Should we worry more about NAMA or the budget deficit?

ronanlyons

Last week I had the misfortune of reading Fintan O'Toole's piece in the times on how we're no better off now than when we were serfs:
http://www.irishtimes.com/newspaper/opinion/2010/0406/1224267752939.html

It was so poorly thought through, I got sufficiently angry to write a response:
http://www.ronanlyons.com/2010/04/13/irish-people-no-better-off-now-than-during-black-death-and-other-stories/

Two things I take issue with are:
(1) That NAMA/bank bailout is our biggest worry - the graph below tries to show it in comparative perspective, beside our national debt and the budget deficit over the next few years.
(2) That Ireland has no economic future - sure, things aren't the best now, but there are number of reasons (I give five) that Fintan could use as reasons for his sons to stay in Ireland.

To stave off a few lines of argument, I am in no way saying that NAMA and the bail-out of the banks is a good thing (my thoughts on that are also in the public domain) - just that we should know the respective scale of the issues the Irish economy faces.

All thoughts, comments and questions welcome.

ei.sdraob

ronanlyons wrote: »

All thoughts, comments and questions welcome.

thanks for graph, should hopefully put a certain argument from the Union reps to rest

edit/offtopic: how do you feel on yesterdays Frontline on "NAMA for the people", in relation to property and economy?

The_Honeybadger

The idea of putting billions into dead banks (especially Anglo) is so maddening and scandelous that it draws attention from the bigger problem of our deficit. Nama is dealing in figures that simply boggle the mind, and opposition parties are having a field day, it is big news and therefore grabs all the headlines. Estimations on the net cost of Nama vary, the latest I have seen is 25bn. That is the same as our deficit for one year, so you would have to conclude that our deficit is by far the bigger issue.

ronanlyons

ei.sdraob wrote: »

edit/offtopic: how do you feel on yesterdays Frontline on "NAMA for the people", in relation to property and economy?

Missed it unfortunately, but my general thoughts are that while something needs to be done, it only needs to be done for a small number. There are a range of options for those in negative equity and for most, it'll be the most boring one - sit in their house and pay off the mortgage.

The worry is that any intervention would spiral out of control and we'd have a "I'm Brian and so's my wife" situation for household NAMA-relief. If something is put in place, it needs to be targeted and, yes, painful, so that it's there - but only as a last resort.

zootroid

I'm not sure I can post something that hasn't already been stated. But while NAMA and the bank bailout is scandalous, and the money involved ridiculous, it is (hopefully) just a one off. Our budget deficit will remain like it is for years, and we'll keep on building up more debt. It will be quite some time before we return to a surplus, and are in a position to reduce our debt, and be able to put the money we collect in taxes to good use rather than servicing the debt.

gandalf

Ronan excellent article that. The big worry without a doubt is the deficit. We can't continue like this. As a country we are just creating an absolute disaster down the line.

I think it was Jim Power on The Frontline who said last night that Greece could default on its debt in 3 years and the Euro could be plunged into a very serious crisis. If we as a country have not addressed this deficit by then we are facing the perfect storm of economic disaster and what is confronting people now will be mild in comparison to what awaits us.

ei.sdraob

ronanlyons wrote: »

Missed it unfortunately, but my general thoughts are that while something needs to be done, it only needs to be done for a small number. There are a range of options for those in negative equity and for most, it'll be the most boring one - sit in their house and pay off the mortgage.

The worry is that any intervention would spiral out of control and we'd have a "I'm Brian and so's my wife" situation for household NAMA-relief. If something is put in place, it needs to be targeted and, yes, painful, so that it's there - but only as a last resort.

