Wednesday, April 23, 2014

23/4/2014: Some scary reading from the Eurostat...

Eurostat published full comparatives on key fiscal performance indicators across the EU and euro area for 2013. Here are three summary tables comparing euro 'periphery' states against each other and the EU18. You can click on images to enlarge:

First data summary:

Second: Ireland's share of the mess:

Third: Ireland's position within the 'periphery':

And key takeaways are:

  1. In 2013, after years of austerity and pain, Irish Government deficit (7.2% of GDP) was the second worst in the euro 'periphery' group.
  2. By relative comparative to EA18 (33% and 50% over EA18 levels), Ireland ranks worse than Italy, Cyprus and Portugal, and Spain (we have more 'red'/'green' cells).
  3. In cumulative terms, 2010-2013 years were brutal to Ireland: we posted worst cumulated Government Deficits over this period and 2nd worst increases in Government debt.

Note: data is taken from

Tuesday, April 22, 2014

22/4/2014: On Irish Taxes, Quangos, Trade and other recent links

Some interesting links from recent media reports:

  1. Apparently, completely unpredictably, unexpectedly, shockingly abruptly etc etc etc... but Ireland-based MNCs are allegedly concerned with the OECD (aka G7-G20 prompted, EU-supported) efforts to reforms international tax systems to close off the more egregious loopholes in corporate taxation: Now, with the IBEC, DofF, and everyone else in irish Officialdom repeatedly declaring that our tax regime is above the water and thus not in the firing line, one must wonder just why are these companies concerned with the OECD moves?
  2. On a related note, I just posted a new paper I wrote for the Cayman Financial Review on the above topic - see link here:
  3. Unrelated to taxation issues, but related to fiscal policies of the Irish state, a note from the Irish Times on Government's heroic struggle with one electoral objective they set before 2011 GE: the objective of rationalising the massive spread of quangoes in Irish public policy ecosystem: Core facts pointed out in the article are: The Government promised to abolish 100-145 quangoes right before it came to power in Q1 2011. Three years later, 45 have been either abolished or planned for abolition, of which only 20 are likely to be completely shut by the next GE in Q1 2016 net of new created. To-date, only 28 bodies have been abolished, 17 more are set to be culled in the remaining tenure. And 33 new agencies have been created or planned for creation. Net impact: of 732 quangoes in existence in mid-2012, we are likely to have 720 quangoes in existence in mid-2016. 
  4. Now, recall that we are being repeatedly told that life outside the Euro for Ireland means kissing good bye our wonderful exporting capabilities. Here is a chart showing current account balance for Ireland and Germany (two star performers in the euro area in terms of trade) as contrasted by Denmark (a non-euro country that should be suffering from the trade deprivation due to its absence from the euro club). It turns out Denmark consistently outperforms Ireland in terms of current account surplus... So next time one of the Government parties' candidates start talking about Ireland's alleged benefits from the euro membership, do suggest they should take a trip to Denmark...
  5. An absolutely brilliant short summary of Economics as a field of inquiry in 297 words by Professor Thomas Sargent It is superb.
  6. On artsy side of things, a stunning and powerfully original statement from China for Milan Expo 2015: 
  7. A set of excellent, insightful essays and articles on Ukrainian crisis or more significantly - on Russia's position vis-a-vis the West: and and

Saturday, April 19, 2014

19/4/2014: FT coverage of Anglo verdicts

Here's FT article covering Anglo Irish Bank trial verdicts with comments from myself, Stephen Kinsella and Michael Clifford:

19/4/2014: Everything is Awesome When You Part of the (Fed) Team

Fed's Balancesheet then and now:


And "Everything is Awesome!"

19/4/2014: If Only Forecasts Were Falling Ripe from Trees...

Here we go, folks… ESRI's latest thoughts on Irish economy... and they are earth-shattering.

Let's take a few pointers from the wise:

1) "Ireland could face a debilitating period of stagnation – characterised by high unemployment, falling prices and low growth – if recovery in Europe falters".

