Here is a slidedeck with some charts from the QNAs released by the CSO today.
Thursday, September 18, 2014
Wednesday, August 20, 2014
The February 2013 liquidation of the IBRC resulted in the Central Bank of Ireland holding around €25 billion of Irish government bonds with maturities of between 25 and 40 years (there is also €3 billion of a 2025 bond that was used to finance the 2012 Promissory Note payment)
The drop in yields since then means that the market value of these is now likely to be above €25 billion. Since February 2013, for example, the 10-year yield on Irish government bonds has fallen from 3.8% to 1.9%. It would be useful to have a current estimate of the market value of these bonds held by the Central Bank but one does not appear to be available.
At the time of the transaction the following was included in a overview presentation published by the Department of Finance (slide 10):
The Central Bank of Ireland will sell the bonds but only where such a sale is not disruptive to financial stability. They have however undertaken that minimum of bonds will be sold in accordance with the following schedule: to end 2014 (€0.5bn), 2015-2018 (€0.5bn p.a.), 2019-2023 (€1bn p.a.), 2024 and after (€2bn p.a.).
A couple of days later the Governor of the Central Bank appeared on RTE’s The Week in Politics and said (from around 05:00):
The Central Bank of Ireland has undertaken to sell these bonds as soon as possible subject to financial stability conditions.
The 2013 Annual Report of the Central Bank contained the following about the €25 billion of Floating Rate Notes (FRNs) acquired by the Bank(footnote (i) to the table in page 123):
The Bank intends to sell the combined portfolio of the FRNs and the fixed rate bond as soon as possible, provided conditions of financial stability permit. The Bank will sell a minimum of these securities in accordance with the following schedule: to end 2014 (€0.5 billion), 2015-2018 (€0.5 billion per annum), 2019-2023 (€1 billion per annum), and 2024 on (€2 billion per annum until all bonds are sold). As part of these minimum sales, the Bank sold €350 million of the 5.4% Irish 2025 Government Bond by end December 2013.
In recent weeks there has been increased attention given to the early repayment of Ireland’s loans from the IMF. The possibility of this has been discussed here for a while. Recently the Minister for Finance indicated that the annual interest savings from the early repayment of €15 billion of the IMF loans could be around €375 million. It seems that attempts will be made with the various EU creditors (requiring getting the agreement of all other Member States) to allow the early repayment of two-thirds of Ireland’s IMF loans.
It appears Ireland is in a position to repay €15 billion of IMF loans, presumably by issuing replacement debt. It is not clear that agreement will be reached to do this. If we have the financial wherewithal to refinance the IMF loans who is to say that the Central Bank of Ireland would not be able to sell €25 billion of government bonds, or say two-thirds of them, without being “disruptive to financial stability”?
It is worth repeating that the 2013 Annual Report of the ECB included the following (page 110):
The liquidation of the Irish Bank Resolution Corporation (IBRC) raises serious monetary financing concerns. These concerns could be somewhat mitigated by the disposal strategy of the Central Bank of Ireland.
Indeed. We might gain a couple of hundred million from reduced interest payments by the Exchequer on the IMF loans but maybe that only rises the possibility that we could lose a couple of hundred million from reduced payments into the Exchequer Account from the Central Bank surplus.
There has been little to indicate do far that these two sub-plots of Ireland’s government debt are linked but with many moving parts it can be unwise to try and look at different things in isolation.Tweet
Friday, August 15, 2014
The implied 10-year yield on Irish government bonds has fallen below two percent. And as can be seen in the table below the implied eight-year yield is less than one per cent.
The yield has been falling for the past while but the drop today is an acceleration of that.
