Dear Deputy,
I am writing to you about proposals to dispose of ESB, and also Aer Lingus. In particular, I would like to argue that any sale of these assets should not include the electricity grid or foreign landing slots in the ownership of these companies.
Firstly, the electricity grid: the current proposal is for the grid to be sold along with ESB, with Eirgrid retaining the contract to run the grid. For 2 reasons this seems a bad idea to me. Firstly, the ownership of the grid should not be in the hands of a private company. The problems this creates in regard to long term investment decisions and the maintenance of competition seem insurmountable. Secondly, and perhaps more importantly, if the grid is sold in this manner, with Eirgrid operating it, we will almost certainly fail to achieve the true value of the grid. What investor, when buying the ESB, will be prepared to pay full price for an electricity grid they cannot even operate? Clearly, to sell the grid bundled with the ESB is to doom us to accept a price below real value. If we are absolutely determined to sell a share of the grid (which I hope is not the case), then we should at least transfer it to Eirgrid first and then sell a minority stake in Eirgrid along with the grid. Noone will be interested in buying the asset without the right to operate it. This is a daft plan.
Secondly, the landing slots owned by Aer Lingus really are the envy of many nations. These slots have been accumulated because the State identified early on the importance of air travel to an island nation with a tourist industry. These considerations remain valid today, and we must safeguard our connections provided by these slots. To me, the slots should never have been sold along with the airline. Rather they should have been retained in a holding company under state control and made available to airlines flying routes into Ireland. I do not have faith in the contractual burdens that the Minister proposes to put on the slots as a reliable safeguard of our flight connections. Rather, before the sell-off of the remainder of Aer Lingus, I would like to see the State embark on a "sale-and-leaseback" arrangement with Aer Lingus to resecure these slots into State ownership. This will be expensive, but the subsequent sale will pay for it and our enviable flight connections will be truly secured. Otherwise, I guarantee you, in a few years some cleverclogs will find a way to sell these slots to the Oil Sheikhs or the Chinese -or some other country with lots of new money and poor flight connections. I know we will regret any sale of these slots. We are relatively overserved with flight connections in comparison to other similar sized countries, and perhaps take this advantage for granted.
Finally, I'd also add that while the private sector does well at managing staff, using fixed assets and addressing costs -it is not good at everything. For instance, the State is far superior to the private sector at capital investment, largely because in normal times it has concessionary lending rates (and presumably we will do sometime again) and also because it has the luxury of looking at long term benefit rather than simple, immediate cashflow problems. Therefore in all state asset disposals, we should aim to dispose as much as possible with those bodies which deal with large numbers of staff, are responsible for delivering services etc., and avoid disposing of assets which are perfectly well run in State ownership and can be used to serve strategic national aims. Legal title to the Grid and ownership of the landing slots are perfect examples of critical national infrastructure which can be leveraged to national ends, can be invested in cheaply by the State and which have small staffing and management requirements. They are better run under public ownership.
sincerely
Ger
Wednesday, October 12, 2011
Wednesday, October 5, 2011
Plan A is a sham
Since my previous entry (Final Fantasy), it has become something of an orthodoxy that the problem is not confined to just the periphery Eurozone, and in fact all countries (US included) must now start making real efforts to balance their books.
But the problems with the official line go deeper than this. Our current plan, is for the Eurozone countries to collectively borrow money and lend it to the weakest countries (Greece, ireland and Portugal), while structural and fiscal reforms take place. A classic international bailout -Plan A. This was always going to be a difficult plan that needed commitment in word and deed from both the net borrowers and the net lenders. However, it has received little from either. Now, with the downgrade of Italy's credit rating, it is no longer a viable plan.
The great kerfuffle last week at Germany's approval of the 2nd Greek bailout package misses the point completely. That Germany has agreed, at the 11th hour, to supporting Greece is no longer a useful decision. While the Germans (and others too it must be said) dithered and protested at Plan A, Italy's credit rating was downgraded, and now she is rapidly losing access to the markets. It now seems unlikely (although this reality has yet to hit home) that the Italians are going to be able to fund their portion of the 2nd Greek bailout. As a large country, their contribution is indispensible to the success of Plan A. But realistically, the idea that Italy is going to borrow money at 8%+ and then lend it to Greece at 3% while trying to reign in their own deficit is a fairy tale.
