True Economics

30/1/2012: Dublin gets horrific ranking on economy

2012-01-31T07:25:00.001+14:00

Dubious distinction for Dublin - identified as the World's 4th Worst-Performing City (see link here): and here are the snapshots of our 'neighborhood' in the rankings:

Source: http://www.businessinsider.com/the-10-worst-performing-cities-in-the-world-2012-1#

Between, I am puzzled by the pic selected for Dublin. Can't think of where it was taken...

30/1/2012: Fake Doctors Treating Fake Disease in Greece

2012-01-31T01:44:00.001+14:00

There are many 'expert' voices in the media saying Greece should exit the Euro zone in order to return to growth. This, as I commented earlier today, is a gross oversimplification of the reality.

There is simply no evidence whatsoever that Greece can grow on its own any faster or more sustainably than it did within the Euro. In fact, the evidence presented below shows that the only period during the last 30 years in which Greece was able to somewhat marginally close the gap in growth between itself and the Advanced Economies group is the period immediately following its accession to the Euro.

It is a fallacy of 'alternative expectations' to believe Greece will be enabled to grow its economy under post-euro devaluation beyond achieving a 1-2 years-long 'bounce'. Analysts who expect Greece to recover on the back of exiting the euro & devaluing are deluding themselves for two major reasons:

Greece has no fundamentals for growth & its debt overhang will remain, unless it defaults hard. Even with a default, removing debt overhang is not going to deliver growth to Greece beyond simple mechanical post-depression bounce, as Greece lacks all fundamentals for growth - institutional, cultural and historical.
However, with a hard default option, post-Euro, Greece will not be able to borrow & absent Government spending Greece has no capacity to grow. This is clearly shown in the charts below which highlight that in 23 out of the last 29 years, Greece has managed to achieve growth only with accompanying fiscal imbalances.

In summary, Greece never once had any fundamentals to grow on its own without massive subsidies either via loose monetary policy or overinflated expectations relating to the country accession to the European common structures. Greece is not about to get real growth-driving fundamentals within or outside the euro area.

In short, all those talking about 'Greece must exit euro zone to achieve growth' are nothing more than fake doctors treating a patient who himself is faking a disease. Greece's problem is not the Euro. It's problem is Greece itself.

Here are the charts proving the point.

Fiscal imbalances:

Structural failure:

External insolvency:

Rotten growth fundamentals:

And lastly, rotten growth record

QED.

28/1/2012: Spin of 'great investment destinations' - Malta

2012-01-29T10:40:00.002+14:00

For 'Malta is a great investment destination' crowd. Here is a quick stats summary based on IMF WEO:

So let’s summarize the above:

Malta is poor, has moderate inflation, which is of course consistent with low growth. Malta’s exports ofgoods and services are growing very slowly – if it is such a great tradinglocation, can someone explain this? Malta performs well in unemployment terms,but this conceals the fact that Malta’s population is either too old or tooyoung or too long unemployed to actually count as being in the workforce.Hence, Malta is second worst performer in the euro area in terms of actualemployment rates.

Malta’s public finances are in line with majority of otherAccession States, so it is doing decently well (though not spectacularly) in termsof Government deficit and structural balance. It is not exactly a stellarperformer when it comes to Government debt, but it is extremely poor performerwhen it comes to external balance – current account. Which, of course, is theexact opposite of the evidence required to support the premise that Malta is asuccess in terms of attracting foreign investment, or being a great destinationto trade from.

You can tell, I hate spin!

28/1/2012: Eurocoin for January 2012

2012-01-29T00:43:00.000+14:00

The latest leading indicator for euro area growth -Eurocoin - for January continues to signal recessionary dynamics, albeit at moderating rates of decline.

January Eurocoin rose to -0.14 from -0.20 in December 2011. Here are some charts:

Eurocoin is now in the negative territory for four consecutive months. 3mo MA is at -0.18, 6mo MA at -0.07, crossing into negative for the first time since the last recession. In January 2011 the indicator stood at +0.48. Quarterly rate of growth is now at -0.17 implying annualized contraction of -0.56%.

There is now, due to persistent negative reading, more consistency in eurocoin and ECB repo rate, but inflation-growth remain unbalanced when it comes to applying Taylor rule to ECB rate policy.

All in, the rates decision based on the leading indicator performance should be to stay put and await more significant moderation on inflation side. Mild bout of inflationary recession is still on the cards for the euro area for Q1.

26/1/2012: Rip-off Ireland - Sunday Times, 22 January 2012

2012-01-27T05:56:00.000+14:00

This is an edited version of my Sunday Times column from January 22, 2012.

Back in 2004, with much fanfare, Fine Gael launched itsripoff.ie campaign that highlighted a large number of cases wherepolicy-related or regulated price structures and practices have resulted in ourcost of living falling well out of line with other Euro area economies. In2009, Fine Gael launched a policy paper that was supposed to end Rip-offculture, including in state controlled sectors, once and for all.

Fast-forward to today. Since elections, having abandoned itspro-consumer agenda, Fine Gael has done marvellously in playing a ‘responsible’possum to Irish vested interests.

According to the CSO, year on year, consumer prices inIreland rose 2.5% through December 2011. Therange of these price changes across sectors, however, was dramatic.

Clothing and footware prices were up0.4% in 12 months through December,Furnishings, Household Equipment and Routine Household Maintenance prices fell1.9%, Recreation and Culture deflated by 0.6%and Restaurants and Hotels costs fell 0.9%. Health costs rose 2.6%, Transportby 1.6%, Education by 8.9%.

Majority of these price hikes have nothing to do withprivate firms ‘profiteering’. Per Purchasing Manager Indices, tracking thechanges in input and output prices for goods and services, Irish firms and MNCshave experienced sustained shrinking of the profit margins since the beginningof the crisis, as consistent with deflation. Instead, the largest priceincreases, and ever expanding profit margins, took place in the sectors that,in the past, Fine Gael have correctly identified as being state-controlledparts of the Rip-off Ireland.

Food and non-alcoholic beverages prices are up just 5.9% inthe last 10 years, cumulatively. State-controlled Tobacco prices are up 69.6%and Alcohol 21.6%. Housing, Water, Electricity, Gas and Other Fuels – singlelargest category of consumer spending – is up 64.4% on December 2001, with 90%increase in Energy Products costs, 63.3% increase in Utilities and LocalCharges, and 99.1% increase in Mortgage Interest costs. In the last five years,Rents have fallen 8%, while Mortgage Interest rose 11.3% despite the fact thatECB rates have dropped 2.5 percentage points over the period. Electricityprices are up 28.3% in 5 years and 11.5% in the last year alone, despite thefact that natural gas prices – the main generation source for Irish electricity– have declined worldwide.

While Fine Gael cannot be blamed for the full extent ofprice hikes since 2001 or 2006, the current Government bears responsibility forfailing to address state-controlled inflation since taking the office.

The above sectors are indirectly controlled by the state viaregulation, state ownership of banks and enterprises, and indirect taxmeasures. But what about those costs more directly set by the Government?

Health costs are up 56.5% on December 2001, Education is up81.5%. In Health, the core drivers of inflation havebeen Hospital Services (up 40.2% since December 2001 and 9.8% in 2011), Dental Services (up 20.6% in 5 years, butdown 0.3% in the last 12 months). Meanwhile, prescribed drugs prices are down11.3% on 2006 and 4% in the last 12 months. Health insurance costs are up 75.7%and 22.9% since December 2006 and in the last 12months, respectively. This in a country with younger population and well-establishedtrends in terms of demand for healthcare. In contrast, vehicles insurance –privately provided and similar in predictability of total claims risks –inflation since December 2006 amounts to just 9% and0.9% in the last 12 months.

Same story of the state-led rip-off is replicated in theTransport sector. Here, overall costs are up 9.3% in the last 5 years, but busfares are up four times as much. Privately controlled costs of buying vehicleshave declined 15.4%, while state-set motor tax rose 14.3%. Ditto inCommunications, where telecoms services costs are up 5.8% in the last 5 years,but postal services up double that.

In two sub-sectors of education where the Government hasleast power to influence prices – Primary Education and Other education andtraining – inflation is the lowest. The highest price increases are in thethird level education, with prices up 50.1% in just 5 years (13.4% in last 12months alone).

The above clearly shows that the Government and thesemi-state bodies and enterprises it owns, along with the banks are at theheart of the extortion racket that is our cost of living. Over the recentyears, rapid deflation in prices and costs in the private economy has beenoffset by the rampant inflation in prices and costs in the state-controlled andregulated sectors. In majority of cases, this inflation was directly benefitingstate and semi-state employment, management and Government coffers. In allcases, the costs were directly impacting Irish consumers who are left with nomeaningful choice, but to comply with the pricing structures set in themarkets.

CHARTS:

Sources: CSO database and author own calculations

Meanwhile, Budget 2012 clearly shows that the Government ishell-bent on extracting ever-higher rents out of consumers through taxes andcharges.

For example, the Government has introduced increasedmortgage interest relief that amounts to €52 million in help for mostindebted-households. But the very same Government refuses to intervene in thebanks’ internecine policies of shifting the burden of losses from trackers ontothe adjustable rate mortgagees. The households that the Government finds in theneed of increased mortgage interest relief will be liable for the new HouseholdCharge. And, if Minister Noonan has his way, mortgagees who default on theirloans will pass into outright debt slavery to the banks.

There are more direct inflation-linked or inflation-raisingtaxes, such as VAT. Increase in the VAT rate simultaneously pushes up theoverall tax component of all goods and services sold in the state that aretaxable at the higher rate (an increase in inflation of some 9.5% for thoseitems) and increases the costs of all goods and services that are dependent onintermediate inputs. Excise tax on tobacco comes against the RevenueCommissioners’ analysis showing that tobacco taxes have reached, even beforeBudget 2012 measures are factored in, the point where higher taxes harmreceipts and fuel black markets. And Carbon Tax quadrupling from €5 per ton to€20 per ton has been responsible for some 2% rise in inflation in fuel andrelated activities. Motor tax increases, accounting for double the share in anaverage household expenditure that accrues to bus fares, are going to directlydrive up the cost of transport.

Increases in State charges for hospital beds are expected toraise the cost of healthcare for middle class patients by some €268 million infull year terms. Health insurance levy hike further compounds this inflationarygrab-and-run approach to policy. Secondary education ‘savings’ are likely tosee parents being forced to cover much of the gap in funding out of their ownpockets. Third level measures, while relatively modest in size, will compoundmassive inflation already accumulated in the sector over the last 5 years.

By the metrics of the Budget 2012, the current Governmentdidn’t just mothball its pre-election ideas on reducing the reach of theState-sponsored Rip-off Ireland, it has actively moved to embrace the cost-of-livingincreases through indirect taxation and encouraging avarice of the semi-statecommercial bodies and dominant near-monopolies. All of which means that thepath to economic recovery we continue upon is the path of deflationary spiralin private sector economy, with mounting unemployment and businessesinsolvencies, offset by the unabated cost increases when it comes to the meagreservices the State does supply or control.

Box-out:

Following an almost 11% month on month decline in tradesurplus in October, Irish exporters have posted a record-breaking return tohealth in November, bucking all expectations. The market consensus was for theIrish trade surplus (merchandise trade only) to decline marginally to ca €3.4billion in November. Instead, the trade surplus rose – on seasonally adjustedbasis – to €4.31 billion – the highest on record. In 11 months throughNovember, cumulative merchandise trade surpluses now amount to €40.53 billionor 1.6% ahead of the same period in 2010. As before, the core drivers of tradesurplus were exports increases in Organic Chemicals, and Medical andPharmaceutical products, while indigenous exports rose significantly during thelast year in Dairy products category. The latest data highlights the resilienceof the Ireland-based MNCs’ exporting capabilities, providing continued contrastto the majority of our counterparts in the Euro area ‘periphery’ who have beenposting dramatic slowdowns in exports and deepening trade deficits since thebeginning of Q4 2011.

26/1/2012: IMF's latest statement on Greece

2012-01-26T14:55:00.001+14:00

Here's an interesting statement:

Given widespread press speculation and rumors regarding IMF views, the following can be attributed to an IMF spokesman, William Murray:

"To ensure debt sustainability for Greece, it is essential that a new program be supported by a combination of private sector involvement and official sector support that will bring debt to 120 percent of GDP by 2020. The Fund has no view on the relative contribution of private sector involvement and official sector support in achieving this target. In line with this view, the IMF has not asked the ECB to play any specific role."

So IMF is making a pre-emptive announcement of 'neutrality' on the issue of the day - who'll be blamed when Greek PSI talks eventually end up in the courts and Greek debt/GDP ratio shoots past 150% mark.

And here's IMF own December 2011 report on Greece (available here)"

Page 13:
"The previous July 21 financing package [agreed for Greece] would not work. Public debt would peak at 187 percent of GDP in 2013 and fall to 152 percent of GDP by 2020. Net external debt would peak at 128 percent of GDP in 2012 and fall to 96 percent of GDP by 2020. These already weak downward trajectories would not be robust to shocks.

The precise outcome of the PSI exercise has an important bearing on public debt dynamics and how robust any improvement would be (the external debt sustainability analysis shows a similar pattern):

With near-universal participation in a debt exchange targeting a 50 percent face value haircut and offering a low coupon, and European support at an interest rate of about 4 percent, debt could be brought to 120 percent of GDP by 2020 (the maximum level considered sustainable for a market access country). The trajectory would also be less susceptible to shocks (including to the official sector funding cost), although a longer period of time would be required to bring debt-to-GDP below 120.
However, with low participation in the debt exchange and a significant amount of hold outs to be amortized with European support—a real risk under a purely voluntary approach (i.e., an approach not involving any measures to induce higher participation levels)—debt could stick above 145 percent of GDP in 2020. Moreover, the trajectory would no longer be robust to the usual range of shocks.

Thus, securing a sustainable debt position will depend on whether PSI negotiations deliver the targeted €100 billion in debt reduction, in particular on the ability of the features of the exchange to deliver near-universal participation."

So in other words, why issue pre-emptive statements now? Because a month ago IMF has already washed its hands on Greece, basically saying that, 'look, if all goes really well, things might get to sustainable scenario (assuming Greece delivers on all structural reforms and privatizations and there are no slippages in growth and external balances, etc), but we don;t quite believe they will...'

25/1/2012: Return to the Bond Markets

2012-01-26T07:16:00.002+14:00

According to the report in FT Alphaville (link here) Ireland has 'returned' to the bond markets by carrying out a swap of a 4% coupon 2014-maturing bond for a 4.5% coupon 2015-maturing bond. This reduces 2014 outgoings on redemption of maturing bonds and forces more maturity into 2015, which has more benign profile. But the switch comes at a price - the coupon is up 12.5% on previous.

In effect, if this is less of an Ireland's 'return to the bond markets', more of Eddie 'The Eagle' Return to the Olympics type of an event. Much pomp (official announcements and Government statements to follow), no circumstance (Ireland still cannot fund itself outside the Troika agreement), and even less real substance (avoiding a total blowout in 2014 is now clearly an objective for policy measures). But hey, let it be a much needed 'green jerseying' distraction, as FT Alphaville suggests, to the gruesome reality of Ireland torching another €1.25 billion worth of taxpayers' funds on that pyre called IBRC/Anglo.

24/1/2012: Residential property prices - 2011 highlights

2012-01-25T05:35:00.000+14:00

Latest Residential Property Price Index (RPPI) from CSO posts another monthly decline in the price series and marks deep drops in the property prices in 2011. Here are top of the line figures - end of year readings:

And updated Nama valuations referencing:

So to summarize (note - there will be more detailed analysis of this data coming up in later posts):

All properties index is now 31.1% below January 2005 levels
Houses are now down 28.3% below January 2005 levels
Apartments are now down 46.5% below January 2005 levels
Dublin all properties are now down 39.3% below January 2005 levels
Rates of decline (monthly) are greater than 1.5% (12mo average) for 3 months in a row for all properties and for houses.

24/1/2012: Europe's Latest Non-Leadership on ESM/EFSF

2012-01-24T22:38:00.000+14:00

Another heated non-debate is sweeping Europe. In the latest round of bizarre, outright Kafkaesque rhetorical contortions, European leaders are now engaged in a heated discussion on the 'enlargement' of ESM. Alas, the whole thing is clearly heading for the same outcome as Europe's previous rounds of 'solutions'. Here's why.

Recently, as reported in German press (here) Angela Merkel started to yield on the idea that the 'permanent' ESM fund should be increased from €500 billion to closer to €1 trillion by, among other things, allowing for concurrent running of existent €250 billion EFSF facility and the setting up of the new ESM.

Sadly, this 'solution' is really a complete red herring, despite all the hopes the EU is pinning onto it. In fact, it so much of a fake, the markets are simply likely to laugh their way through it.

The EFSF is designed to run out of time in the end of 2013. ESM is designed to start the earliest in mid-2012. Which means that even in theory, combined ESM/EFSF can last not much longer than 12 months. In practice, however, even this is not going to happen.

Firstly, EFSF is becoming increasingly funded through short term debt issuance and this means that as we hit 2013, the rate of EFSF paper maturing is going to accelerate. To roll this into longer-dated paper will require more than just re-writing the statutes of the EFSF. It will require EFSF raising funding at the same time as ESM is raising funding. The likelihood of this being a successful market funding strategy is zero.

Secondly, ESM capital basis of (meagre) €80 billion is not going to be fully invested on the initiation of the fund. Which means ESM even in theory is not going to come out on day 1 and borrow full €500 billion capacity. In practice, it can't be expected to raise even 1/4 of that in the first year of operations.

Which means that even running concurrently, EFSF+ESM duo will not constitute a fund with anything close to €750 billion capacity. And this means that European leadership is clearly in line for winning the Global Non-Leadership Prize again this year. IMF, insisting on the concurrent running of EFSF/ESM as well, is going to be a runner up.

23/1/2012: Extreme Events

2012-01-24T01:35:00.000+14:00

Going through 2 charts and mapping the big themes of the ongoing crises, one has to be in awe of the volatility. Here are the maps of extreme (3-Sigma-plus) events with 'directionality' reflected:

Lovely, aren't they? But the trick in the above is: we are not at the decay stage of volatility on the sovereigns re-pricing stage. This, to me, suggests that once the sovereign crisis re-pricing draws to conclusion (whenever that might happen - isa different story), there will be the need for finding that 'new normal' (reversion-to-the-trend target) for the markets valuations overall. And that is the whole new game, dependent less on the previous equilibrium that should have followed the Great Bursting period, but more on the future risks and trends in post-debt economies. Which, itself, really depends on whether any given market can sustain growth without endless supports (implicit and explicit) from the Government borrowings.

Just thought I'd throw few thoughts out there...

22/1/2012: An update to Euribor risk premium post

2012-01-23T12:19:00.000+14:00

On the foot of the previous post, I recomputed risk premia for 3 maturities: 12, 9 and 6 months euribor. Here's the chart:

And some top of the line numbers:

To compare against rates dynamics:

22/1/2012: What do interbank lending rates tell us about risk valuations?

