NTMA - a problem foretold

For months now I have been saying that soon, very soon, there will come a moment when the markets are not going to take any more of the Irish Government IOUs. At least not at the yields consistent with AAA, AA+, AA or even AA- ratings. The Government, its eager-to-please economic advisers and its boffins in the CBFSAI and DofF were not listening and continued to pile on debt commitments as if they were running a San Fran Fed, not an economy with 4.5mln people in it.

Today's NTMA results show that I was (and am) on the right track. I can't stress the fact that, in my view, NTMA are doing a good job in the current conditions, so whatever is to yet to come - it will be the fault of their masters in DofF and the Government.

In a quick summary, NTMA issued €1bn worth of bonds today in 5 and 9-year paper, with the markets willing to bid only €1.24bn on the offer - a 124% coverage overall. This compares with x3 times cover (300%+) for the previous auction. And, this time around, there was plenty of cash in the sovereign debt markets (not the case with the previous auction) with estimated €19bn worth of funds available for 'fishing'.

So what's at play? The 'bait' was off and the fish were too smart to line up for the Irish cast.

Last point first: Ireland to date has raised €12bn in its annual borrowing requirement (per DofF rosy estimate) of €25bn. This is just the stuff to finance the current deficit with. Again, per my projections we would need another €2-4bn in additional borrowings this year. How this can be achieved is unclear, as markets are getting thinner by the day and at €1bn per month, we are not getting there at any rate. But investors are bound to start getting even less welcoming when they realise that with NAMA, Ireland will have to open the flood gates for bonds issues - even at a hefty 40% discount, €90bn-strong NAMA will require €54bn in bond financing. That is the amount needed before we consider re-issuance of maturing paper...

Now to the wrong bait issue - the pricing of the bonds was very ambitious in my view - at 4% for €300mln worth 5-year paper (cover of 160%) and at 4.5% for a 9-year issue (cover at 110%). In March 24 auction, cover ratios achieved were 380% and 270%.

The next to watch is Thursday auction of short-term paper: 1-mo (€400-500mln), 3-mo (€500-600mln) and 6-mo (€400-500mln) T-Bills. If successful in finding a solid market, these might push Irish Government to switch into more aggressive financing through short-term debt - effectively creating a credit card system of financing for Irish deficits.

But even if the Government keeps short-term paper issuance at the going rate, it does appear to me that a part of the Government strategy is to use short-term bonds to finance spending in a hope that either:
(A) the economy improves dramatically (good luck to you chaps), or
(B) Brian Lenihan will raid the taxpayers in an even more massive robbery, comes Budget, or
(C) The ECB will take the balance off Brian's hands (in effect, we are borrowing recklessly short-term in a hope that a rich uncle rides into town with a wallet full of cash).
Otherwise, issuing 1-9mo debt when your problem is a structural deficit of ca €15bn (roughly 45% of your revenue) per annum is as close to playing a Russian Roulette as one can come.

But either way - (A) implies we can't deal with our mess ourselves (an embarrassing line of policy to take), (B) implies that the Government has no moral right to rule, while (C) implies that the Government is willing to go hat-in-hand to the world only to avoid threatening the Trade Unions. Take your pick.

Daily Economics 08/04/09: Toxic Fumes from Toxic Bank

First a bit of news
A birdie in front of my window has just chirped (hat tip to the birdie) that the ECB has tentatively signaled to the Irish Government that it will finance (largely? or in full?) the 'bad bank'. Under such an arrangement, the state will issue a sea of bonds - say €30-60bn to cover €50-90bn of impaired loans floating out there - and swap these for freshly printed cash from the ECB. Taxpayers get debt. Government gets pile of assets with default rates of, ughh say 20-25% (?). Banks get cash.

Why would the state go for this? Because if we price this junk at a fair market value, taking it off the banks will still leave us exposed to the need to recapitalize the banks. As they write down their assets after the transfer, the value of an asset will drop - from its current risk-adjusted (if only bogus) valuation of, say €0.90 per €1 in face value, to a fair value of, say €0.50, implying a loss of €0.40 per €1 in face value. This will chip into banks' capital reserves, driving down their core capital.

So the state will pay over the odds for the default-ridden paper to avoid the follow-up recapitalization call. This will sound like a right thing to do, but given that the taxpayers will be holding highly risky debt for which they have overpaid, it is not.

Second source of added liability comes from the nature of assets transferred to the bad bank. Banks have an incentive to transfer impaired consumer loans - the loans on which they have hard time collecting. So the state impaired assets pool will be saddled with near-default mortgages and credit cards debt. This is political dynamite, for no state organization will enforce collection on these voters-sensitive assets.

So the taxpayers will end up banking with the state. The fat cats of the public sector will end up banking with BofI and AIB.

Why would the banks go for this? While getting rid of the troublesome assets, the banks will get capital injections and no equity dilution. The bondholders will be happy too - lower risk base, higher risk cushion imply lower spreads and thus higher prices. The taxpayers will have to get a second round of squeezing as repayment to the state will be required to compensate for losses generated by the overly-generous original pricing scheme. These will take form of 'Guarantee' dividends to the Exchequer which, alongside with existent preference shares, will lead to a widening in lending spreads and banking fees. Customers will have to pay the Government via the banks.

Why would the ECB go for this? Ah, the birdie told me that the ECB, desperate to find some solutions to similar banking problems elsewhere, is keen on using Ireland as a sort of policy lab. Given it's newly acquired mandate to print cash in quantitative easing exercise, this means the price of such Social Laboratory Ireland is low enough for them to deal on Irish 'bad' bank.

All happy, save the soon-to-be-stuffed-again taxpayers...


A follow up on the Budget
Following the Budget last night, Irish media has gone into an overdrive. The simplistic terminology and naive analysis dominate the space between print, radio and TV with commentators heralding the Budget as:

• 'tough' - nothing tough about slicing off an odd €3bn off a deficit that is so vast. We will have to borrow half of our annual spending requirement this year - primarily, to pay welfare rates and public sector wages. In family economics, such budgeting is known as 'reckless' or 'subprime'. In Lenihanomics it is known as 'making hard choices' (at the expense of others);
• 'fair' - there is nothing fair about the budget that has taken the pain of adjustments required by the serial failure of this Government (in its various past incarnations) to reign in its own cronies' spending and dumping it all onto the population at large. Nothing can be further away from being fair than an idea that you soak the private sector to insulate and even gold-plate more the lives of the true Irish elite - the public sector dons;
• 'timely' - there is nothing timely about the Budget that delivers in April 2009 the corrections promissed in July 2008;
• 'far-reaching' - aside from 'deep-reaching' into yours and my pockets, the Budget failed to deal with the most pressing issues at hand. The actual deficit problem remains unaddressed. Reform of public sector - unaddressed. Economic stimulus - unaddressed. Banks financing - unaddressed. You name the topic.

For anyone who still needs a more down-to-earth explanation of the budget, here is an illustration
The media reaction to the Budget is hardly surprising.

Irish intellectual milieu is based on a vicious pursuit of any independent analysis and thought with a goal of eliminating any possibility of serious dissent. Anyone with a point of view departing from the consensus is left jobless and/or branded as a hack or a generally diseased mind.

How many dissenters are ever asked to advise or brief the policymakers? None. How many non-consensus economists work for the Government? None. In our Universities? A handful and then only on junior posts. How many differing opinions does the Irish Times feature in its main pages? Virtually none, unless they can be comfortably pigeonholed into some agenda slot.