"Could"?! 2013 marked a year of contracting GDP and total demand. We now have six consecutive years of falling total demand (sum of domestic investment and spending by consumers and government). Unemployment is already sky-high, long term unemployment is a hinge problem. Prices are not quite falling, but growing at near-zero rate, and stripping out State controlled sectors, goods and services (something ESRI misses on every occasion, like a clock)we have deflation. So all of this "could" happen?

2) "…Prof Fitzgerald said deleveraging by households could continue for “some considerable time” if recovery stalled in the rest of the EU, resulting in a return to stagnation in Ireland."

Can someone explain to me why would deleveraging of the households (repayment of massive debts accumulated during the Celtic Garfield years) suddenly end if "the rest of the EU" were to post robust growth? Is it possible that growth in Germany will start paying Irish mortgages down? Or consumer demand in France picking up can moderate the size of our credit cards bills? How?

Irish exporting sectors employ a small fraction of our households. Irish exports are geared not toward wages payments, but MNCs profits. Pick up in our exports is unlikely to drive household earnings up (easing debt/income ratios or repayment funds available to households - two conditions necessary for new credit creation) in short or medium term.

3) But wait, according to the ESRI, the core threats to the economy are not debt, but the EU growth and housing markets (more specifically: excess demand in the property markets in Dublin and Cork that are at a risk of not being satisfied in poor credit conditions). So in the nutshell, ESRI thinks that if we start building more houses and Germans start buying more BMWs, our economic growth will take off like a rocket.

Confusing symptoms for causes, ESRI is worried about the Japanese scenario for Ireland. But let's take a look at plausibility of the ESRI logic:

  • Japan is a fully sovereign economy with own monetary and fiscal policies (both of which Ireland lacks)
  • Large population and domestic demand (which Ireland lacks)
  • Indigenous (as opposed to tax-maximising MNCs) exports 
  • Set smack in the middle of the most dynamic growth cluster in the world (Asia Pacific) as opposed to the growth-shy Europe (remember, a pick up in growth in the euro area implies annual growth of 2-2.2 percent; a pick up of growth in Asia Pacific means annual growth of 5-7 percent). 
The real problem with Japan's economy is actually pretty similar to that of Ireland's:

  • pre-1960s Japan's growth was driven by a period of post-WW2 rebuilding, 
  • between 1960s and 1980 it was driven by the rapid catching up with the advanced economies, 
  • thereafter until 1990s - by a massive property and credit bubble. 
  • So stagnation, property crash and low inflation/deflation were not the causes of the malaise in Japan, but its symptoms. The real malaise for Japan is identical to the one we have in Ireland - lack of catalyst for future growth. 
  • In Japan this problem is exacerbated by adverse demographics. In Ireland - by lack of monetary and fiscal policies room. Ireland is 2 decades behind Japan in household and corporate and banking deleveraging. 

So go figure: can growth in the EU and housing supply improvements in Ireland do enough for Dublin?

Ok, take it from a different angle: 1991-2007 marked massive growth around the world. Japan stagnated. 1991-2007 marked massive monetary and fiscal expansion in Japan. Japan stagnated. 1991-2007 marked significant deleveraging of Japanese economy. Japan stagnated. That is 18 years of stagnation and deflation under the global conditions more favourable than Ireland faces today, with full economic policies kit available to Japan, not available to Ireland, and with indigenous exporting engine much mightier than that of Ireland.

Is ESRI having a clue? Of course it does. It can clearly see that once things get really good, things will be really good: "Conversely, Prof FitzGerald believes if the euro zone recovery picks up pace this year and in 2015, and is accompanied by an increase in domestic demand, Ireland could see a more rapid reduction in the numbers unemployed and a return of the public finances to a small surplus over the period 2017-2019."

Ah, now we talking. And if we discover a pot of gold and a chest of diamonds at the end of that proverbial rainbow, just to the North of the fabled riches of oil, gas, uranium, rare earth metals, and Bord Bia certified caviar... then we can afford pensions for the ESRI boffins too. 

