Friday, September 30, 2011

Is Ryanair's latest move so bad?

Ryanair and its boss, the charming Michael O'Leary (left), are hardly ever out of the news. Recently its their debit and credit card charges that have been in the news.

I posted about about ways to avoid Ryanair's card charges but it seems the goalposts have moved and now you can only avoid the £6 each way charge (per passenger) by using a Ryanair prepaid debit card.

These have to be charged up prior to use and there is a monthly £2 charge on them if they are not used. Well worth getting though if you book Ryanair a lot like me. The full story if you missed it is here:

Much of the press was negative focusing on the £2 charge and the fact that everyone who got one of the cards that previously avoided the charge is now left high and dry. One article talked about "fury" and another "hefty" fees.

But is this fair? Lots of other sites and not just airlines charge fees for card use and by getting this free card you can avoid them on The monthly charge can easily be avoided by occasional use and they are free to load up with money.

I ordered one and it was all very straightforward except that ironically enough there was a hidden "card purchase fee" of £6 added to the bill.

There is a strong antipathy toward the airline. The internet is full of "hate ryanair" groups and "ryanair evil" blogs. I liked the Facebook group where someone was so incensed they said "they should have all of their planes' tires slashed". Slightly odd thing to hope for.

I have had my run ins with them but they have done more than anyone else to make air travel cheap and their money-making schemes often work in the customers' favour - like online check in. Give them a break?

Sunday, September 18, 2011

Stimulus is the problem not the solution

As the world's main economies slow, and in some cases grind to a halt, the calls for governments and Central Banks to stimulate their economies are growing louder and they are starting to respond.

With interest rates already on the floor (in the West at least) and public finances dangerously stretched, it is not clear how governments and central banks can provide much of a lift. But even if they could, isn't it time we accepted that there are limitations to what fiscal and monetary stimulus can achieve?

The idea is very simple: extra government spending, tax cuts, lower mortgage rates and quantitative easing (money printing) all are supposed to create fresh demand in the economy and set off second round effects as companies hire and invest to meet the new demand.

But if that's the cure, why are the patients who have been prescribed it (many times) still stuck in hospital with doctors anxiously looking at the graphs zigzagging downwards at the end of their beds?

Never has a "solution" been tried and failed so often as stimulus. Just looking at the American experience alone we have had, and it's worth listing them, multiple attempts to pep up the economy during the last two decades:

1993 : response to the recession that followed the Gulf War oil price spike
1997: response to the Asian currency crisis
1998: monetary easing following Russian crisis and consequent LTCM hedge fund collapse
1999: open market operations to inject liquidity ahead of anticipated Y2K bug problems
2001-3: Fed funds rate cut multiple times to 1%
2001: Economic Growth Act - Bush tax cuts
2001 (end): Fed injects $100bn of credit post 9/11
2007/8: Fed funds rate cut to effectively 0%
2008: Bush stimulus package
2008/9: QE $1.1tn
2009: Obama stimulus
2010/11: QE2 $600bn
2011: Operation Twist and 2 year guarantee on Fed funds rate
2011: American Jobs Act 447bn stimulus package

Every one of these policies was expressly designed to stimulate the economy and was reported (uncritically for the most part) in the press as a "boost" or as "aid". And every one had a future price in terms of higher debts, either public or private.

After all that boosting the economy should be soaring but as we all know the US, Japan, Europe and the UK are stuck in the mire with massive debts, barely any growth, shockingly high unemployment and banks teetering on the brink.

I will write next time on why I think stimulus does more harm than good but will sign off with some stats from the crisis before this one: going back to 2002 after the dot com bust. The year the Fed stoked up a consumer credit binge and private sector credit grew at an annual rate of $695 billion. A massive debt increase that sowed the seeds of the next downturn and under which the US is still languishing. And what did that buy? GDP growth of $110 billion. Every $6 debt produced a measly $1 of growth. The debts are still with us but the growth long gone.

moral hazard

Zapatero's parting shot at the rich

At the end of last month I posted about the possibility of Spain's socialist government reintroducing the wealth tax ("Spain targets the rich"). At the time the move was just "under discussion" and some press reports categorically stated that it wouldn't happen. But unfortunately those reports were wrong and it is on the way back, with big implications for property owners.
The Zapatero government announced the return of the wealth tax on Friday. It's a tax on assets including property, investments, cash, cars etc completely separate and on top of income tax. Fortunately the government has reintroduced the extra tax with a big threshold (700,000€) that make it payable mainly by the very rich only. In addition there is a 300,000€ allowance versus your own home. The rate will be 0,2-0,25%.

As my original post showed the main losers could be foreigners who own holiday homes in Spain. They already pay, or should do, non residents income tax (see our article Spanish taxes for non residents) and this could double or treble that liability. When the wealth tax previously was levied in Spain (2007) non residents could not claim exemptions or allowances and paid quite heavily. We will have to wait for the details this time.

The policy looks similar to Gordon Brown's 50% tax rate. There is an election due this November and the Zapatero government may simply be playing a political game. They know that the opposition PP will hate this tax and indeed some regions governed by the PP have said that they will not collect the tax. But like Brown, Zapatero will know that sympathy for the rich is in short supply and that PP's opposition to the tax will simply make them look like a party for the wealthy.

Sunday, September 11, 2011

Can a tax cut breathe life into the Spanish property market?

An emergency meeting of Spanish government ministers announced a cut in the rate of IVA (Spanish VAT) on new build houses from 8% to 4%. The tax had only been raised from 7% thirteen months ago. The abrupt change of policy is aimed at reviving the housing market.

Something certainly needs to be done if Spain is to start to grow its economy. Before the crash the construction sector accounted for more than 15% of economic output; now it seems to be dead on its feet. Recent figures showed Spanish construction activity fell 43% in the year to June, a steeper fall than anywhere else in Europe. Will the tax cut help?

The idea is that this will help banks and property developers offload a lot of the new build properties that have lain empty since the housing crash hit hard in 2008. Estimates vary but their could be up to a million empty and unsold units weighing down on the whole market. New building will remain depressed until the backlog is at least partly cleared.

4% is a chunky reduction - around €5-8,000 off the purchase price for an average property. The reduction is temporary - just until the end of the current year - which may have the effect of bringing forward some activity and creating some momentum.

But there are doubts - transfer tax on existing home sales remains at 7-8% (depending on the area). Furthermore house prices still appear high in relation to incomes; "stratospherically" so according to one economist who produced a graph showing that average prices are more than 6 times annual average incomes in Spain; much higher than the UK and US: Spanish house prices still high

Banks don't have much of an incentive to shift properties while they hold them on their books at cost; selling them at current market prices would crystalise their losses and actually make their balance sheets look worse.

The tax cut may be helpful to those with property deals in the pipeline but don't expect it to trigger a wider revival in the Spanish property market.

Related on our website:

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