Economics 22/7/10: Irish bonds auctions - a Pyrrhic victory?

“Despite Moody’s downgrade on Ireland’s credit rating on Monday, the NTMA successfully borrowed €1.5bn yesterday. Yesterday’s auction showed increased demand from investors for Irish debt and now means that the NTMA has completed 90% of its 2010 long-term borrowing programme.”

That was the swan song from one of Irish stock brokerages.

Lex column in the FT was far less upbeat, saying Ireland “offers a not terribly encouraging example of how difficult it is to overcome a massive debt binge.”

NTMA might have pre-borrowed 90% of this year’s €20bn borrowing target . But two things are coming to mind when one hears this ‘bullish’ statement.

Firstly, the €20bn is a target, not the hard requirement. If banks come for more cash, Brian Lenihan will have to get more bonds printed.

Secondly, Irish spread over German bunds is now higher than it was at the peak of the crisis in early 2009.

Want see some pictures illustrating Irish borrowing ‘success story’?

Let us start on the shorter end of maturity spectrum – 5 years and under:

Chart 1Average yields are trending up over the entire crisis term and are soudly above their entire crisis trend line since June. More significantly, the trend is now broken. As yields declined in 2009, hitting bottom in October, since then, they have posted a firm reversion up and once again, June and July auctions came at yields above those for this dramatic sub-trend.

Worse than that – in complete refutation of ‘improved demand’ claim by the brokers – yield spreads are now elevated. This spread – the difference between highest yield allocated and lowest yield allocated – suggests that markets are having trouble calmly pricing Irish bonds issues. Success or psychosis?

Chart 2 below illustrates the same happening in terms of price spreads.

Chart 2Auctions cover for shorter term paper is still below the long term trend line, although the line is positively sloped.

Chart 3Chart 3 above shows just how dramatic was the price decline and yields rise in Q2 2010 and how this is continued to be the case in July.

Chart 4Chart 4 gives a snapshot on pricing.

Next, move on to longer term bonds (10 years and over). There has been only one issue of 15 year bonds, so it is clear that the NTMA is simply unwilling to currently issue anything above 10 year horizon because of prohibitive yields.

Chart 5Chart 5 above shows upward trend in yields and July relative underperformance compared to longer term trends. It also shows yield spreads – again posting some pretty impressive volatility in June and bang-on long-term average (or crisis-average) performance in July. If that’s the ‘good news’ I should join a circus.

Chart 6Weighted average price is not changing much over the crisis period, so no improvement is happening here. In fact, since May it is trending down below the long term trend line, suggesting significant and persistent deterioration. Cover is on the up-trending line, but came in below the trend in June and July.

Chart 7 below shows more details on max and min prices and yields.

Chart 7Chart 8Chart 8 above clearly shows how average price is now in the new sub0trend pattern since November 09 price peak. May-July prices achieved are clearly below long term trend line and even more importantly – below the sub-trend line.

Finally, chart 9 shows the maturity profile of auctioned bonds:

Chart 9Notice how before the 2014 deadline, the Exchequer is facing the need to roll over €6,381 million in bonds issued during the 2009-present auctions. If Ireland Inc were to issue more 3-year bonds, that number will rise. That should put some nasty spanners into Irish deficits-reduction machine. But hey, what’s to worry about – our kids will have to roll over some €21,264 million worth of our debts (and rising), assuming the Bearded Ones of Siptu/Ictu & Co don’t get their way into borrowing even more.

Let us summarize the ‘success story’ that our brokerage houses are keen on repeating:

Table 1In other words, we are now worse off in terms of the cost of borrowing than in January 2010 – despite the ‘target’ for new issuance remaining the same throughout the period. We are even worse off now than at the peak of the crisis in March-April 2009 in short-term borrowing costs, although, courtesy of the German bund performance since then, we are only slightly better off in terms of longer maturity borrowings.

The compression in yield term structure delivered in June-July this year is worrisome as well. It suggests that the markets are not willing to assume that Irish Government longer term position is that much different from its shorter term prospects.

So on the net, then, what 'success' are our stock brokers talking about then? The success, of course is that NTMA was able to get someone pick up the phone and place an order, at pretty much any price? Next time, they should try selling pizzas alongside the bonds - the cover might rise again and they might convince the Eurostat that pizza delivery services are not part of the public deficit...

Ecoinomics 19/7/10: Moody's downgrade Redux

As Brian Cowen has been telling the world that Ireland has turned the corner, the country got some rude awakening.

First, Moody’s – aka the lagging indicator – pushed Irish bond ratings one notch down to aa2. Second - and I will be covering this in a separate blog post - Nama has completed transfer of the second tranche of loans.

With it, Moody’s also downgraded to aa2 that ‘not our problem, says Lenihan’ debt called Nama bonds. Irony has it, for all the SPV accounting tricks deployed by the Government, Nama bonds are rated on par with sovereign bonds and Moody’s statement justified both downgrades as being primarily driven by “the government’s gradual but significant loss of financial strength, as reflected by its deteriorating debt affordability”.

Per Moody’s, the third key factor driving rating cut is “the crystallization of contingent liabilities from the banking system... Overall, the recapitalization measures announced to date could reach almost €25bn …and Moody's expects that Anglo Irish Bank may need further support. … While we do not expect the government -- not even in a moderately stressed scenario -- to incur permanent losses in excess of 25% of the country's 2009 GDP as a result of [Nama] obligations, we believe that the uncertainty surrounding final [Nama] losses would exert additional pressure on the government's financial strength.”

Oh, mighty. So Moody’s believes that Nama will generate final losses. May be not as bad as €41bn (1/4 of GDP), but certainly losses. And notice that losses below 25% of GDP are expected by Moody’s explicitly in the scenarios that are better than or equivalent to their ‘moderately stressed scenario’… Of course, Nama’s Business Plan Redux envisions losses only in the ‘worst case scenario’ and even then, the modest €800mln.

“Moody's notes that the country could experience downward rating pressure in the event of (i) a failure of the economy to rebound in a meaningful way; and/or (ii) a severe deterioration in the country's debt metrics triggered by a further crystallization of bank contingent liabilities beyond Moody's current expectations.”

Err… let me see…

Bank recapitalizations that Moody’s have factored in – at €25bn to date – have already been exceeded, with current running estimate at €32bn committed, plus last week’s open-ended offer to give AIB anything it needs from Brian Cowen. These are likely to rise once again after today’s announcement from Nama on tranche II transfers. So condition (ii) is already satisfied.

Per economy’s likelihood of a rebound – well, give it a thought. Government policy over the last two years was characterized by increased taxes, retained waste, lack of reforms in public sector, lack of reforms in state-controlled private economy, lack of reforms in bankruptcy laws, massive waste of funds on poorly structured banks supports, and laissez fare in relation to banks and semi-state companies ripping off consumers and businesses. None of it is likely to change in 2011-2012. Which part of this litany of economic policies misfires can contribute to an increasing likelihood of a robust economic rebound?


