In­vestors face tight turn­around to re­act to ECB bond-buy­ing de­ci­sion

Sunday Independent (Ireland) - Business & Appointments - - FRONT PAGE - Paul Gor­don and Lucy Meakin

AS much as €3bn could be lost to the Ir­ish Ex­che­quer as low-emis­sion ve­hi­cles be­come the norm by 2030, ac­cord­ing to in­dus­try ex­perts. Huge amounts of rev­enue used to fund es­sen­tial ser­vices are gen­er­ated by ve­hi­cle reg­is­tra­tion tax, mo­tor tax and fuel tax and could largely dis­ap­pear as the petrol en­gine is slowly con­signed to his­tory.

Al­most €5bn — or 7pc of gov­ern­ment rev­enue — is gen­er­ated through Ve­hi­cle Reg­is­tra­tion Tax (VRT), fuel tax, tolls, mo­tor tax and Vat, it is es­ti­mated. As yet, there is no clear plan as to how this money can be re­placed.

A gov­ern­ment task­force has been set up to ex­plore op­tions to ac­cel­er­ate the up­take of hy­brid, elec­tric and other low-emis­sion ve­hi­cles. It will pro­pose a pack­age of mea­sures for in­clu­sion in Oc­to­ber’s Bud­get to pro­mote elec­tric ve­hi­cles in par­tic­u­lar.

That, of course, is a laud­able aim and fits with a press­ing need for mea­sures to mit­i­gate cli­mate change. Pic­tures over the past week from Houston and Done­gal dra­mat­i­cally il­lus­trate the good sense of this pol­icy. Such mea­sures are also ab­so­lutely nec­es­sary if Ire­land is to avoid mas­sive EU fines.

They will also help cur­tail the air pol­lu­tion caused by the thou­sands of com­bus­tion en­gines that daily clog our towns and cities, dam­ag­ing peo­ple’s health. Just 8,000 elec­tric ve­hi­cles will be sold in Ire­land by 2020. But as this fig­ure jumps — as it must — it is far from clear as to just how big a hole will be blown in Ex­che­quer fi­nances over the next 10 to 15 years.

A range of sup­port mea­sures en­cour­age the adop­tion of elec­tric ve­hi­cles and other en­vi­ron­men­tally THE Euro­pean Cen­tral Bank has a tight timetable for de­cid­ing the fu­ture of its bond-buy­ing pro­gramme, but in­vestors may face an even tighter one to ad­just to the out­come.

The gov­ern­ing coun­cil will hold its first for­mal talks next week on the pace of as­set pur­chases af­ter De­cem­ber, when the cur­rent pro­gramme is sched­uled to ex­pire.

Yet it’s con­ceiv­able that the de­ci­sion won’t be fi­nalised un­til the De­cem­ber 14 meet­ing, ac­cord­ing to euro-area of­fi­cials fa­mil­iar with the mat­ter.

That would leave around 10 trad­ing days, dur­ing a hol­i­day sea­son when vol­umes are typ­i­cally low, for mar­ket par­tic­i­pants to sort out their strat­egy for the New Year.

The ECB’S 25 pol­i­cy­mak­ers have plenty to talk about: some say the euro area’s ro­bust eco­nomic re­cov­ery war­rants the wind­ing down of bond pur­chases — cur­rently run­ning at €60bn a month — while oth­ers point to fee­ble in­fla­tion as a rea­son to keep stim­u­lus go­ing.

Yet leav­ing a de­ci­sion too late could un­nerve in­vestors and push up the euro and bond yields, un­der­min­ing the ef­forts so far.

“We’re all aware of the re­al­ity of the clock that they face,” said Charles Diebel, head of rates at Aviva In­vestors in Lon­don. “But mar­kets have got very used to be­ing told what’s coming a long time in ad­vance, so to chance your arm and de­cide to wing it at the last minute in it­self is like ask­ing for trou­ble.”

Of­fi­cials are aware of the risk of wait­ing too long, with two of the peo­ple say­ing they shouldn’t sur­prise in­vestors by hold­ing back ev­ery de­tail on the fu­ture of QE un­til the fi­nal meet­ing of the year.

That sug­gests the ECB is still likely to de­liver sig­nals on the plan for as­set pur­chases af­ter one or both of the next two meet­ings. friendly forms of trans­port. Up to €10,000 worth of grants and VRT re­lief is avail­able. While the grants are likely to be scaled back as the elec­tric fleet grows, it will be po­lit­i­cally dif­fi­cult to rein­tro­duce VRT on such ve­hi­cles, with the sys­tem now di­rectly re­lated to a ve­hi­cle’s emis­sions. In 2014 VRT gen­er­ated €0.54bn.

Mo­tor tax rates are also in­creas­ingly re­lated to CO2 emis­sions. Mo­tor tax gen­er­ated €1.12bn in 2015 and was used to fund the coun­try’s lo­cal au­thor­i­ties, but this fund­ing stream will only de­crease as mo­torists leave be­hind their petrol guz­zlers. As the en­vi­ron­men­tally friendly fleet grows, the Ex­che­quer will take an in­creas­ing hit and the big­gest hit of all will come from a dra­matic fall in the amount of tax col­lected from fuel.

In sim­ple terms, how do you levy fuel tax on an elec­tri­cally-pow­ered ve­hi­cle that does not use fuel? In 2015 alone, the Ex­che­quer re­ceived €2.3bn in diesel and petrol ex­cise and car­bon taxes, ex­clud­ing VAT. In­deed tax ac­counts for 70pc of the price of a litre of petrol. Lit­tle won­der it is known as one of “the old re­li­ables”. Not for long. As the huge fleet of petrol cars dis­ap­pears in the next decade or so, the im­pact could be dra­matic.

