29/6/19: Why Moody’s is wrong to keep Cyprus on junk status

Euromoney on Cypriot economy: "Why Moody’s is wrong to keep Cyprus on junk status" https://www.euromoney.com/article/b1g125jl1wvf0v/why-moodys-is-wrong-to-keep-cyprus-on-junk-status with a comment from myself.

20/9/15: Euromoney: "Cyprus almost as safe as Portugal"

"The Cyprus risk score has steadily improved this year in Euromoney’s crowdsourcing survey, rebounding in Q2, and is seemingly on course for further improvement in Q3 as economists and other risk experts make their latest quarterly assessments. Chalking up almost 53.1 points from a maximum 100 allotted, Cyprus has managed to climb one place in the rankings to 56th out of 186 countries surveyed, leapfrogging India and closing in on Portugal into a more comfortable tier-three position:"

Read more here.

Here are my notes on the topic (to accompany the quote in the article):

In my view, Cypriot economy recovery after 3 years of deep recession and banking sector devastation is still vulnerable to growth reversals and deeply unbalanced in terms of sources for growth. Firstly, the rate of growth is hardly consistent with the momentum required to deliver a meaningful recovery. Cypriot GDP rose 0.2% y/y in 1Q 2015 and 1.2% y/y in 2Q 2015. This comes on foot of 14 consecutive quarters of GDP decline. Quarterly growth rate in 2Q came below flash estimate and expectations.

Positive growth was broadly based, but key investment-focused sector of construction posted negative growth. Deflationary pressures remained in the Cypriot economy with HICP posting -1.9% in August y/y on top of -2.4% in July. Over January-August 2015, HICP stood at -1.6% y/y.

Despite some fragile optimism, the Cypriot Government has been slow to introduce meaningful structural reforms outside the financial sector. The economy remains one of the least competitive (institutionally-speaking) in the euro area, ranked 64th in the World Bank Doing Business 2015 report - a worsening of its position of 62nd in 2014 survey. This compares poorly to the already severely under-performing Greece ranked in 61st place.

Thus, in my view, any significant improvements in the country scores relate to the policy-level post-crisis normalisation, rather than to a measurable improvement in macroeconomic fundamentals.

1/4/15: H-W Sinn "Europe’s Easy-Money Endgame"

A very interesting op-ed by Professor Hans-Werner Sinn of German Ifo Institute for Project Syndicate: http://www.project-syndicate.org/commentary/euro-demise-quantitative-easing-by-hans-werner-sinn-2015-03

The problem outlined by Professor Sinn is non-trivial.

"...for countries like Greece, Portugal, or Spain, regaining competitiveness would require them to lower the prices of their own products relative to the rest of the eurozone by about 30%, compared to the beginning of the crisis. Italy probably needs to reduce its relative prices by 10-15%. But Portugal and Italy have so far failed to deliver any such “real depreciation,” while relative prices in Greece and Spain have fallen by only 8% and 6%, respectively".

As Professor Sinn notes, there are four possible solutions:

1. "Europe could become a transfer union, with the north giving more and more credit to the south and later waiving it." 
2. "The south can deflate." 
3. "The north can inflate." 
4. "Countries that are no longer competitive can exit Europe’s monetary union and depreciate their new currency."

So here's the problem, correctly identified by Professor Sinn: "Each path is associated with serious complications. The first creates a permanent dependence on transfers, which, by sustaining relative prices, prevents the economy from regaining competitiveness. The second path drives many debtors in crisis countries into bankruptcy. The third expropriates the creditor countries of the north. And the fourth may cause contagion effects via capital markets, possibly forcing policymakers to introduce capital controls".

Now, note: Ireland has opted for the second path. Any surprise we are driving people into bankruptcy in tens of thousands (once current legal queue is taken into account), along with multiple businesses?

But back to Prof Sinn's analysis. Remember the ECB QE? Ok, says Prof Sinn, suppose it delivers on target inflation of just under 2%. What does it mean for internal devaluations in the 'peripheral' Europe?

"If, say, southern Europe kept its inflation rate at 0% and France inflated at a rate of 1%, Germany would have to inflate by a good 4%, and the rest of the eurozone at 2% annually, to reach a eurozone average of slightly less than 2%. This pattern would have to continue for about ten years to bring the eurozone back into balance. At that point, Germany’s price level would be about 50% higher than it is today."

The problem, thus, is an unresolvable dilemma, since with that sort of arithmetic, we are in a tough bind:

• Either Germany runs mild inflation, while the 'periphery' runs outright deflation, allowing - over a painfully long period of time (decade or more) to devalue the imbalances, or
• Eurozone pursues Mr Draghi's objective of 'just under' 2% inflation across the entire Euro area at the expense of Germany (and the rest of the already shrunken 'core').

Do note, I have argued before that deflation in the 'periphery' is not a bad thing, as it allows for the interest rates to remain low (servicing cost of household and corporate debts is lower) and deleveraging of the households and companies to be less painful, while sustaining some domestic demand through increased purchasing power of incomes. So I agree with Professor Sinn's criticism of the ECB QE programme. 

The problem is that this means, as Professor Sinn rightly suggests, continued suppression of demand (the 'austerity' bit).

The choice faced by Europe are ugly. All of them. And there are no guarantees for any of them to actually work. And the cause of this problem is singular: creation of a political currency union. For anyone who says that Greece, Italy, Portugal, Cyprus, Ireland and Spain have caused their own problems, the replies are both simple and complex: 

• The simple one: absent the euro, their problems would have been by now solved by a combination of the old-fashioned defaults and devaluations. 
• The complex one: absent monetary transfers (lower interest rates and ample bank liquidity flowing cross-borders) with the EMU from the late 1990s through 2007, the imbalances generated in the 'peripheral' economies would never have been this large. Which means that the simple reply above would have been even more easy to apply.