It is hard to see how anyone would give money to the Irish government for eight years at a yield of less than one percent. Things are improving but risks remain. Of course, they are not really buying these on the basis that Ireland will repay the money; they are buying on the basis that Mario Draghi will step in to give them their money back. Draghi has had undoubted success in bringing government bond yields down. Is there any chance he could have similar success in bringing economic growth rates up?Tweet
Tuesday, July 8, 2014
The debate around October’s budget has been heightened recently with the positive results in the half-year Exchequer Returns and the large upward update of nominal GDP by the CSO. The impact of these was explored in this recent post.
There are other factors that will feed into the fiscals sums for 2015. It is not clear what affect they will have but they may come to prominence over the coming months. The first is recurring but small, the second is large but once-off and the third is large and recurring (for a while) but seems unlikely to happen.
1. Changes to the EU VAT Directive
From the first of January 2015 “VAT on telecommunications, broadcasting and electronic services supplied by a supplier established within the EU to non-taxable persons established within the EU will also be charged in the Member State where the customer belongs.” See here. It is not clear what impact this will have on VAT revenues but one would think it will be positive, though will probably be small.
The most visible change will probably be in relation to subscriptions paid to BSkyB the VAT on which will now be payable in Ireland.
2. Return payment under the ELG from IBRC liquidation
When IBRC (formerly Anglo and INBS) was liquidated in February 2013 there was just over €1 billion of state-guaranteed liabilities remaining in the zombie bank. These were covered under the Eligible Liabilities Guarantee that was introduced in early 2010. When the liquidation was announced the guarantee was triggered and the guaranteed liabilities were immediately paid with €1 billion from the Exchequer. After making the payment the ELG scheme took the place of the covered liabilities on the balance sheet of the IBRC but as an unsecured and unguaranteed creditor. When the liquidation is concluded the proceeds of the sales (minus costs) will be divided between the remaining creditors at the time of the liquidation. Creditors will be repaid based on their status but it does seem that there will be funds to make a payment to unsecured creditors.
It is not clear when this will be made or how much this will be. If the proceeds are sufficient the amount returned could be close to the €1 billion paid out under the ELG. This is a once-0ff receipt relating to the public interventions in the banking sector. Ireland has been in the Excessive Deficit Procedure since 2009 but the “once-off” payments to the banks were omitted to give the “underlying” deficit when examining whether Ireland had satisfied the limits set out under the EDP.
If there is a repayment from the IBRC under the ELG then it could be that the “underlying” deficit will be greater than the overall deficit. Is it only payments to the banks that are excluded to get the “underlying” deficit? If receipts from the banks are excluded maybe 2015 would be an opportune time to start measuring our performance to the EDP limits with the headline deficit?
3. Early repayment of IMF loans
The benefits of this were discussed here and here back at the start of the year. The issue arose in a PQ to the Minister for Finance again last week. He repeated the position that all the programme loans have to be repaid in equal proportion. Repaying the IMF loans means repayments also need to be made to the EFSF, EFSM and bilateral loans. But loan agreements can be renegotiated and the Minister outlined how much such a renegotiation would be worth:
It is the obligation to pay everybody if we pay one and makes it not worth pursuing. However, there may be ways around that and it is still worth pursuing that aspect. At present rates in the market and with the rate we are paying on the IMF loan, it is worth about €20 million for every €1 billion we financed. We have about €18 billion of that type of loan from the IMF.
€20 million times 18 equals €360 million – though it will be phased-in in a sense as the IMF loans are amortised (repaid in instalments) over the next few years. But how long will the Ireland 10-year yield stay below 2.5 per cent?
So we have a small effect that definitely will happen (VAT), a large once-off effect that will happen but mightn’t be counted (ELG) and a large recurring effect that mightn’t happen at all (IMF). In an imaginary world where they all fell right the 3 per cent of GDP deficit in 2015 should be easily achievable.Tweet
The Irish Times has a piece on US corporate “inversions” which says that “Ireland’s tax regime comes under US spotlight again”. In this instance an inversion is where a US company merges with a non-US company and the merged holding company has its place of incorporation outside the US. Under current rules the owners of the foreign company have to comprise at least 20 per cent of the ownership of the merged holding company for such an inversion to take place. Some of the technical details about inversions and Ireland can be found here.
