Thursday, January 31, 2013

31/1/2013: Summary of David Hall's Case on Anglo Promo Notes

With the latest twist in David Hall's case on IBRC Promo Notes constitutionality, I decided to post, at last, the summary of David's case as was read out (note - this is not an exact transcript, but darn close to it) in the court earlier this week.

Needless to say, I am disappointed with the ruling issued today, in so far as it simply rejected consideration of the merits of the case, and thus, the case remain outstanding.

Here are the main points of the High Court action taken by David Hall against the legality/constitutionality of the IBRC and EBS promo notes that was presented this week in the court by the Plaintiff. I could not attend the defence statement due to ill health.

Please note, I am no legal expert, so will try to offer the below without a comment on the constitutional or legal issues.

Per Plaintiff's presentation, in a statement made by the Minister for Finance to Dail Eireann on the 30th of March 2010, the Minister announced provision of capital support by the State to the Anglo Irish Bank. The announcement referenced capital injection during that week in the specific form of the Promissory Note payable over the period of 10-15 years. The Minister for Finance, therefore, supplied capital of EUR31 billion to 3 financial institutions: ca EUR25.3 billion to Anglo, EUR5.4 billion to INBS (split as EUR5.3bn in Promissory Note and EUR100mln as a Special Investment Scheme) and EUR350mln to EBS (split as EUR250mln in Promissory Note and EUR100mln in Special Investment Scheme).

The Minister for Finance has also provided the Central Bank of Ireland with the letters of comfort, confirming that the Government of Ireland would indemnify the CBofI in the case of any losses arising from the ELA provision to the Anglo, INBS and EBS. The above financial institutions were thus enabled to borrow, using the Promissory Note as collateral, from the Emergency Liquidity Assistance funds (ELA) of the Central Bank of Ireland.

The key point of this is that the Promo Notes and SIS measures were entered into the General Government Deficit in 2010, raising the headline figure to 32% of GDP and adding to the General Government Debt in 2010, however, since the requirement for these payments did not arise until during the course of 2010, none of these expenditures estimates appeared in the forecasts made in Budget 2010 that were prepared back in December 2009. The next point it that the Government, pursuant to Article 28 of Bunreacht na hEireann, prepared and presented to Dail Eireann the 2011 Estimates of Receipts and Expenditure for the year ending 31st December 2011. Payment of the Promissory Notes was contained in Note 6 under 'Non-Voted Capital Expenditure'. Non-Voted Capital Expenditure means that the Dail did not vote on the expenditure.

Key points: The Dail Eireann did not vote in the Promissory Note expenditure in Budget 2010 or Budget 2011.

The case taken is based on the constitutional argument relating to:

Article 28.4.4 of Bunreacht na hEireann: The Government shall prepare Estimates of the Receipts and Estimates of the Expenditure of the State for each financial year, and shall present them to Dail Eireann for consideration.

Article 17.1 of Bunreacht na hEireann: 1. As soon as possible after the presentation to Dail Eireann under Article 28 of this Constittution of the Estimates of receipts and Estimates of expenditure of the State for any financial year, Dail Eireann shall consider such Estimates. 2. Save in so far as may be provided by specific enactment in each case, the legislation to give effect to the Financial Resolution of each year shall be enacted within that year.

Article 17.2 of Bunreacht na hEireann: Dail Eireann shall not pass any vote or resolution, and no law shall be enacted, for the appropriation of revenue or other public monies unless the purpose of the appropriation shall have been recommended to Dail Eireann by a message from the government signed by the Taoiseach.

Article 21.1.1 of Bunreacht na hEireann: Money Bills shall be initiated in Dail Eireann only.

Thus, Bunreacht na hEireann gives to Dail Eireann a constitutional primacy in the area of State finances and mandate the actual, real and continued involvement of Dail Eireann in the appropriation of revenue and/or public monies. Central to the democratic nature of the State is the oversight of public expenditure by the elected representatives of the People who under Article 6 of Bunreacht na hEireann are sovereign and from whom all power is derived.

As Plaintiff stated, the Promissory Notes were created and funds for their financing were allocated by the Minister for Finance, including the related letters of comfort without involving the elected legislators. Furthermore, the issue of letters of comfort purported to appropriate and has appropriated public funds in an unspecified and unlimited amount in relation to the provision of liquidity assistance in the banking sector.

Per key points 1 & 2 above, the members of Dail Eireann did not consider the making of the Promissory Notes and/or the giving of letters of comfort, did not vote on whether or not to make the Promissory Notes and/or grant such an indemnity; and did not mandate or otherwise authorise the Promissory Notes and/or letters of comfort.

Considering that the Promissory Notes and letters of comfort were extended funding commitments over the time horizon of originally envisioned 10-15 years, the making or provision by the Minister for Finance of Promissory Notes, extending over such a long period of time and over such enormous sums of public funds and/or provision of a purported indemnity to CBofI constituted an attack on the democratic nature of the State and was unlawful and is unconstitutional being contrary to Articles 6 and/or 15 and/or 17 and/or 22 and/or 28 of Bunreacht na hEireann.

As I'd say, Bang! Up to 6 articles of Constitution potentially violated by the previous Government.

Plaintiff requested in the case for the Minister for Finance to identify the precise statutory or other legal basis authorising then provision of the Promissory Note. Alas, to-date there has been no response to this request. Two acts potentially can be argued provide such basis: 
-- Credit Institutions (Financial Support) Act, 2008 and/or
-- Anglo Irish Bank Corporation Act 2009
However, per Plaintiff statement in court, neither makes adequate legal provision for the financial assistance of the extent and/or nature and/or duration committed to by the Minister for Finance. Here are the reasons - as argued by the Plaintiff - for this.

Regarding the Credit Institutions Act 2008:
-- In 2010, the provisions of the Section 6 of the Act prohibited the giving of financial support beyond the 31st of December 2015 and from the 23rd of November 2010 beyond the 20th of June 2016. Of course, the promissory Notes extend to 2025 and thus, could not therefore have been authorised by the said Act.
-- The above provisions cannot be construed as authorising the making of Promissory Notes appropriating public monies, absent a requirement for a resolution of Dail Eireann prior to the provision of same having regard to the requirements of Bunreacht na hEireann.
-- The provisions of section 6(1) Credit Insitutions Act, 2008 do not provide for or allow or permit the Minister to make such large scale and long term financial support to a third party credit institution and did not permit for the provision of support equally a sum in excess of EUR31 billion to the Notice Parties herein.