Hence today's reaction. But also the continuous drift of consensus opinion to the La-La land of pseudo intellectualism of some of our left-of-centre pontificates. This is not reflective of any public opinion in the streets, but it is reflective of the incestuous nature of our public policy discourse.

At least in the Soviet Union they respected dissidents enough to physically hunt them. Here, we are simply growing immune to independent thinking.


And the best non-economist analysis of the state of our affairs

The piers are pummelled by the waves;
In a lonely field the rain
Lashes an abandoned train;
Outlaws fill the mountain caves.

Fantastic grow the evening gowns;
Agents of the Fisc pursue
Absconding tax-defaulters through
The sewers of provincial towns.

Private rites of magic send
The temple prostitutes to sleep;
All the literati keep
An imaginary friend.

Cerebrotonic Cato may
Extol the Ancient Disciplines,
But the muscle-bound Marines
Mutiny for food and pay.

Caesar's double-bed is warm
As an unimportant clerk
Writes I DO NOT LIKE MY WORK
On a pink official form.

Unendowed with wealth or pity,
Little birds with scarlet legs,
Sitting on their speckled eggs,
Eye each flu-infected city.

Altogether elsewhere, vast
Herds of reindeer move across
Miles and miles of golden moss,
Silently and very fast.

W.H. Auden 'The Fall of Rome'

Mini-Budget 2009: A 'Fail' Grade

To summarize, mini-Budget failed to deliver the substantial public expenditure savings promised. As a result of destroying private wealth and failing to cut public sector waste, instead of reducing the Gen Government Deficit to 10.75% of GDP as claimed in the Budget (Table 5), Minister Lenihan has left a Deficit of -12.5% to -13.0% of GDP in 2009. Details below.

The mini-Budget 2009 Part 1 is in and the Government has done exactly what I've expected it to do - soaked the 'rich'. This time around, the 'rich' are no longer those with incomes in excess of €100K pa, but those with a pay of €30K pa. We are now in the 1980s economic management mode, full stop.

Microeconomic Impact: Households

• The heaviest hit are the ordinary income earners and savers: Income levies up, thresholds down. Impact: reduce incentives for work at the lower end of wage spectrum and generate more unemployment through adverse consumption and investment effects. Before this budget, it would have taken a person on welfare living in Dublin ca €35-37,000 in annual pre-tax wages to induce a move into job market. Now, the figure has risen to over €40,000. PRSI ceiling is up a whooping 44.2% to €75K pa. This is jobs creation Lenihan-style;
• DIRT is up from 23% to 25% and levies on non-life and life insurance are up. CGT and CAT are up from 22% to 25%. The CGT is a tax stripping off the savers/investors protection against past inflation, so Mr Lenihan is simply clawing back what was left to the investors after his predecessors generated a rampant inflation. This is savings and investment incentives Lenihan-style;
• Mortgage interest relief is cut and will be eliminated going forward (Budget 2010) - I hope people in negative equity losing their jobs will simply send their mortgage bills to Mr Lenihan. Let him pay it;
  
• Interest reliefs on investment properties and land development are down. The rich folks who bought a small apartment to rent it out in place of their pension (yes, those filthy-rich Celtic Tiger cubs who saved and worked hard to afford such 'luxury' as a pension investment) are getting Lenihan-styled treatment too.These measures, adopted amidst a wholesale collapse in the housing sector, are equivalent to applying heavy blood-letting to a patient with already dangerously low blood pressure.

Microeconomic Impact: Businesses

• Providing no measures to support jobs creation or entrepreneurship, Lenihan managed to mention only his Government's already discredited programme for 'knowledge and green' economy creation from December 2008 as a road map for what the Government intends to do to stimulate growth;
• No banks measures announced or budgeted for, implying that an expected budgetary cost of ca €4-5bn in 2009 due to potential demand for new banks funds is simply not factored into our expenditures. Neither are there any costings or provisions for the 'bad' bank;
• No credit finance resolutions, PRSI cuts for employers, minimum wage reductions etc;
• CAT and CGT taxes up, income of consumers down, insurance levies up... Lenihan-styled treatment for business support is so dramatic that it is clear we have a Government that only knows how to introduce pro-business and pro-growth policies for their own cronies.

Microeconomic Impact: Public Sector
The only clear winners in the Budget were public sector workers. They face no unemployment prospect, no imposition of any new levies or charges, no cuts in salaries or indeed no changes to their atavistic, inherently unproductive, working practices.

Yet, they can retire earlier with a tax-free lumps sum guaranteed. And no actuarial reduction for shorter work-life, implying that the cost of the Rolls-Royce pensions to all of us has just risen by a factor of at least 1/3! Happy times skinning the taxpayers to pay the fat cats of the public sector elites? Lenihan-styled sharing of pain.

Pat McArdle of the Ulster Bank in an excellent late-night note on the Budget said: "Our main quibble with the Budget is with the split of the burden between tax and spending. ...contrary to the recommendation of practically every economist in the country, they opted for a 55% to 45% split in favour of taxes".

This is correct. On the morning of the Budget day, Mr Lenihan told the nation that not a single economic adviser was suggesting that the Budget impact should fall onto expenditure side. Clearly, he was either incapable of listening or simpy arrogantly ignorant.

Adding insult to the injury, Lenihan also ensured that majority of cuts were to befall the already heavily hit middle classes. Microecnomically speaking, Minister Lenihan has just dug the private sector grave a few feet deeper. It was at 6ft before he walked into the Dail chamber. It was at 10ft once he finished his speech.

Macroeconomic Impact: When Figures Don't Add Up
In Macroeconomic terms, we are no longer living in Ireland. We are living in Cuba where numbers are fudged, forecasts are semi-transparent and the state knows better than the workers as to what we deserve to keep in terms of the fruits of our labour. Mr Lenihan has torn up any sort of social contract that could have existed between the vast majority of Irish people and this Government.

All data is from DofF Macroeconomic & Fiscal Framework 2009-2013 document.
More realistic assessment of the GDP collapse in 2009 is being met with a relatively optimistic assumption that GDP contraction will be only 2.9% in 2010. Even more lunatic is the assumption that Ireland will return to a trend growth of ca 4% in 2012-2013. So my assumptions are: -8-8.5% fall in GDP in 2009, -3.5-4% fall in 2010, +1% growth in 2011, +2% in 2012 and +2.2% in 2013. This will be reflected in my estimate of the balance sheet below.

Another thing clearly not understood by the Government is the relationship between income, excise and import duties. Imagine a person putting together a party for few friends. She had before the Budget €100 to spend on, say, booze. Now she has €90. Her VAT, excise, import duties on €100 of spend would have been ca €66. Now she goes off to Northern Ireland with her €90. Does the Government lose €66? No. It also looses other (complimentary) goods shopping revenue. Say that the cost of party-related goods is €250 worth of purchases at 21% VAT, 10% duties. Total cost of a €10 generated by Lenihan in income tax levies is a loss of over €140 in revenue. Good job, Brian. Your overpaid economic policy advisers couldn't see this coming?

Notice investment figures in the table above? Other sources of GDP growth? Well, DofF did apply a haircut on its projections in January 2009 update, but these corrections are seriously optimistic on 2011-2013 tail of the estimates. This again warrants more conservative estimates.
Judging by the inflation figures estimates, the DofF believes that the era of today's low interest rates is simply a permanent feature of the next 5-year horizon. Again, this is too optimistic and should it change will imply much deeper economic slowdown in 2010-2013 period.

