Friday, May 31, 2013

31/5/2013: Bank Holidays Links: On Art, Science and In Praise of Unfocused Thoughts

For the bank holiday - an alternative (to economics) reading list of things artsy & scientific…

A quick note before I launch into the links: I will be taking part in on June 13th. [] article on a fascinating project to build a computer to replicate human brain "down to the individual ion channel". The newsy bit here is that on January 28, 2013, the EU Commission awarded the lead research group (headed by Henry Markram) EUR 1 billion to attempt to perform that task. There is much of interest here - beside the fascinating technology behind. Here are some questions that puzzle myself and many others:

  1. As article points out, the task is multi-dimensional: it is one thing to build a replica of neurons and physical interfaces. It is yet an entirely different thing to build a replica of consciousness. "The way Markram sees it, technology has finally caught up with the dream of AI: Computers are finally growing sophisticated enough to tackle the massive data problem that is the human brain. But not everyone is so optimistic. “There are too many things we don’t yet know,” says Caltech professor Christof Koch, chief scientific officer at one of neuroscience’s biggest data producers, the Allen Institute for Brain Science in Seattle. “The roundworm has exactly 302 neurons, and we still have no frigging idea how this animal works.”"
  2. Is the EU Commission engaging in an absurd gamble with taxpayers money is another, perhaps mundane question, but the one that arises on foot of (1). 
  3. Bigger question of the two above - can consciousness be reproduced? Is consciousness even a logical system system?

ArsTechnica piece on the role of focus (singularity of objective) in raising IQ [] might be leading to an interesting set of questions - possibly even related to the previous link. If focusing on a task help raise our IQ, then:

  1. How meaningful is IQ as a measure of human capacity to think vs to create? After all, focus can also be seen as concentrating attention on a singular subject or even an aspect of a subject. In doing so, we forego the breadth of inquiry for the depth of inquiry. If IQ is positively and strongly correlated with the depth (focus), is it not then negatively correlated with the breadth? 
  2. Is IQ a tool/source of incremental uncovering of knowledge as opposed to revolutionary discoveries? Again, focus can be helpful in the former, but it can also be detrimental to the latter.
  3. In modern academia and even art, specialism is the core driver of publications and output, and the latter are the core drivers of earnings, promotion, access to research and creative funding etc. Does this focus --> IQ --> incremental productivity nexus lead to a dramatic reduction in encyclopaedic inquiry? We are having more and more specialist researchers and fewer and fewer Leonardo's and the reason for this might not be the difficulty of engaging in encyclopaedic inquiry, but a disincentive to engage in it contained in the added capacity for pursuing the IQ-based forms of incremental inquiry that also tend to generate higher career payoffs?

As you can see, I am not attempting to exert too much focus here… perhaps because I don't really care if I do sound like a Mensa member…

And here's a link to show that focus --> IQ link might be complete rubbish: Now, the article quotes: "The first generation immigrant parent brings with her/him a set of memories about how education works and what is to be valued. For Indians that is a memory of endless class tests doled out on a regular basis to evaluate our ability to retrieve information - spellings of words, names of world capitals, cash crops of states, length of rivers, height of mountains, and a plethora of minutiae charmingly labeled as General Knowledge." ... Err… so Indian-Americans are more focused on the task of spelling stuff. Great. I am looking forward to them starting to focus on content of what they are spelling more… which, automatically means they will have to stop focusing and start thinking much broader. Great art and science are not made out of 'focus' - they are made out of wandering.

Now onto art - let's start with kitsch, but brilliant efforts of the Northern Irish and British authorities at creating a Potemkin Village out of Belcoo, Co. Fermanagh in the anticipation of the G8 summit later this month: Here's an image from the Irish Times of a comer butcher's shop in town now transformed into a window-display of fake prosperity.

I class this 'art' because to really describe the nature of what is happening in this instance one would need volumes of unpleasant explicatives... let's keep things academic, instead.

Onto serious art: Biennale is on in Venice and I am going to keep linking to it. One of the most memorable things I did so far in my own life was to take part in 2006 Beinnale by writing an essay for irish entry volume.

The main link to this year's Biennale is here: and a couple of images / stills from there:

Those heading for Venice for Biennale - do not miss great venue for art in Friuli.

On art, @Saatchi_Gallery twitter account was posting some stunning images this week.

One worth checking out is and this comes via PetaPixel article:

Another one is from Art Basel Hong Kong show:

This is the first and probably the last VW, that I would love to own… Artist's work is discussed here: and Art Basel page for the artist:

A quick synopsis of some of the best works at Art basel this year is here:  One of my other favourites is:

Bruegelesque (as in Peter Bruegel's Seven Deadly Sins etching)…

Cool tech thinking from the 1970s? Sure: And it proves, in passim, that much of the cutting-edge-new is really a well-forgotten-old…

Tripping spirituality meets art and collides with nature? Only in NYC, but stunningly so:

From things brilliant to brilliant narrative. Here's a superb blogpost on the nature of the value of expressed beliefs:  This treats beliefs in the context of revealed preferences - many analysts and now even journalists make the argument that to reveal true underlying motives for a judgement, one has to have "a skin in the game". I myself was on a receiving end recently from a business editor of one of the major newspapers. When I queried if an interview with investor in one of the banks was fully open and transparent in his/her praise for the bank in a totally uncritical interview with the investor published by his newspaper, the editor simply accused me of not having "a skin in the game" and thus not having a valid point of view to offer. Idiotic? You betcha: anyone's starting position for a conjecture has nothing to do with validity of the conjecture or with testability of this validity. Double idiotic because as a taxpayer and a bank customer, I do have probably more "skin in the game" than the said investor. Nonetheless, the entire incident reminds me that people often think that someone placing a bet (say going long VIX) is equivalent to them revealing their true belief (that for example volatility will rise in the future). Actually, it is not. And the blogpost linked above explains why. It is all really basic, but we too often forget that basic things are the first ones to be forgotten by us…

Lastly, here's an excellent article (based on a very interesting paper) that argues that sustainability of 'local' food sources might be severely over-exaggerated: Now, one additional point is that we are talking here about UK (heavily subsidised) agriculture vs New Zealand (zero subsidies regime). Should the balance of carbon required to produce subsidies be entered into the equation? I doubt anyone would then be 'ethically' buying much of anything local… The original paper referenced in the article is here:

So enjoy the long weekend!

31/5/2013: Part-time v Full-time Unemployment in Ireland

"Less positively, the Quarterly National Household Survey showed that most of the gains in employment have been in part-time rather than full-time jobs." Irish Times :

Sadly, I must say, this is simply incorrect.

