The profile of Irish investment preferences discovered by Barclays Bank in preparing their latest issue of Wealth Insights is depressing.  According to press reports, their research shows that Irish high-net-worth individuals (HNWIs) hold an amazing 55 per cent of their wealth in property, despite the collapse in property values in the past 5 years.  This is a higher proportion than any other nationality.  Irish HNWIs also hold 18 per cent in cash, 16 per cent in financial investments and 7 per cent in assets such as collectables.  And just how much private wealth do you think is invested in enterprise or business, the sector which is arguably the most vital to our economic future?  A pitiful 2 per cent.

A long legacy of under-taxation of property assets and transactions, only partly being addressed now, is an important factor in this mis-allocation of investment funds.  We all continue to pay a price for past policy failings in this area.

Historic factors are often also quoted as an explanation for our obsession with property. There is a pithy phrase in the famous Vanity Fair article by Michael Lewis (“When Irish Eyes Are Crying”) about how we crashed our economy:

Irish people will tell you that, because of their sad history of dispossession, owning a home is not just a way to avoid paying rent but a mark of freedom. In their rush to freedom, the Irish built their own prisons.

That sums it up nicely.

Morgan Kelly‘s latest episode of “The Sky is Falling” appeared in Saturday’s Irish Times (here).  The opening sentence says it all: “With the Irish Government on track to owe a quarter of a trillion euro by 2014, a prolonged and chaotic national bankruptcy is becoming inevitable.”

I took refuge in Seamus Coffey’s “Economic Incentives” blog, which was more measured and thoughtful.  I hope he doesn’t mind me quoting a few paragraphs.  His analysis helps me to get a clear picture of the components and dynamics of our indebtedness as a nation, and underscores the fact that the cost to the taxpayer of the bank bailout(s) is responsible for only a minority of the debt mountain we are bequeathing to future taxpayers.  The real issue continues to be the chasm that exists between tax revenues and government spending, a problem that we have barely begun to fix.

Starting with the €154 billion GDP outturn for 2010, and assuming moderate nominal GDP growth rates of 1.0%, 2.0%, 3.0%, 3.0% and 3.0% between now and 2015, means that the debt ratio in 2015 will be around 120% of GDP using the General Government Debt measure.  By just looking at the money that would actually have been borrowed by then the debt-to-GDP ratio will be around 108%.  Higher nominal GDP growth would reduce that but there is little sign of that at present.

If the country had avoided assuming the debts of the banking sector the GGD ratio in 2015 would still be around 95% of GDP, which is better than 120% but would not eliminate the fear of default because of the annual deficits……

Servicing the €205 billion debt mountain we have created will cost about €10 billion a year and this will consume close to one-fifth of government revenue.  The actual servicing cost will depend on the average interest rate.  This is a huge burden for the country to carry and one that will require further adjustments just to keep expenditure constant.  It will be just possible to manage this but it may be decided that this is a burden that the country should not carry…..

If the option to default is to be taken those to suffer will be holders of Irish government bonds.  It is more than a little incongruous that those who invested in our delinquent banks are getting their money back while those who invested in our country may be forced to carry losses.  As with a lot of things in this crisis, this just does not add up.

Bini Smaghi at it again

13 April, 2011

In today’s FT our “friend” from the ECB, Lorenzo Bini Smaghi,  is saying that Irish taxpayers shouldn’t complain if they have to bear heavy burdens which arose from failures in local financial regulation.   This is the same tune we have heard him singing before: ‘Ireland’s meltdown is the outcome of the policies of its elected politicians’

Just because it’s true doesn’t mean he has to keep rubbing it in….

There has developed a popular theme (meme?) in Ireland of late: namely that Germany, France and other countries must share the pain with us because it was their banks that lent boatloads of money to our banks to throw at property developers.

It certainly suits the Irish case (and character) to maintain that others must share responsibility, and only the very hard-hearted (which no doubt includes Lorenzo) would see no merit whatsoever in that argument.