In the US Congress, Rep. Sander Levin (D), who is on the Ways and Means Committee has highlighted findings from the Congressional Research Library that US companies have been involved in 76 such inversions since 1983. That is an average of less than 3 per year but the rate has increased in the past decade as shown in this related infographic.
It is not clear from the documents how many of the inversions have involved mergers with Irish companies or the incorporation in Ireland of the merged holding company but it is probably around 10 per cent of the total.
From an Irish perspective inversions offer very little. Simon Carswell’s report today says that:
The practice is known as inversions where an American company acquires or merges with a foreign company that allows it to relocate its legal address for tax purposes outside the US to avoid paying the high American corporate tax rate of 35 per cent.
The report refers to inversions by US companies in recent years involving Irish-based firms including pharmaceutical companies Elan, Mallinckrodt and Warner Chilcott to benefit from the lower Irish corporate tax rate of 12.5 per cent.
This might suggest that the merged companies will be paying tax on a greater amount of profits at the 12.5 per cent Corporation Tax to Ireland. This is unlikely to be the case. Although the original US company may move its place of incorporation and tax residence to Ireland in many cases there is little substantial change in the operations of the companies.
If the US companies continue to have significant operations in the US (and they will) they will continue to be liable for the US corporate income tax of 35 per cent on the profits earned by those operations. Place of incorporation has a limited role in determining tax liabilities. The key factors are the location of a company’s risks, assets and functions with transfer pricing rules used to allocate profit across the company’s risks, assets and functions. A legal inversion changes none of these.
The fact that the inversion changes so little of the tax liability is shown in further research cited by Rep. Levin but this time from the staff of the Joint Committee on Taxation. This shows that if a proposal from Rep. Levin to limit US companies ability to invert their place of incorporation abroad the revenue gains over ten years to the US Treasury would be $19.5 billion. That averages less than $2 billion a year.
The gain is relatively small because the US continues to levy the 35 per cent tax on the operations of the company in the US. What the US loses out on is the right to levy its 35 per cent tax on the global, i.e. non-US, profits of these companies. And it is also the case that the extensive deferral provisions for these tax liabilities means that much of that is not collected.
For comparison in Irish terms the tax revenues gains estimated by the JCT scaled for size in Ireland would be the equivalent of around €15 million in Corporation Tax a year which is 0.4 per cent of current receipts. Of course, there is more to it than just the tax revenue as companies are seen as reneging on their US identities.
Unless the companies move some risks, functions or assets to Ireland as part of the inversion they are unlikely to pay any additional tax in Ireland (above what was paid on activities in Ireland, if any, before the merger). Like the US, Ireland has a worldwide basis for the Corporation Tax. However, the companies will pay corporate income tax in the source country where there risks, functions and assets are.
Ireland will levy a 12.5 per cent tax on such trading profits but will grant a tax credit for corporate income tax in other countries. If the amount of tax paid abroad results in an Irish foreign tax credit greater than 12.5 per cent of the taxable income then the amount of additional tax due in Ireland will be nil.
This is almost always going to be case as virtually every country these companies operate in have a corporate income tax rate greater than Ireland’s 12.5 per cent. This is particularly the case if the inversions involve US companies which keep most of their risks, assets and functions in the US and remain liable to the US 35 per cent corporate tax rate for profits sourced from the US.
The gain for the companies is clear. They will no longer be liable to pay the US 35 corporate income tax on their global, i.e. non-US, profits. This is one of the highest corporate income tax rates in the world so means that US companies do face an additional tax liability on their non-US profits even when they get a credit for foreign corporate income tax paid in the source country. Of course, US companies can use the extensive deferral provisions in the US tax code to delay the actual payment of this tax liability until the money is formally repatriated to the US and in some cases this deferral can be indefinite.