Now to the estimates Table below summarizes the estimated impact of the measures.
Per DofF estimates, the Exchequer deficit drops, post mini-Budget-1, by ca €2.7bn in 2009 or 2% of GDP. This is rather optimistic. In reality, this estimation is done on a simple linear basis, assuming no further deterioration in receipts and a linear 1-to-1 response in tax revenue to tax measures. This also assumes the macro-fundamentals as outlined in the Table 2 discussed earlier.

Now, building in some of my outlook on the budget side and GDP growth side, Table below reproduces DofF Table 5 and adds two scenarios (with assumptions listed): From the above table, we compute the General Government Deficit (the figure that is the main benchmark for fiscal performance) as in the following Table:
This speaks volumes. The Government promised in January 2009 the EU Commission to deliver 9.5% deficit in 2009. It has subsequently reneged on this commitment, producing an estimated Gen Gov Deficit of 10.75% today. However, stress-testing the DofF often unrealistic assumptions provides for the potential deficit of 12.5-13.0% for this year.

But there is a tricky question to be asked. Has Lenihan actually gone too far on the tax increases side? Note that the estimated gross impact of the overall budgetary measures is €3.3bn for the remaining 8 months of 2009, implying an annual effect of €4.95bn in fiscal re-balancing. This is ca 2.9% of GDP - a sizable chunk of the economy. From that figure, per Table 5 above, the implied net loss to the economy from the Government measure (estimated originally at -1% of GDP) should be closer to 1.5-1.7%. This in turn implies that instead of an 7.7% contraction in GDP, the DofF should have been using a 9.2-9.4% contraction. In today's note, Ulster Bank economics team provides a revised estimate of GDP fall for 2009 at 9.5% for exactly this reason.
Mr Lenihan and his advisers simply missed the point that if you take money out of people's pockets, you are cutting growth in the economy. Of course, our Ministers, their senior civil servants and advisers would not be expected to know this, given they lead such sheltered life of privilege.

If the above estimates were to reflect this adjustment, we have: 2009 GDP of €168.2bn;General Government Deficit of 11% for DofF estimates, and 12.7-13.25% for my scenarios. I will do more detailed analysis for 2010-2013 horizon in a separate post, but it is now clear that the Government has not achieved its main objective of an orderly fiscal consolidation to 9.25% deficit. Neither has it achieved an objective of supporting the economy through the downturn.

Conclusions
Today's Budget delivered a nuclear strike to the heart of the private sector economy in Ireland. It furthermore underscored the Government commitment to providing jobs and pay protection for public sector workers regardless of the cost to the rest of this economy. We are in the 1980s scenario facing years of run-away, unsustainably high public spending and no improvements in public sector productivity amidst severe contraction in demand and investment at home and from abroad.

Minister Lenihan has promised to go on a road show selling Ireland Inc. I wish him good luck and I wish his audiences a keen eye to see through the fog of demagoguery this Government has produced in place of sensible economic policies. If they do, their response to Mr Lenihan's approaches is likely to be "Thank you, Minister. We don't need to invest in the economy that taxes producers, savers and consumers to protect public sector waste. Thank you and good by."
From an investment case point of view - they will be right.

PS: As the first fall-out from the Budget, Moody's downgraded Irish banks (here)... More to come.

Daily Economics 07/04/09: Lenihan's McHammer Land

I have posted a set of presentation slides on Irish Economy on my partner blog: Long Run Economics. Feel free to check them out.

(scroll for Ireland note below)

Junk-bonds default rates: Per Bloomberg (here) ca 53% of US companies that issued high-risk, high-yield bonds will default over the next five years. Jim Reid, head of fundamental credit strategy at Deutsche Bank AG, further argued in his note yesterday that the recovery rate on this paper will be around 0%. This compares with 31% 5-year default rate in the two previous recessions and 45% in the Great Depression. “...40% high-yield defaults over five years seems to be a minimum starting point for this default cycle,” Reid wrote, with 50% rate being “not unrealistic.”

According to Moody’s Investors Service note from March, the 12-month default rate will rise to 22.5% in Europe and 13.8% in the U.S. by the end of the year. Moody’s forecast the 5-year default rate to be about 29% by February 2014, according to the report.

Reid's forecast is driven by continuously falling property markets and he sees another 16% declines due for the US and 30% in further falls in the UK property markets. And this leaves us here in Ireland in a dust. Reid-assumed implicit cumulative property declines over the 5-year horizon are:

• per Case-Schiller in the US: 32.8% peak to trough fall, and
  
• per Halifax index in the UK: 44% peak to trough fall;
• per Daft.ie index in Ireland (my estimates consistent with Reid's assumptions on the US & UK dynamics): a whooping cumulative implied contraction of 43% peak to trough.
  

This is pretty bad. How bad - consider some mitigating possibilities:

• Things might be not as bleak if one were to take into account Reid's most contentious assumption of the zero recovery rate. Standard assumptions assign ca 20% recovery rate for senior junk-grade paper. Times are not exactly standard, so, say, we get this down to 10%. This will comfortably bring Reid's numbers to the range of Great Depression, but not to the range of the last two recessions.
  
• Now, take a knife to his housing markets forecast. Although extremely tenuous at this moment in time, the US housing market (and indeed the UK market) is starting to show some early signs of stabilization. Suppose that home prices were to bottom at the OECD latest projection: US at -20% and UK at -34% (for Ireland, -38% drop).
  

Combined, these 'rosier' scenarios do imply a possibility of the US reaching the average ca 30-33% default rate on junk bonds this time around. We might be not as bad off as in the Great Depression after all... and we are certainly not as bad off as the equity markets in some jurisdictions (e.g Ireland) where shareholder wealth destruction has been much deeper than 30%, or indeed, 53%. So assumptions are the key and comparatives are the lock-in!

But what Reid's analysis shows is the dire need for stronger credit risk assessment of the fixed income portfolios traded, including in the ETFs universe. Seniority is the king, plus Government underwriting.

Junk estimates default rates: there are new 'estimates' of the Exchequer receipts being floated around today by Brian Lenihan (here): €33bn in tax revenue for 2009. This is about as realistic of an assessment as a snail's own worldview stuck atop a bullet train. The state will be lucky to pluck €30-31bn out of this economy comes December, simply because whatever the boffins of DofF are forecasting today for increased revenue from the mini-Budget tax hikes - all will be undone tomorrow by business and income tax receipts from sole traders and SMEs.

“Two-thirds of our spending is now welfare payments and payments to public servants. If you want an adjustment on the spending side you have to cut pay for public servants or cut rates for social welfare,” he told RTÉ News. “I have not seen many people advising me to do that. Let’s get real where the balance has to be struck here. Anyone who suggests that this cannot be done without tax is deceiving themselves.” Well, Minister, this is what happens when you surround yourself with lackeys for advisers. If 2/3rds of your household bill goes to pay servants and your non-working extended family, you are in an MCHammer-land: fat trousers and bankrupt estate.

My advice to our Minister-in-Charge-of-Bankrupting-Ireland is to get his head of the sand: cut 20% of the public pay bill by laying off some, trimming wages of others and scaling back pensions to those retired will be a good start. Follow it up with welfare spending cuts and stronger enforcement of welfare standards: unemployment benefits down by 5%, social welfare rates down by 15%.