In Q1 2013, full-time jobs stood at 1,391,100 which is down on Q4 2012 when these counted 1,398,700 (-7,700 q/q change) and is down on Q1 2012 when the full-time jobs counted 1,394,800 (-3,700 y/y). This is also down on Q1 2011 when full-time jobs numbered 1,401,800 (a net loss of 10,700 full-time jobs in 2 years).

Part-time jobs rises accounted for all, repeat all, increases in Q1 2013: these increased to 454,400 in Q1 2013 from 450,200 in Q4 2012 (+4,200 q/q) and were up on 430,200 (+24,200 y/y) on Q1 2012. This is goodish, as - obviously - it is better that people are working at least part-time. However, it is simply incorrect to claim that "most of the gains in employment have been in part-time rather than full-time jobs" when there were DECREASES in full-time jobs.

Worse than that: the picture is further distorted by the differences in changes in part-time underemployed jobs numbers and part-time not underemployed numbers.

Year on year, part-time not underemployed numbers rose from 291,300 in Q1 2012 to 298,500 in Q1 2013 - a gain of 7,200 or just 29.7% of all part-time (and net) jobs gained y/y. The rest 70% of the jobs gains were amongst part-time underemployed. And compounding this, quarter on quarter, numbers of those in part-time employment who are not underemployed actually fell - from 304,400 in Q4 2012 to 298,500 in Q1 2013.

It would help to read the Table 1 of the CSO release :

Thursday, May 30, 2013

30/5/2013: Future Interest Rates & the 'Impossible Monetary Policy Dilemma'

Recently, I wrote about the monetary policy exit dilemma (here) on foot of IMF research. This week, BIS published another paper on the issue of long-term interest rates problem presented by the need to eventually unwind the extraordinary monetary policy measures (including this). Do note that the dilemma also covers the problem of unwinding banking sector leverage overhang (see presentation covering, among other things, this matter here).

BIS paper is linked here.

We might want to believe in the permanence of the low (negative currently) long term rates, but, alas, that is not so. I have written about this on a number of occasions, including in my Sunday Times columns. But a reminder from BIS:

Or even at policy rates level (here), or per BIS:

I don't know about you, but any reversion to the mean will end the bond bubble like the property bust ended the REITs bubble - solidly and overnight. And when the IMF said 6% swing up on yields, they weren't kidding:

Ditto for term premium uplift on reversion:

So unless you are into 'This Time It'll Be Different, For Sure' argument, then brace yourselves for the ride - it is coming. May be not in 2013-2014, but one day it is...

The quality risk-free paper mountain has grown... just as all the ABS and RMBS and other BS... and we know even absent excel errors from R&R 2010 how that stuff ended...

30/5/2013: That fiscal adjustment race... where we are?

How much more adjustment needed for Ireland to reach fiscal debt stabilization? Ok, nice folks at Deutsche Bank Research have done some plots and:

Which is, of course IMF number of ca 5% of GDP, and it puts Ireland neatly ahead of all peripheral states. We are, afterall, in a better position... except... well, except of one snag: GDP is not something that matters much for Ireland. Instead - we are more like a GNP economy, by which metric the primary adjustment required for Ireland to reach debt/GDP stabilisation is more like... 6.25% of GNP which puts us right at Portugal's doorsteps. Now, consider that Ireland has started the crisis well ahead of all other peripheral states and went into the Troika programme well ahead of all peripheral states, save Greece. Which means that at least a year ahead of all peripherals, we are barely ahead of them in distance to target. Yep, you know - that race ain't over until it is over.

30/5/2013: More on Wellbeing v Income

Recently, I have posted on the issue of subjective wellbeing and measured incomes: here. This week, The Economist crunched through the OECD data on synthetic indices of well-being: here.

The chart from The Economist is telling:

Do note that the distance for Germany (gap) is pretty similar to that in the US and, given lower overall well-bing in Germany than the US, proportional gap is probably actually larger.

And the conclusion is: "for all the fancy metrics, the Better-Life Index does not look too different from classic GDP rankings."

Now, back to the top link above for more in-depth analysis...

30/5/2013: A reminder of the road to be travelled

The Chart of the Week from the zerohedge:

There is little new in the chart and it has been reproduced many times before, yet it still strikes the 'Wow!' cord for me. Now, back in 2010 (here) I argued that the Euro area will have to print ca EUR 3 trillion to get itself out of the pickle jar. The US - with a much lighter problem load than the Euro area - USD 2.3 trillion on the printing side alone, ex other measures, already, and climbing.

30/5/2013: Official Broader Unemployment in Ireland stands at 25%

The latest data for Q1 2013 from QNHS is out today with worrying sub-trends indicating that the labour markets are not showing any significant improvements in broader metrics of unemployment.

CSO defines 4 measures of broader unemployment:
PLS1 indicator is unemployed persons plus discouraged workers as a percentage of the Labour Force plus discouraged workers.
PLS2 indicator is unemployed persons plus Potential Additional Labour Force as a percentage of the Labour Force plus Potential Additional Labour Force
PLS3 indicator is unemployed persons plus Potential Additional Labour Force plus others who want a job, who are not available and not seeking for reasons other than being in education or training as a percentage of the Labour Force plus Potential Additional Labour Force plus others who want a job, who are not available and not seeking for reasons other than being in education or training.
PLS4 indicator is unemployed persons plus Potential Additional Labour Force plus others who want a job, who are not available and not seeking for reasons other than being in education or training plus part-time underemployed persons as a percentage of the Labour Force plus Potential Additional Labour Force plus others who want a job, who are not available and not seeking for reasons other than being in education or training.

Since all exclude training, we can add those on State programmes into PLS4 to arrive at PLS4+STP - the broadest measure of unemployment.

Here is a chart:

Year on year through Q1 2013:

  • Standard unemployment (PLS1) declined 1.4% from 16.0% in Q1 2012 to 14.6% in Q1 2013. This is good news, made even better by realising that Q1 2013 reading stood at the lowest level since Q1 2010 when it was 14.2%.
  • Adding potential additional labour force to the PLS1 we have PLS2 measure, which in Q1 2013 was 16.0%, down 1% o n Q1 2012 and marking the lowest reading since Q1 2010 when it was registering 15.1%.
  • PLS3 is the above unemployment plus others who want a job, not available & not seeking for reasons other than being in education or training. This measure stood at 18.0 in Q1 2013, down on 18.8% in Q1 2012 (-0.8% y/y) and bang-on identical to the levels in Q1 2011.
  • Last official measure reported by CSO, PLS4 combines PLS3 and those who are underemployed (in part-time employment, but are seeking full-time employment). PLS4 in Q1 2013 was 25.0% - identical to Q1 2012 and up on Q1 2011 when it stood at 23.7%. Thus, once underemployed are added into the equation, Irish unemployment stood still over the last 12 months. This is not great by any means.
  • Finally, I compute PLS4+ State Training Programmes participants by combining QNHS data with Live Register. In Q1 2013, PLS4+STP measure stood at 29.0%, up 0.7% on Q1 2012 and marking the highest historical point for any quarter on the record (previous record was recoded at 28.991% in Q3 2012, which compares against Q1 2013 level of 28.994%).