By inverting their residence to a a country such as Ireland companies can reduce the additional tax they have to pay on top of the tax paid in the source country. For most of these companies the source country will remain the US and it is also likely that the US authorities will be more active in assessing the structures, and particularly the transfer pricing arrangements, of these companies to ensure that the appropriate amount of profit is attributed to the risks, assets and functions in the US and not deemed “offshore”.
Also in the piece, Simon Carswell references a note from a US law firm on the practice of inversions. The note rightly highlights some costs of these inversions to Ireland. There will be no additional tax revenue but Ireland’s contribution to the EU budget may increase if the companies cause an increase in Irish GNP. There can be one-off effect (if the US company has retained earning on its balance sheet at the time of it residence relocation to Ireland) and an ongoing effect (if the company generates profits that are not distributed to shareholders but are added to retained earnings). As the merged company is Irish resident this income is added to Irish GNP.
The ‘takeaway’ in the note is that US firms seeking to invert to Ireland should do more than the basic minimum required which does not require the relocation of any significant risks, assets or functions. The law firm concludes that:
Although not a requirement, corporations should consider tangible investments beyond the requisite minimum of board meetings, including the establishment of accounting and treasury, legal, intellectual property and business development functions; the appointment of an Irish advisory board or resident Irish directors; and the establishment of regional trading or intellectual property hubs.
If some of these came to Ireland as part of an inversion then there might be gains here. Absent them we are likely to continue to see articles on Ireland’s Corporate Tax regime. And the attention may not be in the right place. Sander Levin was not shining a spotlight on Ireland’s tax regime; he was shining it on the US regime which in the first instance makes these inversions attractive (due to its relatively high rate) and in the second instance allows them (with a low legal barrier to inversions).
There is nothing Ireland can do about these inversions. We rightfully have freedom of establishment and, within certain limited restrictions, allow people to set up companies here. There is nothing underhand that makes Ireland attractive for these inversions. There is the low rate, stable regime, legal system, EU membership, network of tax treaties and all that.
Changing these could reduce the attractiveness for inversions from which Ireland gains nothing bar unwanted, and maybe even unwarranted, attention but these are the key attributes Ireland uses to attract traditional foreign direct investment which brings a much more tangible benefit – employment. As the policy of attracting FDI is likely to remain it looks like inversions will be a negative side effect of an attractive regime unless the US can overcome the paralysis in Congress and actually do something about it. That would be a positive for Ireland but it seems unlikely.Tweet
Thursday, July 3, 2014
Real GDP growth in 2013 was 0.2 per cent which is a revision of the previous estimate of –0.3 per cent. Nominal GDP has gone from a first estimate of €164 billion to a revised and updated estimate of €175 billion which is a very significant increase for the fiscal targets.
Here are the main fiscal aggregates as presented in April’s Stability Programme Update.
If we leave everything unchanged except the 2013 NGDP (i.e. use the same nominal growth rates and same fiscal projections) we get the following:
The changes are pretty clear. The end-2013 debt ratio has changed from 123.7 per cent of GDP to 116.1 per cent of GDP even though the debt and the economy which has to service it is exactly the same – it is just measured differently.
The projections used in the SPU now result in a 2015 deficit of 2.8 per cent of GDP (and an ‘underlying’ deficit of 2.7 per cent of GDP which is the one that has been used up to now as the metric for the EDP targets).
The revisions and updates published today by the CSO mean that a larger deficit of around 0.2 per cent of GDP (c.€350 million) is allowable while still targeting the ceiling set for the deficit in the EDP – if that is what one wishes to do.
A second helping factor (and one that actually reflects economic performance rather than statistical revisions) is the revenue buoyancy that is evident in the Exchequer Returns for the first six months of 2014. The budget day projection for general government revenue in 2014 was €60.9 billion. This was unchanged in April’s SPU.