Ireland is clearly not out of the woods when it comes to bonds ratings and this persistent problem of continued deterioration of public debt ratings will be a costly one.

Mark my words – as Ireland’s public finances continue to deteriorate, our debt will become more costly to finance. Should the Government opt for any tax increases in order to raise 2011 revenue, it will face continued fall off in income and transactions taxes collected, as people engage more actively in tax liability minimization. This will trigger widening of our deficits in excess of international forecasts (no one pays attention to our own ‘rosy’ forecasts anymore), leading to further debt downgrades. In particular, I would expect Fitch to move first once again to put two notches between itself, Moody’s and S&P.

One more point before we conclude. Irish banks are heavily dependent for capital and collateral on Irish sovereign and Nama bonds. The latest downgrade must have an adverse longer term impact on the quality of the banks balance sheets. Regardless whether AIB and BofI pass their EU-administered stress tests or not, I would expect the Moody's downgrade to have potentially significant adverse effect on Irish banks ability to tap private markets for funding in the near future. This, of course, might trigger another run on the Exchequer and customers by our leading banks.

Economics 2/7/10: The markets way of saying 'No'

Just in case anyone reading the vitriolic blogosphere stuff about my conclusions questioning the 'turn around' in the Irish economy based on the 'nominal data' (apparently there are people out there capable of commenting on economy, yet unable to read in plain English), here's another take on our 'turning the corner' path. This time from the bond markets: 10-year bond yields for Ireland (red) and Portugal (black) - hat tip to Brian:
Notice Ireland hanging above Portugal in the chart, and notice the path we took since January 2010.

My entire analysis of Irish data to date is consistent with the markets pricing of Irish economy. So either a couple of nameless commentators on Irish posting boards are off in their views of reality, or the entire market is plain wrong. What was it, that someone once said about doing something against the gale force wind?

Economics 18/06/2010: Banks, bonds and banks again

Brian Lenihan confirmed yesterday that the Government is now seeking an extension of the bank guarantee scheme by 3 months to the end of 2010 to coincide with capital requirement deadline set by the FR. The extension with cover new liabilities of 3mo-5 years and will not cover subordinated debt. This was expected, given the profile of maturing banks debt and the dire conditions in the funding markets where investors have been reluctant to extend new funds to Irish banks (based on the high risk perception concerning the sector and geography) and the interbank lending markets remain in elevated yields territory. Sovereign spreads reaching 313 bps for 10 year paper over the bund are not helping either, record levels, indeed.

Added uncertainty weighted on the banks is stemming from the rumors surrounding the issue of regulatory controls that the Central Bank is expected to impose on banks loans distribution across various sectors. It is expected that the CB will push (next week?) for specific maximum exposure ceilings on lending to property sector for banks. If so, this will require serious re-thinking of Irish banks models away from the traditional reliance on property-based collateral deals going to finance more property-related investments and in favour of more business and consumer oriented banking.

The winner - of the Big 4 - here will be BofI, which has a much more customer-oriented model of consumer banking than AIB (not to mention ptsb or Anglo). But all banks will find it challenging to bring in more consumer orientation in the environment where thy are trying to push up margins on existent paying clients. And even more importantly, all banks will find it difficult to enter serious business investment markets.

Meanwhile, on wholesale funding side, things are now so desperate that the EU - never the first to push for greater transparency - is being forced to publish the results of stress tests on the region’s banks. Expected before the end of this month, the tests are likely to be a hogwash - Merkel already stated that the 'EU has taken precautionary measures' in relation to stress tests results. Whatever this might mean, one wonders.

There's an excellent post on econbrowser blog (here) on the extent of the PIIGS banks problems and the expected size and geographic distribution of potential contagion. A chart below says it all:
I mean, really, folks, we beat Greece and Portugal as a combination. And for UK banks, we beat all other 3 sickest puppies.

Economics 07/06/2010: Moving to the next stage in Euro crisis

Last Friday, speaking at the CPA annual conference (will be posting the highlights of the speech here later) I referred to a new 'beast' of the sickly-prickly Eurostates: the BAN-PIIGS. The new bit - 'BAN' - referred to Belgium, Austria and the Netherlands.

Fast forward two days, getting off the trans-Atlantic flight in hot and humid New York guess what hits my news feed? Belgium and France taking in water on the back of Hungary's woes (see earlier post here) and Ukraine is putting some new pressures on Euro area banks. French and Belgian CDS are moving up, while Austria is also back in the spotlight.

Brian Lenihan's announcement that Irish banks will be rolling over €74.2bn of guaranteed loans, bonds, and other systemic support papers before October 1 guarantee is scheduled to run out is not helping the markets either. As Morgan Kelly, Karl Whelan and couple other analysts estimated - once again well ahead of our gallant DofF 'forecasters' - everyone dependent on the Irish government guarantees will be pushing their re-scheduling/roll-overs before October hits.

Surprised? You see - we used to have one main crisis back in 2008-2009: insolvency of banks balancesheets. It should have been resolved directly through recapitalization of the banks via equity take overs by the taxpayers and restructuring of the banks debts. Foolishly, we chose a different path:

• We facilitated banks rolling over debt - as if changing maturity date on the bonds that cannot be serviced changes the level of debt impacting the banks;
• We then proceeded to allow banks to name their capital requirements by allowing them to spread their losses over longer time horizon, as if changing the date of repayments start on a defaulting loan can make the loan perform;
• Following this, we pumped the banks with steroids of ECB facilitated lending - as if swapping few private bonds for ECB loans resolves the problem of balance sheet overhang;
• We created Nama to take bad loans off the banks balancesheets, but, realising the futility of the undertaking, went on to impose unrealistically low haircuts that simply sped up some of the very process of losses recognition in the second bullet point above. Given the levels of real impairments on the loans, Nama only bought banks more time to spread their losses, thus avoiding recognizing the problem of weak balance sheets and amplifying the problem of insolvency;
• Amidst all of this, banks became liquidity traps - sucking up vast amounts of funding. This was not fully satisfied by the ECB, so the banks engaged in predatory re-pricing of performing loans (mortgages etc) in a futile effort to get some more cash flowing;
• The insolvency crisis blew up into a liquidity crisis.
  

So now we have both. And no real way of resolving either or both.

We could have sustained this game, teetering on the brink between full insolvency and a credit crunch, if and only if the euro bonds markets were at the very least stable and the ECB was capable of parking collateral garbage it collected in exchange for banks loans for a long time. Alas, two things are currently under way.

First, the French bonds have slid off their 'safe heaven' pedestal over the last couple of weeks, with spreads over the German bund going up eight-fold since the end of 2009. French bonds are now posing massive liquidity risk to institutionals holding them. French Prime Minister declared last week that: “I only see good news in parity between euro and dollar”. In effect, the French are now openly inviting massive devaluation of the euro - something that is bound to disappoint Germany.

