but you cannot say it is not working.”

This two handed approach to the economic situation – on the one hand correcting unsustainable public finances, on the other hand getting growth going again – isn’t particularly new.

Here is another section from the 2011 State of the Union address to the European Parliament.

“…..significant growth in Europe is not an impossible dream….. We have done it before. We must and we can do it again.

“It is true that we do not have much room for a new fiscal stimulus. But that does not mean that we cannot do more to promote growth.

“First, those who have fiscal space available must explore it – but in a sustainable way. Second, all member states need to promote structural reforms so that we can increase our competitiveness in the world and promote growth.”

In other worlds; Germany should spend more, and the periphery should do something about competitiveness, mostly through structural reforms.

What’s new?

PricewaterhouseCoopers' new report on water charges

By Business Editor David Murphy

Householders will have to pay water bills in future. It is not entirely clear when that will happen. But the big question is whether they will be paying for an efficient well-run service?

A draft report by PriceWaterhouseCoopers suggests the answer is ‘No’, unless there are radical reforms.

The document, called ”Irish Water: Second Interim Report” was released to RTÉ News following a Freedom of Information request and updates an earlier published study.

At present commercial users are supposed to pay charges. But the PWC report shows 52% of firms are in arrears on their water bills. The level of non-payment varies greatly from one county to another. The worst offenders are Kerry, Limerick and Cork where arrears are close to 70%.

Another worrying feature of commercial water charges is that the fees vary widely. Firms in Kildare are charged €1.75 per cubic metre but in Wicklow the fee is €3.04. The report also notes that there is no central system for logging calls, tracking problems or reporting that issues have been solved.

In Britain and Northern Ireland there are 12 water companies which PWC benchmarked against the existing Irish system. It found the cost per-connected-property of providing water in the Republic of Ireland is €162 higher than in the North.

Ireland has to meet tough EU environmental standards. The total cost of doing so is expected to be a whopping €20 billion. With 41% of water leaking from the system, it is expected the annual cost of fixing the network will be €600m. In Britain the leakage rate is 30%.

Leaving the statistics aside, there are some important fundamental issues. No doubt politicians would like to keep the charges low. Introducing efficiencies will help to achieve that. As the service will be a monopoly it will be important that it is properly regulated to ensure consumers are not ripped off.

How Irish Water charges its users is going to be a hot topic. It could introduce a free allowance and when householders exceed that ceiling they would begin to pay. But international experience suggests there are disadvantages with this model.

Consumers tend to reduce their consumption to remain within the free allowance. That frequently means the water company does not collect the revenue it requires for fixing leaks and other costs. That cash shortfall then raises the prospect of a smaller free water allowance and higher charges.

Water bills will become a reality for householders before too long. But attitudes towards a new service are likely to change. Consumers are likely to be much less tolerant of the usual water restrictions, boil notices and cut offs when they are paying the bills.

Olivier Blanchard, the IMF's chief economist

By Seán Whelan Economics Correspondent

The good news from Olivier  Blanchard, the chief economist of the IMF and main author of its World Economic Outlook, is that only ten advanced countries have such big debt and deficit problems that they cannot avoid taking action to deal with them. The bad news is that Ireland is one of them.  And more bad news – so is America.  Ditto for Britain.  And Japan.  And six other euro zone states.

So that’s us and the vast bulk of our trading partners all having to engage in traumatic fiscal consolidation at the same time.  A group that between them accounts for some 40% of global GDP.  So much for the export led recovery….

But in this age of growing inequality, it seems only right that not all debt-wrecked countries are created equal in misery.  In another report published this week – the Fiscal Monitor – the IMF says there are clear differences across the gang of ten.

One group – Belgium, France and Italy, have already undertaken a large share of the adjustment needed to bring debt levels down to safe levels over time.  They need only increase their cyclically adjusted primary balance (income over expenditure before interest costs on debt) by between 1 and 3 percentage points of GDP.  For Italy, it says little or no further adjustment is needed, but it will need to maintain a bigger primary surplus than France or Belgium over the next decade, to move debt levels down from their current 120% level.

The second group – Ireland, Portugal, Spain, Britain and the USA – still has some way to go in terms of its outstanding adjustment – close to 5.5% of GDP.  Once this adjustment has been completed, all these countries will need to run large primary surpluses over the medium term to move the debt level down.  This is going to be harder to do, it warns, because of failures to tackle pension reform, and additional measures will be needed to keep the primary surplus constant, especially in the US.

Then, in a class of its own, is Japan.  It needs to make an adjustment of 16 percentage points of GDP to achieve a primary surplus of 7% of GDP in order to set its debt level of a staggering 255% of GDP on a sustainable downward path.

That’s nine countries – Greece was the other one Blanchard mentioned, but the Monitor makes no prescription – though it does note that the deficit this year will be lower than the average for advanced economies at 4.5%, that’s eleven percentage points below where it was in 2009, and the primary balance should be zero.  All told, a pretty impressive performance considering where they started.  Ireland is expected to go to primary balance next year.