2012-01-23T09:29:00.000+14:00

Here is an interesting set of charts for euribor:

Notice that as maturity span shortens, there is an increasingly rapid decline in the rates in recent month. This, of course, is a reflection of two forces acting simultaneously - the ECB LTRO and the rate drop in December. You can see this here in the context of 12 months euribor plot for end-of-month (and end of last week for January 2012):

Sounds good? Indeed, the short-term end of liquidity curve improved dramatically, but... here's a trick - the long-term end of the curve is not improving as much as (1) the repo rate supports, and (2) LTRO (3 year facility) should lead it to. To see this - here's a chart:

And the above term premium is rising despite the risk premium falling:

Note: the last chart above is not seasonally adjusted and, with exception for 2010, euribor rates tend to fall seasonally in January compared to December.

In fact, current risk premia are well above the long-term relations and at more extreme end of the spectrum than during the previous months:

The above suggests to me that what we are observing in the liquidity markets is a combination of some improvement due to ECB's LTRO move (substitution along maturity curve) and the (very) incomplete pass through of ECB rate change to funding markets. There appears to be no evidence in risk reduction anywhere in sight.

22/1/2012: 'Markets are crazy', says market economy Ireland

2012-01-22T23:28:00.000+14:00

So we used to have an 'Innovation Island' here that was run by the Deputy PM who confused Einstein with Darwin. She was directly in charge of Innovation policies.

Now we have a 'Competitive Market Economy' that 'Is Open for Business', as we constantly remind our potential foreign investors (domestic investors we have simply taxed into oblivion already and are even expropriating their wealth through Minister Noonan's 'levy' on pensions), run by the Minister responsible for the following statements (source here HT to @brianmlucey for flashing this one out):

"Michael Noonan, Ireland's finance minister, criticised the involvement of private creditors in the [Greek PSI] talks, arguing that it had made the crisis worse. Mr Noonan told the German newspaper Sueddeutsche Zeitung it had been a "fatal" mistake to involve the private creditors and this had "driven the markets crazy". He said that markets would only calm when they were convinced that eurozone countries were making serious efforts to solve their debt problems."

So, 'markets are crazy' and proper risk sharing with private investors in the case of insolvency is a 'fatal mistake'.

Does Minister Noonan believe in slavery? Because if he doesn't then there is no alternative in the case of Greek crisis resolution options to PSI. Of course, Minister Noonan believes in slavery - the modern variety of it - slavery that subjugates those who do not emigrate from Ireland to decades of involuntary repayment of privately accumulated debts they did not contract to accumulate. Minister Noonan has no problem with the Government of Ireland simply undertaking all private debts of a private insolvent banks and forcing ordinary people - not shareholders or lenders to these banks who were paid to take the risks in the first place - to repay them. Just like that. Without any consent: "Give us your money, granny, or else!"

But there's more to the statement above, which shows Minister Noonan in an equally unpleasant light. You see, Minister Noonan swears by the wisdom of the IMF and the ECB and the European 'partners' when it comes to his domestic policies. He did so officially earlier this week when he used Troika endorsement of Ireland's 'progress' in the programme as the reflection of their support for his policies. Yet, it is the very same Troika he so blindly follows into Ireland's economic oblivion which deemed Greek debt levels unsustainable - aka non repayable even were the modern day debt slavery terms (as imposed in Ireland) deployed in Greece as well.

So, for all our Irish concerns about the sanity of the Troika 'solutions' for Ireland, there's an even greater concern that should be preoccupying our minds - concerns for the positions taken by our own national leaders. And for all those would-be foreign investors into Ireland - please remember, you are about to invest in the economy run by those who think that 'markets are crazy' and contracts for risk pricing are 'fatal mistakes'.

PS: Never mind, Minister Noonan's only plan for Ireland is to attempt, asap, borrowing in the 'crazy' markets to finance his 'sane' fiscal management strategies.

20/1/2012: Non-News from a Road to the Second Bailout

2012-01-21T10:57:00.000+14:00

This story in the Irish Times yesterday clearly requires a comment. So here it goes.

Here's the best time-line and explanation as to Minister Noonan's 'efforts' to secure 'savings' on the Promissory Notes.

Now, consider the following from the Irish Times today:

"We think there’s a less expensive way of doing [restructuring of the Promissory Notes] by financialengineering, and we’re not talking about private-sector involvement orrestructuring,” said Mr Noonan in Berlin "...it is about pointing out to the troika that there are difficulties andthat it could be less expensive – and everyone still gets their money.”

"A senior German official said Berlin could envisage extra programmefunding being used for the Irish banking sector not currently earmarkedfor this purpose."

The above might mean many things:

Ireland still has some funds due under the original 'bailout' that were earmarked for banking measures, but were not yet used in the last recapitalizations round in July 2011. This will not in itself constitute any new measures materially impacting Ireland's Government debt projections. It will not constitute a second bailout (as the funds are already earmarked under the first bailout), but by reducing funding available for fiscal and other banking requirements it will increase the probability of such a bailout in the future.
Ireland can be allowed to borrow more from the EFSF/ESM, swapping the Notes for marginally cheaper funding. This too will not constitute any material impact on Ireland's Government debt projections. But it will constitue a second bailout.

Neither option involves any possibility for 'private sector involvement' and at any rate, Minister Noonan's reference to PSI is a red herring - there can be no PSI in relation to the Promissory Notes as these do not involve private investors or lenders at all.

However, both (1) and (2) have material impact in terms of Ireland requiring a second bailout - both increase materially the probability of such an eventuality.

Lastly, there is a catch. The problem of capital adequacy, highlighted by Minister Noonan, means that 'financial engineering' can only involve temporary relief in terms of payments timing, not material relief in terms of NPV of the debt assumed by the state under the Promissory Notes. We will be allowed to borrow more time. At a cost of longer loans, and more repayments in the end. Which, of course, does nothing to achieve sustainability of the 'solution' from the point of view of us, taxpayers, who Minister Noonan expects to pay for all of this. But it probably does give him a chance of holding a 'triumphant' pressie announcing some sort of a 'deal'.

So in the nutshell, the Irish Times story is... errr... a non-story. A sort of traditional Spin that comes out of the Government every time they are caught... errr... fantacising the reality. As NamaWineLake put is so excellently:
"...it has been four months since Minister Noonan’s meeting with the ECB and others in Wroclaw where he, to use his own words “had a ball to kick around” and has proposals. It is two months since Enda Kenny discussed the matter with Angela Merkel. It is more than two months since Minister Noonan said that “technical discussions” were ongoing. And yet the Troika yesterday downplayed any progress in the matter saying that Minister Noonan had merely “requested discussions”."

Or maybe, just speculating here, Minister Noonan is bringing up the Promissory Notes once again this week because next week we are about to repay another tranche of Anglo bonds? Last month, around the time of the repayment, there was much-a-do-about-nothing going on in referencing the very same Promissory Notes?

However, there is, in the end, something openly honest about Minister Noonan's windy trip down the 'Imagine the Superhero, ya Villain' lane.

"[Minister Noonan] said he hoped that the ECB would extend its programme oflow-interest loans beyond next month to improve euro zone bankliquidity in the hope it would stimulate the market in longer-termsovereign debt papers."

Point 1: LTRO-2 was already announced, so Minister Noonan is either uninformed, or pretends to be uninformed to posit himself as a a heroic 'rescuer' proposing a real 'solution'.

Point 2: Minister Noonan clearly shows that his sole concern is how to raise more debt for Ireland. Not how to balance the books (in which case he shouldn't need banks to pawn their assets as ECB to buy Government bonds with this fake cash), or reform the economy (in which case growth would resume and the State shall not require the said scheme, again) and not with restoring functional banking system to health (since functional healthy banking system lends to the real economy, not to Minister Noonan).

At last, truth revealed?

20/1/2012: Deputy Peter Mathews v Minister Noonan

2012-01-21T07:32:00.001+14:00

Here are some extracts from an excellent contribution by Peter Mathews TD (FG) from yesterday's topical debates in the Dail (full record available here). This was comprehensively overlooked in the media reporting which focused solely on the non-event (save for Vincent Browne's questions) of the Torika 'approving' Ireland's 'progress'. My comments in italics.

Deputy Peter Mathews:
NextWednesday, 25 January, is the due date for the redemption of a bond issuedoriginally by Anglo Irish Bank Corporation, now the Irish Bank ResolutionCorporation.
We are at animportant financial crossroads in the history of our country. Anglo Irish Bank has been insolvent andsupported by financial engineering, promissory notes and the emergencyliquidity assistance of the European Central Bank and funds from our CentralBank. The debt that lies embeddedin what was Anglo Irish Bank was not created by the citizens of this country. It has been meted out onto their backsby a mixture of incompetence and mismeasurement over a certain period under thepast Administration.
We are at a moral crossroads. We should bring to the attention of thecreditors holding the bond the facts that the bank is insolvent and that, ineffect, it is not a case of our not wanting to pay but of our not being able todo so...

Consider the debt of €1.25billion. The attention of thecreditors will be in sharp focus because the banking system, the Irish-ownedbanks, are in debt to the ECB and our Central Bank at a level of approximately €150billion. It is the forbearance andtolerance of citizens that keeps the financial edifice and engineering of theeurozone and the greater financial system of the developed world in place. We have been doing considerable work,facing enormous challenges. Through the great work of the Minister for Finance, Deputy Noonan, andthe Taoiseach, we are bearing the load of trying to bring about a fiscaladjustment in line with the troika agreement signed in November 2010. All that work is important and must bedone but the legacy debt is outside the responsibility of the people of thisState.

One and a quarter billion euro isalmost half the budget [measures] introduced in December. It is eight times the sum that will be raised from thehousehold charge and twice that which will be raised by the VAT increase. The debt crisis in Ireland and othercountries cannot be solved by adding more debt... Loading more debt on thiscountry to pay legacy debt is like suggesting a drink problem can be solved byanother whisky.

Minister for Finance (DeputyMichael Noonan):

I thank Deputy Mathews for raising this veryimportant issue. The repayment ofthe bond in question is an obligation of the bank and will be repaid by thebank. It is important to be clearthat it is the bank and not the Exchequer which will meet this obligation. [Need anyone point the following to the Minister, that the 'bank' has no own assets or capital over and above that which has been committed to it by the State and that the Promissory Notes are being financed by the Exchequer?]

The Government has committed toensuring that there is no forced or coerced involvement by the private sectorburden sharing on Irish senior bank paper or Irish sovereign debt without the agreementof the ECB. This commitment hasbeen agreed with our external partners and is the basis on which Ireland'sfuture financing strategy is built. While the cost to the Irish taxpayer has been and will remainsignificant, the Government clearly recognises the need to work as part of theeurozone in order to ensure a return to the funding markets in the future. The only EU state where private sectorinvolvement will apply is Greece.

The following was agreedby all 27 member states at the euro summit last October:

15. As far as our generalapproach to private sector involvement in the euro area is concerned, wereiterate our decision taken on 21 July 2011 that Greece requires anexceptional and unique solution.

16. All other euro areaMember States solemnly reaffirm their inflexible determination to honor fullytheir own individual sovereign signature and all their commitments tosustainable fiscal conditions and structural reforms. The euro area Heads of State or Government fully supportthis determination as the credibility of all their sovereign signatures is adecisive element for ensuring financial stability in the euro area as a whole.

This was agreed by theHeads of State and Government at their meeting in October, and Ireland wasincluded in the 27 states that agreed to it. [Minister Noonan fails to note here that it was on insistence of his own Taoiseach that article 15 does not include Irish banking sector resolution-related debts. And he deflects the arguments made by Deputy Mathews on feasibility of repaying these debts.]

It is not correct to state that onlytaxpayers have borne the burden of rescuing the Irish banks. Holders of equity in the banks havebeen effectively wiped out in burden sharing while holders of subordinated debthave incurred a €15.5 billion share of the burden to date, including €5.6billion since this Government took office less than a year ago. [Again, Minister Noonan is dis-ingenious in his comments. Equity holders and bond holders are contractually in line for these losses. Taxpayers are not. In effect, Minister suggests that there is some sort of equivalence between treating harshly contracted parties to an undertaking and treating harshly an innocent by-stander. There is no such equivalence.]

To impose burden sharing on seniorbondholders, or to postpone the repayment of this bond at this point in time,is not in Ireland's best interest. What is in the Irish people's best interest is that we regain ourfinancial independence and that we place ourselves in a position to re-enterthe financial markets at the earliest possible date... We do not need to scupper our recovery,scupper the goodwill generated or alienate our partners by taking unilateralaction which in the medium to long term will prove wholly counterproductive. [This is an outright conjecture by the Minister that is unfounded in fact. It is not in the interest of the Irish people to simply regain access to financial markets. It is only of such interest if we can regain it at a lower cost than alternative funding provided. Furthermore, his statement assumes that not repaying Anglo bondholders will cause the detrimental impact on 'goodwill' and the 'financial markets'. This remains to be tested and proven.]

If we were to postpone or suspendpayments to creditors of IBRC, this would have a significant impact on both thebank and, ultimately, the State. The senior debt, unsecured as it is, is an obligation of the bank. If the bank does not meet such anobligation, it would lead to a default and, following that, most likelyinsolvency. Insolvency wouldresult in a very significant increase in the cost to the State to resolve theIBRC. [What cost? The Minister scaremongers the public, but cannot name a single tangible expected cost. Why is the interest of the bank aligned with the interest of the State, Minister?] ... Further, the financial market's view of Ireland as a place to dobusiness or invest would be seriously undermined. [Is Minister Noonan seriously suggesting that Ireland's reputation as a place to do business or invest dependent so critically on a bust bank with worst history of speculative decision-making ability to repay its insolvent borrowings? Would IDA confirm they are directly referencing Irish taxpayers willingness to cover private sector losses in any undertaking, no matter how risky, as some sort of the 'investment promotion' positive for Ireland? Can Minister Noonan confirm that he has done the analysis of the effects that bonds repayments by Anglo, and the resultant increases in the sovereign debt have on sustainability of our Government's reputation in the bond markets? Does he not know/ understand that any investor looking at his statements will immediately price into their valuation of Government bonds the possibility that the Irish Government can at will, out of the blue simply hike its own debt pile in the future to suit some other risky private sector fiasco? What does that risk alone do to our 'reputation'?]

Deputy Peter Mathews:

While I willnot get into a long debate, Greece will be the beneficiary of at least a 60%write-down of its debt obligations. The Greeks got the attention of their creditors by going out in thestreets and having riots and by people being killed. We have knuckled down to correcting a fiscal imbalance and,at the same time, we have stayed silent. We have been straitjacketed by the legacy debt. Our loan losses in the banking systemwere €100 billion. While I knowthe shareholders and some of the subordinated bondholders suffered, theremaining losses were in the banks without being declared. The ECB stepped in to redeembondholders to date, which was a mistake. We are compounding the mistake by going along the same route now.

We have got to be honest about it andopen up the discussion. We are notdefaulting; we are opening a discussion. I made the point that we cannot pay. I use the word "we" euphemistically orcollectively in regard to the bank and the State. We cannot pay because of the guarantee that extends over thebank. It is a case of us liftingthe telephone and asking, "Can we have your attention, please?" We cannot pay and we want to open adiscussion and explain to exactly how the creditor liabilities of our bankingsystem remain, and how they should be written down. There is further writing down to do. We have a €60 billion to €75 billion ofwrite-down to organise and negotiate.

To use an analogy, we have asteeplechase race with about four miles to go. We have big jumps ahead. Normally, a steeplechase horse will start with about 12stone on its back. Ireland'slegacy debt of private debt, non-financial corporate debt and national debt whenit peaks out at €120 billion is the equivalent of 24 stone on the back. It is not a possible race to run.

Deputy Michael Noonan:

I do notdisagree with Deputy Mathews' analysis. However, we are in a situation which we inherited from our predecessors,who entered into solemn and legally enforceable commitments in respect of AngloIrish Bank, as it was then. Ofcourse, Deputy Mathews is correct that we should do everything possible toreduce the debt burden on the taxpayers of Ireland and to enhance Ireland'scapacity to repay its debts. Weare working on that and making some progress. [So that's it, folks. The Last Refuge of the Scoundrel = the arguments the Minister puts forward for expropriating personal property and income through higher taxation and reduced services for which we paid and continue to pay is: We are where we are. This alone should be very re-assuring to the future investors here.]

20/1/2012: A view from ECB's airconditioned halls

2012-01-21T04:03:00.000+14:00

I am sure you are all aware of this, but here is a chart on the euro area monetary aggregates:

Do you spot much of drama here? No? How about a snapshot?

No prizes for guessing an answer: there is no drama in monetary policy path chosen by the ECB through the entire period of August 2007-present. None. Which, of course, is surprising, as outside the euro monetary policymakers halls, there was and still is plenty of drama - from banks liquidity crunches, to sovereign debt crises, to sovereign deficits crises, to recessions and double-dips, to unemployment rising, to banks assets valuations crisis, to inflation falling out of sync with FX valuations, to sovereign credit crunches, to socialization of banks losses... and so on. All of the above should have an effect on a monetary policy. Some in less interventionist fashion (but with at least an ex post correlation to the aggregates), and some with more interventionist fashion (with monetary policy being a major tool for dealing with them).

Alas, all is calm, trend(y)-like in the well airconditioned offices of ECB.

20/1/2012: A Question for Keynesianistas

2012-01-21T00:28:00.001+14:00

Keynes remarked that:

"The theory of economics does not furnish a body of settled conclusions immediately applicable to policy. It is a method rather than a doctrine, an apparatus of the mind, a technique for thinking, which helps the possessor to draw correct conclusions."

Sounds plausible.

A question to Keinesianistas, then: Why on earth would you argue that for every recession in every country, there is only one solution that is fully anchored in one Aggregate Demand identity? And that - irrespective of the nature of the path an economy takes into a recession or its underlying causes, irrespective of the economic conditions at the onset of the recession?

19/1/2012: December Inflation - State's Fingerprints all Over the Crime Scene

2012-01-20T06:23:00.000+14:00

There will be a much more detailed analysis of the state-sanctioned rip-off that is revealed in the latest data from CSO on Irish consumer prices in my sunday Times article this weekend, so stay tuned for that, but here are some numbers from today's release.

First off - changes yoy for 2010 and 2011:

And next, cumulated changes in prices for 2007-2011 period:

Lighter blue are categories that have either full or significant share of prices set or influenced directly by Government policies.

