Monday, February 28, 2011

28/02/2011: Retail sales for January

Headline stuff: the volume of retail sales (i.e. excluding price effects) increased by 4.6% in January 2011 when compared with January 2010 and there was a monthly decrease of 3.8%. Now, wait, that sounds good?

Not really. Let’s take another shot at that statement: volume of retail sales was up 4.6% yoy in January 2011, but it was down 3.8% on December 2010. In fact, it was down for the third month running, having declined 0.6% in November, then 1.9% in December and now 3.8% in January. The rate of decline is accelerating so far. And at a massive speed: x3 times in November-December and at x2 times in December-January. (Mrs G is putting that bubbly back in the fridge right now).

But what about the value of sales? Remember – CSO likes volume indices cause they tell you how much physical stuff was shifted through the stores. But let’s not forget that retail sales jobs and businesses depend not on volume, but on value of stuff being sold. Exactly the same picture here as in the case of volume. Value of retail sales was up 4.0% on January 2010, but it was down for the third month running (-1.5%) in monthly terms.

Let me toss in another factoid here. December sales were extremely poor in 2010, but not so much in 2009. In fact, December 2010 value of sales was down 4.0% on December 2009. So the rush post-Christmas into sales was much shallower in 2010 than in 2011. Hence, the current ‘boom in retail sales’ announced today by CSO is nothing more than a compensatory run onto the post-Christmas sales racks. (Mrs G is now putting away the celebratory bottle of Sprite back into the fridge).

And one more point – the value of sales index has been artificially boosted by rampant price inflation in several categories of sales where prices are state-controlled or subject to commodities price inflation (see below).

Now to updated charts:
You can see what I meant by the spin above and below (notice the divergence of monthly and annual rates of change):
And just in case you want to see it: relative to peak retail sales are still declining
Faster rate of decline in the volume, of course, is due to rising prices (as mentioned above).

Now to ex-motors sales (or core sales):
Ok, now, if Motor Trades are excluded, the volume of retail sales decreased by 1.2% in January 2011 when compared with January 2010, while there was a monthly increase of 2.7%. Value of sales rose mom 2.6% although year on year there was a decline of 1%. Both value and volume of core sales broke two months declines in November and December. And this is good news. Relative to peak, value of sales is now at 82.21% (up from 80.10% in December 2010) and volume of sales is at 86.5% (up from 84.19% in December 2010). Last time value of sales was at this level was in June 2010 and volume – in November.
And take a look at the detailed sub-categories of sales:
  • Motor trades - -4.2% in value and -3.5% in volume, so either we are buying cheaper and cheaper cars (in fewer numbers) or prices are falling faster than sales;
  • Department stores down 12% in volume (mom) and 12.3% in value - symmetric drop-off as sales prices continued through the month;
  • Fuel - volume of sales is up 0.9% mom (down 1.4% yoy), but value of sales is up 2.8% mom and 10.4% yoy - as mentioned above - inflation, folks is biting;
  • Non-food business excluding motors, fuel and bars - now, here's the real retail sector story: -0.6% mom and -4.0% yoy in value of sales, and -0.9% mom and -1.5% yoy in volume - deflation and shrinking sales means recession continues.
  • Of course, our massive newsflow has boosted Books, Newspapers and Stationery category - +4.9% mom in January in value and +2.7% mom in volume;
  • Lastly, in tune with the nation watching Vincent Brown and other current affairs programmes, we've invested heavily in furniture and lightning - up 9.5% mom in value and 9.3% in volume

28/02/2011: Ireland v Iceland: Economy, part 2

In the previous post I covered some of the macroeconomic differences between Ireland and Iceland. One core conclusion that can be drawn from the previous post is that while Ireland retains stronger longer-term economic foundations based on historical performance, these foundations are not sufficient for us to achieve better performance than Iceland in the current crisis.

One might wonder what is the reason for this. Let’s recap how both countries have arrived into the current situation.

Both Ireland and Iceland have experienced rapid collapse of their asset markets (in both, there was a property bubble and a general financial services bubble, albeit Iceland had much smaller property sector than Ireland and in another crucial difference, Iceland had IFS bubble, while Ireland experienced a domestic financial services implosion). Hence, both economies started from roughly speaking similar conditions.

The crucial difference between the two can be found in the responses to the crisis. Iceland defaulted on its banks liabilities, writing them off the country economy’s balancesheet. Ireland took the entire banking sector liabilities and loaded it onto the shoulders of its economy.

This story can be traced through the fiscal positions comparatives.
Chart above shows that the two countries have run significantly different fiscal policies through the crisis, with Government revenues deteriorating much more sharply during the early stages of the crisis in Iceland than in Ireland. From the peak of 47.671% in 2007, Iceland’s government revenues fell to 39.447% of GDP in 2010 and are expected to reach the lowest point of 38.464% of GDP in 2011. In the mean time, Ireland’s government revenue fell from 35.83% of GDP in 2007 to 34.423% in 2009 and then rose to 35.362% in 2010. Ex-ante, this suggests that Irish Government balance should be more benign than that of Iceland.