Friday, April 18, 2014

18/4/2014: Ukraine's Trade Flows in One Inforgraphic

Via Bloomberg - a neat summary of Ukraine's external bilateral trade flows:

Which, of course, shows just how feeble are all the claims about the 'replaceability' of Russian markets for Ukrainian economy. When you take out the Customs Union's total flows of USD 15.71 billion, the entire EU trade flows (for top 20 countries) amount to USD 10.99 billion and these include revenues earned from transit of Russian gas and resales of Russian gas, oil and petrochemical products too. So yes, yes, y.e.s... folks - Russia is obviously a problem for Ukraine's economy and Brussels is obviously a solution... unless you dust out a calculator and tally things up...

Thursday, April 17, 2014

17/4/2014: Gabriel Garcí­a Márquez, in his own words...

We have lost one of the greatest writers of all times, Gabriel Garcí­a Márquez. Here are the quotes from his books... the ones never to be exceeded in their genius anymore...

“He was still too young to know that the heart's memory eliminates the bad and magnifies the good, and that thanks to this artifice we manage to endure the burden of the past.”
Love in the Time of Cholera

“Before reaching the final line, however, he had already understood that he would never leave that room, for it was foreseen that the city of mirrors (or mirages) would be wiped out by the wind and exiled from the memory of men at the precise moment when Aureliano Babilonia would finish deciphering the parchments, and that everything written on them was unrepeatable since time immemorial and forever more, because races condemned to one hundred years of solitude did not have a second opportunity on earth.”
One Hundred Years of Solitude

“Just as real events are forgotten, some that never were can be in our memories as if they happened.”
Memories of My Melancholy Whores

“This was when she asked him whether it was true that love conquered all, as the songs said. 'It is true', he replied, 'but you would do well not to believe it.”
Of Love and Other Demons

“But he could not renounce his infinite capacity for illusion at the very moment he needed it most... he saw fireflies where there were none.”
The General in His Labyrinth

“An old man with no destiny with our never knowing who he was, or what he was like, or even if he was only a figment of the imagination, a comic tyrant who never knew where the reverse side was and where the right of this life which we loved with an insatiable passion that you never dared even to imagine out of the fear of knowing what we knew only too well that it was arduous and ephemeral but there wasn't any other, general, because we knew who we were while he was left never knowing it forever with the soft whistle of his rupture of a dead old man cut off at the roots by the slash of death, flying through the dark sound of the last frozen leaves of his autumn toward the homeland of shadows of the truth of oblivion, clinging to his fear of the rotting cloth of death's hooded cassock and alien to the clamor of the frantic crowds who took to the streets singing hymns of joy at the jubilant news of his death and alien forevermore to the music of liberation and the rockets of jubilation and the bells of glory that announced to the world the good news that the uncountable time of eternity had come to an end.”
The Autumn of the Patriarch

“The mayor informed General Petronio San Roman of the episode, down to the last literal phrase, in an alarming telegram. General San Roman must have followed his son's wishes to the letter, because he didn't come for him, but sent his wife with their daughters and two other older women who seemed to be her sisters. They came on a cargo boat, locked in mourning up to their necks because of Bayardo San Roman's misfortunes, and with their hair hanging loose in grief. Before stepping onto land, they took off their shoes and went barefoot through the streets up to the hilltop in the burning dust of noon, pulling out strands of hair by the roots and wailing loudly with such high-pitched shrieks that they seemed to be shouts of joy. I watched them pass from Magdalena Oliver's balcony, and I remember thinking that distress like theirs could only be put on in order to hide other, greater shames.”
Chronicle of a Death Foretold

