Here is an unedited version of my article for Irish Daily Mail for February 28, 2011.
The hardest thing in the General Election 2011 for Fine Gael and Labor is yet to come. After Sunday rest and celebrations this week will start for both parties with a political wrangle over positions of power. This too will be the easy part.
However, comes the week of March 7th, the entire weight of the ongoing crisis will fall on the shoulders of Mr Kenny and his colleagues. There is no rulebook the new Government can consult in these times of need. Old policies, having comprehensively failed to stabilize our banking system, will be of no use. In fact, some – like Nama and the extended guarantee – will have to be unwound or scrapped altogether and fast. New policies touched upon during the campaign – like ‘renegotiation’ of the EU/IMF loans – will be just a side-show to the escalating crisis.
The problem is that, largely unseen by us, the banking crisis continues to rage. We’ve heard about the perils of ATMs running out of cash should we ‘unilaterally burn the banks bondholders’. Alas, our banks are now running ATMs on the back of IOUs they issue to themselves. In other words, every time we dine out or buy a newspaper, we are spending cash that Irish banks have borrowed from the ECB or the Central Bank of Ireland against the collateral that is only worth anything because the taxpayers promised to repay the loans. You might think that your Laser card is a debit card – taking money you own from your account. Courtesy of our bust banking system, it really is a credit card with the debt being spread across the entire economy.
Tens of billions of new debt have been created over the last few months through this ‘backdoor’ borrowing. And the new Government will have to stop this merry-go-round before the taxpayers, and with them the entire economy, collapse under the weight of this debt.
On top of this, there is a new instalment in the series of horror shows looming on the horizon, as AIB is set to report its 2010 results in days to come. For AIB is most likely to reveal this time around that it is not that much better off, when it comes to lending and investment books quality, than Anglo and INBS. AIB spent last three years in active denial of the extent of its impairments. Now, it will have to start airing its dirty laundry. Again, the Government will have to react to put some active policy buffers between the markets – easily spooked by the zombie giant rearing its head – and the bank.
Add to that much anticipated Prudential Capital Assessment Review (PCAR) – the new set of ‘stress tests’ on Irish banks balancesheets – and you have some seriously disastrous newsflow that the Government is heading into. To be credible, the PCAR will have to be really honest. We already had a number of previous reviews that spectacularly failed to reveal the truth about banks, including the ones carried out by the EU which gave AIB and Bank of Ireland their clean bills of health just before AIB was nationalized and Bank of Ireland required new financial wizardry from the Government to avoid the same fate. An honest PCAR expected next month will most likely send AIB into a tailspin.
Last, but not least, the Government will be facing the EU negotiations relating to the Franco-German push to ‘reform’ EU-wide macroeconomic stability rules. During these talks, our fiscal position will come under renewed scrutiny by the very same EU Commission and ECB who have already voiced concerns that the Government 4 year plan for restoring order to our public finances is a castle built of sand. Should the EU take a keen interest in our economic assumptions and forecasts, the Government might be forced to either increase the ‘savings’ planned for 2011-2014 by, possibly, as much as €5-6 billion, or sacrifice something else in return. No prizes if you guessed that it will be our corporate tax rates.
Here is an example. We all heard about unrealistically high assumptions on economic growth that underlie our recovery plans. Over the last couple of weeks, things have gone from bad to worse. For example, Government plan, supported in principle by Fine Gael, assumed oil price inflation of just 10.4% in 2011. Alas, since plan’s publication, oil prices have risen on average by over 20% already. Every 10% increase in oil price in Ireland translates into roughly 0.5% cut in our GDP growth. So if the Budget 2011 projected expected growth of 1.75% in GDP over this year, all signs to-date suggest that in reality we will be lucky if we can get 0.5% (0.1% for larger and less oil-dependent economies, like Germany). And this means that in year 2011 alone, to keep up with the 4 year plan, the Government might need to find additional ‘savings’ of some €200 million net.
So forget the 5 points plans. The new Government will have to get off to a fast start on drawing up the realistic plans for dealing with the crises we faced. Comes Monday week, the honeymoon will be over for Fine Gael and Labor.
Wednesday, March 2, 2011
02/03/2011: Irish Mail article - February 23
Here is an unedited version of my Irish Daily Mail article from February 23, 2011.