Regarding the Anglo Irish Bank Corporation Act 2009:
-- There is no lawful basis for provision of financial support through the Promissory Notes to continue to 2025 or at all and the making and provision of such Promissory Notes was ultra fires the power of the Minister of Finance with the consequence that the said Promissory Notes are null and void.
-- Neither the 2009 nor 2008 Acts can act to excuse the absence of a resolution providing for Promissory Notes voted upon by Dail Eireann in accordance with Article 17 of Bunreacht na hEireann.

The implications of the case are massive. The Plaintiff actually argues that
-- The Promissory Notes and the associated letters of comfort are unconstitutional and, if that is proven to be the case, these instruments are illegal and have no real validity. 
-- The repayment of the Notes in March 2011 was illegal
-- The swap for direct Government debt of the note in March 2012 was illegal
-- The Minister for Finance actions constitute the unlawful delegation or transfer of constitutional power from Dail Eireann to the Minister.

Beyond this, the Plaintiff case argues that the creation of the Notes was in contravention of the Article 123 of the Treaty of the Functioning of the European Union by:
-- Extending financing from the public purse to third parties (as prohibited by Article 123 (2) of the Treaty) and clarified by the Council Regulation (EC) No 3603/93 of 13 December 1993.
-- Violation of Article 123 in provision by the Central Bank of Ireland of ELA to the IBRC.
-- Absence of lawful basis for the issue of the letters of comfort

The Plaintiff stated in court that in the absence of the Promissory Notes, the Irish Central Bank has accepted that the IBRC is insolvent and that the provision of ELA to an insolvent credit institution is illegal. Thus, the provision of Promissory Notes to the Anglo Irish Bank was an unlawful ruse to create the pretence of solvency so as to enable the provision of ELA. Fighting words these are. But there's more. The provision of ELA was in turn used to repay third party liabilities of Anglo Irish Bank. Further it was intended by the Minister for Finance and by the Central Bank of Ireland that the Irish people would in effect, over the period of the Promissory Notes, repay the ELA on behalf of Anglo Irish Bank. The members of Dail Eireann were expressly removed from and denied any involvement in this decision which was an egregious attack on the democratic nature of the State.

I hope to provide a summary of the State responses to the statement as delivered in court.

Wednesday, January 30, 2013

30/1/2013: German Economy: Returning to zero growth in January 2013

Germany's CESIfo published the latests (January 2013) assessment of the state of the German economy in Manufacturing and these are slightly more upbeat than at the end of Q4 2012, albeit with some clear seasonal supports.

"In manufacturing the business climate indicator continued to rise. Manufacturers are more satisfied with their current business situation than last month. The improvement in expectations with regard to future business developments continued into the New Year. Optimism is returning. After three successive declines, capacity utilisation rates also rose."

As per data below, in manufacturing 'optimism' is not exactly 'returning', but rather 'pessimism is receding', as business expectations remain below 0 on balances:

"In wholesaling, on the other hand, the business climate clouded over. Wholesalers are less satisfied with their current business situation and slightly more pessimistic about future business developments. In retailing the business climate indicator rose somewhat. This was due to a slightly more positive assessment of the business situation, while retailers’ business expectations remained unchanged.

In construction the business climate index rose sharply. This was primarily due to far more optimistic expectations, which last reached such a high level in March 2012. Assessments of the current business situation also improved."

It is worth noting that in Construction sector, it was business expectations that drove overall index up sharply and these are exceptionally seasonally-driven:

 However, as balances data below shows clearly, three of five sub-sectors continue showing weaknesses:

Overall, the three core aggregate series are above 100 for the first time since May 2012 (good news), but at levels that are signalling stagnant or very weak growth.

  • Climate indicator reading is at 104.2 - only sixth highest reading in last 12 months, and substantially below 108.2 reading in January 2012;
  • Situation indicator is at 108.0, which is only 10th highest reading in last 12 months, and well below 116.3 recorded a year ago.
  • Expectations are at 100.5, marking 5th highest reading in 12 months, down marginally on 100.7 in January 2012.

In terms of overall impact on the euro area, the above figures suggest that the January 2013 eurocoin indicator-based forecast (see details here) of -0.4% growth in January 2013 should be more moderate. Not enough data yet to recompute the actual forecast figure from -0.4%, but I believe it can be closer to -0.2-0.1%.

Sunday, January 27, 2013

27/1/2013: Eurocoin January 2013: Misery broadly unchanged isn't a sign of stabilization

You might be forgiven for thinking that the euro crisis is over and that we are returning to the 'Old Normal' of growth, recovery, stability etc... Much of the recent commentary has been focused on the 'restoration of markets confidence' in sovereign finances, citing yields declines across the euro area.

I covered the latest data on sovereign yields from the CMA quarterly report for Q4 2012 here.

However, euro area remains a global (that's right - global) growth laggard on par with the gravely sick Japan - as the IMF latest WEO update clearly shown (see details here).

And here are the most up-to-date data on leading economic growth indicator from CEPR and Banca d'Italia - the eurocoin - for January 2013:

  • In January 2013 eurocoin stood at -0.23, an improvement on -0.27 in December 2012 and the highest reading since June 2012, but still in the negative territory.
  • January marked 16th consecutive month of below zero reading in eurocoin and based on historical trends, this gives us forecast for the euro area economic growth of -0.4% in Q4 2012 and same for January 2013.
  • In 2008-2009 recession, eurocoin average reading stood at -0.31. In 6 months period through January 2013, the average reading is at -0.29. 
  • Ominously, while in 2008-2009 recession period, average ECB rate stood at 2.54%, last 6 months average rate was 0.75%, suggesting that easing of monetary conditions has little effect on the real economy.
Some charts to illustrate:

The next set of charts shows that the ECB policy remains in a bizarre no-man's land of neither delivering price 'stability' target (close to, but below 2%), nor supporting growth.