6/2/15: Cyprus AWOL on Troika 'Reforms'

Yes, at some point, Troika won't be able to handle all the bad news flying its way... for now, however, a new alarm at the barbwire fence of European Reformism: Cyprus is heading off the Troika Reservation:

Whatever might have made Cyprus rush for the AWOL, I'll let you discover, but judging by the foreclosure and insolvency framework reforms approved by the Troika in Ireland, one can't be too much surprised if any country would have much of faith in Troika expectations on that front. Then again, Cypriots would probably remember how EU regulators first encouraged accumulation of Greek sovereign debt in Cypriot banks, then haircut that debt, causing instant insolvency crisis across the Cypriot banks. Why would anyone listen to the same people giving advice on 'structural' reforms next, puzzles me.

27/12/2014: Geography of the Euro Area Debt Flows

The debate about who was rescued in the euro area 'peripheral' economies banking crisis will be raging on for years to come. One interesting paper by Hale, Galina and Obstfeld, Maurice, titled "The Euro and the Geography of International Debt Flows" (NBER Working Paper No. w20033, see http://www.nber.org/papers/w20033.pdf) puts some facts behind the arguments.

Per authors, "greater financial integration between core and peripheral EMU members had an effect on both sets of countries. Lower interest rates allowed peripheral countries to run bigger deficits, which inflated their economies by allowing credit booms. Core EMU countries took on extra foreign leverage to expose themselves to the peripherals. The result has been asset-price bubbles and collapses in some of the peripheral countries, area-wide banking crisis, and sovereign debt problems."

The causes explained, the paper maps out "the geography of international debt flows using multiple data sources and provide evidence that after the euro’s introduction, Core EMU countries increased their borrowing from outside of EMU and their lending to the EMU periphery."

So braodly-speaking, core euro area economies funded excesses. Hence, in any post-crisis rescue, they were the beneficiaries of transfers from the 'peripheral' economies and taxpayers.

Some details.

According to Hale and Obstfeld, "one mechanism generating the big current account deficits of the European periphery could be summarized as follows: after EMU (and even in the immediately preceding years), compression of bond spreads in the euro area periphery encouraged excessive borrowing by these countries, domestic lending booms, and asset price inflation. We further argue that a substantial portion of the financial capital flowing into the European periphery was intermediated by the countries in the center (core) of the euro area, inflating both sides of the balance sheet of the large financial institutions in the euro area core."

So, intuitively, lenders/funders of the asset bubbles should be bearing some liability. And it would have been the case were the funds transmitted via equity or direct asset purchases (investment from the Core to the 'periphery' in form of buying shares or actual real estate assets). Alas they were not. "These gross positions largely took the form of debt instruments, often issued and held by banks. Thus, EMU contributed not only to the big net deficits of the peripheral countries, but to inflated gross foreign debt liability and asset positions for nonperipheral countries such as Belgium, France, Germany, and the Netherlands – countries that all experienced systemic banking crises after 2007."

Debt, as we know it now, has precedence over equity when it comes to taking a hit in a crisis, and debt is treated on par with deposits. Hence, "the tendency for systemically important banks to increase leverage in line with balance sheet size …implied a substantial increase in financial fragility for these countries’ financial sectors."

In the short run, prior to the crisis, leveraging up from the Core into the 'periphery' had a stimulative effect on asset bubbles. "Four main factors contributed to the suppression of bond yields in the European periphery after the introduction of the euro.
- First, the risk of investing in the European periphery declined with the advent of the euro due to investor assumptions (perhaps erroneous) about future political risks, including the possibility of official bailouts.
- Second, transaction costs declined and currency risk disappeared for euro area investors investing in the periphery countries.
- Third, the ECB’s policy of applying an identical collateral haircut to all euro area sovereigns, notwithstanding their varied credit ratings, encouraged additional demand for periphery sovereign debt by euro area financial institutions, which, moreover, were able to apply zero risk weights to
these assets for computing regulatory capital. The EU’s recent fourth Capital Requirements
Directive continues to allow zero risk weights for euro area sovereign debts, even though the borrowing countries cannot print currency to pay their debts.
- Fourth, financial regulations in the EU were harmonized and the euro infrastructure implied a more efficient payment system though its TARGET settlement mechanism."

Crucially, all four factors combined to reinforce each other giving "…core euro area financial institutions a perceived comparative advantage in terms of lending to the periphery, and this would also likely have affected financial flows from outside to both regions of the euro area.

In line with the above, the authors find:
- "...strong evidence of the increase in the financial flows, both through debt markets and
through bank lending, from core EMU countries to the EMU periphery."
- "… that financial flows from financial centers to core EMU countries increased, but predominantly due to increased bank lending and not portfolio debt flows.
- "In addition, …evidence from the syndicated loan market that is broadly consistent with the core EMU lenders having a comparative advantage in lending to the GIIPS."

Net conclusion: "The concentration of peripheral risks on core EMU lenders’ balance sheets helped to set the stage for the diabolical loop between banks and sovereigns that has been at the heart of the euro crisis."

Authors quote other sources on similar: “German banks could get money at the lower rates in the euro zone and invest it for a decade in higher yielding assets: for much of the 2000s, those were not only American toxic assets but the sovereign bonds of Greece, Ireland, Portugal, Spain, and Italy. For ten years this German version of the carry trade brought substantial profits to the German banks — on the order of hundreds of billions of euros ... The German advantage, relative to all other countries in terms of cost of funding, has developed into an exorbitant privilege. French banks exploited a similar advantage, given their major role as financial intermediaries between AAA-rated countries and higher yielding debtors in the euro area.” (From Carlo Bastasin, Saving Europe: How National Politics Nearly Destroyed the Euro, Washington, D.C.: Brookings, 2012, page 10.)

