Tuesday, April 30, 2013

30/4/2013: The latest from the island nuked by the Troika 'rescuers'

Cypriot Parliament has narrowly (29:27 votes) approved the EU 'rescue' package agreement that covers EUR 17 billion in funds, according to the majority of the media analysts. Alas, the devil of the package is in the details.

Cyprus is not (repeat - not) getting EUR 17 billion in funds. Instead the package lists the following sources of funding:
- EUR 1.2 billion to be raised via losses on junior bonds in Popular and BoC
- The “bailin” of uninsured depositors (deposits in excess of EUR 100K) and senior bondholders is set to yield €8.3 billion
- EUR 10 billion loan from the euro zone and the IMF of which the IMF will provide EUR 1 billion (http://www.imf.org/external/np/sec/pr/2013/pr13103.htm)
- EUR 1 billion from rolling over domestically-held government bonds, plus EUR 100 million from extending Russian bilateral loan
- EUR 0.4 billion from gold sales by the Cypriot central bank and EUR 0.5 billion from privatizations

Grand total is, therefore, EUR 1.2 + 8.3 + 10 + 1.1 + 0.9 = EUR 21.5 billion.

Per preliminary MOU, Cyprus 'programme' has three core pillars:

"The first pillar aims to restore the health of the financial system and minimize the contingent liabilities from the banks to the state." This includes haircuts on depositors and bondholders in the first stage - as confirmed in the today's approval vote. In later stages, this involves "a substantial reduction in the size of the banking system in relation to the economy as well as in restructuring and recapitalization of one of the banks."

“The second pillar entails an ambitious and well-paced fiscal adjustment that balances short-run cyclical concerns and long-run sustainability objectives, while protecting vulnerable groups. In addition to the fiscal consolidation already underway—estimated at about 5 percent of GDP— an additional 2 percent of GDP in measures will be implemented during the program period, including by raising the corporate income tax rate from 10 to 12 ½ percent and the tax rate on interest income from 15 to 30 percent. An additional 4½ percent of GDP in measures will be needed over the medium term to achieve a 4 percent of GDP primary surplus by 2018, which is required to put debt on a firmly downward path. There will be protection for the most vulnerable groups. The social welfare system will be reviewed to streamline administration costs, minimize the overlap of existing programs, and improve their targeting to ensure that public resources reach those in need."

The third pillar, per usual IMF waffle, involves 'structural reforms'. “To complement the fiscal consolidation efforts, the program will undertake substantial structural reforms aimed to improve the effectiveness of the public sector. The state’s capacity to collect revenues will be strengthened with the implementation of a comprehensive reform agenda to modernize and harmonize procedures, improve internal coordination, and exploit economies of scale. Public financial management reforms will include the implementation of a medium-term budget framework and the adoption of a law on fiscal responsibility. In addition, to enhance the efficiency of the economy and reduce public debt, viable state-owned enterprises will be privatized. Finally, based on an assessment of needs, the program will supplement the recent reform of the pension system with additional measures to ensure its long-run sustainability.

In short, Cyprus gets the usual Troika 'Package +' of big-bang commitments delivery of which will be measured as common not by achieved sustainability or risk metrics, but by passed legislation and enacted legal changes (paper ahead of real impact). And the '+' bit refers to the total wrecking of the Cypriot economy under the reforms of the banking sector and international financial services sector, plus tax hikes which will assure that if there is any oil / gas off-shore, Cypriots will be out with shovels and snorkelling masks to dig every hydrocarbon molecule out to repay these debts.

30/4/2013: Irish chart that worries me most

The chart that bothers me most in Irish context is:

This shows the structural nature of the growth slowdown in Ireland in post-2007 period (based on IMF forecasts through 2018). The period of this slowdown is consistent with the growth rates recorded in the 1980s. And here's the summary of decade-average real GDP growth rates:

Now, keep in mind, in the 1980s and 1990s, Irish growth was driven by a combination of domestic drivers, plus external demand, primarily and predominantly in the goods exports areas. Which means that more of our GDP actually had real impact on the ground in Ireland. Since the onset of the crisis, most of our growth has been driven by the growth in exports of services, which have far less tangible impact on the ground.

Another point to make: current rates of growth for the 2010s are below those in the 1980s and, recall back, the rates of growth achieved in the 1980s were not enough to deflate the debt/GDP overhang we had. Of course, in addition to the Government debt overhang (similar to that in the 1980s) we also now have a household and corporate debt overhang.

If the IMF projections above turn out out be close to reality, we are in a structural decline economically and are unlikely to generate sufficient escape velocity to exit the debt crisis any time before 2025 at the earliest.

30/4/2013: Why not in Ireland?..

Bloomberg has an excellent report on MIT pairing up with Russia's Skolkovo on research, education and commercialisation:

Key stats of interest: "There were 83 international branch campuses of U.S. universities as of March, not including partnerships such as MIT and Skolkovo’s, according to GlobalHigherEd.org, a website run by researchers at the State University of New York at Albany. That number has climbed from 10 in 1990, says Jason Lane, a SUNY Albany professor."

Ok, how many are in Ireland - the country with self-professed 'best educated workforce' and focused on building 'knowledge economy' self-dubbed 'innovation island', where we are so solemnly focused on exports (yes, education is exportable and it is a very high value-adding export too)? Answer: none.

There's an MIT campus in Portugal (hardly a shining light in 'knowledge economics'), there are educational 'hubs' all over the world (http://www.globalhighered.org/edhubs.php) and campuses all around the globe (http://www.globalhighered.org/branchcampuses.php). We even have 5 Irish institutions' campuses outside Ireland (though I seem to think UCD and TCD have either plans or actual campuses too, though they are not on the list), but when it comes to the closed shop market inside Ireland, there are no top-league unis from the US trading from the Emerald Isle into Europe and beyond.

Check out this map with locations and spot Ireland... http://www.globalhighered.org/maps.php

Why?.. We have lavish facilities for some ITs built around the country with little reason or rationale for their existence. Why not convert one of them into a JV with, say, Stanford? Princeton? Hell, University of Arkansas would be an improvement... Ah, I hear the Unis dons say, competition is good when it is regulated (aka, stacked in incumbents' favour), but in the age of economic crisis, why not get universities to start really competing for exports by giving them a worthy competitor here, targeting markets outside Ireland?

30/4/2013: Business Confidence... not exactly an unbiased metric of reality

Readers of this blog would know that I have always been skeptical about 'business confidence' and 'consumer confidence' surveys as indicators of true underlying activity or predictors of the future activity. In the past I have criticised the German Ifo data on business expectations (http://trueeconomics.blogspot.ie/2013/02/22022013-small-cloud-over-german.html) and Irish consumer confidence indicators (http://trueeconomics.blogspot.ie/2013/04/2642013-another-indicator-turns-south.html) as being somewhat systemically biased into the la-la land. I even lost Sunday Tribune column back in 2007 on foot of criticising one of Ireland's largest real estate brokers' research on similar methodological basis.

Now, behold research from NBER, titled "Firms’ Optimism and Pessimism"  
(NBER Working Paper No. w18989) by RUDI BACHMANN, STEFFEN ELSTNER and (http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2257179) which looks at whether in general, firms’ expectations can be systematically too optimistic or too pessimistic. The authors used "micro data from the West German manufacturing subset of the IFO Business Climate Survey to infer quarterly production changes at the firm level and combine them with production expectations over a quarterly horizon in the same survey to construct series of quantitative firm-specific expectation errors."

The authors found that "depending on the details of the empirical strategy at least 6 percent and at most 34 percent of firms systematically over- or underpredict their one-quarter-ahead upcoming production. In a simple neoclassical heterogeneous-firm model these expectational biases lead to factor misallocations that cause welfare losses which in the worst case are comparable to conventional estimates of the welfare costs of business cycles fluctuations. In more conservative calibrations the welfare losses are even smaller."

Ouch… the confidence fairy might not only be a lier, but biased lier on top of that…

30/4/2013: 2012 Was Not a Year of Brilliance for the Central Bank

From the Opening Statement by Governor Patrick Honohan at the publication of the Central Bank of Ireland Annual Report 2012, 30 April 2013

"Two major elements of the Bank’s work during 2012 came to decisive junctures early this year – the liquidation of IBRC and related replacement of the promissory notes with marketable government bonds; and the introduction of an enhanced mortgage arrears resolution framework, which was announced in recent weeks. All of these measures are ultimately concerned with creating the environment for sustainable economic growth and reduction in unemployment."

