Irish authorities contested Eurostat ruling on AIB

Irish officials strongly disputed a ruling by the EU statistical agency which led to a bigger 2015 deficit than foreseen by the Government, it has emerged.

In private exchanges with Eurostat, the Central Statistics Office questioned the logic and consistency of the ruling by the agency that a preference share conversion in the nationalised AIB should be classified as a government expenditure. The transaction, in December, yielded a €1.6 billion dividend for the State.

Although the CSO has not written formally to Eurostat about it, its “surprise” was conveyed at a series of meetings and teleconferences on Ireland’s annual return of financial data to the EU authorities.

A separate Eurostat decision in 2015, which compelled the Government to account for Irish Water’s liabilities on the State balance sheet, led the CSO to take issue in writing with the agency.

The Government did not expect Eurostat’s ruling on AIB, as previous arrangements had led officials to work on the basis the conversion would be classified as a financial transaction. Such a designation would have lowered the recorded deficit, a key barometer for the condition of the public finances in the eyes of financial markets.

Instead, the ruling took the recorded deficit above the level projected by the Government. The 2015 deficit – 2.3 per cent of GDP – was 1 percentage point higher than the Government anticipated, but still in line with an EU requirement for a deficit below 3 per cent of GDP.

However, there was concern in Government circles that Eurostat’s determination could have led to a breach of that target if other favourable developments did not lower the underlying deficit.

Ultimate disposal

After a 3.8 per cent of GDP deficit in 2014, the 2015 deficit was pushed lower by surging tax returns and economic growth.

In response to questions from The Irish Times, the CSO said it sought to apply the "same logic" to the preference share conversion as was applied to earlier share and dividend transactions in AIB.

“In this context, and taking account of the preference share conversion as being a first step towards an ultimate disposal of the State’s shareholding in AIB, the CSO viewed the conversion as a financial transaction: the conversion of one form of financial asset to another,” it said.

“However, during the clarification process Eurostat advised CSO that they regarded the conversion as a different case to previous decisions and that these could not be regarded as a precedent for assessing the current transaction.”

Clarifications take place routinely when annual statistical submissions are in preparation for the EU authorities.

Capital injection

Eurostat determined that €2.11 billion of the amount of the conversion of the AIB preference shares to ordinary shares should be recorded as a capital injection (expenditure).

“This was based on their views of AIB losses incurred since the last capital injection was made in 2012 and of the uncertainty of a return on the investment when compared to the guaranteed return on the preference shares previously held,” said the CSO.

“They advised CSO that this was in line with decisions taken in relation to similar transactions in other states.”

In March 2014, the CSO had reviewed the classification of the 2013 dividend paid to the State by AIB in ordinary shares. The proposal then was that the transaction should be treated as an acquisition of equity in AIB and not as a capital injection.

That proposal was based on a review of AIB’s 2013 accounts and updated financial projections for 2014-2016.

“By 2014 it was clear that the out-turns recorded for AIB indicated that no additional losses, other than originally projected, had been incurred since the time of these injections, but that on the contrary the position both in terms of profit/loss and in shareholder equity could be observed to have improved.”