Charts below summarise flows from Core markets to 'peripheral' markets

CPIS is stock of portfolio debt claims from CPIS data in real USD:

BISC is stock of total international bank claims from consolidated BIS data in real USD:

BISL Flow is valuation-adjusted flows of total cross-border bank claims from locational BIS data in real USD:

And conclusions: "Not only did peripheral countries borrow more after EMU; in addition, financial institutions in the core of the euro area expanded their balance sheets to facilitate peripheral deficits, thereby increasing their own fragility. This pattern set the stage for the diabolical feedback loop between banks and sovereigns that has been such a powerful driver of the euro area's recent crisis."

So next time someone says that 'periphery' is to be blamed for the causes of the crisis, send them here. for in finance, like in dating, it takes two to tango…

26/12/2014: Advanced Economies: Public Debt Explosion 2008-2014

Some interesting insight into the legacy of the Great Recession that we are carrying over into 2015. From the start of 2008 through 2014:

• Average increase in gross debt of all advanced economies was 27.2 percentage points of GDP, with a range from a decrease of 21 percentage points for Norway and an increase of 88.5 percentage points for Ireland. Thus, the average annualised rate of increase in government debt over the period was around 3.47 percentage points of GDP with a range of -2.76 percentage points annualised decline for Norway and a 9.48 percentage points annualised increase in Ireland.
• Average change in the gross government debt of the group of countries where debt declined over the crisis was -12.0 percentage points of GDP. There were only 3 countries in this group.
• Average increase in gross government debt of the group of countries with benign levels of increase (levels of increase consistent roughly with offsetting GDP contraction over the crisis period) was 4.8 percentage points of GDP. There were only 5 countries in this group and only two of these were in Europe, with none (at the time of the crisis onset) being members of the euro area.
• Average increase in gross government debt within the group of countries where debt rises were moderately in excess of contraction in the economy was 16.4 percentage points of GDP.
• Average increase in gross government debt within the group of countries with debt increases significantly in excess of economic contraction was 26.6 percent of GDP.
• Average increase in the government debt within the group of countries with severe debt overhang was 60.4 percentage points of GDP, with a range of increases in this group between 41.6% for the U.S. at the lower end and 88.5% of GDP for Ireland at a higher end.

Chart above summarises these facts and also highlights the extent to which Ireland's government debt increases were out of line with experience in all other countries, including Greece and all other 'peripheral' economies.

The average rise in gross government debt across all peripheral economies 2008-2014 was 56.5 percentage points of GDP (excluding Ireland), which is more than 1/3 lower than that for Ireland. Our closest competitor to the dubious title of worst performing sovereign in terms of debt accumulation is Greece, which experienced a debt/GDP ratio increase almost 1/4 lower than Ireland.

And in case you wonder, our Government's net debt position is not much better:

16/8/2014: Three Charts of Euro Area's Abysmal Growth Performance

Few charts to summarise the continued problems with growth in euro area and the 'peripheral' states:

First, consider changes in real GDP on pre-crisis peak:

Next, the weakest link in the euro area: Italy. This is really woeful - since hitting absolute lows, Italian economy continued to decline, steadily and with little sign of improvement.

The above also shows the miserable state of the euro area as a whole.

Another chart, to show changes on crisis-period absolute lows:

Note: the first 2 charts reference index to 2005=100, the last one references index to Q4 2006=100.

10/8/2014: Can EU Rely on Large Primary Surpluses to Solve its Debt Problem?

Another paper relating to debt corrections/deflations, this time covering the euro area case. "A Surplus of Ambition: Can Europe Rely on Large Primary Surpluses to Solve its Debt Problem?" (NBER Working Paper No. w20316) by Barry Eichengreen and Ugo Panizza tackle the hope that current account (external balances) surpluses can rescue Europe from debt overhangs.

Note: I covered a recent study published by NBER on the effectiveness of inflation in deflating public debts here: http://trueeconomics.blogspot.it/2014/08/1082014-inflating-away-public-debt-not.html.

Eichengreen and Panizza set out their case by pointing to the expectations and forecasts underpinning the thesis that current account surpluses can be persistent and large enough to deflate Europe's debts. "IMF forecasts and the EU’s Fiscal Compact foresee Europe’s heavily indebted countries running primary budget surpluses of as much as 5 percent of GDP for as long as 10 years in order to maintain debt sustainability and bring their debt/GDP ratios down to the Compact’s 60 percent target." More specifically: "The IMF, in its Fiscal Monitor (2013), sketches a scenario in which the obligations of heavily indebted European sovereigns first stabilize and then fall to the 60 percent level targeted by the EU’s Fiscal Compact by 2030. It makes assumptions regarding interest rates, growth rates and related variables and computes the cyclically adjusted primary budget surplus (the surplus exclusive of interest payments) consistent with this scenario. The heavier the debt, the higher the interest rate and the slower the growth rate, the larger is the requisite surplus. The average primary surplus in the decade 2020-2030 is calculated as

• 5.6 percent for Ireland, 
• 6.6 percent for Italy, 
• 5.9 percent for Portugal, 
• 4.0 percent for Spain, and 
• (wait for it…) 7.2 percent for Greece."

It is worth noting that Current Account Surpluses strategy for dealing with public debt overhang in Ireland has been aggressively promoted by the likes of the Bruegel Institute.

These are ridiculous levels of target current account surpluses. And Eichengreen and Panizza go all empirical on showing why.