“Everyone will have gone then except us, because we're tied to this soil by a roomful of trunks where the household goods and clothing of grandparents are kept, and the canopies that my parenrs' horses used when they came to Macondo, fleeing from the war. We've been sown into this soil by the memory of the remote dead whose bones can no longer be found twenty fathoms under the earth. The trunks have been in the room ever since the last days of the war; and they'll be there this afternoon when we come back from the burial, if that final wind hasn't passed, the one that will sweep away Macondo, its bedrooms full of lizards and its silent people devastated by memories.”
Leaf Storm and Other Stories

"The men opened Maruja’s door and another two opened Beatriz’s. The fifth shot the driver in the head through the glass, and the silencer made it sound no louder than a sigh. Then he opened the door, pulled him out, and shot him three more times as he lay on the ground. It was another man’s destiny: Angel Maria Roa had been Maruja’s driver for only three days, and for the first time he was displaying his new dignity with the dark suit, starched shirt, and black tie worn by the chauffeurs who drove government ministers. His predecessor, who had retired the week before, had been the government agency’s regular driver for ten years."
News Of A Kidnapping

"Life is not what one lived, but what one remembers and how one remembers it in order to recount it."
Living To Tell The Tale

“A lost bird appeared in the court and was half an hour jumping around between the spikenard. It sang a progressive note, rising an octave at a time, until it became so acute that it was necessary to imagine it.”
In Evil Hour

"He who awaits much can expect little."
No One Writes to the Colonel

And for the parting one:

“He really had been through death, but he had returned because he could not bear the solitude.”
One Hundred Years of Solitude

And for the starting one:

"Many years later, as he faced the firing squad, General Aureliano Buendia was to remember that distant afternoon when his father took him to discover ice."
One Hundred Years of Solitude

RIP, Gabriel Garcia Marquez

17/4/2014: Toothless Shark? EU's Banking Union

EU has been pushing hard on the road toward the Banking Union (BU) with recent weeks seeing completion of the agreement and vote in the EU Parliament on SRM and other aspects of the BU (see: But beyond the facade of all this activity, there is a nagging question of the BU's structural effectiveness. This question is yet to penetrate the thick sculls of investors seemingly obsessed with new issuance of debt and equity by the European banks.

The latest BU shape is much improved on the previous versions: gone are national discretions and in is a new streamlined process with ECB and EU Commission in the driving seat. SRM got an efficiency push with new deadline for completion of funding pushed to 8 years from previous 10 years. The fund will be 60 percent mutualised by the end of year two of its operations. Which further reduces potential for national authorities picking at it while bickering with the EU regulators and supervisors. The SRF will have access to ESM while the funds are being accumulated. And the new version cuts the time required to deploy the Single Resolution Mechanism and the Single Resolution Fund, should the banks run into systemic tight spot. All good.

The bad bits are, however, still there.

  1. The SRF is still only EUR55 billion at maximum capacity. Which is peanuts for a systemic crisis, give euro area banking system has EUR30.5 trillion worth of assets (which means that SRF can cover just 0.18 percent of the euro area assets).
  2. There is no defined mechanism by which banks will be contributing to SRF. Will banks be liable on the basis of their deposits base? If so, the BU will be a de facto mechanism for rewarding less deposits-rich banks and penalising banks that are funded using greater share of deposits. Not a good idea, since alternative to deposits is… err… interbank markets. And a bad idea, because deposits-rich banks are in the euro area's core and in particular - Germany. Alternatively, contributions to SRF can be based on assets. In which case, French, Spanish and peripheral banks are crunched. 
  3. There is little in terms of SRF / SRM promise of breaking the contingent liabilities spilling from the systemic crisis in banking sector onto sovereigns. The only way of doing so is to reduce the rate of crisis spread and probability of crisis becoming systemic. 

The break between taxpayers and banks can only be achieved by creating a highly competitive system of diversified, smaller and better capitalised banks (see:

Step one would be to hike minimum leverage ratio (core capital to total assets) to the US standard. Currently we have 3% standard in the EU ( and in the US the ratio is set at minimum 5% for eight biggest bank-holding companies and 6% for the rest of the banking system ( Given weakness of euro area SRF (pre-funded and capped) compared to FDIC (pre-funded and backed by a stand by loan from the Treasury of USD30 billion, plus a further US Government guarantee to cover any excess obligations) and the heavier reliance of the European system on bank lending, this means leverage ratios of close to 6.5-7% or more than double current minimum.