The above conclusion is supported by the data on Government expenditure above. Both countries peaked in terms of their Government spending in 2009 (Iceland at 52.09% of GDP) and 2010 (Ireland at 53.03% of GDP). But in terms of starting points, Iceland was in a much worse shape than Ireland with total expenditure in 2007 at 42.27% of GDP as opposed to Ireland with 35.78%.

However, the ex-ante expected deeper deterioration in fiscal positions for Iceland turns out to be incorrect.

As the chart above clearly shows, Iceland’s public net borrowing requirements were much more benign and are expected to be much shorter lived, than those of Ireland. In 2007 Ireland’s net lending stood at 0.051% of GDP, while Iceland posted a lending surplus of 5.402%. In 2009 Iceland hit the rock bottom in terms of its Government borrowings at 12.644% of GDP. But Ireland kept on going: from the net Government borrowing of 14.613% in 2009, we fell to 17.667% in 2010. By 2015 Iceland is expected to enjoy three years of surplus and its forecast government net lending in 2015 is set at 2.757%. Over the same time, Ireland will remain firmly in net borrower hole, with 2015 net government borrowing expected at 5.153% of GDP.

Much of this gap between Ireland and Iceland is accounted for by the liabilities assumed by the Irish state from its banking sector. Stripping out Government interest bill – again massively overextended by the banking sector rescue funding, primary net lending/deficits of the two governments are shown in the chart below.

Now, let’s take a look at the overall public debt levels. First the IMF data
It does appear that Irish Exchequer, despite having run smaller surpluses in 2004-2007 and despite having suffered much deeper crisis in the banking and own balancesheets is going to end up holding less debt than Iceland. This, however, does not reflect the quasi-Governmental debt, which relates to banks rescue packages and which in Ireland adds to at least 25% of GDP ion today’s terms while in Iceland the same debt adds up to nothing courtesy of their decision to default on banks liabilities.

The chart below corrects for this omission.
In fact in its recent assessment of the Irish economy prospects for recovery, the IMF stated that they expect Irish Government debt to GDP ratio peaking at over 120% and in the case of an adverse economic growth scenario – reaching possibly 150% of GDP.

Finally, here are the summaries of data from the IMF comparing two economies performance.

First - period averages:
And finally - starting year spot values:

Sunday, February 27, 2011

27/02/2011: Ireland v Iceland: Economy, part 1

This is the first post of two dealing with comparatives between Irish and Icelandic economies during the ongoing crises. The post was motivated by a number of recent articles in Irish press presenting Irish situation in terms of the allegedly stronger crisis performance than Iceland, as well as Paul Krugman's response to these (here). This post will deal with real economy comparatives, while the second post will deal with fiscal performance relatives.

Both economies experienced deep crises in 2008-2010: Icelandic economy contracted to 90.41% of 2007 levels by the end of 2010, while Irish economy declined to 92.13%. Per IMF Q4 2010 forecasts, Icelandic economy is likely to reach 103.12% of its 2007 level GDP by 2015 while Irish economy is expected to reach 106.10%. However, latest revisions to 2011 forecasts (but not yet to 2011-2015 period) suggest that this advantage of the Irish economy over Icelandic economy is unlikely to hold.

In terms of real GDP per capita Icelandic economy contracted to 88.64% of 2007 levels by the end of 2010, while Irish economy declined to 91.08%. Per IMF Q4 2010 forecasts, Icelandic economy is likely to reach 98.05% of its 2007 level GDP by 2015 while Irish economy is expected to reach 106.10%. Again, latest revisions to 2011 forecasts (but not yet to 2011-2015 period) suggest that this advantage of the Irish economy over Icelandic economy is unlikely to hold in the next IMF database updates.

In terms of GDP based on purchasing-power-parity (PPP) per capita, Current international dollars, Irish economy has contracted by 10.25% in 2010 relative to 2007, while Icelandic economy declined by 7.75% - much less. Why? This result is especially worrisome, given that over the same period Irish economy experienced deep deflation (see below), while Icelandic currency was devalued substantially. Thus, Irish purchasing power should have risen, while Icelandic purchasing power should have fallen. And yet, real purchasing power of Icelandic income earners held up better than that of Irish counterparts.
In projections through 2015, the IMF expect that per capita, PPP-adjusted GDP in Iceland will reach 10% above 2007 levels, while in Ireland it will reach 7.58% above 2007 level. This, once again, means that the IMF expect Icelandic income earners to fare better than their Irish counterparts.

The same is reflected in the gap between GDP per capita in Ireland and Iceland. This gap stood at 3,487.63 in favour of Ireland in 2007. By 2009 it fell to 832.61 and by 2010 rose to 2,135.11 still below 2007 levels. According to IMF projections, the gap is expected to be 2,788.53 by the end of 2015. Notice that the average gap between 2008 and 2015 will remain below its historical average levels for 2000-2007. This confirms that much of the underperformance in terms of absolute real GDP per capita discussed above is due to (1) historical trends and (2) price differentials between the two countries.