"There are  both political and economic reasons for questioning whether they are plausible. As any resident of California can tell you, when tax revenues rise, legislators and their  constituents apply pressure to spend them." No need to go to California, just look at what the Irish Government is about to start doing in Budget 2015: buying up blocks of votes by fattening up public wages and spending. Ditto in Greece: "In 2014 Greece, when years of deficits and fiscal austerity, enjoyed its first primary surpluses; the government came under pressure to disburse a “social dividend” of €525 million to 500,000 low-income households ... Budgeting, as is well known, creates a common pool problem, and the larger the  surplus, the deeper and more tempting is the pool. Only countries with strong political and budgetary institutions may be able to mitigate this problem (de Haan, Jong-A-Pin and Mierau 2013)."

More significantly, Eichengreen and Panizza show that "primary surpluses this large and persistent are rare. In an extensive sample of high- and middle-income countries there are just 3 (non-overlapping) episodes where countries ran primary surpluses of at least 5 per cent of GDP for 10 years." These countries are: Singapore (clearly not a comparable case to Euro area countries), Ireland in the 1990s and New Zealand in the 1990s as well.

"Analyzing a less restrictive definition of persistent surplus episodes (primary surpluses averaging at least 3 percent of GDP for 5 years), we find that surplus episodes are more likely when growth is strong, when the current account of the balance of payments is in surplus (savings rates are high), when the debt-to-GDP ratio is high (heightening the urgency of fiscal adjustment), and when the governing party controls all houses of parliament or congress (its bargaining position is strong). Left wing governments, strikingly, are more likely to run large, persistent primary surpluses. In advanced countries, proportional representation electoral systems that give rise to encompassing coalitions are associated with surplus episodes. The point estimates do not provide much encouragement for the view that a country like Italy will be able to run a primary budget surplus as large and persistent as officially projected."

Good luck spotting such governance institutions in the euro area 'periphery' nowadays. "Researchers at the Kiel Institute (2014) conclude that “assessment of historical developments in numerous countries leads to the conclusion that it is extremely difficult for a country to prevent its debt from increasing when the necessary primary surplus ratio reaches a critical level of more than 5 percent.”"

Eichengreen and Panizza take a sample of 54 emerging and advanced economies over the period 1974-2013. They show that "primary surpluses as large as 5 percent of GDP for as long as a decade are rare; there are just 3 such non-overlapping episodes  in the sample. These cases are special; they are economically and politically idiosyncratic in the sense that their incidence is not explicable by the usual economic and political correlates. Close examination of the three cases suggests that their experience does not scale."

As mentioned above, one case is Ireland, starting from 1991. "Ireland’s experience in the 1990s is widely pointed to by observers who insist  that Eurozone countries can escape their debt dilemma by running large, persistent primary surpluses. Ireland’s move to large primary surpluses was taken in response to an incipient debt crisis: after a period of deficits as high as 8 per cent of GDP, general government debt as a share of GDP reached 110 per cent in 1987. A new government then slashed public spending by 7 per cent of GDP, abolishing some long-standing government agencies, and offered a one-time tax amnesty to delinquents. The result was faster economic growth that then led to self-reinforcing favorable debt dynamics, as revenue growth accelerated and the debt-to-GDP ratio declined even more rapidly with the accelerating growth of its denominator. This is a classic case pointed to by those who believe in the existence of expansionary fiscal consolidations (Giavazzi and Pagano 1990). But it is important, equally, to emphasize that Ireland’s success in running large primary surpluses was supported by special circumstances. The country was able to devalue its currency – an option that is not available to individual Eurozone countries – enabling it sustain growth in the face of large public-spending cuts by crowding in exports. As a small economy, Ireland was in a favorable position to negotiate a national pact (known as the Program for National Recovery) that created confidence that the burden of fiscal austerity would be widely and fairly shared, a perception that helped those surpluses to be sustained. (Indeed, it is striking that every exception considered in this section is a small open economy.) Global growth was strong in the decade of the
1990s (the role of this facilitating condition is emphasized by Hagemann 2013). Ireland, like Belgium, was under special pressure to reduce its debt-to-GDP ratio in order to meet the Maastricht criteria and qualify for monetary union in 1999. Finally, the country’s multinational-friendly tax regime encouraged foreign corporations to book their profits in Ireland, which augmented revenues."

The point of this is that "Whether other Eurozone countries – and, indeed, Ireland itself – will be able to pursue a similar strategy in the future is dubious. Thus, while Irish experience has some general lessons for other countries, it also points to special circumstances that are likely to prevent its experience from being generalized."

Another country was New Zealand, starting with 1994. "New Zealand experienced chronic instability in the first half of the 1980s; the budget deficit was 9 percent of GDP in 1984, while the debt ratio was high and rising. Somewhat in the manner of Singapore, the country’s small size and highly open economy heightened the perceived urgency of correcting the resulting problems. New Zealand therefore adopted far-reaching and, in some sense, unprecedented institutional reforms. At the aggregate level, the Fiscal Responsibility Act of 1994 limited the scope for off-budget spending and creative accounting. It required the government to provide Parliament with a statement of its long-term fiscal objectives, a forecast of budget outcomes, and a statement of fiscal intentions explaining whether its budget forecasts were consistent with its budget objectives. It required prompt release of aggregate financial statements and regular auditing, using internationally accepted accounting practices. At the level of individual departments, the government set up a management framework that imposed strong separation between the role of ministers (political appointees who specified departmental objectives) and departmental CEOs (civil servants with leeway to choose tactics appropriate for delivering outputs). This separation was sustained by separating governmental departments into narrowly focused policy ministries and service-delivery agencies, and by adopting procedures that emphasized transparency, employing private-sector financial reporting and accounting rules, and by imposing accountability on technocratic decision makers (Mulgan 2004). As a result of these initiatives, New Zealand was able to cut public spending by more than 7 per cent of GDP. Revenues were augmented by privatization receipts, as political opposition to privatization of public services was successfully overcome. The cost of delivering remaining public services was limited by comprehensive deregulation
that subjected public providers to private competition. The upshot was more than a decade of 4+% primary surpluses, allowing the country to halve its debt ratio from 71 per cent of GDP in 1995 to 30 per cent in 2010."