Second, there is no room for more Quantitative Easing, as the ECB has been exposed as an institution that has run out of reserves cover for its own operations. Last week, ECB balancesheet had more than 150% ratio of immediate liabilities to assets held. And that was only for liabilities vis-a-vis Greek rescue package.

Something will have to give, folks. Just as Ireland has precipitated its own implosion by pushing the liquidity crisis on top of our already formidable insolvency crisis, so the ECB and the entire euro zone is now working hard to achieve the same. We are now well behind that point of no return in monetary policy where promises to act with support for the sovereign bonds will be sufficient to stave off a run on the bond yields. Instead, the ECB's rhetoric will be tested, leaving it only one option - start running printing presses.

Now, those of you who followed my writings on the issue will say 'Good, we need a massive - €3-5 trillion - issuance of cash, don't we?' The problem is that while the answer is 'yes, we do', this emission cannot simply involve purchasing of more Government bonds. We need a direct, un-levered injection of new money into the system and it must be broadly based - going not just to the public coffers, but to private economies of the Euro area as well. ECB printing cash to buy Government debt will not reduce the debt levels for the Eurozone sovereigns (which means insolvency problem will remain and will actually increase), nor will it resolve the problem of liquidity crunch in the block (giving money to the Governments to finance roll over of existent debt is about as liquidity-enhancing as burning this cash in a fireplace).

The end game, in my view, can be only across three major disruptions in the euro assets:

• Collapse of the euro below parity of the US dollar; followed by
• Debt restructuring through offers to the bondholders to take a haircut (possible ranges: 35-50% for Greece and Portugal, 25-30% for Spain, 20% for Ireland and Italy, 15-20% for Austria, Belgium... and so on). These will be attempted first privately - via larger institutional consortia, with both sticks (threat of default) and carrots (some sort of delayed tax incentives?) being deployed to get larger institutional holders to accepts a drastic shave off; and once this is underway, the inevitable conclusion to the crisis will be:
• Imposing haircuts on banks bondholders, with the ECB standing by to hose the banks with cash, should liquidity dry up during the haircut imposition.
  

Finale: euro's credibility gone, euro/usd rate below parity persists, inflation will be running ahead of economic recovery and Europe will slide into a Japan-styled long-term depression.

In the mean time, before the end game, expect more bans on trading in various instruments (the French have finally agreed to the German-style ban on naked shorts) and more fiery rhetoric about speculators, destabilizing market forces and other gibberish from the dear leaders of Europe.


PS: All of this reminds me of a conversation I had with one very senior stocks analyst/strategist back in the middle of 2008 meltdown in the markets. I was concerned that the ways in which fiscal and monetary authorities were throwing cash at the banks were going to lead to both running out of policy space to continue accelerated supports for the sector and economy at large. "Charged by the bear, make sure you don't run out of all bullets early on. You might miss," I insisted. In response I was given a complete assurance that resolute actions on large scale (equivalent to unloading the entire magazine of ammunition at the shadow of the problem before actually having an idea as to what the problem really is) will mean that the 'Bear won't be charging for long'. I wish I was wrong... He still writes daily, weekly and monthly missives about the investment strategy for clients.

Economics 04/06/2010: Bond markets are still jittery

For all the EU efforts:

• Throwing hundreds of billions into the markets in bonds supports;
• Banning 'speculative' transactions;
• Talking tough on reforms;
• Bashing rating agencies into a quasi-submission; and
  
• Proposing a 'markets calming' [more like 'markets killing'] financial transactions taxes

There has been preciously little change in the way the bond markets are pricing sovereign debt of the PIIGS. More ominously, the crisis is not only far from containment, it is spreading. Following PIIGS, the attention is now shifting onto BAN countries - Belgium, Austria and Netherlands. And in the case of Austria, the unhappy return of the Eastern European woes is now seemingly on the cards.

How so? Look no further than Hungary. The country had taken IMF bailout money, promising to deliver severe austerity measures. It now faces a new round of pressures due to once again accelerating deficits. It looks like the cuts enacted were not structural in nature, amounting to chopping capital expenditure programmes rather than current spending... Sounds familiar? so here we go again (courtesy of Calculated Risk blog): spreads are rising (Ireland's position as the second sickest country by this metric remains unchallenged) and CDS rates are rising as well (Ireland's still in number 3 spot).
As Calculated Risk points: "After declining early last week, sovereign debt spreads have begun widening for peripheral euro area countries. As of June 1, the 10-year bond spread stands at 503 basis points (bps) for Greece, 219 bps for Ireland, 195 bps for Portugal, and 162 bps for Spain."

Let's get back to Hungary, though: yesterday, Hungarian officials said that instead of 3.8% of GDP deficit target, 2010 is likely to see the deficit widening to 7-7.5% of GDP. Who's to blame? Well, per Reuters report: '"fiscal skeletons" left by the previous Socialist administration'.

Economics 29/04/2010: Debt crisis is spreading

Another credit downgrade from S&P, this time for Spain, from AA+ to AA with negative outlook, based on the outlook for years of private sector deleveraging and low growth. Spain, as you can see, is severely in red in terms of debt, ranking 14th in the world. Spain's external liabilities stand at 186.1% or $2.55 trillion (as of 2009 Q3) against estimated 2009 GDP of $1.37 trillion.

The country is actually worse off in terms of debt than Greece which has ranks 16th at debt at 170.5% of GDP or $581.68 billion, with 2009 GDP of $341 billion.

Of course, Ireland is world's number 1 debtor nation with external debt of 1,312% of GDP (IFSC-inclusive) of $2.32 trillion in Q3 2009 against the GDP of $176.9 billion. Of course, part of this debt is IFSC, but then, again, we really do not have a claim on our GDP either, with GNP being a more real measure of our income. So on the net, our debts - the actual Irish economy's debts - are somewhere in the neighborhood of 740%. This is still leagues above the UK - the second most indebted nation in the world - which has the debt to GDP ratio of 'only' 426%!

The S&P also provided estimate for expected recovery rate on Greek bonds, which the agency put at 30-50%. In other words, S&P expects investors in Greek bonds to be paid no more than 30-50 cents on the euro. Yesterday on twitter I suggested that "Greek debt should be renegotiated @ 50cents on the euro - severe default. Portugal's @ 80 cents - mild default, Irish @ 70-75 cents". Looks like someone (S&P) agrees. Before it is too late, before German and other European taxpayers have poured hundreds of billions of euro into the PIIGS black hole of delinquent public finances, Europe should cut losses and force Greece and Portugal to renegotiate their liabilities. If Ireland and Spain were to elect to follow, so be it. Of course, in Irish case, the debt re-negotiations should cover private debts, not public debt.

Just how many billions of euros are EU taxpayers in for for the folly of admitting Greece - a country that spent 90 years of the last 180 (since 1829) in defaults on its debts - into the common currency area? Well, Greek 2-year bonds were traded at yields of 26% yesterday at one point in time. This is pricing that's in excess of pretty much every developing country, save for basket cases which practically cannot issue bonds at all.