Otherwise, Mr Lenihan's default rates on Budget forecasts will exceed those of the US junk bonds... Then again, it is hard to tell right now which paper is of higher quality.
Capital flows and Irish Capital Acquisitions Data:
Per mu post yesterday, here are two charts (from Follow the Money)showing US financial and trade flows dynamics and an even faster fall off in the capital formation. Clearly, our yesterday's CSO data is somewhat different, which suggests to me that Irish stats on relatively slow-declining capital acquisition in the industrial sectors are linked to some accounting trickery more than to real acquisitions. If the rest of the world is falling through the basement, how can Ireland still be hanging around in its first floor bedroom?

Over5seas Travel Data from CSO is out: predictably, the number of trips abroad by Irish residents fell by 13.4% to 474,000 in February 2009 compared to 547,600 a year ago. February 2009 overseas trips to Ireland were down 5.5% to 445,200 from the same month in 2008. Visits from the UK fell by 15,000 (5.8%) to 244,800. Trips from Other Europe increased by 1% to
149,100 while those from North America fell by almost 20% to 37,500. Chart below (courtesy of CSO) illustrates:
In 2009 to date, trips abroad by Irish residents are down by almost 11% to 976,100, "a complete reversal of the growth rate achieved in 2008". Overseas trips to Ireland are down 4.3% to 869,400 compared to an increase of almost 1% in 2008.

The cost of Ministerial chatter: Irish credit ratings

After a week of incomprehensible gibberish coming out of the Government statements on:

• borrowing restraints (here);
• receipts shortfalls (here and here);
• 'painful' solutions (aka destruction of private sector economy via fiscal policy - here);

and months of policy wobbles, two things came to their logical conclusion today.

The first one - reported (for now in very oblique terms - I will put more flesh on it when the embargo on the documents I received expires) here.

The second one - the S&P downgrade of Irish sovereign credit ratings.

Now, S&P is not known for being the quickest or the sharpest analysis provider on the block (I wrote about the need for a downgrade for some three months now), but at last they have moved, if only a notch, lowering Ireland's ratings from AAA to AA+ and retaining negative watch outlook (meaning more downgrades await).

I was neither surprised nor impressed by the S&P statement:

"March 30 - Standard & Poor's Ratings Services today said it had lowered its long-term sovereign credit rating on the Republic of Ireland to 'AA+' from 'AAA.' At the same time, the 'A-1+' short-term rating on the Republic was affirmed. The rating outlook is negative"

So far so good. Except in my view, a combination of the depth of our crisis, the severity of our economic policy failures and the lack of realism on behalf of this Government, pooled together with Cowen's unwavering determination to 'soak the rich' (middle and upper classes) to protect his cronies in the public sector - all warrant at the very least a downgrade to an A level. Given the structural nature of our deficits and Cowen's willingness to flip-flop on policy - an A- rating will be also justifiable.

Ok, back to S&P statement: "The downgrade reflects our view that the deterioration of Ireland's public finances will likely require a number of years of sustained effort to repair, on a scale greater than factored into the government's current plans," Standard & Poor's credit analyst David Beers said. As I said - lack of realism on behalf of the Government is costly. I have mentioned some recent evidence I got from the Partnership Talks (here). Telling... But what is also telling is the shade of realism that is being brought to the policy discussion table by the S&P, which is completely missed by the quasi-state ESRI (see here) who expect swift (2-3 year time horizon) action on closing structural deficits by increasing taxes.

The S&P is also referencing their belief that there will be further need for additional support for banking sector. I agree. And the Government has been boasting to the Partnership folks that it has resolved the banking crisis...

But here is a really good piece - bang on in line with what I've been warning about for a long time now. Despite our Government's senile belief that soon - a year or two from now - we are going to return to strong growth, S&P clearly states: "We expect that the Irish economy will materially under perform the Eurozone economy as a whole over the next five years, recording minimal growth in real and nominal GDP, on average, during the period. As a result, we believe that Ireland's net general government debt burden could peak at over 70% of GDP by 2013, a level we view as inconsistent with the prospective debt burdens of other small Eurozone sovereigns in the 'AAA' category."For comparison, here is the table from the DofF Junior Nostradamus's' January 2009 Update (below). This shows that our boffins are thinking we will be churning out 2.3% GDP growth in 2011, with 3.4% in 2012 and 3.0% in 2013...

Yeah, may be if we get Michael O'Leary to run this country...

"The medium-term prospects for the Irish economy are constrained by three interrelated factors: first, the impact on domestic demand as the private sector reduces its high debt burden, which stood at 280% of GDP in 2008; second, the scale of the deterioration of asset quality in the banking sector and possible need for additional capital; and, third, the support from external demand Ireland can expect as global economic conditions improve."

Ont the first point, I am again delighted that S&P decided to look beyond their naive insistence on focusing on public debt alone. Private debt mountains choking Ireland Inc (and soon to be added public taxation concrete weighing the economy down as we sink deeper into a recession) have been something I warned about for some time now.

On the second point, it is important to recognise that this Government has done virtually nothing to help repair the banks balance sheets and is not forcing households deeper into financial mess. Banking sector and real economy are linked.

• When a bank gets capital injection, but sees more mortgage holders defaulting because the Government has sucked their cash dry, what happens to banks assets?
  
• When a bank gets a deposits guarantee scheme at a cost to the system of €226mln since inception, but it costs the Exchequer twice as much due to higher cost of borrowing, what happens to the financial system's ability to provide credit finance?
  
• When a bank gets a promise to be rescued in some time in the future, but sees corporate deposits dry out today because the Government actually taxes companies (and sole traders) in advance of their receiving payments on overdue invoices, what happens to bank's capital?

Has Mr Lenihan bothered to take Level I CFA exams, he would have probably understood these brutal A-B-Cs of macrofinance. Alas, he didn't.

Now, next, the S&P avoids falling back into its comfort zone: "The government has already taken steps to contain the budgetary impact of these pressures, and further adjustments in taxation and spending, amounting to 2%-2.5% of GDP, are expected to be announced in next month's supplementary budget. At best, however, these measures will contain this year's general budget deficit to around 10% of GDP and lay the basis for a slow reduction in nominal budget deficits in future years. We are concerned, however, that a credible multi-year fiscal consolidation strategy will not emerge until after the next general elections, due by 2012. Accordingly, on current trends, we believe Irish net general government debt will likely exceed 70% of GDP by 2013 before beginning to trend downwards."

True that, as they say in the USofA. True that. Can you close your eyes and imagine Brian Cowen telling public sector unions that he is going to cut numbers of paper pushers employed in the public sector? or to trim their pay? or to eliminate our overseas aid budget? or to cut our defense spending by half to reflect the real might of our armed forces? or to privatize health care delivery (not access to services - delivery)? or to introduce efficient system of education fees? or that he will switch all public sector employees of age 45 and less into defined contribution private pension schemes? or that he will no longer automatically index pensions to already retired public sector workers to future wage increases in the sector? or that the corporatist model of centralized wage bargaining is done and over for ever? or that he will impose restrictions on striking activities in the public sector and will end job-for-life conditions of employment in the sector?

No? Neither do I. And neither does the S&P - at last.

Cowen is just 3 weeks behind this blog?

When I was updating my budget deficit forecasts last week, I noted that the Government has been catching up quickly with my predictions from December, followed by February forecast for a shortfall in revenue.

Now, like Ireland behind Iceland (with an alleged 3-months delay), our Government is about 3 weeks behind this blog. Today's papers report that Brian Cowen now expects a tax revenue of €32bn in 2009. Well, I'll be damned... see my latest update here projecting €31.4bn in revenue.

