Moody's were right to keep Irish 'junk' rating.

Nobody should be surprised by Moody's decision to maintain Ireland's Ba1 Junk Rating, which was largely taken on foot of the very vulnerable Irish banking sector.

In a press statement, Moody's said:

The first driver underlying Moody's decision to maintain a negative outlook on Ireland's Ba1 sovereign rating is the country's susceptibility to euro-area-related event risk because of its very high debt levels and ongoing asset quality issues affecting its banking system. Such risks were most recently evidenced by the EU's unprecedented decision to fund Cyprus's financial rescue by imposing a levy on bank deposits above a certain size. The move has significantly heightened fears surrounding the safety of bank deposits in other European systems. 

Although it now appears that the danger of a Cypriot bank-run and further destabilisation of the European banking system appears to have been over-stated, a very real fragility remains in the Eurosystem.

Indeed, nowhere else in the Eurozone is this more apparent than Ireland, whose banking system more closely resembles the Cypriot system than any other member of the bloc.

That is to say, the size of the banking sector in Ireland is 800% of GDP. The current public debt is at about 120% of GDP, so there is no fiscal leeway in the event of a further recapitalisation being required. And no, it is not beyond the realms of possibility that another recapitalisation will be required - Pether Matthews puts this figure at €30 billion.

If that were to be the case, it could pose serious problems for the Irish financial system, since the Government only has about €10 billion remaining in the EU-IMF kitty for use in the banking system. The shortfall would have to come from somewhere, and it would be extremely difficult, if not electorally fatal, to attempt to return to the taxpayer for it.

Although Jeroen Dijsselbloem's comments about Cyprus being a 'template' for future bank recapitalisations went without a great deal of engaged comment in Irish media, it could have stark relevance to deposit holders in Irish retail banks in the event of Matthew's €30 billion figure being accurate.

Critics of my arguably pessimistic attitude will point out that the Irish banking sector has over €80 billion in debt securities, which would rank higher than deposits in the event of a recapitalisation.

In actual fact, Irish law does not give depositors precedence over other senior unsecured liabilities. There would be a far more serious scope for legal challenge than there was in Cyprus's case, where only 1% of liabilities in Cypriot banks consisted of marketable debt.

Furthermore, because the Cypriot banks contained only 1% marketable debt, hitting their debt securities was a pithy gesture with no meaningful resonance. As such, it does not prove that the EU Commission and the Eurogroup have deviated from their heretofore position of unwillingness in burning senior bondholders.

It remains to be seen whether they would not rather to 'spread the pain' by sharing the burden between deposiors and senior bondholders in Ireland who are not covered under the Deposit Guarantee Scheme.

After all, what's another levy?

No evidence of money laundering in Cypriot banks

There is widespread media acceptance that large Russian deposits in Cypriot banks indicate that Cyprus is a haven for Russian money laundering activities.

But how much do the facts support this theory?

Cyprus has been a member of the European Union since 2004 and a member of the Eurozone since 2008. It was admitted to the Eurozone after three successive, detailed evaluations of money laundering were carried out by none other than the Moneyval Committee of the Council of Europe.

The fourth report, in 2011, made findings which are totally at odds with recent media reporting.

This report found that money laundering is indeed criminalised in line with the most widely accepted international standards (FATF). As well as its own anti-money laundering legislation, Cyprus has transposed all relevant EU legislation in this regard.

While it made recommendations for increased diligence in the non-banking sector, the EU report was glowing in its praise for the Cypriot banking system.

According to the Moneyval Committee, there are no secrecy laws governing financial institutions which inhibit the implementations of the international standards against money laundering, unlike, say in Austria or Switzerland.

Furthermore, banks in Cyprus show a high degree of awareness of their responsibilities to combat money laundering, with banks going over and above the record keeping standards set out in law. Banks are prohibited from maintaining anonymous or numbered bank accounts like, again, in Austria or Switzerland.

Indeed, Beneficial ownership of capital is determined by stricter rules than set out in EU legislation.

Overall, the report said, the banking system is adequately monitored and the supervisory authorities are fully resourced to supervise compliance and carry out inspections.

Moreover, the Cypriot anti-money laundering agency, is "adequately performing its role as a key player in the [anti money laundering] system.

But there's more.