With the new Government standing to inherit a ca 10% deficit this year and a prospect of the sovereign debt in excess of €240 billion by the end of 2013, Friday elections will deliver only one certain outcome – our next Toiseach will most likely enjoy the shortest honeymoon with the voters in the history of the state. Given all the opinion polls, Enda Kenny will be redecorating the offices occupied previously by Brian Cowen. Fresh ‘IOU’ forms with Fine Gael’s insignia and new Taoiseach name will be gracing the desk. The change, alas, risks stopping there.
On a serious note, given the gravity of our economic and financial situation, it is virtually certain that the new Government will have to abandon, at least for the next 24 months, all of its 5-point plans. Fighting forest fires sweeping across our banking landscape will, once again take priority. No matter who wins in these elections, our State Guaranteed (and mostly State-owned) banks will continue to print own bonds (also State-Guaranteed) to roll over €9.7 billion of the older paper maturing this year. No matter what parties will end up forming the Government, deposits flight will go on, powered over, under the un-blinking eyes of the Financial Regulator and the Central Bank, by more borrowing. In the mean time, state finances will continue flopping along the ‘road to recovery’ like a deflated tyre.
By the end of 2013, the state will run out of the EU/IMF funds and own cash (aka NPRF), so forget whatever promises you heard throughout the current campaign about ‘stimulating growth’ and ‘improving competitiveness’. In the mean time, with the blessing of the Croke Park agreement, the public sector reforms will continue in the pages of newspapers, but not on the ground. All signs suggest that by the end of this year, the EU will face a severe banking crisis of its own, which will further exacerbate our local problems and will risk derailing our exports – the only bright spot on otherwise leaden horizon.
All of this suggests that the new Government will have to go into yet another crisis management exercise and this time around possibly without a safety cushion of the EU. The radical, unthinkable today, solutions will have to be considered. This is why the current elections are unlikely to give us much of a relief from the disasters of the last three years.
The only real uncertainty worth considering in the context of the Friday vote, therefore, is that of the new emerging power of the independents. Should the outcome of the vote this week return, as forecast, some 20 independent TDs, Ireland will be on a road to formation of at least two new parties, each with popular votes close to the combined votes of PDs and Greens, averaged over the last 4 elections. A combination of such robust support for independent alternatives to the 4 main parties and continued and amplifying economic crisis will then set the stage for a watershed change in the next elections. That date, in my estimates, is now no more than 18-21 months away.
With the new Government standing to inherit a ca 10% deficit this year and a prospect of the sovereign debt in excess of €240 billion by the end of 2013, Friday elections will deliver only one certain outcome – our next Toiseach will most likely enjoy the shortest honeymoon with the voters in the history of the state. Given all the opinion polls, Enda Kenny will be redecorating the offices occupied previously by Brian Cowen. Fresh ‘IOU’ forms with Fine Gael’s insignia and new Taoiseach name will be gracing the desk. The change, alas, risks stopping there.
On a serious note, given the gravity of our economic and financial situation, it is virtually certain that the new Government will have to abandon, at least for the next 24 months, all of its 5-point plans. Fighting forest fires sweeping across our banking landscape will, once again take priority. No matter who wins in these elections, our State Guaranteed (and mostly State-owned) banks will continue to print own bonds (also State-Guaranteed) to roll over €9.7 billion of the older paper maturing this year. No matter what parties will end up forming the Government, deposits flight will go on, powered over, under the un-blinking eyes of the Financial Regulator and the Central Bank, by more borrowing. In the mean time, state finances will continue flopping along the ‘road to recovery’ like a deflated tyre.
By the end of 2013, the state will run out of the EU/IMF funds and own cash (aka NPRF), so forget whatever promises you heard throughout the current campaign about ‘stimulating growth’ and ‘improving competitiveness’. In the mean time, with the blessing of the Croke Park agreement, the public sector reforms will continue in the pages of newspapers, but not on the ground. All signs suggest that by the end of this year, the EU will face a severe banking crisis of its own, which will further exacerbate our local problems and will risk derailing our exports – the only bright spot on otherwise leaden horizon.
All of this suggests that the new Government will have to go into yet another crisis management exercise and this time around possibly without a safety cushion of the EU. The radical, unthinkable today, solutions will have to be considered. This is why the current elections are unlikely to give us much of a relief from the disasters of the last three years.