Of course, a speculation is due - the results are to be released on the 3rd of April. Last month, Biffo didn't bother to read these in advance, nor did anyone else in the Government. This ended up looking like the Government that can't handle its own figures (which, obviously, the can't) let alone deal with the crisis in the entire economy (ditto). Maybe this time around Brian^2+Mary decided to set aside some time to govern? Fat chance. I think the entire drip-feeding of new - downward - figures is designed not for the public consumption but for the clandestine Partnership Talks going on.

Per information I gathered from the sources at that Partnership Table, last week, the Government managed to present a half-baked argument that things have bottomed out in the economy already. Improvement is around the corner and thus we can borrow our way through this. Documents I have seen - given to the Partners - showed relatively rosy forecasts for 2009 and 2010. The Government, it appears, also believes that it has resolved successfully the financial institutions crisis via a mix of past policies and the forthcoming scheme for dealing with 'bad' loans. It further claimed that it will be delivering a stimulus package, icnlsuive of some enterprise credit support measures - alongside the mini-Budget next week.

Well the latter might have something to do with a forthcoming document from one serious international organization that we are the members of which (later this week) will show that compared to other developed countries around the world, Ireland finds itself as:

• the worst economically governed in the world;
• in deepest trouble when it comes to housing markets declines to date;
• the country that is applying all the wrong (uniquely Irish) remedies to its fiscal problems; and
• the country that is least well positioned to come out of this recession any time soon.

Incidentally, the same document will show that some 90% of the bonds spreads for the developed countries is explained by the underlying risk of debt default... Hmmm... should we send our DofF 'commentators' (see here) back to school?..

But back to our Taoiseach's pronouncements on fiscal policy matters. At the same time as delivering 'good' news, keeping public pressure on the Partners by sending 'bad news' messages is a relatively unsophisticated practice that our Triumvirate is well capable of. So go figure.

By all measures to date, however, it looks like the March Exchequer returns are going to be very bad, even by our recent standards. Remember - you have read it first here. Biffo is still 3 weeks behind...

Melting Down Lenihan Style & Daily Economics 27/03/2009

According to the Irish Times, Brian Lenihan is now admitting that the revenue receipts for March are going to show even further deterioration in the fiscal position. This time around, Lenihan is claiming we will fall to €34bn in receipts, as opposed to the DofF forecast issued in January, assuming receipts of €37bn. Oh, Brian, thou are an incorrigible optimist. Anyone who has read this blog knows that I predicted this much in February (see here). That was then and despite the fact that our Minister Lenihan, with his new advisers from NUI (or 'yes-men' as I would put it), are catching up with my numbers, I have to move the targets once again.

(can someone figure it out what's the value of all these paid economists working for him if they are a month-and-a-half behind this free blog in forecasting?)

So here is my latest forecast - it will be subject to a revision once the actual Exchequer returns come out for March.Notice that I have dropped expected gross tax revenue to €31.4bn (inclusive of non-tax items), consistent with tax revenue of €31bn. I have also computed the General Government Deficit as a function of my forecast for 6.5-7% drop in GDP this year. Thus, 2009 Gen Gov Deficit is now expected to reach 11.8% of GDP and by the end of 2013 this will drop to 7.13%, not 2.5% that DofF predicted in January 2009 estimates. The reason for this later-years discrepancy is to a large extent driven by the short-term debt being issued by the NTMA to finance current spending.

So, Brian, here is a challenge - how soon will you and your advisers get down to my forecast figures? Or, should you want to save some dosh for the taxpayers - you can fire a couple of them and hire myself - I'll do their jobs (obviously) better and for, say, 1/4 of their price?

Now another update - new Eurocoin forecast for Euro-area economic activity is out, so time to update my own forecasts. Here is the chart. Lines in red denote my forecast forward.

External Trade stats for December 2008 are out and things are looking bad. Jan-Dec 2008 imports down 10%, exports down 3% y-o-y.

MNCs lead in declines, with Computer equipment exports down from €12,577m to €9,322m (-26%) and Organic chemicals from €19,641m to €17,853m (-9%). These are real declines, not offset by transfer pricing. In other words - these are jobs under threat or being lost. In other MNCs-led sectors: Chemicals exports increased from €2,664m to €3,483m (+31%), Pharma from €14,749m to €16,704m (+13%) and Professional, scientific & controlling apparatus from €2,109m to €2,779m (+32%). These are transfer-pricing driven, but at least for now, jobs are being supported, if only by our Bahamas-on-the-Liffey tax shelter, if not by superior productivity. How do we know this? Look at imports: Pharma imports up from €2,397m to €2,866m (+20%), Petroleum & relateds from €4,479m to €4,813m (+7%) and Natural gas from
€1,039m to €1,378m (+33%). These are inputs into the sectors where MNCs-led exports still are growing.

Goods shipped to Great Britain decreased from €15,002m to €14,302m (-5%) - evidence that our exporters are absorbing exchange rates changes into their bottom lines - and to Switzerland from €3,251m to €2,555m (-21%). Goods to the United States increased from €15,825m to €16,657m (+5% - also evidence of significant real competitiveness improvements, given still adverse terms of trade conditions), to China from €1,989m to €2,323m (+17%), to Malaysia from €694m to €1,062m (+53%) and to Spain from €3,281m to €3,587m (+9%). These are strong geographical results, showing, amongst other things that we are moving away from intra-EU trade dependency.

Inter-temporally: December 2008 the value of exports was +10% on December 2007, while imports were down -19%. But seasonally adjusted exports were down 4% on November 2008, while imports were down 11%. Preliminary estimates for January 2009 show exports of
€7,014m, down 1% on January 2008 and imports of €3,946m, down 28%. This is (good) mixed result showing that exports in general remain relatively buoyant when compared against domestic economy collapse.

Per separate data from CSO: the volume of output in building & construction decreased by 26.7% in Q4 2008 compared with Q4 2007. The value of production decreased by 24.3% in the same period. This tells me that the anticipated Exchequer savings due to lower cost of construction are unlikely to be significant: volume falls outstripping value falls implies unit cost of construction is up!

Daily Economics Update 24/03/2009

Ireland:

I tried to resist commenting too much on Brian Cowen's remarks today concerning the extended borrowing he envisions for Ireland Inc in 2009. I tried, but this is simply an extraordinary statement from a person who is

• either clearly not capable of thinking straight in the crisis or
  
• from a politician, so cynical and obsessed with self-preservation that he is willing to preemptively surrender this nation's hope for economic survival in order to throw another bone to his political cronies.

Either way, Cowen today has managed to achieve nearly impossible in virtually a single breath:

• Putting Ireland closer to fiscal insolvency - by enhancing the (already significant) uncertainty as to how much he will borrow in 2009 (and through 2013) and on which terms (will Ireland be forced to continue borrowing short, front loading 2011-2013 deficits to finance Brian's 'Partners' today?);
• Destroying his own reputation by telling the world that he cannot be trusted on any of his future policy pronouncements (undoing his own pre-commitment to keep the deficit under 10% he stated that no budgetary projection, including yet to be published mini-Budget, from this Government can be trusted);
• Showing that this Government will flip flop not only on soft targets (e.g promises not to tax us to death), but also on hard ones (including his commitments to the EMU);
• Destroying whatever hopes the ECB and the EU Commission might have had that this Government can be a responsible participant in the EMU;
• Forcing the bonds markets into a situation where, from now on, no pricing of Irish debt paper can be conducted on a basis of rational valuation.
  

