Thursday, 29 October 2009

Its OK to borrow off-sheet when it comes to NAMA

Slí eile: When it comes to sorting out banking and keeping risk to under 5% for bondholders, there is nothing to beat a bit of creative accounting and re-labelling. The creation of SPV - Special Purpose Vehicle involving a 51% private (big) investor holdings to get around the EU Stability and Growth Pact guidelines is intriguing. We are talking about big money here - over 30% of annual GDP in 2009. I am not complaining except to wonder if this latest wizardry will not give rise to more questions, delays and problems.

In a letter to Eurostat regarding September Maastricht Return, the Department of Finance projected a General Government Balance (GGB) for 2009 of -€19,982 million or -12.0% of GDP, 'which shows a worsening of €1,569 million on the April 2009 forecast deficit of -€18,413 million, or 10.7% of GDP'. In other words, as everyone knows and accepts by now the exchequer is miles off course and the wind of collapsing tax receipts continues to blow the ship north by north west where we are warned of some nasty IMF rocks (although Michael Casey doesn't regard this as the worse thing that could happen).

The Department of Finance acknowledge that the 'principal causes of the dis-improvement in this level of the GGB' includes a further collapse in tax revenue of €2.1 bn

Would anyone in Merrion Street, the ESRI or among academia care to estimate what proportion of this tax shortfall (and rising spending resulting from more unemployment) is a direct consequence of:

pay cuts
collapse in consumer confidence
businesses going to the wall because of lack of credit

How long will the GGB increase or remain at about 12% until the truth emerges? I suspect that some people are thinking to themselves that an international recovery allied to resumed emigration will relieve the pressure and pull us - eventually - out the present impossible bind.

Eventually things will come around - no matter how incompetent and self-defeating fiscal policy is. However, we have choices. If we cut too much and too quickly allied to measures which target low pay and welfare then the recovery will be slower, longer and more painful with pain multiplied for those at the bottom.

A national unemployment emergency should be declared and every initiative, cut or allocation job-proofed. The consequences of a lost generation to unemployment, despair and ill-health are incalculable.

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