But how do our budget plans for this year compare with some of the leading fiscal strugglers of the Western World?  Here is the handy guide from the Fiscal Monitor for you to cut out and keep.

From the Fiscal Monitor, April 2013, IMF Staff.

The United States, despite having averted the “fiscal cliff,” is set for a decline of 1.75% of GDP in its cyclically adjusted primary deficit in 2013, almost 0.5% of GDP more than in 2012, largely reflecting the automatic spending cuts (the so-called sequester) that went into effect on March 1. Currently projected at 6.5% of GDP in 2013, the headline deficit will fall this year to about half its level at the peak of the crisis in 2009, although some of this decline is due to reduced financial sector support. The overall fiscal tightening is one of the largest in recent decades and is clearly excessive in light of cyclical considerations. Uncertainty about this year’s outturn remains. The debt ceiling will need to be raised soon, as it has been suspended only until May (pushing the effective deadline to midsummer, assuming the Treasury again resorts to the available extraordinary measures). Insufficient progress has been made toward an agreement on entitlement reforms and other much-needed measures to control the debt path over the medium term. Adjustment is expected to continue in most other advanced economies this year largely in line with earlier projections, notwithstanding the weak economic recovery.

In Spain, the revision to the fiscal forecasts mainly reflects nonfiscal factors. The estimate of the 2012 deficit (excluding financial sector costs) of 7% of GDP is in line with the October 2012 Fiscal Monitor’s projection. Financial sector support amounted to approximately 3.25% of GDP, bringing the overall deficit to 10.25%. The underlying consolidation was nevertheless very sizeable: an improvement in the cyclically adjusted primary balance of about 3% of GDP (excluding financial sector support) in the face of a large output contraction. Further substantial consolidation is projected for 2013, though the deficit forecast has been revised up by over 0.5% of GDP since the October 2012 Fiscal Monitor, reflecting the worse unemployment outlook and the lack of specified medium-term measures.

In France, a structural adjustment of 1.25 percentage points of GDP is projected, mostly focused-as in previous consolidation efforts-on selective tax increases (with an emphasis on high-income individuals). The deficit is projected to decline to about 3.5% of GDP in 2014.

In the Netherlands, the 2013 deficit is projected at 3.5% of GDP, slightly above the authorities target. The recapitalization of SNS REAAL will have a budgetary cost of about 0.6% of GDP, but this is expected to be fully offset by an increase in revenue from an auction of broadcast spectrum rights.

In Italy, the pace of underlying consolidation will slow to 1% of GDP, a little less than projected earlier, but enough to broadly balance the budget in structural terms. The 2012 deficit is projected to have been at the 3% threshold, allowing Italy to exit the EU Excessive Deficit Procedure.

In the United Kingdom, the 2013 deficit forecast has been revised down by about 0.25% of GDP, mostly reflecting the transfer of Bank of England profits to the Treasury from January 2013 (1 percentage point of GDP), partly offset by projected lower revenue collections. Despite headwinds, the government will undertake continued consolidation to reduce the cyclically adjusted deficit by another 1% of GDP in 2013. Some deficit-neutral measures have been introduced to support growth.

In Ireland, the 2012 fiscal outturn was better than expected. Additional tightening is forecast this year, underpinned by measures amounting to 2.1% of GDP. These include reforms in property taxes and welfare services, as outlined in the 2013 budget. Financial transactions associated with the liquidation of the state-owned Irish Bank Resolution Corporation and the associated exchange of promissory notes for long-term government bonds will result in annual interest savings of about 0.6% of GDP.

In Portugal, fiscal consolidation is projected to continue in 2013, largely through increases in personal income and property taxation. The deficit target has, however, been revised upward from 4.5% of GDP to 5.5% of GDP in 2013 given the weak growth and employment outlook.

In Greece, continued adjustment and a renewed institutional reform agenda (with a focus on revenue administration and expenditure controls) are expected to bring the primary balance to zero in 2013. The overall deficit is expected to fall to 4.5% of GDP this year, below the advanced economy average and 11 percentage points lower than its 2009 peak.

However, a few advanced economies facing limited fiscal pressures are adopting more neutral stances:

In Germany, the cyclically adjusted fiscal balance strengthened by 1% of GDP in 2012 on the back of buoyant revenue and lower interest payments. The cyclically adjusted balance is expected to be largely unchanged this year, with the overall deficit widening by 0.5% of GDP in 2013 as a result of the operation of the automatic stabilizers. The authorities remain on track to meet the requirements of the domestic debt brake rule.

In Canada, the gradual withdrawal of fiscal stimulus is continuing and consolidation plans are being implemented, at both the federal and provincial levels, though at a more modest pace in a number of provinces.

All of which sounds like as good a reason as any to sign off on an EU-US free trade deal as quickly as possible (one with Canada is almost done and dusted, Japan is in the works).  Debt junkies of the world unite…..