Chart 2 shows Q1 2013 measures relative to their historical peaks.

Overall labour force participation rate fell again, this time -0.44% y/y and labour force is now down 162,600 on peak.

Notice: the above numbers do not account for emigration and the above unemployment numbers do not account for those who are of labour force participation age, but are not seeking employment and are no longer registering as being a part of labour force. If gross emigration in 2008-2012 stood around 300,000, and assuming that all of it related to families, taking average participation rate at current 59.5% and applying average size of household to the above emigration numbers implies ca 90,000 emigration for those who otherwise could have been in the labour force. With this number factored in the above numbers change as follows:

  • PLS1 standard unemployment would rise from 312,075 to 401,325 or in percentage terms, from 14.6% to 18.0%
  • PLS2 standard unemployment, plus potential additional labour force numbers would rise from 342,000 to 431,250 or in percentage terms, from 16% to 19.4%
  • PLS3 = PLS2, plus others who want a job, not available & not seeking for reasons other than being in education or training would rise from 384,750 to 474,000 or in percentage terms, from 18% to 21.3%
  • PLS4 combines PLS3 and those who are underemployed (in part-time employment, but are seeking full-time employment) would rise from 534,375 (or 25.0%) to 623,625 (or 18.0%)
  • PLS4 + STP would rise from 619,744 (or 29.0%) to 708,994 (or 31.8%)
With some serious caution we can say that approximately over 700,000 people in this country are now either unemployed, underemployed, on State Training Programmes or have been forced to emigrate by the realities of this crisis. We can also say, with much more clarity, that - per official figures - broad unemployment and underemployment in this country is running at its highest level ever, or 29%. recorded.

30/5/2013: FTT: Up, Down, Down again: Climbing Political Hillocks in Europe

Looks like the EU is now climbing down another over-hyped policy hillock. After scrapping plans to ban / regulate olive oil in restaurants, the EU is now moving in the direction of drastically undercutting original plans for the Financial Transactions Tax (FTT).

I outlined on a number of occasions numerous reasons why FTT was a bad idea for the EU (see set of posts here: The latest changes in the EU seem to be related primarily to the rate of tax (see

However, also per article: "Rather than levying trade in stocks, bonds and some derivatives from 2014, it may now apply to shares only next year and to bonds up to two years later." Again, sadly, the new changes are way off, as argued here: .

The real problem is that there is no way to structure a reasonably efficient FTT. None at all. Any FTT proposal will strike either one or some of the outcomes below:

  1. Raise too much revenue, chocking off market efficiency and damaging liquidity
  2. Raise too little revenue, making no real differences in any direction
  3. Push high volume (liquidity-enhancing) and low margin (information-disclosing) transactions out of open markets platforms into dark pools and off-shore
  4. Incentivise even more debt over equity
At some point in time, we must realise that any defence of FTT is at this stage is nothing but political face-saving.

30/5/2013: Irish Competitiveness Improves in 2013... but

IMD released its World Competitiveness Rankings yesterday (see link here: and the results summary is:

Good news: Ireland's rank improved from 20th in 2012 to 17th in 2013 (we swapped places with Finland). Bad news: Ireland's ranking remains vastly below the 10th place back in 1997.

Here's the link to comparatives for Worst Ranking to Best Ranking by year:

And here's 5 years data for Ireland:

As always, methodology is a 'black box', largely and GDP-based, which means it most likely overstates the true extent of Ireland's competitiveness.

Tuesday, May 28, 2013

28/5/2013: Germany Might Have Caused the Euro Crisis... but...

CNBC today cites a piece of research ( that argued that "Germany's insistence on keeping wage growth in check has given the country an unfair competitive advantage vis-à-vis its euro zone peers and is preventing troubled countries from returning to growth, a new study argues."

This non-sensical argument cuts across any reasonable understanding of competitive advantage and the role of economic policy in driving this advantage. Germany undertaking structural reforms neither prevented other states from doing the same, nor imposed any costs (or reduced competitiveness) of other states. The authors of the report and the CNBC should go back to Economics 101 to brush up on their understanding of the competitive advantage concept.

In the nutshell, it is not Germany that caused the crisis - based on competitive advantage argument - but the peripheral states' lack of reforms to deliver their own competitiveness improvements.

However, the mere idea that Germany has 'caused' the crisis in the euro area still merits consideration. There are two strands of thought on this that are potentially valid:
1) Germany actively suppressed domestic demand and thus reduced aggregate demand within the euro area: while true to the point that German domestic demand was and remains too weak, this hardly implies any negative slipovers to the peripheral economies of the euro area, unless someone makes a compelling reason as to why German consumers should be buying vastly more Greek feta cheese or olive oil, and paying vastly more for their purchases; and
2) euro area construct itself induced asymmetric development within the common currency area: Germany, as the core driver of euro area creation is, thus, to be blamed for some failures of the construct.

The latter is a preferred explanation in my opinion and there is an interesting paper from the CEPR (published in March 2013: CEPR Discussion Paper No. 9404) titled "Political Credit Cycles: The Case of the Euro Zone" by Jesús Fernández-Villaverde Luis Garicano and Tano Santos that actually confirms my gut instinct.

The authors "study the mechanisms through which the adoption of the Euro delayed, rather than advanced, economic reforms in the Euro zone periphery and led to the deterioration of important institutions in these countries. We show that the abandonment of the reform process and the institutional deterioration, in turn, not only reduced their growth prospects but also fed back into financial conditions, prolonging the credit boom and delaying the response to the bubble when the speculative nature of the cycle was already evident. We analyze empirically the interrelation between the financial boom and the reform process in Greece, Spain, Ireland, and Portugal and, by way of contrast, in Germany, a country that did experience a reform process after the creation of the Euro."

Some more beef from the paper, as CEPR is password protected site:

Per authors, "Before monetary union took place with the fixing of parities on January 1, 1999, the conventional wisdom was that it would cause its least productive members -particularly Greece, Portugal, Spain, and Ireland1- to undertake structural reforms to modernize their economies and improve their institutions. [However], due to the impact of the global financial bubble on the Euro peripheral countries, the result was the opposite: reforms were abandoned and institutions deteriorated. Moreover, …the abandonment of reforms and the institutional deterioration prolonged the credit bubble, delayed the response to the burst, and reduced the growth prospects of these countries."

How so?