One thing to note: mortgage interest costs which, per CSO data have fallen 10.7% in 2007-2011. Of course, this conceals the fact that since the Irish State took over most of the Irish banking sector, in 2010-2011, mortgage interest costs are up cumulated 28.11%. Over the same period of time, ECB rates have moved from 1.0% in January 2010-March 2011, to 1.25% in April-June 2011, to 1.50% in July-October 2011, to 1.25% in November and 1.0% back in December 2011. In other words, the average rate has gone DOWN from 1.23% in 12 months pre-January 2010 to 1.13% in 24 months since then. And yet, mortgage interest keeps on climbing... up whooping 20.4% in 2011 alone.

Yet another useful comparative that is concealed by the above data is that while mortgage interest costs might be down 11.7% on December 2007, they are up 7.7% on December 2006. Now, in December 2006, ECB rate was 3.5% or 2.5 percentage points above where it was in December 2011.

So let's take a look at slightly longer horizons. Chart below show cumulated price changes between December 2001 and present and December 2006 and present also courtesy of the good folks of CSO.

Again, the same story - the higher the price increases, the more likely we are dealing with directly regulated or state owned enterprises-dominated or state-controlled sector.

More detailed analysis in my forthcoming Sunday Times piece this week.

19/01/2012: One Question, please...

2012-01-20T04:37:00.000+14:00

In the spirit of asking our Troika overlords questions around the time of their serial reviews of Ireland's Programme, here's mine:
"Given that since the previous review, Irish economy has posted

A full quarter of GDP & GNP contraction
Missed targets on fiscal side covered up by vague reforms papers publications and capital spending cuts, plus 'temporary' tax measures
Rampant tax increases & state costs rises, covered up by deflation in the private sector economy
Stuck sky-high unemployment, with massive contractions in labour force and emigration
Another botched 'austerity' budget with hope-for revenue measures substituted for reforms of spending
Repayment of billions in bust banks bonds
Continued lack of recovery in its banking sector

What part of (1)-(7) above constitutes 'successful completion' of the review?"

19/01/2012: Quarterly data on complete trade balance: Q3 2011

2012-01-20T01:29:00.000+14:00

While we are on trade data (see previous post on November 2011 merchandise trade stats here), let's also update full trade stats for QNA results for Q3 2011. This covers all trade - merchandise and services, so it paints a full picture of our trade balance.

Chart below shows quarterly trade stats for Ireland. Per latest QNA:

Exports of goods and services fell from €41.945bn in Q2 2011 to €41.186bn in Q3 2011, a decline of 1.81%. This comes after a qoq rise of 4.34% in Q1-Q2 2011 period. Year on year, Q2 2011 saw exports rise 3.78% and Q3 saw an increase of 1.91%.
Despite the slowdown, Q3 results was still the second best quarterly exports performance on record.
Imports of goods and services shrunk in Q3 2011 to €31.6bn, down 5.45% qoq, which comes on foot of a 3.06% rise qoq in Q2 2011. Year on year, imports were up 3.3% in Q2 2011 and are down just 0.29% in Q3 2011.
This means the trade balance has reached another historical high at €9.586bn in Q3 2011. The trade surplus was up 9.66% in qoq terms and 5.69% in yoy terms in Q2 2011 and it rose 12.49% qoq and 9.89% yoy in Q3 2011.

The core driver for the dramatic gains in trade balance for goods and services was a substantial decline in trade deficit on services side. This can be best seen from annualized figures, shown below:

Based on Q3 data, we can expect:

Total annual exports to rise to €164.75bn in 2011, up 4.48% on €157.67bn in 2010
Total annual imports to increase 3.95% yoy to €132.953bn, and
Total trade surplus to rise 6.55% yoy to €31.72bn
Of the above €1.95bn improvement in the annual expected trade surplus is likely to come from a €1.66bn improvement (reduction) in the annual trade deficit in services which is expected tos shrink to €11.99bn in 2011.

19/1/2012: Irish External Trade data - November 2011

2012-01-19T23:33:00.001+14:00

Latest trade stats for Ireland are out - covering preliminary figures for November - and... it's another record trade surplus. I recently wrote about this issue for PressEurop (link here) and for Globe & Mail (link here).

But the latest data from Ireland's external trade side is truly impressive. Until that is, you dig slightly below the surface... where some strange things are starting to pop up.

Let's take it from the top.

On seasonally adjusted basis,

Irish merchandise imports in November stood at €3,706mln, a decline of 5.97% mom that comes on foot of a previous monthly rise of 2.68%. Imports are up 4.91% year on year and relative to 2009 they are up 0.21%. In the 11 months from January 2011, imports are up 6.46% on same period in 2010.
Imports increases are, of course, closely linked to increases in exports - as MNCs import much of their inputs into production from abroad. I shall cover this in a second, so keep this in mind.
Irish merchandise exports rose in November to €8,016mln - an uplift of 4.58% mom on the foot of the previous month decline of 4.32%. Year on year exports are up 8.83% and relative to November 2009 they are up 23.22%. In the 11 months through November, cumulative exports rose 4.09% relative to the same period 2010.

As the result, trade balance (again, referencing just merchandise trade) rose 15.74% mom (after contracting 10.75% in October, mom) to an all-time record of €4,310mln. The trade surplus is now 12.44 ahead of November 2010 and 53.5% ahead of same period 2009. In the first 11 months of 2011 trade balance rose 1.61% on the same period of 2010.
The last observation in the previous bullet point is not a strong reason to cheer. Remember, comparable rise in 2009-2010 period was 8.77% or some 5.5 times faster than in 2011.

Updating annualized trade stats based on 11 months performance, we can expect imports to come at ca €48.46bn - up 5.82% yoy reversing average annual rate of decline of 9.85% achieved in 2007-2010 period. Exports are likely to post another record year, consistent with my predictions before, at €92.25bn - up 3.36% yoy and well behind the Government-projected rate of over 5%. Trade surplus (for merchandise trade) is likely to reach a record €43.78bn some 0.75% ahead of 2010 result - an increase that would pale in comparison with 10.6% rise in annual surplus in 2010 yoy and well below the average 19.62% increase achieved over 2007-2010 period.

So what is going on, folks? Why are we seeing record surpluses, against fairly impressive exports and growing imports? The answer can be found in two stats. The first one, relates to terms of trade, and the second one relates to transfer pricing. let's take a look, shall, we?

CSO reports terms of trade data with 1 month lag, so we do not have November results yet, but we do have october figures.

As you can see from the above chart, terms of trade improved (downward movement in series) in october for Irish exporters. And this improvement is rather dramatic both in the short-term and in the long-run. However, as the chart below shows, the improvement in terms of trade in October 2011 relative to October 2010 was not fully utilized by the exporters (we are below the long term relationship, implying that for current levels of terms of trade, our exports should be higher than they are).

What did, however, take place is a massive jump - to a record high - in overall ratio of exports to imports in merchandise trade (chart below). In more layman's terms, all of a sudden, in November, Irish exporters needed less imported materials to supply more of exports. Hmmm... Has the chemicals component of Viagra pill change? Not really. Has the value of this component become cheaper for Irish operations of the respective MNC? No. In fact it became more expensive as the euro weakened against other currencies and terms of trade improved. So what did happen?

Take another look:

What the above suggests is that Ireland-based MNCs are:

Drawing down inventories to boost exports - something they would do were they planning for a slowdown in December and onward;
Pushing up the component of exports value that is transfer pricing, thus boosting their profit side - something that will eventually show up in wider GDP/GNP gap;
Both of the above.

This is not exactly the stuff the dreams of 'exports-led recovery' should be made of, but for now, let us rejoice that at least in one area we have really strong performance in this economy. Afterall, better that than nothing.

16/1/2012: Summary of S&P move and more

2012-01-17T00:16:00.000+14:00

In the wake of the S&P action it is a good idea to put side-by-side some ratings on euro area countries. here are S&P ratings before and after downgrade along with CMA ratings and CDS data for Q1 2009 beginning of the crisis) and Q4 2011.

Per S&P: "...the agreement [between euro zone member states in December 2011 attempting to address the crisis] is predicated on only a partial recognition of the source of the crisis: that the current financial turmoil stems primarily from fiscal profligacy at the periphery of the eurozone. In our view, however, the financial problems facing the eurozone are as much a consequence of rising external imbalances and divergences in competitiveness between the eurozone's core and the so-called "periphery". As such, we believe that a reform process based on a pillar of fiscal austerity alone risks becoming self-defeating, as domestic demand falls in line with consumers' rising concerns about job security and disposable incomes, eroding national tax revenues."

In other words, it's growth, stupid. And herein lies the main problem for Europe. While EU might - if forced hard enough - jump onto a more sustainable fiscal spending path (cut deficits and structural deficits) - the EU has absolutely no record of creating pro-growth conditions or environments. In fact, in a bizarre response to the S&P moves:

France is discussing an increase in VAT as the means for stimulating productivity growth, while
Austria is planning wealth taxes and increase in retirement age as its response to economic growth challenge.

Now, where do you start in dealing with this lunatic asylum?

16/1/2012: Irish Bailout Redux - Sunday Times 15/01/2012

2012-01-16T22:16:00.000+14:00

Several articles in the press yesterday on why Ireland will require / need a second 'bailout' - here's an excellent piece from Namawinelake and here's a piece from Colm McCarthy.

This is an unedited version of my Sunday Times (January 15, 2012) article on the same topic.

In May 2011, as Greece was slidingtoward the second bailout, I conjectured that within 24 months, Ireland andPortugal will both require additional bailout packages as well. This week, myprediction has been echoed by the Chief Economist of the Citi, William Buiter.

According to Buiter, the costs ofborrowing in the markets are currently prohibitive and the expiration of the€67.5 billion loans deal with the Torika, scheduled for 2014 will see Irelandonce again unable to borrow to cover remaining deficits and refinancingmaturing bonds. Ireland should secure additional funding as a back up, to avoidseeking it later “in a state of near panic”.

Buiter’s suggestion represents nothingmore than a prudent planning-ahead exercise. In addition to Buiter’s originalrationale for securing new lending, Ireland is facing significant fiscal andeconomic challenges that will make it nearly impossible for the State tofinance its fiscal adjustment path through private borrowing in 2014-2016.

Speaking to the RTE, Buiter said thatalthough Ireland’s situation was different from that of Greece, the economyremains under severe stress from banking sector bailouts. Addressing thisstress should involve restructuring of the promissory notes issued by the stateto IBRC, as the Government was hoping to do in recent months. But it alsorequires anchoring our longer-term fiscal adjustment path to predictable andstable sources of funding at a cost that can be carried by the weakenedeconomy.

The Government will do well to listen tothese early warnings to avoid repeating mistakes of their predecessors.

On November 18, 2011, Carlo Cottarelli,IMF Director of Fiscal Affairs Department gave a presentation in the LondonSchool of Economics, titled Challenges of Budgetary and Financial Crises inEurope. In it, Mr Cottarelli provided threeimportant insights into the expected dynamics for debt and deficits that havematerial impact on Ireland.

Firstly, he showed that to achieve the‘golden rule’ debt to GDP ratio of 60% of GDP by 2030, Ireland will be requiredto run extremely high primary surpluses in years to come. Only Greece and Japanwill have to shoulder greater pain than us over the next 19 years to get publicdebt overhang down to a safety level.

Secondly, amongst all PIIGS, Ireland hasthe highest proportion of outstanding public debt held by non-residents (84%),implying the highest cost of restructuring such debt. The runner up is Greecewith 65%. In general, bond yields are positively correlated with the proportionof debt held by non-residents.

Thirdly, Cottarelli presented a modelestimating the relationship between the observed bond yields and the underlyingmacroeconomic and fiscal fundamentals that looked at 31 countries. This modelcan be recalibrated to see what yields on Irish debt can be consistent withmarket funding under IMF growth projections for Ireland. Using headline IMFforecasts from December 2011, 2014-2016 yields for Ireland are expected torange between 4.7% and 6.5%. Incorporating some downside risks to growth andother macroeconomic parameters, Irish yields can be expected to range between5.3% and 7.0%.

Even in 5.5-6% average yields range,financing Irish bonds rollovers in the market in 2014-2016 will beprohibitively costly as at the above yields, Ireland's debt dynamics will nolonger be consistent with the rates of decline in debt/GDP ratio planned forunder the Troika agreement. This, in turn, means that the markets will beunlikely to provide financing in volumes, sufficient to cover debt rollovers.Thus, Ireland will either require new bridging loans from the Troika or willhave to extract even greater primary surpluses out of the economy, divertingmore funds to cover debt repayments and risking derailing any recovery we mightsee by then.

What Butier statement this week does notconsider, however, are the potential downside risks to the Irish fiscalstability projections. These risks are material and can be broadly divided intoexternal and internal.

Per external risks, the latest CMAGlobal Sovereign Risk Report for Q4 2011, released this week, shows Ireland asthe 6^th riskiest country in the world with estimated probability ofsovereign default of 46.4% and credit ratings of ccc+. Despite stableperformance of our bonds in Q4 2011, CMA credit ratings for Ireland havedeteriorated, compared to Q3 2011. And, our 5 year mid-point CDS spreads arenow at around 747 bps – more than seven times ahead of Germany. This highlightsthe effect of a moderate slowdown in euro zone growth on our bonds performance.

Even absent the above risks, Irish debtdynamics can be significantly improved by significantly extending preferentialinterest rates obtained under the Troika agreement to cover post-2014 rolloversand adjustments. Based on IMF projections from December 2011, such a move cansecure savings of some €9 billion or almost 5% of our forecast 2016 GDP inyears 2014-2016 alone (see chart).

CHART

Chart source: IMF Country Report11/356, December 2011 and author own calculations

Looking into the next 5 years, there isa risk of significant increase in inflationary pressures once the growthmomentum returns to the Euro area. A rise in the bund rates can also take placedue to deterioration in the German fiscal position or due to Germany assuminggreater role in the risk-sharing arrangements within the euro area. Lastly,German and all other bonds yields can also rise when risk-on switch takes placein post-recessionary period, drawing significant amounts of liquidity out ofthe global bond markets. All of these will adversely impact German bunds, butalso Irish bonds.

On the domestic front, we should be providing a precautionary cover forthe risk of a more protracted slowdown in the Irish economy especially ifaccompanied by sticky unemployment. The risk of deterioration in Irish primarybalances due to structural slowdown in the rate of growth in Irish exports(potentially due to strengthening of the euro in 2013-2016 period orsignificant adverse effect of the patent cliff on pharma exports) is anotherone worth considering well before it materializes. Lastly, there is theever-growing risk that the markets will simply refuse to fund the vastrollovers of debt which is currently being increasingly warehoused outside thenormal markets in the vaults of the Central Banks and on the books of theTroika.

Overall, Ireland should form a multi-pronged strategic approach tofiscal debt adjustment. Recognizing future risks, the Government shouldaggressively pursue the agenda of restructuring the promissory notes issued tothe IBRC with an aim of driving down notes yield down to ECB repo rate and push for ECB acceptance of burden sharing imposition on IBRC bondholdersto reduce the principal amount of the promissory notes. Pursuit of longer-termobjective of forcing the ECB to accept a writedown on the banks debtsaccumulated through the Emergency Liquidity Assistance lines at the CentralBank of Ireland is another key policy target. Lastly, Ireland needs to securesignificant lines of credit with the EU at preferential rates for post-2014period with longer-term maturity than currently envisaged under the Troikadeal.

Given the general conditions across theEurozone today, the last priority should be pursued as early as possible. Inother words, there’s no better time to do the right things than now.

Box-out:

The latest EU-wide statistics for Retailsales for November 2011 released this week present an interesting reading.Retail sector turnover index, taking into account adjustments for working days,shows Irish retail activity has contracted by 0.4% in November 2011 year onyear. Overall activity is now down 5.2% on same period 2008, but is up 7.9% on2005. For all the Irish retail sector woes, here’s an interesting comparative.Euro area retail sales turnover is now down 2.5% year on year and 1.6% on 2005.In terms of overall contraction in turnover, Ireland is ranked 15^thin EU27 in terms of the rate of contraction relative to November 2010 andNovember 2008 and 12^th in terms of contraction relative to 2005. Notexactly a catastrophic decline. Once set against significant losses in retailsector employment since 2008, these numbers suggest that to a large extent jobslosses in the sector were driven by lack of efficiencies in the sector at thepeak of the Celtic Tiger, as well as by declines in revenues.

15/1/2012: Research Update - January 2012

2012-01-16T08:43:00.004+14:00

Research update for January 2012:

Two new papers added to my ssrn page:

http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1985617 and
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1985618

Two papers now published (since last update):

http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1881444 and
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1919792

Five papers in various working stages:

Tsallis Entropy: Does the Market Size Matter? with G. Hearte
Review of core properties of gold as financial diversification instrument, with Brian M. Lucey and Fearghal O'Connor
Tobin Tax: Literature Review, with Brian M. Lucey
Modeling the Risks of Large House Price Falls: International Evidence, with Caoimhe Proud-Murphy, and
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1940481

14/1/2012: Irish banking crisis - on a road to nowhere

2012-01-15T12:03:00.001+14:00

This is an unedited version of my Sunday Times article from January 8, 2012.

In the theoretical world of Irish banking reforms, 2012 issupposed to be the halfway marker for delivering on structural change. Almost ayear into the process, banks are yet to meet close to 70% of their totaldeleveraging targets, SMEs are yet to see any improvements in credit supply,households are yet to be offered any supports to reduce their unsustainabledebt burdens, longer-term strategic plans reflective of the banks new businessmodels, now approved by the EU not once, but twice are yet to be operationalized,and funding models are yet to be transitioned off the ECB dependency.

In the period since publication of the banking sectorreforms proposals, total banks core and non-core assets disposals are runningat some €14 billion of the €70 billion to be achieved by the end of 2013. Eventhis lacklustre performance was heavily concentrated in the first nine monthsof 2011, when few of Irish banks competitors were engaging in similar assetssales.

Since then, things have changed. Plans by the euro areabanking institutions, already announced in Q4, suggest that some €775 billionworth of euro area banks’ assets will come up for sale in 2012. That is morethan 8.5 times the volumes of assets disposals achieved in 2011. And 2012 isjust the tip of the proverbial iceberg. According to the Morgan Stanleyresearch, 2012-2013 can see some €1.5-2.5 trillion worth of banks assetshitting the markets. With 2012 starting with clear ‘risk-off’ signals from thesovereign bond markets and banks equities valuations, the near term future forIrish banks deleveraging plans can be described as bleak at best.

Further ahead, the process of rebuilding capital buffers, inboth quantity and quality, can take core euro zone banks a good part of currentdecade to achieve. In this context, Irish banks deleveraging targets aregrossly off the mark when it comes to timing and recovery rates expectations.

Progress achieved to-date leaves at least €35-40 billion innew assets disposals to be completed in 2012 – two-and-a-half times the rate of2011. The two Pillars of Irish banking alongside the IL&P are now facing animpossible dilemma: either the banks meet their regulatory targets by the endof 2013, which will require deeper haircuts on assets and thus highercrystallized losses, or the 2013 deleveraging deadline is bust. In other words,Irish banks have a choice to make between having to potentially go to theGovernment for more capital or suffer a reputational cost of delaying, if notderailing altogether, the reforms timetable.