It now seems that Plan A is unworkable, it just hasn't sunken in yet. Plan B is going to be more chaotic. It could take the form of countries exiting the currency union (harmful to banks, diplomacy), a global bailout of indebted eurozone countries (unlikely), common borrowing (politically unpopular and diplomatically undesirable) or more robust action from the European institutions to support the currency.
Personally, I think Quantitative Easing is the way to go. This has been anathema to the Eurozone until now because of cultural issues about inflation -but inflation is the very thing we need. Inflation punishes money hoarders, relieves the indebted, forces the wealthy to invest/spend. It is the principle tool FDR used to lift America out of Depression and it is IMO the best solution to our current problems. If the Euro-area inflation rate was artificially boosted to around 4-5%, we would quickly see convergence between the core and the periphery. We would also see a lift in economic activity as money hoarders would be forced to spend or invest. Finally, it would deleverage the economy, relieving the indebted, the banks and even the sovereigns. Quantitative easing has the added advantage of also providing a large amount of cash as ready ammunition for the central bank to use to fight financial fires for a few years.
It will be 3 years next week since I advocated the use of inflation to fight the financial crisis. The UK and the US have followed my advice and recovered from what were far worse starting positions than Europe. However, paralysed by cultural sensitivities, Europe has refused to take its medicine. But now, the alternatives have become so terrible that I feel sure our next step (Plan B) will be Quantitative easing and inflation. Once we get on with it, we will start to wonder why we made such a fuss about it in the first place and caused so much hardship to Europeans. Stupidity, I believe.
But the problems with the official line go deeper than this. Our current plan, is for the Eurozone countries to collectively borrow money and lend it to the weakest countries (Greece, ireland and Portugal), while structural and fiscal reforms take place. A classic international bailout -Plan A. This was always going to be a difficult plan that needed commitment in word and deed from both the net borrowers and the net lenders. However, it has received little from either. Now, with the downgrade of Italy's credit rating, it is no longer a viable plan.
The great kerfuffle last week at Germany's approval of the 2nd Greek bailout package misses the point completely. That Germany has agreed, at the 11th hour, to supporting Greece is no longer a useful decision. While the Germans (and others too it must be said) dithered and protested at Plan A, Italy's credit rating was downgraded, and now she is rapidly losing access to the markets. It now seems unlikely (although this reality has yet to hit home) that the Italians are going to be able to fund their portion of the 2nd Greek bailout. As a large country, their contribution is indispensible to the success of Plan A. But realistically, the idea that Italy is going to borrow money at 8%+ and then lend it to Greece at 3% while trying to reign in their own deficit is a fairy tale.
It now seems that Plan A is unworkable, it just hasn't sunken in yet. Plan B is going to be more chaotic. It could take the form of countries exiting the currency union (harmful to banks, diplomacy), a global bailout of indebted eurozone countries (unlikely), common borrowing (politically unpopular and diplomatically undesirable) or more robust action from the European institutions to support the currency.
Personally, I think Quantitative Easing is the way to go. This has been anathema to the Eurozone until now because of cultural issues about inflation -but inflation is the very thing we need. Inflation punishes money hoarders, relieves the indebted, forces the wealthy to invest/spend. It is the principle tool FDR used to lift America out of Depression and it is IMO the best solution to our current problems. If the Euro-area inflation rate was artificially boosted to around 4-5%, we would quickly see convergence between the core and the periphery. We would also see a lift in economic activity as money hoarders would be forced to spend or invest. Finally, it would deleverage the economy, relieving the indebted, the banks and even the sovereigns. Quantitative easing has the added advantage of also providing a large amount of cash as ready ammunition for the central bank to use to fight financial fires for a few years.
It will be 3 years next week since I advocated the use of inflation to fight the financial crisis. The UK and the US have followed my advice and recovered from what were far worse starting positions than Europe. However, paralysed by cultural sensitivities, Europe has refused to take its medicine. But now, the alternatives have become so terrible that I feel sure our next step (Plan B) will be Quantitative easing and inflation. Once we get on with it, we will start to wonder why we made such a fuss about it in the first place and caused so much hardship to Europeans. Stupidity, I believe.
