We may be sorry we didn’t squir­rel away €4bn sav­ings

Irish Independent - Business Week - - BUSINESSWEEK -

WHAT­EVER hap­pened to that four bil­lion euro? This was the amount of money – ac­tu­ally a bit more – which Ir­ish cit­i­zens saved in the last three years as in­ter­est rates on the na­tional debt and tum­bled, com­pared with what they thought they would pay.

The fig­ure was quoted by Conor O’Kelly, chief ex­ec­u­tive of the Na­tional Trea­sury Man­age­ment Agency (NTMA), who told in­ter­na­tional in­vestors about how, just four years ago, it was ex­pected that the an­nual in­ter­est bill would be €10 bil­lion in 2017, whereas it is just un­der €6 bil­lion.

He at­trib­uted this happy fore­cast­ing er­ror to the in­tro­duc­tion of the Euro­pean Cen­tral Bank’s bond buy­ing pro­gramme where, if you’ll par­don the pun, things are about to get in­ter­est­ing. Last week, ECB Pres­i­dent Mario Draghi an­nounced a re­duc­tion in the €60bn a month which the bank has been shov­el­ling into the fi­nan­cial sys­tem in re­turn for tak­ing over its loans; much of them debts of euro­zone gov­ern­ments.

The revo­lu­tion this has cre­ated was dra­mat­i­cally dis­played last month when the NTMA paid off a bunch of five-year debt and re­placed it with some new loans.

The old stuff – over €6bn – car­ried an in­ter­est rate of just un­der 6pc, which is what the gov­ern­ment had to of­fer to raise the money just five years ago. It did not have to of­fer any­thing to bor­row the new €4bn. On the con­trary, the lenders will pay the NTMA a small per­cent­age for the priv­i­lege of be­ing able to add some safe as­sets to their port­fo­lio.

Even safety is not what it used to be. Last week the most hawk­ish rat­ings agency when it comes to Ire­land, Moody’s, raised the coun­try’s stand­ing to A2. That is pretty safe but is five notches be­low the high­est rat­ing. And yet the |Ir­ish gov­ern­ment can bor­row as if it rep­re­sented no risk at all.

Is it re­ally that dif­fer­ent this time? In all of my ca­reer, and for a lot longer than that, those who said that things had changed for­ever were proved wrong; usu­ally with dis­as­trous con­se­quences. The bet­ting must be that they are wrong again and that this un­prece­dented sit­u­a­tion can­not last.

The pos­si­bil­ity is some­thing Ire­land must take very se­ri­ously. The dan­gers are ob­vi­ous in the ex­treme cau­tion with which the ECB is ap­proach­ing its change of course, just like the US Fed­eral Re­serve be­fore it.

Well be­fore. The Fed and the Bank of Eng­land be­gan stim­u­lat­ing their economies six years ago. The US cen­tral bank has now be­gun rais­ing in­ter­est rates. It is mov­ing with ex­treme cau­tion but, with the econ­omy show­ing 3pc growth for two quar­ters in a row, may have to move faster.

As for the Bank of Eng­land, who would be in Gov­er­nor Mark Car­ney’s shoes, as in­fla­tion ac­cel­er­ates and the econ­omy slows un­der the cosh of Brexit? Fur­ther strange things may hap­pen in the UK. Tighten or loosen? Like ev­ery­thing to do with Brexit, there is no ob­vi­ous an­swer.

The ECB, hav­ing been slow out of the stalls, seems in no hurry to go back. Mr Draghi’s com­ments were widely in­ter­preted as mean­ing no ac­tual rise in in­ter­est rates be­fore 2019, with the money print­ing ma­chine run­ning un­til then, even if more slowly.

Ger­many had much to do with the de­lay in in­tro­duc­ing the stim­u­lus pro­gramme but there is not much sign of ob­jec­tion to its pro­longed re­duc­tion.

Ber­lin has a lot on its plate right now, with the chal­lenge of form­ing a new coali­tion and the mood mu­sic may change next year when a new ad­min­is­tra­tion is in place. Its con­cerns will in­clude task of restor­ing in­cen­tives to sav­ing money via real in­ter­est rates which beat in­fla­tion.