Not only are financial institutions in Cyprus compliant working to combat money laundering activities, Moneyval actually judges them to be more compliant than, say, Germany. (click to enlarge)

click to enlarge

The Ministry of Finance in Cyprus puts the difficulty of placing 'dirty money' into the Cypriot economy down to a number of factors. For example, unlike many of its mediterranean neighbours, there are no bureaux de changes or casinos on the island.

As elsewhere, but especially in a Mediterranean resort like Cyprus, the property industry can seem to represent an attractive money laundering proposition. This may be a cause for concern, but it doesn't involve the banking sector, and furthermore Cyprus in quite unique in restricting foreign ownership of property except to EU citizens.

Well that challenges the money laundering allegations, but why is the Cypriot financial services sector so large?

Well, that can be explained by a number of reasons, but its wide network of arrangements with other countries for the avoidance of double-taxation is significant, as is low corporation tax, in fact the lowest in the European Union.
The abolition of offshore status for brass plate companies and its geographic location on the edge of the EU are also attractive.

The financial services industry is important to Cyprus's economy and so their Government's desire to protect it is convincing.

However, whatever the eventual outcome of crisis negotiations with the Troika, one vital piece of reading for EU leaders should be their very own report into money laundering in Cyprus.

Link to report in English

Bank closures represent Cypriot capital controls: but are they legal?

1: LEGAL BACKGROUND

In 1958, the Treaty of Rome established four European freedoms which have remained fundamental principles of the European Single Market. They were freedom of movement for people, freedom of movement for services, freedom of movement for goods, and the freedom of movement of capital.

The freedom of movement of capital within the European Community was fully liberalised in 1990, and together with the provisions of the Treaty of Rome, has evolved into Article 63 of the TFEU.

It states:

1. Within the framework of the provisions set out in this Chapter, all restrictions on the movement of capital between Member States and between Member States and third countries shall be prohibited.
2. Within the framework of the provisions set out in this Chapter, all restrictions on payments between Member States and between Member States and third countries shall be prohibited.

Sound like an unusually broad and sweeping freedom? Yes, of course; there is more.

Article 65.1(b) of the Treaties qualifies this freedom by limiting the free of movement of capital "on grounds of public policy or public security".

So what exactly constitutes a public policy need or public security need? That is difficult to answer, although the article does say that the limit must not be discriminatory to any one individual or group, and it must not merely be disguised as being in the interests of public policy.

We do know from a ruling of the CJEU (European Commission v Italy) that the freedom of movement of capital may simply be restricted by 'over-riding public interest grounds'.

The CJEU expanded on this in European Commission v The Netherlands by noting a condition that the public interest cannot be met by other Community harmonising measures.
While adding that the Member State in question must act with proportionality in mind, the CJEU further stated

...it is in principle for the Member States to decide on the degree of protection which they wish to afford to such legitimate interests and on the way in which that protection is to be achieved. (paragraph 33)

and, significantly,

...the Court acknowledges that the guarantee of a service of general interest, such as universal postal service, may constitute an overriding reason in the general interest capable of justifying an obstacle to the free movement of capital  

2: THE APPLICATION OF EUROPEAN LAW TO CAPITAL CONTROLS IN CYPRUS  

The purpose of the existing capital controls in Cyprus were, initially, to execute a levy on all deposits in the Cypriot financial system, under the terms of a programme agreement between the European authorities, the IMF, and the Cypriot authorities. Under this agreement, Cyprus was required to meet a multi billion euro revenue shortfall via its financial system.

The capital controls first came into place on the 16th of March 2013. After this levy was rejected by the Cypriot Parliament, the capital controls remained in place. As of today, they are anticipated to remain in place until at least the 26th of March 2013. 

In order to determine the present legality of these capital controls under European Law, it is necessary to determine to present justification. 

According to media reports and indications made by Cypriot politicians, the controls exist to prevent a deleterious depletion (or, a 'run') on the reserves of the Cypriot financial institutions until a solution is found to a sovereign funding crisis.

Therefore, in keeping with Article 65.1(b), there is a prima facie urgent public policy need for capital controls. 

Moreover, since this control relates not only to sovereign funding, but the provision of an essential public service in the long term (i.e. an operational banking sector), then the capital controls also appear to satisfy the requirement of protecting a service in the general interest. 

In conclusion, although the capital controls are seriously unpalatable in the short term, it appears unlikely that the limits to the freedom of movement of capital have been met in this instance. 