Thursday, September 15, 2011
Letter to the Minister for Energy Re: Sale of ESB
Dear Pat,
I am writing to you about the ownership of the electricity grid and the sale of ESB. In particular I am urging decoupling of the grid from the ESB prior to any sale of the state utility.
Firstly, the creation of a competitive electricity market in Ireland is incomplete. ESB remains a dominant player, and its ownership of the grid allows it to influence investment decisions that effect the whole market. Our principle aim must be to create a competitive industry where other smaller companies get a fair crack of the whip. A large dominant player is neither economically sensible nor fair to the smaller competitors. Consumers, including employers, suffer from the resultant high electricity prices.
Secondly, I am extremely concerned that we will not gain the full value of the transmission grid in any sale if it is bundled with the ESB. Because the grid is operated by Eirgrid, it is therefore not an attractive investment for private investors. No sensible investor wants to pay full price for an asset they will not be allowed to operate. By selling the grid with ESB, I believe we are doomed to accept a price that is substantially below the true value of the grid. It can only be sold for full price if Eirgrid is sold along with the grid (although I definitely do no advocate this).
Therefore, both to improve competition and to safeguard the value of State assets, I urge you to decouple the grid from the ESB prior to any sale of the ESB.
I am writing to you about the ownership of the electricity grid and the sale of ESB. In particular I am urging decoupling of the grid from the ESB prior to any sale of the state utility.
Firstly, the creation of a competitive electricity market in Ireland is incomplete. ESB remains a dominant player, and its ownership of the grid allows it to influence investment decisions that effect the whole market. Our principle aim must be to create a competitive industry where other smaller companies get a fair crack of the whip. A large dominant player is neither economically sensible nor fair to the smaller competitors. Consumers, including employers, suffer from the resultant high electricity prices.
Secondly, I am extremely concerned that we will not gain the full value of the transmission grid in any sale if it is bundled with the ESB. Because the grid is operated by Eirgrid, it is therefore not an attractive investment for private investors. No sensible investor wants to pay full price for an asset they will not be allowed to operate. By selling the grid with ESB, I believe we are doomed to accept a price that is substantially below the true value of the grid. It can only be sold for full price if Eirgrid is sold along with the grid (although I definitely do no advocate this).
Therefore, both to improve competition and to safeguard the value of State assets, I urge you to decouple the grid from the ESB prior to any sale of the ESB.
Letter to the Minister for Transport
Dear Leo
I am writing to you about the proposed sell-off of the remainder of Aer Lingus. In particular I am writing to emphasise the critical importance of retaining effective State control over the landing slots currently in Aer Lingus' posession.
In my view, the part-privatisation of Aer Lingus with its slots was a mistake. The slots should have been removed from the company (decoupled) prior to the part-sale of the airline. We now face a difficulty in selling off the remainder of the company without endangering these vital assets of national importance.
Unlike the review group on State Assets, I do not believe we should trust blindly to the market to deliver high quality flight connections to Ireland. Indeed, our flight connections are currently the envy of other countries, primarily because, as an island state, we identified the crucial value of air travel at any early stage and developed it aggressively over the last century. If the market alone had dictated our flight connections we would have far fewer and far less high quality connections than at present. But as an industry of national importance we have actively collected high quality flight connections.
I read that it is the Department's intention to insert clauses into the sale of the State's shares to safeguard the landing slots. However, clauses such as this are ripe for failure: companies are liquidated, dismembered, they surrender assets -there are myriad ways in which such clauses can lose their effect.
Rather, I urge you, prior to any sale of Aer Lingus, to devise a "Sale-and-leaseback" agreement with Aer Lingus so that the state can regain ownership of the slots. Such an agreement will not be cheap, but it will be more than paid for by the subsequent sale and is the only way to guarantee our control over the foreign landing slots that successive governments have gathered. Frankly, they are vital to tourism, business and our globally integrated economy and their worth to the country far exceeds their market worth to the airline.
Otherwise, I guarantee you that the chinese or the oil sheikhs, or some such investor, with lots of money and poor flight connections will snap them up and deprive us of these vital assets. Countries that are less well endowed with flight connections, are better placed to appreciate their true worth. We have become complacent when we think we can simply sell our principle connections to the outside world.
I am writing to you about the proposed sell-off of the remainder of Aer Lingus. In particular I am writing to emphasise the critical importance of retaining effective State control over the landing slots currently in Aer Lingus' posession.
