17/12/2012: Don't write manufacturing off

Here is an amazing (yep, amazing) report from McKinsey on the future of Manufacturing: http://www.mckinsey.com/insights/mgi/research/productivity_competitiveness_and_growth/the_future_of_manufacturing

And here is a really fascinating eye-opening chart from it:

What are the interesting bits in the above?

1. The US retained its position as number 1 manufacturing source in the world (note - with recent emergence of on-shoring trend for US manufacturing, this is likely to stay)
2. China moved - predictably - quite fast in the league table
3. India's performance has been relatively weaker than that of China - not surprising 
4. Russia - in 2000 only 21st in the world is now 11th
5. Brazil moved from 15th in 2000 to 6th
6. Indonesia moved from 20th in 2000 to 13th
7. Germany dropped from the 2nd in 1980 to the 4th
8. Italy rose from the 6th in 1980 to the 5th
9. France dropped from the 5th to the 8th
10. In 1980 and 1990, EU had 5 countries in the top 10, in 2000 - 4 countries and the same number in 2010 - a rate of relative decline
11. Big loser is Canada, rising from 10th in 1980 to 9th in 2000 and falling to 15th in 2010.

Here is another revealing chart, mapping 5 broad categories of manufacturing sectors based on specific inputs intensities:

Let's give it a thought. Ireland is a location most suited for R&D intensive and labour (skilled) intensive sectors, as we have neither sufficient capital, nor access to cheap energy (sorry, the renewables bugs - these are not cheap and not abundant). We also want to aim for high trade intensity and high value density. Which means priority sectors for us should be:

• Motor vehicles, trailers, parts
• Other transport equipment
• Electrical machinery
• Machinery, equipment, appliances

Tier 2 priorities (mostly driven by imported capital due to their high capital intensities) should be:

• Chemicals
• Computers and office machinery
• Semiconductors and electronics
• Medical, precision, and optical

Interestingly, and rather counter contrary to the perceived effects of the web-based economy, R&D intensive areas of the economy remain manufacturing:

These are just some of the fascinating insights. I will try blogging on the report some more in later posts.

17/12/2012: More spin on Promo Notes 2012

Here's the latest saga on Anglo Promo Notes 'non-payment' in March 2012:

This relates to the past here on the topic.

The point raised, allegedly, by the Department of Finance is as follows: Promo Note was 'settled' not in cash, but by issuance of a bond, so that

1. Irish Government issued a bond (which is to say borrowed money) to the IBRC
2. IBRC took the bond to the 'market' to obtain cash in exchange for it
3. Absent a 'market' for this bond, Bank of Ireland took the bond on for one year and paid the IBRC €3.06 billion (presumably, Bank of Ireland borrowed the funds to do so from the ECB using the bond as the collateral)
4. The IBRC paid down the ELA with the money.
5. ELA was written down by the required amount in 2012.

Let's re-narrate this in more simple terms:

1. Irish Government official went to a restaurant for a working lunch without having any money
2. The official, upon consuming lunch, wrote an IOU for €100 covering the bill to her lunch companion who had a credit card with him.
3. The credit card was maxed-out, so the second official called his bank and arranged for a 1-day overdraft facility from the bank to cover the bill, using as security the IOU from his lunch companion.
4. The credit card owner then used the credit card new facility and paid €100 bill.
5. The restaurant recorded payment of €100 bill.

Now, two questions:

Question 1: was the bill paid? Answer: yes. Proof: if no, then the restaurant could claim that no payment was received, so no tax is due on the proceeds from this payment. I doubt the Revenue will be so keen to allow this.

Question 2: did the original official pay the bill? Answer: it depends on which scenario will take place in 1 day: Scenario A: Original official does not intend to settle the debt (IOU) - in which case she defaults on loan from the second official and no payment by her was made under the IOU agreement. Scenario B: Original official honors her commitment, and the original IOU was a form payment.

However, Question 2 is purely academic from the standpoint of whether the lunch was paid for or not - it was paid. Full stop.

Substitute 'Promo Note' for 'lunch' and you have it. Promo note 2012 was paid. QED

16/12/2012: Europe's Social Welfare State gets German Warning

"If Europe today accounts for just over 7 per cent of the world’s population, produces around 25 per cent of global GDP and has to finance 50 per cent of global social spending, then it’s obvious that it will have to work very hard to maintain its prosperity and way of life."