The only real uncertainty worth considering in the context of the Friday vote, therefore, is that of the new emerging power of the independents. Should the outcome of the vote this week return, as forecast, some 20 independent TDs, Ireland will be on a road to formation of at least two new parties, each with popular votes close to the combined votes of PDs and Greens, averaged over the last 4 elections. A combination of such robust support for independent alternatives to the 4 main parties and continued and amplifying economic crisis will then set the stage for a watershed change in the next elections. That date, in my estimates, is now no more than 18-21 months away.
02/02/2011: Credit and Deposits of Irish residents: January 2011
Let's get back to the credit stats released yesterday by the CBofI. This is the second post (earlier post - here - focused on foreign depositors flight), so let's update the core charts and review some monthly changes in the data.
Credit side:
- Irish households credit contracted mom by €948mln in January 2011 (a drop of 0.73%) against a monthly contraction of 5.29% in December 2010 - so deleveraging has slowed down
- Year on year, Irish households total outstanding debt fell to €129,370 mln in January 2011 or yoy decline of €10,392mln (7.44%) while in December yoy decline was 6.97%.
- Irish household's outstanding mortgages amounted to €99,289mln, down in January by €289mln (-0.29%) against a monthly drop of 7.05% in December 2010
- Year on year, mortgages were down 9.78% (or €10,766mln) in January against a yoy decline of 9.65% in December 2010.
- Non-financial corporations outstanding debts amounted to €92,652mln in January up 0.1% mom (+€90mln), but down 35.67% yoy (-€51,363mln).
- Total private sector credit fell 0.57% (-€1,908mln) mom in January (December 2010 saw mom decline of 0.98%) and fell 10.6% yoy (-€39,427mln) in January (December 2010 saw yoy decline of 10.73%).
And growth rates:
Next, deposits for Irish residents (remember - non-resident deposits were highlighted in the previous post linked at the top):
- Total private deposits down 0.82% mom (-€1,387 mln) in January and yoy down 9.05% (-€16,613 mln). Steep. Deposits were down 2.24% mom in December 2010 (8.41% yoy).
- Households deposits contracted 0.7% mom in January (-€663mln) and 5.56% yoy (-€5,531mln). There go our 'savings rates', folks. In December 2010, yoy drop was 4.57% so things are accelerating downward. Month on month deposits were down 0.71% in December 2010.
- Non-financial corporations deposits rose 0.12% (VAT carry overs and seasonal receipts and payments, especially for MNCs being most likely drivers) month on month (+€41mln), but were down 16.57% yoy (-€6,670mln). In December 2010 corporate deposits were down 4.93% mom and 17.42% yoy.
Now, let's consider the degree of leverage we carry in this economy:
As charts above show:- Leverage rose 0.26% mom and fell 1.7% yoy in January 2011 across the entire economy. In December, leverage rose 0.51% mom and fell 3.44% yoy
- Overall leverage trend is up and currently this economy is leverage 199.32%
- For households, leverage fell 0.03% mom and 1.99% yoy in January 2011, having fallen 0.04% mom and 2.79% in December 2010. So deleveraginng is slowing down
- Currently Irish households are leveraged 137.69%
- Non-financial corporations leverage was formidable 275.93% in January, down 0.02% on December 2010 and 1.99% on January 2010. In December 2010 corporate leverage was down 0.04% mom and 2.79% yoy. So deleveraging is slowing down for corporates as well.
Clearly, longer maturity has fallen off the cliff and a slight bounce in longer maturities this month follows a catastrophic drop off in months before. This cliff is a clear indication that households are moving cash into shorter maturities - either to withdraw deposits all together or as a form of short term precautionary savings. So:- Overnight deposits were down -0.9% (-€788mln) mom and -4.42% yoy (-€3,998mln) in January
- Deposits with maturity up to 3 months were down -1.26% (-€197mln) mom and -6.16% (-€1,011mln) yoy in January 2011
- Deposits with maturity up to 2 years were up 1.15% (+€780mln) mom and down -16.67% (-13,374mln) yoy.
Finally, credit cards debt fell 1.84% mom (€53.48mln) and -5.8% (-€175.81mln) yoy in January 2011. Good news for one of the most expensive forms of debt.