"In the past, the peripheral European countries had used devaluations to recover from adverse business cycle shocks, but without correcting the underlying imbalances of their economies. The Euro promised to impose a time-consistent monetary policy and force a sound fiscal policy. It would also induce social agents to change their inflation-prone ways. Finally, … it would trigger a thorough modernization of the economy."

Germany actually is an example of what the euro was supposed to deliver:

"Faced with a limited margin of maneuver allowed by the Maastricht Treaty and with a stagnant economy, Germany chose the path of structural reforms, giving a new lease on life to German exports. But this did not happen in the peripheral countries. Instead, the underlying institutional divergence between them and the core increased. The efforts to reform key institutions that burden long-run growth, such as rigid labor markets, monopolized product markets, failed educational systems, or hugely distortionary tax systems plagued by tax evasion, were abandoned and often reversed. Behind a shining facade laid unreformed economies.

"The common origins of the financial boom are well understood. The elimination of exchange rate risk, an accommodative monetary policy, and the worldwide easing in financial conditions resulted in a large drop in interest rates and a rush of financing into the peripheral countries, which had traditionally been deprived of capital. Furthermore, demographics in Ireland and Spain favored the start of a construction boom with some foundations in real changes in housing demand, the opposite of Germany, where demographics depressed housing demand. … the percentage of the population between 15 and 64 increased dramatically in Ireland and, to a lesser degree, in Spain between the mid 1970s and 2007. In France and Germany, the peak happened about two decades earlier. Since then, both countries have experienced a slow decay in this segment of the population. These demographic trends were accompanied by an increase in the employment to population ratio and, thus, resulted in strong rates of growth even in the absence of productivity gains."

The paper identifies "two channels through which the large inflows of capital into the peripheral economies led to a gradual end to and abandonment of reforms":

  1. The first channel "is the relaxation of constraints affecting all agents. It has long been observed in the political economy literature that for growth-enhancing reforms to take place, things must get “sufficiently bad” (see Sachs and Warner, 1995, and Rodrik, 1996). And, as the development literature has emphasized, foreign aid loosens these constraints by allowing those interest groups whose constraints are loosened to oppose reforms for longer. As explained in section 2, Vamvakidis (2007) also finds that this mechanism operates when debt grows, rather than aid."
  2. "The second mechanism is more novel. It affects the ability and willingness of principals to extract signals from the realized variables in a bubble, where everything suggests all is well. A sequence of good realizations of observed outcomes leads principals to increase their priors of the agents’ quality. When all banks are delivering great profits, all managers look competent; when all countries are delivering the public goods demanded by voters, all governments look efficient (this mechanism applies both to real estate bubbles, as in Ireland and Spain, and to sovereign debt bubbles, as in Portugal and Greece). This information problem has negative consequences for selection and incentives. Bad agents are not fired: incompetent managers keep their jobs and inefficient governments are reelected. The lack of selection has particularly negative consequences after the crisis hits. Moreover, incentives worsen and agents provide less effort."

Combining the two channels: "Both of these mechanisms, the relaxation of constraints and the signal extraction problem, led to a reversal of reforms and a deterioration in the quality of governance in these countries. Somewhat counterintuitively, this observation implies that being able to finance oneself at low (or negative) real interest rates may have negative long-run consequences for growth."

There is little new here:

  • "Other economists have already pointed out that the financial cycle reduces future growth, simply because of the debt overhang (Reinhart and Rogoff, 2009; Bernanke, Gertler, and Gilchrist, 1999)." [Note: the R&R 2010 controversy does little to dispel the core argument of financial cycle transmission of adverse debt effects, as I am arguing in my forthcoming Village magazine column - stay tuned for later link posting on this blog];
  • "Also, researchers working on resource booms have suggested mechanisms that delay growth that apply here by analogy (a financial bubble is, in a way, a form of a resource boom). Grand, ill-conceived government programs involve lasting commitments that lead to higher taxes in the long run."
  • "Also, the “Dutch disease” suffered most clearly by Ireland and Spain (with land playing the role of a natural resource here) spreads, whereby human and physical capital moves from the export-oriented sector toward real estate and the government sector. But in our view, the reform reversal and institutional deterioration suffered by these countries are likely to have the largest negative consequences for growth."
  • The idea also relates to Rajan (2011), "who links the real estate bubble in the U.S. with an attempt by politicians to shore up the fortunes of a dwindling middle class." 

The authors "emphasize, instead, that in Europe the real estate boom interacted with the political-economic coalition that blocked reforms, allowing large policy errors to remain uncorrected and institutions to deteriorate."

Thus, if Germany did 'cause' the crisis in the euro periphery, it is solely by not enforcing the discipline required within a common currency area - too little stick too much carrots from Berlin was the problem, not too little imports of peripheral products into the core.

28/5/2013: US Gen-Xers are Screwed... but Not as Much as the Irish Ones

Here is what the brain-dead Irish political and business 'elites' should read every time they talk about negative equity not being a big problem 'until you move house' & debt being sustainable 'until you can't repay loans'. The wealth destruction wrecked on Irish mid-generation families is so much more comprehensive than that for the US Generation-X households, and the debt levels loaded onto the shoulders of Irish households (private and public) are that much more extensive than those for the US Gen-Xers, and yet,

  • Irish politicians are incapable of comprehending the effects of wealth destruction and are solely obsessed with public finances; while
  • Irish business elites are mumbling left-right-and-centre about the need to 'free' people from their savings to 'get economy going again'.

Read this, morons:

28/5/2013: Russian GDP and GVA: Composition

Two interesting charts on composition of Russian GDP (and gross value added):

Chart above shows remarkably low share of Mining and Quarrying activities in GVA (11%). Even recognising that some of the manufacturing value added is transfered (via subsidies etc) from the extraction sector, still the chart above is puzzling. And it is especially puzzling given the chart below shows net exports (dominated heavily by extraction sectors outputs) running at 8.6% of the total economic output.

Note that comparatives in the last chart are a bit off due to normal seasonality differences (H1 vs FY), so here's a table showing H1 to H1 comparatives:

28/5/2013: EU Looks Into Bending Rules... Again...

Spiegel [] reports that the EU Commission, as a part of a planned shift in the policy focus from austerity to structural reforms, will consider altering accounting rules per classification of fiscal deficits. The idea is that member states will be allowed to exempting certain types of government spending from the deficit calculations.

How this will work? Ok, insolvent state, like, say Greece, can borrow (somewhere) EUR X billion to use as a backing for its 50% share in matching EU Structural funds, thus raising EUR 2X billion for investment. The EU will then allow Greek Government to classify EUR X billion borrowings as aquarium fish and not deficit nor debt.

(1) EU thinks it is a grand idea to hide even more debt and deficit under the proverbial rug of 'accounting rules' bent to suit EU; and
(2) EU thinks that 'structural funds' deployment will be sufficient to 'stimulate' euro area economies out of structural balance sheet recession.