What about economic performance in the two countries relative to the global economy? Chart below shows the shares of each economy in total global GDP. In 2007, Iceland accounted for 0.019% of the world GDP, while Ireland accounted for 0.268%. By 2010 these shares were 0.016% and 0.237 respectively. The decline in Iceland was 15.79% and in Ireland 16.55%. So Iceland outperformed Ireland here.

By 2015 IMF expects Icelandic economy’s weight in the global economy to be 0.015% - a decline of 21.05% on 2007. For Ireland the same forecasts imply 0.215% weight in the global economy and a decline on 2007 of 24.30%. Again, Iceland is expected to outperform Ireland into 2015 in these relative (to global economy performance) terms.

Comparatives with Iceland aside, however, Irish economy is expected to reach, by 2015, virtually identical level of global economy share as it enjoyed between 1996 and 1997, in effect erasing the entire period of some 20 years worth of economic growth.

As I mentioned before, Ireland clearly showing real deflation trend during the crisis, which is not the case for Iceland (in part, Icelandic inflation reflects devaluation of its currency).
It is worth noting that moderation in Icelandic economy inflation has been dramatic and highly orderly since 2008-2009 peak. This shows that the economy is expected to be adjusting through its post-default and post-devaluation period in an orderly fashion. In contrast, Irish deflation during the crisis has been pronounced and persistent.

Now on to unemployment. It is clear that Irish unemployment is running at the rates more than 50% above those in Iceland. By the end of 2015, IMF forecasts Irish unemployment to be 9.5% and Icelandic unemployment to be 3.12% or more than 3 times lower than that in Ireland.
Again, note the dynamics of expected adjustments to peak unemployment in the two countries. IMF clearly forecasts unemployment to decline in Iceland at a much faster rate than in Ireland. Given that icelandic unemployment declines are more likely to arise from jobs creation, rather than emigration, while Irish unemployment declines are robustly influenced by rampant outward migration of displaced workers, these dynamics also reflect the deeply-troubled nature of the Irish economic crisis, when compared with that of Iceland.

Which, in turn, shows that more likely than not, stronger Irish performance in GDP growth terms above is really driven by the MNCs and their transfer pricing, rather than real economic activity at the domestic economy. Lest I be accused of voicing anti-MNC sentiments - we do live in a society where saying factual things can get us labeled anything totally unrelated to the factual evidence presented - MNCs activities are great. All I am suggesting is that counting on them to carry us out of our real economy collapse (unemployment, shrinking employment, declining real disposable incomes etc) might be a bit naive.

Although IMF provides no forecasts for employment numbers after 2011, we can use population statistics and employment numbers through 2011 to compare two countries in terms of employment rates as percent of total population. In 2007 51.76% of Icelanders were in employment – a percentage that declined to 45.20 in 2010 and is expected to fall to 45.09% in 2011. In Ireland, 2007 employment rate was 48.93%, and this has fallen to 41.18% in 2010 and is expected to be 41.33% in 2011.
Again, in terms of employment rates Ireland is far behind Iceland – a sign that although out workers might be more productive (with a large share of this productivity accounted for by the transfer pricing by the MNCs), we tend to have smaller share of people working.

Do notice that the Icelandic economy performance in terms of employment takes place against the backdrop of having younger population than Iceland. Over the period of time covered, Iceland showed relatively stable rate of employment, while Ireland posted dramatic increases in employment rates during its growth period. This means that our current performance in terms of employment rates cuts against our demographic trends, while that of Iceland is in line with their demographic structures. In other words, one could have expected a decline in Icelandic employment rates even absent the crisis, while we should have expected continued increase in Irish employment rates absent the crisis.

In terms of external trade, both countries have improved their chronic current account deficits throughout the crisis. However, the great exporting nation of Ireland have seen much more shallower improvements than those found in Iceland. Krugman makes exactly this point in his article (linked above), but he considers net exports instead of the current account.
Chart above shows that between 2007 and 2010, Icelandic current account deficits fell from 16.29% of GDP to 0.91%. The Icelandic current account deficits are expected to continue declining through 2015, reaching forecast 0.38% of GDP by 2015. In Ireland, 2007-2010 decline was from 5.24% to 2.73%, while by 2015 the current account deficit is expected to fall to 1.24%.

The reason I prefer using the current account is because of several reasons:
  1. As I have argued in a different post (here), current account can be used as a metric of our ability to repay debt out of trade surpluses, once we account for transfers abroad to pay dividends and profits on earnings by the foreign investors into Ireland, including the MNCs, take in our own investors earnings from abroad etc
  2. Current account does not mask the extent of transfer pricing on our net exports
  3. Current account also links to Government debt costs and thus lends itself naturally to the second post to follow
As we show in the next post, much of the reason for better external economic balance performance of Iceland is due to lower transfers from Government to the foreign bondholders, s Icelandic debt is expected to perform much better through the entire crisis. This means Icelandic current account is going to be relatively stronger than Irish one, as Ireland is expected to lose increasingly larger share of its economy to payments to foreign debt holders in years to come.