In my view, the part-privatisation of Aer Lingus with its slots was a mistake. The slots should have been removed from the company (decoupled) prior to the part-sale of the airline. We now face a difficulty in selling off the remainder of the company without endangering these vital assets of national importance.
Unlike the review group on State Assets, I do not believe we should trust blindly to the market to deliver high quality flight connections to Ireland. Indeed, our flight connections are currently the envy of other countries, primarily because, as an island state, we identified the crucial value of air travel at any early stage and developed it aggressively over the last century. If the market alone had dictated our flight connections we would have far fewer and far less high quality connections than at present. But as an industry of national importance we have actively collected high quality flight connections.
I read that it is the Department's intention to insert clauses into the sale of the State's shares to safeguard the landing slots. However, clauses such as this are ripe for failure: companies are liquidated, dismembered, they surrender assets -there are myriad ways in which such clauses can lose their effect.
Rather, I urge you, prior to any sale of Aer Lingus, to devise a "Sale-and-leaseback" agreement with Aer Lingus so that the state can regain ownership of the slots. Such an agreement will not be cheap, but it will be more than paid for by the subsequent sale and is the only way to guarantee our control over the foreign landing slots that successive governments have gathered. Frankly, they are vital to tourism, business and our globally integrated economy and their worth to the country far exceeds their market worth to the airline.
Otherwise, I guarantee you that the chinese or the oil sheikhs, or some such investor, with lots of money and poor flight connections will snap them up and deprive us of these vital assets. Countries that are less well endowed with flight connections, are better placed to appreciate their true worth. We have become complacent when we think we can simply sell our principle connections to the outside world.
Friday, August 12, 2011
the Bull will eventually leave the China shop
"In any set of data, the fact that is most undoubtedly true, beyond all need of measurement, is the mistake".
It has been a truism for over a decade now that the Asian tigers (especially China) are on the rise and the old Western powers are in decline. Certainly there is more than ample empirical evidence for this. China's growth rates have outstripped the West's by a multiple, they have industrialised vast areas and vast numbers of their population. They have made some (though not very impressive) advances on moving up the economic value chain, they have gained new technologies by means fair or foul (depending on who you listen to). The list is endless, but the narrative is the same -China vigorous, West sclerotic. The evidence seems to be overwhelming.
Yet it does not feel right. There are a limited number of doubters of this hypotheses (Chris Patten and Will Hutton for starters), but they are held out as rather fringe views. Nonetheless, there are questions to be answered about financial lending practices, poorly developed financial systems, political stability, income inequality, a credit boom and above all -demographic projections. The customary response to any such query usually takes the line that China is different, that it has a track record of defying Western maxims and that it is simply not possible to assess China by the same criteria as other countries.
It does not ring true.
In recent weeks there have been (very muted) articles warning about a high inflation rate, exposure to Western sovereign crises, the imminent peaking of the demographic dividend, the Chinese Government's unhappy choice between curbing inflation or killing growth etc.. Though it seems unlikely that these are the harbingers of a full-blown economic/political upheaval in China, nonetheless, it does not seem possible that the People's Republic can continue to defy gravity indefinitely.
Indeed I would go further than this. In my view, demographic input to China's development is being dramatically underestimated (ditto for Ireland during the Celtic Tiger years). Much of their growth story can be attributed to their (now reversing) demographics, a transitory benefit that will soon be militating against them. Besides demographics, a chronically loose monetary policy (which includes lending targets for banks and massive export subsidies in the form of currency manipulation) has supercharged the economy -but this too can only be a transitory advantage. Indeed the Chinese financial bubble might have burst long ago if it did not have the demographic trend underpinning it all along.
China, like Ireland has had very favourable demographics and a loose monetary policy which delivered consistently high, but ultimately illusory growth rates. Ireland came back to earth with a bump, but is too small to really damage the global economy. However, needless to say that an Irish style recession in China would really make waves in the global economy.
I feel sure that such a reverse is coming. If it came now while Western powers were still sorting out the financial crisis, then it would really put the tin hat on this recession. But regardless of when it happens, it will be a huge upheaval.