It is my opinion that 2012 marked the year when the Central Bank has done the least to deliver on any meaningful reforms and change that can create or sustain "the environment for sustainable economic growth and reduction in unemployment". The bases for my opinion are:

  1. In 2013, the Central Bank attempted (key word here) to introduce an enhanced mortgage arrears resolution framework. The new framework is 'enhanced' only to the extent that the previous framework was proven to be a complete failure. However, looking forward and setting aside the failures of the very recent past, the new framework is not consistent with the goals for either reducing unemployment or enhancing prospects for economic growth. Some of my criticism of the new framework in the context of these two objectives can be found here: http://trueeconomics.blogspot.ie/2013/04/1842013-legalising-modern-version-of.html
  2. In 2013, the Irish Government has undertaken a swap of one financial liability (promissory notes) with another (government bonds). This transaction has been deemed by myself, many others, including the IMF, to have near-zero impact on debt sustainability when it comes to the Irish Government debt. The transaction was net positive for cash flow, albeit moderately, and hugely positive for PR. while th CB of Ireland did benefit significantly from improved security underlying the ELA, this benefit came at a cost to the rest of the Irish economy in the form of the conversion of the quasi-sovereign debt (promo note) into long-dated sovereign bonds.
  3. Beyond the above two points, there has been very little progress on any tangible reforms in the banking sector in Ireland. We are still pursuing a duopoly model of the domestic banking market,  and there is no effective discussion, let alone effective resolution of the problem of lack of new entrants and lack of restructuring of the existent lenders. We have no new models of banking and lending in the country emerging after six years of this crisis and, if anything, we are now consolidating the strategic space in our banking services to a singular model of low-quality, low-access services supplied at an excessive cost. Both AIB and Bank of Ireland are pursuing this model, leaving customers to pick up the tab for reduced access to services and increased charges on the remaining services. This hardly supports Governor Honohan's claim that the Central Bank is working on creating and sustaining environment for growth.
  4. All banking sector performance parameters have been either not improving or deteriorating over 2012 within the directly state-influenced covered group of financial institutions.
Slapping ad hoc targets on the banks to reduce mortgages arrears and then introducing masers to give them power well in excess of that awarded to the borrowers is about as productive of a measure for dealing with mortgages crisis as giving hospitals management targets for reducing the number of trolleys in corridors while removing patients protection from malpractice.

The Central Bank-supplied 'framework' is thus simply not fit for purpose, neither by the criteria of dealing effectively and humanely with the debt crisis (by first removing the unsustainable debt in systemic, transparent and fairly-priced fashion, then by addressing future moral hazard), nor in terms of placing the burden of crisis resolution where the causes of the crisis rest (proportionally with both the banks and the borrowers), nor in respect of the Central Bank claimed objectives of delivering supports for economic recovery.

Updated: Central Bank of Ireland has made a claim of 2012 'profit' of EUR 1.4 billion. But wait, a business makes profit by taking investors' / equity holders' / lenders' or own funds, purchasing inputs into production, producing something and then selling that something to willing customers who pay for these goods from their own funds. Central Bank of Ireland took claims imposed by the Government of Ireland on consumers and taxpayers, gambled these claims on the banks, who were basically compelled to take 'as offered' these Central Bank-supplied 'goods' and then collected from these captive banks pay (which the banks promptly ripped-off their customers - aka consumers and taxpayers). The Central Bank subsequently relabelled these rip-off charges 'profits' and remitted them back (EUR 1.1 billion) to the Exchequer. So can anyone explain to me what Central Bank produced that someone voluntarily was willing to buy with their own cash?

30/4/2013: German credit keeps flowing to firms... & still there's no growth

Per German Ifo institute: " Credit constraints for German trade and industry edged downwards by 0.1 percentage points compared to March. Around a fifth of the companies surveyed reported a restrictive credit policy on the part of banks. Despite recent developments in the euro crisis, there have been no significant changes in the favourable financial environment of German companies.

"After last month's decrease, credit constraints for large and small firms rose again, with the latter experiencing the sharpest increase of 1.3 percent. Medium-sized companies reported an easing of credit constraints."

So things are going swimmingly in terms of credit for German enterprises. Ease of getting credit is about as good as 2005-2007 average - the years when German banks were not just lending with abandon to domestic enterprises, but were also funding massive property booms in Spain and Ireland... yet, for all the credit access, German growth is... tanking.

So much for the Irish (and other governments') thesis that if only credit flows were improved, growth will return...

30/4/2013: The horrors of Euro-austerity: Part 1

The horrors of Euro-austerity are so vivid in this chart...

It is obvious (to anyone who is economically blind or illiterate in a basic Cartesian sense) that 'sustaining growth' would have required deficits of ugh... ogh... like... say 5% pa over 2009-2013 period? Or 6%? To cumulate these to over 25-30% of GDP in added debt? What could have possibly gone wrong?..

Sunday, April 28, 2013

28/4/2013: That German Miracle...

Germany... the miracle economy of Europe:

Let's do some growth facts. recall that G7 includes such powerhouses of negative growth as Japan and Italy, and the flagship of anemia France.

1) Germany vs G7 in real GDP growth:

From data illustrated above:

  • In the G7 group, Germany ranked 6th in growth terms over the 1980s, rising to 5th in the 1990s and 2000s, and, based on the IMF forecasts, can be expected to rank 4th in the period 2010-2018. In simple terms - Germany ranked below average in every decade since 1980 through 2009 and exact average in 2010-2018 period.
  • On a cumulated basis, starting from 100=1980, by the end of this year, judging by latests IMF forecast for 2013, Germany would end up with second slowest growth in G7, second only to Italy. 
  • On a cumulated basis, starting from 100=1990, by the end of this year, judging by latests IMF forecast for 2013, Germany would end up with fourth fastest growth in G7. Ditto for the basis starting from 100=2000.
2) Germany vs G7 in annual growth rates in GDP based on Purchasing-power-parity adjustment (PPP) per capita to account for exchange rates and prices differentials:

From data illustrated above:

  • In the G7 group, Germany ranked 5th - or below average - in PPP-adjusted per capita growth terms over the 1980s and the 1990s, rising to 4th - group average - in the 2000s, and, based on the IMF forecasts, can be expected to rank 3rd - slightly above average - in the period 2010-2018. In simple terms - Germany ranked below or at the average in every decade since 1980 through 2009 and one place ahead of the average in 2010-2018 period.
  • Note: Germany is the only G7 country with shrinking overall population, that peaked in 2003 and has been declining since, thus helping its GDP (PPP) per capita performance.
Here's the chart summarising Germany's rankings in G7 in terms of two growth criteria discussed:

Germany might have been performing well in 2006 and 2011 (when it ranked 1st in real GDP growth terms) and really well in 2007-2008 and 2010 when it ranked 2nd, but other than that, it has been a lousy example for any sort of a miracle.

28/4/2013: Nassim Taleb's Reading List

Following on my link to a TED talk (go figure... I am getting soft) here's another link, this time to Nassim Taleb's reading list:


Worth a 'trip' to the Amazon... 

28/4/2013: A must-view TED talk

I rarely post on TED talks for a reason - aiming high, they often deliver flat repackaging of the known - but this one is worth listening to:


It has been a long running topic of many conversations I have had over the years with some of you, always taking place in private discussions, rather than in public media, that modern science is a belief-based system. My position on this stems not from a dogmatic view of science, but from a simple philosophical realisation that all sciences are based on axiomatic bases for subsequent inquiry. As axioms are by definition non-provable concepts, then the very scientific method itself is limited in its applications by the bounds of these axioms.

This is not invalidate scientific method or sciences, but to put some humbleness into occasionally arrogant position held by many (especially non-scientists) that elevates science above arts, religions, beliefs, and other systems of understanding or narrating the reality.

Saturday, April 27, 2013

27/4/2013: Bars, Pubs, Recession Craic

I recently watched an Irish comedian (let's keep the names out of this) quip that Irish people are not having that bad of a time during this recession, as we are still going out for pints, and that is all that matters in measuring our happiness.

Obviously, humor aside, there can be some truth in this. Most of entertainment and 'cultural' life in this country revolves about the pub or (in shwankier neighborhoods - around a cocktail bar). So bars sales can be a somewhat decent indicator of some sort of the social well-being in this country.