Next post will cover Government/fiscal policy performance of the two countries.

Saturday, February 19, 2011

19/02/2011: Paying down our debt out of Exports

Let's do a quick exercise. Suppose we take our current account - defined as the sum of the balance of trade (exports minus imports of goods and services), net factor income (such as interest and dividends) and net transfer payments (such as foreign aid and remitted profits). Suppose every year we use the current account balance solely for the purpose of repaying our Government debt. How long will it take us to do so.

Let us start with some notes on methodology.

Our current account is in deficit - since 2000, there was only one year - 2003 - when we had a surplus in the current account (charts below), which really means our external trade was not enough to generate a surplus to the economy. So let us assume that the we can reverse this 180 degrees and that the deficits posted in 2009-2010, plus those projected by the IMF to occur in 2011-2015 are all diverted to pay our Government debt.
Notice - this is impossibly optimistic, as our Government does not own current account, but suppose, for the sake of this exercise that it can fully capture net profits transfers abroad and cut the foreign aid to zero, plus divert all interest payments on own debt and private external debts to repayment of the principal on own debt.

Secondly, assume that only Government debt is taken into the account (in other words, we assume away Nama debt, some of the quasi-sovereign financing of the banks resolutions, and all and any potential future banks and spending demands in excess of the EU/IMF assumptions, as well as all future bonds redemptions - the latter assumed to have a zero net effect at roll-over, so no added costs, no higher interest rates, etc).

In other words, here is what we are paying down in this exercise:

Now, suppose we take current account balances for 2009-2015 (projected by IMF) as the starting point. The reason for this choice of years is that they omit fall-off in our exports in 2008 and also the bubble years of 2004-2007 when our current account imbalances were absurdly large due to excessive outward investment and consumption of imports.

Next, assume:
  • We deal with present value of the debts
  • We apply an average 3% annual growth rate to repayments we make (current account transfers grow 3% on average per annum)
  • Currency effects are removed (so we use flat USD1.33/Euro FX rate throughout)
So here is the result:
And the conclusion is: if Ireland diverts ALL of its net current account (2009-2015 IMF projections taken at 3% average growth rate forward) to pay down Gov debt, it will take us until 2064 to reach 2007 level of official (ex-Nama+banks) Government debt.

Note: incidentally - the charts tell couple of interesting side-points based on our historical debt path:

The Government told us that we are not in the 1980s - as we had much higher levels of debt then. Ok, the figure above shows that as of 2010 - we ARE back in the 1980s: 2011 debt will equal as a share of GDP that attained in 1989. According to IMF database, our debt has peaked at 109.241% of GDP back in 1987. It is projected to be 104.7% in 2013. Not that much off the peak.

But, of course, in the 1980s there was no quasi-Governmental debt - the debt of Nama, some of the banks recapitalization measures and the debts that still might arise post-2013 from the Government banks Guarantees and resolution schemes. If we add Nama's 31bn worth of debt issued, this alone will push our 2011 debt levels to 121.8% of GDP and factoring in coupon rate on these, but 2015 our Official Gov Debt + Nama will stand (using IMF projections again) at 124.8% of GDP - well in excess of the peak 1980s levels of indebtedness.

Secondly, despite what any of us might think about the Celtic Tiger years, the Government never paid down the old debt, it simply was deflated by rising GDP. Which suggests that even during the Celtic Tiger boom years - our exporting economy was NOT capable of paying down actual debt levels.

Wednesday, February 16, 2011

16/02/2011: Banks issuing loans to themselves

Note from the banks front:

ECB’s printing machine keeps working over time. Greek and Irish banks have issued at least €70 billion of bonds to themselves to create the collateral required to get cash from the ECB before last week. Then, Greeks announced they will issue €30 billion more unsecured bonds to themselves for the purpose of pawning these at the ECB. The European Central Bank's balance sheet now funds the equivalent of 18% of Greek banking sector assets, 15% of Irish and 7% of Portuguese. CBofI holds another 7%.

Some amazing 'innovation' on financial front this is.

16/02/2011: Heading for another round of crisis pressures?

Two nice charts, lest we forget where the crisis is at:

Greek 10y sovereign bonds:
And Irish 10y sovereign bonds
Both courtesy of Goldcore, both are daily yields over 1 year.

Sunday, February 13, 2011

13/02/2011: What a Jeopardy champ can do in the world of finance

Here is my article along with Shanker Ramamurthy that was published last Thursday in the American Banker, discussing IBM's Watson super computer system's potential applications in the financial services industry - helping to advance industry thinking on how in the era of "big data" only advanced non-linear analytics can make sense of structured and unstructured data flows to transform it into valuable insights.