Agin, problem is, New Zealand-style reforms might not be applicable to euro area countries. Even with this, "it is worth observing that it took full ten years from the implementation of the first reforms, in 1984, to the emergence of 4+% budget surpluses in New Zealand a decade later."


Key conclusion of the study is that "On balance, this analysis does not leave us optimistic that Europe’s crisis countries will be able to run primary budget surpluses as large and persistent as officially projected." Which leaves us with the menu of options that is highly unpleasant. If current account surpluses approach to debt-deflation fails, and if inflation is not a solution (as noted here: http://trueeconomics.blogspot.it/2014/08/1082014-inflating-away-public-debt-not.html) then we are left with the old favourites: debt forgiveness (not likely within the euro area), foreign aid (impossible within the euro area on any appreciable scale), or debt restructuring (already done several times and more forthcoming - just watch Irish Government 'early repayment' of IMF loans).

19/7/2014: Global Innovation Index 2014: Ireland vs 'Periphery'

In the previous post I gave detailed breakdown of Ireland's performance in Global Innovation Index 2014. I used small open economies and Switzerland (the world's highest ranked economy) as a reference group.

Here, primarily for the reason of convention, are the comparatives of Ireland's performance relative to the Euro area 'peripheral' states:

Clearly, Ireland is a much stronger performer in Innovation than all other 'peripheral' states. This is neither surprising nor unexpected. Crucially, the gap is wider today than in 2007-2008 and the gap is rather persistent over time. Average ex-Ireland 'peripheral' state rank was 34st in 2014 against Ireland's 11th, this is a very significant gap. This gap increased from 16-19 points on average for 2007-2010 period to 32 points in 2012 and 23 points in 2014.

Furthermore, it appears that even if we are to abstract away from the metrics very heavily influenced by the tax optimising MNCs, Ireland (under such a metric closer to 20th-23rd position in the World rankings) would still post a stronger performance than any other 'peripheral' state (best - Spain at 27th).

20/6/2014: Household Disposable Income: Great Recession 2007-2011

Excellently spotted by @stephenkinsella - a chart from The Economist blog mapping changes in disposable incomes across a set of advanced economies over 2007-2011 period:

Link to the post: http://www.economist.com/blogs/graphicdetail/2014/06/daily-chart-13?fsrc=rss

As I mentioned on Twitter, good news "Ireland is not Greece"... kind of...

23/4/2014: Some scary reading from the Eurostat...

Eurostat published full comparatives on key fiscal performance indicators across the EU and euro area for 2013. Here are three summary tables comparing euro 'periphery' states against each other and the EU18. You can click on images to enlarge:

First data summary:

Second: Ireland's share of the mess:

Third: Ireland's position within the 'periphery':

And key takeaways are:

1. In 2013, after years of austerity and pain, Irish Government deficit (7.2% of GDP) was the second worst in the euro 'periphery' group.
2. By relative comparative to EA18 (33% and 50% over EA18 levels), Ireland ranks worse than Italy, Cyprus and Portugal, and Spain (we have more 'red'/'green' cells).
3. In cumulative terms, 2010-2013 years were brutal to Ireland: we posted worst cumulated Government Deficits over this period and 2nd worst increases in Government debt.

Note: data is taken from http://epp.eurostat.ec.europa.eu/cache/ITY_PUBLIC/2-23042014-AP/EN/2-23042014-AP-EN.PDF

6/4/2014: IMF forecasts of unemployment; 'peripheral' countries

Note to my previously posted Sunday Times column from March 23, 2014 and to my Sunday Times column from March 30, 2014 (still to be posted here, so stay tuned).

Here is a chart summarising 'troika' programmes forecasts and revisions of unemployment:

18/2/2014: Wither Irish manufacturing? Not so fast! Sunday Times, February 2

This is an unedited version of my Sunday Times  column from February 2, 2014


The news flow was mixed in recent days when it comes to covering Irish economy.

After a massive boost of consumer confidence and a maelstrom of media spin extolling the expected rebound in Christmas season sales, December retail sector statistics came in as a disappointment. Over the entire Q4 2013, core retail sales (excluding motors) were up just 1.1 percent year on year in terms of volume and down 0.5 percent in value. Profit margins in services sectors have shrunk once again in the third quarter and with them, non-financial services sectors activity also slumped in the five months through November 2013.

One bright spot, however, was the return to growth in industrial production. Based on 5 months data through November, in the second half of 2013 industrial output was up 1.2 percent year on year in Traditional sectors and up 3.3 percent in Modern sectors.


This latter bit of news highlights the potential for the sector to play a more active role in delivering long-term source of growth in Irish economy.

Over the second half of 2013, using data through November, Irish manufacturing activity rose 3 percent in volume and 0.1 percent in turnover terms. The improvement in output was largely driven by the MNCs-dominated modern sectors. However, it was also supported by positive performance in domestic sectors, such as food, basic and fabricated metals, and capital and core consumer goods. All in, H2 2013 marked a positive break in the previously negative trend across a number of manufacturing sectors. And this change was even more substantial when one takes out downward pressures exerted on the 2011-2013 figures by the pharmaceuticals, where patents cliff continues to cut into output and revenues of major MNCs operating from Ireland.