How did bar sales fare in the Great Recession? Four charts:

By value (chart above),

  • Bar sales were down 18.1% on average in the period from January 2008 through present (March 2013), aka pre-crisis period, compared to the crisis period from January 2005 through December 2007.
  • In March 2013 they were down 14.6% on pre-crisis average. 3mo average through March 2013 was down 1.5% y/y.
  • So by value of sales, we are not heading for the pub as much.
  • Worse, compared to both All Retail Sales and to Retail Sales of Food - Bars sales are doing much worse. 
  • Noting that Food sales are running above pre-crisis average, both currently and on the basis of crisis average, and also noting that Food sales are signals of us staying more at home, rather than going out to pubs and bars and restaurants, there is no indicator here that we are having good times during this recession. At least not in the pubs.
Next: volume of sales:

Again as with value of sales, volume of sales index shows that the above conjecture of 'good times' is not holding up. In fact, comparative dynamics for retail sales in bars in volume are worse than dynamics in value.

Here's a more distilled version, showing dynamics in bars sales compared to all retail sales:

And here's an illustration of divergent dynamics between food and bars sales:

Seems like if we are having 'craic' in this recession, it is not in our locals or in the Temple Bar, but with a bottle of cheaper booze at home, drumstick in hand, slippers on...

27/4/2013: Village Magazine, April 2013

The third of three posts covering my recent articles.

This is an unedited version of my regular column in The Village magazine, April 2014.

As the events of the last few weeks clearly show, Irish trade union movement is suffering from a number of acute crises, ranging from systemically existential to psychological.

First up, the crisis of identity, best symptomised by the conclusion of the Croke Park 2.0 deal in which the Unions once again traded the interests of their future members – the younger public sector workers – to preserve the privileges of their current and past members. This is hardly surprising. During the last decade-and-a-half, the Unions and their leadership have became firmly embedded in the corporatist structure of the Irish State. Self-serving, focused on the immediate membership concentrated in the least productive sectors of the economy, the unions have opted to be paid over being relevant to the changing economy and society.

Second, the crisis of the short-term memory amnesia. In recent weeks, the Irish Trade Unions have managed to produce much bluster on the topic of the centenary anniversary of the 1913 Lockout. Throughout the crisis, the very same unions have been vocal on the topics of social fairness, austerity, protection of the frontline services etc. Yet, all along, the Liberty Hall has attempted to sweep under the rug its principal role in helping the Irish State to polarize and pillage both the society and the economy during the Celtic Tiger era, in part aiding the very processes that led to our national insolvency. Promoting the narrow interests of the state and associated domestic private sectors’ elites, the Social Partnership (including the two Croke Park agreements) assured boards representations, funds and other pathways to decision-making for unions. This power was deployed consistently to reduce accountability in the public sector for decisions and actions of its foot soldiers and bosses alike. By corollary of the cooperative approach to policy formation, the Partnership also protected domestic sectors, especially those dominated by the semi-state companies.  As the money rolled into the unionized sectors of the economy, the Unions had no problem with rampant costs inflation in health insurance and services, energy, transport, and education. The interests of the own members were always well ahead of the interests of the society at large.  Thus, today, in the environment of reduced incomes and high unemployment, with hundreds of thousands households in sever financial distress, Liberty Hall sees no problem with state-generated inflation in state-controlled Unionized sectors.

All in, the irony has it, Irish Trade Unions movement has been traveling along the same road previously mapped out by the Anglo Irish Bank: reducing their scope of competencies, their reach across various social. demographic and economic groups, and focusing on a singular, medium-term unsustainable objective. Where Anglo, post-2001, became a monoline bank for funding speculative property plays, Irish Trade Unions today are a monoline agency for preserving the status quo of the incumbent public vs private sector divisions in the economy.

The failure of the Trade Unions movement model in Ireland is best exemplified by the years of the current crisis.

Since the onset of the present economic recession Irish Government policy, directly and indirectly supported by the majority of the Unions’ leaders was to consistently shift the burden of the economic adjustment to younger workers in both private and public sectors, indebted Irish households, and consumers. Liberty Hall’s clear objective underpinning their position toward these groups of people was to retain, at all possible costs, the pay and working conditions protection granted to the incumbent full-time employees in the public and semi-state sector. Grumbling about the ‘low-paid public sector workers’ aside, the Unions have consented to the creation of a two-tier public sector employment with incumbent workers collecting the benefits of jobs security and higher pay, and the new incoming workers paying the price of these benefits with lower pay and virtually no promotion opportunities. The very same unions are now acting to preserve, at huge costs to the economy, unsustainably high levels of employment in our zombified banking sector.

Even on the surface, based on the headline figures, the Unions act to protect the pay and working conditions of the incumbent public sector employees. Average weekly earnings in Ireland have fallen 2.7% between 2008 and 2012 in the private sectors, while in the broader public sector these were down only 1.1%. Over the same period of time, the pay gap between public and private sector has risen from 46.1% in favour of public sector employees to 48.5%.

But the reality is much worse than that.  Between 2008 and 2012, numbers in employment in private sectors have fallen 14.7% while in the public sector the decline was less than 8.9%.  Within the public sector, largest losses in employment took place in Defence (-20% on 2008), Regional bodies (-15.4% on 2008), Semi-State bodies (-10.1%). No layoffs or compulsory redundancies took place, with natural attrition and cuts to contract and temporary staff taking on all of the adjustments.

In simple terms, the Machiavelian Croke Park deals have meant that the Irish public sector ‘reforms’ were neither structural, nor progressive in their nature. These ‘reforms’ do not support long-term process of realigning Irish economy to more sustainable growth path away from the bubbles-prone path of the last fifteen years.

Lack of layoffs and across-the-board shedding of temporary and contract staff have meant that the public sector in Ireland has lost any ability to link pay and promotions to real productivity differentials that exist between individual employees, work groups and organizations. This effect was further compounded by the Croke Park 2.0 agreement. The shinier the pants, the higher the pay principle of rewards has now been legally enshrined, relabeled as a ‘reform’ and fully protected at the expense of younger, better educated and potentially more innovative employees.

Such a system of pay and promotions engenders severe and irreversible selection bias, whereby the quality of applicants for jobs in the public sector is likely to decline over time, with more ambitious and more employable candidates opting out of pursuing careers in the state sector. Deterred by limited promotions opportunities and lower pay for the same, and in some cases heavier workloads, younger applicants are likely to seek work in private sector and outside the country. This selection bias will only gain in strength as economy starts to add private jobs in the future recovery.

The status quo of non-meritocratic employment in the public sector will also mean continued emigration of the younger workers with internationally marketable skills.

Meanwhile, per EU-wide KLEMS database, back at the peak of the public sector activities in 2007, labour productivity in Ireland’s public sectors was already running at below 1995 levels. In Public Administration and Defence, Compulsory Social Security sector, labour productivity stood at below 86% of 1995 levels, in Education at 80% and in Health and Social Work at 95%. In contrast, in Industry, labour productivity in 2007 was running at 153% of 1995 levels.  The same holds for the technological innovation intensities of the specific sectors. Three core public sectors of public administration, education and health all posted declines in productivity associated with new technologies compared to 1995 of 17-30% against an increase of 8% in Industry and a 20% rise in Manufacturing.

If Irish public services productivity was falling in the times of massive spending uplifts and big-ticket capital investment programmes, what can we expect in the present environment of drastically reduced investment? Unfortunately, we do not have data beyond 2007 to provide such an insight.  But the most probable answer is that stripping away superficial productivity gains recorded due to higher current spend on social welfare supports being managed by fewer overall state employees, plus the productivity growth arising from reductions in employment levels, there is little or no real same-employee productivity gains in the public sector.

One has to simply consider the ‘cost reduction’ measures enacted through the Budgets 2010-2012 to realize that during the crisis, Irish public sector was shedding, not adding responsibilities. Much of these reductions in services was picked up by the private sector payees and providers. This too implies that the actual productivity in the public sector in Ireland has probably declined during the years of the crisis.

Marking the centenary anniversary of the 1913 Lockout, Irish Trade Unions movement needs serious and deep rethink of both its raison d’etre and its modus operandi. Otherwise the movement is risking being locked out of the society itself as the irrelevant and atavistic remnant of the Celtic Tiger and Social Partnership.