Step two would be to test the banking system to identify larger banks that will require splitting up and smaller banks that will require capital raising. This will have to be facilitated by forcing new deleveraging targets and supporting equity issuance and forcing mergers in some cases.

Step three will be removing implicit and explicit barriers to new banks entry into European markets and actively promoting emergence and development of alternative banking institutions.

17/4/2014: Savings and Income in Ireland: ILCU new survey data

New survey from the ILCU on income and savings conditions for Irish households shows:

  • 1,696,000 people in Ireland have EUR100 or less left at the end of each month once the bills and taxes are paid, up 32,000 on December 2013 figure.
  • Total population of Ireland aged 15 and older is estimated by the CSO to be 3,585,400, which means that a whooping 47% of people are living on incomes with basically zero risk cushion when it comes to covering normal expenses and with no means for securing retirement savings.
  • 1,154,000 live on income that delivers only EUR50 or less at the end of the month for payments and consumption over and above the necessities and number that is up 56,000 on December 2013.
  • On improvement side, 470,000 people are left with zero disposable income after paying their normal bills - a drop of 10,000 on December 2013 survey.
  • Another improvement is that people are increasing their savings capacity: 44% of respondents in April 2014 survey said they were in the position to save, a rise on 39% in April 2013. The above suggests that precautionary savings might be picking up again.

Here is a recent research note from ESRI on trends in Irish savings:

One trend is the disconnect between savings of 21-35 year olds (up and sustained above other demographic groups) and those over 35 years old (sustained gap to younger demographic group):

And here is intensity of propensity to save:

The above shows that propensity to save in first instance of surplus income (precautionary savings-consistent indicator) is stable for older demographic, up-trending for middle-aged demographic and rising for younger demographic.

Wednesday, April 16, 2014

16/4/2014: Tearing Up Ukraine Well Before Crimea

Per Foreign Affairs (hardly a pro-Russian platform): two maps of two consecutive Governments in Ukraine showing the drivers of national rifts between Western and Eastern Ukraine:

Yanukovich Presidency (last Government Cabinet)

Maidan (Yatsenyuk Government Cabinet)

I don't see Russian tanks in either of them. But I do see venal incompetence and nationalist preferences in both that are intrinsic to two, allegedly, different Governments.

As I noted before, Ukraine needs a Government of National Unity, not a pro- or anti- Moscow/Maidan/EU/Nato/US/China/Japan/UN/IMF/... Government.

16/4/2014: EU Parliament Passes Bail-ins, SRM and MiFID2

So the EU Parliament voted in the three proposals relating to banking sector 'reforms' in the EU. These included

  1. SRM set up - a EUR55bn Single Resolution Fund to be used as the last line of defence in the future banking crises. Here is an earlier note on how effective that will be in stopping bank runs: You can see recent assessment of the directive by the IMF and myself here:
  2. Bank Restructuring and Resolution Directive - a directive that amongst other things sets the first line of defence at shareholders' bail-ins, followed by debt and depositors' bail-ins. That's right, depositors' bail-ins. And do note, the rabbit hole doesn't stop there - see box out here:
  3. Bail-ins are now not just 'on the horizon' but are de jure a law. All depositors over EUR100,000 (the maximum amount for which bank deposits guarantee is allowed) will be at risk. The law requires depositors and bondholders to absorb the second hit to the minimum of 8 percent of total bank's liabilities.
  4. As Reuters recently reported, non-performing loans not covered by provisions currently make up ca 1/3 of equity across the top 20 banks in the euro area. And that is after massive waves of deleveraging, recapitalisations and equity rebuilding that took place since 2008, or over the last 5 years plus. Now imagine the likelihood of the next crisis requiring exhaustion of equity to regulatory minimum and subsequent call on depositors. Pretty darn high. You can read Reuters analysis here: and see this handy infographic:
  5. In addition to the above, the Parliament also passed the directive establishing the European Securities and Markets Authority - a Paris-based body in charge of regulating trading and other activities in the markets, and the revamped amended MiFID2. This sets up the basic terms for regulating trading in securities and derivatives and contains new rules for trading commodities, OTC derivatives and HFT. ESMA is now empowered to write some 175 new rules to deploy MiFID2 and the proposals for these are due in May. One key area of regulation will cover HF traders, with all market traders requiring to register as either market participants or HF traders, as well as disclose their strategies.