Adding to good news, capital goods sectors growth signaled the restart in domestic and international investment cycle. And this confirmed the earlier data on capital acquisitions in the industry.

The latest data is now starting to feed through to official forecasts. This week, the Central Bank upgraded 2014 and 2015 outlook for Irish economy. Specifically, the Central Bank is now projecting investment growth of 8.9 percent in 2014 against 0.1% estimated growth in 2013. Crucially, investment in machinery and equipment, having declined 10 percent in 2013 is now forecast to rise 7 percent in 2014.


The news of the quiet out-of-media-sight stabilisation in the Irish manufacturing is welcome because our exports and economy at large are still heavily dependent on industrial and manufacturing sectors activity.  This news is also positive because manufacturing sectors are responsible for high quality jobs creation and hold a significant potential for Ireland in developing a long-term sustainable economic growth model in the future.  In 2013, weekly earnings in industry were the third highest of all private sectors in Ireland and carried a premium of 33 percent on average private sector earnings.

Beyond the above reasons, there are two basic arguments as to why the latest manufacturing trends are encouraging in the context of sustainable economic development.

The first one is a push-factor, driving Ireland in the direction of the new manufacturing.

Worldwide, we are witnessing a new trend in manufacturing. In the commoditised manufacturing geared toward mass-market supply, global supply chains continue to drive down margins and costs, necessitating ever-increasing degree of automation and labour cost reductions. This trend covers a wide range of goods, such as generic consumer goods and intermediate goods production, ranging from textiles and clothing, to consumer electronics, and basic materials industries. Here, robots are increasingly displacing workers. For example, the McKinsey Global Institute study published this month projects that by 2025 up to 25 percent of the tasks performed by industrial workers in developed countries and up to 15 percent in developing countries will be at a risk of replacement by automated systems.

Meanwhile, highly specialist, customised manufacturing, where the businesses processes are dominated by user-unique design and/or proximity to customers, are seeing development costs and time-to-build lags becoming the main points of competition between producers. Actual production in these sectors is based on high precision and skills flexibility and these drivers are pushing for on-shoring of these sectors to the economies with requisite skills and talent infrastructure. The examples of such manufacturing sub-sectors are also numerous, spanning customised precision equipment manufacturing, professional equipment design and production, medical devices, customised medical equipment, individualised or specialist medicines, technology-intensive and complex machinery, but also high value-added consumer goods. Ireland has some limited experience in this area, with companies such as Mincon and Mainstay Medical, Outsource Technical Concepts and others. And we are witnessing growth in design-rich consumer goods areas, such as homewares, personal accessories and higher value-added foods.

I covered these trends in my recent presentation at the TEDxDublin in September 2013 and over the last three months, major consultancies, such as McKinsey and the Institute for Business Value, IBM have written on the topic.


The second factor is the pull-factor of the opportunities presented by new manufacturing.

The crucial point for Ireland is that this trend offers smaller economies a comparative advantage over larger manufacturing centres, as long as the smaller economies can create, attract, retain and enable core human capital.

The competitive advantage of skills-intensive manufacturing is anchored to traditions of high quality specialist production in the country, and to the innovative and entrepreneurial capacity of the economies. Here, examples of Switzerland, Northern Italy, Germany, Holland, Sweden, Denmark and Finland offer a significant promise for countries like Ireland.

In fact, our immediate neighbours industrial policy platform is now firmly focused on enhancing the connection between industrial design, consumer innovation and manufacturing. This is well-anchored in the UK’s Design Council initiatives and in the Government programmes aiming to systemically increase the role of industrial design in the UK manufacturing. Most recently, Government report “Future of manufacturing: a new era of opportunity and challenge for the UK”, published in October 2013 stresses the importance of merging skills, design and technological innovation in driving the future industrial policy in the UK.


To deliver on this potential, our industrial policy needs to be enhanced further to stimulate growth in entrepreneurship in manufacturing. We also need policies that more closely align product, process and design innovation and R&D, especially within indigenous and traditional sectors.

Skills training in manufacturing should be boosted via a targeted apprenticeship programme that develops key expertise and provides support for training both in Ireland and abroad. Our supports for development of manufacturing clusters in traditional industries need to become more pro-active, providing shared sales and marketing platforms for smaller producers.

We can start by consolidating various promotional agencies under the cover of Enterprise Ireland in order to reduce trade and investment facilitation bureaucracy, while increasing resources available on the ground in the foreign markets. Aligning Enterprise Ireland’s pay and promotion systems with tangible longer-term outcomes for indigenous entrepreneurs and exporters should be considered. The overall thrust of reforms should be on reducing duplication and complexity of the system.

Recent report by the Entrepreneurship Forum, published earlier this month outlined a number of measures aimed at helping the unemployed and underemployed to transition into entrepreneurship. These include reducing the eligibility period for the Back to Work Enterprise allowances and creating an entrepreneurship internship programmes. Beyond this, focused incubation and co-working centres targeting manufacturing entrepreneurs can help develop new capabilities and generate new startups. Aligning these programmes with vertical market access accelerators set up in key cities can help enhancing growth potential of indigenous high value-added entrepreneurship. The above programmes can also stimulate inflow of key talent into the country from abroad, including entrepreneurial talent. One of the core benefits of high value-added manufacturing is that the jobs created and capital investment made in this sector are much better anchored in the economy than comparable outlays undertaken in services sectors.

To simultaneously enhance incentives to undertake entrepreneurial activities and to invest time, effort, talent and funding in such activities, employee stock ownership should be encouraged. Over the recent years, this column has repeatedly argued for a reform of tax codes applying to employee share ownership in startups and SMEs. The Entrepreneurship Forum report echoed these ideas.