02/03/2011: Live Register February 2011
Live register for February is out today and makes for some interesting reading.
Headline figures are mildly encouraging. In February 2011 there were 444,299 people on the Live Register an increase of 7,343 (+1.7%) yoy. This compares with an increase of 5,741 (+1.3%) in the year to January 2011 and an increase of 84,503 (+24.0%) in the year to February 2010.
On a seasonally adjusted basis there was a decrease of 1,700 on the Live Register in 2011. M decrease of 5,800 was recorded in January 2011.
Overall the Live Register has now fallen by 10,000 on a seasonally adjusted basis since its peak in August/September 2010.
Let's update some charts:
To put the LR changes into perspective, consider weekly average changes:
and monthly averages:
Live Register-implied unemployment rate (pretty good measure of unemployment) is now at 13.5% - same as in January:
Now to some numbers in more detail:
All of the decrease in the seasonally adjusted series over the last six months has been recorded for males.
One core problem has been the increasing duration on LR. Month on month, February saw an increase of 2,413 males and 858 females (total of 3,271) of signees on the LR for a year or longer. This contrasts with decreases of 2,610 males and and increase of 961 females with duration under 1 year. This suggests that the unemployment is, predictably, sticky for earlier LR signees.
Finally, separate figures released today by the Dept of Enterprise, Trade & Innovation show that notified redundancies were down 44% year on year in February. In addition, as reported earlier, PMIs for Manufacturing have signaled for the third month running that employers are starting to add jobs in the sector. These two developments suggest that barring some significant shocks, LR is now stabilizing and possibly reverting to a shallow downward trend. This trend, however, still appears to be driven by exits and emigration, rather than jobs creation.
Headline figures are mildly encouraging. In February 2011 there were 444,299 people on the Live Register an increase of 7,343 (+1.7%) yoy. This compares with an increase of 5,741 (+1.3%) in the year to January 2011 and an increase of 84,503 (+24.0%) in the year to February 2010.
On a seasonally adjusted basis there was a decrease of 1,700 on the Live Register in 2011. M decrease of 5,800 was recorded in January 2011.
Overall the Live Register has now fallen by 10,000 on a seasonally adjusted basis since its peak in August/September 2010.
Let's update some charts:
To put the LR changes into perspective, consider weekly average changes:
and monthly averages:
Live Register-implied unemployment rate (pretty good measure of unemployment) is now at 13.5% - same as in January:
Now to some numbers in more detail:
- Year on year January 2011 saw increase in LR of 19,300. This has fallen back to 17,800 in February;
- In percentage terms, yoy change in LR in January was +4.522%, which eased to +4.150% in February
- For 25+ year olds, January LR increased by 10,000 year on year (+2.879%), while February increase was 11,300 (+3.272%) - so things are getting better here, but by only 600 mom
- For <25 year olds, January 2011 saw a decrease in numbers of 3,400 (-3.908%) yoy, but February decrease was 2,600 yoy (or -3.055%) - an improvement mom of 1,100
- Casual and part-time employment increased 5,770 in February (yoy) or +7.277% against an increase of 6,369 in January (+8.286%) - or mom increase of 1,827 (more people taking part time and casual work than the seasonally adjusted drop in overall LR)
- Non-nationals accounted for 79,162 of the total LR count against nationals with 365,137. So non-nationals count increased 635 month on month in February, while nationals saw an increase of 987.
- Non-nationals LR signees numbers fell 2,868 yoy in January (-3.524%) and by 2,104 (-2.589%) in February
- Nationals signees numbers increased 8,609 yoy in in January and 9,447 in February
- The above points on nationals v non-nationals signees imply rather rampant emigration or outflow from the labour force of non-nationals.
All of the decrease in the seasonally adjusted series over the last six months has been recorded for males.
One core problem has been the increasing duration on LR. Month on month, February saw an increase of 2,413 males and 858 females (total of 3,271) of signees on the LR for a year or longer. This contrasts with decreases of 2,610 males and and increase of 961 females with duration under 1 year. This suggests that the unemployment is, predictably, sticky for earlier LR signees.
Finally, separate figures released today by the Dept of Enterprise, Trade & Innovation show that notified redundancies were down 44% year on year in February. In addition, as reported earlier, PMIs for Manufacturing have signaled for the third month running that employers are starting to add jobs in the sector. These two developments suggest that barring some significant shocks, LR is now stabilizing and possibly reverting to a shallow downward trend. This trend, however, still appears to be driven by exits and emigration, rather than jobs creation.