Thanks for answer, its worth watching was "entertaining" having the various Unions and PS workers go at each other later on in the episode

Anyways back on subject in hand

There was a graph on your blog projecting the amount of money we will have to spend over the next few years on debt repayment/servicing alone (i believe you posted it before recent bank fiasco)
was between 4 and 10 billion a year for next decade

If you have the figures, then a graph of debt repayment vs projected tax income vs cost of welfare and cost of public services
would really put it into perspective the trouble we are in

What amazes me about all this talk of debt and taking on a dozen billion here and few billion there is the complete absense of any consideration that this money will have to be paid back at some stage + high interest

Looking at NTMA site theres 80 billion outstanding and needing to be paid back in next 15 years

ronanlyons

ei.sdraob wrote: »

There was a graph on your blog projecting the amount of money we will have to spend over the next few years on debt repayment/servicing alone (i believe you posted it before recent bank fiasco)
was between 4 and 10 billion a year for next decade

If you have the figures, then a graph of debt repayment vs projected tax income vs cost of welfare and cost of public services
would really put it into perspective the trouble we are in

As they say in showbiz, here's one I made earlier...
Red lines are expenditure items (thick red line is debt servicing), blue/green lines are income, and the figures are billions unfortunately. Oh, and this is the optimistic/best case scenario.


I've two pieces on Ireland's Budgetary situation, one from last December taking a five-year perspective:
http://www.ronanlyons.com/2009/12/22/what-will-irelands-government-finances-be-like-in-2015-a-five-year-view-on-the-budget/
And one from last month, which is more focused on the next Budget (where this graph comes from):
http://www.ronanlyons.com/2010/03/02/budget-2011-and-the-eight-things-on-irelands-fiscal-to-do-list/

Either way, it's grim reading, unfortunately.

Laminations

Ronan while you are excellent at crunching numbers and have often been referenced here because of the clarity with which you can present data, I do not like the way you straw man Fintan O'Toole.

Should we worry more about NAMA or the budget deficit?
Obviously as you have shown the budget deficit is the bigger problem. But Fintan was not talking about magnitude nor did he suggest NAMA was greater than the scale of the budget deficit.

Ronan Lyons wrote:

O’Toole’s article is set to win “Worst Opinion Piece of the Year” for two very important reasons: first, his focus on the bank bailout as the centrepiece of our problems, and second, his belief that Ireland has no economic future.

He never suggests its the centrepiece of our problems, he is talking about fairness. There is a distinction between the national budget deficit (the hallmark of FFs mismanagement) and nationalised private debt (the hallmark of their unfairness). The latter is unfair regardless of the magnitude, but in the case of NAMA and the bail-out the magnitude is quite large (although not as big a 'worry' as the deficit). Would you criticise a journo for writing an article about Bertie being a c*** because he was not focusing on the budget deficit which is the far bigger worry?

Ronan Lyons wrote:

O’Toole reaches new heights of frankly ridiculous hyperbole, with his equation of Irish citizens now to our ancestors who starved to death in their hundreds of thousands in the mid-nineteenth century.

I would guess this hyperbole was intentional, after all it is a literary device used to 'create emphasis'. His comparison, although exaggerated is correct and highlights the unfairness of NAMA and the bail-out, the point of his article is to get people exercised.

Finatan O'Toole wrote:

To belong to this State, we have to pay what is in effect a Seanie and Fingers Tax (SFT). Our ancestors had their rents raised when their absentee landlords lost fortunes at the gambling tables of London or Paris. After a century and a half of struggle, we’ve landed ourselves back in precisely the same position of feudal servitude.

We are paying other peoples debts, this is unfair and it is this unfairness coupled with the lack of hope and direction from the incompetent government we have that is driving people from the country.
NAMA and the bank bail-out seems just as unfair to many as a wealthy businessman getting wages capped at €100k (Vincent Brownes 'amazingly ill-thought idea'). And when you have the perception of unfairness coupled with gross incompetence and distrust of governemnt then your 5 points don't matter

• Ireland is still one of the wealthiest countries in the world.

Someone on €100k would still be one of the wealtiest people in Ireland, will that knowledge stop them upping sticks?

• In fact, about 9 in 10 people who were working here in Ireland at the height of the boom are still at work.

Those people getting their wages capped would still be at work, would simply having a job be enough to keep them here?

• Ireland is still one of the top locations worldwide for foreign direct investment,

Would this fact stop the wealthy from emigrating if they perceived government actions to be grossly unfair? (i.e. capping their wages)

• Irish people have a famously small tax burden

It doesn't trump the feeling of 'we are getting screwed' when a supposedly capitalist society socialises losses.

• Ireland is a hub for internationally traded services

see above.

In fact reading your article made me more worried about the future rather than encouraging me to stay with those 5 points.