It has been a truism for over a decade now that the Asian tigers (especially China) are on the rise and the old Western powers are in decline. Certainly there is more than ample empirical evidence for this. China's growth rates have outstripped the West's by a multiple, they have industrialised vast areas and vast numbers of their population. They have made some (though not very impressive) advances on moving up the economic value chain, they have gained new technologies by means fair or foul (depending on who you listen to). The list is endless, but the narrative is the same -China vigorous, West sclerotic. The evidence seems to be overwhelming.
Yet it does not feel right. There are a limited number of doubters of this hypotheses (Chris Patten and Will Hutton for starters), but they are held out as rather fringe views. Nonetheless, there are questions to be answered about financial lending practices, poorly developed financial systems, political stability, income inequality, a credit boom and above all -demographic projections. The customary response to any such query usually takes the line that China is different, that it has a track record of defying Western maxims and that it is simply not possible to assess China by the same criteria as other countries.
It does not ring true.
In recent weeks there have been (very muted) articles warning about a high inflation rate, exposure to Western sovereign crises, the imminent peaking of the demographic dividend, the Chinese Government's unhappy choice between curbing inflation or killing growth etc.. Though it seems unlikely that these are the harbingers of a full-blown economic/political upheaval in China, nonetheless, it does not seem possible that the People's Republic can continue to defy gravity indefinitely.
Indeed I would go further than this. In my view, demographic input to China's development is being dramatically underestimated (ditto for Ireland during the Celtic Tiger years). Much of their growth story can be attributed to their (now reversing) demographics, a transitory benefit that will soon be militating against them. Besides demographics, a chronically loose monetary policy (which includes lending targets for banks and massive export subsidies in the form of currency manipulation) has supercharged the economy -but this too can only be a transitory advantage. Indeed the Chinese financial bubble might have burst long ago if it did not have the demographic trend underpinning it all along.
China, like Ireland has had very favourable demographics and a loose monetary policy which delivered consistently high, but ultimately illusory growth rates. Ireland came back to earth with a bump, but is too small to really damage the global economy. However, needless to say that an Irish style recession in China would really make waves in the global economy.
I feel sure that such a reverse is coming. If it came now while Western powers were still sorting out the financial crisis, then it would really put the tin hat on this recession. But regardless of when it happens, it will be a huge upheaval.
Final Fantasy
As bad as our self-imposed national economic disaster has been, nevertheless Ireland deserves credit for having acted. The sheer size of our banking losses meant that Ireland has been unable to hide from the truth that is still only emerging across the rest of the OECD countries -that cheap borrowing and living on credit will not be an option for many years to come.
Ireland and the Baltic countries are virtually alone in having made serious fiscal and household adjustments in recent years. Portugal and Britain have also started on this road but have yet to deliver significant results. However, the other developed countries, notably the United States, Japan and much of continental Europe seem to still be in denial about the paradigm shift that has occurred. While the PIIGS have been in the headlines, in reality lenders will soon be casting a sceptical eye on all State borrowings and from now on, balanced budgets and declining debt profiles will have to be the order of the day -like it or not.
The truth is that all countries need to move quickly to a fiscally secure footing, and only those with the most extreme situations (such as Greece) can receive help in achieving this.
Far from requiring a European response, this crisis requires much more widespread austerity -which falls mainly in the domain of domestic, even houshold policy. All of our European policy interventions to date have been aimed at staving off these uncomfortable but inevitable national tasks. The very stability of the Euro has been called into doubt over the manouevring of leaders to delay austerity. Nonetheless we will eventually have to face up to our deficits and the control over the process we still retain could evaporate at any moment. The crisis calls for much more concerted actions by all States to correct their budgets for next year. That is the fundamental truth of the sovereign part of this crisis, all the complexity that has been heaped on top of that is simply detail.
In these circumstances, a "double-dip" recession seems inevitable (despite what Mr Buffett says). We have been living beyond our means and no wizardry will substitute for what must come next -working harder for less.
Ireland and the Baltic countries are virtually alone in having made serious fiscal and household adjustments in recent years. Portugal and Britain have also started on this road but have yet to deliver significant results. However, the other developed countries, notably the United States, Japan and much of continental Europe seem to still be in denial about the paradigm shift that has occurred. While the PIIGS have been in the headlines, in reality lenders will soon be casting a sceptical eye on all State borrowings and from now on, balanced budgets and declining debt profiles will have to be the order of the day -like it or not.