But it’s a bit like the argument as to whether a bar owner bears any responsibility if he keeps selling drink to a clearly inebriated customer who then smashes himself up in a drink-driving car accident.  Is the drinker fully to blame, or does the bar owner have any legal (or moral) liability? 

In most States of the USA, under what are known as dram shop laws, a bar that lets an obviously drunk customer drive away can be held financially responsible for damage caused by that customer.   The principle has yet to be established, or legislated for, in Ireland.

Nevertheless, perhaps the Irish taxpayer should mount a lawsuit against the ECB to establish that they share responsibility for the damage caused by the Irish Government’s and Irish banks’ fiscal drink-driving.  If it would shut Lorenzo up, it might be worth a try.

The most recent post on the blog of BBC Newsnight’s economics editor Paul Mason is called “Timetable of the euro-showdown” and is very informative, albeit slightly worrying.

 As an aside, it includes this quote: “So the difference in this phase of the crisis is that what is driving the problem is not economic collapse and abject political mis-accounting (as per Greece) nor the collapse of a kleptocratic banking and property elite (as per Ireland), but collapsing confidence in the Eurozone’s authorities.”

Interesting to see Auntie Beeb’s man describing what we had as a kleptocracy.

Well, the headline on this post is mainly just to get your attention, as I do believe we need more, not fewer, economists in Ireland, particularly (as Garret Fitzgerald has pointed out), in the Department of Finance.  In fact, I think economics should be a compulsory subject for all schoolchildren.

However, Jeremy Warner, assistant editor of The Daily Telegraph, has an interesting piece today called “Will someone please shut Krugman up” in which he condemns the US economist (and winner of the 2008 Nobel Memorial Prize in Economic Sciences) for his opposition to deficit-reduction measures in Britain.

Warner advises that “the idea that you can more or less indefinitely keep putting off deficit reduction until the economy is firing on all cylinders again just looks like an excuse to me for continuing to spend at unaffordable levels. …. [Krugman] conveniently skirts around the underlying issue, which is in essence that the country can no longer afford this expenditure……Osborne’s fiscal consolidation is aimed only at removing the structural deficit – which is the bit that won’t go away when the economy returns to normal. The Obama Administration’s reluctance to take similar action in the US is extraordinarily irresponsible, and one of the reasons why the Democrats are so hopelessly down in the polls.”

Here in Ireland, our own dismal scientists are fighting the same war amongst themselves: do we make huge cuts in government expenditure now, or phase them in over a longer number of years?   Read the rest of this entry »

Two related news pieces….

Firstly, according to the Irish Times this morning, the number of prisoners in Irish jails has passed 4,000 for the first time in the history of the State, based on new Irish Prison Services figures.

Secondly, a “career criminal” who preyed on elderly people alone in their homes has been given an eight-year jail sentence, according to The Irish Independent  (13th October 2009).   Alice Connors (36) apparently had 86 (yes, 86) previous convictions — including 22 burglaries  — with victims aged from 60 to 84 years.  One is tempted to ask why somebody who has racked up so many convictions by the age of 36 was still at large.

 These reports set me thinking again about an issue that has always intrigued me. 

According to the World Prison Population List, for every 100,000 of population, Ireland in December 2008 had 76 people in prison (although presumably it is a bit higher today).  This compares with twice this number (153)  in England and Wales and no less than 756 in the United States.  These differences are dramatic.  But what causes them?

Read the rest of this entry »

Another Fás Tale

11 October, 2009

A friend of mine is in the restaurant business and swears the following is true.   I believe him.

One night last year, he was phoned  by his restaurant manager to get clearance on a strange request a valuable customer had made.  The customer was an executive in Fás, who had just hosted a lavish dinner for about 25 people in the restaurant, all paid for by Fás, and presumably validly so.

However at the end of the evening, when the bill (which was for about €2,500) was being settled, the executive asked asked the manager to add an extra €500 to the bill, and to give the exceutive a voucher for this amount in return, for his personal use.

Read the rest of this entry »