Economics 14/06/2009: Housekeeping & DofF

Per housekeeping: there is a new post on my Long Run Economics blog with a full copy of DofF's latest ludicrously used-car-salesman-like presentation on Irish economy. Check it out here.


As a companion to the presentation, DofF also released a 3-page document: Ireland: Key messages Department of Finance May 2009. Below are my comments on some of the DofF views on Irish economy.

“Domestic pressures in the Irish economy, in particular the ongoing contraction
in the construction sector and its effect on the wider economy, are compounding the deterioration in international economic conditions.”

Conveniently, DofF fails to list any other challenges, suggesting that all would be fine in Ireland Inc were it not for building sites slowdown. No banking crisis to worry about when it comes to real growth, no fiscal crisis (made largely of DofF’s disastrous past policy choices).

“Ireland has a track record of adjusting and showing its flexibility; asset prices, wage levels and price levels are all adjusting rapidly to the new circumstances improving Ireland’s competitiveness.”

Ireland has a historical record of staying in recessions for decades, not ‘adjusting’ or ‘showing its flexibility’ but getting stuck in vicious past fiscal spending quagmires. This is exactly where we find ourselves today – perpetuation of unsustainable public spending spree that we entered in 2001.

Furthermore, per DofF assertion on wages, asset prices and prices:
• Declines in wages have been concentrated in the productive economy whilst unproductive public sector-dominated activities continue to post wage increases;
• Ditto for price falls (see below);
• Asset price declines – it amazes me that DofF can call the destruction of wealth we have experienced as an ‘improvement in Ireland’s competitiveness’, but the most bizarre twist of DofF’s logic comes when one considers the fact that these assets also include property prices. If property price falls are restoring our competitiveness, the same price declines are also responsible for the collapse of the property markets, including building activity, which per DofF earlier point is the cause of our problems. So per DofF – asset price falls are both good and bad for Ireland Inc…

The latest CPI data released last Thursday clearly shows continued trend of public sector-controlled inflation. In percentage terms, state-set prices for alcohol and tobacco rose 0.4% month on month in May 2009, while health continues to post 3.5% inflation when measured in annual terms. As do communications services – up 0.8% year on year. Recreation and culture – a category also largely influenced by state pricing policies posted a 0.2% rise in prices in May. While utilities and local charges have fallen 6.5% in monthly terms, this category of services remains in a positive inflationary territory in annual terms, up 4% year on year. One category of services highlights the differences between private sector and public sector controlled inflationary pressures: housing, water, electricity, gas and other fuels. Here, 12-months change to the end of May 2009 in mortgage interest costs was -42.4% (posting a -4.2% additional loss in may itself). This was exactly the same as the rate of price decline for largely private sector-distributed liquid fuels. In contrast, Electricity and Natural gas – two largely state-monopolized sectors posted price increases of 4.7% and 6.5% year on year respectively despite the last month’s price reductions of 10.4% and 11.3%. Similarly in health: state-priced hospital services costs are up 9.1% year on year in May, more privately supplied outpatient services up 1.9%. Consumers rip-off by public sector is well alive in our age of deflation and DofF has absolutely nothing to say on this.

“Ireland has made significant strides in the development of modern 21st Century infrastructure while positioning itself for its next stage of development as a knowledge economy. While there are obvious difficulties, it is important to state that keyfactors which facilitated Ireland economic success in recent years still remain. These include:
• stable political system; part of the EU and the eurozone; access to the Internal Market,
• young, highly educated, English speaking, flexible, mobile workforce,
• export orientated, open economy,
• relatively low corporation tax rate,
• pro-enterprise focus.”
Cringing yet? Me too…