Driving growth across the design-rich and R&D-intensive manufacturing will also require managerial talent. Looking across the sectors, Irish management skills are the strongest in the externally trading traditional industries, such as food, beverages, and building and construction services. Here, the pressures of global competition, coupled with the acute need to build exports bases have driven management to adopt lean and effective M&A and organic growth models. Management track record of companies such as CRH, Glanbia, Kerry Group and Ryanair presents the best practices in their sectors that can and should be brought to enterprises in much earlier stages of development.


The encouraging signals from Irish manufacturing suggest that we can put our indigenous economy on an evolutionary path toward ever-increasing reliance on radical technological innovation, design and creativity. This path is closely aligned with the need to develop new models of entrepreneurship that combine disruptive technologies with cultural, managerial and skills-rich talent. The key to success here will be in developing greater agility and flexibility of all systems: from crowdsourcing networks for new product development, to training and education, to data analytics for gauging new demand and to new market access platforms.

Box-out:

This Monday, in its monthly report, Germany's Bundesbank stated that in future crises, countries requiring international assistance should first impose a one-off capital tax on net assets of its own citizens, before any international assistance can be extended to them. In the view of the Bundesbank, a capital tax reflects the principle that "tax payers are responsible for their government's obligations before solidarity of other states is required". These latest musings about the need for a capital or wealth tax come on foot of October 2013 IMF report that estimated that reducing euro area's debt levels to 2007 levels will require a 10 percent tax on net wealth of the euro area residents. Neither the IMF, nor Bundesbank identify explicitly specific assets to which the tax should apply. Alas, past experience with Cyprus suggests that such a tax will most likely take the form of a levy on household deposits. Logically, all other assets held by the households are already either heavily taxed, or illiquid. Property taxes are in place in majority of countries and it is hard to imagine every household being able to come up with cash to cover 10 percent levy on their assets values without being forced to sell their homes. Equity and investment funds are de facto illiquid, as a large scale sell-off of these assets in a distressed economy will trigger a crisis hardly any better than the one the levy will be trying to cure. Business equity is notoriously illiquid. Which leaves deposits as the only readily available cash sitting on captive banks balancesheets. In short, Bundesbank and the IMF might be talking about 'capital levies' and solidarity, but all they really mean are deposits bail-ins and loading pain onto taxpayers. That's one way to underwrite inherently faulty and unstable common currency zone.

16/12/2013: Troika Consultancies... via EUObserver

A very interesting article on the EUObserver.com today (disclosure: I contributed a comment) on the issue of professional advisory services relating to the banks and fiscal crises: "Troika consultancies: A multi-million euro business beyond scrutiny"

9/8/2013: Political Waffle Passing for Learning?

Mr Schulz - the President of the European Parliament - has penned an op-ed that is available here: http://www.linkedin.com/today/post/article/20130809113308-239623471-did-we-really-learn-the-lessons-of-the-crisis?trk=tod-home-art-large_0


My response is as follows:

This article is a trite rehashing of cliches, some of which have served as pre-conditions to the crisis, by a man who is presiding over the institution complicit in creation of the crisis in the first place, as well as in exacerbating the adverse impact of the crisis on the member states of the EU. 

Let me just deal with the first set of Mr Schulz's core hypotheses: 

"Firstly, the invisible hand of the market does not work and needs a robust regulatory framework." 

Given that the Euro area crisis arose from the disastrous mis-management of the monetary union, the statement is absurd and ideologically dogmatic. Markets require proper regulation and are legally-based structures. Mr Schulz seems to fail to understand this and is confusing anarchy with the 'invisible hand' of the markets. European markets have failed, in part, due to wrong regulation (not the lack of regulation) and in part due to the lack of enforcement of existent regulation. Mr Schulz seems to have no idea as to these facts. Institutions that commonly failed to enforce existent regulations and treaties include, among others, the European Commission (allegedly reporting to the EU Parliament, that Mr Schulz presides over) and the European Parliament itself.

The markets failures were, in the case of the 'peripheral' euro states, exacerbated by the inactions and actions of the European authorities, including those by the European Parliament.

"Secondly, politics should gain primacy over markets and labour over capital." 

Primacy of politics over markets (or rather economics) in Europe is exactly what led us into this crisis. 

Political dominance over economic policies design is behind the creation of the monetary union and the expansion of the union to include countries that are not ready for a single currency regime. It is also responsible for the fraudulent ways in which some member states have acceded to the monetary union (e.g. Italy and Greece, where misreporting and financial instrumentation of deficits and debt were rampant and Mr Schulz's institution was amongst those that were aware of these facts, were required to be aware of these facts, and yet were inactive in the face of these facts). Politicization of the markets for Government bonds, for foreign exchange, for credit, for equity, for risk pricing, etc has been responsible for inducing many deep failures in the markets in Europe. For one, this politicization has led to an unsustainable debt accumulation in the private sector and transfer of private debts onto the shoulders of taxpayers. 

I might agree with Mr Schulz on the point of 'labour' supremacy over 'capital'. Alas these are poorly defined concepts in Mr Schulz's case. Labour can mean labour unions (organised labour movement) or labour as human capital (skills, entrepreneurship, creativity, etc) and everything in-between. All of these definitions will contain internal contradictions in incentives, preferences for policies and responses to policies to each other and to the definitions of capital that can be deployed. Mr Schulz fails to define the categories he references, which suggests that his assertions are once again nothing more than populist sloganeering. Mr Schulz seems to have no idea that capital can be physical, technological, financial, intellectual or human. That 'labour' can be complementary to physical and technological capital in which case primacy of labour over technology can be destructive to the objectives of both. Mr Schulz appears to be inhabiting a simplistic universe more corresponding to that inhabited by Marx and Engels in the late 1840s than the one that exists today.