The Liberty Hall must shake off the ethos of corrupting proximity to the State power and re-discover its grass roots. It will also need to purge completely the legacy of the Social Partnership and embrace new base within the workforce and the society at large in order to assure its ability to last beyond the rapidly advancing retirement age of its members. Lastly, the Unions should think hard about their overall role in the society to better balance the interests of their members against the needs of the country and the reality of the new economy.

Irish society needs a strong and ethically underpinned Unions as the guarantors of the rights of association and supporters of the policy dialogues and debates. What Ireland does not need is another layer of quasi-state bureaucracy insulating protected elites and sectors from pressures of demographically young, technologically modernizing and global competitiveness-focused small open economy.

27/4/2013: Sunday Times : April 7, 2013

Second post of three catching up with some of my recent articles.

This is an unedited version of Sunday Times article from April 7, 2013.

Just when the EU leaders were ready to relax after the tough couple of weeks spent dismantling the economy of Cyprus, the news flow has turned once again and, predictably, not in their favour.

Over the last week, euro area Purchasing Managers Indices for manufacturing have showed that the economic activity in the sector has fallen for 19th consecutive month. The downturn in the eurozone manufacturing has accelerated, slipping to 46.8 in March, down from 47.9 in February. In Ireland, manufacturing PMI reading fell to a 14-months low at 48.6.

Meanwhile, Eurostat data showed that seasonally adjusted unemployment in the common currency area reached 19.1 million in February, up on 17.3 million a year ago. In Ireland, seasonally adjusted unemployment rate is stuck at 14.2% since December 2012, while youth unemployment rate rose to 30.8% in February.

Adding insult to an injury, CEPR and Bank of Italy leading growth indicator for the euro area, eurocoin, posted another negative reading in March. This means that the euro area economy has been contracting now for 18 months in a row. The previous crisis of 2008-2009 counted only 13 months of continued sub-zero readings.

In short, over the last 10 days we had a plethora of reminders that the current growth crisis sweeping across the euro area is both deep and structural in nature. Which puts into the context last week’s warning from the IMF to Ireland that the headwinds to our economic growth prospects in the medium term are posing some serious risks to the prospects of our recovery and debt sustainability.

The underlying causes of the crisis we are experiencing since 2008 relate to the structural weakness in our economic system when it comes to identifying, pursuing and delivering organic growth opportunities.

Since around 1997-1998, Irish economy has been growing by one asset bubble displacing another. We started with a sizeable bubble in the ICT sector that inflated out of any proportion with the real economy from 1997 and finally met its end with the dot.com crash of 2000-2001. Alongside this bubble, around 1998, we began to inflate a public spending and investment bubble. Between 1999 and 2005 Irish Government voted spending rose from EUR22.8bn to EUR45.1bn, with 2001-2002 period increases accounting for 43% of the total  rise over 1999-2005. Rampant over-spending in the public sector was coincident with (and co-dependent on) a massive bubble in the property market.

In short, Irish economy has been running on steroids of spending or credit bubbles for some eleven years prior to the crisis of 2008. An entire generation of Irish policymakers, analysts, bankers, investors and businessmen has matured with not a slightest idea as to where the real sustainable economic value added comes from other than the over-inflated egos, valuations and leverage.

As the result, today, we need serious reforms to reduce our reliance for growth on the structurally sick euro area, and to shift our own economy's development engine away from unsustainable reliance on bubbles-inflating activities and re-focus it on growth reliant on high value added activities, entrepreneurship and human capital.

On human capital, OECD's annual Going for Growth report from 2013 shows that Irish economy suffers from structural deficiencies in labour force participation by women. On average, women outside the workforce have higher skills and better work experience than men in similar demographics and work status. However, women participation rates in Ireland are below those in many other advanced economies due to a combination of factors, including high cost of early age education, childcare.

Improving affordability and access to childcare is an imperative for Ireland, given our demographics, but we also require a wholesale re-balancing of our tax system to reduce Exchequer reliance on income tax-related revenues. Current tax system in Ireland penalises skills and higher investment in human capital through excessive taxation at the upper marginal tax rate and exceptionally low threshold for the upper tax band applicability.

Other labour market measures needed include: increasing resources for job-search assistance and workplace training within the existent education systems, and better aligning training programmes with skills needs of the economy. Both of these objectives formed cornerstone of the Fas reforms. However, these reforms were only partial, especially considering that the very same people who were responsible for the past training and up-skilling systems failures are now manning in the reformed entities.

Irish economy must become more knowledge and skills-intensive - a process that requires simultaneous development and rapid expansion of our R&D capacity and output, as well as our human capital base.

On R&D front, the Government pursued policy of retaining and even enhancing R&D tax credits. Alas, recent research shows that lower tax rate on patent income is more effective in improving R&D climate in the economy than R&D tax credits and allowance.

Supporting human capital investment in the economy means strengthening value-for-money delivery in public services, providing higher quality services to skilled workers (an area where Irish system fails completely), reducing tax disincentives relating to human capital and enhancing our education, training and immigration systems to improve inflow of human capital.

Education acts as major driver of human capital formation and innovation in the economy, as well as a viable exporting sector. In a small economy like Ireland we have to think outside the box to deliver greater efficiencies in the higher education sector.

We need to decentralise pricing and decision-making in universities and IT sector by introducing variable, flexible fees reflective of differences in degrees and awarding institutions. To continue increasing access to education a system of merit and need-based grants should be used to offset the cost of tuition. Ireland has three or four internationally competitive universities with potential to compete globally for quality students and staff, including TCD, UCD and UCC. These universities should move toward a model of accepting 2nd and 3rd year undergraduates to deliver full and internationally-competitive 4 year degrees. This can free more resources to focus on post-graduate education. Other Universities can continue with the current model of 3 year degrees and focus on undergraduate education with post-graduate training geared toward more applied fields. IT schools should become feeder-schools for universities, supplying early-stage undergraduate training equivalent to years 1 and 2 of the 4-year degrees, and on professional and applied training.

Both OECD and the IMF focus a lot of attention on increasing competition and efficiencies in our non-manufacturing domestic sectors, including energy, utilities, health insurance, legal and professional services. The recent strengthening of the Competition Authority is helpful, but hardly sufficient, especially in the environment where regulators of the domestic services are captives of the semi-state companies operating in these sectors. The way to break this industry stronghold on the state is to break up and privatise commercial semi-state entities. The Government has committed to such actions, but no privatizations took place to-date and the break ups under the planned privatizations remain inadequate in scope.

The same principles of increasing completion and choice of service providers should apply to the all client-facing public services. Alas, the Government is incapable of even starting a debate about such a change in the status quo.

Another major reform of domestic economy we need to undertake that is not covered by the Government strategies is the change in the way we fund our business creation and growth. Globally, as the fall-out from the financial crisis settles, advanced economies are shifting more and more corporate and SMEs funding away from debt, toward business equity. In Ireland, such a change is being held back by a number of small policy bottlenecks.

One is the unequal treatment of debt and equity in taxation. Last month, IMF published a research paper looking at the effects of preferential treatment that debt financing receives over equity in the majority of the advanced economies. The paper concluded that such asymmetry in taxation increases likelihood and severity of the financial crises. IMF study shows that providing for a tax on business equity returns, in line with the treatment of bonds returns, is the most effective measure to improve systemic stability of the economy.

The second, and somewhat related bottleneck is the punitive treatment of employee share ownership in Ireland. Issuance of business equity to key and long-term employees is both an efficient means for raising capital for the firms and for incentivising key employees. However, in Ireland, such a move triggers income tax liability on equity granted for the employees, which is completely divorced from any actual returns accruing to the employee. The solution to this problem is simple enough: the state should apply capital gains tax to employees shares, with an added incentive for shares issued to long-term key employees.

Another major problem with out tax regime is the application of taxes to proceeds from the sale of business. Many new ventures are launched by entrepreneurs on the basis of funding obtained from the sale of pervious business. Allowing a 2-3 year tax-deferral for any reinvestment of such proceeds can stimulate flow of funding into the Irish economy, reduce incentives for entrepreneurs to domicile outside Ireland prior to the sale of business and net exchequer more tax revenues over the medium term than the current regime allows.

Reaching well beyond the confines of the existent Troika and Government-own programmes for reforms, the above measures can help shift Ireland’s growth model away from unsustainable reliance on tax arbitrage activities of the MNCs and bubbles-prone domestic investment.