IMF's Dominique Strauss Kahn has told Bundestag yesterday that Greek package will be

• €100-120bn for three years;
• Which means German taxpayers are on the hook for €67 billion over 3 years, not €25 billion that Germany ‘s economics minister was signing for in the original deal;
• Ireland's contribution will also have to rise to €4 billion over 3 years, not €500 million we originally were told we will have to contribute;
• Greece will not be forced to restructure or reschedule debt
• The loans to Greece will be subordinated to existent bondholders, which means that if in the end Greece does pay 30-50 cents on the euro to the latter, European taxpayers will be lucky to get 10 cents on the euro.

The whole deal is now looking like a massive subsidy for Greece and entails absolutely no protection to European taxpayers.

But internationally, EU news are getting darker and darker by the minute. Last night Bloomberg reported that EU countries are in for estimated €600 billion bill for the fiscal crises that have spread across the block. That's the cost, in the end, of all the tacky policy follies that Brussels endorsed and pushed through over the last 10 years -

• from the Lisbon Agenda, which was supposed to deliver EU to the position of economic superiority over the US by 2010,
  
• to the Social Economy, which was supposed to deliver... well, who knows what...
  
• to the Knowledge Economy, which was aiming to turn us all into brains in a Petri Dish
• to the absolutely outlandish HIPCI and HIPCII agendas wholeheartedly embraced by the EU, which were supposed to deliver debt relief to the world's real basket cases (before Greece and other PIIGS took the spotlight away from them), and the rest of the international white elephants.

The problem, of course, is that €600 billion price tag for fiscal excesses has generated preciously little in returns (despite what folks at Tasc keep telling us about the fiscal stimulus) which means we will have to pay for it out of our long term wealth. The same wealth that has been demolished by the recession and the financial markets collapse!

Economics 28/04/2010: Our week so far

So will Germany open a 'needle exchange' for Europe's debt junkies (para-phrasing Laughinbear comment)? Check CNBC's rankings of debt by nation (here - all rankings slide show)... Greece is No 16, Ireland is No1! Link here.

Ireland 10-year yields are at 5.6% and moving in tandem with Portugal and Greece. Here is a revealing weekly step-function for our 10-year notes (hat tip to Brian Lucey):

Economics 23/04/2010: Further details on Irish deficit numbers

More detailed analysis from the Eurostat on reclassification of the Irish deficit is available now. The link to the document is here. Go into Ireland file, spreadsheet for 2009.

Here is what is now apparent from the Eurostat analysis (italics are mine):

"In normal circumstances, under the National Pensions Reserve Fund Act, an amount equivalent to 1% of GNP (about €1.5bn) is paid by the Exchequer into the NPRF every year, in 12 equal monthly instalments. In May 2009, the total due to be paid under this arrangement for the remainder of 2009 and 2010 was paid in one tranche, in order to allow NPRF to fund the bank equity purchase entirely from liquid assets. (The actual 'extra' amount paid at this time was some €2.5bn, given the amount already paid or due to be paid under the normal Exchequer- NPRF funding arrangement.) The impact on Government D4_pay in 2009 is therefore the cost of borrowing this extra €2.5bn earlier than it would otherwise have to have been borrowed..."

In other words:

• The Government has by-passed voted-in Budgetary procedures to inject €2.5 billion in additional funding into Anglo by front-loading future NPRF funds into 2009 provision. There was no Dail vote on this.
• The Government pretended that the additional 2010 funds injected were not borrowed for under General Government Balance, thereby de facto claiming a right to transfer future expected receipts into 'liquid' current receipts. There was never any Dail vote to allow for this, as far as I know.
• This is not the only time that the Government exceeded its remit in by-passing the Dail vote in relation to recapitalizations. One can argue that the entire Anglo recapitalization was planned and committed in advance of the Dail vote on the issue.

Furthermore, under contingent liabilities section 7:

"7. Special purpose entities included here are those where government has a significant role, including a guarantee, but which are classified outside the general government sector (see the Eurostat Decision and accompanying guidance note for details). Their liabilities are recorded outside the general government sector (as contingent liabilities of general government)."

Per table 2 in the same spreadsheet, the above does not cover the Guarantees which amount to over €281 billion in 2009 (line 5). And in fact, these refer to Nama. Now, notice that 'imputations relating to the financing costs should be included' in line 4, which does count as a full General Government liability. Guess where the euribor cost of Nama bonds should be entered? Thus, Irish deficit might also include the 1.25%-odd payments to the banks from Nama bonds, or, assuming €35 billion issuance of these bonds - €437.5 million in additional deficit not accounted for in the Budget 2010.

Now, recall that in 2007 euribor has reached well over 4%. Suppose we go to a 3-3.5% euribor pricing on Nama bonds, rolled over annually. In subsequent years, if Eurostat retains this classification of liabilities, up to €1,225 million will be added to our deficits courtesy of Nama.

Economics 12/04/2010: Nama's economic distorionism

An interesting quote from the just-published paper (Claessens, Stijn, Dell’Ariccia, Giovanni, Igan, Deniz and Laeven, Luc A., Cross-Country Experiences and Policy Implications from the Global Financial Crisis. Economic Policy, Vol. 25, Issue 62, pp. 267-293, April 2010). I reported on this paper last year at length, when it was still an IMF Working Paper.

“An example of distortions between financial institutions and the fiscal conditions is the extension of guarantees in the case of Ireland to the largest banks. Prior to the extension of guarantees, the CDS-spreads for the large Irish commercial banks were very high. Post guarantees, bank CDS-spreads declined sharply, while the sovereign spread increased. Measures like these, now numerous in many advanced countries today, distort asset prices and financial flows.”

This goes hand-in-hand with the EU assessment of Nama as a market distorting mechanism, which, as reported last week by Irish Independent, was concealed from the public when our Minister for Finance issued a press release claiming that Nama was fully supported by the EU Commission.

Further per Claessens et al: “Guarantees on deposits and other liabilities issued by individual countries have led to beggar thy neighbor effects as, starting with Ireland, they forced other countries to follow with similar measures.”

This statement in effect condemns Irish Government claim that our Guarantee was a success because it was copied by other countries. Instead, as Claessens et al confirm, the Guarantee forced risk from Ireland onto our trade and investment partners. Not exactly a high moral ground.

“The rapid spread of guarantees led to further financial turmoil in other markets. Many emerging markets not able to match guarantees suffered from capital outflows as depositors and other creditors sought the safe havens. Distribution of risks sharply changed over time and across circumstances."

More importantly, both – the revealed note from the EU and the above academic assessment – provide a significant warning in terms of the future of the banking and property sectors in Ireland. Given the systemic nature of distortions, subsequent exits and scaling back of foreign banks presence in the country, the lack of transparency and fairness in the property markets, it is now virtually assured that post-crisis interventions Irish banks and property markets will remain in their zombie state. Japan-styled recession is a looming threat for Ireland Inc.


