Cooking the books

Today has been a tumultuous day on the economic front with public sector pay negotiations concluding, Quinn Insurance going into administration, and, of course, all the banking and NAMA related announcements.

The biggest of these is undoubtedly the latter of the three.  The numbers used in today’s analysis of the Irish banking failure are staggering.  The ‘Big Bang’ was that Anglo Irish Bank will require anything up to an additional €10 billion on top of the €8.3 billion it will receive “this week”.  With €4 billion given to the bank last year this is a total state contribution of €22.3 billion.

Yet, in interviews after today’s statement, the Minister for Finance, Brian Lenihan, said that today’s measures would not lead to any additional borrowing by the National Treasury Management Agency on behalf of the State.

The borrowing projections for the year were outlined in the Budget and are best seen from Table 10 of the Stability Programme Update (page 19).  The actual outturn for 2009 and the projections for 2010 are given below.  The table in the SPU also gives projections for 2011 to 2014 but the European Commission has already rubbished these as being based on overly optimistic growth predictions.  Anyway here’s my version of the table.

Table 10: Projections for the Public Finances
	2009	2010
CURRENT BUDGET
Expenditure
Gross Voted Current Expenditure	55,957	54,940
Non-Voted (Central Fund) Expenditure	4,992	6,932
Gross Current Expenditure	60,949	61,872
less Expenditure Receipts and Balances	15,701	14,748
Net Current Expenditure	45,248	47,123
Receipts
Tax Revenue	33,043	31,050
Non-Tax Revenue	836	2,355
Net Current Revenue	33,879	33,405
CURRENT BUDGET BALANCE	-11,368	-13,718
CAPITAL BUDGET
Expenditure
Gross Voted Capital	6,907	6,445
Non-Voted Expenditure	4,829	825
Payment to the NPRF	3,000	-
Gross Capital Expenditure	15,737	7,270
less Capital Receipts	1,128	536
Net Capital Expenditure	14,609	6,734
Capital Resources	1,464	1,672
CAPITAL BUDGET BALANCE	-13,272	-5,062
EXCHEQUER BALANCE	-24,641	-18,780
GENERAL GOVERNMENT BALANCE	-19,260	-18,720
% of GDP	-11.70%	-11.60%

The key figures for 2010 are Net Current Expenditure of €47.123 billion and Net Current Revenue of €33.405 billion.  Both of these figures, and in particular the revenue prediction are doubtful, but they give a best-case Current Budget Deficit of €13.718 billion.  It is true that today’s banking announcements do not change this.  The Public Service Agreement 2010 - 2014 may do so.

On the capital side the Government have planned for Net Capital Expenditure of €6.734 billion.  With Capital Resources of €1.672 billion this gives a Capital Budget Deficit of €5.062 billion.

Combining the Current and Capital Deficits gives an Exchequer Deficit of €18.780 billion, down from €24.641 billion last year.  This is the money we need to borrow to keep the government operating.  Today’s announcement, we are told, will not lead to any increase in this borrowing, with the NTMA target to raise €20 billion still standing.

With the Current Budget Deficit forecast to deteriorate by at least another €2.5 billion this year, the planned reduction in the Exchequer Deficit of almost €6 billion comes from the Capital Account.
The deficit on the Capital Account is forecast to improve by almost €8 billion this year.  This is driven by two factors.

1. Capital Expenditure in 2009 included a €3 billion contribution to the National Pension Reserve Fund.
2. The 2009 Non-Voted Capital Expenditure figure of €4.8 billion included the €4 billion used to recapitalise Anglo Irish Bank last May.

Budget 2010 did not include a provision for either of these.  We will not be making a contribution to the National Pension Reserve Fund in 2010.
However, in relation to the state-owned Anglo Irish Bank, the Minister for Finance today said that:

“I am providing €8.3 billion this week to support the capital position of the bank to take account of the bank's losses to date…I must point out that the bank will need further capital to cover future losses and accomplish the restructuring of the bank and its balance sheet. The current estimate is that this could be of the order of a further €10 billion.”

If everything else in the government’s projections held, the addition of this one provision will increase the Exchequer Deficit to €27 billion (€18.7 billion + €8.3 billion).  This would mean Exchequer borrowing of 16.7% of GDP this year!
But we are told there will be no additional borrowing and the NTMA target of €20 billion holds. What gives? Cue the Minister again:

“The bank’s capital support is being provided by the State in a way which spreads the cash requirements over an extended period of time. I am injecting the capital this week in the form of a promissory note, payable over a number of years into the future. In essence this means the amount will be paid over a period of 10 to 15 years, thereby reducing the impact on the Exchequer this year and stretching the payments into the future.”

Ah, the bank needs the money now so we’ll give them a ‘promissory note’ (a what?) for the €8.3 billion.  We’ll give them the actual money over 15 years so it doesn’t look bad on the books.  And this to a bank he hopes to partly sell on in five years.

What Minister Lenihan seems to be saying to everyone (including bond markets) is “I know we have a liability because of Anglo. You know we have a liability because of Anglo. Everyone knows we have a liability because of Anglo. But if I keep it off the books with a ‘promissory note’ everything will be appear fine and we’ll definitely look good in comparison to the Greeks.”

With the borrowings to fund the NAMA operation also ‘off balance sheet’ there seems to be little relevance to the officially published government debt figure.  This should rise by €16.8 billion based on today’s measures: €8.5 billion for the money spent by NAMA on rubbish loans and €8.3 billion given to Anglo to recapitalise a rubbish bank.  But our debt figure won’t change one jot.

They may “believe in us” now, but how long will it last?