VIEWPOINT: New Computer, New Modeling Possibilities
By Shanker Ramamurthy and Constantin Gurdgiev
February 10 , 2011 - p8

Next Monday a new IBM computer system called Watson will battle two quiz-show champions in a game of Jeopardy! There is more at stake here than winning a game. The potential applications of this technology to transform the operations of industries such as health care, government and finance are enormous.

In the financial services industry, integrated risk management is an everyday struggle. Financial practitioners and supervisory and regulatory authorities must make split-second decisions using information coming from all sides: the Internet to corporate and call center channels.

The challenge is to efficiently process diverse data streams and pick out relevant data insights to apply to strategic business and regulatory decisions.

In the banking industry today, data "fuzziness" abounds. Uncertainty exists about the quality of data, assumptions and models that are being used to make judgments. This, of course, clouds the true picture of risk and biases our decision-making, often in econometrically undetectable ways.
Most banks today run risk models on a discrete and disaggregated basis while relying on often subjective assumptions. High-performance computing advances, represented by Watson's capabilities, can rectify this - by providing visibility into concentrations of risks and risk-related activities, as they happen. Simultaneously, it deploys nonlinear analytics in selecting both the statistically and operationally important scenarios.

The beauty of a nonlinear computer that "learns" is that it can analyze a complex set of implied possible scenarios and give answers to the broadest set of questions. This potentially can lead to the emergence of analytical systems that not only report on probabilistically likely events but also identify latent "Black Swan" events and even sense deeper levels of uncertainty.

For example, a legislative decision altering a specific set of financial strategies can have no impact on traditional linear models because the outcomes can be weighted by an extremely low assigned or assumed probability. But in a nonlinear world, such an outcome can still be testable as part of the selection list for reporting. More importantly, it can be made recognizable by the analytic system and, therefore, objectively reportable.

A system like Watson has the potential to get answers to incredibly difficult questions about strategic decisions, risks and market changes that can otherwise be elusive.

For example, it has the ability to create an interactive risk-pricing system using a menu of models that evolve as the system learns, detecting structural breaks in data before analysts can spot them and build them into existing programs.

Of even more significance, Watson will be able to deliver scenario analysis based not just on either event probability or expected loss/gain but also on more complex company objectives.

This can involve analyzing corporate strategy inputs, including non-quantifiable questions, alongside fully quantifiable inputs. Imagine asking a computer "How do I increase my loan book profit margin by 10%?" or "What actions can I take to strengthen my capital reserves, with minimum impact to my asset base?"

At a much deeper level, the nonlinear learning capabilities that Watson pioneers can lead to the creation of systems that are able not only to handle traditional risks and their interactions but also to evolve into systems capable of transforming deep uncertainty into explicit models. Though still some years away, this could mean an artificial intelligence able to sense Donald Rumsfeld's famous "unknown unknowns," converting them into specific models suitable for risk analysis and getting meaningful, actionable responses.

The real-time, decision-making capability that is so sought after in the financial industry will be a crucial, competitive differentiator.

As risk intensifies within interconnected global markets, the complexity and exploding volumes of data will only rise.

Shanker Ramamurthy is the general manager of banking and financial markets at IBM Corp. Dr Constantin Gurdgiev is the head of macroeconomics in the Center for Economic Analysis at the IBM Institute for Business Value.

13/02/2011: IMF's statement on Iceland

I twitted about the latest conclusions from the IMF on the state of Icelandic economy post-banks collapse. Here are the exact details of the IMF statement and the statement itself. Emphasis and comments in brackets are mine:

"Financial sector restructuring is moving forward [in contrast, one may add to Ireland's]. Savings banks and non-bank financial institutions are being recapitalized [in Ireland's case, recapitalizations of the banks have been predominantly wiped-out by the continued writedowns, so net increases in actual capital have been negligible], and the supervisory framework is being strengthened by amendments that will be enacted in the coming months [no serious far-reaching amendments have been introduced in Ireland since the beginning of the crisis and the marginal ones that were are yet to be enacted].

"Moreover, recent agreements to restructure the debts of households and small enterprises will help put households, corporations and banks on a more secure financial footing, which is essential for a sustainable recovery [this stands in contrast with what has been happening in Ireland. In addition this directly and indisputably puts the blame for the policy errors in the Irish case onto our Government and EU shoulders, for it is clear that within the EU/IMF deal framework, the IMF was basing its policy proposals on their experience in Iceland].

“Policy discussions focused on the strategy to liberalize capital controls, fiscal and monetary policies, and financial sector reforms [none of these issues are even on our agenda].

Here is the actual press release from the IMF

13/02/2011: Public Sector Earnings - the need for change hasn't gone away

A quick run through the numbers in employment and pay rates for the public sector for 2010.