This is already reflected in the negative outlook and lowerratings given by S&P to AIB last month. The rating agency stressed theirexpectation of the slowdown in assets deleveraging in 2012 as one key rationalefor the latest downgrades. Post-recapitalization in July, AIB core Tier 1regulatory capital ratios stood at a massive 22%, the fact much lauded by theIrish authorities. However, per S&P “AIB’s capital ratio… will be between5.5% ad 6.5% by 2013” due to materially “higher risk weights [on] capital,estimated deleveraging costs, as well as further capital erosion from the corebusiness”.

Bank of Ireland finds itself in a better position, but,unlike AIB, it has much smaller capital reserves to call upon in the case ofshortfall on July 2011 recapitalization funds.

Another area of concern for Irish banking sector relates tofunding. Central Bank stress tests (PCAR) carried out in March 2011 assumedthat by the end of 2013 Irish banking institutions will be funded on commercialterms. This too is subject to significant uncertainty as euro area banks entera period of rapid bonds roll-overs in 2012-2014. Overall, the sector will faceca €700 billion of bonds maturing in 2012 and total senior debt maturing in2012-2014 amounts to close to €2.2 trillion once ECB’s latest 3-year long termrefinancing facility is factored in. For comparison, in 11 months throughNovember 2011, euro area banks have managed to raise less than €350 billion incapital instruments, and various senior bonds. Again, international environmentdoes not provide any grounds for optimism about Irish banks ability to decouplethemselves from the ECB supply of funds.

In the short run, Irish Pillar Banks dependency on centralbanks’ funding is a net subsidy to their bottom line, as central banks creditlines come at a fraction of the expected cost of raising funds in themarketplace. This makes it possible for the banks to sustain theirextend-and-pretend approach toward retail borrowers.

However, in the longer term, reliance on this fundingrepresents major risks of maturity mismatch and sudden liquidity stops. Thelatest data clearly shows that the major risk of Irish banking sector becomingfully dependent on ECB as the core source of funding is now a reality.Reductions in the emergency liquidity assistance loans extended by the CentralBank of Ireland are now matched by increases in ECB lending to these banks. Arecent research paper from the New York Federal Reserve shows that Irish bankscontinue to account for the largest proportion of all loans extended by the ECBto the banking systems of the euro area ‘periphery’.

Lacking functional banking sector, in turn, puts a boot intoGovernment’s plans to use reforms as the vehicle for reversing credit supplycontraction that has been running uninterrupted since 2008.

Another major risk inherent in the Irish banks’ funding andcapital dependencies on Central Banks and the Government is the risk thathaving delayed for years the necessary processes of restructuring householddebts, the banks can find themselves in the dire need of calling in thenegative equity loans. This can happen if the Irish banking sector were to beleft lingering in its quasi-transformed shape when ECB decides to pull the plugon extraordinary liquidity supply measures it deployed. While such a prospectmight be 2-3 years away, it is only a matter of time before this threat becomesa reality and the very possibility of such eventuality should breath fear intothe ranks of Ireland’s politicians.

As the current reforms stand, the sector will not be able toprovide significant protection against the ECB policies reversal, even if theCentral Bank-planned reforms are completed on time. The reason for this issimple. Our twin Pillar banks will be facing – over 2013-2018 – a rising tideof mortgages defaults and voluntary property surrenders, as well as continuedmounting corporate loans losses as the economy undergoes a lengthy and painfuldebt overhang correction, consistent with the historical evidence of similarbalance sheet recession.

While the capital for writing these assets down might havebeen at least in part supplied under PCAR 2011, the banks have no means ofmanaging any added risks that might emerge alongside the mortgages defaults,such as, for example, the risk of their cost of funding rising from the current1 percent under the ECB mandate to, say, 6 or 7 percent that private marketsmight charge.

For all the plans for banking reforms proclaimed for 2012 bythe Central Bank and the Government, in all likelihood, this year is going tosee more mounting corporate and household loans writedowns, amidst thecontinuation of the extend-and-pretend policies by the banks. The longer thisprocess of delaying losses realization continues, the less viable the remainingbanks assets become. And with them, the lower will be the credit supplied intothe real economy already starved of investment and funding.

Box-out:

Irish banking sector structure envisioned under theGovernment reforms plans will not be conducive to an orderly deleveraging ofthe real economy and simultaneous repairing of the banks balance sheets.Sectoral concentration, in part driven directly by the Government dictate, inpart by the massive subsidies provided to insolvent domestic banks, will see acolluding AIB & BOFI duopoly running circles around the regulators,supervisors and politicians.

How serious is this threat of the duopoly-induced marketsdistortions in post-reform Irish banking? Serious enough for the latest EUCommission statement on Bank of Ireland restructuring plans to devotesignificant space to outlining high-level set of subsidies that the Irishauthorities are planning jointly with ECB.

No one as of yet noticed the irony of these latestamendments to the Government plans for the banking sector reforms: to undo thedamaging effects of state subsidies to the incumbents, the EU and theGovernment will offer more subsidies to the potential newcomers. Such approachto policy would be comical, were it not designed explicitly to evade the realsolution to the banking sector collapse in this country – a wholesalerestructuring of the sector, that would have used insolvent banks’ performingassets as the basis for endowing new banking institutions to serve thiseconomy.

13/1/2012: Irish Household Income and Consumption: Q3 2011

2012-01-14T07:13:00.000+14:00

The latest data on disposable income (Institutional Accounts) from CSO presents the picture of real recession ravaging Irish economy. Here are the core details from Q3 2011 - the quarter when Irish economy tanked once again in terms of aggregate GDP and GNP.

Gross disposable income of Irish households in Q3 2011 amounted to €21,761 million - a decline of 4% yoy and a drop of 4.3% qoq.
By use of disposable income (separate database proving longer historical series), gross disposable income of households dropped 3.8% yoy and 4.2% qoq.
Final consumption has declined 3.8% yoy and 2.5% qoq.
Gross savings of the households fell 3.9% yoy and 11.6% qoq

Using Q1-Q3 2011 data we can compute expected annualized series for 2011, which are shown in chart below. In annualized terms:

2011 is forecast to see gross disposable income of Irish households drop 2.9% yoy on 2010 and reach -14.2% cumulative fall on the peak at 2008
Final household consumption expenditure is set to fall 2.7% yoy and 16.2% on peak at 2008
Gross household savings is expected to fall 4% yoy and 17% on the peak in 2009

Of course, in the above, Gross household savings includes repayments of debts, which is reflected in the fact that since the beginning of the crisis, our savings were rising, just as out incomes tanked.

13/1/2012: EU27 External Trade - Greece falling out of trade picture

2012-01-14T01:45:00.000+14:00

As German lawmakers are putting pressure on the parties in the PSI negotiations in Greece with calls for Greece to exit the Euro to devalue and regain competitiveness have some serious basis in real economic performance of the country.

Today's data on trade balance across EU27 clearly shows that Greece is unable to sustain serious debt repayments under the current arrangements. Here are the details:

The first estimate for November 2011 euro area (EA17) trade surplus came in at €6.9 bn surplus, against the deficit of -€2.3 bn in November 2010. October 2011 trade balance was +€1.0 bn, against a surplus of +€3.1 bn in October 2010.

In November 2011 compared with October 2011, seasonally adjusted exports rose by 3.9%, while imports remained unchanged.

The first estimate for the November 2011 extra-EU27 posted trade deficit of -€7.2 bn, compared with a deficit of -€16.8 bn in November 2010. In October 2011 the trade balance extra-EU27 was -€11.2 bn, compared with -€9.5 bn in October 2010.

In November 2011 compared with October 2011, extra-EU27 seasonally adjusted exports rose by 2.8%, while imports fell by 0.6%.

EU27 detailed results for January to October 2011:

The EU27 deficit for energy increased significantly (-€317.5 bn in January-October 2011 compared with -€246.4 bn in January-October 2010)
Trade surplus for manufactured goods rose to +€198.9 bn compared with +€136.4 bn in the same period of 2010.
The highest increases were recorded for EU27 exports to Russia (+28%), Turkey (+23%), China (+21%) and India (+20%), and for imports from Russia (+26%), Norway (+21%), Brazil and India (both +20%).
The EU27 trade surplus increased slightly with the USA (+€60.8 bn in January-October 2011 compared with +€60.1 bn in January-October 2010) and more significantly with Switzerland (+€24.1 bn compared with +€16.6 bn) and Turkey (+€21.3 bn compared with +€14.7 bn).
The EU27 trade deficit fell with China (-€132.2 bn compared with -€139.8 bn), Japan (-€16.1 bn compared with -€18.3 bn) and South Korea (-€3.9 bn compared with -€9.6 bn), but increased with Russia (-€76.0 bn compared with -€61.1 bn) and Norway (-€38.7 bn compared with -€29.8 bn).
Concerning the total trade of Member States, the largest surplus was observed in Germany (+€129.2 bn in January-October 2011), followed by Ireland and the Netherlands (both +€35.9 bn) and Belgium (+€10.1 bn). The United Kingdom (-€98.2 bn) registered the largest deficit, followed by France (-€72.5 bn), Spain (-€40.1 bn), Italy (-€24.2 bn), Greece (-€16.9 bn), Portugal (-€13.3 bn) and Poland (-€12.0 bn).

Some charts:

The charts above clearly show that:

Of all PIIGS, Ireland is the only country showing capacity to generate significant trade surpluses, with Irish merchandise trade surplus of €2.5bn in November being the second highest in EU 27 in absolute terms and the highest in terms relative to GDP. Exactly the same is true for Irish trade surplus recorded in October. Irish trade surplus in November was almost as large as the combined surpluses of all other countries with positive trade balance, ex-Germany (€2.9bn).
In November 2011 Ireland posted the third fastest rate of mom growth in exports in EU27 (+8.3%), the effect compounded by the 9.4% drop (4th deepest in EU27) in imports.
In contrast, Greece posted a 14.4% contraction in its exports in November 2011 compared to October 2011 - the largest drop of all countries in EU27. Greek trade balance in October stood at a deficit €0.1 billion and in November 2011 this widened to €0.2 billion.

So in terms of trade, Ireland is not Greece, and Greece is not showing any signs of ability to sustain internal debt adjustment within the euro structure.

13/1/2012: The need for political reforms

2012-01-14T00:13:00.000+14:00

An interesting paper from the World Bank (linked here), by Torgler, Benno, titled "Tax Morale and Compliance: Review ofEvidence and Case Studies for Europe" (December 1, 2011). World Bank PolicyResearch Working Paper Series, 2011 (World Bank Policy research Working Paper 5922) presents an overview of the literature on tax morale and tax compliance. Perhaps unsurprisingly, it finds that accountability, democratic governance, efficient and transparent legal structures, and crucially, "trust within the society" are important in enforcing tax compliance and tax morale.

Which offers an interesting point for observation: in 2011, trust in Irishsystem of government as measured by the Edelman Trust Barometer stood at 20%, against theaverage of 52% for 23 countries surveyed in the report, making Ireland thelowest ranked country in the study.

But things are even worse than the above number suggests:

Ireland ranks lowest 23rd in terms of average trust measures across four institutions of government, media, business and NGOs
The above result is driven by: high trust in NGOs at 53%, although this is still below global trust in NGOs at 61%, high trust in business at 46% against global trust in business at 56%, low trust in media at 38% and abysmally low trust in government.

So may be, just may be, folks, in order to improve our fiscal performance we need deep political and leadership changes at least as much as tax increases and spending cuts? Perhaps, one of the problems with Irish fiscal crisis response to date is that the current Government and its predecessor are not doing enough to make Ireland's elites more accountable, more transparent, and better governed? There's an old Russian saying that every fish rots from the head (although Chinese, British and other nations claim the origin of this phrase as well).

12/1/2012: Q4 2011 Sovereign Bonds performance

2012-01-13T22:15:00.000+14:00

Four charts covering Q4 2011 sovereign bonds (CDS) performance:

Data sourced from CMA Global Sovereign Risk Report Q4 2011

12/1/2012: Q4 2011 Sovereign Bonds Report

2012-01-13T07:01:00.000+14:00

CMA released their Quarterly Global Sovereign Risk Report Q4 2011 which makes for an interesting reading. Here are some highlights:

"The Eurozone debt situation continued throughout Q4, with the region widening 9% overall. A bail out of Dexia at the beginning of the quarter was followed by continued concerns on Italy’s debt in November and risk of an S&P downgrade of the entire Eurozone in December.

"Nearly all global CDS prices widened during November’s volatile period, clearly indicating the significance of Western Europe to the global economy and the importance of finding a permanent resolution to the debt crisis.

Italy’s austerity measures failed to move the market tighter in Q3, and the spread widened to a high of 595bp in-mid November. This prompted the end of the Bersculoni era, a new president [obviously, they mean PM] and a new set of austerity measures aimed at reducing the 2 trillion dollars of debt and 120% debt-to-GDP ratio. Implied FX devaluation from a default in Italy is around 17% according to CMA DatavisionTM Quantos.
Spain and Belgium’s charts were a mirror image of Italy’s.
Ireland remained relatively stable throughout the quarter, perhaps indicating a balance between a well capitalised banking sector and IMF concerns about the prospects for growth in exports to Europe."
Greece was the worst performer worldwide (see tables below charts), while Portugal outperformed Ireland

Charts:

Summary of 10 highest and lowest risk sovereigns:

So despite our 'gains' in the bond markets, Ireland moved into 6th highest risk position in Q4 2011 from 7th in Q3 2011.

And amongst the safest bond issuers there are just 2 euro zone countries: Finland and Germany (an improvement on Q3 2011 where only Finland was there).

Here's the summary of our performance since Q1 2009.

11/1/2012: Great Moderation or Great Delusion

2012-01-12T12:49:00.003+14:00

A recent (December 2011) paper published by CEPR offers a very interesting analysis of the macroeconomic risks propagation in the current crisis. The paper, titled Great Moderation or Great Mistake: Can rising confidence in low macro-risk explain the boom in asset prices? (CEPR DP 8700) by Tobias Broer and Afroditi Kero looks at the evidence on whether the period of Great Moderation in macroeconomic volatility during the period from the mid-1980s (the decline in macroeconomic volatility that is unprecedented in modern history) had an associated impact on the rise of asset prices that accompanied this period, setting the stage for the ongoing crash.

In recent literature, this rise in asset prices, and the crash that followed, have both been attributed to "overconfidence in a benign macroeconomic environment of low volatility" or to excessively optimistic expectations of investors that the lengthy period of macroeconomic stability and upward trending is the 'new normal'.

The study introduced learning about the persistence of volatility regimes in a standard asset pricing model of investor decision making. "It shows that the fall in US macroeconomic volatility since the mid-1980s only leads to a relatively small increase in asset prices when investors have full information about the highly persistent, but not permanent, nature of low volatility regimes." In other words, in the rational expectations setting with no errors in judgement and perfect foresight (investors are aware that volatility reductions are temporary), there is no bubble forming.

However, when investors "infer the persistence of low volatility from empirical evidence" (in other words when knowledge is imperfect and there is a probabilistic scenario under which the moderation can be permanent, then "Bayesian learning can deliver a strong rise in asset prices by up to 80%. Moreover, the end of the low volatility period leads to a strong and sudden crash in prices."

Specifically, calibrated model generates pre-collapse rise in asset prices of 77% and overvaluation of assets by 79% over the case of no learning. The subsequent collapse of asset prices is 84% in the case of imperfect information learning.

A pretty nice result!

11/01/2012: Risk-off or 'Grab that Straw, Man'?

2012-01-12T09:40:00.000+14:00

Another day, another historical marker falls under the weight of the euro area mess:

US Treasury auctioned off USD21bn of 10 year notes today achieving the yield of 1.90% - lowest on record for an auction. Cover was 3.19 times the offering, slightly ahead of 3.15 average for previous four 10 year notes auctions. Direct bidders demand was up to 17.4% of sales against the average 10%. 10 year secondary markets yields sliped to 1.91% from 1.97% pre-auction.

Here's the IMF illustration (all charts below are from Cottarelli November 2011 presentation) of the evolution of holdings of US debt:

Which, funnily enough, is pretty diversified when compared to that found in Europe:

But the US yields are, of course, purely irrational:

Then, again, not as irrational as those found in Japan:

Altogether elsewhere, vast... German bund auction - 5 year, €4 billion - attracted cover of 2.24 and the average yield of 0.9%. That is well below inflation - however measured - and even below expected inflation, accounting for the potential slowdown. In other words, investors are now so scared, they are paying German government money to store their cash. In the secondary markets, German 1 year bonds turned negative yield back at the end of November, for the first time in history. German 10-years are currently trading in the 1.87% yield territory. According to FT, 10 year bund yields fell from 3.49% in April 2011 to a low of 1.67% in September last year.

Risk-off raging as EU vacillates... or rather, as its leaders consider how to by-pass Belgian General strike that has derailed their January 30 summit.

Nice one, folks. The insolvent Rome burns, the leaders are having summits galore and the unions are demanding more insolvency, while country output shrinks due to striking.

We are no longer in risk-aversion or even loss-aversion world, we are in a grab-anything-that-might-float world.

10/1/2012: Entrepreneurship and Chaos

2012-01-11T08:48:00.000+14:00

In a slight departure from macroeconomic focus of the blog, here are two links to, in my view, pivotal articles on business and entrepreneurship. Pivotal not because they provide the answers, but because they raise questions I suspect will be the most important ones in years to come.

So enjoy:
http://www.inc.com/eric-schurenberg/the-best-definition-of-entepreneurship.html
and
http://www.fastcompany.com/magazine/162/generation-flux-future-of-business

And I would be interested in your views on these as well.

9/1/2012: Week opener: Merkozy continuing to ignore Greek realities

2012-01-09T22:19:00.000+14:00

Today's meeting between Sarkozy and Merkel is being framed in the context of continued pressures across the euro area (see report on the meeting here). More ominously - within the context of the euro area leadership duet ignoring the latests warning signs for Greece.

Per Der Spiegel report, IMF has changed its analysis of the Greek rescue package agreed in July 2011 in-line with IMF changes in forecasts for Greek economy in the latest programme review in December 2011. Specifically, IMF lowered its forecast for growth from -3% to -6% GDP.

Der Spiegel cites IMF internal memo in claiming that the Fund is viewing existent Greek programme (including to 50% 'voluntary' haircut on Greek bonds currently under negotiations) as insufficient to stabilize the Greek economy and fiscal situation. The Fund is, reportedly, considering 3 possible options to alleviate the latest set of growth pressures:

New austerity measures for Athens - a measure that in my view will only exacerbate immediate pressures on Greece and will lead to dangerous destabilization of political situation in the country, leading to even more second order adverse effects on growth (e.g. prolonged strikes and rioting);
Deeper haircuts on Greek debt held by private institutions - in my opinion this will lead to more contagion from Greece to euro area banks and sovereigns and should be, instead complemented by writedowns of Greek debt held by the ECB, to match existent private sector arrangements;
Increase in the euro zone bailout funds - in my view, this measure is currently outside the feasibility envelope for Europe and, if attempted, will lead to increased cost of euro area borrowing and have a knock on effect of higher cost of lending to countries currently in the Troika programme. It is also important to note that the EFSF head Klaus Regling is aiming to raise EFSF guarantees to foreign investors to 30%, thus reducing the leverage ratio from 4-5 times to 3 times. This will lower EFSF's theoretical borrowing capacity even further.