Ronan Lyons wrote:

However, an Irish person worrying exclusively about amounts we may have to pay on NAMA and the banks is a bit like a home-owner fretting about a leak in his attic while his house is on fire

On the one hand you are criticising O'Toole for saying his sons should leave because there is 'a leak in the attic' while on the other hand you are rightly highlighting that the 'house is on fire'. Your piece is more in line with reality and that makes it scarier, but we need this reality check.

Ronan Lyons wrote:

Perhaps the worst aspect of the bank bailout is that it is not only distracting us all from the bigger picture – over-spending on public services relative to government revenues – but also that it is giving everyone an excuse to say “I’m not responsible”. If we didn’t have the bank bailout, the focus would be squarely on public sector reform and no-one would be able to point to the banks as a distraction.

This is a fair point but the 'distracting' bank bailout does not exist because of Fintan O'Toole, and he cannot be chastised for reporting on it, nor is it fair to make it appear that he is presenting NAMA and the bail-out as our biggest problem. The bail-out hinders people from focusing on the far bigger problem, the budget deficit, so if the bail-out didn't exist you would get what you want, a realisation of the real problems facing this country

Ronan Lyons wrote:

Ignoring the budget deficit while hyping up the bank bail-out up to the point where it’s apparently going to swallow the Irish worker whole is not the way to do it.

1. He is not ignoring the budget defict
2. He is highlighting unfairness, injustice, humiliation.

Fintan O'Toole wrote:

So, yes, the financial side of the SFT is sickening. But the humiliation is worse. The idea that, year-in, year-out, we will be working to pay off the gambling debts of our absentee landlords, turns us from citizens to serfs. It cuts to the heart of the meaning of a democratic community – the sense of mutual obligation. Now, all the obligations are one way. We can no longer even pay lip service to social justice. The most rank and brazen injustice is written into every clause of our new social contract.

Humiliation is the most corrosive of emotions. It destroys self-respect. It generates the sense of absolute powerlessness that is every bit as corrupting as absolute power. It festers and sours. It turns both inwards on itself and outwards on to those who are even weaker than ourselves. It took us a century to overcome our sense of national humiliation and a little over a decade to give it back.

It is humiliating to have to work most of a day a week for scroungers and scoundrels. It is humiliating that Brian Cowen, who bears as much personal responsibility for this disaster as anyone else, is still Taoiseach. And it is humiliating that, collectively, we seem incapable of anything beyond impotent rage.

.
So his article has nothing to do with magnitude of deficit or debt, it has to do with nature of debt

Fintan O'Toole wrote:

It is humiliating to have to work most of a day a week for scroungers and scoundrels

In this sense you'd be better off attacking him on the grounds of social welfare payments.

3. Would you have the same criticism of an article about Berties tax break, or O'Donaghues expenses, or senior civil servants pay u-turn?

We cant end every article that is not about the massive budget deficit with the disclaimer 'but at least its not as bad as the massive budget deficit!'

Bertie is a c*** but at least he's not as bad as the massive budget deficit!

O'Donaghue spent your money wastefully but at least its not as bad as the massive budget deficit!

Pay cuts were reversed unfairly but at least its not as bad as the massive budget deficit!

Anglo is getting €25 billion, money that the ERSI says we will never get back....but at least its not as bad as the massive budget deficit!

Scofflaw

I imagine, strangely enough, that the government would rather concentrate on NAMA (and the bank recapitalisations) than on the budget deficit, and are probably therefore engaged in a bit of media agenda-setting in respect of it. The former offer both the possibility of repayment as well as the opportunity for masterful public actions with no opposition from vested interests - the latter has no such upside.

cordially,
Scofflaw

danman

In laymans terms, should we be more worried about NAMA and the bailouts, where there is a chance of getting the money back.

Or the deficit, where the borrowings are simply going into a black hole. It can never be clawed back.

Is this too simplistic?

WalterMitty

NAMA and bank bailout is a legacy cost and we cant do much about except maximise amount we can get by owning a lot of the banks shares and not overpaying too much for NAMA property.
The budget deficit is current and ongoing and it;s amount can be lowered unlike the legacy costs of NAMA etc.
On the frontline the other night an angry public servant told an unemployed man that "cutting my wages wont give you a job" and it wont directly but borrowing less to pay for government expenditure(pay and other non capital project costs) means less future tax burden on the country and means we can borrow more to use in productive purposes like infrastructure,research and innovation, etc which will ensure economic growth into the future and more jobs for the unemployed and new school and college leavers.

