Davy chief economist Rossa White comments: Government expenditure still has to be tackled - - "In today's Weekly Market Comment, we focus on the huge task that lies ahead in December (see 'Government expenditure still has to be tackled', issued September 14th). The job of restructuring Ireland's public finances has barely begun. Voted current spending is set to reach a record as a share of national income this year. Yet spending cannot be meaningfully reduced without tackling public pay and social welfare: they account for more than 70% of the total. It is time to take the hard decisions.

The argument for cutting public sector pay is compelling. The average pay premium for those with equivalent occupation, experience and education in the public sector over the private sector is between 25% and 76%. Cutting pay by 10% would save about €2bn. At the same time, the public perception is that no sector of society has received a fiscal boost in 2009. But the social welfare bill was indexed by 3% in October's Budget, and taking into account consumer prices, the real increase in support payments is 7%. A 5% cut is more than justified as prices have not yet stopped falling.

Taxes have already been hiked substantially, harming the competitiveness of existing firms, deterring entrepreneurship and reducing the country's attractiveness as an investment location. In the upcoming Budget, we think that tax rises should be limited to €750m. We cannot afford to cut capital spending any further: ideally the planned cuts for 2010 should be reversed. Current spending must make up the difference. The 2010 fiscal consolidation announced in April should be re-shaped, by doubling planned cuts in current spending from €1.5bn to €3bn. If pay and social welfare were reduced by 5%, the balance of just over €1bn could be found from the near €4.5bn in non-social-welfare reductions outlined in the McCarthy report."

Goodbody chief economist Dermot O’Leary comments: Economic View; NAMA crunch time - - "It’s a year to the day that Lehman Brothers collapsed, triggering a chain of events that took the global financial system to the precipice. Domestically, the increased financial turmoil forced the Irish Government into the bank guarantee to fend off the prospect of collapse of the banking system here. One year on from that seminal event, this week is likely to be the most important yet for the domestic banking system. With the number-crunching complete, Minister Brian Lenihan is expected to announce the details of the amount of bonds to be issued to pay for the transfer of loans from the banks to NAMA. After all the speculation (see banking piece below for the latest), we should know the all-important haircut and the amount of equity injection the banks require this week.

We learned from the Department of Finance on Friday though that the Minister will also outline the future for the Irish banking sector, with details likely to emerge on what is becoming known as the “third banking force”, comprising some of the smaller lenders that will compete with the two larger institutions. There are still potential political roadblocks in the way of NAMA becoming fully operational, but with constrained credit supply continuing to impact negatively on the Irish economy, most can agree on the eventual goal of fixing this problem. We commended the decision of the Irish Government to introduce the temporary bank guarantee last September, as we thought it was vital. This was not the full solution. Although it has taken a full twelve months to get to this stage, NAMA provides the best possible chance of returning the banking system to stability."

Goodbody's Eamonn Hughes commemnts: Irish Financials; Welcome to NAMA week - -"If you are sick of all the NAMA commentary, don’t worry, there’s only a few more days to go. The second draft of the legislation was published last week, to which the main addition was the proposed legislation around a risk sharing mechanism, whereby the banks will get a large proportion of the payment in NAMA bonds, but receive an element in subordinated bonds to enable NAMA to suspend certain payments to the banks in the event of a loss. Also, specific lending supply measures are being looked into by government.

So, on Wednesday, probably after the market close, the Minister for Finance will finally set out the broad parameters around NAMA that we have all been waiting for. It appears that an overall haircut will be announced, rather than by institution, with the figure net of any provisions taken to date. From what we understand, there will be little in relation to capital levels in the banks, but there will be information in broad terms about what the future is for each institution involved. We are also assuming that the government is willing to accept a core equity ratio of 4% at the bottom of the cycle, although we note press comments that the Government and the Central Bank were meeting over the weekend to decide how much capital the banks will need to hold post NAMA. The commentary is expected to incorporate some perspective on the mortgage banks as well, with most speculation recently on a merger of IL&P’s bank (ptsb), EBS and Irish Nationwide. We note some commentary at the end of last week that HBOS Ireland is also trying to get in on the act there as well.

We are assuming gross haircuts of 20% and 17% at AIB and BOI respectively, which net of provisions already taken, sees the figures drop to 13%. On the release of the first draft of the NAMA bill, the government indicated that the previously guided €85-90bn level of loans going into NAMA was still applicable. However, there has been much debate in recent weeks on potential cut-offs of smaller loans, including commentary in today’s papers (Irish Independent) that development loans less than €5m won’t be going in, which will reduce the NAMA figure from €90bn to €80bn. However, it would be our view that this process may only defer likely losses on these loans until further out, thereby not impacting our end FY11 TNAVs. Press commentary this morning indicates that up to €60bn could be issued in NAMA bonds (Irish Times) which (if the smaller loan cut-off holds) would imply a haircut of c25% (though the paper presents this as closer to a haircut of one-third). As an aide memoir, we estimate that every five percentage points on the haircut drives a higher capital requirement of c€1bn for AIB and c€800m for BOI. Based on our existing core assumptions, we are forecasting an end FY11 TNAV of €3.66 for AIB and €1.44 for BOI (though investors will note we have €1.8bn higher credit losses for BOI than company guidance over the 3 years to end FY11)."