A (sort of) farewell from the Troika
By Economics Correspondent Seán Whelan
According to the European Commission, NAMA has sold 7,000 individual properties, raising €10 billion in the process. It has also pulled in €4 billion in rent from its property roster. And it has repaid (redeemed) 25% of the €30.5 billion in NAMA bonds it issued to the banks to buy their commercial property assets.
NAMA was the centrepiece of Government efforts to restructure the Irish banking industry. It allowed the banks to quickly “delever” – reduce the amount of assets on their balance sheet that they were funding mostly from money borrowed on international financial markets – markets that didn’t want to fund Irish banks any more. For the first few years of its existence there was a lot of scepticism around about NAMA, with some predicting total disaster. So far, so good, says the EU now.
The draft version of the Commission’s final report on Ireland tries to strike a balance between praising the country for its performance in the three year programme, and pointing out work that still needs doing. Indeed it could be accused of mission creep, as it is making suggestions about the 2015 budget, even though the programme ends about now.
But the mission creep accusation would be misplaced. Although the programme is ending, the surveillance continues. The post programme surveillance (PPS) mechanism (EU regulation 472/2013 if you really must know) applies until states have repaid 75% of the loans received under the programme, to make sure the country has the capacity to service its loans.
And because we have benefited financially from an extension of the repayment terms, the “price” of those extensions is literally decades of EU surveillance. Footnote 32 tells us that “under the current repayment schedule, this means that PPS will continue until 2031 at the earliest”.
That means missions and reports twice a year, with reports to the European Parliament, the technocrats at the Economic and Finance Committee, and national parliaments. Hopefully the freshly minted tradition of “beat the Bundestag” report-leaking will continue too.
But back to the (draft) report itself. Apart from a good amount of praise for the performance of the programme, there are three standout areas – Banking, Budget policy and Health.
In Ireland, the banks were too big to bail, and pulled down the sovereign. Thus the bailout programme had to tackle the size and health of the banking sector as a matter of urgency – a “fundamental downsizing, recapitalisation and reorganisation of the banking sector”, as the Commission report puts it.
The reorganisation “happened quickly with bank mergers completed ahead of schedule, followed by the resolution of a large domestic lender that had initially been transformed into an asset-recovery bank”. That’s Anglo, in case you hadn’t guessed.
It says the stress tests led to a high level of capitalisation, which although costly to the taxpayer was “significantly below what was anticipated at the start of the programme”. This was because subordinate bondholders were burned, Wilbur Ross and chums bought into Bank of Ireland and stopped it being nationalised, and BoI in particular has been paying back the state money it got, along with several billion in guarantee payments from all the surviving banks, and the sell-off of contingent capital instruments and preference shares – again in Bank if Ireland.
The big remaining problems in the banks are no surprise – the non-performing loans, particularly in mortgage and SME lending, and the return to profitability of the banks, which means they can build up their own capital reserves and increase lending to the real economy. All this is going to take time to work out, and while the Commission is satisfied “significant progress has been made in stabilising and downsizing Ireland’s financial sector under the programme, the process of financial sector repair is not yet fully complete”. So, no surprise there.
On the Budget situation, the headline grabbing part has been the Commission’s suggestion that Budget 2015 (the preparation of which starts just after Christmas with the next “European Semester” in which the states send their macro-budget plans to Brussels for Commission and peer review) should be bigger than the Government is planning.
The good folk of Merrion Street are planning on a €2 billion adjustment in the next Budget (and the politicians are hoping they can get away with less, if growth and inflation are good to them). But the Commission interpret the economic data slightly differently. They think there will be a little less growth than the Government do in 2014. They also think some of the €600m in savings and one off initiatives that the Government used to bring a €2.5 billion budget adjustment for domestic consumption up to €3.1 billion for international audiences, will not prove to be permanent.
For example, interest cost savings, unemployment benefit savings from falling unemployment, a one off income from selling the lottery licence. As a result of both growth and durability of measures concerns, the Commission think a €2.5 billion adjustment will be needed in budget 2015 to bring the deficit below 3% of GDP. Only time will tell on this one.
Then there is the health budget and its chronic problem with overruns. The Commission thinks the Department of Health and HSE won’t be able to deliver all the planned savings on staff costs due under Haddington Road. They also say the targets on savings from drug costs, medical cards and charging private health insurers for public hospital beds are not delivering the required amounts either.
More interestingly, I think, are the Commission’s remarks on the systems underlying HSE management. It says “necessary reform of financial management systems in the HSE has begun”. The problem is the different parts of the HSE use different accounting systems, and they don’t talk to each other. This means big delays in processing information and spotting emerging budget problems.
It’s the old “if you can’t measure it, you can’t manage it” problem. There is a new system being introduced that will allow a breakdown of costs by clinical activity. This is described as a “key enabler” of the Government’s plans for a “money follows the patient” funding model.
A key first step, due to start by the end of this month, is the design of “a common chart of accounts and data standards for use by budget holders throughout the HSE”. They are also supposed to specify a new single accounts computer system for implementation by the end of 2015. Until then it looks like we are in for a couple of more years of ropey HSE financial management. And that assumes that a large scale public service computer project will come in on time (and maybe even on budget – changes to Britain’s social welfare system software have run up losses of £40m this year, with more to come).
A couple of other points of interest from the Commission report – it confirms that the Central Bank are reviewing a portfolio of about 100 credit unions ( that’s roughly one in four) on a case by case basis to assess various supervisory concerns including the level of arrears and the adequacy of provision. At the end of September, 20 credit unions reported regulator reserves below the minimum requirement of 10% of assets. This implied a capital shortfall of €11m for those 20 credit unions.
It also continues to be very critical of the slow pace of rollout of the state’s labour activation measures. It says Intreo – the one stop shop for social welfare, jobsearch and training services – is supposed to have 43 offices covering 70% of the long term unemployed, open by the end of this month. As of the end of September it had opened 16 of those offices, “with a mere six opened this year”.
Of the 300 staff at the Department of Social Welfare (payroll circa 6,000) which are due to transfer to the Intreo service by the end of this month, 160 are in training for redeployment, while a further 140 officers “have been identified and notified of their redeployment”.
These extra staff will enable the Department of Social protection to engage with an additional 10,000 long term unemployed per quarter through one-to-one interviews. That’s an extra 40,000 per year. But the Commission notes there are 230,000 long term unemployed on the Live Register.
In the meantime, the Government has turned to private contractors to pick up the slack, with the commission stating that private training contracts will cover 80,000 to 90,000 jobseekers. But with the tender documents only supposed to be mailed out this month, they don’t expect the private sector providers to be able to start operations for another year.
The development of a labour activation service is claimed by the EU as one of the gains of the bailout process: one simply didn’t exist here before the Troika came to town. But given our long history of high levels of long term unemployment – not to mention the five years of crisis levels of unemployment we are enduring now – even this level of progress has been painfully slow in coming about.
While the dramatic fall in bond yields on Irish sovereign debt – from a high of 14% to a current level of 3.5%, lower than the average yield in the 2003-2008 period – is rightly seen as a measure of the success of the Irish programme’s aims of dealing with the core problem of the banks and the consequent problem of state finance, the drop in unemployment in the same period from a high of 15% to a current 12.5% stands in marked contrast.
As does the massive restructuring of the banking industry, compared with the minimal restructuring of the social welfare/ labour activation/ training system in the same period.