Recent data from CSO’s Residential Property Price Index and the GeoView/DKM survey of commercial property vacancy rates shows that contrary to the Government claims of turnaround in the Irish property markets, our real estate sector continues to suffer from the ongoing crisis. Per GeoView/DKM survey, 23,432 commercial premises remained vacant in Ireland in January 2013, up 6.7 percent on previous survey results from August 2012. In Dublin, some 13% of all commercial premises are empty, up on 12% in August 2012. Meanwhile, prices of residential properties have fallen 1.53% in February 2012, compared to January, marking the steepest decline in 12 months and the decline is accelerating over the last 3 months period compared to previous 3 months through November 2012. In other words, the green shoots in our domestic investment, claimed by the Government and property sector analysts over 2012 so far appear to be an illusion. Irish property market remains stagnant, with occasional volatility pushing prices up a few percentage points only to see subsequent reversion to the zero growth trend established since January 2012.

27/4/2013: Sunday Times : March 31, 2014

The first of three consecutive posts to update on my recent articles in press.

This is an unedited version of my Sunday Times article from March 31, 2013.

What a difference a week, let alone nine months, make. 

Nine months ago, on June 29th, 2012, the eurozone leaders pledged "to break the links between the banks and the sovereign" prompting the Irish Government to call the results of the euro summit 'seismic' and ‘game-changing’. 

Fast-forward nine months. The number of mortgages in arrears in Irish banks rose at an annualised rate of 25%, the amounts of arrears have been growing at 65%. The number of all mortgages either in arrears, or temporarily restructured and not in arrears, or in repossessions is up 23% per annum. 
Deposits held in Irish ‘covered’ banks have fallen 13.9% between June 2012 and January 2013. In three months through January 2013 average levels of Irish residents' private sector deposits was down 2.34% on three months through June 2012, clocking annualised rate of decline of 4%. Over the same period of time, loans to Irish private sector fell 1.54% (annualised drop of 2.7%).

Smoothing out some of the monthly volatility, average ratio of private sector loans to deposits in the repaired Irish banking system rose from 145.8% in April-June 2012 to 147.0% in three months through January 2013.

Put simply, in the nine months since June 29th last year, the urgency of implementing the eurozone leaders' 'seismic' decisions on direct recapitalization of the banks and on examining Irish financial sector programme performance has been rising. 

Yet, this week, in the wake of yet another crisis this time decimating the economy of Cyprus, a number of EU officials have clearly stated that the euro area main mechanism for funding any future bailouts - the European Stability Mechanism fund - will not be used for direct and/or retrospective recapitalization of the banks. The willingness to act is still wanting in Europe.

First, chief of the euro area finance ministers group, Jeroen Djisselbloem, opined  that the ESM should never be used for direct capital supports to failing banks. Mr Djisselbloem went on to add that Cypriot deal, imposing forced bail-in of depositors and bondholders, is the template for future banks restructuring programmes. This pretty much rules out use of ESM to retroactively recapitalize Iriosh banks and take the burden of our past banks’ supports measures off the shoulders of the Irish taxpayers.
On foot of Mr Djisselbloem's comments, the EU Commission stated that it too hopes that direct recapitalisation of the banks via ESM will be avoided. In addition, the EU Internal Markets Commissioner Michel Barnier, while denying Mr Djisselbloem's claim that Cypriot 'deal' will serve as a future template for dealing with the banking crises, said that "Under the current legislation for bank resolution . . . it is not excluded that deposits over €100,000 could be instruments eligible for bail-in". Finnish Prime Minister Jyrki Katainen weighed in with his own assertion that the ESM should not be used to deal with the banking crises, especially in the case of legacy banks debts assumed. Klaus Regling, the head of the ESM, made a realistic assessment of the viability of the June 29, 2012 promises by stating that using ESM to directly recapitlise troubled banks will be politically impossible to achieve.  German officials defined their position in forthcoming talks on ESM future as being consistent with excluding legacy banks debts from ESM scope.

All of this must have been a shocker to the Irish Government that presided over the Cypriot bailout deal structuring which has shut the door on our hopes for Europe to come through on June 2012 commitments. After last weekend, uniqueness of Ireland is surpassed by the uniqueness of Greece where sovereign bonds were thrown into the fire and Cyprus where depositors and bondholders were savaged and not a single cent of Troika money was allocated to support the banks recapitalisations. 
The slavish conformity to the EU diktat that prompted the Irish Government to support disastrous application of the Troika programmes in Greece and Cyprus is now bearing its bitter fruit.

Which means that three years into what is termed by the Troika to be a 'successful adjustment programme', Ireland is now facing an old question: absent legacy banks debts restructuring, can we sustain the current fiscal path to debt stabilisation and avoid sovereign insolvency down the road?

Let’s look at the banking sector side of the problem.

Latest reports from the Irish banks show lower losses for 2012 compared to 2011, prompting many analysts and the Government to issue upbeat statements about the allegedly abating banking crisis. Such claims betray short foresight of our bankers and policymakers. Even according to the Central Bank stress tests from 2011, Irish banks are not expected to face the bulk of mortgages-related losses until 2015-2018. Latest data from CSO clearly shows that residential property prices across the nation were down for three months in a row through February. Prices have now fallen almost 23% since the original PCAR assessments were made. Even at the current levels, prices are still supported to the upside by the banks' inability to foreclose on defaulting mortgagees. Meanwhile, there are EUR45.3 billion worth of mortgages that are either in repossessions, in arrears or restructured and performing for now. Taken together, these facts mean that at current rates of decline in property values from PCAR valuations, we are already at the top of the envelope when it comes to banks ability to cover  potential mortgages losses. Add to this the effect of increasing supply of distressed properties into the market and it is hard to see how current prices can remain flat or rise through 2014-2015. 

All of the above suggests that before the first half of 2014 runs its course we are likely to see renewed concerns about banks capital levels starting to trickle into the media. Thereafter, the natural question will be who can shoulder any additional losses, given the entire Euro area banking system is moving toward higher capital ratios and quality overall. The answer to that is, of course, either the ESM or the Irish State.  The former is being ruled out by the euro area core member states. The latter is already nearly insolvent as is.

The headwinds to Irish debt sustainability argument do not end with the mortgages saga. 

Take a look at the economic growth dynamics. Back at the end of 2010, when Troika structured Irish ‘bailout’, our debt sustainability depended on the 2011-2015 forecast average annual growth at 2.68% for GDP.  By Budget 2013 time, these expectations were scaled back to 1.76%, yet the Troika continued to claim that our Government debt is sustainable. To attain medium-term sustainability, defined as declining debt/GDP ratios, between 2013 and 2017, IMF estimates that to stay the course Ireland will require average nominal GDP growth of 3.9% annually. To satisfy IMF sustainability assumptions, Irish economy will have to grow at 4.5% on average in 2016-2017 to compensate for slower rates of growth forecast in 2013-2015. So far, in 2011-2012 recovery we managed to achieve average growth rate in nominal GDP of just under 2.25%  - not even close to the average rates assumed by the IMF.

And the real challenge will come in 2015-2017 when we are likely to face sharp increases in mortgages-related losses. In other words, growth is expected to skyrocket just as banks and households will engage in massive mortgages defaults management exercise. 

There are additional headwinds in the workings, relating to the shifting composition of our GDP in recent years. Between 2007 and 2012, ratio of services in our total exports rose from 44.8% to 51.2%, while trade balance in services went from EUR2.75bn deficit to EUR3.1bn surplus. Trade in services is both more imports-intensive (with each EUR1 in services imports associated with EUR1.03 of services exports, as opposed to EUR1 in goods imports associated with EUR1.73 in exports) and has lower impact on our real economy. Irish tax system permits more aggressive, near-zero taxation of services trade against higher effective taxation for goods trade. This implies that while services-exporting MNCs book vastly more revenue into Ireland, most of the money flows through our economy without having any tangible relationship to either employment here or value added or any other real economic activity. In recent years, a significant share of our already anemic growth came from activities that are basically-speaking pure accounting trick with no bearing on our economy’s capacity to sustain public debt levels we have. If this trend were to continue into 2017, we can see some 5-7 percent of our GDP shifting to services-related tax arbitrage activities. 