Wonder what 'extremist' right-wing 'demagogue' said this? Why, Angela Merkel...

Read the full story here.

But here is some data from the OECD


Estimates of real public social spending and real GDP (Index 2007=100) and public social spending in percentage of GDP (right scale), 2007-2012

Source:

Projected public social spending as a % GDP and as a % “trend GDP” and real GDP, 1980-2012  (select countries):

Source for above: http://www.oecd-ilibrary.org/social-issues-migration-health/is-the-european-welfare-state-really-more-expensive_5kg2d2d4pbf0-en

And here is the latest OECD data (2009, published 2012):

Back in 2009, Ireland ranked 18th in the OECD in terms of private spending on Social Expenditures as % of GDP and 14th in the OECD in terms of public spending. We ranked 15th in terms of overall Social Expenditures. In comparison, Swiss spent 19.4% of their GDP, against Ireland spending 25.8%.

Setting aside Irish case, Ms Merkel has a point. EA12 average public spending is 26.8% of GDP against the OECD average of 22.1%, while private spending average is 2.4% against the OECD 2.5%. In other words, EA12 spend more publicly, less privately, on social expenditure.

16/12/2012: A Bucket of the Bad with a Pinch of the Ugly

I wanted to post this chart for some time now, but kept forgetting about it. The chart comes from RBS research on banks from November 2012 and is based on data through Q3 2012.

The interesting bits - beyond the overall apparent weakness of the European banks, as highlighted in the headline, is which banks are the weakest. Basically: Mediobanca leads, with Danske and Banco Popolare in second. Which brings us to the irony of Danske's latest marketing push for becoming a bank for the 'New Normal' (see here). Oh, the irony...

16/12/2012: Stop the nonsense on 'non-payment' of Promo Notes 2012

In recent weeks, the Irish Government has engaged in a willful and undeniable distortion of fact. Here is one example of a senior Minister on the record saying that : ""[The Government] didn't pay the promissory note this year…"
http://www.herald.ie/news/rabbitte-rules-out-31bn-payment-for-anglo-debt-3321386.html

The same was repeated today on RTE programme.

The Ministers must know that according to the official exchequer accounts, the Promissory Note due 2012 was paid in full.

In the Budget 2013 Economic and Fiscal Outlook (official document released by the Department of Finance: http://budget.gov.ie/budgets/2013/Documents/Budget%202013%20-%20Economic%20and%20Fiscal%20Outlook.pdf) contains the following references to repayment of the Promissory Note 2012:

Page C.19, explanatory note to Table 10 (reproduced above): "The 2012 IBRC Promissory Note payment was settled with a Government bond…"

In Table 10 above, 2012 item for "Promissory Note Repayment of Principal" enters -€3.1 billion, fully confirming the repayment was made.

Page C.22 Table 13 clearly identifies 2012 Promissory Notes repayment as being "Non-cash payment in 2012 of IBRC promissory note" and states in the explanatory note below the table that "In 2012 the annual promissory note payment to IBRC was made with a Government bond". The same is entered on page C.5 under the Table 1.

The details of the bond settlement scheme are here:
http://www.finance.gov.ie/viewdoc.asp?DocID=7195

ECB position on what transpired vis the Promo Notes in March 2012 is outlined here: http://www.ecb.int/press/pressconf/2012/html/is120404.en.html quoting from Mario Draghi's responses to press query regarding the note payment (emphasis mine):
"we take note of the scheduled end-March redemption of the promissory notes and a subsequent reduction in Emergency Liquidity Assistance provided by the Central Bank of Ireland. We expect that the future redemptions will be met according to the schedule to which the government has committed itself."

The above was confirmed less than a week later: Few days after repayment of the March 2012 note, Joerg Asmussen, a member of the ECB's executive board, was speaking in Dublin where he "reiterated the ECB's view that Ireland must continue to repay the Anglo Irish Bank promissory note". Asmussen clearly did not believe that Ireland did not pay 2012 installment on the notes.
Soruce: http://www.rte.ie/news/2012/0411/ecb-official-warns-irish-banks-on-debt.html


The transaction of 'non-payment of cash payment' involved Irish State issuing a €3.06bn bond that was funded by Nama for the period of time it took Bank of Ireland to deliver approval by shareholders. Thereafter, the bond was transferred to the Bank of Ireland for 1 year. Which means that comes April 2013, Irish Government must have some sort of an agreement in place as to what to do with this bond. Either the Bank of Ireland agrees to hold it longer, or the bond has to be sold to another holder.