A note of caution: these figures do not cover commercial semi-states or local authorities. Thus, per DofF accounts statement, there were 380,953 people on the direct Exchequer payroll in 2010, which includes 277,540 employees and 103,413 pensioned individuals. These exclude commercial semi-state employees 52,300 per latest figures available (Q3 2009) and employees of the regional bodies 37,000 (Q3 2009). The combined figure, therefore, is closer to 470,253 (of course, this omits those who are on semi-state pensions and who are in the receipt of pensions from local authorities and bodies).

Now, on to the numbers.
So HSE accounts for 36.8% of the total numbers in employment and on pensions as well as for 40.2% of the total pay bill. Education & Science account for 32.6% and 33.03% respectively. The third largest employer on the Exchequer balance sheet is Garda Siochana with 6.74% of the total employment and pensions numbers and 7.11% of the total wages and pensions bill.

Now, let's take a look at private-public sector comparatives at the aggregate levels:
Self-explanatory, really. But some more detailed comparisons are here:
The above figures relate (except for Exchequer balance sheet average employees) to CSO data for Q3 2010 on earnings and labour costs.

Next by the departments:

Enjoy the absolutely absurd outliers - the Appeals Commissioners - enjoying the total staff of 4 being paid, on average, 107,500 per annum. If one of these 4 employees a receptionist or staff worker, on, say 40,000 that would make the other 3 earning on average 130,000... that's of course is a pure hypothetical. Then there's the cost of our "International Cooperation" workers - hard at labour, the 190 employees here earn a meager wages of just 78,874 per annum on average. One can understand high earnings in highly professionally-concentrated services, such as for example the Attorney General (75,713 pa - still high, but we can give them a break), but what does the President's Establishment do to earn on average (for its 22 staff) 67,955 - which is in excess of average earnings in ALL subcategories of employment reported in the table above?

In fact, lets take as a benchmark the highest average earnings in the economy by sub-category (omitting public sector employment) - those earned in Information & Communication sub-category (50,203pa). Of the 38 sub-groups on the total Exchequer payroll, 23 sub-groups earn more on average than the highest earning economic group in the private sector. 16 sub-groups actually exceed by more than double digits (in percentage terms) the average annual earnings of the highest paid sub-categories in the private economy, as shown in the table below:
That, folks, takes some doing to achieve...

Saturday, February 12, 2011

12/02/2011: Just how much are the bondholders in Irish banks worth to the taxpayer?

In recent weeks the question of bondholders and the extent of our banks exposure to the bonds-linked debts has been hotly debated in the media and by the political parties.

Many supporters of the Government position have repeated, in their defence, the claim that at this moment in time there are virtually no unpaid bond holders left, so applying ‘burden-sharing’ haircuts to their bond holdings will produce little gain, while causing much of pain to Ireland’s ‘reputation’.

So the question is – just how much of bonds is left for a potential haircut and what such a haircut might save for the country.

There is a lot of confusion in this area, some caused by the fact that the Central Bank does not readily publish any real information about the six banking institutions covered by the extended guarantee. I personally heard a number of times the following two figures used as an estimate of the total bonds-backed debt still outstanding: €15bn senior bonds and €6bn subordinated bonds.

This implies that total bonds outstanding amount to €21bn and any savings that can be had from these would be on average around: 40% senior debt haircut + 70% subordinated debt haircut, to the total amount of €10.2bn maximum.

However, the figure of €21bn is simply not a true or correct estimate of the total bonds still remaining outstanding.

The table below provides what we know officially (note: the last column refers to the unpublished document that was Minister Lenihan’s clarification of his own statement on record to the Dail, not published previously).

So per table above, the total amount of bonds outstanding for the six guaranteed credit institutions is €50bn. Of this
  • ca €28.1bn is guaranteed senior bond debt - standard haircut assumption for CDS pricing – 40% or €11.24bn;
  • un-guaranteed senior debt roughly of €11.7bn (we can assume a haircut of 50%, which is smaller than the simple average of the senior guaranteed and subordinated un-guaranteed debt), to the potential savings of €5.85bn;
  • subordinated debt (all un-guaranteed) of €10.2bn (which can be subject to a 100% write-off, but let’s assume it is haircut at 70%) generating potential for savings of €8.4bn.

So total scope for savings under relatively normal (by market pricing) haircuts is a cool €25.49bn (with a full hit on un-guaranteed debt we can save €33.14bn) – more than the cost of rescuing Anglo to-date (€23.9bn).

Note: hat tip to P.D. for providing the two documents referenced in the table above.

Update: related story today here clearly shows that the markets now expect significant haircuts and that any resistance by the ECB to such haircuts is, at this stage, irrelevant from the markets/investors perspective.

Friday, February 4, 2011

4/02/2011: Another glitch in our 'knowledge' economy?

Anyone reading this blog more than once or twice would know by now - I've got plenty of deficit cutting credentials. But sometimes, the absurdity of cuts and associated policies can get even to a hawk like myself. So here we go, again.