Which, of course, would mean that the ‘sustainability’ levels of nominal growth mentioned above must be much higher in years to come to deliver real effect on our government debt mountain.
Take these headwinds together and there is a reasonable chance that Ireland will find itself at the point of yet another fiscal crisis with reigniting underlying banking and economic crises. Far from certainty, this high-impact possibility warrants some serious consideration in the halls of power. Maybe, continuing to sit on our hands and wait until the euro area acts upon its past promises is not good enough? Is it time we start building a coalition of the states willing to tackle the Northern Core States’ diktat over the ESM and banks rescue policies?


Following the High Court judgment in the case involving rent review for Bewley’s Café on Dublin’s once swanky now increasingly dilapidated Grafton Street, one of the premier commercial real estate brokerages issued a note to its clients touching upon the expected or potential fallout from the case. The note mentions the stress the case might be causing many landlords sitting on ‘upward only rent review’ contracts and goes on to decry the possibility that with the Court’s decision in some cases rents might now revert to open market valuations. One does not need a better proof than this that Irish domestic sectors are nowhere near regaining any serious competitiveness. Instead of embracing self-correcting supply-demand reflecting market pricing, Irish domestic enterprises still seek protection and circumvention of the market forces to extract rents out of their customers. That’s one hell of a ‘the best small country to do business in’ culture, folks.

27/4/2013: News from Irish Corporate Tax Haven Front

Latest instalment on Irish corporate tax haven: http://www.irishtimes.com/news/politics/oireachtas/irish-corporate-tax-rate-on-agenda-in-berlin-1.1374576

For those who want to read more, here are earlier links on same topic:
Follow link at the end to more posts.

27/4/2013: ECR latest league table for ECE

Handy sovereign risk summary via ECR for Eastern and Central Europe. Note changes over time:

Interestingly, Cyprus - default event took place - is still ranked higher than a number of non-default states. Another interesting bit: Latvia, Hungary, Romania are ranked in 4th tier - low quality sovereign risks, all are EU countries, while Croatia is barely above Cyprus and Bulgaria is below - one is accession state another is the member of the EU. For much talk about 'heterogeneity' not being a problem, with differences between the US states evoked often to support this proposition, I doubt there is such a divergence between individual states in any function federal or near-federal structure anywhere... not even in Italy or Spain...

Friday, April 26, 2013

26/4/2013: Exports-led Recovery Mythology

An excellent blogpost on the UK failure to drive 'exports-led recovery': http://blogs.telegraph.co.uk/finance/jeremywarner/100024274/the-killing-of-britains-economic-salvation-an-export-led-recovery/

And it has a handy chart:

What's telling about the chart? Recall that every country in Europe is angling to get that 'exports-led recovery' going, including Ireland. which raises two questions

  1. As commonly asked: who will be importing all these exports from Europe? Traditional answer is: China or Asia, but the problem is - save for some luxury goods, China and Asia can manufacture all that Europe can export.
  2. What about Ireland? Well, see the chart above: apparently, our exports-led recovery is more robust than just two countries in the sample: the UK and Denmark.
Oh, and a note: Japan has been having an 'exports-led recovery' at record rates, and it is still nowhere near any real recovery.

26/4/2013: ECB's policy mismatch in 6 graphs

For those interested in the monetary drivers of the current euro area crisis, here's an interesting new paper from CESifo (WP 4178, March 31, 2013): "The Monetary Policy of the ECB: A Robin Hood Approach?" by Marcus Drometer, Thomas I. Siemsen and Sebastian Watzka.

In the paper, authors "derive four sets of counterfactual national interest rate paths for the 17 Euro Area countries for the time period 1999 to 2012. They approximate desirable national interest rates countries would have liked to implement if they could still conduct independent monetary policy. We find that prior to the financial crisis the counterfactual interest rates for Germany trace the realized EONIA rate very closely, while monetary policy has been too loose especially for the southern European countries. This situation was inverted with the onset of the financial crisis. To shed light on the underlying decision rule of the ECB, we rank different rules according to their ability to aggregate the national counterfactual paths to the EONIA rate. In addition to previous literature we find that those mechanisms which care for countries who fare economically worse than the Euro Area average perform best."

Paper is available at SSRN: http://ssrn.com/abstract=2244821

Here are few charts, illustrating the results. In these TR references Taylor Rule, quarterly estimated backward-looking Bundesbank rule denoted BuBa, monthly estimated Bundesbank rules with interest rates smoothing denoted BuBaS and BuBaGMM respectively for backward- and forward-looking, and realised EONIA rate.



Per authors: "Two results are worth noting.

First, the counterfactual interest rate path derived from the original Taylor rule and our baseline counterfactual path (quarterly estimated backward-looking Bundesbank rule) trace each other very closely. In fact, they are hardly distinguishable. The monthly estimated Bundesbank rules with interest rate smoothing (backward- and forward-looking) deviate sometimes considerably from the quarterly paths. …all four paths yield qualitatively similar results...

Second, …all four counterfactual paths for Germany lie strikingly close to the actual realization of the EONIA rate. Especially
for the southern European countries the ECB’s monetary policy has been too loose according to all four counterfactuals."

And more: "For all four sets of counterfactual national interest rate paths the Robin Hood rules outperform the standard decision rules. Especially our "economic-needs"-rule performs exceptionally good across all four specifications. Moreover, the forward looking model performs worse than the three backward looking specifications."

In other words, ECB policy rules were completely mis-matching the reality in all countries, save Germany, with (per charts above) mismatch most dramatic in… right… Ireland.

26/4/2013: Another indicator turns South: Irish Retail Sales March 2014

Off the start, let me say I am sorry that I have to bring one set of bad news after another. Living, working, raising kids and building my family future in Ireland means that I have as much 'skin in the game' of seeing Irish economy recover from this crisis as any one of us.

With that in mind, here are the latest statistics from the CSO on Irish retail services activity in March 2013. These make for ugly reading.

First, quoting CSO own release:

"The volume of retail sales (i.e. excluding price effects) decreased by 1.9% in March 2013 when compared with February 2013 and there was a decrease of 3.6% in the annual figure.  If Motor Trades are excluded, the volume of retail sales decreased by 1.8% in March 2013 when compared with February 2013 and there was an annual decrease of 1.6%.

There was a decrease in the value of retail sales in March 2013 when compared with February 2013 of 1.9% and there was an annual decrease of 4.1% when compared with March 2012.  If Motor Trades are excluded, there was a monthly decrease of 1.8% in the value of retail sales and an annual decrease of 1.7%."

So, both volumes and values of sales, both core (ex-Motors) and overall have tanked in m/m and y/y terms. This is outright ugly.

Details of dynamics, all for ex-Motors sales:

  • Value Index for core retail sales 3mo MA through March 2013 stood at 95.7 down from 3mo MA through December 2012 which read 97.1 (a 3mo back decline of 2.38%). 6mo MA stood at 96.4 against 6mo MA through August 2012 at 95.8. Which means deterioration set in over the last 3 months. Volumes of sales is now down 5.2% on 2005 average levels and 6.42% down on crisis period average activity levels.
  • Volume Index for core retail sales 3mo MA through March 2013 stood at 99.0 down from 3mo MA through December 2012 which read 100.9 (a 3mo back decline of 3.07%). 6mo MA stood at 100.0 against 6mo MA through August 2012 at 99.4. Which means deterioration in value of sales also set in over the last 3 months. Values of sales are now down 2.2% on 2005 average levels and 5.35% down on crisis period average activity levels.
  • Meanwhile, ESRI-reported Consumer Confidence Index rose to 60.0 in March 2013 against 59.4 in February, with 1.01% m/m rise and down only 0.99% on March 2012. 
  • On 3mo MA basis - while both Volume and Value of core activities fell, Consumer Confidence index rose at a massive 20.5% rate. Bizarre stuff.
  • Both Volume and Value of sales in March 2013 stood below 2005 average, while Consumer Confidence stood 18.5% above! Both measures of retails sales have dropped in march 2013 compared to crisis period average, but Consumer Confidence rose 8.3%. Even more bizarre stuff.
  • My Retail Sales Activity Index fared much better than the ESRI Consumer Confidence Indicator - down m/m 1.22% and down 1.46% y/y, while up only slightly (+0.20%) on 2005 average and down 3.11% on crisis period average.