So no easing of the real economic crisis in sight and no signs of the euro 'saviour' ECB when it comes to dealing with the growth collapse.

Saturday, January 26, 2013

26/1/2013: A quick reading list

My reading list these days includes two excellent essays on State Capitalism (here) and the moral limits of markets (here). A third essay is on Europe's Next Big Mistake (here). All via Project Syndicate. Reminds me exactly why I was the first editor in Ireland to bring Project Syndicate content to public domain, back in the days when I edited Business & Finance. 

Wednesday, January 23, 2013

23/1/2013: IMF WEO Update: Euro Area snapshot

In the previous post (link here) I have looked at the headline numbers from the IMF revision to their World Economic Outlook. Now, a quick summary for the Euro area:

"The euro area continues to pose a large downside risk to the global outlook. In particular, risks of prolonged stagnation in the euro area as a whole will rise if the momentum for reform is not maintained. Adjustment efforts in the periphery countries need to be sustained and must be supported by the center, including through full deployment of European firewalls, utilization of the
flexibility offered by the Fiscal Compact, and further steps toward full banking union and greater fiscal integration."

To summarise the forecasts and their revisions:

The above clearly show that the euro area remains the weak point for global growth and that this picture is likely to continue in 2013 and 2014. More importantly, the revisions since October 2012 show that the IMF pessimism about the euro area growth prospects is getting deeper, compared to other economies.

Time stamp

23/1/2013: IMF World Economic Outlook Update

IMF WEO is out just now. Headline reading is:

"Global growth is projected to increase during 2013, as the factors underlying soft global activity are expected to subside."

"However, this upturn is projected to be more gradual than in the October 2012 World Economic 
Outlook (WEO) projections."

"Policy actions have lowered acute crisis risks in the euro area and the United States. But in the euro area, the return to recovery after a protracted contraction is delayed. While Japan has slid into recession, stimulus is expected to boost growth in the near term. At the same time, policies have 
supported a modest growth pickup in some emerging market economies, although others continue to struggle with weak external demand and domestic bottlenecks. If crisis risks do not materialize and financial conditions continue to improve, global growth could be stronger than projected. However, downside risks remain significant, including renewed setbacks in the euro area and risks of excessive near-term fiscal consolidation in the United States. Policy action must urgently address these risks."

On Global growth drivers:

  • The IMF expectations are for World Trade Volumes to rise 3.8% in 2013 and 5.5% in 2014, after posting increases of 5.9% in 2011 and 2.8% in 2012. In other words, the average growth rate in 2011-2012 was 4.4% and in 2013-2014 the projection is for the average of 4.7% growth. Not exactly a massively rapid recovery. 
  • World Trade Volume forecasts have been revised down -0.7 ppt for 2013 and -0.3 ppt for 2014 compared to october 2012 forecasts, implying that average growth in trade over 2013-2014 was expected to hit 5.15% annually back in October 2012 and this has been brought down now to 4.7%.
  • The IMF further predicts exports volumes for Advanced Economies to rise 2.8% in 2013 and 4.5% in 2014, with annual average of 3.7% forecast. This contrast with exports growth of 5.6% in 2011 and 2.1% in 2012 - an annual average of 3.9%. 
  • Back in October 2012, the IMF forecast for exports growth in Advanced Economies was for an average rate of growth of 4.25% pa in 2013-2014. This has now been brought down to 3.7%.
  • The IMF forecast for exports growth in the Emerging Markets & Developing Economies for 2013 of 5.5% and 2014 of 6.9%, down from 5.7% and 7.1% projections issued back in October 2012. 
  • However, in 2011 the growth rate in exports from the Emerging Markets & Developing Economies reached 6.6% and this has fallen to 3.6% in 2012. Thus, 2011-2012 annual average rate of growth was 5.1%, 2013-2014 projection is for 6.2% and this represents a reduction from October 2012 forecast of 6.4%. In other words, in contrast with the Advanced Economies, the Emerging Markets & Developing Economies are expected to accelerate significantly in growth of exports compared to 2011-2012.

23/1/2013: CDS markets in Q4 2012 - CMA report

CMA published Q4 2012 report on sovereign CDS markets and there are some interesting trends and stats highlighted.

First 25 top riskiest sovereigns (CPD referes to cumulative probability of default over 5 years):

Note that Ireland is no longer in top 10 riskiest states. Good news. A bit more on this below.

Per CMA: "Global CDS prices ended the year on a strong note, tightening 16% overall as Europe rallies strongly and Greece repurchases debt allaying fears of an exit from the Euro. Only Argentina and Egypt widen significantly on the quarter."

"Argentina CDS ended a volatile quarter as the most risky sovereign reaching a high of 4832bps at the end of November on concerns over USA debt guarantees, but rallied to finish on 1450bps. CDS spreads in Spain tightened from 384bps to 295bps as spreads in Western Europe as a whole tightened 19%."

Next, top 25 least riskiest states:

Note that only 3 euro afea states make it into top 10.

Per CMA:
"Sweden edged Norway off the top spot of the least risky table by 1bps, as the Scandinavian countries ended a strong quarter on the back of a good performance in Europe as a whole. The USA slipped two positions, as a solution to the “Fiscal Cliff” and debt ceiling concerns continue into year end. Austria and Netherlands enter the table with the spreads aligning with the strong economies of Germany and Switzerland." The latter rationale is most bizarre one I heard - the Netherlands are in a serious economic recession, deeper and longer than the rest of the euro area, so I have no idea what CMA are talking about.

Now, some interesting charts relating to Western Europe. Per CMA: "Western Europe continued on the rally from Q3 into Q4, with spreads tightening 19% overall and Greece looking more likely to stay in the Euro. Spreads in Portugal creeped over the 600bps level mid-November but ended the year at 436bps, 13%  tighter. Ireland tightened 31% closing the year at 218bps as the turnaround story continues. Spain and Italy, seen as the key economies in southern Europe, tightened 23% and 19% respectively."

Recall that European CDS overall tightened 19% in Q4 2012 and overall global momentum was very strongly on tightening side.

Note that Ireland experienced comparable (in levels) declines in CDS to all other peripheral countries excluding Cyprus (which saw an increase) and Portugal (where declines were more pronounced, when considered relative to peak reached in the Quarter. It is hard to tell - in this environment - whether Irish performance is driven by own fundamentals or by a combination of these said fundamentals and overall improved investor tolerance for risk.