Of course, you wouldn’t notice this, if you were listening to some of our heroic stock brokers – especially those folks like Bloxham who back in mid 2008 ‘forecast’ that ‘markets do come back’. In their latest strategy statement, issued last Friday, the Bloxham’s boys have managed to outperform themselves in terms of Green-jerseying (emphasis is mine):

“Ireland is undergoing some of the heaviest self imposed penalties for the fiscal over exuberance of the 2000s of any EU economy since the global credit crisis began in 2008. From budgetary austerity measures to public sector wage cuts, from crushing additional taxes both personal and indirect, to a mega-costing banking recovery plan; all in the name of stabalisation and repositioning as a viable economy. As Ireland passes through the next major set of hurdles (the transfer of assets to NAMA and the recap of the banking system), the market reaction so far has been favourable.”

Any evidence of this?

“10-year sovereign Irish bonds are still trading at 146 basis points above German bonds, compared with 280 basis points at the worst point for the Irish system in March 2009. Compared with Portugal at 126 bps over Germany, Irish spreads still have strong progress to make.”

The more the things improve in the wake of all the measures passed by the Government, the more the spreads stay the same? Indeed: “Irish sovereign debt costs have remained static in the past week, while Greek debt costs balloon by 100 bps. In relative terms, Ireland sovereign performance has been exceptionally good since the “Super Tuesday” announcements from the National Asset Management Agency (NAMA), the Financial Regulator and the Minister for Finance.”

But hold on to your seats for a wild ride into the land of bizarre logic: “A falling Irish debt cost is largely unappreciated domestically but is a very hansom reward for the pain taken in Ireland thus far.”

I am now thoroughly confused, folks – if the spreads stayed the same, what falling Irish debt costs do the Bloxham folks have in mind? Am I missing something in their vernacular? Or are they missing in the faculty of trivial maths – falling costs mean declining spreads, yet the spreads ‘remained static’ and debt costs did the same.


A real pearl of the note is in its conclusions: “We would expect that the wider Irish stock market will also benefit strongly over the next 6 months, as re-cap plans proceed and the export sector resilience is maintained. Ireland could be finally coming back on the international investor map.”

Indeed it might. Or it might not. I wouldn’t venture a prediction here, but Bloxham guys – having been so right on so many occasions in the past (including that brilliant note from them back in July 2008 (see the note here) surely would know better. Except, hmmm, what does Ireland’s exporting performance have to do with Irish stock prices? Not much – more than 80% of our goods exports and over 90% of our services exports are accounted for by the MNCs – none of which are listed on Irish Stock Exchange. So unless Bloxham guys know something about Fortune 500 companies plans to relocate their listings to Dublin…

Economics 29/03/2010: PS productivity deal will cost us all

Per latest reports on the talks with the Unions, it now appears that the Government will yield on the Budget 2010 pay cuts and accept a premise that our vast structural deficit can be corrected through a long-term change in work practices in the public sector.

This position represents a drastic reversal of the attempted correction of the structural deficit and has the following long-run implications for Ireland:

1. Since productivity gains do not address the issue of reducing actual spend in the public sector, the entire burden of correcting the structural deficit can be expected to fall on the shoulders of the taxpayers;
2. If the deal commits the Government to no future cuts in public spending in Budgets 2011-2013, the deal will mean that the entire €13-14 billion in Budget adjustments needed before 2014 will have to be carried by the Irish taxpayers. This means taxes will have to rise by a massive €13,000 per annum per current tax payer - a move that would trigger a meltdown in the economy;
   
3. Since higher earning taxpayers are already paying more than half of the income tax bill, the new taxes will have to disproportionately impact lower middle classes, thus in effect inflicting pain on the very workers whom the unions are allegedly aiming to protect;
4. Since the structural deficit will remain unaddressed, Ireland will not reach 3% deficit target by 2014, or for that matter by 2020, implying that we will be facing excruciatingly high cost of borrowing through the next 10 years or so, a cost, once again to be carried by our middle and lower-middle classes.

Using a simple prisoners' dilemma game, one can easily show that the Government currently has all the incentives to run the economy deeper into depression. Such a move will ensure that the poisoned chalice the current Government passes to the opposition will be even more toxic, thus giving Fianna Fail stronger chances of election victory in the next 5 years.

In other words, if the Government does indeed sign up to the unions'-conjured 'plan' for 'efficiency'-exit from the deficit, it will be implicitly acting to derail any hope of a fiscal and economic recovery, while optimising its own political objectives.



PS: For all those who are keen on accusing me of being anti-Fianna Fail: nothing I write is designed to attack any political party in general or its members in totality. There are plenty of very good people in FF, and some of my friends are members of the party. There some competent, well-meaning and experienced members of the Government. Sometimes I disagree with them on policies, sometimes on ideologies, sometimes we agree. I express these views in public and privately. I always prefer an open debate.

The collective actions of the current Government, in my view, deserve very severe criticism. And that criticism I tend to provide: not behind the back, but in the open, publicly accessible fora.

Economics 05.03.2010: Greeks are paying the price

So you've heard by now that Greece 'escaped' the wrath of the market yesterday by placing €5bn worth of 10-year bonds. But don't be fooled - Greek's escape was nothing more than a respite: Greek taxpayers are now on the hook for paying a 6.3% yield on the 10-year paper - in line with near junk status of the bonds. This marks the highest spread for Greek debt since 2001.

Despite the issue being covered at 3x, there is a possibility for prices to tumble in the secondary markets (as happened with their 5-year paper last month) and there is an added concern that demand was underpinned by speculative investors with short-term horizons, as 'hold-to-maturity' types of investors (e.g insurance companies and pension funds) are cutting back on their holdings of PIIGS bonds. If the latter is true, then we can expect a serious pressure on yields to emerge in the next few days, with subsequent noises from the EU authorities about 'speculators' profiteering.

Big - albeit artificial - test for the euro will be March 16th when the EU Commission will rule on Greek fiscal consolidation plans. Expect approval, enthused speeches, and backroom talks on how to proceed forward with the country that

• plans to cut 2% of its GDP-worth off the deficit this year, but
  
• is unlikely to deliver on this target, whilst
• needing to cut a whooping double the planned amount just to stay afloat toward the 3% deficit goal for 2014-2015.
  

Meanwhile, Jean Claude Trichet went out of his way yesterday to tell the Greeks not to invite the IMF. During his press conference, Trichet repeatedly stressed that Europe has its own safety net for defaulting states (well, not quite in these terms) so no need to call in the big boys from the IMF. One wonders, what is Mr Trichet talking about. Papers quote Trichet saying that it is absurd to envisage scenarios of Greek exit from the euro.

All of this resembles the debates in the Afghan government in 1979 - to invite the Soviets or not... And the really, really, really funny thing is - IMF is EU-led organization (of the two supernationals: the World Bank is traditionally reserved as the leadership game for the Americans, while the IMF leadership goes to the EU appointees). While the Greek taxpayers are now set to pay over ten years €184.22 per each €100 borrowed last night - a steep price for not calling in 'Your Own Bad Guys' from Washington.