Only 3 weeks ago, Cowen was fully committed to keeping 2009 borrowing under 9.5% of GDP. He is now telling the world that this was all a matter for him to change his mind over. Perhaps the only reason for such an extraordinary statement I can think of is that possibly (I am speculating here), Cowen saw preliminary figures from the Exchequer revenue for March. Even then, there has to be a real 'nuke' in these figures to justify such a public humiliation of this economy in the eyes of the developed world.

Cowen said in his address that he is not willing to sacrifice the real economy on the altar of public finances. Coming from him, this is rich. Cowen and his Government

• raised taxes in October 2008 and again in December 2008, and is going to raise them in April - 3 times in 7 months - amidst the wholesale collapse of the real economy (incidentally, these tax hikes were necessitated by the decisions on run-away train of public current expenditure growth that he adopted during his tenure as the Minister for Finance);
• raised VAT and other taxes directly impacting businesses, employment and public economic welfare, as his incompetent Minister for Enterprise sat silently beside him;
• raised levies, taxes and charges on all workers, including those who lost their jobs and then cynically turned around to wage an oratorical crusade about 'equality' and 'shared pain';
  
• paid public sector wage increases and then clawed some of these back, posturing as if a heroic leader who broke the mold 'to do the right thing';
• got in bed with trade unions in the Summer 2008 to produce a partnership agreement that committed the private sector taxpayers to servitude to public sector wage demands;
  
• once again cowardly moved into the new Partnership Talks last night as an excuse to surrender his policy making authority;
• presided over a largely failed set of actions on the banks that shored up (temporarily) Irish Developers Country Club at the expense of the real economy;
• watched idly as the real economy was falling off the cliff between June 2008 and October 2008;
• made wild promises of reforms and productivity enhancements in the public sector and delivered none;
• blamed everyone - from Americans to the World - for our economic ills, but not a single time managed to tell the nation that he is sorry for serial errors of judgment his Government committed in only 9 months in power;
• appointed the most incompetent person imaginable to run the key ministry in charge of our real economy (and no, I do not mean DofF here); and now
  
• turned our entire budgeting process into a public farce...

This is really rich!

Richard Brutton put it perfectly when he said today that “The spectacle of a Government thrashing around, unable to set any clear framework for a Budget that is just two weeks away is damaging our international reputation. It is damaging the confidence of markets from whom we hope to borrow €24 billion this year... This Government is destroying its authority to provide ...leadership.”

May I add that it is also destroying the real economy - the same one that Brian Cowen claims to be protecting.


International:

March McKinsey survey of economic conditions is out today, showing that "the percentage of the executives who say economic conditions have gotten worse at the national level hasn’t increased, but fewer than a third expect an upturn this year... 53 percent expect profits to drop in the first half of 2009, and the number expecting to shed workers has jumped eight percentage points in six weeks." Companies that are thought of as being well managed in the downturn are likelier:

• to be reducing both operating costs and capital spending,
• not weakening operations a great deal, and
  
• "are also likelier than others to be improving productivity".

Here is an interesting one: "overall, the results show that most companies are not actively seeking more cash." So there is no significant demand for credit, then? As I've been saying all along, it is hard to imagine that during the extreme hangover period following the leveraging binge that the corporates have embarked upon in the mid-2000s there will be strong demand for new credit.


US:

Existent sales up, prices up and now new home sales are up as well - what is the world (ok, the US) is turning into? Well, not anything resembling of a bull market, at least not yet. Per data released today, new homes sales were up 4.7% in February relative to the record low (since 1963) reached in January, but sales are still down 43.8% compared to February 2008. I worry that this is not a floor yet, but a slight bounce before further falls. Even if the current level signals an upturn in sales, things are bound to remain testing for a while, as inventory overhang remains enormous. A 2.9% fall in inventories of unsold homes in February still leaves 12.2-months worth of stuff unsold - up full 3 months on February 2008.

But there is more noisy data coming out today - there was an unexpected and a welcome rise in orders for durable goods - the first increase after six-straight-monthly declines. Offsetting the gain in February somewhat was a sharp downward revision to orders in January (from -4.5% in preliminary estimate, to -7.3% decline).

The best piece of analysis on this is on Bloomberg (here). In my own view - setting aside defense spending and consumer stuff - the gains are reflective most likely of amortization cycle (replacement of capital goods delayed during the previous 15 months) than due to capital inventories build up. There is also a strong 'noise' component to the rebound - given the precipitous fall in orders in Q4 2008, when durable goods orders fell at a rate not seen since the late 1950s.

The fact that we are seeing all this volatility in economic series away from the unrelenting downward trend is a good signal. In my view, as I said before, this is a sign that the markets are now seriously testing the floor of this recession. In other words, I now expect similar modest gains in some parameters and stabilization of other parameters through May, followed by the first positive gains in the capital spending and declines in new unemployment claims in June-August. This will put the US economy onto recovery path by mid-Q3-early-Q4.

'Happy Times' at NTMA: Updated

Remember that unrivaled shot of Borat sun-bathing on the banks of the river? Green unitard thong and brownish sand of post-Apocalypse industrial wasteland of a landscape? This is probably the scenery at NTMA today. The guys, and my heart goes to them for their effort (honestly - they did as good of a job as was possible under the circumstances), have gone away with loading into the markets a €700mln worth of 10-year Irish bonds. They wanted to upload €1bn, but stopped selling 30% short of the target. Why, you might ask? Well, it all comes down to terms. There is no actual information on bid spreads, but the average was 5.80%, lowest price of 89.6, average price 89.527. Yikes.

Some time ago I predicted that we might see 6.5-7% yields on Irish Government paper by the year end. Well, that was before the latest 50bps drop in the ECB rate (March 11), implying that at 5.80% today we are in the territory of 6.00-6.10% already if compared with the situation before March 11th.

What is even more telling is that I was right on March 10 when I priced 10-year bonds in the range of 5.7%-5.9% (here).

Lastly, it is worth looking at the volume of issue - €700mln... sunflower seeds for the public sector - at current rate of spending, Brian^2+Mary are going to get through this amount in less than 4 days and 1 hour 30 minutes. NTMA is better start issuing new paper weekly at that rate of spend! Or maybe they should pick up a phone and dial Leinster House, asking to stop the madness of bleeding the taxpayers and companies to feed the beast of our public sector and start cutting fat. Showing the markets that Ireland's Government is not just a public sector unions' crony and is capable of getting its fiscal policy under control just might bring down the cost of borrowing.

Happy Times?


Update: the media is singing praise for yesterday's issue, but hold on: they say we raised €1bn, in reality, we raised only €700mln in 10-year paper and €300mln in 3-year paper. You don't have to be genius to see that the 3-year stuff is going to mature before the expiration of the 2013 deadline for putting our finances in order. So in effect, we kicked €300mln worth of a problem into the scoring zone... This is equivalent to a drug addict's miraculous 'recovery' reports when the chap simply stashed some powder for a quick hit in a couple of hours time. Some success.

More details from NTMA itself: for the 10-year bond, lowest price 89.46 at yield of 5.818%, weighted average yield 5.808%. Pricey stuff this is and wait until the mini-budget shows the rest of the world that Cowen has no intention of seriously tackling the deficit - where will we be next time we shove pile of debt into pre-2013 maturity?

And you don't have to be a genius to recognize that if the state completes one 'successful' auction like the one yesterday per month, NTMA will have, by the end of 2009:

• raised maximum of €10bn, while we need €15bn just to stay afloat this year;
• pushed some €7bn (€3bn in monthly auctions, plus €4bn in February sale) in new debt into 2011;
• reached €63.5bn national debt level (up from €52.5bn as of the end of February); and
• forced Ireland Inc even further away from meeting its commitment to the European Commission of getting under 3% budget deficit limit by 2013.