I suggest they (a) read up on why honesty and transparency matter in fiscal accounting and (b) read up on what happened in Japan where a stimulus ca 100 times larger than 'structural funds' one was applied to no avail.

Then again, the EU might also change the rules on reading, so the inconvenient reality does never interfere with the dreamy Enronising…

28/5/2013: That Cracking Success of the Troika Programmes

Some 'stuff' is coming out of the EU nowdays to greet the silly season of summer newsflow slowdown:

The loose-mouthed Eurogroup head Jeroen Dijsselbloem [] is striking again. This time on Portugal's 'progress' on the road to recovery:
""If more time is necessary because of the economic setback, that more time might be considered" as long as the country is being "compliant" with the program, Mr. Dijsselbloem told reporters after meeting with Portuguese Finance Minister Vitor Gaspar."

Of course, Dijsselbloem is simply doing what is inevitable - acknowledging that the EU/Troika programme for Portugal is as realistic as it was for

  • Ireland (which undertook two extensions, one restructuring, one expropriation round vis-a-vis pensions funds, and two rates cuts to-date on its 'well-performing programme' and is looking for more), 
  • Greece (which received three extensions, three restructuring, PSI - aka outright default, deficit and privatizations targets adjustments),
  • Spain (which so far got only banks bailouts, but has already secured two rounds of deficit targets extensions),
  • Cyprus (which hasn't even received full 'support' package yet, and already needs more funds).

It is worth noting that Portugal itself has already seen debt restructuring by the Troika in two rounds of loans extensions and two rounds of interest rates cuts.

So in the world of EU logic: if loans restructuring => success.

Please, keep in mind loans restricting ⊥ <=> success (for those of you who tend to argue that my above argument can mean that absence of EU restructuring implies success).

Oh, and while on the case of Ireland, Herr Schaeuble has stepped in to put a boot into Minister Noonan's dream of ESM swallowing loads of Irish banks' legacy debts []:"European countries should be under no illusion that they can shift responsibility for problems in their national banking sectors to the bloc's rescue mechanism". Now, recall that Minister Noonan is having high hopes riding on ESM taking stakes in Irish banks to ease burden on taxpayers. See point 1 links here:

So it looks like another round of loans restructurings is in works, just to underpin the immense success of the Troika programmes in Euro area 'periphery'.

Sunday, May 26, 2013

26/5/2013: FTT v Sovereigns' Addiction to Debt reports ( that 

"The European Central Bank has offered to help the EU redesign its financial transactions tax to avoid any ‘negative impact’ on market stability, highlighting official fears about the implementation of the levy."

So far so good, as FTT indeed is likely to cut liquidity in the markets, reducing markets efficiency, and potentially increasing volatility, rather thane educing it.

Of course, the original idea the EU came up involved levying tax on trading in bonds, equities and derivatives. So one would expect the following prioritisation from the ECB concerned with markets impacts:
1) Not to distinguish between bonds and equities in tax application and rates, as the two instruments are de facto long-only instruments in either corporate (real) economy, banks (financial economy) and sovereigns (for bonds - which somewhat qualifies as a real economy as well).
2) Levy tax primarily on derivative instruments (although here, tax can be avoided much easier)
3) Recognise that in the restricted competition environment and with legacy subsidies from the crisis period still in place for incumbent financial institutions, any FTT will be at least in part passed onto retail investors and savers, and in more extreme cases - e.g. duopoly model of banking in Ireland - onto all retail users of banking services)
4) Real economy - incomes, investment, entrepreneurship, unemployment, etc - will be most impacted by the FTT levied on real assets - equities and some (not all) bonds and this effect will be stronger the stronger is the banking and investment banking sector concentration in the economy.

Alas, as is clear from the article, the ECB is not concerned with (3) and (4) whatsoever, and it is unconcerned with (1) either. It also seems to be aware of (2) pitfalls. Aside from that, ECB is concerned with the perennial task faced by all European Government - the obsession of raising as much tax revenue as possible while incentivising more debt pumped into sovereign bond markets.

Per "The ECB believes markets should efficiently “transmit” changes in interest rates to the real economy." You might think that this means transmitting higher (lower) ECB rates into higher (lower) (a) Government bond yields and (b) higher/lower cost of private credit. Err… you would be wrong.

Per there are rumours that "…the ECB would prefer to have a limited UK-style stamp duty on equities". What can possibly go wrong, then?

ECB concern is clearly to grease the wheels of sovereign bond markets. The fact that FTT will reduce markets liquidity in real instruments & will cost retail investors in the end - well, that is hardly ECB's concern at all. ECB like the EU Governments is only worried about own coffers & give no attention to the economy.  

Equity markets volatility (FTT original raison d'être is to reduce volatility) had NOTHING to do with the current crises. The ECB focus on 'UK-styled stamp duty on equities', if confirmed, thus exposes FTT as a pure scam to raise more tax revenues, not a measure to deal with 'markets instability'. 

As quotes one of the market participants: "bond markets were a “phenomenally attractive” way of channelling savings into investment." Alas, it is not - corporate bonds are debt. Shoving more debt while disincentivising equity investment is not a great idea for long term sustainable funding.

In Europe, lending money to Governments, including to fund dodgy unfunded pensions and white elephant projects, is tax-wise deemed to be more laudable than to invest in equity of real enterprises. By corollary, lending to companies is also deemed to be more preferential than funding them via equity. One of the outcomes of this decades-long preferential treatment of debt is the current crisis: over-bloated and under-funded public spending coupled with too much private debt (including banking debt) against too little equity (the latter imbalance drove the bailouts of banks in euro area periphery).

With this in mind, talking about 'Robin Hood' taxes on Financial Services in EU is equivalent to believing in Santa's Magic raindeer as a viable alternative for public transport.

26/5/2013: Corporate Tax Haven Ireland Weekly Links Page

"Taxes are not up to Google," Schmidt reiterated. "If the international tax regime changes we will follow. But virtually all American companies have structures like this; this is how the international tax regime works. The fact of the matter is if we pay more tax in one area, we pay less somewhere else."

Thus spoke Eric Schmidt of Google ( and guess what: he is right. Google is not breaking the law. It is the law that allows for countries, like Ireland, to follow beggar thy neighbour economic policies and strategies.

The issue is not the low tax rate, but the fact that various loopholes allow companies operating - allegedly in Ireland - to channel revenues from other countries into Ireland. This is not about exports from Ireland, and it is not about low tax regime in Ireland. When an MNC books revenue earned somewhere else to Dublin, MNC is not break a law. Instead, Ireland is facilitating transfer of funds that relate to value added activity elsewhere to its own economy. This, in the nutshell, summarises the entire nature of Irish economic development strategy: take value added from somewhere else and appropriate it as Irish.