SEPA issues aside it seems that tax revenue is ahead of the DoF’s projections by around €500 million. PRSI contributions are about €100 million ahead of the projection while the surplus from the Central Bank is around €200 million larger than expected.
There are some offsetting factors on the expenditure side – main health overrruns and a larger than expected contribution to the EU Budget. Voted Capital Expenditure is “behind profile” but that could due to timing issues.
For recurring or standard items the fiscal position is probably around €500 million (c.0.3 per cent of GDP) better than was expected when the Budget and SPU projections were made. This means the 2014 deficit outturn could be around 4.2 per cent of GDP if these improvements from H1 are just held and maybe even close to 4 per cent if the improvements continue to accumulate.
If the objective is to draft a budget targeting a 3 per cent deficit the fiscal effort required to so might be little more than the introduction of water charges.
PS Is there any indication somewhere of the budgetary impact in Ireland of the changes to the EU 6th VAT Directive that are due to come in force in January 2015? That is the change that means the VAT payable on, for example, television subscriptions will be collected in the country of the customer rather than the country of the supplier.Tweet
Friday, June 27, 2014
The May update of the CSO’s Retail Sales Index doesn’t show a whole lot of movement. The May readings (though provisional) of both the value and volume for the series of the index excluding motor trades are almost exactly the same as those recorded six months ago in December 2013. There has been some fluctuation in the interim but there has been no overall positive or negative movement in the past six months.
It can be seen that both series are ahead of where they were in the first half of 2013. Thus the annual changes paint a slightly healthier picture. The recent annual increases are the fastest since early 2008 and are only matched by those that were seen around the time of the temporary fillip that resulted from the ‘digital switchover’ of the broadcast television signal in October 2012.
However, unless there are increases over the coming months to match those seen towards the end of 2013 the annual changes will reduce to zero. Still, on the goods side at least, we are likely to see an annual increase in Consumption Expenditure for H1 2014 compared to H1 2013.
The monthly changes again highlight that it is difficult to read anything into changes over a short timeframe given the volatility in the series.
Overall, retail sales are ahead of where they were this time last year but the growth of the final few months of 2013 has not continued into 2014.Tweet
Friday, June 13, 2014
The announcement this week is not the first time the calculation of the tax base for Ireland’s Corporation Tax has appeared on the radar of the EU’s state aid rules. There was a previous formal investigation launched by the EU in 2001 and it concluded in 2003 with a negative state aid ruling against Ireland. Unlike now though the Ireland was not under the glare of international scrutiny and condemnation.
The case related to an exemption from Irish Corporation Tax for foreign income of Irish resident companies and branches if that income was used for investment and job creation in Ireland. It was introduced in 1988 when the top rate of Corporation Tax was 40 per cent so there would have companies who would have benefitted if the tax rate in the source country of their foreign income was less than the Irish rate. Of course, Ireland’s dual system of Corporation Tax fell foul of EU rules and the top was rate reduced significantly until the single rate of 12.5 per cent was introduced in 2003.
When the rate fell to 12.5 per cent the exemption of foreign income under investigation was almost obsolete as the tax rate in the source country for Irish companies’ foreign income was almost certainly to be greater than 12.5 per cent.
Anyway, the EU did undertake an informal information gathering exercise and subsequently proceeded with a formal investigation and concluded that the exemption was state aid. The companies who benefitted from the state aid were not asked to make redress payments and by the time the final decision was reached the exemption was obsolete and only one part of it remained (and that had been closed off to new entrants in 2001).
Some details of the case can be accessed from here. The quickest summary is in the press release rather than the judgements.Tweet
Friday, June 6, 2014
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Monday 20 August 2012
EUROZONE: ECB moves show Draghi's London comments not so hollow after all
Friday 03 August 2012
EUROZONE: A good soundbite from Mario Draghi. Now for the action to back up that big talk
Friday 27 July 2012
Friday 29 June 2012
BAILOUT: What makes us think that Spain will get a deal that we would want any part of?