In terms of percentages declines, we did perform stronger than other peripherals (ex-Portugal) and the Western Europe as a whole.

However, it is still too early to claim that Ireland - based on CDS valuations - is not a part of the 'peripheral' euro area group. Hopefully, more progress in near future will get us decoupled from this camp.

23/1/2013: One Face of 'Irish Confidence Heroes'

Go to Minute 15 to hear this distressed assets investor bragging about forcing the Irish taxpayers to pay for his speculative bets on distressed junior bonds from BofI:

You wanted to see those 'investors' who have 'confidence' in Ireland? There's one. He got burned by Russians in a similar setting, but, what the hell, Irish Government conveniently made sure same didn't happen to him here. He was made whole on his exceptionally speculative bet.

Tuesday, January 22, 2013

22/1/2013: US Existing Home Sales Signal Restart of Household Investment in 2012

Cycle returned to the upswing in 2012 in the US Household Investment area, despite a headline dip on monthly series basis:

  • Sales of existing homes in the US fell 1% in December to a seasonally adjusted annual rate of 4.94 million, according to the National Association of Realtors. The rate in November was revised down to 4.99 million from an estimate of 5.04 million released earlier. This was the highest rate of sales since November 2009. 
  • Lawrence Yun, NAR's chief economist: "Record low mortgage interest rates clearly are helping many home buyers, but tight inventory and restrictive mortgage underwriting standards are limiting sales." 
  • On annual basis, existing-home sales are up 12.8% from 2011. 
  • The median existing-home price rose 11.5% from 2011 to $180,800. 
  • Overall over 2012, existing-home sales hit 4.65 million annual rate of sales, the highest rate since 2007 and up 9.2% on full year 2011. 
  • The median price reached $176,600 in 2012, rising 6.3% on 2011 and marking the highest annual growth since 2005
The Calculated Risk has an excellent analysis of underlying data:

Chart from Calculated Risk summarising trends:

22/1/2013: RPPI, Ireland: December 2012

In the previous post I took a quick look at the Residential Property Price Index (RPPI) annual series. Here are monthly frequency observations.

All properties:

  • December 2012 All Properties RPPI stood at 65.8, the same level the index was at back in between March and April 2012 and again in September 2012. In Other words, the index de facto is running flat.
  • Put differently, the index has now fully erased the miraculous gain of November 2012 and returned prices back to September levels.
  • Monthly rate of change in the index was negative at -0.454% and the index is running well below 65.77 12mo MA.
  • Year on year the index fell 4.5% in December 2012, after posting a 5.71% decline in November. Thus December represents the slowest y/y rate of decline in the series since May 2008. Which is good-ish sort of news.
  • For Nama valuations, latest data suggests a fall in values of 33.26% net of burden sharing cushion.
  • 12mo MA monthly rate of change is at -0.378% which is shallower than December 2012 m/m decline of 0.454%
  • Putting things into a bit more longer term perspective, simple average of RPPI for the period from January 2008 through present is 90.02, which stands contrasted with 2012 average of 65.73 and 2011 year average of 75.37.
  • On shorter term comparatives: H1 2012 average reading was 65.92 against marginally lower H2 2012 average of 65.53. 
  • Relative to monthly peak, RPPI stood at -49.58% or comfortably rounded off to 50%. This reading for December 2012 was statistically indistinguishable from the 'nominal' monthly low of -50.34% set back in June 2012.
  • Thus, monthly volatility aside, there is no increase in prices. As I noted in November data analysis, we are bouncing along the bottom, which may or may not be a 'true' bottom or a 'false' bottom. This conclusion is further supported by the factors that are likely to impact prices going forward that I outlined in September 2012 data analysis (link here).

House prices sub-index:

  • House prices subindex declined marginally from 69.1 in November to 68.7 in December, thus erasing completely any gains delivered from September 2012. 
  • House price dynamics are virtually identical to those of the overall RPPI as outlined above.
  • 2012 year monthly average index reading was 68.57, slightly behind 68.7 recorded in December. However, 6mo average through H1 2012 was 68.7 and this has fallen to 68.43 average for H2 2012. 
  • Y/y index fell 4.18% in December, marking the shallowest rate of decline in the series since May 2008.
  • Frankly, all of the changes are within the range of being statistically insignificant, so the theme of 'flat line market' continues unabated.

Apartments show the same dynamics as Houses, so let's avoid repetition and note that

  • Houses prices are down 47.95% on peak, while Apartments prices are down 62.15% on peak.

The index has been criticised, for the n-th time by the realtors for failing to reflect the 'great demand' from the cash buyers. Alas, my view is that cash buyers are not, repeat, not a normal market, but rather an aberration that is bound to be short-lived. In this sense, if we want a gauge of real market activity, then the CSO data provides a far better picture than testosterone-fuelled hype of few whales with cash stashed from CPOs of the old days bidding each other out to land a 'family home suitable for conversion into student bedsits'.

Dublin, last.

  • Property prices in Dublin slid from 60 in November to 59.2 in December, marking 1.33% decline m/m and 2.47% drop y/y. 
  • Relative to peak, Dublin market is down 55.99%. Which is above the absolute low of 57.40 achieved in August.
  • On dynamics side, 12mo average is running at 58.32, worse than December reading, but well below 2011 average of 67.86. H2 2012 average is at 58.57 and virtually identical to H2 2012 average of 58.07. In other words, medium-term dynamics are flat. Flatlining is the theme here again.

22/1/2013: Merkel cites Ireland as one of 3 tax havens in Europe

A very interesting exchange between Angela Merkel and Francois Hollande talking at a public venue, as reported by the EUObserver :

In particular, consider the following quote:

"When asked if it is "utopian" to think that one day there would be a federal EU state, Hollande said that the EU as it is today seemed "utopian" 50 years ago. "I accepted that we need to converge towards common budgetary policies. We need to have a similar discussions about taxes, for instance a common CO2 tax. It's true there are political risks, but we need to embrace our common destiny," he said.

