Sunday, 18 December 2011

Footnote my Foot, and Other Matters

Article published on 18 December 2011
in The Malta Independent on Sunday

In my last contribution two weeks ago, I asked various questions about Enemalta’s financial sustainability. As expected, my questions were ignored by whoever has the responsibility to provide the information and the transparency demanded. The dire conclusion is that the information demanded is too bitter to enter the public domain and our caring authorities stay mum to protect us, fearing that we lesser mortals cannot handle the truth.

Still, some information leaks through different channels and the Report by the Auditor General on the Public Accounts 2010 published this week shed some information on Enemalta’s poisonous habit of borrowing commercially to finance its operations and capex against government guarantees and letters of comfort.

Enemalta’s borrowings covered by such government guarantees and letters of comfort increased during 2010 by €131 million, reaching a mind boggling figure of €580 million at the end of 2010.

This represents the bulk of the overall increase amounting to €143 million in the total of such loans which at the end of last year totalled €1037 million of which 56 per cent relate to the above-mentioned exposure of Enemalta.

The increase in Enemalta’s borrowings during 2010 amount to 2.13per cent of the GDP, so the reported 2010 government deficit of 3.6 per cent of the GDP should in reality be written up to at least 5.73 per cent to include Enemalta’s borrowing. The reported debt to GDP ratio of 69 per cent should increase by at least 9.4 per cent to 78.4 per cent of the GDP if Enemalta’s debt is added to the national debt.

Why is Enemalta’s debt not captured by EU’s statistics as forming part of the national debt, as is done in the case of the debts of other publicly owned corporations like for example The Foundation for Tomorrow’s Schools or the Housing Authority?

This is a statistical quirk in that Enemalta is considered a commercial enterprise generating its own revenues and should in theory be able to service and pay back its own debts. Theory and practice however live on different planets. Enemalta is a financial mess, has not made a profit for many years and the only way Enemalta could be profitable is if it raises further its utility rates to levels which are clearly unsustainable, politically and socially. Enemalta will never be able to repay these loans from its own cash flows and, as happened in the case of the shipyards, the government will eventually have to honour its guarantees and the contingent obligations will eventually become real hard cash payments of taxpayers’ money.

The Auditor General makes the following footnote to the government’s guarantees obligations:

“The above EUR 1,036,945,249 Letters of Comfort and Bank Guarantees may translate into dues by Government should the Companies call upon Government to make good for their debts.”

Footnote my foot! This should be headlines. Mr Auditor General, you have the responsibility to form an opinion and inform us about the likelihood of these contingent obligations turning into real claims. We are not talking peanuts here. We are talking about commitments amounting to 17 per cent of the GDP. And we are seeing some financial manoeuvring which demands elucidation.

In the bad old days, Enemalta used to subsidise its electricity generation losses by profits from its petroleum division. In the modern hi-tech days government taxes away the surplus from petroleum through excise duty and VAT, which thus become normal revenue in the Consolidated Fund (Budget), but the losses on electricity division and capex are financed by guaranteed bank loans. This is financial foolery that postpones reality but does not avoid it. Instead of a posterity fund our children will inherit debts for their posterity.

* * *

Gozo Bishop Mario Grech is concerned about the increasing demand for childcare facilities by young mothers who wish to proceed with their career. Presumably, the Bishop finds socially objectionable the EU funded campaign for family work sharing responsibilities to ensure that married women can return to work as quickly as possible after motherhood so that society does not lose the benefit from the investment made in their education.

Let’s just say that Bishop Grech belongs to the age when families used to work in their fields and used to make children by the dozen, the more the better for more help to till the soil.

* * *

The EU summit was yet again another unworkable fudge.

The more I read about it the more I am convinced that Chancellor Merkel and the Germans in general are abusing their economic power by forcing the whole of Europe to become German. What’s wrong with that, one may ask, if the whole Europe could be as economically strong as Germany?

What’s wrong is that it is just utopia. Germany is economically strong because locked in a monetary union at a very competitive exchange rate compared to their efficient export machine, the things which are depressing the peripheral countries who enjoyed the joie de vivre in very typical non-German way of life, are the very same things that are pushing the German economy forward in an artificial unsustainable manner.

The scope of a fiscal union could be validated if all countries in the fiscal union were to start from a level platform. But countries are starting from extremely disparate situations and fiscal union cannot work unless all existent debt is pooled and becomes everyone’s responsibility through refinancing of Eurobonds. But the Germans don’t want that. Their Constitution would not even allow it.

The Germans want to continue enjoying the gains and want to shift all the pain on the countries already in distress.

This won’t work. Sooner rather than later, countries undergoing round after round of austerity in an attempt to create internal devaluation as a route to recover their competitiveness, will find it hard to stay the course. Technical governments by their nature have limited longevity and it is not in the interest of democracy for such technical governments to become a permanent fixture. Democracy will, in the end, have to be a bottom up exercise and, as turkeys never vote for Christmas, democracy will, in the end, elect demagogues who promise to challenge Brussels (read the Germans) rather than force more bitter medicine down the throat of electorates already finding it hard to keep a roof over their head and put food on their family table.

We cannot solve the crisis unless the solution contains a high dose of economic growth that will make the adjustment process more bearable. And the only countries with financial capacity to generate growth are Germany and its peers who can still borrow on the markets at absurdly cheap rates even for long-term money. Unless Germany loosens its fiscal screws to create external demand for countries on the periphery as they undergo tough austerity adjustment crushing their domestic demand, Europe will simply stall and fall into a crushing depression.

And what exactly has our government agreed to regarding the grand plan for a fiscal union? I am all in favour of more effective discipline to ensure that Euro members’ borrowings stay within the agreed parameters. Experience has shown that there is substantial implied joint obligation regarding the debts of individual member states. So it is fair that once implicitly responsible borrowings are approved by a central authority a priori.

However, if we are agreeing to a fiscal union which restricts how we tax and spend, not just on how and how much we borrow, then we would be committing political suicide and I would rather we join Cameron than Merkel.

* * *

I wish you all a peaceful Christmas. Don’t forget that many recession-crushed citizens in Europe will not be having a merry Christmas unless they go all philosophical and appreciate that the best things in life are free.


  1. If it were up to Bishop Mario Grech we will be Iran in the Med. The Bishop Grech will be our Mullah.

    Please leave Talibanism aside and get nto the 21st century

  2. Much as I hate to admit it, I can see no solution to our electrical generation problems (leaving aside some magical powerstation running on coal and olive stones!!)other than a further stiff hike of electrical tariffs.