Scofflaw

danman wrote: »

In laymans terms, should we be more worried about NAMA and the bailouts, where there is a chance of getting the money back.

Or the deficit, where the borrowings are simply going into a black hole. It can never be clawed back.

Is this too simplistic?

I have to say, I agree with that - NAMA and the bank bailouts are, in a sense, capital purchases. They may not be worth as much as we've paid for them, but we're actually buying something with the money. The majority of the deficit, on the other hand, is wages, and all we're buying with that is the services offered by the people we're paying. If you don't use the services of the HSE today, the money spent on it is gone irretrievably - it doesn't buy you the services of the HSE tomorrow.

cordially,
Scofflaw

The_Honeybadger

Scofflaw wrote: »

I have to say, I agree with that - NAMA and the bank bailouts are, in a sense, capital purchases. They may not be worth as much as we've paid for them, but we're actually buying something with the money. The majority of the deficit, on the other hand, is wages, and all we're buying with that is the services offered by the people we're paying. If you don't use the services of the HSE today, the money spent on it is gone irretrievably - it doesn't buy you the services of the HSE tomorrow.

cordially,
Scofflaw

According to some posters the money that is spent on wages is a sound investment, as the gov get it all back when the employees spend it so it doesn't cost anything in net terms.

ei.sdraob

mickeyk wrote: »

According to some posters the money that is spent on wages is a sound investment, as the gov get it all back when the employees spend it so it doesn't cost anything in net terms.

they are so mistaken ignorance is bliss as some say

the only wy to payback the debt + high interest, thats being taken on is to generate real wealth
the way to generate wealth is thru exports, selling products and services needed by others OUTSIDE this economy


meh bangs head against desk

danman

mickeyk wrote: »

According to some posters the money that is spent on wages is a sound investment, as the gov get it all back when the employees spend it so it doesn't cost anything in net terms.

If that was the case, why would we need to borrow?
The money would just continue in a perpetual cycle.

It's one of the ridiculous arguments put forward by the unions.

DJCR

In relation to whether we should be worried more about NAMA or the budget deficit I think we should be suitably worried about both however, I think we should be more worried about NAMA, and that is because it is a major requisit for economic recovery.

If NAMA doesn't work - the economy will take even longer to recover and that in turn will increase the deficit making it more costly to borrow... yady yady ya.

For the economic rcovery and the creation of new jobs there are 4 pre-requisits set out:

1) Sustainable Public Finances - i.e. the issues we here about today with the unions.

2) A functioning Banking system - Which NAMA seeks to address as you can't have growth without investment and seen as the Govt. can't invest as its broke this will have to come from banks (even though in saying that the govt. is investing 5% of GDP at the mo. which is 2x the EU average).

3) Competitiveness - which we all heard on the news a while back we are regaining (not to mention the weak euro is helping a little) - we gained 5% competitiveness on our European brothers and sisters last year alone.

4) Retraining for those without jobs - we now have far too many houses and so the jobs market in construction will remain depressed for years.


So with regards NAMA and the banking crisis... NAMA wasn't the first step.

The govt's guarentee on savings stopped what could possibly have been a run on the banks.
NAMA was then set up to clean up their balance sheets.
Recapitalisation and restructuring of the banking system came next.
And of course reform of the regulatory system is ongoing.

NAMA crystalises bank balance sheets and forces the banks to show us the true extent of there mistakes. Buys the bad debts from banks (at a discount) and they will then have clean balance sheets.

At the moment the banks are nearly ready to lend and should be well ready by the time economic growth arrives mid way through this year. They have been re-capitalised now so that when economic growth occurs they will have the funds to lend and drive on further growth.

So as you see one is as important as the other but I would see that NAMA should be the big worry as if that goes badly so does the budget deficit!!

gandalf

Well this article in the Irish Times doesn't make easy reading!

Only 33% of Nama loans being repaid

The National Asset Management Agency (Nama) has found up to 100 per cent speculative lending on agricultural land was “approved at all levels within the banks” and that only one-third of loans due to transfer to it are generating interest repayments.

