There a couple of breaking stories concerning a report by the IMF about what needs to happen in Ireland (see Press Association here and Reuters here).  This is actually a report about structural reform and governance across the Euro area and includes recommendations for every country, principally about kick-starting growth through comprehensive labour and service market reforms.  The report then does not specifically focus on Ireland and actually only gives very broad brush policy suggestions.  These are:

Raise employment to avoid persistence of current high unemployment rate:

  • Introduce gradual decrease of benefits over time of unemployment spell and stricter job search requirements
  • Provide more resources to the unemployment agencies (FÁS) to provide efficient job search assistance to the growing number of unemployed
  • Review the level of minimum wage to make it consistent with the general fall in wages

Improve competitiveness to promote exports as a sustainable source of growth:

  • Reform planning and licensing systems in network industries, so as to increase competition in sheltered services sectors
  • Focus public resources on high-priority projects in the knowledge-based economy

The report does not deal with the specific parameters of these suggestions, which are not really a surprise.   The report does, however, give a general framing of the IMF view.  For example, the following statement re. taxation and benefits very much favours harmonization across the Euro area: “Improving access to the labor market should be high on the priority list everywhere—including through some harmonization of key features of the labor market, which will help deal with intra-euro area imbalances. Differences in labor taxation, unemployment benefit systems, and employment protection will need to be reduced. Improving regulation and reforming taxes and social benefits will be essential to make inroads.”  It does not mention corporation tax specifically, but one imagines it is not off the agenda.

As for the broader kinds of structural reforms needed in Ireland and elsewhere, the following heatmap from the report gives some indications of where the IMF see the gaps.

IMF structural reform gaps in European economies

The report then gives some indication of the broader IMF view re. the Euro area, but we’ll probably have to wait a little while before they flesh out their specific recommendations with respect to Ireland.

Rob Kitchin

No surprises, to be honest, but leading International Monetary Fund (IMF) officials are heaping pressure on Ireland to take tough and dramatic action to sort out the economic mess we’re in. Thus, asked about Ireland’s fate in a Press Briefing on the World Economic Outlook, Olivier Blanchard, Economic Counsellor and Director of the IMF Research Department, said, “there is really no choice than [for Ireland] to do fairly dramatic things”. He continued by saying that markets are “demanding a downpayment” and that the IMF supports “the tough fiscal consolidation measures that the government is taking.”

There’s already been some pretty tough and dramatic action taken by the Irish government, not least trying to transfer private debts onto the citizenry as a whole; and then there are the various cutbacks, some of which have been pretty vicious, and many others that have blatantly targeted those who really should not be paying for this crisis. So what else does the IMF have in mind? Public sector pay cuts must be on the agenda. And if the Irish government isn’t thinking about it, there should be no question that the IMF is.

Alistair Fraser

Another guest post from Iceland, this time from Huginn Freyr Þorsteinsson.

In the early days of the present financial crisis Iceland became one of the poster children for the crash that seemed inevitable. Some commentators thought Iceland’s problems were an indicator for what would soon be the fate of other countries that had prospered in the days of the economic boom. The question was posed in early January 2009: “What’s the difference between Ireland and Iceland? – One letter and about 6-months!”

The question was valid. Although Ireland did not expand its banking system nearly as much as Iceland did the situation in Ireland was serious enough. Both countries had followed neo-liberal policies in trying to lure investors to the country with deregulation, lowering of taxes and privatization. For this the two respected countries got lauded by neo-liberal economists who stated that the proof was in the pudding – economic growth was staggering in both cases. But what is the situation now one year has gone by since the above question was posed?

I think it is fair to say that the doomsday scenarios put forward in October 2008 for Iceland have not materialized. Also that predictions for other countries such as the Baltic States, Ukraine, Ireland, Spain, Italy and Greece turned out to be wrong because they were too optimistic. The status of these countries is now catching the international media headlines whilst Iceland has somewhat gone out of the spotlight and news that Iceland’s economic contraction was smaller then envisaged, unemployment figures lower, less capital needed to put into the resurrected banks and a huge turnover from a massive trade deficit to trade surplus has not surfaced.

Three major differences separate Ireland and Iceland. One is that we do not have the Euro which is extremely helpful when we need to rely on exports and a trade surplus. The Icelandic krona gives way whilst the crisis in Ireland has little or no impact on the Euro. Once an expensive place of travel, Iceland is now actually a relatively cheap destination, helping the tourist industry staying strong despite diminishing tourism around the world. The same goes for the export industry which benefits greatly from a weakened krona as it gets more kronas for the products exported.

The second difference is that Ireland went for an all-out bank bailout whilst Iceland took deposits and matching important assets (loans to individuals and Icelandic companies etc.) and put it into new banks whilst letting the old banks go into administration. This manoeuvre was implemented through emergency legislation in October 2008 in order to protect the Icelandic economy from collapsing along with its gigantic banks (their size was 8-10 times Iceland’s GDP at the time of collapse). This means that the sovereign did not try to stand behind the big banks but used the opportunity to heavily trim them down which in turn has made Iceland’s external debt many times lower than it was in the months before the crash.

The third difference is the future unforeseen impact of pensions on the tax payers’ money. One thing we do know is that the future number of pensioners in Europe will be considerably higher than today and more money is needed to fund pension schemes. When it comes to calculating the government debt or obligations of the state such numbers are left out but it is quite evident that many states will struggle with meeting pension obligations. Iceland has a well funded pension system and as seen on the picture below will be well off in meeting these demands and will probably not have to rely on tax payer money.