And in the spirit of usual weekly posts (see thread start on Irish Corporate Tax Haven here: ): in this week, it is virtually impossible to list all Tax Haven Ireland links from around the world in a post, but here are some:

I shall stop there, for now...

26/05/2013: Ireland Hard at Work on Troika & Tax Haven Fronts

Several recent points raised in relation to the work being done by Minister Noonan are worth a quick consideration.

Point 1: Ireland, allegedly, is the best-performing 'Troika programme' in the 'periphery' (forget the semiotics of a country being a programme and 1/3 of the EZ being a 'periphery'). We are fulfilling all programme requirements and are even ahead of schedule on some (namely - issuance of bonds we don't have to issue). If so, then can Minister Noonan explain:

Point 2: Ireland, allegedly, is not reliant in its adjustment on beggaring its neighbours via asymmetric tax regime, when it comes to corporate tax rates. Per Minister Noonan (see: "The ability of multinational companies to lower their global taxes using international structures reflected the global context in which all countries operated." 

But then, "Mr Noonan said ... “some multinational corporations, with the assistance of legal practitioners and tax advisors, have exploited the differences in these systems to their own advantage”." So, wait a second here: it is down to 'some' MNCs - with help of legal & tax advisors - to 'exploit' tax system to their advantage. "The Minister said tax management was an international business. “Very clever accountants and very clever lawyers are involved in it and they basically try to get into an unspecified space between the tax laws of two jurisdictions." 

Ok, we get the point - bad advisors and bad companies are exploiting good Irish regime or global regime. Were it not for this 'exploitation, one can assume things would have been different, right? Wrong: “Operating in that space, they find ways of avoiding the tax that otherwise would not have been payable.”

Come again? Apparently, some multinationals just love hiring expensive advisors to avoid tax that would not have been payable even absent these advisors. You see, per Minister Noonan, Ireland's reputational problems of being branded a tax haven stem from utter stupidity of some MNCs that are so dim, they hire useless but very clever advisors to devise complicated and clever schemes to avoid that which doesn't exist. 

Seems like Minister Noonan has been exposed to too much logic lessons as of late.

26/5/2013: 'North' out, 'South' in?

The theme of 'North' (advanced economies and primarily EZ) banks deleveraging (exiting) out of the future centres if global growth - the 'South' - has been consistent one in my presentations on the future of global financial services. Here's an example:

It is good to see other researchers also spotting the trend:

However, my concern is distinct from that of the above authors. I do not think that EZ banks' deleveraging out of the middle income and emerging markets will have a huge detrimental impact, as - in contrast to earlier episodes - we now have emerging markets and BRICS banks more than capable of absorbing capacity created by the EZ banks exits.

Saturday, May 25, 2013

25/5/2013: Saturday Reading Links

Some interesting reading links:

FT Weekend edition has a full supplement on Venice Biennale 2013 - no link, but here's the official page:

A fascinating article from The Economist on the movement toward technology displacing 'knowledge' workers next

This cuts across my own view that we are seeing rising complementarity between technology and human capital, as opposed to substitutability thesis advanced in the article. The Economist view is thought provoking, for sure.

At last, there is a proof of the theorem that postulates that gaps between prime numbers are bounded: and more on same

An excellent piece on the changes big data is bringing to economics - not from the point of view of new studies directions, but from the point of view of verifiability:
There added 'bonus' points in the article discussing overall relationship between the research recognition, rewards and background work.

And a brilliant example of just how atavistic and primitive is the understanding of the web-based and mobile-platformed services in the top political echelons in Europe:
Apparently, dinosaurs in French political elites have trouble comprehending just how revolutionary to culture and its creators (artists, thinkers, analysts, developers etc) Apple 'i'- and Google platforms are. It is highly likely that iTunes, for example, are doing more to distribution of Francophone music across the world than the entire Ministry of 'French' Culture. Then again, the entire tax debate in Europe is never about culture or arts or anything tangible, but about finding ever more elaborate and bizarre paths for milking the economy to sustain ever expanding state.

While on topic of matters European, a fascinating study on genetic persistency in European populations covered in
Given it comes from the US (original home to Apple and Google), may be the French can pay a special levy to the US for bothering to include their subjects in global research? Afterall, shall they fail to pay up, ignoring France should not be that hard - it works in geopolitics and economics, after all...

Sunday, May 19, 2013

19/5/2013: Namawinelake closure

I do not know the reasons behind the Namawinelake decision to stop operations, but the announcement that the blog will cease publishing new material starting from tomorrow was a shocker for me.

I can attest from my own & others' experiences that those of us who run anything independent of the officialdom mouthpieces (regardless of political / ideological orientation or even the lack of one) have near-zero support (moral or citations- and links-wise) from our internal (not to be confused with international) media and all businesses.

Those in our society, including the traditional media, who only benefit from the free analysis and the climate of openness and debate the independent analysts help to create prefer to endlessly endorse and support, including via advertising revenues, cross-links, citations and readership, those who offer no alternative but consensus.

In contrast, independent analysts in Ireland operate in the environment of constant, usually indirect, 'soft', pressure from the part of the Irish society which is fully aligned with the official elite. This 'aligned' sub-section of Ireland often has direct and indirect support (including financial) from major business, political and ideological organisations in this country, and even from European organisations. Because of this, Irish new independent media remains relatively small, under-resourced and often marginalised.

The rarity of honest, no-spin analysis in this country is exemplified by the rarity of excellence regularly provided by a handful of independent blogs, like Namawinelake. To say that Namawinelake will be missed is a massive understatement for me, personally.

Any healthy society requires healthy dissent both in the traditional and new media, funded and resourced by the society that values debate, honesty, independence and discourse. Any healthy economy requires a healthy society. It is a benefit to businesses, their customers, their investors, as well as in the interest of the entire nation to nurture and support such dissent. I can only hope that Namawinelake closure had nothing to do with our collective and repeated, long running failures to recognise the immense personal, social and economic values of the independent new media.

Friday, May 17, 2013

17/5/2013: Ireland v Iceland 2013

Ireland vs Iceland macroeconomic comparatives in 15 simple charts that DofF wouldn't want you to see...

All data is either IMF direct-sourced or based on IMF data. Click on the charts to see more detailed comments imbedded in them.

Three charts on GDP comparatives:


External trade and balance:

Unemployment and Employment:

Government Finances:

17/5/2013: Good News Feel Chart That Is Real

Nice chart via Markit:

Lat time I checked, (yesterday) Irish CDS were trading at implied cumulative probability of default of 12.25% - wider than Iceland's 12.02% or South Africa's 10.58%.