"Merkel named Ireland, Malta and Cyprus as low-corporate tax havens: "I don't want to make a statement now that my fellow EU leaders will be upset about, but step by step we'll need to establish margins and then each country will have to choose how it fits in those margins. Your utopia is totally right.""

No comment needed.

Update: 9/2/2013: Here's another link on Apple use of Irish legal structures to reduce tax exposures in the US. And another one.

Update 10/2/2013: UK MNC Associated British Foods is implicated in tax minimisation scheme involving Ireland:

22/1/2013: Irish Property Prices: 2012

Per CSO's Residential Property Prices Index released today, property prices in Ireland registered a fall of 4.5% in the year to December 2012.

The spin of 'good news' is seemingly abating in the wake of the figures. While I will cover detailed trends in the next post, here is a snapshot of annual series. Do, please, let me know if you see much of 'return to growth' in house prices:

To summarise the above and extend to the begging of the CSO series:
-- Overall RPP Index fell in 2012 to the annual level of 65.7 down from 75.4 in 2011 and down 49.5% on peak. In 2011 relative to peak RPP Index stood at a 42.0% discount. Y/y rate of fall in the annual index in 2012 was 12.86%, statistically identical to 13.10% drop in 2011. Surely, this is not a 'bottom has been reached' set of figures, no?
-- Houses nationally sub-index fell in 2012 to 68.6 against 2011 level of 78.4 (posting y/y decline of 12.5% in 2012, marginally and virtually dental to 13.0% fall in 2011). Again, please, tell me that decline of 13% followed by 12.5% is some sort of 'bottoming out'. Annual series for national house prices is now at 47.7% below peak having fallen 40.2% relative to peak in 2008-2011.
-- Apartments nationwide dropped from 57.8 in 2011 to 47.8 in 2012, with annual rate of decline in 2012 of 17.3% showing acceleration on 16.4% y/y drop in 2011. Again, the clear 'bottoming-out' of prices for Irish apartments is now in sight. These have fallen 52.7% relative to peak in 2011 and are now at 60.9% below peak.
-- Dublin property prices have posted a drop from 67.9 annual 2011 index reading to 58.3 in 2012 - a decline y/y of 14.14% which follows 2011 y/y drop of 13.9%.

To summarise, the 'bottoming-out' of Irish property prices in 2012 has resulted in prices declines across all four core categories (the few with a potentially sufficient numbers of sales to make any meaningful conjectures about). Not one category saw an annual increase in prices. And, to add an insult to the injury, y/y rates of decline in the prices in 2012 were worse than in 2011 in one case, marginally better in one case, and practically identical in two series. 

Monday, January 21, 2013

21/1/2013: Blackrock Institute Survey on Growth Conditions

Blackrock Investment Institute released latest summary of survey results for global growth outlook. Here are the charts by regions:

 Western Europe & North America
 Latin America:

And summarising overall optimism levels for Western Europe and North America:

Good to see decent (not spectacular) performance for Ireland in the above (chart 2 and table above). Note: analysis is based on the surveys of professional economists.

21/1/2013: An Uncomfortable Question

Let's ask our Government an uncomfortable question: 

The Government claims (legitimately, to some extent) that 
  1. The economy has stabilised & fiscal situation has improved significantly and
  2. The Croke Park agreement 1.0 delivered what it required in terms of savings. 
Thus, by (1) & (2) things are going according to the MOU-sealed plan (signed within the confines of the Croke Park 1.0) and there are no new urgent pressures or shocks arising. 

In that case, why does the Government need Croke Park 2.0 with another round of EUR1bn 'savings'?

The idea that we need structural reforms in the public sector is not exactly hot on the Government's agenda. Furthermore, that idea was already, allegedly, reflected in the Croke Park 1.0 which was a 'success' per Government official accounts. Lastly, all structural reforms were supposed to deliver on targets set within the MOUs and these are consistent with the Croke Park 1.0.

So which side of the Government is talking porkies? The side that claims Croke Park 1.0 has delivered on reforms and changes and savings needed or the side that claims we need Croke Park 2.0?

21/1/2013: Fitch: Ageing Costs: The Second Fiscal Crisis

One theme I've been tracking over some time now is the longer-term state liabilities.

Here's a note from Fitch on the matter:

"Without the implementation of mitigating reforms the median country analysed in our new report today is projected to see its budget worsen by 0.6% of GDP by 2020 and 4.9% of GDP by 2050. Consequently, many of these countries would experience escalating government debt-to-GDP ratios, with the average EU27 debt-to-GDP projected by Fitch to rise by 6.9% by 2020 and 119.4% by 2050."


"According to the model, Japan, Ireland and Cyprus face the largest jump in ageing costs over the next decade..."

Here's a summary table:

And a chart summarising policy pressures:

Guess how we are doing in terms of mitigating pensions pressures? Oh, not too well to begin with and are getting worse:

So what measures does Fitch list as Ireland's mitigation means so far planned?

"Tax relief on private pension contributions; Abolition of exemption from contribution to public pension scheme for low-wage earners; Pension levy on public sector wages; Reduction in pension tax privileges. Eligibility age for various pension schemes increased."

Sunday, January 20, 2013

20/1/2013: Minister for Reform thinks... out loud...

In the week when  it was revealed that ca 2 months after first detecting contamination in beef samples taken at retail levels, and after a 5 days delay between confirmation of the contamination receipts and notification of the retailers and the public of the event, the Irish food safety standards are, apprently, beyond reproach.

Read and laugh:

But in case this disappears into the domain of password protected archive, here are few quotes from the duo of the Irish Times journalists (might one assume that it took two journalists to write this up, as whilst one was laughing beyond her/his control, the other one was typing, and that these duties were rotated as required):

"Ireland has the best oversight system in the world for food production, Minister for Public Expenditure Brendan Howlin has insisted in the Dáil in the ongoing controversy over the discovery of horse meat in a beefburger. He was responding to Fianna Fáil leader Micheál Martin who questioned why Minister for Agriculture Simon Coveney was only told on Monday of the findings of tests carried out on burger meat in November and again in December, both of which proved positive for horse meat content. Mr 
Martin asked the Minister if he believed it was acceptable that Mr Coveney was only told three days ago. Department of Agriculture officials were informed on December 21st."