The only problematic issue for the Cypriot Government may be any further delay of reinstating capital movements leading to a further detrimental impact on the welfare of the Cypriot people, whereby the issue of proportionality will begin to arise. 

Reducing funding for fee-charging schools

In today's opinion piece for The Irish Times ('Cutting State support from fee-paying schools makes no financial sense'), Eoin Murphy T.D. (FG) defends state funding for fee charging schools as a money saving exercise.

Murphy contends that this occurs when the state contributes towards these schools' teacher salaries (which the state would pay for if the schools were in the public system), while parents and alumni contribute the residual funding themselves, thereby saving the state from the latter commitment.

The logical blunder here is an inference that without state funding, fee charging schools would cease to exist, or would revert to the public system in such numbers as to bring about a net liability to the state.
This notion was previously demolished in the McCarthy report.

Colm McCarthy calculated that a disposal of state funding for fee charging schools would require an average increase of 21% in the level of fees charged by schools, phased in over time:

"While this may prove to be an issue for some of the smaller, less viable private schools, which may seek to dispense with fees and transfer to the free education scheme, it is not considered that the level of increase in fees required would result in a significant change in the sector overall." 

Using McCarthy's figures, reform would amount to an increase in fees ranging from about €500 per annum for the cheapest fee charging schools, to an increase of about €2000 per annum for the most expensive school if they chose to maintain the same level of school funding, which they might not. Hefty increases, indeed, but hardly enough to obliterate private education in the state.

In fact, Government proposals thus far only seek to reduce the student:teacher ratio of the fee charging schools. Nevertheless, lets employ impossibly pessimistic estimates.

If the number of schools currently taking in half of the fee allocation to fee charging schools (and likewise saving the state half of the total grant and teacher allocation payments) entered the public system, the state would still be saving about €46 million per annum.

Even if those schools represented 100% of discounts, unpaid fees, and capital loan repayments in the fee charging system, there would be a huge net saving to the state.

Yet it is beyond question that the only schools who are likely to end up in the public system are the smaller, vulnerable institutions who earn the least from private donations, often due to small numbers. The overall savings to the state would be considerably higher than the above €46 million per annum.

Murphy writes that "it is an undeniable fact that sending children to fee paying schools saves the state money".

In doing so, Murphy engages in the same cynical exercise of which the Michael Healy Raes and the Michael Lowrys of this world are most often accused: pandering to a line that is perceived as popular at his parish pump.

There is important. There is a valuable role for fee charging schools in Irish society. But with privilege, there comes responsibility. The responsibility to pay for private education rests with those who directly benefit. As the evidence has shown, that benefit does not accrue to, for example, indigent or near-destitute taxpayers.

It is grossly unfair to add private education to the tax burden of the least wealthy in this society.

The Mobility Transport Grant Part II

The Oireachtas Joint Committee on Public Service Oversight convened again yesterday for a return to the discussion on the abolition of the Mobility Allowance and Motorised Transport Scheme (see earlier post on this topic).

The little information we gleaned from this session was the exact methodology employed by the Department in assessing the numbers likely to avail of the Transport Grant, were it to be brought into line with equality legislation.

Working on Census 2011 information, the Department of Health found there were approximately 595,000 individuals living with a disability in the state.

Of these, the Department found, 20%, approximately 119,000, were in employment.

The Department then divided the total number of disabled people in employment by 50%, apparently to take account of the average industrial wage.
The average industrial wage is general estimate of a cut off point for eligibility, said the Department. That's a pretty arbitrary line to draw, but lets continue.

This provided the Department with a figure of about 59,000 individuals, which, give or take, supplies you with a grand total of about 19,000 claimants per annum, per rolling three year period.

____________________

By now you may have noticed that this figure deals with all disabilities across the spectrum, not just those that impact upon walking ability.

That's correct.

Because the Department of Health have somehow managed to obtain legal advice which has indicated that the Mobility & Transport Schemes must apply across the disability spectrum.

They contend that any attempt to limit payment to those who are physically unable to walk would impugn the Equal Status Act 2000.

So instead of using census data which indicates that only 10,000 (1.6%) of disabled people have difficulty working or attending educational facilities, the Department have been 'forced' to include all 600,000 individuals. Including, apparently, those who would never be in a physical or intellectual position to control a motor vehicle.

Peddling such nonsense is an insult to the disabled community.

By now the Department should no better than to expect them to swallow it.