Yesterday's success is starting to look more like a Pyrrhic victory to me.

Private Sector credit supply is being damaged by this Government

A recent working paper from the European Central Bank, titled "Modelling Loans to Non-Financial Corporations in the Euro Area" (ECB WP No 989/January 2009) provided a benchmark model for assessing the impact of twin shocks of increase in the policy rate (ECB main interest rate) and increase in the banking system risk premium on the supply of credit to non-financial corporations across the Eurozone. The authors, Christoffer Kok Sørensen, David Marqués Ibáñez and Carlotta Rossi showed that a 25bps increase in the headline interest rate "causes a reduction in bank lending of about 1.4%, 5.4% and 6.4% after 2, 5 and 10 years, respectively. A 20bp increase in the risk premium on bank lending rate reduces bank lending to non-financial corporations by about 0.6%, 4.0% and 5.1% after 2, 5 and 10 years, respectively."

Of course, the first experiment coincides fully with the ECB's reckless 25bps hike in rates between June 2007 and October 2008. The second, however, is even more dramatically important from the point of view of private credit availability. Between August 2007 and today, Irish bank's risk premia on lending to the banks has risen by some 300%, implying, under the ECB model, an expected drop in the credit supply to Irish non-financial corporations of ca 9-11% in 2009-2010, rising to a whooping 75-99% between 2009-2018.

Alternatively, between December 2008 and today, the average weekly CDS spreads on Irish Government bonds have risen some 160bps. Given our state's exposure to banks debts, this is a comparatively reasonable measure of the overall increase in the risk premium on banks lending. Thus, within the span of only 3.5 months, our expected credit supply to non-financial corporations has fallen by the estimated 5-6% for the period 2009-2010, 30-35% for the period of 2009-2013 and by 40-47% for the period of 2009-2018.

As I always said, Mr Lenihan should stop blaming the Americans for this crisis. And he should stop saying that there is no cost to the broader economy from his rushed general debt guarantee to the banks. Instead he should look at his Government's fiscal imbalances, wobbling decisions on financial sector rescue, blanket and unsustainable guarantees to the banks, appeasement of trade unions at the expense of the taxpayers, destruction of the private sector via higher taxation and charges, etc - in other words all the policies that undermine international markets' confidence in Ireland Inc. His policies, responsible directly for the rising risk premium on Irish Government debt are also destroying the private credit markets here. Not only today, but well into the future.

Daily Economics Update 20/03/2009 - II

Ireland

Retail Sales volume decreases by 20.4% in January 2009 relative to a year ago, per CSO report out today. In monthly terms, index fell 9.4%. Mad numbers. And the things are going only to get worse, given the inept, virtually economically illiterate policies this Government has been putting out to date. Motor trades collapsed by 42.2% in January 2009 - in part due to tax hikes in October, in part due to VRT and road tax changes by the Greens, and to a large extent due to income uncertainty being hammered by the additional uncertainty as to the tax hikes the Government is planning to inflict on this already devastated economy. Ex-motor trade the volume of retail sales decreased by 8.1% in January 2009 compared to January 2008 and the monthly change was -0.1%. The value of retail sales decreased by 19.9% in January 2009 compared to January 2008 and decreased by 10.0% in the month. These are the largest annual decreases on record (1974 for volume record, 1962 for value).

Food, beverages & tobacco were down -11.6% in volume and -8.2% in value annually. These are inelastic demand articles, showing the full extent of consumers taking their business out of the Brian^2+Mary-devastated Ireland to the North and the Continent. Virtually every category of durable goods - goods that can be purchased up North and brought back to Ireland - is showing decreases in the 20-30% range. This is the real cost of Government's incompetence and the real indication that for all the wishful thinking our pro-tax-and-spend economists (in academe and SIPTU/ICTU) might deploy arguing that higher VAT will produce higher revenue, the reality of raising VAT (or income tax, for that matter) in terms of Exchequer revenue is going to be brutally contrarian.

Check other commentators' view - here Gerard O'Neill's blog on the topic, comparing the situation to "economic bungee jumping without the bungee". Well put! And here is another good comment worth reading.

Myles' post links to a report produced by the Office of the Revenue Commissioners and the CSO in February 2009, desperately trying to explain away the price differentials between the Republic and NI by all possible means other than those that put blame at the feet of the Government. Myles cuts past the bull&castle stuff in the report and, I think, correctly places most of the blame on the Government policies of squeezing consumers out of their earnings. But the linked report is fun. Fun, because it had to rely on, wait, other Government reports (e.g. June 2008 report by that illustrious data collection and analysis organization - the National Consumer Agency - that wouldn't know a data point if it jumped out of the hedge and bit it, and December 2008 Forfas report that was so poorly prepared and sampled that it was rubbished by several subsequent responses to it, including some from the objective/disinterested organizations and individuals). So I do encourage you to read through the report that Myles links in his blog - it is a good example of self-referential work being done by Government agencies.

Also per CSO release, the number of dwelling units approved was down 22.4% in year to the end of Q4 2008. In Q4 2008, planning permissions were granted for 10,375 houses as opposed to 13,135 in the Q4 2007, a decrease of 21%. Only 3,392 planning permissions were granted for apartment units, compared with 4,598 in Q4 2007, a decrease of 26.2%. The total number of planning permissions granted for all developments was 8,977, as compared to 12,330 in Q4 2007, a decrease of 27.2%. Dire stuff once again. I will do the detailed analysis of the sectoral decline dynamics in a follow up to this post.

Oh, and here is a pearl: Industrial wars are heating up... This is from IFUT - "a professional association and union representing over 1400 staff in third-level institutions" (hat tip to an Anonymous)

"Subject: BALLOT FOR INDUSTRIAL ACTION
I wish to advise you that the Ballot for Industrial Action was counted today and the following is the result:

Total Ballots Cast: 737

Those in Favour: 499 - 67.7%

Those Against: 237 - 32.3%

Spoiled Votes: 1

Therefore, the majority in favour being above the minimum set out in Rule 16 (b) (ii) we are authorised to participate in the ICTU National One-Day Stoppage scheduled for 30 March 2009..." blah-blah-blah, signed by the General Secretary of IFUT.

Note that per IFUT own website, there are over 1,400 members in this organization. Assuming the vote count reported is correct and that IFUT's rounding rules are the same as those holding for the rest of humanity, the ballot was passed with just 35-36% of the total number of eligible voters on a turnout of just above 50%. Hmmm... without a doubt - a mass-movement, supported by popular outrage against the Government.

US
According to the latest data from the US Treasury Department (here) the US public debt just passed $11 trillion. Chart below (courtesy Seeking Alpha - here) illustrates.
If you think Obamanomics will be the New Bill Clinton era, think again - more than $2trillion worth of new US bonds to be issued this year alone is going to see this chart shooting for $13trillion mark by the end of 2009. Thereafter? The sky is the limit.

Although dollar is currently trading on the upside (0.41%) to the euro, given the US public debt trajectory and factoring in the aggressive quantitative easing by the Fed, it is hard to see how the green buck can stay below $1.45-1.47/1euro range...

To update you on General Electric figures concerning GE Capital's (alleged) rude health, here is a link to investor presentation.