Core Conclusions: Latest retail sales figures are outright ugly. These signal continued downside pressure on the domestic economy and, given the dynamics in personal income and earnings, this momentum appears to be driven by the overall consumer sentiment and lack of confidence in future income dynamics, related to Government policy (property tax and personal insolvency regime reforms) and to banks' interest rates policies (consumers expecting rises in the rates, confirmed by this week's ARM rate hikes by AIB & its subsidiaries). The economy is once again putting us on warning: turn downward in economic activity can be expected as a major risk.

26/4/2013: Meanwhile, Patients Still Run the Euro Policy Asylum...

Headlines (via Eurointelligence.com):

  • Angela Merkel: "The European Central Bank would really have to increase the interest rates for Germany";
  • Angela Merkel also said that for other countries, the ECB would have to provide more liquidity for companies;
  • German economics minister Phillip Rosler issued a statement to confirm that the ECB was still an independent central bank;
  • ECB officials, meanwhile, played down expectations that a rate cut would have much of an effect;
  • Joerg Asmussen did not rule out an interest rate cut, but was playing down expectations. He said lower interest rates could work in ways not intended by the ECB, and added that they had virtually no effect in the periphery due to the broken transmission mechanisms;
  • Benoit Coeure as saying that the ECB had done what it can. It was now up to all the European institutions to find ways to solve the problem;
  • Wolfgang Schauble said Italy’s problems were a lack of reforms, and that it would be wrong to blame others for their own misfortune. "... in the eurozone everybody had to solve their own problems. And that is is what Italy needed to do as well. There was no point in asking Germany to take on more debt. Everybody had to run their government in a responsible way";
  • Schauble also said that it would be wrong for member states to depart from austerity path, saying the eurozone problems had nothing to do with strict budget rules, and that "somebody should tell Barroso that".

Conclusion: rest assured - the screw up known as "Euro area policy" will go on unabated no matter what JMBarosso & Co are saying.

ECB rate cut might come or it might not, but it will be minor (25bps) and one-off (with rates unchanged throughout the rest of the year) and it will do no difference whatsoever, other than fuel anti-inflationary rhetoric in pre-election Germany.

Fiscal policy will remain largely unchanged with some states (France, Italy, even Spain?) adopting an Irish-government approach to 'stimulus': find one-off non-tax, like pensions funds expropriation, to fund 'jobs creation programme', while leaving net fiscal adjustments intact. Which will, of course, amount to short-term reallocation of productive funds to unproductive GDP supports, with medium-term negative impact of tax increases and reduced confidence in economic institutions.

26/4/2013: Where's that 'recovery' thingy? Irish Residential Property Prices, March 2013

Various Irish ministers and Government 'analysts' have been on the media in recent months extolling the virtues of 'recovery'. In a society still obsessed with property prices, one of the key tenets of the 'recovery is upon us' proposition is the view that Irish property prices are rising once again usually followed by the claims that hordes of 'foreign investors' and 'domestic cash buyers' are fighting to get their hands on prized Irish properties.

Of course, a major point of internal contradiction for all these 'green jersey' claims is that if property prices are rising, then the cost of doing business in Ireland should be rising as well, just as the 'analysts' are claiming that it is falling, especially when it comes to rents and property costs. You see, one can't really have both: deflation in costs is incompatible with rising prices on assets underlying these costs.

Meanwhile, as usual with the Government's exhortations, reality has been having a mind of its own.

Latest numbers from CSO, covering the Residential Property Price Index for Ireland, show exactly how out of touch the folks peddling are.

All properties RPPI fell 3.03% y/y in March and this accelerated 2.57% y/y fall recorded in February. M/m property prices were down 0.47%, which is better than 1.59% m/m drop in February, but marks 4th consecutive month of monthly prices drops. Last time Irish residential property prices were up was in November 2012 and since then we have seen a cumulative decline in prices of 3.03%.

6mo cumulative decline in RPPI stands at 2.58% against previous 6mo cumulative drop of 1.23% and against average m/m drop over the last 6 months of 0.43%.

In fact, All Properties index has fallen to an all-time low in March 2013 despite numerous proclamations of recovery by the Government. Property prices are now down 50.88% on their peak and are statistically significantly below crisis period average.

The distance to 6mo MA line is now widening, which suggests that we might be in a medium-term secular change in trend downward from the previous trend that was just flat. As a note of caution: this remains to be confirmed over time.

House prices also hit an all-time low in March 2013 with index sliding 3.05% y/y, against 2.90% decline recorded in February, and 0.3% down on m/m basis. 3mo cumulated change is now -3.04%, 6mo cumulated change is at -2.77% and previous 6mo cumulated change was -1.47% so things are getting worse faster. House prices are now down 49.39% on peak.

Apartments prices have decline 1.44% in March on y/y basis, having posted 6.4% rise y/y in February. Monthly change in Apartments prices was -6.99%. 3mo cumulated change in prices is still +2.13%, with 6mo cumulated change of +2.13% down from previous 6mo cumulated change at +9.81%. Relative to peak, Apartments prices are running down 61.34% and relative to all-time low they are up just 4.81%.

Dublin prices were most often cited as showing significant gains in the current 'recovery'. These are still up 1.38% y/y in march, but they were up 2.95% y/y in February. Monthly drop in Dublin residential properties was -0.84% m/m and this marks second consecutive m/m drop. 3mo cumulated change in prices was -0.68% against -1.17% in previous 3mo period, 6mo cumulated change is now at +0.17% against +3.49% increase on previous 6mo period. Dublin prices are now down 56.28% on peak and are up 2.62% on absolute low.

In short, to conclude:

  1. As I have maintained throughout recent months, Irish residential property prices are trending flat overall.
  2. Flat trend is now being challenged to the downside, with some indications that it is turning to negative, though this requires more data to make any conclusion firm.
  3. Prices are seeking some catalyst in the market and despite all the efforts by the Government to 'talk the talk' on recovery, there are no indications from the property market that such 'recovery' is anywhere in sight.

Thursday, April 25, 2013

25/4/2013: IMF's 'End of Austerity' Napkin Sketch Is Soggy Wet

IMF catches up with 'End Austerity' bandwagon and overtakes the EU 'policymakers' in providing a general blueprint. From today's comments by IMF First Deputy Managing Director David Lipton (emphasis is mine):

"...Europe needs to act on several fronts. Countries will need to have clear and specific commitments to medium-term fiscal consolidation, with the appropriate pace to be evaluated on a case-by-case basis. Careful consideration should also be given to the composition of fiscal measures. The European Central Bank (ECB) should maintain its very accommodative stance, he said, but noted that eliminating financial fragmentation – whereby households and companies in some countries face clogged credit channels and lending rates well above those in the core – will probably require the ECB to implement some “additional unconventional measures.”

So the Fiscal Compact of 'One Policy Target & Timeframe Fit All' is out of the window then? If timeframe (pace) were to be set on a case-by-case basis, there is hardly any real discipline left. Here's why. Suppose Italy takes slower path to deflating debt levels to the target of 60% than that mandated by the Fiscal Compact (FC) (5% adjustment per annum). France, then, can demand either a slower pace for its drawdown of debt or it can opt to demand slower reductions in deficits. Which means Spain will also have its list of requests ready, all in breach of the FC.

"As we see it, countries that can afford to support the economy need to do so—but in ways that encourage the private sector to invest and boost demand..."

Ok, but what does it mean? AAA countries borrowing to stimulate? Suppose they succeed. What happens to growth rates and income levels in Euro area? Right - divergence will be amplified and with it, mismatch of monetary and FX policies too. 

Per paying attention to the composition of fiscal measures: it is a fine objective. Except in the case of European leaders, this means, usually, hiking taxes even more instead of cutting spending. IMF knows that this is counterproductive, but whilst correctly arguing that policies should be reflective of heterogeneity between member states' economies, IMF is incorrectly ignoring the political reality of Europe, where more spending = good, lower taxes = bad.

More: "Another country responsibility is better structural policies. Countries should press on to tackle long-standing rigidities in order to raise medium-term growth prospects. Southern Europe, and even some of the core, needs to increase its competitiveness in the tradeable goods sector, especially through labor and product market reforms. So far, much of the reduction in current account deficits has come because demand is sluggish.  For a stronger, sustained improvement -- enough to boost exports that will create jobs for the unemployed -- countries need a broader and more durable improvement in competitiveness, based on structural reform. In Northern Europe, even where national competitiveness is not the issue, reforms could help generate a more vibrant services sector."