The truth is that all countries need to move quickly to a fiscally secure footing, and only those with the most extreme situations (such as Greece) can receive help in achieving this.
Far from requiring a European response, this crisis requires much more widespread austerity -which falls mainly in the domain of domestic, even houshold policy. All of our European policy interventions to date have been aimed at staving off these uncomfortable but inevitable national tasks. The very stability of the Euro has been called into doubt over the manouevring of leaders to delay austerity. Nonetheless we will eventually have to face up to our deficits and the control over the process we still retain could evaporate at any moment. The crisis calls for much more concerted actions by all States to correct their budgets for next year. That is the fundamental truth of the sovereign part of this crisis, all the complexity that has been heaped on top of that is simply detail.
In these circumstances, a "double-dip" recession seems inevitable (despite what Mr Buffett says). We have been living beyond our means and no wizardry will substitute for what must come next -working harder for less.
Saturday, July 30, 2011
The land of the free
Without getting into the specifics of the US debt ceiling crisis, this is an appalling state of affairs from two perspectives.
Firstly, ideological differences about big government versus small government, though important and worth debating -should never be allowed to get in the way of balancing budgets. Regardless of whether you think the State should do a lot, or do a little, it seems obvious that it must pay its way. Day-to-day expenses should not be paid for by borrowing.
Unlike Ireland, where a bank and budget implosion has caused us to borrow heavily in recent years, the Americans seem to simply be indecisive. They want the State to pay for things, but they don't want to pay the state for doing them. Whatever economic efficiencies may be achieved from tweaking the model of economic governance in the US, they will not compensate the state for having to borrow on the markets to fund a lifestyle deficit.
Personally, I think it is outrageous that the richest people in America can get away with contributing so little, but whether or not the books are to be balanced by cuts or taxes is unimportant beside the crucial task of balancing them.
Secondly, the divisions over this philosophical issue are not only crippling the US' ability to balance its books, but in recent weeks it has been shown, that both sides of this absurdly overheated discussion are willing to bring the country to the brink (seemingly beyond the brink) of chaos simply to win the argument. This is not about economics. Economics is about tweaking governance to try and achieve the greatest prosperity. This artificial crisis, has been created to serve bitter political ends without regard to the economic consequences.
Watching this completely reckless argument, one can't help but feel the decline of America, and recognise that it is (mostly) self-imposed. Friends of the United States must watch on in acute embarassment at this abject failure to complete one of the most basic tasks of any democracy -to agree a budget. You would be aghast to see this in the most turbulent banana republic, but in democracy's greatest champion it's unthinkable.
The state's services must be paid for; when they named it the land of the free, they did not mean there's no charge.
Firstly, ideological differences about big government versus small government, though important and worth debating -should never be allowed to get in the way of balancing budgets. Regardless of whether you think the State should do a lot, or do a little, it seems obvious that it must pay its way. Day-to-day expenses should not be paid for by borrowing.
Unlike Ireland, where a bank and budget implosion has caused us to borrow heavily in recent years, the Americans seem to simply be indecisive. They want the State to pay for things, but they don't want to pay the state for doing them. Whatever economic efficiencies may be achieved from tweaking the model of economic governance in the US, they will not compensate the state for having to borrow on the markets to fund a lifestyle deficit.
Personally, I think it is outrageous that the richest people in America can get away with contributing so little, but whether or not the books are to be balanced by cuts or taxes is unimportant beside the crucial task of balancing them.
Secondly, the divisions over this philosophical issue are not only crippling the US' ability to balance its books, but in recent weeks it has been shown, that both sides of this absurdly overheated discussion are willing to bring the country to the brink (seemingly beyond the brink) of chaos simply to win the argument. This is not about economics. Economics is about tweaking governance to try and achieve the greatest prosperity. This artificial crisis, has been created to serve bitter political ends without regard to the economic consequences.
Watching this completely reckless argument, one can't help but feel the decline of America, and recognise that it is (mostly) self-imposed. Friends of the United States must watch on in acute embarassment at this abject failure to complete one of the most basic tasks of any democracy -to agree a budget. You would be aghast to see this in the most turbulent banana republic, but in democracy's greatest champion it's unthinkable.
The state's services must be paid for; when they named it the land of the free, they did not mean there's no charge.
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