The mountain we climbed down from is impressive by all possible standards, but it is not remarkable, nor does if get much past the hardly 'untroubled' days of 2009-2010...

17/5/2013: Welcome to Surreal Irish National Accounts

A significant, but only because it is now 'official', confirmation that Ireland's GDP and GNP figures are vastly over-exaggerated by the distorting presence of some MNCs in Ireland has finally arrived to the pages of FT:

As one of those who said this time and again, starting with my work in the Open Republic Institute in 2001 and through today, I am grateful to Jamie Smyth for pointing this out.

The ESRI, which - being tasked directly with doing research on Irish economy and being paid for doing such research - has slept through the years of boom as the Government wasted resources in chasing imaginary investment/GDP and spending/GDP targets. After years of the Social partnership bulls**t, we only now, driven into desperation by necessity of the crisis, are beginning to face the reality that we are poorer than our GDP and GNP levels actually imply.

I take heart that all those who never once before voiced their concern about the distorting nature of our MNCs-dependent economic variables are now quoted in the FT voicing that concern. Since the beginning of the crisis I put forward consistently a three-points position countering Ireland's official sustainability analysis when it comes the economy being able to sustain current levels of Government debt:

  1. Despite all the focus in Irish and international media and official circles, it is the total economic debt mountain (household, government and non-financial corporate debts) that matters in determining sustainability of our economic development;
  2. Irish economy's capacity to carry the above debt burden is determined not by GDP, but by something closer to an average of GNP and Total Domestic Demand which, in 2012, stood at 81.54 and 75.21% of our official GDP.
  3. Irish exports growth is now becoming decoupled from the real economy as it is primarily driven by services exports which are dominated by a handful of tax arbitrage plays with little real connection to value added generated in this country.
The ESRI note cited in FT - detailed and well-research as it is - only scratches the surface of tax arbitrage effects on our official statistics. 

Thursday, May 16, 2013

16/5/2013: There are jobs & then there are...

Off the start - there is nothing wrong with debt collection as business when it is properly delivered and regulated / supervised. And there is nothing wrong with debt collection agency growing its workforce.

But, then again, there is nothing particularly laudable about this either.

Unless, that is, you are an Irish Government Minister who cares none but for a headline grabbing opportunity.

Capita - some background on the company is given here: and - is to double its workforce in Ireland by bringing in 800 new jobs. There is no information on the split of Capita's activities in the ROI, but one can venture a guess that booming business of debt collections here will take up the bulk of the new jobs 'created'.

Irony has it - Capita's new HQs in Dublin will be at the heart of the pride of Irish economy: the Barrow Street cluster that houses top firms in law and ICT services, but also has the dubious distinction of housing Ireland's 'bad bank' Nama. Nothing like calling the 'knowledge economy neighbourhood meets debt collectors' a 'vote of confidence in the Irish economy'.

Have we lost all bearings and compases?

I, for one, can't wait for the next congratulatory flyer from FG to my home - it will undoubtedly explain how the misery of thousands of Irish homeowners facing repossessions benefits my local economy of Ringsend-Irishtown with blessed new jobs.

16/5/2013: On That Impossible Monetary Policy Dilemma

At last, the IMF has published something beefy on the extraordinary (or so-called 'unconventional') monetary policy instruments unrolled by the ECB, BOJ, BOE and the Fed since the start of the crisis in the context of the question I been asking for some time now: What happens when these measures are unwound?

See and


Box 2 in the main paper is worth a special consideration as it covers Potential Costs of Exit to Central Banks. Italics are mine.

Per IMF: "Losses to central bank balance sheets upon exit are likely to stem from a maturity mismatch between assets and liabilities. In normal circumstances, higher interest rates—and thus lower bond prices—would lead to an immediate valuation loss to the central bank. These losses, though, would be fully recouped if assets were held to maturity. [In other words, normally, when CBs exit QE operations, they sell the Government bonds accumulated during the QE. This leads to a rise in supply of Government bonds in the market, raising yields and lowering prices of these bonds, with CBs taking a 'loss' on lower prices basis. In normal cases, CBs tend to accumulate shorter-term Government bonds in greater numbers, so sales and thus price decreases would normally be associated with the front end of maturity profile - meaning with shorter-dated bonds. Lastly, in normal cases of QE, some of the shorter-dated bonds would have matured by the time the CBs begin dumping them in the market, naturally reducing some of the supply glut on exits.]

But current times are not normal. "Two things have changed with the current policy environment: (i) balance sheets have grown enormously, and (ii) assets purchased are much longer-dated on average and will likely not roll-off central bank balance sheets before exit begins."

This means that in current environment, as contrasted by normal unwinding of the QE operations. "…valuation losses will be amplified and become realized losses if central banks sell assets in an attempt to permanently diminish excess reserves. But central banks will not be able to shrink their balance sheets overnight. In the interim, similar losses would arise from paying higher interest rates on reserves (and other liquidity absorbing instruments) than earning on assets held (mostly fixed coupon payments). This would not have been the case in normal times, when there was no need to sell significant amounts of longer-dated bonds and when most central bank liabilities were non-interest bearing (currency in circulation)."

The IMF notes that "the ECB is less exposed to losses from higher interest rates as its assets— primarily loans to banks rather than bond purchases—are of relatively short maturity and yields of its loans to banks are indexed on the policy rate; the ECB is thus not included in the estimates of losses that follow." [Note: this does not mean that the ECB unwinding of extraordinary measures will be painless, but that the current IMF paper is not covering these. In many ways, ECB will face an even bigger problem: withdrawing liquidity supply to the banks that are sick (if not permanently, at least for a long period of time) will risk destabilising the financial system. This cost to ECB will likely be compounded by the fact that unwinding loans to banks will require banks to claw liquidity out of the existent assets in the environment where there is already a drastic shortage of credit supply to the real economy. Lastly, the ECB will also face indirect costs of unwinding its measures that will work through the mechanism similar to the above because European banks used much of ECB's emergency liquidity supply to buy Government bonds. Thus unlike say the BOE, ECB unwinding will lead to banks, not the ECB, selling some of the Government bonds and this will have an adverse impact on the Sovereign yields, despite the fact that the IMF does not estimate such effect in the present paper.]