Now, put the Greek pricing into a perspective. On 14 January 2010 the NTMA issued €5 billion of a new bond, the 5% Treasury Bond 2020. If Irish debt was priced at Greek yields, the total cost to Irish taxpayer from this deficit financing would have risen €21.33 from €62.89 per €100 borrowed. In other words, our expected annual deficit for 2010 alone would be some €4,050 million more expensive over 10 years.

Economics 12/02/2010: Crisis pressures in broader debt markets

And so the Greek saga continues, with yesterday’s announcement that the EU has a worked-out rescue package for the country now turning out to be yet another wishful thinking piece of poorly prepared PR. No package details, and the markets are not impressed.

But forget Greece for a moment. The good news is that just as in Autumn 2008, the last couple of months have been the case of “bad news = good news”. The markets have finally started to turn their attention to the completely reckless ways in which majority of Governments around the world have been managing their finances, both before the crisis and during it.

The new line of fire is now directed at Turkey and Japan.

Japan, pushing for well over 200% of GDP ratio of debt is in a league of its own. And the current Government is hell-bent on raising the debt limits higher with aggressive spending targets and Napoleonic plans for shifting even more public expenditure into largely unproductive investment (for a country with already extensive public capital stock, the diminishing marginal returns on new public investment have set in some time ago). Debt ratio to working age population is now well above USD100,000 and is rising at accelerating pace. Savings rate has fallen to below 4% while the fiscal deficits are now much higher than they were back in the days when the savings rate was around 18%. Current account balance has declined from the peak of 5% in 2007 to under 1.5% today and is set to fall further. With these dynamics in mind, Japan is going to account for roughly 11% of the total global expected issuance of new bonds in 2010.

Turkey is a serious basket case, although it might not appear to be such from the simple debt levels comparisons. Like Ireland, Turkey has low debt to GDP ratio (45% as opposed to Greece with 113%, Portugal with 77%, Spain with 54%), It is in line with Ireland current 46.2% debt levels (although in Ireland’s case, a GNP base would work much better, bringing out true public debt to a much more formidable 57% of GNP). But it is not the level of debt that is worrisome. The awesome rate of debt increase, along with hidden debts that the public sector underwrites are the real concerns here.

An interesting chart from Turkey Data Monitor:
shows just how bad Turkish debt dynamics are. In the environment where it is currently yielding over 8% with an average maturity being around 2 years, the problem for Turkey is the following:

• Can a country with history of past debt problems and rising deficits really roll-over some USD125 billion worth of debt? and
• Can such a country do this in the environment where worldwide, national governments are expected to issue some USD4.5 trillion worth of bonds in 2010 - three times the normal volume of global debt issuance?

Now, think of it this way – Turkey debt is held by domestic banks (roughly 60%) and the remainder – by foreigners. This, normally, presents the point of stability. Alas, if the banks are not operating in the liquidity saturated markets for funding (and they are clearly not doing so) the Turkish Government cannot default on the debt without risking destabilizing its banking system. And if it does destabilize the banks, the Government ‘solution’ to default will imply demand for massive banks rescue package, adding further to the debt mountain. In other words, unlike with other countries that have heavier exposures to international lenders, Turkey simply must refinance the roll-over debt.

So dynamics matter. And they matter for Ireland. Which got me thinking – just how bad is our debt position going to get and what costs will this impose on the economy. Here are few charts:
Start with gross debt as percentage of GDP and GNP. Above chart shows figures for the official debt estimates from Stability Plan Update, December 2009, issued by the Department of Finance. Additional lines show the ratio of debt to GNP and also extension of debt figures to include Nama's €59 billion allocation, plus expected €12 billion in post-Nama capital injections into the banks. Finally, the last line shows the above, accounting for a lower growth rate in GNP scenario than the one forecast by the DofF for 2012-2014 period. The important issue here is that our debt to GNP (the real measure of our economy) is going to breach 100% even under DofF own rosy assumptions.

Next, consider the growth rate in our debt:
Pretty dramatic, especially when you compare the rate of growth in 2009-2012 against the tiny rates of decline predicted for 2013-2014. The rates of decline in fact will be about half the rate of interest we will be paying on this debt.

So expect no respite in terms of the cost of debt financing in sight:
The above are pretty big annual numbers - up to €14 billion going to feed the debt monster annually! Crazy stuff for an economy worth around €130 billion in terms of its GNP. Alternatively, €14 billion is roughly 30% of the total Government expenditure that this country can afford if we were to stay on structurally balanced fiscal path!

And thus, cost of debt financing as percentage of our economy is going to be excruciating - up to 9.5% of the annual economic output at the peak (under the most pessimistic scenario). Which means the total cost of the current fiscal crisis is also going to be astronomical:
By the end of 2014, thus, we are looking to have wasted between €50 billion and €80 billion in total on sustaining that which is simply unsustainable - our gargantuan public sector overspending.


Incidentally, this pretty much explains why I do not believe that marginal reforms of the public sector, such as 'productivity improvements', 'reduced spending on external consultants' and 'staff re-allocations' will be enough to address the issue. In real world we inhabit, we need a massive cut in terms of overall spending on public sector and this can only be achieved by slashing numbers employed in the public sector and cutting pensions and wage expenditure on the remaining staff.


PS 1: given chronic lack of skills, aptitude and capabilities present in many areas of the public sector, an idea of using internal expertise to reduce reliance on external consultants advice and expertise, while hoping for improved efficiency is simply absurd.


PS2: A year ago, myself and Brian Lucey wrote an article for the Irish Times about the massive debt overhang in the Irish economy. Using IMF statistics we established that Irish economy stands out as the second most indebted economy in the world in terms of ratio of debts to GDP, the most indebted economy in the world when it comes to applying our real measure of economic activity - GNP, and one of the most indebted economies in absolute terms.

In response to the article, we were told by the Irish officials that 'total debts do not matter, only public debt does'.

In the real world, total debts of economy do matter because they show structural composition of economy itself, revealing the extent to which economic growth is being financed by reckless borrowing.

This month, Hayman Advisors weighted in on our side:
The above debts cover public debt, plus 5 top banks per country, with Iceland figure showing pre-crisis conditions. Forbes magazine reproduced this chart in their cover story for February 8 edition with a tag line saying "It's the Total Debt, Stupid".

I agree.

Economics 08/02/2010: PIIGS or PIGS?

For those of you who missed my article in yesterday's Sunday Times, here is an unedited version of it, as usual:

This week marked a new low for the euro zone. Despite all the posturing by Brussels officials about Greek deficits and the incessant talking up of the euro by the ECB and the Commission, the events clearly show that the common currency is lacking credible tools to bring order to public finances of its member states. Thanks to the clientilist politicians and the electorate, keen on piling up debt to pay for perks and inefficient public services, the Greeks really blew it. Then again, given their performance over the last fifteen years – inclusive of massive persistent deficits and outright manipulation of official data to conceal them – about the only surprising thing in the ongoing Greek tragedy is that their bonds are still trading at all.