Again, usual tool kit deployed by the IMF: structural reforms are needed (no real innovation as to what these might be) and exports must be increased (who will be buying these exports in the world where every country is being told by the IMF to increase its exports?).

I wonder why would Mr Lipton label ECB current stance as being accommodative. ECB interest rate is above G7 average and ECB's 'panacea' of OMT is yet to make any real purchases. ECB has attempted to sterilise all past 'accommodative' interventions and is now pleased with winding up LTROs. In brief, setting aside war-time rhetoric from the ECB, Frankfurt is accommodating very little.

One has to agree with the need to eliminate financial fragmentation, but IMF is fully aware that European system will have to continue deleveraging. There is too much debt in the pipeline to de-clog it by simply pushing through more credit at lower cost.

"...the Single Supervisory Mechanism [is] “a key step” and ...the IMF supports a market-based bail-in approach as being considered in the European Union Directive on Bank Recovery and Resolution, which would require banks to hold a minimum amount of securities with features that permit them to be written-off or converted to equity if capital buffers fall too low..."

So getting Cyprused is  the future for Europe, then.

Mr Lipton is dead on right, saying that "In our preoccupation with sovereign debt, we tend to overlook the huge overhang of private debt in some countries that could be a deadweight on demand and bank balance sheets for a long time. We’ve already seen the hit that households have taken in the periphery economies because of the sharp correction in home prices (e.g. Ireland). This could only worsen without renewed growth (e.g. Spain, Belgium and the Netherlands)." And more: "On the corporate side, we know how much the level of debt has increased over the past decade, particularly in the periphery. We elaborated on this development in our recent Global Financial Stability Report.  ...Measured on a debt-to-equity basis, a portion of Italy's corporate sector is rising into stressed levels. In the event of a prolonged stagnation, corporate profits would slacken further, putting pressure on companies to deleverage and increasing the risk of debt distress. Corporates are not being helped by bank retrenchment back into home markets. This is most pronounced from the periphery; French and German banks reduced their exposures to these markets by some 30-40 percent between mid 2011 and the third quarter of last year."

Conclusion (relevant to 'being Cyprused' above): "None of this bodes well for banks in a stagnation scenario. They are already weak. But higher levels of corporate and household defaults and credit losses would threaten a second round of bank balance sheet deterioration."

Net result: IMF has no new ideas on what to do if 'austerity' path were to be altered. There's a good reason as to why they don't - borrowing cash to burn it on Government spending (traditional European way) is out of question, given the risk of raising costs of borrowing, slow growth and higher interest bills that await. And using monetary policy to full extent is infeasible because IMF has no hope for ECB in its current state.

'Austerity' might be overdone, but 'Not Austerity' is unlikely to be any different...

Wednesday, April 24, 2013

24/4/2013: Credit demand conditions in Irish banks: Q2 2013

All's quiet in the Irish Banking 'sector' Zombieland, per CBofI latest missive (link):

Good news: there was an improved demand for Fixed Investment in Q4 2012. Since then, Q1-Q2 2013 shows zero growth in demand. Non-news: Operating capital is now again tight (Q4 2012 and Q2 2013) against zero change in Q1 2013. Bad news: restructuring demand is up again after posting zero growth in Q1 2013.

So on business credit demand side: no real economic activity growth is signalled by investment demand, poorer conditions in operating capital signalled by the respective demand increase (albeit very moderate rate of increase) and credit restructuring pressures are slightly up as well.

On households side:

House purchases credit demand is up, at weak and moderating rate. Nothing dramatic, really, but good-ish sort of news. 

Basically, things are flat. Again, you can read this as a somewhat positive (things are not getting worse), or you can treat it as somewhat negative (given rates of contraction in credit during the crisis, real recovery should see demand and supply spiking rapidly up). My view is - the above confirms the proposition that Irish economy is at near-zero real growth trendline and the banking sector remains a drag on growth.

24/4/2013: Systemic biases in income, consumption & savings surveys

A subtle, but important from policy and business strategy perspective paper from the Banca d'Italia, Working Paper No. 908, titled "Asking income and consumption questions in the same survey: what are the risks?" (April 2013) by Giulia Cifaldi and Andrea Neri.

The issue at hand is of relevance to:

  • Marketing and market surveyors who aim to identify the relationship between sub-groups or categories of consumers in terms of their incomes and consumption, as well as savings;
  • Policymakers concerned with use of surveys to accurately gauge savings and consumption (in the recent case in Ireland the issue relates to the accuracy of the estimates of required income expenditure and available disposable income in the case of Personal Insolvency Guidelines).

Per authors: "Sample surveys … focusing on income usually do collect some information on expenditure data. A main drawback of this practice is that it could let some researchers think that both sets of information have similar accuracy, as they are derived from the same survey. This paper provides an empirical investigation of the consequences of such an assumption.

We draw on the Survey of Household Income and Wealth (SHIW, thereafter) as a case study, since it collects information on both income and consumption. We combine this survey with the information coming from other surveys that are assumed to be more reliable than the SHIW for specific items."

Core findings:

  • On average, "the underestimation of household income is lower than the one relating to consumption."
  • "As a consequence, in the survey saving rates are likely to be overestimated," and  "…measurement error in income data is proportionally higher for high incomes."
  • In the case of consumption data: "Household saving is likely to be overestimated, especially for households in the low income classes."
  • Authors also "find evidence that measurement error may bias the relationship between household savings and its determinants."

Link to the study: http://www.bancaditalia.it/pubblicazioni/econo/temidi/td13/td908_13/en_td908/en_tema_908.pdf

24/4/2014: Mandatory or Voluntary Board Independence?

An interesting paper on the impact of independent directors appointments on equity prices published in September-October 2012 issue of the Emerging Markets Finance & Trade (vol 48, number 5, pages 25-47) throws some light on the role of regulatory and governance restrictions relating to Corporate Governance.

Traditionally, and especially in the present economic climate of mistrust of the enterprise and markets, imposition of the regulatory requirements for independent directors appointments to the boards of the companies is seen as a good thing. The argument in favour of mandatory requirement of this sort goes along the lines that forcing a company to comply with the 'best practice' in corporate governance leads to an improvement in company performance. Presence of independent directors on the boards, especially where mandated, is seen as one of the most important aspects of board-level governance, bestowing the benefits of monitoring of the management decisions and performance, as well as signalling to investors (and even potentially customers and counterparties to the firm's operations) the quality of the firm (at least as far as its governance structures are concerned).

If the above thesis is correct, on average, firms operating in the regulatory environment of mandatory requirements for appointment of independent non-executive directors should outperform (from investor perspective) firms operating in the environment where such appointments are not required.

Ming-Chang Wang and Yung-Chuan Lee - in their paper titled "The Signaling Effect of Independent Director Appointments" - use data for Korean plcs during the period of time when some of the firms were covered by the explicit requirement for appointment of directors and some operated in the environment where such appointments were made on the basis of voluntary choice of the firm board.

The authors hypothecise that "analytical model proposes that the market expects voluntary appointments to bring more positive value than mandatory appointments since voluntary appointments signal the integrity of the firm". And indeed, the authors find that voluntary and not mandatory appointments "are associated with higher abnormal returns from appointment announcements, particularly for firms with severe agency problems..."

Empirical results from the study show that:

  1. "... there are significantly positive market reactions to the announcements of the appointment of independent directors" in terms of abnormal returns in days 0, 1 and 2 after the announcement (+0.095-0.125%) and in cumulated abnormal returns "in the windows after and between the event day" at 0.236% and 0.254%, respectively.
  2. "... mandatory appointment policy has not provided investors with any significant monitoring value, and we can therefore also state that the regulation has not been effective for the market".
  3. "In contrast to the mandatory appointments, the significantly positive abnormal returns of the voluntary appointments for days 0, 1, 2, and 3 reveal the possibility of the existence of a combination effect of both signaling and monitoring value after the event day, based upon firms' voluntarily appointing independent directors to signal their integrity."
From the point of view of the policy systems, the results above suggest that instead of imposing mandatory requirements, we would be better off cultivating voluntary culture of board independence and appointment of directors with truly independent track records. Afterall, when you think of the potential for cronyism determining or co-determining appointments choices in the mandatory requirement setting, you can see that mandatory appointments can do more damage than good to both the firms and the markets.