The Irish Times references the timeline of the events as follows: Department of Agriculture was notified of the contamination on December 21st. Minister for Agriculture was notified on January 14th. FSAI received confirmed re-test results from Germany of January 11th. What the Irish Times article does not state (it simply falls outside the questions raised by Micheal Martin, TD) is that the public and the retailers were notified of contamination only on January 16th. 

And to all of this, Minister for 'Reforms' had only one thing to answer: 

"Mr Howlin said... there had been criticism of Ireland, but the traces were only found because of Ireland's very high standard of oversight for food production, the best in the world I would say."

Err, and of course he then proceeded to accuse the UK of not having same high standards of testing as Ireland does.

Per other report (here), "Minister Howlin said that he believes Ireland has a high standard of oversight of food production, “the best, I would say, in the world”. He reiterated that this is not a public health issue and said it it is an issue that doesn’t relate to food safety, but relates to food standards."

Err, and of course he then proceeded to accuse the UK of not having same high standards of testing as Ireland does. So we now have a Minister for Reforms who thinks that 

  1. food standards are unrelated to food safety, and 
  2. that a system that allowed potentially contaminated meat to remain on supermarket shelves and continue flowing into the retail chain since December 2012 through mid-January 2013 is 'the best... in the world'.
No other comment needed.

20/1/2013: Euromoney Credit Risk Data: Q4 2012

All of the G10 countries, with the notable exception of Sweden, saw their risks rise in 2012, according to the latest results from Euromoney’s Country Risk Survey – and not just because of the problems affecting the debt-ridden euro zone sovereigns.

ECR (Euromoney Country Risk survey data for Q4 2012 is out and the results are quite interesting. Broadly they confirm the risk dynamics traced by the survey through the entire 2012, suggesting that qualitatively little has changed over 12 months to signal the improvements in the global economic environment.  Here are some top-line results:

  • Of G10 countries, all but one (Sweden) saw further deterioration in ratings.
  • G10 ratings deteriorations were not only driven by the continued euro area crisis, but are also present in the case of Japan, the US, and the UK own dynamics.
  • Japan and the US continued "on a downward trend, as various economic and political problems continued to raise alarm bells among economists and country-risk experts regarding their medium-to-long term fiscal viability…"
  • "Japan’s crippling debt problems, stunted growth and deflation have seen its score fall to 65.5 out of 100 and to 32nd out of 185 countries surveyed – a new record low, when 20 years ago Asia’s former powerhouse was ranked the world’s safest sovereign."
  • US scores were down 1.6 points over 2012 to 74.7. 
  • "…The US is far from a substantial risk – it is, after all, the 15th safest sovereign in the world, according to the survey. However, US politics has had a decidedly negative influence on its risk profile – all six of the political risk indicators were downgraded in 2012".
  • On December 'deal' reached by the US Congress and the White House: "The two sides in the debate must still find common ground to negotiate $110 billion of spending cuts (the “sequester”) without bringing the US economy to a grinding halt. A budget must be agreed, while raising the $16.4 trillion debt ceiling even further presents another, even more perplexing, question of how to ensure medium-to-long term fiscal sustainability in light of adverse demographics – the weakest of the country’s structural factors, according to the survey."

Realting to two major themes I have been highlighting for some time now:

  1. The fallout of the euro area from the global growth & growth environment clusters; and
  2. The relative rise in risk quality in the 'Southern' growth clusters, leading to relative convergence in risks between the deteriorating 'North' (advanced economies of the West) and the improving 'South' (the middle income and some emerging economies of Asia-Pacific and Latin America)
we have this:

  • "Risk differentials between the G10 and the emerging market regions narrowed by between two and three points in 2012, to 25 points for the Middle East and to 30 points each for Asia and Latin America." This is a notable result, coincident with one major theme in global risk changes that I have highlighted for some time now.
  • "Differentials between the eurozone and emerging markets saw even larger shrinkage, highlighting that, although traditional markets are still safer, their comparative advantages have diminished."
  • "Some of the emerging markets became safer in 2012: those that were largely decoupled from Europe’s debt problems – growing rapidly in many cases – and with fewer domestic issues." 
  • "Latin America saw three distinct patterns emerging. Brazil, Chile and Colombia continued their long-term ascent in the global rankings, despite having their economic scores shaved by a slowdown in China paring back commodity demand. Argentina and Venezuela struggled with their domestic crises, which caused both countries to slide further down the rankings. Mexico, Peru, Uruguay and Bolivia all emerged on the radar, benefiting from strong policy management, good growth and other factors."

A special place in the risk rankings 'hell', however is reserved for the euro area:

  • "Eurozone countries, …saw shrinking levels of confidence as Slovenia, Cyprus, Spain and Italy endured the largest falls in country risk scores of any of the countries surveyed worldwide, weighed down by creaking banks, rising debts, contracting economies, and the political and structural dimensions to the crisis."
  • "The eurozone score fell by 3.1 points, the largest drop of any of the main geographical or economic regions."
  • In the case of largest downgrades within the euro area: "All four saw their risks continue to rise during the fourth quarter, despite some progress in tackling their fiscal problems. Bond yields fell and credit default swap (CDS) spreads tightened, suggesting the risks had eased, but ECR has had reason to doubt CDS signalling." Which is the theme consistent with my analysis of CDS in the past.
  • Of the peripherals: "Italy, down 14 places in the global rankings this year (to 51st place), Spain (an 18-place faller to 58th), Cyprus (down 11 to 42) and Slovenia (plunging 15 places to 37th) all failed to convince country-risk experts that the worst of the crisis was over."
  • The crisis is now perceived to have spread from purely financial and fiscal dimensions to political and structural: "The systemic banking sector and sovereign debt problems stretching across the single currency area have invariably influenced economic risk assessments. However, the political and structural elements to the crisis have resulted in broadly equivalent falls in scores for each of the three measures of risk, on a euro-wide basis."