The chart below "shows the net present value (NPV) estimate of losses in three different scenarios." Here's how to read that chart:

  • "Losses are estimated given today’s balance sheet (no expansion) and the balance sheet that would result from expected purchases to end 2013 (end 2014 for the BOJ, accounting for QQME). 
  • "Losses are estimated while assuming everything else remains unchanged (notably absent capital gains or income from asset holdings)… [so that] no stance is taken as to the precise path and timing of exit. ...These losses—which may be significant even if spread over several years—would impact fiscal balances through reduced profit transfers to government. 
  • "Scenario 1 foresees a limited parallel shift in the yield curve by 100 bps from today’s levels. 
  • "Scenario 2, a more likely case corresponding to a stronger growth scenario requiring a steady normalization of rates, suggests a flatter yield curve, 400 bps higher at the short end and 225 bps at the long. The scenario is similar to the Fed’s tightening from November 1993 to February 1995, which saw one year rates increase by around 400bps. Losses in this case would amount to between 2 percent and 4.3 percent of GDP,  depending on the central bank. 
  • "Scenario 3 is a tail risk scenario, in which policy has to react to a loss of confidence in the currency or in the central bank’s commitment to price stability, or to a severe commodity price shock with second round effects. The short and long ends of the yield curve increase by 600 bps and 375 bps respectively, and losses rise to between 2 percent and 7.5 percent of GDP. 
  • "Scenarios 2 and 3 foresee somewhat smaller hikes for the BOJ, given the persistence of the ZLB.

And now on transmission of the shocks: "The appropriate sequence of policy actions in an eventual exit is relatively clear.

  • "A tightening cycle would begin with some forward guidance provided by the central bank on the timing and pace of interest rate hikes. [At which point bond markets will also start repricing forward Government paper, leading to bond markets prices drops and mounting paper losses on the assets side of CBs balance sheets]
  • "It would then be followed by higher short-term interest rates, guided over a first (likely lengthy) period by central bank floor rates (which can be hiked at any time, independently of the level of reserves) until excess reserves are substantially removed. [So shorter rates will rise first, implying that shorter-term interbank funding costs will also rise, leading to a rise in lone rates disproportionately for banks reliant on short interbank loans - guess where will Irish banks be by then if the 'reforms' we have for them in mind succeed?
  • "Term open market operations (“reverse repos” or other liquidity absorbing instruments) would be used to drain excess reserves initially; outright asset sales would likely be more difficult in the early part of the transition, until the price of longer-term assets had adjusted. Higher reserve requirements (remunerated or unremunerated) could also be employed." [All of which mean that whatever credit supply to private sector would have been before the unwinding starts, it will become even more constrained and costlier to obtain once the unwinding begins.]
  • For a kicker to that last comment: "The transmission of policy, though, is likely to somewhat bumpy in the tightening cycle associated with exit. Reduced competition for funding in the presence of substantial excess reserve balances tends to weaken the transmission mechanism. Though higher rates paid on reserves and other liquidity absorbing instruments should generally increase other short-term market rates (for example, unsecured interbank rates, repo rates, commercial paper rates), there may be some slippage, with market rates lagging. This could occur because of market segmentation, with cash rich lenders not able to benefit from the central bank’s official deposit rate, or lack of arbitrage in a hardly operating money market flush with liquidity. Also, there may be limits as to how much liquidity the central bank can absorb at reasonable rates, since banks would face capital charges and leverage ratio constraints against repo lending." [But none of these effects - generally acting to reduce immediate pressure of CB unwinding of QE measures - apply to the Irish banks and will unlikely apply to the ECB case in general precisely because the banks own balance sheets will be directly impacted by the ECB unwinding.]
  • "There is also a risk that even if policy rates are raised gradually, longer-term yields could increase sharply. While central banks should be able to manage expectations of the pace of bond sales and rise in future short-term rates—at least for the coming 2 to 3 years—through enhanced forward guidance and more solid communication channels, they have less control over the term premium component of long-term rates (the return required to bear interest rate risk) and over longer-term expectations. These could jump because leveraged investors could “run for the door” in the hope of locking in profits, because of expected reverse portfolio rebalancing effects from bond sales, uncertainty over inflation prospects or because of fiscal policy, financial stability or other macro risks emerging at the time of exit. To the extent a rise in long-term rates triggers cross-border flows, exchange rate volatility is bound to increase, further complicating policy decisions." [All of which means two things: (a) any and all institutions holding 'sticky' (e.g. mandated) positions in G7 bonds will be hammered by speculative and book-profit exits (guess what these institutions are? right: pension funds and insurance companies and banks who 'hold to maturity' G7-linked risky bonds - e.g peripheral euro area bonds), and (b) long-term interest rates will rise and can rise in a 'jump fashion' - abruptly and significantly (and guess what determines the cost of mortgages and existent not-fixed rate loans?).]

And so we do  it forget the ECB plight, here's what the technical note had to say about Frankfurt's dilemma:  "The ECB faces relatively little direct interest rate risk, as the bulk of its loan assets are linked to its short-term policy rate. However, it may be difficult for the ECB to shrink its balance sheet, as those commercial banks currently borrowing from the ECB may not easily be able to repay loans on maturity. The ECB could use other instruments to drain surplus liquidity, but could then face some loss of net income as the yield on liquidity-draining open market operations (OMOs) could exceed the rate earned on lending, assuming a positively-sloped yield curve, if draining operations were of a longer maturity." [I would evoke the 'No Sh*t, Sherlock" clause here: who could have thought Euro area's commercial banks "may not easily be able to repay loans on maturity". I mean they are beaming with health and are full of good loans they can call in to cover an ECB unwind call… right?]

Obviously, not the IMF as it does cover the 'geographic' divergence in unwinding risks: "But the ECB potentially faces credit risk on its lending to the banking system for financial stability purposes. In a “benign” scenario, where monetary tightening is a response to higher inflation resulting from economic growth, non-performing loans should fall and bank balance sheets should improve. But even then, some areas of the eurozone may lag in economic recovery. Banks in such areas could come under further pressure in a rising rate environment: weak banks may not be able to pass on to weak customers the rising costs of financing their balance sheets." [No prize for guessing which 'areas' the IMF has in mind for being whacked the hardest with ECB unwinding measures.]

So would you like to take the centre-case scenario at 1/2 Fed impact measure for ECB costs and apply to Ireland's case? Ok - we are guessing here, but it will be close to:

  1. Euro area-wide impact of -1.0-1.5% GDP shaved off with most impact absorbed by the peripheral states; and
  2. Yields rises of ca 200-220bps on longer term paper, which will automatically translate into massive losses on banks balancesheets (and all balancesheets for institutions holding Government bonds). 
  3. The impact of (2) will be more severe for peripheral countries via 2 channels: normal premium channel on peripheral bonds compared to Bunds and via margins hikes on loans by the banks to compensate for losses sustained on bonds.
  4. Net result? Try mortgages rates rising over time by, say 300bps? or 350bps? You say 'extreme'? Not really - per crisis historical ECB repo rate averages at 3.10% which is 260bps higher than current repo rate... 
Ooopsy... as some would say. Have a nice day paying that 30 year mortgage on negative equity home in Co Meath (or Dublin 4 for that matter).