Much more interesting events, related to the Greek debacle, are unfolding in Ireland. Boosted by the factually erroneous, yet ideologically pleasing statements by international observers, Ireland’s image in the euro area has improved significantly since the publication of the Budget 2010.

Which, of course, is out of line with economic reality on the ground. Far from exiting the PIIGS club of sickest euro economies, comprised of Portugal, Ireland, Italy, Greece and Spain, we are now looking like a country to which the wrath of international bond markets might turn next, once Greece is dealt with.

Let me explain.

This week, writing in the Financial Times, a respected economist, Nouriel Roubini has clearly shown just how escapist is the current thinking about the state of public finances in Ireland.

"The best course [for Greece] would be to follow Ireland, Hungary and Latvia with a credible fiscal plan heavy on spending cuts that government can control, rather than tax hikes... This approach is working in Ireland – spreads exploded as public debt ballooned to save its banks, but came back in as public spending was cut by 20 percent."

Professor Roubini’s comment was echoed later in the day by ECB’s President Jean-Claude Trichet who lent unprecedented amount of good will to the ‘right policy choices’ made by Ireland.

Even our Department of Finance has not, officially, claimed such a thing.

First off - Irish fiscal adjustments from the beginning of the crisis to-date are split approximately 50:50 between higher tax burden and ‘savings’. This debunks Professor Roubini’s general analysis of our policies.

But more importantly, it shows that our Government policies have focused on providing fiscal and financial supports to a select few at the expense of the entire economy. Some €70 billion plus of real future taxpayers’ money has been already committed and €10-15 billion more is still waiting to be deployed post-Nama to rescuing Irish banks’ bondholders. Slightly less comfort was given to the developers who will get a three year holiday on loans repayments courtesy of the taxpayers.

In a real world, economic recovery can only start with ordinary households and businesses. In Ireland, public policy assumes that raising taxes and charges at the times of shrinking incomes and revenues to sustain banks bondholders and narrow interest groups within this society passes for ‘doing the right thing’.

International observers might overlook this fact. For them the costs of encountering a deep and prolonged Irish recession are nil. But for us, the spectre of the 1980s is painfully evident.

In contrast to Greece, Ireland has been hit by an unprecedented, in magnitude and duration, economic recession. Our house prices bust and financial assets collapse was deeper than that of Greece. We also are facing a much more severe banking crisis and a significantly more dramatic rates of deterioration in public deficits. Ditto for our unemployment levels and credit contraction rates.

Our sole claim to better health is a substantially lower existent public debt burden. Alas, this too is optical. In real per capita terms, total levels of debt in Ireland (combining public and private debts) are several times greater than those in Greece.

Even when it comes to budgetary adjustments – as far as Governments plans go – the Greeks are ahead of us. Starting from marginally higher deficit in 2009, the Greeks are planning to bring their deficit to within 3% of GDP limit by 2012. We are planning to do the same by 2014. Of course, both plans are unrealistic, but whilst the EU Commission will attempt to force the Greeks to comply with their target, no one will be closely monitoring our Government’s progress.

In summary, we are nowhere near exiting the PIIGS club.

But let’s take a look at the ‘Love the Irish Policies’ media circus going on in international press. Contrary to Professor Roubini statement, Irish Government has been unable to achieve meaningful cuts in public spending to-date. Instead, we delivered a reallocation of some funding from one side of public expenditure to another. ‘Cuts’ in majority of departments have been simply re-diverted to social welfare and Fas.

By Government-own admission, there will be no net reduction in public expenditure in Ireland since 2009. Department of Finance’s "Ireland – Stability Programme Update, December 2009" provides some stats. In 2009, Gross Current Government Expenditure in Ireland stood at €61,108 million. In 2010 it is budgeted to reach €61,872 million. The latter figure does not include the cost of recapitalizing the banks post-Nama. In 2011-2014 the Government is projecting the Gross Current Expenditure to rise steadily from €63,518 million to €65,768 million.

To Professor Roubini this might look like savings, but to me it looks like the Government continuing to leverage our economic future in exchange for avoiding taking necessary medicine now.

The only reasons why our deficits are expected to contract from 2011 through 2014 is because the Government has been slashing public investment, raising tax burden and is banking on a robust recovery after 2010.

Overall, DofF plans for a 2.8% cut in the General Government Balance in 2010, and that will leave us (per their rosy forecasts on growth and tax revenue) at 11.6% deficit relative to GDP, down a whooping 0.1 percentage point on 11.7% deficit achieved in 2009. Adding expected costs of banks recapitalization, our Government deficit can easily reach beyond 14-15 percent of GDP this year. Greece is now aiming for 8-9% deficit this year under a watchful eye of the Commission. Do tell me Budget 2010 qualifies us for being treated as a stronger economy than Greece.

Stripping out its interest rate bill, Greece is planning for lower per-capita state borrowing in 2010 than Ireland. But Irish Exchequer is planning to raise its borrowing this year by 3%. If international observers are correct, why would the Government that managed to cut its spending by 20% increase its borrowing? That would only make sense if the revenue is expected to fall by more than 20%. Yet Budget 2010 assumes tax revenue decline of only 4.7% in 2010 and an increase in non-tax revenues.

So what has Irish Government done to deserve such a sweet-heart treatment from the EU and Professor Roubini?

One word comes to mind – smart marketing. Budget 2010 simply took €4,051 million from one Government pocket and loaded it into another. Then, the Government promptly reversed itself out of some of the higher profile cuts, such as those imposed on higher earners in the public sector. Even at the highest point of estimates, the savings – before they get cancelled out by rising spending and falling revenue – amount to the total of 6.42% of the Gross Total Expenditure in 2009.

After 2 years of the deepest economic crisis in the euro area, we are now facing one of the heaviest upper marginal tax burdens in the developed world, and a deficit that is simply out of control. Hardly the road map to a recovery.

Economics 07/01/2010: NTMA's end of year results

Here is an interesting one: NTMA published their End Year review. Per statement (page 3 top): “The National Pensions Reserve Fund Discretionary Investment Portfolio (the Fund excluding the preference shares in Bank of Ireland and Allied Irish Banks held on the direction of the Minister for Finance) earned a return of 20.9 per cent in 2009. Since the Fund’s inception in 2001, the Investment Portfolio has delivered an annualised return of 2.6 per cent per annum. Including the bank preference shares and related warrants, which are held at cost and zero respectively, the Fund recorded a return of 11.6 per cent in 2009. At 31 December 2009 the total Fund’s value stood at €22.3 billion.”

If the state were to invest €7 billion it gave AIB and BofI for their preference shares in the Discretionary Fund, the returns on these investments would have been roughly €1.463 billion in 2009. Instead, we got zilch in risk-adjusted returns.