The IMF note reports are effectively matched by the statement from the senior Germany Finance Ministry adviser made Saturday, who tole the Greek press that a 50% haircut on Greek debt will not be enough to restore sustainability to Greek fiscal dynamics.

In effect, three of out three IMF 'options' cited will exacerbate the crisis, not resolve it. And there is no Option 4 on the books.

8/1/2012: Irish property prices - History, Equilibrium & Directions to Nowhere Fast

2012-01-09T03:12:00.000+14:00

A quick footnote to Brian Lucey's post on house prices:

I often hear people referring to 'historical averages' as price equilibrium indicators. Hmmm... historical and histrionic - here's a snapshot from The Economist data plot:

That pretty much does the trick for anyone still saying we have crossed some sort of the long term equilibrium level...

7/1/2012: Irish Exchequer Results 2011 - Shifting Tax Burde

2012-01-08T09:05:00.000+14:00

In the previous 3 posts we focused on Exchequer receipts, total expenditure by relevant department head, and the trends in capital v current spending. In this post, consider the relative incidence of taxation burden.

Over the years of the crisis, several trends became apparent when it comes to the shifting burden of taxes across various heads. These are summarized in the following table and chart:

To summarize these trends, over the years of this crisis,

Income tax share of total tax revenue has risen from just under 29% in 2007 to almost 41% in 2011.
VAT share of total tax revenue has fallen, but not as dramatically as one might have expected, declining from 30.7% in 2007 to 29.7% in 2011
MNCs supply some 50% of the total corporation tax receipts in Ireland. And they are having, allegedly, an exports boom with expatriated profits up (see QNA analysis last month). Yet, despite this (the exports-led recovery thingy) corporation tax receipts are down (see earlier post on tax receipts, linked above) and they are not just down in absolute terms. In 2007-2011 period, share of total revenue accruing to the corporation tax receipts has fallen from 13.5% to 10.3%. So if there is an exports-led recovery underway somewhere, would, please, Minister Noonan show us the proverbial money?

So on the tax side of equation, the 'austerity' we've been experiencing is a real one - full of pain for households (whose share of total tax payments now stands at around 58% - some 12 percentage points above it levels in 2007) and the real sweet times for the corporates (the ones that are still managing to make profits to pay taxes, that is). This, perhaps, explains why even those working in protected sectors are talking about their biggest losses coming from tax changes.

7/1/2012: Irish Exchequer Results 2011 - Capital v Current Spending Trends

2012-01-07T23:00:00.000+14:00

In the previous posts we considered Exchequer results for 2011 for tax receipts and headline expenditure items. In this post we look at the capital and current spending composition breakdown for total spending.

One core assertion that was made in the previous posts is that capital spending carried the main load of Exchequer spending adjustments in 2011. Overall, year on year, total net cumulative voted spending by the Irish state declined 1.6% or €721 million. At the same time, current expenditure went up by 2.2% or €903 million. Capital expenditure dropped 27.4% year on year in 2011 or €1,623 million.

Table below highlights the yearly changes over the crisis period:

The table above clearly shows that while during the crisis Net Voted Current Spending went up by €663 million, capital spending has declined by €4,265 mln on aggregate. The table also shows that despite all the austerity discourse, our Net Current expenditure was rising in 2010 and 2011, while our capital expenditure was declining to compensate for these increases.

In addition, the table highlights the trend that shows current expenditure rising at accelerating rate in 2010 and 2011 and capital expenditure falling at accelerating rate in 2011 relative to 2010.

If capital spending by the state constitutes either a 'Keynesian' stimulus (as claimed by the Governments over the years) or an investment in future productive capacity of our economy (as also claimed by the Governments in the past), we are now into a third consecutive year of bleeding the economy dry.

And the dynamics are best illustrated by referencing to the longer time horizons:

So current expenditure share of total spending by the Government now stands at 90.6%, up from 2010 level of 87.3% and 1998-2002 average share of 82.3%. On the other hand, capital investment share of total Government spending has dropped from 21.7% average for 1998-2002 period to 21.0% in 2008 and to 14.6% in 2010. In 2011 this share declined to below 10.4%.

Between 2000 and 2010, Irish State invested in new capital stock some €66.26 billion of funds. Assuming 8% combined amortization and depreciation on this stock implies the need for continued gross investment of ca €5.3 billion annually. This means that 2011 Net Capital Spending fell some €1.01 billion short of covering the depletion of the state-financed capital stock.

The above, of course, is a rather crude calculation, since amortization and depreciation are at least in part covered from the current spending and since we use net voted capital spending figure for the capital stock measurements, but it does clearly suggest that current rates of capital investment cannot be sustained in the long term. And hence, much of the savings that have driven our Exchequer deficit improvements to-date are not sustainable either.

7/1/2012: Irish Exchequer Results 2011 - Expenditure

2012-01-07T21:54:00.000+14:00

In the previous post I looked at the tax revenues side ofthe Exchequer figures for 2011. The core conclusions emerging from thatanalysis was that:

Irish Exchequer tax receipts did not perform well in 2011compared to both 2010 and the target, with most of the improvement (some 80%)accounted for by reclassification of the Health Levy as tax revenue andaddition of the temporary, extra-Budget 2011 Pensions Levy.

Irish Exchequer tax revenues for 2011 cannot be interpretedas being indicative of any serious improvement. Factoring in Pensions Levy anddelayed receipts (Corporation Tax receipts for December carried over into2012), overall Exchequer revenue fell 3.1% short of the target set in Budget2011, not 2.5% claimed by the Department of Finance.

The above shortfall amounts to 0.66% of the expected 2011GDP and 0.81% of our expected GNP and comes after significant increases intaxation burden passed in the Budget 2011, suggesting that the economy’scapacity to generate tax revenues based on the current structure of taxation isexhausted.

Subsequent posts on the topic of Exchequer balance willfocus on overall balance, capital spending dynamics and relative distributionof tax burdens. This post focuses on the expenditure side of the Exchequerbalance.

In general, there are good reasons as to why discussion ofthe expenditure side of the Exchequer balance is a largely useless exercise,rendered such by:

- Constantre-alignment and renaming of departments, and

- Changes in the departmental revenues (as in the casewith the Health Levy reclassification) impacting the Net Voted Expenditure onHealth

Here’sa good post on the above caveats from Dr Seamus Coffey which is worth a read.

Solet’s consider some of the higher level figures.

OverallNet Voted Expenditure for 2011 came in at €45.711 billion, or €723 million(-1.56%) below 2010 levels and with a savings of €3.602 billion (-7.3%) on2008. The target for 2011 expenditure was set at €46.022 billion and the endoutrun implies that the Government has under-spent the target by €311 million.Note: I am referencing the original Budget 2011 target, as referenced, forexample, in End-June 2011 - Analysis of Net Voted Expenditure. The Departmentfor Finance reference figure for the annual 2011 target is €46.151 billion or€129 million ahead of the original estimate. This discrepancy is reflected inpart in the capital carryover figures for 2010-2011 and 2011-2012.

Yearon year, 2011 marks the third year of declining cuts. In 2009 yoy spending fell€2.150 billion, in 2010 it declined by €0.730 billion and in 2011 the drop was€0.723 billion. In proportional terms, expenditure declined 4.56% in 2009,1.57% in 2010 and 1.58% in 2011. Cumulated net expenditure ‘savings’ since 2008are now standing at a miserly €3.602 billion. Given that over the same periodwe accumulated €81.017 billion of deficits clearly shows the inadequate extentof cost reductions in the public services. Whichever way you spin it, to coverjust ½ of already accumulated deficits out of cost savings achieved so farwould take decades, and that before we factor in interest payments and the factthat much of the ‘savings’ delivered to-date comes out of temporary cuts tocapital spending. More on this in the forthcoming analysis of capital andcurrent spending.

Now,since we cannot clearly de-alienate actual spending, let us at the very leastconsider the spending priorities. These have changed over the years and changedin the direction that, while inevitable in the current crisis, is worrisomenonetheless.

Please keep in mind that although I did try to adjust asmuch as possible for changes in departments compositions, the data below is notfully reflective of these. Nonetheless, it does present some interestingchanges in the overall spending dynamics.

As shown above,

- Agriculture,Food and the Marine net voted spending constituted 3.36% of the total spendingin 2008. This now has fallen to 2.28%.

- Tourism,Culture and Sport accounted for 1.43% of the total spending in 2008 and is nowdown to 0.60%.

- Communications,Energy and Natural Resources share actually rose from 0.54% in 2008 to 0.55% in2011.

- Defencesaw a relatively shallow decline from 2.16% in 2008 to 1.93% in 2011.

- Educationand Skills – the third highest spending department in 2008 and 2011 – remainedrelatively static with 18.31% of total spending in 2008 and 18.07% in 2011.

- Jobs,Enterprise and Innovation share of total spending fell from 2.94% in 2008 to1.73% in 2011.

- Environment,Community and Local Government spending fell from 6.41% in 2008 to 3.39% in2011 – the drop that largely reflects changes in the departmental composition.

- Financeshare of spending declined from 2.83% in 2008 to 0.75% in 2011 – a dramaticfall.

- Foreignaffairs and Trade, despite gaining a new function of Trade have seen theirshare of spending decline from 1.99% in 2008 to 1.51% in 2011.

- Health– the largest spender in 2008 at 27.45% dropped to the second place in spendingdistribution with 28.25% in 2011 despite having lost a number of functions.Adding back Children function to the DofH, the department spending share roseto 28.7% in 2011.

- Justiceand Equality accounted for 5.25% in 2008 and this dropped to 4.84% in 2011.

- SocialProtection rose from being the second highest spending department in 2008 with19.06% (virtually identical share to that of Education) to the first highestspending department in 2011 with 29.16%.

- PublicExpenditure and Reform – a new department that, at least in my opinion isfailing to show much value for money so far – has managed to rake in spendingamounting to 1.71% of total net voted expenditure in 2011 – higher spendingpriority than Foreign Affairs and Trade, almost identical priority to Jobs,Enterprise and Innovation, more than double the spending priority of theDepartment of Finance. Let us presume - for a moment - that the Department has two important, related, but not fully coincident functions: bring down current spending (since bringing down capital spending is no-brainer) and produce longer-term reforms of public services (which is not all about cuts, of course). Given the numbers achieved to-date - see forthcoming post on capital and current expenditure reductions - one should have serious questions about the new department value for money.

- Taoiseachgroup saw its spending priority virtually unchanged over the years, decliningmarginally from 0.38% in 2008 to 0.37% in 2011.

- Transport– the department with significant compositional changes – has seen its spendingshare decline from 6.47% in 2008 to 4.18% in 2011.

So overall, top 3 departments accounted for 64.83% of totalnet voted spending in 2008 and this figure rose to 75.48% in 2011. The rate ofincrease in these expenditure shares has accelerated over the years. Year onyear, share of the three top spending departments in overall expenditure rose2.97 percentage points in 2008-2009, 3.80 percentage points in 2009-2010 and3.89 percentage points in 2010-2011. Once Children function is added back toHealth, the rate of increase in 2010-2011 jumps to 4.34 percentage points.

Top 4^th and 5^th ranked departments(Justice and Equality and Transport) saw their combined share of spendingdeclining from 11.71% in 2008 to 9.02% in 2011. This largely reflects changesin composition of the Department of Transport.

Together, Social Protection, Health and Children accountedfor 46.51% of the spending in 2008 and this now is up at 57.88% in 2011. Inother words, almost €6 per every €10 spent by the state goes to finance the twofunctions that constitute in traditional nomenclature social welfare benefitsand social benefits (note that private spending on health is netted out viadepartmental receipts in the net expenditure figures). Education accounts forroughly the same share – ca 18% of total spend – in 2011 as in 2008. Economicsectors departments (other than Transport) used to account for 6.84% of thetotal spend in 2008 and this is now down to 4.56% in 2011.

In short, the priority of the Government spending over theyears of the crisis has shifted firmly away from supporting economy’sproductive capacity and delivering structural subsidies to ‘social andenvironmental pillars’, to serving social welfare functions and preserving asmuch as possible public health spending. It is worth noting that the latter, ofcourse, has been achieved by shifting more costs burden onto the shoulders ofhealth insurance purchasers.

5/1/2012: Irish Exchequer Results 2011 - Tax Receipts

2012-01-06T09:38:00.001+14:00

Irish Exchequer returns for 2011 are in and there has been much in the line of fireworks celebrating the 'strong' results. Alas, these celebrations are revealing more about the nature of the Exchequer figures analysis deployed by the Government spin doctors than about the real dynamics in tax revenues and spending reforms.

In this post, let's take a look at the tax performance over 2011.

Income tax receipts came in at the grand total of €13.798 billion this year, 22.4% up on 2010 and 16.6% up on 2009. Alas, the gross year on year gain of €2.522 billion achieved in 2011 is accounted for by re-labeling of the former health levy into income tax component. In 2010 the state collected €2.018 billion worth of health levies receipts which were not classified as a tax measure. This year, it was classed as such, and although we do not know just how much of the health levy has been collected, netting out 2010 receipts for this revenue head out of the 2011 tax receipts leaves us with an increase in income tax like-for-like of closer to €500 million year on year. And these net receipts would imply income tax still down on 2009 levels.

Overall, income tax was down €327 million on target set in Budget 2011 - a shortfall of 2.3% - not dramatic, but hardly confidence-instilling.

The chart below illustrates trends over time, but one has to keep in mind that 2011 figures are gross of USC (and thus Health Levy receipts).

More revealing (as these compare like-for-like) are VAT receipts:

As the chart above illustrates, VAT receipts came in at €9.741 billion in 2011, down 3.57% on 2010 and 8.71% on 2009. Now, we are talking some real numbers here. While income tax 'improvements' were in reality very much marginal, VAT deterioration is very significant. VAT receipts are down 4.8% or €489 million on 2011 target and the receipts are off €360 million on 2010 and €929 million on 2009. VAT receipts are running €4.76 billion behind, compared to 2007 levels.

Corporation tax is shrinking. Official numbers show Corpo receipts are at €3.52 billion in 2011, down €404 million on 2010. These include €261 million in delayed receipts, so year on year Corpo receipts are down really €143 million. This might look small, but for the economy that is allegedly 'recovering' the dynamic is poor. In percentage terms, Corporation tax receipts are off 10.29% yoy and 9.74% on 2009. Compared to 2007, corporate taxes are down €2.871 billion (disregarding the late receipts).

Relative to target, once December delayed payments are factored in, Corporation tax has fallen short of the projections by €239 million. In overall official terms, the tax is down €500 million on traget (-12.4%).

Another big tax head is the Excise. This came in exactly at the same level as 2010: €4.678 billion. Excise receipts are down just €25 million on 2009, but significantly lower - by €1.16 billion relative to 2007. Excise taxes are now basically in line with Department projections for Budget 2011.

Stamps are up, but this is solely due to the pension levy introduction. Leve of Stamps receipts in 2011 reached €1.391 billion, which is €431 million ahead of 2010 and €461 million ahead of 2009. But once we factor out pension levy receipts, Stamps are actually down €26 million on 2010 and just €4 million ahead of 2009 levels. Compared to 2007 Stamps are down a massive €2.25 billion once pension levy is accounted for. And Stamps are down on target as well - by some €21 million.

When it comes to capital taxes, combined CAT and CGT receipts came in at €660 million or 12.9% ahead of 2010 receipts, although still 17.1% down on 2009 levels.

Both tax heads combined were bang-on on target.

So overall, of top 5 tax heads, 3 were behind the target despite the fact that Income tax included reclassification of tax revenues under USC, one was bang on target and one was ahead of target once temporary pensions levy is added, but behind target when this is netted out. In a summary, 4 out of 5 tax heads have underperformed the target and one came in at virtually identical levels to target. Where's, pardon me, the fabled 'improvements' and 'stabilization' in Exchequer revenues that Minister Noonan has been talking about?

Overall tax revenue stood at €34.027 billion in 2011, which is 7.16% ahead of 2010 and 2.97% ahead of 2009. However, if we are to correct for reclassified Health levy receipts and temporary pensions levy receipts, tax revenues for 2011 were at €31.552 billion, or 0.63% below those in 2010. tax rates went up, tax revenues went down, folks. Not what one would term an improvement in performance.

Even using dodgy apples-for-oranges accounting procedures deployed by the Government, tax revenues are down 2.5% on the Budget 2011 target. How on earth can anyone claim this to be 'stabilizing' performance or an 'improvement' defies any logic.

Let's do the sums:

2011 total tax revenues were €873 million behind Budget 2011 projections. These included non-tax revenue of at least €2 billion (Health levy) that was re-branded as tax revenues this time around, plus €457 million hit on pensions (not in the Budget 2011) and a delayed set of corporate returns of €261 million. So overall, tax revenues are down on target not €873 million, but €1.069 billion.
At the same time 2010-2011 outrun surplus claimed by the DofF at €2.522 billion in reality is a revenue gain of just €308 million.

That means that the Exchequer revenues side performance was really surprisingly unimpressive.

5/1/2012: 2012 Debt redemptions - select euro area countries

2012-01-06T07:53:00.001+14:00

A very revealing summary of 2012 bond redemptions by country and month, courtesy of the zerohedge.com (link here):

Cracking! While Germany won't have (most likely) any problem rolling €193.1 billion worth of paper other countries are in for a potentially (an highly likely) bumpy rides for France at €289.9 billion, Italy at €337.1 billion, Spain at €147.9 billion and GPI at combined €79.2 billion. This year won't be the real test for Ireland, however, with just €5.6 billion of paper coming up for refinancing, but it will be a testing year for PIIGS in general with €564.2 billion worth of sovereign debt to be rolled.

And here's the data for scheduled rollovers relative to country GDP as projected by the IMF:

This can easily get ugly.

4/1/2012: EU Commission new logo

2012-01-05T00:56:00.002+14:00

In the Really-Really-Really Important News of the Day: the EU Commission has a new logo... ahem... yes, a NEW LOGO:

Notice the two distinct sets of correlated lines - one set ascending, another descending, separated by a clear space with no sign of continuity between the two sets, presumably to summarize the emerging dis-Union of those states that are set to grow in the future, from those that are set to contract. Also note the 'growth' group dynamic is shallower than the dynamic of decline in the 'drop-outs' group.