  • On ECB actions: " the absence of growth and amid justifiable concerns about the political commitment to budget consolidation and reform – highlighting the risks of policy execution failure – fiscal projections have proved wildly optimistic, deferring the prospect of outright debt reduction for many countries." In other words, while ECB can talk as much as it wants (OMT, the inevitability of the euro etc), end-game is set by real actions. And these are now increasingly in question.
  • "Peripheral country risk remains high, even in Greece, which has seen its ECR score stabilize this year, yet on a score of just 34 points and languishing in 110th place on the ECR scoreboard, the country’s problems are far from over… All of Greece’s economic and political factors, 11 in all, score less than five out of 10 as another future debt rescheduling looms. The much-feared Grexit is still not out of the question either, although the markets have been calmed by the progress achieved to date."
  • "Debt resolution programmes in Spain, France and other countries are all being questioned."

You can see (subscribers only) the data and play with interactive charts and maps here and the overall site for the data is

Saturday, January 19, 2013

19/1/2013: Euro area banks need EUR400bn in capital: OECD

An interesting article via Euromoney (January 14, 2013) on European banks facing EUR400bn in capital shortfall estimated by the OECD.

A quote:

"A chief gripe is the extent to which European banks have refused to acknowledge their losses and write down bad loans, echoing the comedy of errors that has blighted Japan in recent decades.

... the European Banking Authority’s (EBA) financial stress test in June 2011 – which determined the capital-raising target for the regional banking system for 2012 – was based on an excessively benign treatment of the coverage ratio.

The median coverage ratio of the 90 European banks examined in the test was just 38% to meet the 9% core tier 1 capital ratio target. By contrast, the coverage ratio -  which indicates the amount of reserves banks have set aside relative to a pool of non-performing loans - for US banks equated to 67% in the first quarter of 2011, according to the Federal Deposit Insurance Corporation. ...

In a November report, before the Draghi ‘put’, Deluard noted: “In its mild form, European banks’ refusal to recognize losses could lead to a Japanese ‘lost decade’: banks evergreen their loans [ie, rolling over loans to borrowers who are unable to pay], regulators agree to play the ‘extend and pretend’ game, and the credit creation mechanism is permanently clogged."

And this week "the OECD, headed by Angel Gurria, added to the chorus of criticism – in contrast to the EBA’s upbeat assessments – by stating that the ratio of core tier 1 capital to unweighted assets of eurozone banks falls well short of 5% “in many cases”. On this benchmark, European banks face a €400 billion capital shortfall, or 4.5% of the eurozone’s GDP."

The OECD’s concern echoes that of the IMF, the Bank of England and the Basel Committee: "banks have inflated their asset values, despite the EBA’s self-congratulatory claim in July 2012 that banks in the region had reached a minimum 9% of the best quality core tier 1 capital to risk-weighted assets, in excess of the current international requirements."

And as OECD points out, the problem is much more than just 'peripheral' banks - the problem is Germany and France.

Here are two slides from my recent presentation on banking sector (I was planning to present more on this at the Irish Economy conference on February 1, but the session on banking got canceled, so will be posting the full slide deck here in few days time - stay tuned).

19/1/2013: Asia & CEE risk metrics: January 2013

Asia and CEE risk metrics (via Byblos Bank Research) (click on the image to enlarge to see the full table):

19/1/2013: Ireland's cost of funding

An interesting chart in today's IMF review of Greece:

Now, that's right - prior to Bailout 2.0, Greece led the euro area in terms of its overall Government debt financing burden as % of GDP and Ireland ranked 3rd in these dubious (in virtue) rankings. After Bailout 2.0, Greece funding costs are now below euro area average (ranked 7th) and Irish ones are ranked 2nd highest after Italy.

Now, note that this means that Ireland has the highest debt financing costs of all countries in Troika bailouts. In other words, with hefty subsidy to our cost of funding via EFSF et al, we are coming out very poorly. What will happen if we 'regain access to the markets' at costs higher than those under the Troika bailout?..

Although approximate, a deal to bring Irish debt financing costs to euro area average would see the Government benefiting from savings of ca 2.3% of our GDP annually or ca EUR3.73 billion making measures passed in Budget 2013 in their entirety unnecessary.

Friday, January 18, 2013

18/1/2013: Some Lessons from the US Recovery

This is an unedited version of my article that appeared in Sunday Independent, January 6, 2013.

Basking in West Florida’s sunshine, downtown Venice is a sleepy affair – a quaint and quiet boulevard full of historic trees, if not historic buildings, leading beaches free of crowds and full of sea birds. An unlikely mirror to the US economy, in many ways, it nonetheless shares in the dynamics of the country’s leading economic indicators.

According to the majority of the forecasters, 2013 is going to be the year when the US economy is set to take off onto a new growth trajectory, pushing inflation-adjusted GDP by some 3-3.5%. Pent up economic capacity, capital investment and jobs creation, held in check since the end of 2007, should act as the major drivers for the world's largest economic engine. Meanwhile, four years of relatively robust deleveraging of the American households will be an economic lubricant, facilitating expansion of private sector credit.

In reality, these forecasts are not new. Year after year, since the end of the last official recession in June 2009, the US and international analysts have predicted that over the next 12 months the economy will post a real recovery, comparable to the exits from all previous recessions. Year after year their forecasts were proven to be overly optimistic. Instead of escaping the near-zero growth dynamics, the US economy continues to struggle with finding a solid ground.

In the likes of Venice, this translates into a strange split in the overall economic activity, best exemplified by the local property market. Robust sales of new construction homes are offset by the stagnant secondary market, reflecting the bifurcation of the American fortunes. Those who accumulated debts in the 1997-2007 bubble are still fighting for survival. Meanwhile those who entered either jobs or retirement since 2008 are enjoying robust savings on new, high quality, lower priced dwellings.

Much the same applies to the rest of the US. Headlines suggest that house prices are on the rebound, and mortgages lending is up. Mortgages rates are near historic lows, despite the fact that banks lending margins are near historic highs. Corporate debt issuance is up and unemployment rolls are slowly inching down.

The US markets had a blast of a year in 2012. with Nasdaq came up some 15.9%, DOW went up 7.26% and S&P 500 rose 13.4%.  The Small Cap stocks index, Russel 2000, ended 2012 up 14.6%. Despite the still unresolved fiscal deficit overhang, the breaching of the debt ceiling, and ballooning Federal debt, the US Government borrowing costs were sustained at a superficially low levels. Helped by high risk aversion amongst the global investors and the aggressive monetary easing by the Federal Reserve, the US 10 year Treasury bonds yields came down from 1.88% to 1.76%, while 5 year Treasuries yields compressed from 0.83% to 0.72% over the year. US 10-year bonds gained 1.86% in return terms in 2012, while 30-year Treasuries rose 1.5%.