Ok, one would say that ‘investing’ in AIB and BofI is a sensible undertaking as the banks are market-determining entities for ISE. Nope, wrong. Page 4 of release states: “As a result, the Investment Portfolio had an elevated level of quoted equity investment of 80 per cent following completion of the recapitalisation in May compared with 57 per cent before the preference share investments were made. The Fund took advantage of the strong equity market rally to reduce its absolute risk and exposure to the equity markets through phased equity sales of €2.7 billion through the remainder of the year. The Investment Portfolio’s exposure to the quoted equity markets had been reduced to 63 per cent by year end.”

So as the result of AIB & BofI ‘investments’, NPRF is now more heavily geared toward equities as a class. Full stop. Now, give this a thought. We have a Pension fund with 63% exposure to equities that has been forced to sell equity on the basis of the need to re-gear toward banks shares in the economy where banks are the weakest point… Aggressive high risk investment strategy. What’s next? A highly geared derivative undertaking with taxpayers money? Ooops – we already got one, called NAMA SPV.

Back to page 3 stuff: “During 2009 the Minister for Finance directed the Fund to invest €7 billion in preference shares issued by Bank of Ireland and Allied Irish Banks for the purposes of recapitalising these institutions. The terms of the deal, which was negotiated by the NTMA, include a non-cumulative fixed dividend of 8 per cent on the preference shares and warrants which give an option to purchase up to 25 per cent of the enlarged ordinary share capital of each bank following exercise of the warrants. The dividends payable on the preference shares are not recognised or accrued by the Fund until declaration by the bank concerned. These investments were funded by €4 billion from the Fund’s own resources and by €3 billion from a frontloading of the Exchequer contributions to the Fund for 2009 and 2010.”

Two points here:

1. 2009 thus saw a direct transfer of €3 billion to NPRF from the economy that has contracted by 10.5% (GNP). Since NPRF is a de facto piggy bank for public sector pensions only, this type of fiscal management, of course, has no precedent. It is equivalent to taking from the strained middle classes (taxpayers) to award future pay for public employees.
2. This reminds us as to just how outrageously overpriced the preference shares we bought were. AIB and BofI preference shares yielding 8%? Remember – these two banks have balancesheets weaker than those of the main UK banks. Yet, at the same time we were signing off on 8% return, the UK banks bonds were yielding 12-15%. What’s the opportunity cost of such a sweetheart deal for the banks from taxpayers’ perspective? 7% yield foregone, or in 2009 terms - €490 million.
   

Add the two bolded numbers: €1.953 billion is the opportunity cost to the taxpayers of the AIB and BofI capital injection in foregone earnings. This is more than double the amount of savings generated by the Exchequer through public sector wage ‘cuts’ in 2010 Budget.


Another interesting thingy – page 4: “NAMA will acquire loans with a nominal value of approximately €80 billion”. Hold on, folks – was it €77 billion or €80 billion? Or should we take it from the NTMA that +/-€3 billion in taxpayers funds exposure is simply pittance that can be rounded off? What’s next? February 2010 numbers rising to €85 billion, then to €90 billion by March? Why not just state ‘we’ll buy anything they throw at us’ and close off this Cossack Dance with the numbers?


Pages 5 (end) and 6 provide a small, but interesting insight into operational efficiencies of the State Claims Agency: “There has been a substantial decline in employer and public liability claim volumes associated with incidents that have occurred since the SCA was established. Since 2002 the number of employer liability claims has fallen by 71 per cent and the number of public liability claims has fallen by 19 per cent. The total number of active employer and public liability claims has fallen by 35 per cent in 2009 compared with 2008.”

Sounds like good news? All claims are down since 2002 and in particular between 2008 and 2009. Happy times? Not really: “During 2009 the SCA paid out a total of €64 million against all classes of claims. This compares with a total of €53 million in 2008.” So let me run this by you – cases numbers are down 35%, but payouts are up 20.8%! I guess the gravity of injuries in the public sector rose dramatically during the year.


Lastly, Appendix 1 lists bond issues for 2009. This is a nice summary of the fine work being done by the NTMA in placing our debt (although most of it has gone to the banks to be rolled into ECB). But the worrying thing is the time profile of these bonds. €14.53 billion of the bonds issued this year will mature (and will be rolled over) during or before 2014 - the deadline for our compliance with the Stability & Growth Pact ceilings on deficit and debt. Such a large amount, coming already on top of the billions in short/medium-term debt issued in 2008 doesn't do much to support markets confidence in Ireland actually delivering on 2014 commitment...

Economics 31/12/2009: Bond markets

Food for thought: rummaging through backlogged papers, I cam across 3 notes from our heroic stockbrokers' bonds desks singing songs about the right timings for investment in bonds. These trace back to June and October 2009.

So I asked myself the following question: should I have listened to your brokers' advice to buy Irish or US bonds in 2009?

Well, here are two tables giving a breakdown on bond price sensitivities to changes in interest rates. The US table:And the Irish table is here:Now, in darker blue I marked the cells corresponding to the reasonably plausible scenario for yields for 2010. In lighter blue - the next best predictions. So go figures - should you have listened to anyone pushing Irish or US bonds onto you?

Think of the following numbers - I don't have the same for the Irish markets - in the US, cash inflows into bond funds markets amounted to some USD313 billion in 2009, as yields kept on dropping to artificially low levels on the back of the US Fed buying up Federal paper. At the same time, as stock markets rallied, just USD2 billion net was added to stocks funds. (Numbers are to November 1, 2009). Some has been fooled.

So a Happy New Year for all and best wishes for the new decade!

My next post will be already in 2010 and will show comparative performance for Irish banking sector relative to other EU states - the latest data - for 2008.

Economics 18/12/2009: How fair is that Ireland-Greece comparison?

Our policymakers are quick to point out that Ireland has been unfairly treated by the bond markets, for its CDS and bonds spreads are moving in tandem with those of Greece.

The sop story usually flows along the following lines: “Ireland has a better starting position in terms of lower debt burden and it has taken the pain necessary – through three Budgets effecting significant cuts to spending and imposing new revenue raising measures. Greece, obviously, have not done so. Thus, our bonds spreads should be much closer to Germany than they are to Greece.”

An interesting, if somewhat lopsided proposition.

Here are some comparatives (do keep in mind that our real income is GNP which is now 20% below the GDP figure):
Note: No recap scenario refers to no recapitalization funding for banks post-Nama; Recap 50% scenario assumes that 50% of expected cost of recapitalization of banks post-Nama impacts in 2010.
* Severely unrealistic target.
** Ex-Nama.
*** Nama primary €59bn, higher number also factors in expected post-Nama recapitalization costs.

And consider a couple figures:
Data for all three is from IMF/World Bank/BIS database

So here we go. Is Ireland unfairly singled out to be put next to Greece? You decide, but remember, bond markets do not care about one’s starting position or about the current position – they care about the future positions. When a patient gets a massive stroke, the fact that he was jogging 5 miles a day before is neither here, nor there.

And on a good news front: here. We are saved! Escaping Nama will be just a quick 88-mph blast to the past away.