Tuesday, April 15, 2014

15/4/2014: Flat Tax for Italy? Ask PIN...

Last week Italy sold EUR3.5 billion in 2016 Bonds today at an average yield 0.93% and with bid cover of 1.41, delivering a record low yield. At these yields, it is easy to think that the Italian fiscal and economic crises are over. Or at least that they are easing substantially enough to allow for the repricing of risks and some breathing space when it comes to markets expectations concerning euro area's third largest economy.

However, despite the positive news, Italy's economy remains a 'sick man' of Europe and it has been such for some time now. More importantly, the problem is unlike to go way unless Italian economy is reformed; dramatically and radically.

Chart below shows very clearly sustained, long-term underperformance of the Italian economy in terms of real growth since 1980. In addition, Italian economy has been a significant laggard in terms of growth during the current crisis. For example, if the Great Recession resulted in the G7 economies regaining their pre-crisis peak real GDP of 2007 by the end of 2011, Italian economy is not expected to regain pre-crisis peak levels of real output (2007) until at least 2020.

Growth weaknesses in the economy, running over the long periods of time, drive persistent structural decline in multi-annual, generational trends. One of particular note is the trend relating to employment ratios and unemployment.

The key takeaway from the above is that Italy is structurally (or in other words long-term, very long-term) sustaining economic development model that is associated with persistently higher unemployment and dependency ratios. Coupled with relatively high emigration, this model is driving generational momentum toward loss of human capital.According to the World Bank data, Italy had one of the highest rates of net emigration of population with at least tertiary education in the 1990s and 2000s - averaging around 10 percent and unemployment rate for those with tertiary education well in excess of the euro area and G7 averages.

This relatively poor performance, when it comes to the country ability to create, attract, retain and enable human capital is a core weakness and challenge for Italian economy that I recently was asked to address by the new political party, PIN: Partito Italia Nuova ( in Milan.

The core argument of my presentation was focused on the thesis that I started developing at IBM ( and summarised in my TEDx talk last year (

In my presentation in Milan, I looked at Irish experience from the 1980s through present in the context of developing a human capital-intensive economy. Here are some slides from the presentation:

From the point of view of Italian policies, post-crisis structural reforms require refocusing Italy's economy toward facilitating:

  • Closure of the human capital gap (education, immigration and emigration)
  • Stimulation of growth at the SMEs levels (family firms incentives and investment, professionalisation of management, enterprise reforms)
  • Reforms of incentives structures in labour markets (increase returns to Human Capital, reduce disincentives to work, increase incentives to take up self-employment and entrepreneurship)
  • Closer alignment of tax rates with tax compliance and enforcement
  • Conversion of 'black economy' into legally and tax compliant transactions
  • Reducing distortions from outflows of savings and investment from private sectors to public debt.

As argued in my analysis of the Irish situation, changes along these lines are required not only to bring domestic economy to pre-crisis levels of competitiveness and growth generation, but also address the pressures arising from international markets and from the transition of the global economy toward greater dependency on Human Capital as the core driver for growth.

The above objectives can be partially addressed via reforms of tax codes that act to simplify tax compliance, reduce tax burden on income from work, and increase transparency of tax systems. Flat tax is one of the best ways to achieve these, but flat tax is just the first step on aligning global realities of Human Capital intensive growth with national institutional and policies frameworks.