There is also a semiotically potentially revealing positioning of the flag and the banner - off centre, more into the growth set of lines, possibly suggesting that the EU is now becoming more of a 'growth club' or alternatively 'de hell with dem slower periphery states' club?

So how about a new tag line: EU - a Union for Disunity?

Disclaimer: I am obviously take a proverbial p***ss, but., as Russians say - every joke contains at least a grain of reality...

3/1/2012: Government debt - maturity v overhang

2012-01-04T03:30:00.000+14:00

There are some good reports on the massive debt rollover in G7 and BRICs in 2012 - see a summary here. That can lead non-economists to confuse total outstanding Government debt with that maturing in 2012. Here's the summary of Government debt projections for G7 and BRICs for 2012 and 2016 based on September 2011 WEO database from the IMF.

So overall:

Back in September 2011, the IMF projected total G7 Government debt to reach US$43.02 trillion, or 123% of the expected 2012 GDP
BRICs 2012 Government debt is projected to reach US$4.9 trillion or 34% of GDP
Total G7+BRIC Government debt outstanding for 2012 is expected to be US$47.92 trillion or 97% of GDP
The above figures show why public debt in G7 nations is such a concern for the markets and the real economies.
By 2016, G7 Government debt is expected to rise to US$51.01 trillion or 127% of GDP. These projections are based on rather rosy assumptions that were built into September WEO forecasts and since then have been revised down, although there is no comprehensive database data incorporating these revisions available yet (it should come out in April 2012).
Absolute debt levels for G7 Governments are expected to rise for all countries except Canada and Germany. Relative to GDP, Government debt levels are expected to rise between 2012 and 2016 in Japan and the US.

So that US$ 7.6 trillion figure of maturing Government debt for G7+BRICs mentioned in the Bloomberg article linked above - that is just 15.9% of the total Government debt of these countries outstanding that matures in 2012. Not to be confused with the whole debt mountain...

3/1/2012: Are we really still 'filthy rich'?

2012-01-03T19:15:00.001+14:00

Parts of Irish media love GDP per capita comparatives within the EU27. Years after the Celtic Tiger went belly up, the Irish Times and RTE and some (though not all) Left-of-Centre alternative media trumpet our allegedly stellar performance in this metric as the evidence that more should be taxed out of the 'rich' to pay for 'vital services'. Parts of international Right-of-Centre media still refer to these comparatives as the evidence of the 'Low Tax' Irish miracle at work. Both are missing the core point I have been raising over the last decade (since moving to Ireland, really): GDP is irrelevant metric for Irish economic well-being.

Take, for example, the following 'latests' data released last month by the eurostat. In 2010, Irish GDP per capita stood at 28 percent premium over EU27 average and at 18.5% premium over EA17 (euro area). This 'achievement' made us look like the third highest income economy in EU27, and the 5th highest earning population when Norway, Switzerland and Iceland are added into the equation. Our GDP per capita was ahead of Iceland (111% of the EU27 average) and was second only to Luxembourg and Netherlands. Even more significantly, although our standing compared to EU27 did drop from 133% in 2008 to 128% in 2009 and 2010, our rank did not change. We were the 3rd highest 'income' economy in per capita terms in 2008 and we were, allegedly, that in 2010.

Now, that claim alone should put a grain of doubt into the wheels of the 'spend more, tax more' machine here. Afterall, we, in Ireland, have experienced the worst recession on record in 2008-2010. And yet, the indicator is showing us doing 'Just Grrreat!'

Of course, we know that somewhere around 20% of the GDP is expatriated with little benefit to the economy by the MNCs. And shaving off these 20% off the 128% premium we allegedly possess leaves us with an approximate GNP-linked premium of 102% - just above Italy at 101%. This would rank Ireland as 12th highest income economy in EU27. But in addition, what GNP and GDP don't measure and yet all of us know, Ireland's cost of living is well ahead of the EU27 average. Which means that while nominally we might earn slightly more than the average European, in terms of what these earnings buy us we should be much further behind. The alleged 'competitiveness gains' so much lauded by the Government help, but they shouldn't make as much of a difference to consumers, since these gains are primarily adversely impacting their earnings, not the cost of things we spend our money on. Deflation in the private sectors of economy over the last 3 years has been matched by inflation in the State-controlled sectors.

So the eurostat, handily, reports another metric of real incomes and wellbeing in the state - the Actual Individual Consumption per Capita - a measure that takes into account both public and private sources of individual consumption. And here, folks, we are much less of a 'high achiever'. In 2010 Irish AIC was 102% of the EU27 average - exactly where it should be once we control GDp for GDP/GNP gap. Which makes us 13-14th highest ranked economy in EU27. Or in other words, an average performer. Worse than that, our performance here was on par with italy (102%) and just 1 percentage point ahead of Greece. Barring the PIIGS we were the worst performing economy in the group of advanced EU27 member states.

And rebasing the data to compare against the EA17 average (euro area average) shows things are pretty much dire in Ireland. Back in 2008 we had AIC of 102% of the EA17 average. that fell to 96% in 2009 and 95% in 2008. This 7 percentage points drop in ireland's relative standing is the worst of all EA17 states. For comparison, in Greece the decline was 3 percentage points. Chart below illustrates:

Now, there's a chart RTE and Irish Times won't show you. And not only because it requires doing some research in the form of recalibrating the data, but because it won't fit the philosophy of 'Ireland is Still Rich. Tax Ireland!' that both outfits are so keen supporting.

2/1/2012: Sunday Times January 1 - 2012 Economy Forecast

2012-01-02T18:45:00.000+14:00

This is an unedited version of my Sunday Times article for January 1, 2012.

Happy New Year and the best wishes to all of you fond ofreading up on economics this morning.

Having just closed the book on the fourth year of thecrisis, one can only hope that 2012 will be the year of the return of theglobal and Irish economic fortunes.

I wish I could tell you that this will be so with some sortof certainty. That ‘exports-led growth’ will open the way for reducedunemployment and that ‘real reforms’ will take place to the benefit of those ofus living here and restore the confidence of the proverbial internationalinvestors. Alas, the only reality we can glimpse from the road we travelledsince 2008 is that this year will be marked by the same fiscal uncertainty,growth volatility and markets psychosis that were the hallmarks of the yearspast.

So in line with the New Year’s Day tradition for forecasts,lets take a look at the crystal ball and ask two questions.

Question number one: Where are we today on the road of theglobal economic and financial crises resolution?

At the macroeconomy level, the US has completed sometwo-thirds of the required private sector deleveraging. This means that by thevery end of 2012 we might see some signs of life in the US consumer demand andhousehold investment, assuming the credit system globally does not experienceanother seizure. Until this takes place, corporate balance sheets will remainfocused on hoarding cash and capex is unlikely to re-start. The US economy islikely to bounce around the growth rates just above zero, with moderate risk ofa recession in the first half of 2012.

The three black swans for the global economy are: the riskof the deficit blowout and the lack of Congressional consensus on dealing withthe US debt mountain that can destabilize the Treasury market; China’s economyteetering on the brink of an asset crisis and growth slowdown; and the euroarea hurtling toward a disorderly collapse. Should any one of thesematerialising, there will be an unprecedented shift in global investmentportfolia with gold and a handful of international blue chip corporatesbecoming the only stores of value. Unlikely as it might seem, such a scenariowill cause a new Great Depression worldwide.

Barring the catastrophe identified above, global demand willmost likely remain subdued in 2012, with previous pockets of growth – e.g. theemerging markets, the beneficiaries of exceptionally low cost of carry-tradefinance from QE funds in the US in 2009-2010 – becoming mired in a significantgrowth slowdown.

Europe is likely to be on the receiving end of the poorglobal growth newsflows.

Germany was the driver of European growth in 2011 and itsexports performance (up 13.4% in 2010 and 8.5% in 2011) looks set for a severetest in 2012. In months ahead, the ECB will drive down key interest rates to0.5-0.25 percent from the current 1.0 percent to accommodate the default-boundeuro area sovereigns. However, in the climate of deleveraging banking sector,this move will fail to stimulate private demand. Government spending in Germanyis also set to fall in 2012, by 0.4-0.5 percent. As the result, we can expectGerman GDP to contract in Q4 2011 and Q1 2012. Annual rate of growth is likelyto fall from 2.9% in 2011 to 0.2-0.4% in 2012.

France is now forecast to enter a shallow recession betweenQ4 2011 and Q1 2012 with annual growth falling from 1.6% in 2011 to zeropercent in 2012. The downside risk for the second largest euro area economy isthat fiscal adjustments planned to-date can be derailed by lower growth. Inthis case, France can remain in a shallow recession through 2012.

Overall, euro area growth looks set for some negativedowngrades in months ahead. We can expect GDP to remain flat in 2012, havingshown expansion of 1.5 percent in 2011. Personal consumption will be static,investment will shrink by 1.2 percent and Government spending will contract 0.3percent. Exports growth will fall 10-fold, from 2011 annual rate of 6.3percent.

This provides the backdrop to the second question of theday: What will 2012 bring to Ireland?

We are all familiar with the fact that Irish economy ishighly volatile and subject to a number of push and pull factors ranging fromglobal demand for Irish exports, to foreign conditions for debt crisisresolution in the common currency area.

Assuming no major disruptions to the current globalenvironment, we can look at two possible scenarios.

Scenario 1 involves benign assumptions of continued growthin agricultural output, modest resilience in exports, moderating contraction inconstruction sector, and only slightly deeper reduction in public spendingcompared to 2011. Crucially, this scenario assumes virtually no nominal changein the services sector activity, a moderate rise in net taxes and a slightdecrease in profits by the multinational enterprises expatriated abroad. Allin, Scenario 1 yields estimated rate of growth in real GDP of 0.8% and GNPgrowth of 0.7%.

Less benign Scenario 2 with shallower growth in agriculturaland exporting sectors activity, as well as services sectors contraction, yieldsgrowth forecast of -0.6% for real GDP and -0.9% for GNP. In this adversescenario, Irish economy is likely to end 2012 with real GNP 13% below the peak2007 levels.

These small differences in forecasts are, however,compounded year on year, as illustrated by the historical divergences betweenprevious Department of Finance forecasts and realised rates of growth in thechart.

The range of risks we face is a daunting one, but there isalso a narrow range of potential outcomes that present an upside for thebattered economy.

In terms of the sovereign risk, recent discontent with theBudget 2012 has translated into dramatically reduced approval ratings for bothFine Gael and Labor. These are likely to persist on the back of higher taxesand a potential increases in unemployment in the retail sector and otherservices, post-January sales. By mid-2012, lower growth and overly optimisticprojections on tax revenues and expenditure reductions will mean that theCoalition will face a stark choice of either further reducing capitalexpenditure, or levying some sort of a new revenue raising measure. Discontentof the backbenchers will only increase as time moves closer to the Budget 2013,possibly forcing the Government to adopt some structural reforms on theexpenditure side and rethink its policy on future tax increases.

The latest projections by the Economist Intelligence Unitput peak Government debt/GDP ratio at 120-125% in 2013. At this stage, therewill be a belated restructuring deal struck with EU that will see debt/GDPratio falling to below 100%. The pressure for such a deal will be building upthroughout 2012 and we might see some positive moves during the year.

Banks will be nursing continued losses, with mortgagesshowing a more visible trend toward deterioration, while business insolvencieswill continue driving significant losses behind the façade. Again, pressure ofthese losses will become more apparent in late 2012, just around the time bankscapital buffers begin to dwindle once again.

With economy bouncing up and down along the generallystagnant growth trend, the Government will continue its search for excuses foravoiding deep reforms. Thus, 2012 will be the year of silent risks build up inIrish economy, culminating in a major blow-out in late 2012 or early 2013.Welcome to the Groundhog Year Number Five.

Box-out:

Most recent data for Ireland’s external accounts shows thatin Q3 2011 our balance of payments stood at a surplus of €838 million,comprising a current account surplus of €850 million and a capital accountdeficit of €12 million. For the nine months of 2011, the current account hasregistered a deficit of €669 million, an improvement of just €125 million onthe deficit in the same period of 2010. Over the same time, balance of paymentsdeficit fell from €771 million in the nine months through September 2010 to€675 million for the first nine months of 2011. Which raises the followingquestion: given that we continue running current account and balance ofpayments deficits, what external surpluses does the Government foresee for thenear future that can possibly make a dent in our public debt overhang? Sincethe onset of the current exports boom in the beginning of 2010, Ireland’saverage quarterly current account surplus has been a meagre €13 million. Atthis rate, it will take Ireland Inc some 190 years to pay down just €10 billionof debts, even if these debts were costing us nothing to finance.

2/1/2012: Latest Composite Leading Indicators for Q4 2011

2012-01-02T18:39:00.002+14:00

Latest leading economic indicators for Q4 2011 for OECD are not showing any real signs of economic recovery for the euro area. Here are some of the details (please note, data is through October, so forward signal is for November-December 2011).

For Australia, Q4 2011 indicator is now down at 100.55 against Q3 2011 reading of 100.80. 3mo MA is 100.71 against previous 3mo MA of 100.89. For comparative purposes, 2007 average reading was 101.96, 2009 average of 96.07 and 2010 average 101.13. 2011 average to-date is 100.99.

Canada's CLI is at 99.66, ahead of Q3 2011 reading of 99.42. 3mo MA is at 99.62 and previous 3mo MA was 100.72. 2011 average to-date is 100.90, well behind 102.13 average for 2010 and 101.26 average in 2007.

France current reading is at 98.13 slightly behind Q3 2011 at 98.60. 3mo MA is at 98.69, behind previous 3mo MA of 100.96. 2011-to-date average is at 101.16, behind 2010 average of 103.38 and 2007 average of 101.37.

Germany's current reading is at 98.28, down from 99.10 in Q3 2011 with current 3mo MA at 99.26, down from the previous 3mo MA of 102.93 - one of the highest rates of slowdown at 3.57%. 2011-to-date average is at 102.77, down from 2010 average of 104.08 and 2007 average of 103.96.

Ireland (for our local interest) is at 96.99 against Q3 2011 of 96.19 - one of the handful of countries (such as Greece) that shows some improvement. 3mo MA is at 100.40 against previous 3mo MA of 101.00. 2011-to-date reading is at 100.94 against 2010 average of 99.74 and 2007 average of 105.28.

Italy is currently reading at 96.55, down from 97.47 in Q3 2011. Current 3mo MA is at 97.50 down from 100.46 for previous 3mo MA - a decline of 2.95%. 2011-to-date average is 100.58 against 2010 average of 103.93 and 2007 average of 101.69.

Japan current reading is at 101.33 against previous reading of 101.55. 3mo MA at 101.62 down from 102.69 for previous 3mo MA. 2011-to-date average is 102.65 against 2010 average of 100.78 and 2007 average of 102.29.

Spain latest reading is 100.16 against previous reading of 100.65. 3mo MA is at 100.52 against previous 3mo MA of 101.18 and 2011-to-date average is at 101.38 against 2010 average of 102.86 and 2007 average of 102.52.

UK current reading is at 98.64 against previous reading of 99.01, with current 3mo MA of 99.14 against previous 3mo MA of 101.13 (-1.96%). 2011-to-date average is at 101.02 against 2010 average of 103.14 and 2007 average of 102.13.

US current reading is at 100.95 down from the previous reading of 101.25. 3mo MA is at 101.24, down from previous 3mo MA of 102.37 (-1.11%). 2011-to-date average is at 102.20 and 2010 average was 100.39, while 2007 average was 103.20.

In terms of EA17, current reading for the euro area stands at 98.53, down from previous reading of 99.13. 3mo MA currently stands at 99.20 against previous 3mo MA of 101.67 (down 2.43%). 2011-to-date average is at 101.75 against 2010 average of 103.34 and 2007 average of 102.81.

Big Euro Area 4 economies index is now at 98.12, down from the previous reading of 98.77. 3mo MA is at 98.88, down from 101.66 for the previous 3mo MA (-2.74%) and 2011-to-date average is at 101.66, down from 103.77 average for 2010 and 102.44 average for 2007.

Charts to illustrate:

1/1/2012: That debt overhang problem: replay

2012-01-02T09:09:00.000+14:00

I am delighted to note that John Mauldin is also stressing the issue of total real economic debt overhang that I have been vocal about for some time now. Here's his 2012 predictions post: http://www.businessinsider.com/mauldin-collateral-damage-2011-12
that also contains this delightful chart:

And, spot the one country that stands out? Yep, that's Ireland - second to Japan in terms of total combined debt/GDP ratio, and well ahead of Japan when GNP is referenced in the above.

I have highlighted the issue of debt overhang and the long term real growth drag exerted by it in a number of articles now, including articles in the Sunday Times, the Globe and Mail, Ireland's Village magazine and on this blog. At last, analysts are starting to pay attention to the issue.

1/1/2012: Groundhog Year 2012 - part 2

2012-01-02T07:44:00.001+14:00

And on with another summary of 2011. One side of the euro area economy had a boom year in 2011, unlike the rest of us. The boom, of course, was of a very dubious nature, but it is set to continue through 2012. That side was the ECB balance sheet.

Check out the following charts to spot the 'up year' for ECB's 'assets':

But what about ECB's capacity to carry these? Well, of course, ECB doesn't really function like a regular bank, but were it, with capital and reserves finishing 2012 at €81.481bn against total assets of €2,733.2 billion, ECB's leverage currently stands at 3,354%, which is well above 2000-2004 average of 1,372% and 2005-2008 average of 2,180% and 2009 level of 2,609% and 2010 level of leverage of 2,565%.

And, of course, more financial wizardry to come in 2012, folks. So brace yourselves for another 'up-and-up they go' year at ECB.

1/1/2012: Groundhog Year 2012 - part 1

2012-01-01T21:39:00.000+14:00

In the tradition of looking back at the year passed, let's take a quick view of one of my favorite indicators for risk assets fundamentals: the VIX index.

CBOE Volatility Index finished the year well off the inter-year highs, but nonetheless in an unpleasant territory. VIX closed December 2011 at an elevated 23.40, ahead of December 2010 close of 17.75, 2009 close of 21.68 and only behind the December 2008 levels of 40.00. December 2007 close was 22.50 and December 2006 was 11.56.

More unpleasant arithmetic emerges when we consider inter-annual performance. Historical maximum for daily close (from January 1990 through present) is 80.86, while maximum for 2010-present was 48.00 set on August 8, 2011.

The historical average for VIX is 20.57, while the average for January 2008-present is 27.74, for January 2010-present is 23.38 and for 2011 as a whole - 24.20, implying that wile 2011 was not the worst performing year on the record, it was certainly worse than 2010. Table below summarizes annual data comparatives.

Average intra-day volatility actually marks 2011 as the worst year on record. Average intra-day spread for VIX stands at 9.28 in 2011 against 8.97 in 2010-present and 9.08 in 2008-present. And both 3mo and 1mo dynamic standard deviations posted poor performance for VIX in 2011, making it the worst year on the record other than 2009. VIX dynamic 1mo semi-variance closed the year on 7.80 and annual average of 4.26 against 2010 average of 3.96 and 2009 average of 5.78.