"Thirdly, and most importantly, the economy and politics should return to the values of solidarity, social justice, decency and respect." 

This is both historically incorrect and, frankly put, too rich coming from someone heading a powerful EU institution. 

It is inherently incorrect because a return implies existence of something in the past. European societies never possessed any real sense of 'solidarity' or 'social justice' but historically (and to-date) relied on preservation of the status quo of distribution of wealth within the set confines of the European elites and independent of merit. Thus, Europe never pursued meritocratic systems of wealth and income allocations. And subsequently never developed such systems. What Mr Schulz might mean (and we are reduced here to guessing) is the return to the status quo of interest groups-driven 'social' allocations of resources - a system commonly known as tax (someone else) and spend (on me or my friends). 

It is a rich statement coming from Mr Schulz because he presides over the EU institution that was at least complicit in forcing member states to transfer private sector losses onto taxpayers and failed to structure properly core institutional frameworks of the EU. Whether this complicity involved errors of omission or commission is irrelevant. The outcomes of these errors are Greece today, Cyprus today, Ireland today, and Italy, Spain, Portugal and so on. From this point of view, the perspective of returning to values by the political and economic institutions of Europe would first and foremost involve (require) restructuring of the European institutions from the top. Mr Schulz's job would be on the line in any such process of renewal and return to accountability. 

That, alas, is the nature of leadership: you fail and you are gone. Writing op-eds full of well-meaning waffle is, frankly, not an excuse for the failures of both action and inaction.

18/7/2013: One table, four entries, wealth of irony...

One cannot contain a sense of deep irony when looking at today's mid-day CDS markets snapshot from CMA:

In one table we have:

• Euro area CDS spread from Finland (implied cumulative 5 year probability of default of 2.02% - which is asymptotically zero), Greece (implied CPD of 50.85% after two previous defaults), and Cyprus (implied CPD of 65.39% after previous default). 
• Egypt (implied CPD of 41.22% after a coup d'etat) 

That's, as Mario Draghi put it on June 25th, "reflect[s] on the importance of a stable euro and a strong Europe" or perhaps, as he put it "the euro area is a more stable and resilient place to invest in than it was a year ago" or may be "I am confident that the project for Europe will continue to evolve towards renewed economic strength and social cohesion based on mutual trust, both within and across national borders, and above all stability". Take your pick... (link)

17/6/2013: Deutsche, AIB and Cypriot Banks: 3 links

Back in 2011, I wrote about the extreme leverage ratios in some of Europe's top banks: http://trueeconomics.blogspot.ie/2011/09/13092011-german-and-french-banks.html. Deutsche Bank was at the top of the list. Now, 19 moths later it seems others are catching up: http://www.reuters.com/article/2013/06/14/financial-regulation-deutsche-idUSL2N0EO1D220130614.

And while on topic of banks, let's check this one for the record: http://www.independent.ie/business/irish/aib-will-not-repay-35bn-cash-it-owes-to-the-state-29337833.html. I wrote about this in Sunday Times last weekend, in passim, but this is more comprehensive article.

Another link of worth on the topic of banks is Cyprus banks fiasco history from ZeroHedge: http://www.zerohedge.com/news/2013-06-17/guest-post-real-story-cyprus-debt-crisis-part-1

16/6/2013: Euromoney Country Risk Scores Update

Some updates from Euromoney Country Risk (ECR) reports. First a summary of latest credit risk assessment scores moves:

And on foot of Russia's score move, a related story on Russian government delaying issuance of much expected sovereign bond. Via Euroweek:


"Russia is likely to wait until autumn before bringing its mandated sovereign bond, said analysts. Forcing through a $7bn bond in one deal might also be unwise, but demand is deep and the sovereign could spread its funding plan out across separate transactions, said bankers... Investors have already priced in a large sovereign issue and Russia would not struggle to drum up demand, he added. But the problem is price."Everything is 100bp wider than a month ago and so the sovereign will hope things calm down and allow them to issue closer to the historic tights they were looking at just a few weeks ago," said another syndicate banker."

15/5/2013: Straight from 1984... The Department of Stabilisation...

Fir the fun of reading between the lines, follow my italics:

"IMF Executive Board Approves €1 Billion Arrangement Under Extended Fund Facility for Cyprus

The Executive Board of the International Monetary Fund (IMF) today approved a three-year SDR 891 million (about €1 billion, or US$1.33 billion; 563 percent of the country’s quota) arrangement under the Extended Fund Facility  (EFF) for Cyprus in support of the authorities’ economic adjustment program. [Given that Greece has more than double time to 'repay' its 'facilities' and Cyprus is likely to face an economic collapse worse than that experienced in Greece, good luck betting on that 3-year window not staying open less than a decade] The approval allows for the immediate disbursement of SDR 74.25 million (about €86 million, or US$110.7 million).

The EFF arrangement is part of a combined financing package with the European Stability Mechanism (ESM) amounting to €10 billion. It is intended to stabilize the country’s financial system [completely destabilised by the Troika arranging 'stabilisation' of the Greek economy], achieve fiscal sustainability [by pushing the GDP down by close to 13% in 2013 and likely another 15% by the end of the 'stabilisation' period], and support the recovery of economic activity [devastated by the Greek 'rescue' by the Troika and botched 'rescue' of Cyprus] to preserve the welfare of the population [who now need welfare as their jobs and savings are being vaporised by the economic 'stabilisation' measures of the Troika]."

13/5/2013: Cyprus CDS

It doesn't look like anyone (save for Olli Rehn) is betting on Cyprus' 'vast gas wealth' to be anywhere near its current account anytime within the next 5 years...