“The Government has been clear in its strategy to address the difficulties in the public finances and has already taken a number of very significant steps in this regard:
• In July 2008, expenditure adjustments were introduced to save €440 million in 2008 and up to €1billion in 2009 [of course, they can’t tell us the exact number for 2009 savings arising from July 2008 measures, because there were no measures of any sort introduced in July 2008 – just promises. As per €440mln savings for 2008 – well these ended up with an overrun, not savings];
• Last October in Budget 2009, expenditure for 2009 was strictly contained and significant tax measures were brought forward to secure close to €2 billion in additional revenue in 2009 [not really - €2bn is the figure that does not include second order effects of proposed measures, so the real value of these tax measures was less than €1bn];
• In early January, the Government set a five year framework to 2013, with ambitious targets, to restore order to the public finances over the five years; In February, in line with the framework, a series of measures were announced to secure further savings of up to €2 billion on a full year basis primarily through the introduction of a pension levy for public servants [again, this is the case of powdering over the scars – the pensions levy will not generate claimed returns due to secondary tax effects and clawbacks, implying that the net effect on the revenue is expected at around €1.4bn, before we subtract a massive cost of the early retirement scheme];
• On 7 April, the Government introduced a supplementary Budget for 2009 which sets out further taxation and spending measures for this year amounting to some €3.3billion in 2009 and over €5billion in a full year. Government also signalled that there will be additional spending adjustments of €2.25 billion in 2010 and €2.5billion in 2011 with taxation increases of €1.75 billion in 2010 and €1.5 billion in 2011 [in case you’ve missed the point – yes, they will tax us all into economic oblivion to save their pals in public sector unions. Per claimed 'savings' and 'revenue enhancements' - I already did this analysis before (here)];
• Ireland will need to borrow some €25 billion in 2009 which it is well on the road to achieving but Ireland has a relatively low debt level to begin with. [ok, to date, we have borrowed €1.532bn in short-term paper maturing after 2009 and €4.9bn in longer term paper (see here). This is less than 26% of the total borrowing requirement for 2009! ‘Well on the road’, then? And that is before NAMA borrowings are factored in.];

“A greater integration of the Central Bank responsibilities with the regulatory and supervisory functions of the Financial Regulator is being considered.
• The objective is to deliver robust standards of banking and financial regulation and corporate governance;
• This will help restore the reputation of Ireland’s regulatory regime and rebuild confidence;
• It will ensure that best EU and international practice is applied to Ireland’s regulatory system and it is appropriately aligned with new developments in international supervisory architecture.”

Actually – already close links between the DofF, CB and FR are the main source of the problem with lax regulatory enforcement and lack of risk pricing capabilities at the Regulator level. Further integration is the worst form of response to the existent structure challenges. A truly independent regulatory office for financial services separate from the consumer agency would offer much stronger potential for enhancing enforcement and preventive powers.

IL&P: next in line? Update II

Per Irish Life & Permanent post last week - the predictions of the market downgrades for IL&P have materialised and by now are starting to be exhausted (barring any adverse news). IL&P is now likely to slide toward a general downgrade trend that has plagued the rest of the Irish banking sector.

Here are the updated charts reflecting the call I've made on IL&P last week.

Chart below shows that IL&P is still being pulled away from the rest of the banks, with the share price collapse being much more pronounced. The support for this momentum should be exhausted sooner rather than later, given a hefty sell volume hitting the market.
Chart above shows volumes relative to historic average, with current standing for IL&P sell-off at the local maximum. Again, in my view, this suggests some easing in volumes in days to come.

Chart below shows pure closing price (unadjusted for volume traded), with IL&P's nosedive being steeper than that for other banks. There is some room to travel down the price trend, but the downgrade over the last 3 trading days appears to me deep enough, so that, barring more adverse news, we should see settling of the share price into a gentler downward trend with wavering volume supports.
Finally, the chart below shows volume-adjusted sell-off of IL&P shares in line with the above charts.

Brian Lucey of TCD B-school was last night stressing the issues of the IL&P's uncertain balance sheet and the overall position of the bank in the greater scheme of financial services in Ireland (see Vincent Brown's program recording), although, sadly, this issue was not picked up by either Vincent or other panelists. It is time we put Anglo's saga behind us and start looking at the rest of the sector.

I am also starting to gradually shift into the unpopular view that while Anglo's own share support scheme (that €450mln loan-for-shares deal for the 'Golden Circle' investors) was wrong, ethically unsound and manipulative of the market, the 10 investors themselves (assuming the transaction was cleared by the Financial Regulator and other authorities) should not be scape-goated for their (stupid and financially ruinous) actions.

Instead of disclosing their names, we should demand the disclosure of the names of all incompetent (or negligent - take your pick) employees of CBFSAI who were engaged in clearing the Anglo deal. To date, the blame for the entire affair has been placed solely on the shoulders of private investors who took losses under their own commitments (reportedly covering 30% of the loans total). Instead, it should rest on the shoulders of the Irish regulatory authorities and those in the Department of Finance who knew of the deal and approved it. They are the truly rotten part of the system!