Charts below highlight the fact that 2011 was a poor year for fundamentals-based analytics:

All above suggest that volatility is the starting point for 2012. Welcome back to the New 'Groundhog Day' Year.

30/12/2011: Eurocoin December 2011: recession + inflation

2011-12-31T01:00:00.000+14:00

Eurocoin - euro area's leading indicator of growth environment - posted another disappointing month in December. December reading came in at -0.20, same as November with 'stabilization' accounted for by improvement in surveys-based indicators for industrial and services firms, offset by material deterioration in actual demand indicators. Core Q4 2011 forecast for euro area growth now moved to -0.2, dangerously close to establishing a full-blown statistical contraction in the economy. More significantly, current growth and inflation conditions pairing pushed ECB policymaking into a proverbial straight jacket corner: rates consistent with inflation remain in the region of 3-times higher than current rate, while rates consistent with growth conditions are about right for the current 1.0% rate.

Charts below illustrate.

3mo MA for Eurocoin is now at -0.18, against 6mo MA of +0.03. YOY Eurocoin is down 141% and the indicator remains at the lowest level since August 2009. Annualized growth rate is forecast is running at -0.798% and 6mo MA annualized growth rate is running at +0.117% (also the worst performance since August 2009).

30/12/2011: Taleb's quote

2011-12-31T00:49:00.001+14:00

AN excellent quote from Nassim Taleb via @econbrothers :

"If we attempt to systematically extinguish all forest fires, we will eventually experience a big one".

Which, of course, goes to describe concisely and precisely the fallacy of rescuing all banks that Europe has pursued as a principled policy. The old Schumpeterian creative destruction is a required condition for functioning of the private economy, with the latter being the required condition for functioning of the public economy as well. Bankruptcy - as a tool for clearing the hazardously dead forest of private enterprises - must apply to the banks too.

By underwriting the entire private banking system, the EU has created the Mother of All Hazards - a dry forest with numerous pockets of quasi-extinguished fires burning. Now, all we need is wind...

28/12/2011: ECB: New evidence on public-private pay gap: part 2

2011-12-27T23:38:00.001-10:00

As an addendum to the previous post on public-private pay gap study, here are the core results for differences in the pay gap based on various income percentiles:

In the table above, levels of income are referenced to percentiles, so wage differentials are estimated for public-private sector gap per each income percentile. In general, for most countries other than Spain, Ireland and Portugal, "the public sector gap is higher at the lower quantiles and declines along the wage distribution. This is further evidence that the dispersion of the wages in the public sector is much smaller than in the private sector. In this context, public sector employees with low wages earn a higher wage premium relative to higher income employees [again, ex- Spain, Ireland and Portugal]."

In the case of Ireland, the premium lowest for top-earners, second lowest for bottom-earners. The premium rises slightly for 25th percentile and 75th percentile and peaks at 50th percentile. So Irish public sector premium is highest for mid-range earners, lowest for top-range earners, and second lowest for low earners.

28/12/2011: Brain-drain & IRL's knowledge economy

2011-12-27T19:03:00.000-10:00

When Government policy-supported brain-drain is compounded by heavily subsidised 3rd level education system, Ireland risks turning into a third world-styled resources supplier to our more dynamic trading partners:

http://www.irishtimes.com/newspaper/ireland/2011/1228/1224309553505.html

HT to @dalkeyhead

That's the 'Knowledge Economy' in the absence of real jobs creation: taxpayers pay for knowledge, private holders of knowledge emigrate to earn private returns, taxpayers pay for more 'Knowledge Economy' boffins and pamphlets... but do not worry - 20 years from now, the IDA will have plenty of new ex-Irish execs in UK, US, Australia, Canada, etc to beg for FDI.

28/12/2011: ECB: New evidence on public-private pay gap: part 1

2011-12-27T18:44:00.002-10:00

ECB Working Paper 1406 (December 2011) titled "The Public Sector Pay Gap in a Selection of Euro Area Countries" looks at the relationship between public and private sector wages over recent decades in the light of "the increase in public sector employment in many countries, with relevant implications for the overall macroeconomic performance and for public finances". The study considered ten euro area countries: Austria, Belgium, France, Germany, Greece, Ireland, Italy, Portugal, Slovenia and Spain.

Per authors: "According to national account aggregate data, the wage earned by a representative public sector employee is higher than the one earned by a representative private sector employee in all the countries of this study, except Belgium, France and Germany. In particular, in the period 1995-2009 the ratio of public to private compensation per employee is found to be consistently below one in the case of France, slightly below one in the cases of Germany and Belgium, around 1.1 for Austria, around 1.2-1.3 for Italy, Spain, Greece, Ireland and Slovenia, and above 1.5 for Portugal."

"Available data on union membership – referring to the period 1997-2009 depending on the country - show that union density (measured by the ratio between reported membership and employed dependent labour force) is typically much higher in the public than in the private sector (in the European countries approximately twice as much). Among the countries included in this study, union density rates are relatively high in Belgium (around 50%), followed by Austria, Ireland, Italy and Portugal (in the 30- 40% range) and Germany (27%); it is relatively low in France (about 8%) and Spain (16%)."

The summary of the premium evolution is provided here:

In the chart above, Ireland has the second highest gap after Portugal.

The paper provides a reminder of a number of studies that have examined the public-private sector wage gap in Ireland:

Boyle at. al. (2004) report wage premia for public sector workers, greater for low-paid workers and smaller for public sector workers at the top of the earnings distribution using microdata from the European Community Household Panel Survey.
Foley and O’Callaghan (2009), using micro data from the 2007 National Employment Survey, also find a sizable public sector wage premium, highest at the lower ends of the earnings distribution. The authors use a variety of estimation techniques and control for work place and employee characteristics such as age, education, gender, occupation, etc. However, the authors urge caution in reaching a definitive conclusions on the average public sector premium.
Kelly et. al. (2009), using data from the 2003 and 2006 National Employment Surveys, analise the public- private sector wage gap in Ireland. Their results indicate that the public sector pay premium increased considerably from 14 to 26 per cent between 2003 and 2006. Moreover, they also reported that there was significant variation across public service sub-sectors.

The ECB research provides controls for a number of variables that can theoretically explain diferences in pay between public and private sector, such as education as skills proxy and gender, earnings groupings by percentiles, and firm size. All are found to retain statistically signifcant public sector earnings premium in the case of Ireland.

The study also looks at one specific category - Education. "On average workers in “Education” earn much higher wages with respect to workers with similar characteristics in the private sector relative to workers in the other sub-sectors, while workers in the “Health” sector are less at advantage, and as in the case of Germany even at disadvantage with respect to their private sector counterparts. This finding is confirmed on the basis of a formal statistical test..."

And the premium holds when controlling for workers' own education:

So overall, the study finds that: "A large body of literature has analysed the issue using micro-data on single countries. Most of these studies find a differential in favour of public sector workers, even after taking into account some observable individual characteristics. As in the previous studies, our results, referring to the period 2004-2007, point to a conditional pay differential in favour of the public sector that is generally higher for women, for workers at the bottom of the wage distribution, in the Education and the Public administration sectors rather than in the Health sector. We also find notable differences across countries, with Greece, Ireland, Italy, Portugal and Spain exhibiting higher public sector premia than other countries. The differential generally decreases when considering monthly wages as opposed to hourly wages and if we restrict our comparison to large private firms."

There goes one of those "We are not Greece" comparatives that the Irish Government is so keen on. When it comes to pay premium in the public sector, we are in the Club Med (PIIGS) group after all.

26/12/2011: LTRO will not solve Euro banks' problem

2011-12-26T04:37:00.000-10:00

As the annus horribilis concludes for the terminallyill, but refused (by the ECB & EU & the respective Governments) death,Euro area banks, the key note of that Mahlerian (the 5^thsymphony-styled) Trauermarsch is the LTRO allocation of cheap 3 year €489billion worth of ECB credit (at 1%) to the European banks. And, thus, the themefor 2012, the second movement in the opus magnum of the Euro destruction, isthe looming recapitalization deadline for the said zombies – the end of June.

Alas, the hope that seems to sweep the markets toboost, albeit moderately, Euro area banks valuations – the hope that having themother of all carry trades can help these banks recover their margins just intime to use ‘organic’ recapitalization path through mid 2012 – is seemingly outof reach.

Firstly, I put ‘organic’ in the inverted commas, sincethe margins rebuilding on the back of ECB-created artificial liquidity boost isabout as organic as performing a puppet show with a corpse is ‘live-like’.

Secondly, the carry trade I am talking about - forthose readers of this blog who are unfamiliar with finance – is the artificialexercise of taking cheap loans in one country/currency and carrying funds intopurchase of assets in another country/currency. Of course, with nothing butloss making (or near-loss making) assets in the markets of the Euro zone, anybanks who borrowed funds in the LTRO will be either buying Government paper(yielding on average, say, 3.0 percent margin on borrowings gives Euro areabanks pre-tax uplift of just €7.3 billion in 6 months time (and no, there areno capital gains realizable, since buying today and selling into mid-2012 willleave this paper, at best, capital gains neutral). Thus, to make even a dent inthe capital demand, the banks will be needing assets yielding more than doublethe junkier Euro area sovereign yields, which means carry trade, and allassociated currency and asset risks.

Of course, Euro area banks can try to magnify theirreturns via ECB-offered leveraged carry trades. But unless ECB offers more LTRO-styled longer term operations, doing so at 3mo or even 11mo liquidity supply windows would be simply mad.

So, having borrowed through LTRO, Euro area banks will purchase Governmentbonds which then can be used as a collateral for further ECB borrowing. So letus assume that the banks will be buying liquid debt, e.g. Spanish or Italian.The margin earned by banks is ca 2.6-3.5% per annum after they cover the costof LTRO borrowing. Note, this carry trade will turn loss-making for the bank ifthe sovereign bonds yields fall below 1% cost of ECB LTRO funds. In my view,this is highly unlikely.

So the whole operation can provide some €14.6 billionannually to the banks in terms of profits earned. And this is pretty much theunleveraged maximum. Nice one, but through June 2012 hardly enough to supportbanks recaps. Even if EBA deadline is shifted to December 2012, profits fromLTRO are nowhere near the required funds to cover recapitalizations. Recallthat under 9% Core Tier 1 scenario, euro area banks require something to thetune of €119 billion in fresh capital.

The downsidefrom this conclusion is that the Euro area banks will require, post LTRO eithera warrant to die (the preferred option, assuming the death warrant involvesorderly shutdown of the insolvent banks) or a public bailout of immenseproportion. Given the EU hit some serious trouble coming up with €200 billionfor loans to IMF, good luck with that latter option.

23/12/2011: EU - 2013 = Year of Citizens, Rest of Time = Years of Brussels?

2011-12-23T10:35:00.001-10:00

So 2013 theme for EU is "The European Year of Citizens". I know, it was proposed some months ago, but...

The challenges for the "Year of Citizens" will be to:

Raise citizens' awareness of their right to reside freely within the European Union and of how they can benefit from EU rights and policies [Though, of course, if they happen to be Russian-speaking near-majority in some Baltic States, they are not quite 'citizens' and if they happen to be from certain EEC member states, they can reside, but have no right to work in other member states, plus if they live in Ireland, they have a duty to repay banks bondholders in other member states, and if they live in Greece, they have no right to have a referendum on their own economic policies, and... oh, well... the list goes on];
Stimulate citizens' active participation in EU policy-making [because, as we know it, European 'citizens' are starting to get tired of the farcical nature of governance in the EU, especially when it comes to that pesky democratic deficit (chart below is from Spiegel Online):

Build debate about the impact and potential of the right to free movement, especially on strengthening cohesion and people's mutual understanding of one another [no comment here, since we are currently living through the period when many member states are starting to put in place measures to reduce that 'free movement']

But overall, did anyone ask the EU Commission and the European Parliament the following question: If 2013 is the year of European citizens, then, pardon me for using foreign turn of phrase here, what the hell were all the previous and will the subsequent years be about? Years of Brussels?

23/12/2011: Composition of Irish exports to Russia

2011-12-22T22:24:00.000-10:00

For those of you who asked: composition of Ireland's exports to Russia, data through August 2011:

This shows pretty decent diversification and the stronger role for indigenous enterprises, especially in Agrifood sector (26.2%, plus some segment of Other category).

22/12/2011: Irish Foreign Assets and Liabilities: Q3 2011

2011-12-22T10:48:00.000-10:00

Some interesting data courtesy of CSO's Quarterly International Investment Position and External Debt for Q3 2011.

The summary:

Yep, pretty dramatic. The above is in billions of euros. Let's look at the historical series and decomposition by IFSC and non-IFSC:

Overall Total Foreign Assets in the country amounted to €2,587,566 million (€2.59 trillion) in Q3 2011, which is up on €2,544,483mln in Q2 2011. Total Foreign Assets are up 1.69% qoq and down 1.51% yoy.
Of the above, €2,093,152mln accrues to IFSC or 80.89% of all our Foreign Assets. This is up from €2,039,307mln in Q2 2011. IFSC assets are up 2.64% qoq and 1.35% yoy.
Non-IFSC Foreign Assets amounted to €494,404mln or 19.11% of our total Foreign Assets. These assets are down 2.13% qoq and 11.99% yoy.
Overall, Total Foreign Liabilities (Debt) are up from €2,678,809mln (€2.68 trillion) in Q2 2011 to €2,735,556mln (€2.74 trillion) in Q3 2011. Total Foreign Liabilities are now 2.12% qoq but down 1.50% yoy.
Of the above, €2,072,484mln accrues to IFSC or 75.76% of all our Foreign Liabilities. This is up from €2,007,592mln in Q2 2011. IFSC liabilities are up 3.23% qoq but down 0.2% yoy.
Non-IFSC Foreign Liabilities amounted to €663,072mln or 24.24% of our total Foreign Liabilities. These debts are down 1.21% qoq and down 5.34% yoy.

Charts illustrate:

The above figures are massive, but the balance of them is shocking:

In Q3 2011, Net External Liabilities position (Net IIP) was €148,000mln up 10.18% qoq but down 1.37% yoy
The above accounted for the surplus of €20,668mln in IFSC - down 34.83% qoq but up 282% yoy
Which means that non-IFSC net debt was €168,668mln - more than our entire GDP - which is up 1.58% qoq and 21.6% yoy.

Yes, that's right - the 'bad' IFSC had a positive impact on our net External Liabilities position in Q3 2011, while the 'good' Ireland Inc had a massive shortfall of more than 100% of its GDP.

So now, let's think in relative terms - relative to our GDP:

In Q3 2011 our Total Gross External Liabilities stood at a massive 1,738.9% of our GDP
Of the above, 1,317.4% of our GDP was accounted for IFSC, and
421.5% of our GDP was captured by non-IFSC.

Now, that's pretty impressive... 17.4 times the GDP! And even at 4.2 times the GDP for non-IFSC foreign liabilities (keep in mind, these are just foreign liabilities, not capturing internal debts and other internal liabilities) we are pretty heavily under water.

22/12/2011: Retail Sector Activity Index: November 2011

2011-12-22T08:38:00.002-10:00

I covered detailed retail sales for November data in the previous post (link here). Now is the time to update the Retail Sector Activity Index.

It is worth noting that my Retail Sector Activity Index for October has predicted November moderate uplift in sales - a nice surprise for the index just created:
"A large jump in consumer confidence in October (to 63.7 from September reading of 53.3) is the core driver of improvement in the overall Index od Retail Sector Activity, which now stands at 102.2 - above the expansion level of 100. This means that we can expect a small uplift in retail sector activity in months ahead, but this uplift can manifest itself through improved volumes of sales (value static, so margins declining) or improved value of sales (inflation) or both (more demand-driven uplift)."

As shown in my detailed analysis (linked above), the retail sales did indeed improve in November, and the improvement took place across all three possible drivers (depending on specific areas of sales):
" Only notable increases yoy are in Non-specialized stores ex-Department Stores (where inflationary pressures drove value up 1.4% while volume was up only 0.5%), Fuel (where inflation was so rampant that value of sales rose 10.3% while volume of sales fell 3.7%) and Electrical goods (where season sales started early and cuts were running deep with value +0.5% and volume up 7.5% yoy). Everything else was either down or flat."

So now to that data update:

Retail sales (core) volume index rose to 100.6 in November from 98.8 in October.
Retail sales (core) value index rose from 94.6 in October to 95.6 in November
Consumer confidence, however, declined from 63.7 in October to 60.1 in November.

The above implies that RSAI have dropped slightly from 108.64 in October to 107.96 in November. Dynamics however remain encouraging for continued firming up of sales:

RSAI November reading is 3% ahead of 3mo ago, and 5.33% above the reading a year ago.
6mo MA now stands at 105.94, ahead of previous 6mo MA of 104.91, signaling what can be a moderate uplift.
For comparison, 2006-2007 average is 125.41.

Charts to illustrate:

Medium-term, however, the indices remain below historical trends, with more firm confidence still failing to drive up retail volumes and values:

In other words, structural weakness in the sector remains unchanged. It will take couple of months of solid gains in retail sales (annual gains of 1.5-2% minimum per month) to deliver signs of real structural improvement.

22/12/2011: Europe's policy errors

2011-12-22T06:03:00.000-10:00

By now, you have figured it out - I am a big fan of my old UofC professor, John Cochrane. And in this latest article (here) he delivers even more real common sense.

Defaults:

"Conventional wisdom says that sovereign defaults mean theend of the euro: If Greece defaults it has to leave the singlecurrency; German taxpayers have to bail out southern governmentsto save the union.
This is nonsense. U.S. states and local governments havedefaulted on dollar debts, just as companies default."

Cochrane is correct. Orange County, CA - size ca 1/2 Ireland - has defaulted before and so... no end to the State of California or to the Feds and, crucially, no bailout. New York went bust in 1975, Cleveland in 1978. Fitch did a study in 1999, updated in 2003, that shows 2,339 cases of municipal bonds defaults in the US for 1980-2002 totaling USD32.8 billion. And guess what: no bailouts and yet the dollar still exists. Fitch estimated cumulative default rate for 1980-1986 issuance of 1.5%m cumulative default rate for 1987-1994 issuance of 0.63%, average recovery rates were around 63-64%, consistent with standardized CPD pricing practice of 40% haircut. This is not to say that defaults are costless or easy, but there is no ex-ante intrinsic reason for the common currency to implode were a country like Greece - expected by all to default - to restructure its sovereign debts.

Bailouts:
"Bailouts are the real threat to the euro. The ECB has been buying Greek, Italian, Portuguese andSpanish debt. It has been lending money to banks that, in turn,buy the debt. There is strong pressure for the ECB to buy orguarantee more. When the debt finally defaults, either the restof Europe will have to raise trillions of euros in fresh taxesto replenish the central bank, or the euro will inflate away."