An interesting (and pioneering) case is developing in the US: the battle-ravaged AIG filed a lawsuit against Countrywide Financial Corp - one of the largest issuers of MBS. The lawsuit alleges the mortgage lender misrepresented the underwriting standard of loans that the AIG unit insured. The claim is that mortgages packages insured by AIG either violated Countrywide’s own guidelines or contained defects. Surely this paves the road to European insurers to sue mortgage providers and MBS-issuers. The big question for Irish financials is now - how soon can this wave of liabilities reach our own shores?

A Georgia-based FirstCity Bank was closed by the US regulators today, marking the 18th bank failure of 2009. Regulators also shut down some US credit unions with assets of up to $57bn.

Market View: Lenihan's Cod Oil Sales Trip?

Weekly round up
We are in a thaw though don’t bet on this being a sign of global warming. The markets have shown some (to some not surprising) bounce in the latest (bear) rally. Across the world and here in Ireland. But the winter isn’t over, yet.

First where it all started from: the US. Some encouraging news:

• The U.S. trade deficit narrowed by 9.7% in January to $36bn, the lowest monthly gap since October 2002. This marks a sixth consecutive decline in the trade deficit, the first case of such extended contraction since the new data collection started in 1992. Oil and petroleum products deficit fell to $14.7bn in January, the lowest since September 2004. Trade deficit with China widened to $20.57bn relative to $20.31bn in the same month last year. Lower prices for inputs and commodities helped. In exports, main decreases were in the areas of capital goods and industrial goods – reflective of the global investment slowdown. Ditto in the area of imports (except that capital goods imports were down less than exports, suggesting companies continue to travel down the cost curve. Details here).
• US University of Michigan/Reuters consumer sentiment index notched up in March to 56.6 from 56.3 one month ago. While this beats analysts’ expectations (55.0), the improvement is hardly significant to signal any improvement in consumer spending and borrowing going forward. This is despite March being the first month of Obama’s massive stimulus plan – not exactly a ringing endorsement (for more on this see here)
  

So the last week came to be a somewhat bullish one with flat US Treasuries, low single-digit gains in commodities and a rally in stocks (up ca 10-14%) with commercial real estate-leading markets, like REITs. Up over 20%.
US Dollar has lost some ground on the Euro, further underlying markets desire to see continued strengthening of the US trade balance. In this beggar-thy-neighbour climate, good news for US is bad news for exports-driven Ireland.

Financials
JP Morgan and Morgan Stanley (first chart below) illustrate the rally for the financials. Most of the sector gains were probably due to rising levels of speculative news flow. If this is a signal of a renewed focus on balance sheet health, expect the rally to turn into a deep correction. Bank of America (BAC) – up some 85% during the week – is a case in point. There is no fundamentally new development, yet this week’s statements about improving outlook on profitability pushed the stock to the top of the financial shares (Citibank (C), Wells Fargo (WFC) etc) performance rankings. The second chart below illustrates, while highlighting the relatively poor performance of non-financials.

Irish Markets
Pretty much the same picture holds for Irish markets. Two of the three remaining banks led the positive momentum with few features of note:

1. Volumes were relatively weak (running at ca ½ of the 52-weeks daily averages);
2. IL&P underperformed (with the markets having little faith in the bank side of the insurer, as in the past);
3. Overall ISEQ posted a lacklustre performance for the week, signaling that the main concerns about Irish economy’s fundamentals are still there.
   

These are illustrated below and show continued theme of volatility around a relatively flat broad markets trend - something I predicted a month ago.
The above concerns, of course are to continue next week as well.

Ireland Inc Sales Pitch
It is now being rumored that Mr Lenihan is going on that 'road trip' to showcase Ireland to UK (and other international) investors. Here is a list of problems that I would put to him at such a sales meeting. All of these basically ask the same question - why would any investor expose herself to Ireland today.

1. Fiscal position: all the indications are that Minister Lenihan will opt for a ‘soft’ solution – raising taxes and refusing to inflict real cuts on the public sector. Thus, ‘savings’ on the current expenditure side will be pushed into 2011 or later as the Minister ‘cuts’ numbers through natural attrition. Taxes will hammer the economy today. Only an insanely naïve person can be convinced by such a strategy.
   
2. Corporate credit: debts problems continue to plague Irish companies, with more roll-overs and re-negotiations of the covenants. This will be compounded in weeks ahead by an accumulation of arrears to contractors and suppliers. Mini-Budget will spell a war of attrition between smaller services providers and larger contracting companies as the former struggle to extract payments in the environment where Messrs Lenihan and Cowen sneaking deeper into peoples' (and thus companies') pockets.
3. Corporate outlook: PE ratios are still too high for Ireland Inc, implying that there is more room for downgrades. In the US, there is more clarity as to the 2010 PE ratios supported by the markets, with a range in 15-20 perceived to be the top during the recovery part of the cycle (whenever this happens). So the expected downgrading room that is still remaining in, say S&P500 is -150 points or ca 20%. In Ireland, the same figures imply probably a range of sustainable 2010-2011 PE ratios of ca 10 (again assuming that we see some recovery starting in 2010 and companies actually living up to the idea of proper disclosure of losses and impairments – something that few of them have done to date). So the bottom line is that we can see ISEQ travelling all the way to 1,470-1,500 before hitting a sustainable U-turn, while IFin might be tumbling down to 200-215.
4. Earnings and demand are going to continue falling in months to come. Although much of this is already built into expectations, the actual numbers are not yet visible through the fog of corporate denial. Banks still lead in terms of balance sheets opacity and the Government is doing nothing less than destroying in a wholesale fashion private workers’ ability to stay afloat on mortgages repayment and consumption. Dividend yields are now poised to continue downward well into 2010 (optimistically) or even past 2011 (pessimistically). So any bottoming-out of the market will coincide with an on-set of an inverted J-styled recovery – we are not getting back to 4-5% long term growth trend once we come out of this recession. A poultry 2% would be a miracle and a Belgian-style 1.2-1.5% GDP growth over the long run is a more likely scenario.
5. Global growth for Ireland Inc is not going to be a magic bullet. The Government has wasted all chances of reforming the least productive sectors in this downturn and is hell-bent on protecting our excessively high cost base. This means we are unlikely to benefit from any serious global growth upturn.
6. Increased global reliance on Governments interventions is going to hurt Irish exports in the long run as national Governments will tend to reduce incentives for outsourcing, leading many MNCs to gradually unwind transfer pricing activities here in Ireland. There is absolutely no chance our Enterprise Ireland-sponsored companies are going to be able to take up the slack.
7. No recovery in Ireland will be possible until house prices and commercial real estate values stabilize and start improving. High debt, diminishing ability to repay existent loans (courtesy of Government raiding households finances to pay for waste in the public sector and a growing army of consultants – e.g Alan Ahearne & Co) all mean that there is no prospect for a return in house values growth until, possibly, well after 2013. Absent such a recovery, there will be no sustained rallies in other asset classes.
8. Finally, there is a psychological shift that is underway when it comes to Irish public perceptions of asset markets. This shift is now counter-positing a 40-50% decline in house prices against a 90% decline in most popular equity categories and a wipe-out of investors in nationalized (and potentially yet to be nationalized) banks. The return of a growth cycle is unlikely to trigger significant movement of households’ cash into Irish stocks. This will be further compounded by the aversion to leveraging and continued credit rationing (induced via new banking regulations and investor hysteresis).
   

So the conclusion is a simple one – Irish equities recovery is nowhere near becoming a reality. Expect further turbulence on a generally downward trajectory in weeks ahead, followed by a potential spike of misplaced short-term optimism in the wake of the mini-Budget. Once the investors work through the forthcoming Government decisions, it will be down again for ISE.