Economic competitiveness gains in the US have been spectacular in 2012. On top of historically weaker dollar boosting exports and lowering demand for imports, the 'shale revolution' saw energy costs plummet. The US manufacturing is now experiencing a new on-shoring trend with corporates bringing back manufacturing capacity previously located outside the US. The most recent example of this is Ford's plan to build a new USD773 million factory in Michigan. Ford has now committed USD6.2 billion for investment in the US manufacturing over 2013-2015. The WTI-Brent spread (the differential in the cost of oil between the US and Europe) has declined USD18.39 per barrel (some 20% of the overall price) compared to 2001-2010 average as the US ramped up production from shale deposits to 6.99 million barrels per day - the highest level of crude output since 1993.

However, as in Ireland’s case, improved US competitiveness is yet to translate into a broader economic recovery. According to the Current Population Survey data, American median annual household income remained stagnant between January and November 2012. The November 2012 median household income was 4.4% lower than at the end of 2008-2009 recession and the beginning of the current ‘economic recovery’. 2012 incomes are some 6.9% below those reached at the end of 2007 and 7.6% lower than in January 2000. On top of this, the latest ‘fiscal cliff’ compromise raised taxes on virtually all working Americans, reducing disposable household incomes by some 2% by some estimates. The deal is estimated to cost the US economy 1% of GDP annually, starting with 2013.

Weak and narrowly focused on specific subsets of the economy (financials, ICT, exports-oriented sectors) economic growth in the US has been unable to lift the real economy out of the L-shaped ‘recovery’. In other words, the main lessons to be learned by Ireland’s policymakers from the US ‘recovery’ of 2012 are unpleasant ones. Firstly, gains in competitiveness and exports growth are not capable of propelling the economy onto a growth path. Secondly, even with fully-deployed monetary and fiscal policies tools, the debt crises are unlikely to lead to a J-shaped or even a U-shaped recovery any time soon. Thirdly, ‘green shoots’ in various pockets of the economy are not necessarily going to lead to a widespread recovery.

Even when these sources of stabilization are supported by expansionary monetary policies, debasement of the domestic currency and massive accumulation of debt – policies not available to Ireland – they are simply not enough.

In the case of Ireland, these lessons mean that in 2013 we will most likely remain stuck in near-zero growth scenario, with continued contraction in domestic consumption and investment.  Even if Ireland delivers on GDP growth of 1.1% in 2013, as forecast by the IMF, the associated uplift in our economic fortunes will be negligible, as all growth will remain concentrated in the MNCs-dominated exports sectors. Real GNP – a much better measure of our economic activity – is more likely to post a 0.1-0.3% rise, while Gross National Income (GNI) per capita is likely to stay at the levels some 22-23% below those attained in 2007. In fact, current inflation-adjusted GNI per capita in Ireland stands below 2000-2001 levels, implying that in real terms, Irish economy is now marking 12th year of the so-called ‘lost decade’.

With zero employment growth, our unemployment rate will stay static at around 14.5% only thanks to rampant emigration and the expiry of unemployment assistance supports for long-term jobless.

In other words, like the Western Florida’s economy, the Irish economy will continue bifurcating into the pockets of continued stability, underpinned by the Multinationals, amidst the general landscape of continued economic stagnation. Subtract Florida’s beaches and sunshine, and the 2013 economic outlook for Ireland is more pain, punctuated by the delirious Government pronouncements of turnarounds and recoveries that the rest of us will struggle to connect to the everyday reality on the ground.

Sunday Independent, January 6, 2013.

18/1/2013: Iceland's U-shaped Recovery

Back in December, there was quite a bit of controversy stirred around by a short note about the failures of the so-called Icelandic model for dealing with the crisis. The note - a blogpost (and I have no link to it right now) - was alleging that much of the reforms in Iceland were not voluntarily chosen by the Government (which is true), did not result in significant debt relief for homeowners (due to mortgages markets structure differences) and did not produce significant improvements in the economy.

At the time, some readers of the note in Ireland went on to accuse myself of 'talking up' Iceland to promote my 'personal agenda'.

Aside from the above accusations being complete and unadulterated bulls**t (I never said Iceland did everything right or that all of Iceland's policies should be adopted in Ireland), they were based on the reading of one blog post.

Not to stir up any controversy, here's a link to the Danske Bank note on Iceland's economy from December 2012. I am not going to make any judgements here - just read the note. I am reproducing few charts below for those unwilling to read through the entire report.


"The recovery of the Icelandic economy has been challenged by the deteriorating conditions in the European trading partners, which account for a large share of the Icelandic exports. It looks like growth in Iceland will perform above most of Europe over the next few years and that its recovery will continue but the level is still well below the pre-crisis level. We expect growth rates of 2.5% y/y in 2012 and 2.2% in 2013. It is also worth noting that recent national account revisions showed that growth in 2011 was adjusted down.

While investment activity and inventories have been rather volatile recently, private consumption has held up relatively well and 2012 should show about 3.8% y/y growth. We expect it will slow somewhat in the following years, to a growth level just below 3%. Investment activity should be fairly solid too and we expect growth rates of about 8-9 % y/y in 2012 and 2013, perhaps with a slightly increasing trend.

Inflation remains above the central bank’s 2.5% target, and has been so for a while, but inflationary pressures have eased somewhat in 2012 and we expect this trend to continue. Our forecast for the GDP deflator is currently 3.7% y/y in 2012 and 3.1% in 2013.

As the economy has been undergoing recovery, the labour market has improved significantly too. While we do not see this trend ending, we do expect it to slow gradually  as the unemployment rate comes down. Consequently, our year-end unemployment rate forecast is 5.8% for 2012, falling to 5.3% in 2013"

Here you go: Iceland's U-shaped recovery and Danske's forecasts for 2013-on:

And for the commentariate loving to accuse me of just dropping numbers to 'fool the readers' - I am not giving a commentary on the above precisely because you accuse me too often of commenting.