Here's an extract from the HEA to administrators and heads of schools in Irish Universities, dated, per my source, from January 19th last:

As you are aware the Employment Control Framework for the higher education sector expired on the 31st December 2010. A revised framework for the sector, which will operate until 31 December 2014, is currently being drafted. Some further reductions in the number of posts that may be filled will be required under the new Framework. We will inform you as soon as possible of the revised reduced targets for your institution.

Pending finalisation of the revised Framework I wish to advise that all proposals for recruitment of staff, both contract and permanent and regardless of source of funding (core grant, research grant or non-exchequer), must be submitted in advance to the HEA."

Ok, so HEA are requiring explicit approval for all hires. sounds reasonable? Sure, if we are talking about the normal course of business. But imagine the following situation:

A researcher gains a very large EU research grant that requires hiring research assistants and post-doctoral researchers. The funds have nothing to do with the Irish Exchequer deficit. The job is specified and milestones are set in... err... kind of set in stone. But HEA approval requires time - as I've heard, up to 3-6 months. Now, imagine the researcher blowing through the milestones and losing a grant. Some savings to the Exchequer? Nope - actually - a loss. Exchequer loses income tax from the hires who never materialized, from the purchasing done for the purpose of research and so on.

And there's an added danger - if such uncertainty is present in the market for new researchers and promotion, the brighter academics might discount Ireland as a good research location. After all, academic market is truly global, folks.

Is that a serious problem? Yes, a number of researchers I have heard of are currently in this predicament with one being just a few days from giving an offer to a junior research staff.

Now imagine another scenario - also, per my sources close to playing out. A major corporation decides to provide a grant to an Irish University for research. The grant stipulates hiring certain number of researchers and other staff. Oops... the letter goes out to the corporate headquarters, saying that HEA approval is needed. What's the likelihood that the grant is going to travel to the UK? Or another jurisdiction, where fiscal cuts might be in place, but policymakers have some finesse to understand that when the money comes from outside the state coffers, hiring decisions should be made by those managing these funds...

What beats me is why can't the Exchequer simply allocate funds to universities and let the academic and administrative staff manage these funds in line with each university/school/department own objectives? Why is there such a need to micromanage fiscal adjustments.

Oh, and while we are at it, here's another question. If we stop renewing and issuing new contracts for post-docs, how fast will the reality of unemployed phds arrive to our shores? And what will happen to our knowledge economy's grand plan for doubling phds output?..

4/02/2011: Can economy function with shut banks?

Last night on Vincent Browne's programme, Prof. Antoin Murphy (TCD) - an excellent scholar of economic history - stated that absent the Government Guarantee of 2008 and/or in the case of a 'default' by Ireland on its debts, the banking system will collapse precipitating the 'ATMs with no cash' crisis.

According to Prof. Murphy - such an outcome would be more disastrous than loading up some €185bn worth of banks debts onto ECB and our own CBofI and pushing Irish taxpayers into even more debt to the tune of ca €100bn.

I do not wish to engage (for the lack of time and space now) in the arguments as to which outcome (debt death spiral or cashless ATMs) is the worse one. Nor do I wish to argue here (for the very same reasons) as to whether a 'default' (I prefer - restructuring) of our banks debts will trigger a crisis leading to the total shut down of the banking system in the country.

But let me provide you with the following summary of the economist's opinion on the matter of an economy's viability in the case of a systemic banking crisis with no cash circulating via the banking system (a hat tip to B. Lucey):

Quote (original source here):

"Since banks create money under fractional-reserve banking, we would expect the closure of banks severely to disrupt the functioning of an economy. The Irish experience in 1970 an interesting counterexample. In that year, a major strike closed all Irish banks for a period of six and a half months. All the indications from the start, moreover, were that this would be a long closure. As a consequence of the strike, the public lost direct access to about 85 percent of the money supply (M2). Irish currency still circulated, of course, British currency was also freely accepted in Ireland, and some North American and merchant (commercial) banks provided banking facilities. Increases in Irish and British currency and in deposits in these banks, however, accounted for less than 10 percent of M2.

Somewhat remarkably, checks on the closed banks continued to be the main medium of exchange during the dispute. Despite the increased risk of default, individuals continued to be willing to accept personal and other checks. [The author] summarizes the situation as follows: “a highly personalized credit system without any definite time horizon for the eventual clearance of debits and credits substituted for the existing institutionalized banking system.”

According to [the author], it was the small size of the Irish economy (the population of Ireland was about 3 million at that time) and the high degree of personal contact that allowed the system to function. Stores and pubs took over some of the functions of the banking system. “It appears that the managers of these retail outlets and public houses had a high degree of information about their customers—one does not after all serve drink to someone for years without discovering something of his liquid resources. This information enabled them to provide commodities and currency for their customers against undated trade credit. Public houses and shops emerged as a substitute banking system.”