Pension fund assets growing in relation to the size of the economy (OECD Pensions and Markets 2008)

The ratio of OECD pension fund assets to OECD GDP increased from 70.7% in 2005 to 72.5% of GDP in 2006. The largest asset-to-GDP ratio was Iceland’s, at 132.7%.

However, Iceland has become very indebted because of the need to take loans to support its currency, restore the banks, resurrect the Central Bank (which went bankrupt), reimburse depositors in the UK and the Netherlands for the Icesave accounts and tackle a massive government deficit. At the moment the Icelandic government is working with the IMF and the Nordic countries in order to get the economy back on track and hasten the recovery. The IMF is working in close collaboration with a left-wing majority government whose finance minister, Mr. Steingrímur J. Sigfússon, comes from the Left-green Movement. The situation for the IMF is probably quite unique as they are dealing with a crisis that is a result of radical neo-liberal policies as opposed to lack thereof. Traditionally the IMF has thought such policies were medicine for failed economies but now the case is the opposite.

The uniqueness of the Icelandic case might be seen in how multi-dimensional it is. It is a bank crisis, a debt crisis (households and companies), a currency crisis and a tainted reputation. But as events unfold in the world economy Iceland’s difficulties seem to be less and less unique. Other countries seem to be catching up quickly and even possibly have already left us behind.

Huginn Freyr Þorsteinsson is adjunct professor at the University of Akureyri.

The Irish Times reported two interesting stories on Saturday which both raise questions about NAMA.

The first story concerned the re-valuation of two development sites.  The first site in Athlone, Westmeath, valued at €31m in 2006 has just been re-valued at €0.6m (a drop of 98%).  The second site in Sallins, Kildare valued at €17.5m at the market’s peak is now valued at €4m (a drop of 73%), holding up a little better in value one presumes because of its proximity to Dublin and its siting on a commuter rail line.  As we’ve posted previously, these drops in valuation are not exceptions.  City centre prime sites such as the 24.9 acre Irish Bottle Plant site in Ringsend bought for €412m in 2006 is, according to the Dublin Docklands Development Authority (DDDA), presently worth €50m (a drop of 87%), while its Long Term Economic Value (LTEV) is €62.5m.  The national average price paid for farmland in 2009 was €9,678 per acre, a drop of 43.3 per cent on the average price of €17,081 per acre in 2008 (and this was on top of a drop in 2008).  It therefore seems likely that both zoned and serviced development land and unzoned land in Ireland has dropped substantially in value, probably somewhere between 70-98% depending on the site and the original amount paid.  36% of NAMA’s portfolio is land, with loans worth €27.8b attached to them, and it is likely that a proportion of the ‘development loans’ category (28%, €21.8b) also consists of development land.  67% of NAMA portfolio relates to land and property in Ireland, and although we do not have details of the geographic location of all NAMA land holdings it is probably a fair bet that 67% or more of it resides in Ireland.

The value of land destined for management by NAMA then is likely to be far below the 30% ‘haircut’ the government has proposed to pay.  It is difficult to see how a profit, one of the aims of NAMA, could be made with respect to land holdings over its proposed life span unless a 70-90% haircut is applied to the original loan valuation.  It is also hard to believe that prices will rise back up to anywhere near 2005/06 prices any time soon given the grossly inflated prices paid for land at the peak of the market and the present supply of zoned land.  As Sinead Kelly has posted on IAN, land values spiralled upwards in Ireland in the early 2000s, jumping in value from just under €10,000 per hectare in 1998 to over €58,400 per hectare in 2006 (see Figure 1), making Irish land the most expensive in Europe, nearly twice the cost per hectare of any other European country and 3 times greater for all but 4 countries (Spain, N. Ireland, Luxembourg, Netherlands) (see Figure 2).  According to the DEHLG housing stats, in June 2008 there were 14,191 hectares of zoned, serviced housing land in the state that could accommodate 462,709 additional housing units (to put that in perspective, the number of households grew according to the Census by 342,221 between 1996 and 2006), and this doesn’t include other kinds of zoned land.  Which brings us on to the second story.

Figure 1: Irish Land Values 1973-2006 (€ per hectare)

Figure 2: European Land Values by Country (€ per hectare)

The second story concerned the Waterford County Draft Development Plan which went on display on Friday and proposes to rezone 70-90 percent of the 800 hectares zoned in the previous plan, bringing it into line with changed circumstances, projected population growth and national and regional planning guidelines.  According the Irish Times, one of the maps shows ‘large tracts of land, acquired in recent years by developers at astronomical prices, reverting to agricultural use.’  Such rezoning makes a lot of sense and Waterford should be commended for taking the lead, but it also raises a number of questions.  Why was the zoning in the previous plan so excessive (and likewise in other counties)?  Will such rezoning occur in other counties as they formulate their draft development plans?  How much of the rezoned land is projected to be moved into the NAMA portfolio and what are the implications of any rezoning for its projected value?  Will there be political pressure to make sure that it is NAMA land that is kept zoned to maintain some kind of value above agricultural prices?  Clearly the answers to the latter questions will have an impact on the valuations attached to NAMA managed land and need to be factored into any calculation of present and future valuation.

As these two stories illustrate, there are good reasons as to why people are concerned about NAMA and whether it will be able to fulfil its remit.  Already the IMF has noted that it is unlikely that NAMA will get credit moving in the Irish economy.  If the valuations of land and property are wildly inaccurate, and the ‘haircut’ paid by the government is in excess of the true value, then NAMA could be a very expensive exercise that the Irish tax payer will shoulder for years to come.  One can hope that government knows what it is doing, and maybe they can reassure on all the questions above, but one can’t help being worried pending such reassurance.

Rob Kitchin