The big ques­tion that needs to be asked is how A spokesman for the cen­tral bank de­clined to com­ment.

Nei­ther would a ta­per­ing de­ci­sion at two weeks no­tice be unprecedented. When the US Fed­eral Re­serve de­cided to cut its own bond pur­chases start­ing in Jan­uary 2014, it made the an­nounce­ment on De­cem­ber 18, 2013.

The dif­fer­ence is that the Fed started for­mal talks on ta­per­ing at their June 2013 meet­ing and fre­quently talked in pub­lic about ta­per­ing in the fol­low­ing months.

The ECB has so far ex­plic­itly avoided putting the topic of next year’s pur­chases does this in­come stream for the State get re­placed even as the coun­try makes the ab­so­lutely cru­cial shift to low emis­sion ve­hi­cles?

And it is not only an issue for mo­torists. Taxes raised by motoring pay for es­sen­tial ser­vices right across so­ci­ety, such as health and ed­u­ca­tion. Fu­ture gov­ern­ments will face some stark and dif­fi­cult choices as they look to re­place all of this lost in­come. Taxes on prop­erty, in­come and busi­ness may have to rise to fill the hole.

In­deed, in Nor­way, where sub­si­dies and other mea­sures saw the elec­tric ve­hi­cle fleet grow to over 100,000 last year, the gov­ern­ment has been forced to row back on some in­cen­tives due to their over­whelm­ing suc­cess.

A more likely ap­proach is the in­tro­duc­tion of ex­ten­sive road-user pric­ing. That is already im­ple­mented through tolls on mo­tor­ways in Ire­land and by con­ges­tion charg­ing in cities such as Lon­don. But in its most de­vel­oped form, this would see tech­nol­ogy in­tro­duced to charge driv­ers per kilo­me­tre of road driven. For some driv­ers it could even mean a sav­ing on the high level of tax­a­tion they face through other means at the mo­ment, and it is the ap­proach slowly be­ing adopted right across Europe. But look at the de­ba­cle over new water charges to see just how dif­fi­cult an issue this could be­come for any gov­ern­ment op­er­at­ing in a four-year elec­toral cy­cle.

The Gov­ern­ment should still ac­cel­er­ate its ef­forts to re­place dirty, car­bon-emit­ting ve­hi­cles as quickly as pos­si­ble. But care­ful con­sid­er­a­tion is needed as to how the rev­enue this fleet gen­er­ates is re­placed, so that there is still cash to fund schools, hos­pi­tals and other es­sen­tial ser­vices. on the coun­cil’s agenda. At July’s ses­sion, it agreed to start dis­cus­sions in “the fall,” but even then opted not to say if that nec­es­sar­ily meant the Septem­ber 7 meet­ing.

The slide in the euro in re­ac­tion to the news that the full de­tails of the as­set­pur­chase plan may wait un­til De­cem­ber might en­cour­age those pol­i­cy­mak­ers who ex­pressed con­cern at the July meet­ing of a pos­si­ble over­shoot of the sin­gle cur­rency.

The euro’s gain af­ter Pres­i­dent Mario Draghi’s speech in Por­tu­gal in June — when he spoke of “re­fla­tion­ary forces” — and the cur­rency’s jump again last week when he opted not to try to talk it down in a speech in Jack­son Hole, Wy­oming, showed how sen­si­tive mar­kets are.

That jus­ti­fies ex­treme pru­dence, with changes to com­mu­ni­ca­tion and pol­icy likely to move even slower than orig­i­nally ex­pected, two of the peo­ple said.

Some pol­i­cy­mak­ers are more san­guine. Bun­des­bank Pres­i­dent Jens Wei­d­mann and Es­to­nian cen­tral-bank gov­er­nor Ardo Hans­son have both said re­cently that the euro’s strength re­flects the econ­omy’s up­turn and is noth­ing to worry about. Aus­trian Gov­er­nor Ewald Nowotny said on Fri­day that he wouldn’t “drama­tise” the gain.

But Nowotny also added that pol­icy nor­mal­i­sa­tion can’t be about “abruptly step­ping on the brake.”

Hold­ing off un­til De­cem­ber would al­low the ECB to tie its fi­nal de­ci­sion to up­dated fore­casts for growth and in­fla­tion, which will be pub­lished at that meet­ing.

The cen­tral bank has fre­quently used re­vi­sions to the outlook to jus­tify pol­icy changes.

But for some com­men­ta­tors, the ur­gency for ac­tion is mount­ing be­cause the ECB looks set to run into its self-im­posed lim­its on how much debt it can buy from each nation, is­suer and bond issue.

The cur­rent sched­ule will take its pur­chases to €2.3 tril­lion, equiv­a­lent to al­most a quar­ter of gross do­mes­tic prod­uct. The ECB’S bal­ance sheet — fu­elled by free loans to banks — has soared to €4.3 tril­lion.

“Stick­ing your head in the sand un­til De­cem­ber and hop­ing the prob­lem goes away is not a com­mu­ni­ca­tion strat­egy,” said Richard Bar­well, an econ­o­mist at BNP Paribas As­set Man­age­ment in Lon­don.

“The issue lim­its are go­ing to force them to exit pre­ma­turely. They can­not duck the con­se­quences in­def­i­nitely.” Bloomberg

Re­ac­tion to ECB Pres­i­dent Mario Draghi’s lat­est speech il­lus­trated mar­ket sen­si­tiv­ity

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