02/03/2011: CB data - Total deposits
In the next few posts I will be covering the data released yesterday by the Central Bank.
Here are two telling charts rarely seen side by side:
Let's spell out some numbers:
Here are two telling charts rarely seen side by side:
Let's spell out some numbers:- Total deposits from non-residents fell 36.35% year on year in January 2011 (€190.88bn) and 3.71% mom (€12.685bn)
- Private sector deposits from non-residents fell 22.89% yoy (€22.888bn) or 0.79% mom (€0.616bn)
- Total private sector deposits from Irish residents declined 9.05% yoy (€16.613bn) and 0.82% (€1.6387bn) mom
- No media outlet to my knowledge told us just how much distrust in our financial system do foreigners have
Tuesday, March 1, 2011
01/03/2011: Manufacturing PMIs
From NCB Manufacturing PMI report:
“Manufacturing production increased at the third fastest pace in the history of the survey, which began in May 1998. According to respondents, higher output mainly reflected strong new order growth.
Total new business rose at the sharpest pace in more than eleven years in February. New export orders expanded at the second-steepest rate in the series history, with the EU and Asia highlighted as sources of growth.
The second consecutive accumulation of backlogs of work was solid, and the fastest in the history of the series, in line with strong new order growth.
Employment growth hit a four-and-a-half year high in February as firms raised staffing levels in response to higher workloads. Job creation has now been recorded in each of the past three months.
Input cost inflation accelerated for the second month running to the steepest since July 2008. Higher prices for raw materials was the main factor behind increased input costs, with fuel and steel mentioned in particular.
As input prices rose, Irish manufacturers increased their charges accordingly. Furthermore, the marked inflation of output prices was the sharpest in four years.
Purchasing activity increased at the fastest pace since December 1999 in February, in line with rising production requirements. Anecdotal evidence suggested that suppliers had struggled to cope with rising demand for inputs, resulting in delivery delays.
Lead times lengthened markedly again over the month.
Despite a near-record rise in purchasing, preproduction inventories decreased modestly as inputs were consumed by production. Stocks of finished goods also declined in February, albeit only marginally. Panellists reported that post-production inventories were utilised to partly satisfy the sharp rise in new orders."
Nothing to add to this – across the board, strong performance and most encouragingly, expansion in employment prospects is holding over time and even getting stronger.
Perhaps one suggestion going forward - can the folks from NCB get us a breakdown of MNCs led activities from domestic respondents going forward.
Now, updated charts:
“Manufacturing production increased at the third fastest pace in the history of the survey, which began in May 1998. According to respondents, higher output mainly reflected strong new order growth.
Total new business rose at the sharpest pace in more than eleven years in February. New export orders expanded at the second-steepest rate in the series history, with the EU and Asia highlighted as sources of growth.
The second consecutive accumulation of backlogs of work was solid, and the fastest in the history of the series, in line with strong new order growth.
Employment growth hit a four-and-a-half year high in February as firms raised staffing levels in response to higher workloads. Job creation has now been recorded in each of the past three months.
Input cost inflation accelerated for the second month running to the steepest since July 2008. Higher prices for raw materials was the main factor behind increased input costs, with fuel and steel mentioned in particular.
As input prices rose, Irish manufacturers increased their charges accordingly. Furthermore, the marked inflation of output prices was the sharpest in four years.
Purchasing activity increased at the fastest pace since December 1999 in February, in line with rising production requirements. Anecdotal evidence suggested that suppliers had struggled to cope with rising demand for inputs, resulting in delivery delays.
Lead times lengthened markedly again over the month.
Despite a near-record rise in purchasing, preproduction inventories decreased modestly as inputs were consumed by production. Stocks of finished goods also declined in February, albeit only marginally. Panellists reported that post-production inventories were utilised to partly satisfy the sharp rise in new orders."
Nothing to add to this – across the board, strong performance and most encouragingly, expansion in employment prospects is holding over time and even getting stronger.
Perhaps one suggestion going forward - can the folks from NCB get us a breakdown of MNCs led activities from domestic respondents going forward.
Now, updated charts:
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