Wednesday 6 June 2012
REFERENDUM: This Treaty won't stop governments spending, despite what the No alarmists say
Friday 25 May 2012
REFERENDUM: Campaigners have failed to connect with voters ... and the scaremongering hasn’t helped
DEBT: David McWilliams’ analysis of private debt is stark ... but it also 100pc wrong
Wednesday 25 January 2012
DOWNGRADES: Another bump on a long road that seems to have no turning
Wednesday 18 January 2012
A SECOND BAILOUT? Not a very helpful or relevant contribution from Willem Buiter
Thursday 12 January 2012
BUDGET: No room for error or slippage if we are to meet 2011 [sic 2012] targets for vigilant Troika
ECONOMY: Welfare and public service sectors will be the keys in a tough and daunting 2012
DEBT CRISIS: EU leaders are doing their very best not to face up to the terrifying problems we face
Tuesday 13 December 2011
BUDGET: The government may have squandered the political capital of first year in office
Tuesday 6 December 2011
DEBT CRISIS: So much for central banks' pact...we were here before and not so long ago
Thursday 1 December 2011
MORTGAGES: Those who can never pay back their mortgage need to be given a way out
Tuesday 22 November 2011
DEBT CRISIS: Only the unlimited balance sheet of the ECB has the necessary firepower to solve this crisis
Wednesday 16 November 2011
DEBT CRISIS: Italy could trigger a euro break-up if EU leaders don't catch up with markets
Wednesday 9 November 2011
DEBT DEAL: The only reason bailout deal should be voted down is because it's not tough enough
Tuesday 1 November 2011
DEBT DEAL: A default for Ireland? It's not as simple as that, I'm afraid ...
Thursday 27 October 2011
DEBT CRISIS: No Euro deal can save Greece but where will that leave us?
Tuesday 25 October 2011
RECESSION: Unlike banjaxed Greece we can work our way through the pain
Tuesday 27 September 2011
DEBT CRISIS: Signs that we can work our way out of this terrible mess
Friday 23 September 2011
RECOVERY: Four reasons why the ESRI might be on to something
Tuesday 6 September 2011
MORTGAGE CRISIS: Three percent of all households are in arrears
Monday 29 August 2011
MORTGAGES: Why debt forgiveness couldn't work and can't happen
Monday 22 August 2011
ECONOMICS: Morgan Kelly forecast on mortgages simply ‘wrong’
Friday 19 August 2011
TURMOIL: No evidence of a double dip but that doesn't mean it can't happen
Friday 5 August 2011
DEBT CRISIS: It better not come to it because Italy is too big to save
Thursday 4 August 2011
BAILOUT: A good day for Ireland Inc., but not a great one
Friday 22 July 2011
EURO CRISIS: Where will it all end? Follow the bond yields to find out ...
Tuesday 11 July 2011
DEBT CRISIS: Why French appear to be helping Greece but not poor us
Tuesday 28 June 2011
EXPORTS: A bit of sunshine in a sea of woes
Tuesday 21 June 2011
CROKE PARK: This deal is only tinkering at the edges
Wednesday 15 June 2011
BRIAN LENIHAN: How David McWilliams influenced blanket guarantee
Friday 10 June 2011
Irish Economy Blog
Current versus Capital
30th January 2012
Debt and Interest (update)
15th December 2011
Debt and Interest
30th November 2011
Patterns of Investment
24th October 2011
Selected Unemployment Rates
20th September 2011
7th September 2011
23rd August 2011
Leaving Cert Results
18th August 2011
Trading Volumes in Irish Bonds
10th August 2011
The Exchequer Balance
6th July 2011
Current and Capital Expenditure
(Croke Park Conference, January 2012)
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(Central Bank Data, August 2011)
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(CSO, Quarter 2 2011)
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