Correct again: latest LTRO allocation of €489bn this week, with €235bn of this being lent in excess of the banks covering shorter-term ECB debt is the case in point. ECB's hope is that the banks - already sick from overloading with low quality sovereign debts on their balance sheets - will use €235bn to buy more sovereign debt. This, of course, will help ECB to cut back its own purchases of Government bonds and to, thus, pretend that 'the market' for sovereign debt in Europe is somehow being repaired. The madness of this 'solution' is that it creates even greater link between ECB, banks and sovereign debt - the very cause of the crisis contagion. You can see an excellent, albeit a bit politically-correct piece on this in the Economist (here).

And to correct for the 'politically correct' bit - here's my view of LTRO: In a nutshell, the ECB will lend the banks unlimited money at 1% so they can buy PIIGS+Belgian+French debt making 2-6% margin as pure profit and benefiting from capital gains in the process. As bonds prices firm up on the back of these purchases, banks collateral deposited with ECB will also improve in value, allowing them to borrow even more. This positive correlation between banks borrowings from ECB and their profits gains will continue until in 3 years from now the entire pyramid collapses - the banks will have to repay ECB funds, prompting massive sales of bonds. And in the mean time, there will be no lending in the real economy, as banks funding will be tied into financing Government spending and banks will continue to deleverage out of real assets. This makes LTRO an equivalent of an RX to a drug addict for unlimited supply of free opiate.

As Cochrane puts it:
"Sovereign default would damage the financial system,however, for the simple reason that Europe has allowed its banksto load up on debt, kept on the books at face value, and treatedas riskless and buffered by no capital. Indebted governments have been pressuring banks to buy moredebt, not less.

As banks have been increasing capital, they haveloaded up even more on “risk-free” sovereign debt, which theycan use as collateral for ECB loans. The big ECB “liquidityoperation” that took place yesterday will give banks hundredsof billions of euros to increase their sovereign bets. Bankdepositors and creditors have figured this out, and are runningfor the exits.

...By stuffing the banks with sovereign debt, Europeanpoliticians and regulators are making the inevitable defaultmuch more financially dangerous. So much for the faith thatregulation will keep banks safe."

Fiscal Union:
"More fiscal union hurts the euro. Think of Poland orSlovakia. ...A common currency without a fiscalunion could have universal appeal. A currency union with abailout-based fiscal union will remain a small affair."

"Europeans leaders think their job is to stop “contagion,”to “calm markets.” They blame “speculation” for theirtroubles. They keep looking for the Big Announcement that willsoothe markets into rolling over another few hundred billioneuros of debt. Alas, the problem is reality, not psychology, andgovernments are poor psychologists. You just can’t fill atrillion-euro hole with psychology."

Conclusion:

"The euro’s fatal flaw then wasn’t to unite areas withdiffering levels and types of development under one currency. ...Nor wasit to deprive governments of the ephemeral pleasures ofdevaluation. Nor was it to envision a currency union withoutfiscal union.

Banking misregulation was the euro’s fatal flaw [emphasis is mine]. Sovereigndebt, which can always avoid explicit default when countriesprint money, doesn’t remain risk-free in a currency union. Yetbanking regulators and ECB rules continue to pretend otherwise.

So, by artful application of bad ideas, Europe has taken aplain-vanilla sovereign restructuring and turned it into abanking crisis, a currency crisis, a fiscal crisis, and now apolitical crisis."

And then,
"When the era of wishful thinking ends, Europe will face astark choice.

It can have a monetary union without sovereigndefaults. That option means fiscal union, accepting real Germancontrol of Greek and Italian (and maybe French) budgets. Nobodywants that, with good reason.
Or Europe can have a monetary union without fiscal union.That would work well, but it needs to be based on two centralideas: Sovereigns must be able to default just like companies,and banks, including the central bank, must treat sovereign debtjust like company debt.
The final option is a breakup, probably after a crisis andinflation. The euro, like the meter, is a great idea. Throwingit away would be a real and needless tragedy."

I agree.

22/12/2011: Retail Sales for November

2011-12-22T04:25:00.001-10:00

Ok, folks, RTE is shouting "Biggest Retail Sales Rise Since March" (see link here) but you do know to turn to this blog to see the real numbers. So here are the updated charts and historical trends and some analysis.

It is worth noting that my Retail Sector Activity Index for October has predicted this uplift:
"A large jump in consumer confidence in October (to 63.7 from September reading of 53.3) is the core driver of improvement in the overall Index od Retail Sector Activity, which now stands at 102.2 - above the expansion level of 100. This means that we can expect a small uplift in retail sector activity in months ahead, but this uplift can manifest itself through improved volumes of sales (value static, so margins declining) or improved value of sales (inflation) or both (more demand-driven uplift)."
Please note that below analysis exactly confirms the above predictions.

However, this does not mean that I share with the RTE headline excitement about the actual sales indices performance in November 2011. Here's why:

First of all - general retail sales (including motors), seasonally adjusted:

Value of retail sales rose from 87.2 in October to 88.2 in November, an increase of 1.1% mom, a drop of 0.68% yoy. History in making? Well, not really - in 2 months of October and November, retail sales rose 1.50%, in 2 months of May-June retail sales value grew 1.25% (statistically indifferent from 1.5% gain in last two months), and in 2 months between February and March they rose 1.26%, which is again identical - statistically-speaking - to the rise in last 2 months. So history is not being made here.
Significantly, annual rate of declines has slowed down in November to -0.7%, which is the best reading since June when there was zero change in retail sales year on year, but then, again, in January value of sales was up 4.3% yoy and then in February it was down just -0.2% yoy. Now, again, no historical headlines here.
Let's take a look at the trends. At 88.2 current reading is ahead of 3mo MA of 87.4 and 6mo MA of 87.7, but it is below 201 average of 88.86. In other words, current sales are worse than monthly average for 2010. And current sales are slightly ahead of 2011 monthly average to-date of 87.82%. Not that the RTE would bother mentioning that.
Relative to the peak, value of retail sales is still down 24.10% in November.
In Volume terms, there was a 1.6% monthly rise from 91.9 in October to 93.3 in November. This is statistically insignificant difference too. In 2 months through November, index of the volume of retail sales rose 1.97%, in May-June it was up 2.07% and we do know that it was not exactly boom time on the high street back then.
Volume index is now down 0.8% yoy and 19.8% down on peak. 3moMA is at 92.23 and 6mo MA at 92.47. However, 2010 monthly average is at 93.6, which is ahead of November monthly reading. So, as with value index, the 'record sales' in November are lower than the average monthly sales volumes in 2010.

Charts to illustrate:

Frankly, I am not seeing anything that jumps out on an extraordinary scale. Some uplift, most likely supported by the decline in foreign travel for shopping and by better weather conditions this year than in 2010, but hardly spectacular. Only notable increases yoy are in Non-specialized stores ex-Department Stores (where inflationary pressures drove value up 1.4% while volume was up only 0.5%), Fuel (where inflation was so rampant that value of sales rose 10.3% while volume of sales fell 3.7%) and Electrical goods (where season sales started early and cuts were running deep with value +0.5% and volume up 7.5% yoy). everything else was either down or flat. You tell me if this is something that we can cheer about?

Let's take another look at the pure index numbers:

Value index at 88.2 was the highest reading since June when it stood at 88.8. In last 12 months through November, index was in excess of 88.2 or equal to it on 5 occasions other than November 2011, which makes this month's reading oh, sort-of average.
Volume index at 93.3 in November 2011 is the highest since 93.8 in June 2011 and is the 4th highest in the last 12 months - also not exactly a trend-breaking performance.

So adjusting for motors sales, core retail sales indices were:

Value of core retail sales rose 1% mom from 94.6 to 95.6 in November. November 2011 reading is 0.1% ahead of November 2010 reading and the current index stands at the 5th highest reading level over the last 12 months.
Relative to peak value of core retail sales is down 19.39%. 2010 monthly average reading is 97.57% - ahead of November 2011 reading. More ironically, year-to-date 2011 average monthly reading is 95.62 which is identical to the November 2011 reading.
By all possible comparisons, November 2011 reading for the Value of core retail sales (ex-motors) is average.
Volume reading reached 100.6 - the first over-100 reading since April 2011. Index is now up 1.8% mom and down -0.8% yoy. This is the set of numbers that excited the RTE the most.
Yet, 2010 monthly average reading for this index was 102.7 - above the November 2011 reading. However, importantly, 2011 year-to-date average monthly reading is 99.7 - statistically insignificantly different from November 2011, but still below November reading in actual terms.
Still, November 2011 is worse than the average month of 2010. Not exactly a strong performance.

Charts to illustrate:

Ok, let's summarize the above: supposedly we had an exciting retail sales month in November. Yet, by all measures CSO reports, November performance this year was worse than average monthly performance in 2010, and by 3 out of 4 measures reported by CSO, November was worse than the average month in 11 months from January 2011 through November 2011.

Oh, and as an aside, here are the comparatives in retail sales volumes across Ireland, EU17 and EU27 (data reported with a monthly lag here, so latest we have is for October sales):

22/12/2011: Long term growth and the crisis

2011-12-22T03:30:00.000-10:00

Let me highlight the following angle on considering latest Irish economic forecasts. The downgrade by IMF, OECD and EU Comm, plus ESRI to 2012 growth of 0.9-1.0% - as much as I personally think these forecasts to be optimistic as they are - cuts across the strikingly more optimistic Department of Finance forecasts for 1.3% growth (in the Budget) or 1.6% growth (in the documents released one day ahead of the Budget). This is pretty clear.

But the real issue here is that in the long term, IMF projects Irish growth of 2.3%, 2.7% and 3.0% in 2013-2015, with the output gap of 3.6%, 2.2% and 1.1%. The implied loss to the Irish economy due to the crisis, from 2010 through 2015 is a cumulative €37.5bn. In other words, our economy's long-term growth potential for growth, held back by the structural recession and debt overhang, plus fiscal mess, is - between 2010-2015 - €37 billion higher than the expected realized income. Or 20.9% of the expected 2015 GDP.

While differences year on year are significant in terms of fiscal targets, the fact that in 6 years between 2010 and 2015 Ireland's economy will be forced (by our inept Government policies on debt and banks, plus our inept EU 'partners' policies on 'bailout' and banks) to waste almost 21% of our expected annual income shows the following:

Current policies are incapable to drive Ireland back to its potential long term growth rates, and
Ireland is clearly distinct from other peripheral countries which, while having a similar crisis, do not have the same potential for future growth as Ireland.

21/12/2011: Sunday Times December 18, 2011 article

2011-12-21T09:35:00.001-10:00

This is an unedited version of my Sunday Times article for December 18, 2011.

Last week’s EU Summit was billed as offering long-term solutions to thefiscal stability in the euro area and setting out the tools for dealing withthe immediate threats. Just a week after the summit, however, the euro zonefinds itself in the midst of an ever-deepening crisis once again.

This, of course, is a logical conclusion to the meeting that not onlyfailed to present any new measures, but went on to undermine credibility of thepreviously deployed solutions, such as the EFSF, the ESM, Private SectorInvolvement in bondholders haircuts in Greece, the expanded IMF engagement inlending to the euro zone member states, and the ECB deployment of aggressivequantitative easing programmes.

Let’s take a look at the hard numbers that emerged from the summit.

Post-July 2011 plan was to enhance EFSF lending capacity to €1.5-2trillion either by raising new funding or by running €500 billion EFSFconcurrently with €1 trillion ESM. Post-December summit we have: no increase inEFSF, no concurrent schemes and a vague promise of a €1 trillion target forESM. This means that the effective lending capacity of the long-term funds ineuro zone will be less than one half of what was expected.

That, of course, assumes that EFSF and ESM will carry on borrowing underAAA rating status and that funding markets will be receptive to new issuance ofdebt. The former is now jeopardized, courtesy of the summit failure, leading toFrance downgrade. The latter has been under severe questions for weeks now,since the EFSF failed to raise €3 billion in the last auction earlier thismonth. In fact, things are now so desperate, that this week EFSF was forced toissue 91 days bills. A fund that is lending under 7.5-10 year mandate now runsshort term funding schemes that imply a massive maturity mismatch risk.

In order to by-pass ECB’s statutory restriction on financing the memberstates, for months prior to the December summit, EU leaders were voicing theidea of lending funds to the IMF so that the IMF can re-lend these same funds,leveraged ca 4-5 times back to the euro member states. This too now appearscompletely out of reach. Following the summit, the US, Canada and Japan statedunequivocally that they will not support targeted funding by the IMF. Inaddition, Russia, Brazil, China and India have in the past said no to matchingeuro area loans, meaning that the scheme cannot come into existence as ageneral fund allocation. Of course, in all the excitement surrounding theSummit, everyone forgot to ask a simple question – where will the EU governmentsfind the said €200 billion if they can’t raise the money to fund the EFSF?

Private sector participation in Greece – the cornerstone of the July andOctober 2011 summits – was also put to gather dust this week. Firstly, theEuropean Banking Authority clearly stated that efforts to-date to agree such‘voluntary’ participation have come short of the required target of 90% offoreign bond holders. Secondly, in the 5^th review of Greece’sprogress under the lending programmes, the IMF team in Athens concluded that:“There are yet significant risks ahead for the [Greek] authorities’ program,including …the possible failure to agree with creditors on a PSI deal, leadingto a non-voluntary outcome.” And furthermore, despite having engaged inplanning PSI operations since June 2011, after six months of haggling andplanning by the EU, “… the specific details of the operation remain to befinalized …” The sums involved are hardly insignificant. October 26 summit – upto 1/4 of the entire EFSF once banks recapitalization measures are included.Absent full implementation of PSI, Greece will be insolvent vis-à-vis IMF,triggering a mother of all defaults.

Last, but not least, the hopes of the ECB riding into the battle withdirect quantitative easing were cindered by Frankfurt. Following the summit,ECB decision makers were quick to state that direct assistance to the memberstates and expanded bonds purchases were not consistent with the ECB statutesand strategy. Of course, no open market operations – no matter how large –could have been sufficient to deal with the crisis. To-date, ECB balancesheetof loans to sovereigns (via direct purchases of Government bonds) and euro areabanks has swollen dangerously close to €1 trillion. And, yet, this hadvirtually no real long-term effect on the crisis dynamics.

Adding insult to the already grave injuries, the Summit precipitated twonew crises in Europe – a political one and an economic one. The former ismanifested in the legal problems surrounding formulation, passing andenforcement of the new Fiscal Pact. But these are legal and political problemsso let us focus on the economic ones.

Even for the deficit hawk like myself, the Fiscal Pact is equivalent toan economic suicide. The Pact formula of 3%-0.5%-60% is a combination of thealready failed Stability and Growth Pact targets enriched with the lethallyobscure and totally unattainable 0.5% structural deficit limit.

Between 1990 and 2008 – in other words, before the crisis hit – Irelandwas able to satisfy the 0.5% structural deficit target only once in very 10years, same as Belgium, Germany and the Netherlands. Austria, France, Greece,Italy, Portugal and Spain never once satisfied this criterion. Two bestperformers in the euro area – Malta and Finland have met the target in 6 out ofthe 19 pre-crisis years. In terms of 0.5% structural deficit rule, all memberstates, except Germany will require further austerity measures.

For Ireland, a longer-term expected slowdown in growth over the next 10years compared to previous two decades will mean that it will be even harder tostick to the target for the structural deficit, as we see reduction in thepotential growth rates going forward.

Ireland fared much better as far as the 3% standard deficit goes,satisfying the criteria in all but 1 year. The same does not hold for othereuro area states. France has failed to meet the target in more than 5 out of 10years, as did Spain; Italy in more than 7 in each 10 years; Portugal andGermany more than 4; Greece – never once. And looking forward, under ratherrosy IMF September 2011 projections for 2012-2013, Belgium, Cyprus, France,Greece, Ireland, Slovenia and Spain will require even more austerity thanalready planned to comply with 3% deficit rule.

For Ireland, complying with the 3% rule will require the deepestadditional adjustments in the euro area, while complying with the 0.5%structural deficit rule will need second largest adjustment. In fact, thisweek, Sen. Sean Barrett, a TCD economist proposed a bill that aims to bringabout a more open and transparent approach to the public finances and stressesthe overall significance of the structural deficits rules for Ireland.

Messrs Kenny and Noonan have signed off on the deal that will be thecostliest to Ireland of all other states, disastrous to our economy in itscurrent condition and, given the legal issues surrounding its enforceabilityfor countries not in debt to the Troika, also pretty much useless for the EU atlarge.

The second point of weakness in the Irish Government position withrespect to the new Pact relates to the implicit Government support for theFinancial Services Transactions Tax (FSTT). Empirical evidence firmly showsthat Tobin-styled taxes in financial services, when effective in reducing thespeed and volume of transactions, have to be prohibitively high, impacting moreadversely secondary financial services centres, like Dublin IFSC and benefitingoffshore locations and jurisdictions that fall outside the new tax net. Insummary, Tobin tax can lead to less transparency, more tax evasion and lowereconomic growth across the EU. James Tobin himself argued against the blanketintroduction of his ideas in later years.

By agreeing to the new Pact without as much as voicing a threat of theveto over the FSTT, the Irish Government has signed a long term death warrantto Dublin's competitiveness in front-office international financial services -the highest value added segment of the sector and one of the best performingareas of Irish economy in recent years, including during this crisis.

On the net, as the direct result of the Summit failures, the probabilityof the Euro zone exits for Greece, Portugal, Ireland and Belgium has risen. Atthe same time, the sustainability of public finances in Italy, Spain and Franceis now in doubt as Fiscal Pact is likely to result in a reduction in thepotential growth rates for Span and France and no increase in future growth forItaly. Likewise, the probability of Irish fiscal adjustment path must bequestioned, especially since the Pact will depress our longer term growthrates, that are already, barring the Pact introduction, less than spectacular.

It is thus, that the Government deficit of leadership has finallycontributed to a bitter failure at the EU policy level. Contagion has spreadfrom all matters economics and financial to the heart of politics in Europe.

Box-out:

Breaking up the doom-and-gloom newsflow that dominates our everydayreality, last month’s high level Irish delegation trade visit to Russia, headedby Tanaiste Eamon Gillmore, yielded some encouraging progress on thelonger-term bilateral trade and investment policies development front. Since 1976,Irish and Russian authorities have been in somewhat infrequent and irregulardialogues on these issues under the umbrella of the Joint Economic Council.Last month, for the first time ever both sides agreed to set up sector-specificworking groups with regular reporting and strict annual targets fordeliverables. Given that Irish exports to Russia are set to grow 40% plus thisyear, having 52% in 2010, while Irish trade surplus with Russia is about toexpand by 150% in the last 2 years, this is a truly welcomed development. In2010, Irish trade surplus with Russia was €465 million ahead of that withChina, €352 million ahead of trade balance with India and €119 million greaterthan the trade surplus with Brazil.