With a board made up of more than two dozen na­tional in­ter­ests, the ECB has never man­aged to get its tim­ing right. It too may find that the euro­zone econ­omy is run­ning ahead of its pol­icy, forc­ing it to raise rates more dra­mat­i­cally than any­one would wish and re­turn­ing risk to the agenda.

Right now, the ECB is wor­ried about the strength of the euro sti­fling the re­cov­ery and does not want to push it higher by talk­ing abut a rise in in­ter­est rates.

Be­sides, for all its strength on the mar­kets, the sin­gle cur­rency re­mains vul­ner­a­ble to any new cri­sis. This might be po­lit­i­cal – the end of Brexit or the start of Catalexit per­haps – or it might be be­cause it turns out that pro­longed ul­tra-low in­ter­est rates were just as dan­ger­ous as his­tory sug­gests they ought to be.

The present favourable con­di­tions would be the time to strengthen the euro’s shaky foun­da­tions, rather than ig­nor­ing them un­til another cri­sis, as gov­ern­ments tend to do. A re­cent pa­per from the Brus­sels think tank, Bruegel, puts for­ward some ideas as to what needs to be done and in the process shows how dif­fi­cult it will be to achieve.

The prob­lem as the au­thors, and many others, see it, is too much reliance on ECB ac­tions and not enough on fis­cal pol­icy to ease re­ces­sions and curb booms. They reckon that fis­cal pol­icy has ex­ac­er­bated con­di­tions – was “pro-cycli­cal” – in ev­ery year since the es­tab­lish­ment of the cur­rency in 1999.

They favour rules based on an econ­omy’s po­ten­tial – long a favourite with many econ­o­mists but hardly ever with fi­nance min­istries. Per­haps it is just too sim­ple and, there­fore, more dif­fi­cult for gov­ern­ments to game. It would also have the po­lit­i­cally del­i­cate ef­fect that pub­lic spend­ing could in­crease faster in Ire­land or Es­to­nia than in Ger­many or Italy – al­though there is an el­e­ment of that in the cur­rent rules.

To go fur­ther, some new gov­ern­ing struc­ture would be needed, along with bet­ter demo­cratic le­git­i­macy. The re­port sug­gests a Fis­cal Gov­ern­ing Coun­cil, made up of the 27 fi­nance min­is­ters, headed by a euro­zone fi­nance min­is­ter in charge, who would re­place both the EU eco­nom­ics com­mis­sioner and the pres­i­dent of the group of euro­zone min­is­ters.

Hmmm. We may be for­given for think­ing we may be stuck with the present in­ad­e­quate ar­range­ments for some time; cer­tainly for what­ever Brexit brings and pos­si­bly for the re­turn to re­al­is­tic in­ter­est rates pro­vok­ing another crash in the prices of prop­erty and gov­ern­ment debt.

Un­der those ar­range­ments, Pro­fes­sor Kevin O’Rourke of Ox­ford Univer­sity has said, coun­tries like Ire­land should make sure that they never get into pub­lic fi­nance dif­fi­cul­ties again. Yet last month’s Bud­get was pure Ground­hog Day; a bad dream from which one can­not awaken.

This is where the ‘miss­ing’ €4bn comes in. Com­par­isons with the world as seen in 2013 are in­struc­tive – al­though there is clearly a cam­paign in the De­part­ment of Fi­nance to make the Bud­get harder to un­der­stand and trick­ier to com­pare. One won­ders why.

Even so, we can see that rev­enues this year will be €5bn greater than was ex­pected four years ago and the cen­tral fund, which is mainly debt in­ter­est, will be €2bn less. On the other side, cap­i­tal spend­ing is €1bn more and the Ex­che­quer deficit – a cash fig­ure – is €1.5bn smaller.

Tak­ing this dif­fer­ent route also leads to a €4bn dif­fer­ence. It looks like we spent it on our­selves, in pay, pen­sions and tax cuts. There is not much sign that it has bought €4bn worth of good cheer or con­tent­ment. With the rainy day post­poned to 2020 when the coun­try is due to re­new €20bn of that debt, we may yet be sorry we did not squir­rel away more of it.

There is too much reliance on the ECB and not enough on fis­cal pol­icy to ease re­ces­sion and curb booms

The view from the Euro­pean Cen­tral Bank head­quar­ters in Frank­furt, where the ap­proach to mon­e­tary pol­icy in the bloc is chang­ing with stim­u­lus halved from €60bn

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