Nama chief executive Brendan McDonagh told the Oireachtas Committee on Finance and Public Service this afternoon the agency was working on a revised business plan and hoped to have this completed by June.

The original estimate was that 40 per cent of the loans being transferred to Nama would generate interest repayments.

He went on to say that Nama may knock down some vacant homes. The agency "may well be faced with the very difficult decision of perhaps knocking down certain developments," McDonagh said.

"We can all see land and half-built developments which should never have been contemplated," Mr McDonagh said. "It is hard for anyone with an objective view to see how they made sense even at the top of an overheated property market."

Nama is planning to buy property loans with a nominal value of €80 billion as part of the Government’s plan to remove the most toxic loans from the balance sheets of Irish banks.

If borrowers don't repay their loans, the agency can seize the underlying asset.

Most of the homes that may be knocked are outside Dublin. During the housing boom, there was a "mindless scramble to funnel lending into one sector at considerable pace and of a reckless abandonment of basic principles of credit risk and prudent lending," he said.

The agency aims to transfer all loans by the end of the year, and no later than February 2011, Mr McDonagh said.

The discount on the first tranche of loans with a nominal value of €16 billion is expected to be about 50 per cent, Mr McDonagh said.

Two-thirds of the first tranche of loans are not "cashflow producing", he added.

http://www.irishtimes.com/newspaper/breaking/2010/0413/breaking54.html

Whatever about finished developments if they are considering knocking down half finished ones then they will never realise their loan value. I suppose it all depends on what type of assets the loans were secured against.

I assume they are considering setting up housing trusts for finished developments as well.

As I said before unfortunately we are living in interesting times.

DJCR

deadtiger wrote: »

Well this article in the Irish Times doesn't make easy reading!



http://www.irishtimes.com/newspaper/breaking/2010/0413/breaking54.html

Whatever about finished developments if they are considering knocking down half finished ones then they will never realise their loan value. I suppose it all depends on what type of assets the loans were secured against.

I assume they are considering setting up housing trusts for finished developments as well.

As I said before unfortunately we are living in interesting times.

Are you surprised?? NAMA did take on the banks BAD DEBTS. I don't know how long NAMA can hold out for but I presume its fairly stable and they can afford to wait a while until people get their jobs back and can start paying back loans or even affording to pay for the assets that NAMA will have no doubt Seized by the time the economy recovers sufficiently.

gandalf

DJCR wrote: »

Are you surprised??

No I am not but it does make grim reading.

NAMA did take on the banks BAD DEBTS. I don't know how long NAMA can hold out for but I presume its fairly stable and they can afford to wait a while until people get their jobs back and can start paying back loans or even affording to pay for the assets that NAMA will have no doubt Seized by the time the economy recovers sufficiently.

Its going to be interesting to see how vigorously they pursue defaulters. If they can demonstrate efficiency and ruthlessness I think people will be satisfied that this is the right route to take. If they let those responsible for the loans away lightly or exceed to political pressure on behalf of certain defaulters then I can see extreme anger being levied at them.

Tim Robbins

That's easy the budget deficit.

Every two / three years the deficit is equal to another NAMA. Except there is no absolutely no land in return. NAMA is a long term solution whether you agree or disagree with it. The budget deficit has no long term solution as a political fireball as the public service can cause havoc with any proposed changes as was seen recently with the passport office.

DJCR

deadtiger wrote: »

Its going to be interesting to see how vigorously they pursue defaulters. If they can demonstrate efficiency and ruthlessness I think people will be satisfied that this is the right route to take. If they let those responsible for the loans away lightly or exceed to political pressure on behalf of certain defaulters then I can see extreme anger being levied at them.

The time frame will be interesting as well. How long can they afford to wait... how long can the govt. afford to wait?

ronanlyons

Laminations wrote: »

Ronan while you are excellent at crunching numbers and have often been referenced here because of the clarity with which you can present data, I do not like the way you straw man Fintan O'Toole.

Should we worry more about NAMA or the budget deficit?
Obviously as you have shown the budget deficit is the bigger problem. But Fintan was not talking about magnitude nor did he suggest NAMA was greater than the scale of the budget deficit.