Presumably as a result of this spontaneous alternative banking system, economic activity in Ireland was not substantially affected by the banking strike. Detrended retail sales did not differ much on a month-by-month basis from average levels in the absence of banking disputes, and a central bank survey concluded that the Irish economy continued to grow over the period (although the growth rate fell)."

The paper referred to in the above citation is: A. Murphy, “Money in an Economy without Banks: The Case of Ireland,” The Manchester School (March 1978): 41–50.

Once again, let me repeat, I do not believe that such a cashless economy is a good idea, nor do I believe that the banks debt restructuring will lead to a significant disruption in supply of cash or access to deposits, especially if such restructuring is pre-planned, with liquidity buffers set in place by the CBofI. But I find it interesting that a superb economic history researcher - Prof Murphy - would argue the inevitability of something happening today which did not happen in the less financially and economically advanced 1970.

Yes, the conditions have changed - we are less personal of a society today than back in the 1970s. But we also have much stronger presence in the country of other banks and we have access to the global markets (currently shut by the insolvent banking system). We also have, presumably, our European partners, who can help, and most importantly - for now - significant funding buffer in the form of NPRF. The CBofI has printed enough cash already to cover a large share of our deposits (except it chose to dump this cash into the banks balance sheets instead). In fact, between CBofI cash printing for the banks and NPRF and pre-borrowed money, Irish state has potential access to more cash than the 80% deposits base for deposits at a risk of flight (those with demand withdrawal terms of <3mo and overnight).

Virtually none of these were there in 1970... and still, the economy did not collapse after losing some 85% of cash from circulation!

Thursday, February 3, 2011

3/02/2011: Services PMI for Ireland

NCB released their PMI for January for Irish Services sector. Headline news is good:
  • After contracting in December, Irish Services sector showed modest growth, signaled by PMI rising to 53.9 (up from December contractionary 47.4)
  • January reading of 53.9 was ahead of 12 months average of 51.5 and well ahead of Q1 2010 reading of 47.6
  • January 2011 reading, however was below Summer 2010 peak readings of 55.4 and 55.7 in June and July

Or over the entire series history:
And a more recent snapshot with the core driver of increase:

New business orders have actually fallen in January, with a reading of just 47.7, marking 5th consecutive month of declines. 12-months average was 50.0 but Q1 2010 reading average was 47.1, so realistically speaking, the latest reading is not an improvement.

Historically, you can see where we are from here:

Other sub-components showed weaknesses, with exports orders being trend breakers and the driver of the positive improvement in overall PMI reading:

Hence:, quoting from the NCB report:
  • New Export Business In contrast to the trend seen for overall new business, new export orders rose markedly over the month, with the UK a key source of new work. New export business has now expanded in the sector in sixteen of the past seventeen months
  • Backlogs of Work Falling new business alongside increased activity led to a further reduction in backlogs of work during January, extending the current sequence of depletion to forty-one months
  • Providers expect economic conditions in Ireland to improve over the coming year, leading to higher new business and subsequently increased activity. According to respondents, export markets will remain a key source of growth over the year. The level of optimism in the service sector improved to the highest since last September
  • Input cost inflation accelerated over the month, but remained much weaker than the long run series average. Where input prices increased, panelists mentioned higher fuel costs as well as rising taxes [My comment - the wedge between input and output prices points to severe pressures on services providers' margins]
  • Irish service providers were unable to pass on higher cost burdens to their clients during January. Intense competition was the main factor leading firms to cut charges, which fell at a substantial pace that was steeper than that seen in the previous month
  • Profitability at Irish services companies continued to decline over the three months to January, extending the current period of decline to thirty-seven survey periods. Moreover, the pace of reduction was the sharpest since the three months to February 2010, with panelists reporting a combination of lower sales and strong competition
  • Employment continues to be a bad performer with jobs losses continued
So on the net Services have jumped into expansion zone, but the recovery at the very best is jobless and volatility of the series implies that it will take several months of continued robust improvements in index sub-components to provide comfort in the sector improvements overall:

Wednesday, February 2, 2011

2/02/2011: Dependency ratios

Looking over LR data earlier tonight, I decided to update the charts for dependency ratios, based on a combination of LR and QNHS. Here are some charts.

From the top: in Q1 1998 there were 1,619.8 thousand persons aged 15 years or older in Ireland that were not in full-time employment and 1,237.4 thousand of the same age category persons who were in full time employment - a ratio of 1.3. By Q1 2000 this ratio fell to 1.1. The same was attained in Q1 2005. This ratio declined to 1.0 in Q4 2005 and stayed there until Q4 2008. Then in Q 12009 the ratio rose to 1.3. As of Q3 2010, there were 2,075.9 thousand 15 year old and over persons who were not in full time employment in Ireland. Against this, there were 1,436.8 thousand persons of the same age category in full time employment. The implied ratio there for has rise to 1.4. Chart below illustrates:
Not scared yet? Ok, another shot:
Oh, and another angle:
The above shows just how bad is the dependency ratio getting in Ireland during the current crisis.