Here is NTMA Issuance Circular for that bond: http://www.ntma.ie/erratum-2015-bond-offering-circular/

Now, note: the coupon on that bond is 4.5%, far less than 5.5% issued in August 2012, after significant improvements in Irish secondary markets bond yields, so 4.5% Promo Notes Bond is a 'better' deal than ordinary bonds. Which means that Bank of Ireland was buying a dodo. Of course, Nama effectively backstopped Bank of Ireland, which simply borrowed money from the ECB to fund the bond.

All of this stuff I explained back in April 2012. But here's a bit worth repeating: in 2012 Promo Notes carried no interest (the last year of a two years holiday), while in 2012 the state paid 4.5% on 3,629.92 million bond. Thus, the cost to the taxpayers of Minister Noonan's 'non-payment' was €163.35 million annualized.

Which means that were Minister Noonan to repeat the exercise comes March 2013, he will be increasing the interest bill on Promo Notes by the above amount on top of the already hefty €1.9 billion one scheduled for 2013.

14/12/2012: Irish external trade in goods: October 2012

Irish trade in goods stats are out for October 2012 and here are the core highlights (aal seasonally adjusted):

• Imports of goods in value have fallen from €4.482bn in September to €4.188 billion in October, a m/m decline of €294mln (-6.56%) and y/y increase of €327mln (+8.47%). Compared to October 2010, imports are up 16.43%
• Imports were running close to historical average of €4.404bn in October, but below pre-crisis average of €4.673bn and ahead of crisis-period average of €4.126bn. Year-to-date average through October was €4.109, so October imports were relatively average.
• Exports increased from €7.349bn in September to €7.468bn in October (up €119mln or +1.62%). Year on year, however, exports are up only €7 million or +0.09% and compared to October 2010 Irish exports of goods are down 1.48%.
• Year-to-date average exports are at monthly €7.687bn which means October exports were below this, although October exports were very close to the crisis period average of €7.433bn.

• Overall, the rise of €423mln in trade surplus can be attributed as follows: 71.2% of trade surplus increase came from shrinking imports, while 28.8% came from rising exports. Not exactly robust performance, especially given exports are up only 0.09% y/y.
• Trade surplus expanded by 14.4% m/m after a rather significant drop off in September. However, october trade surplus at €3.28bn was still the second lowest reading in 7 months.
• Year on year, trade surplus in October actually fell €321 million or -8.91% and compared to October 2010 trade suplus is down 17.65%. These are massive declines and worrying.
• Trade surplus in October 2012 stood ahead of the historical average of €2.903bn and ahead of pre-crisis average of €2.513bn - both heavily influenced by much more robust domestic consumption in years before the crisis. Crisis period average of €3.307 is slightly ahead of October 2012 reading. However, average monthly trade surplus for 12 months through October was more robust (€3.578bn) than that for October 2012.

Here are some charts on the relationship between exports, imports and trade balance:

Accordingly with the above, imports intensity of exports rose slightly in October on foot of a steep fall-off in imports, rising 8.75% m/m. However, the metric of 'productivity' of irish exporting sectors is now down 7.72% y/y and down 15.38% on October 2010. During crisis period, Exports/Imports ratio averages 182.4%, while YTD the ratio averages 188.0%. In October 2012 it stood at 178.3% well behind both longer term trend metrics.

Lastly, the above relatively poor performance of exporting sector came amidst two forces, both representing adverse headwinds for Irish exporters:

1. Global trade slowdown
2. Term of trade deterioration.

October 2012 on October 2011, saw decreases in the value of exports of Chemicals and related
products - down -€253 million (or -6%), and a decrease of €513 million in Organic chemicals, "partially offset by an increase of €208 million in Medical and pharmaceutical products" per CSO. Further per CSO: "The value of exports increased for Miscellaneous manufactured articles (up €91 million), Mineral fuels (up €54 million), Machinery and transport equipment (up €47 million) and Food and live animals (up €39 million)... The larger increases were for imports of Food and live
animals (up €116 million), Mineral fuels (up €96 million) and Machinery and transport equipment (up €92 million)."

So to summarize: headline rise in tarde surplus is driven more than 3/4 by drop off in imports, with exports performing poorly on y/y basis and m/m basis. However, we have to be cognizant of the adverse headwinds experienced by irish exporters in global markets and by the continued effect of pharma patent cliff.