He never suggests its the centrepiece of our problems, he is talking about fairness. There is a distinction between the national budget deficit (the hallmark of FFs mismanagement) and nationalised private debt (the hallmark of their unfairness). The latter is unfair regardless of the magnitude, but in the case of NAMA and the bail-out the magnitude is quite large (although not as big a 'worry' as the deficit). Would you criticise a journo for writing an article about Bertie being a c*** because he was not focusing on the budget deficit which is the far bigger worry?

Hi, it was certainly not my intention to build a straw man for FO'T - I honestly came away from that article believing that he believes we'll be paying a day a week on the banks and thus there's no point staying here. I see what you're saying but if it's an article on Ireland's economic prospects - which I took it to be - and it managed to get to the end without even a "and that's without considering the deficit", then there's something wrong.

In a sense, though, I did take the opportunity to use FO'T's article to respond to a more general sentiment in some parts of society that all would be well if it weren't for the banks, when in reality as someone else said, NAMA's just the sideshow.

You make the case that the article "has nothing to do with magnitude of deficit or debt, it has to do with nature of debt". I would agree to a certain point, in fact my blog is littered with posts on why NAMA is a risky gamble for the Irish taxpayer to take on.

That makes it even more confusing, though, that he's able to alienate someone like me, who - if your analysis is correct - agrees with his point! How that happened comes back to whether or not my reaction - that this is what FO'T believes is the most important thing going on in the economy at the moment - is shared by other people.

There are, looking around here at any rate, at least a few who agree with the response I made.

Thanks for taking the time to share your point of view.

Laminations

ronanlyons wrote: »

Hi, it was certainly not my intention to build a straw man for FO'T - I honestly came away from that article believing that he believes we'll be paying a day a week on the banks and thus there's no point staying here. I see what you're saying but if it's an article on Ireland's economic prospects - which I took it to be - and it managed to get to the end without even a "and that's without considering the deficit", then there's something wrong.

In a sense, though, I did take the opportunity to use FO'T's article to respond to a more general sentiment in some parts of society that all would be well if it weren't for the banks, when in reality as someone else said, NAMA's just the sideshow.

You make the case that the article "has nothing to do with magnitude of deficit or debt, it has to do with nature of debt". I would agree to a certain point, in fact my blog is littered with posts on why NAMA is a risky gamble for the Irish taxpayer to take on.

That makes it even more confusing, though, that he's able to alienate someone like me, who - if your analysis is correct - agrees with his point! How that happened comes back to whether or not my reaction - that this is what FO'T believes is the most important thing going on in the economy at the moment - is shared by other people.

There are, looking around here at any rate, at least a few who agree with the response I made.

Thanks for taking the time to share your point of view.

Thanks for replying. Just to be clear, I completely agree with your analysis that the budget deficit is the bigger problem. My only issue was with you dragging FO'T into it, suggesting he is missing the big picture. His article was not about the budget deficit, it was about the fairness of NAMA and the bank bail-out. Now you can say that he should have at least mentioned the deficit but why single him out from the littany of articles about NAMA and the bank bail-out. Yes there is a problem in the media that the focus is on this bail-out rather than the more pressing and worrying issue of the budget deficit but thats not how you phrased your piece, you attacked FO'T, whose articles for the most part aim to highlight unfairness and injustice.

And interestingly, although inappropriate (and wrong), people seem more interested in perceived fairness of economic solutions than the realities of the debt and the amounts involved. People just do not like the idea of private profits and public losses. Fintan hit the nail on the head, people will leave (regardless of Irelands wealth standings on a league table) because of lack of faith and trust in this government, a government who are humiliating the population with their bail-out. The bail-out should not be a distraction (you are absolutely correct), the government created the bail-out, the government created the distraction, FO'T is just reporting on the bail-out in terms of fairness, not as a comparison with the budget deficit.

And as for people saying NAMA is an investment, see above
Only 33% of Nama loans being repaid

And read the ERSI report on the €25 billion we'll never get back from Anglo.


Discalimer: mentioning Anglo does not mean I am unaware of the more worrying budget deficit

WalterMitty

The multi billions we are losing on anglo didnt just disappear. It went into the economy in form of builders wages, farmers/landowners pockets, public servants pockets etc. It was like a stimulus package when we didnt need one!