Saturday 21 September 2019

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

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 €60b. Photo: Bloomberg
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 €60b. Photo: Bloomberg
Brendan Keenan

Brendan Keenan

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.

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