1/2/15: Oh, those largely repaired Irish banks...

What do foreign 'experts' like BofE Mark Carney forget to tell you when they say that Ireland's banking system has been [largely] repaired?

Oh a lot. But here are just two most important things:

Both, in level terms and in growth terms, Irish banks remain zombified. 'Repaired' into continuously shrinking credit supply and stagnant household deposits base, the banks have been flatlining ever since the beginning of the crisis. In the last 6 consecutive quarters, household deposits posted negative rates of growth - a run of 'improvement' that is twice longer than the 'recovery period' of Q3 2012 - Q1 2013 when the deposits rose (albeit barely perceptibly).  Meanwhile, credit continues to shrink in the system with not a single quarter of positive growth (y/y) since Q4 2009. In four quarters through Q3 2014, credit for house purchases shrunk at just around 3.05% on average - the steepest rate of decline since the start of the crisis.

"Yep, [largely] repaired, Mr. Carney", said undertaker firming up the dirt on top of the grave...

3/4/3014: In the eye of a growth hurricane? Irish National Accounts 2013

This is an unedited version of my Sunday Times article from March 23, 2014


Russian-Ukrainian writer, Nikolai Gogol, once quipped that "The longer and more carefully we look at a funny story, the sadder it becomes." Unfortunately, the converse does not hold. As the current Euro area and Irish economic misfortunes aptly illustrate, five and a half years of facing the crisis does little to improve one’s spirits or the prospects for change for the better.

At a recent international conference, framed by the Swiss Alps, the discussion about Europe's immediate future has been focused not on geopolitical risks or deep reforms of common governance and institutions, but on structural growth collapse in the euro area. Practically everyone - from Swedes to Italians, from Americans to Albanians - are concerned with a prospect of the common currency area heading into a deflationary spiral. The core fear is of a Japanese-styled monetary policy trap: zero interest rates, zero credit creation, and zero growth in consumption and investment. Even Germans are feeling the pressure and some senior advisers are now privately admitting the need for the ECB to develop unorthodox measures to increase private consumption and domestic investment. The ECB, predictably, remains defensively inactive, for the moment.


The Irish Government spent the last twelve months proclaiming to the world that our economy is outperforming the euro area in growth and other economic recovery indicators. To the chagrin of our political leaders, Ireland is also caught in this growth crisis. And it is threatening both, sustainability of our public finances and feasibility of many reforms still to be undertaken across the domestic economy.

Last week, the CSO published the quarterly national accounts for 2013. Last year, based on the preliminary figures, Irish economy posted a contraction of 0.34 percent, slightly better than a half-percent drop in euro area output. But for Ireland, getting worse more slowly is hardly a marker of achievement. When you strip out State spending, taxes and subsidies, Irish private sector activity was down by more than 0.48 percent - broadly in line with the euro area’s abysmal performance.

Beyond these headline numbers lay even more worrying trends.

Of all expenditure components of the national accounts, gross fixed capital formation yielded the only positive contribution to our GDP in 2013, rising by EUR 710 million compared to 2012. However, this increase came from an exceptionally low base, with investment flows over 2013 still down 28 percent on those recorded in 2009. Crucially, most, if not all, of the increase in investment over the last year was down to the recovery in Dublin residential and commercial property markets. In 2013, house sales in Dublin rose by more than EUR1.2 billion to around EUR3.6 billion. Commercial property investment activity rose more than three-fold in 2013 compared to previous year, adding some EUR1.24 billion to the investment accounts.

Meanwhile, Q4 2013 balance of payments statistics revealed weakness in more traditional sources of investment in Ireland as non-IFSC FDI fell by roughly one third on 2012 levels, down almost EUR6.3 billion. As the result, total balance on financial account collapsed from a surplus EUR987 million in 2012 to a deficit of EUR10 billion in 2013.

Put simply, stripping out commercial and residential property prices acceleration in Dublin, there is little real investment activity anywhere in the economy. Certainly not enough to get employment and domestic demand off their knees. And this dynamic is very similar to what we are witnessing across the euro area. In 2013, euro area gross fixed capital formation fell, year on year, in three quarters out of four, with Q4 2013 figures barely above Q4 2012 levels, up just 0.1 percent.

At the same time, demand continued to contract in Ireland. In real terms, personal consumption of goods and services was down EUR941 million in 2013 compared to previous year, while net expenditure by central and local government on current goods and services declined EUR135 million. These changes more than offset increases in investment, resulting in the final domestic demand falling EUR366 million year-on-year, almost exactly in line with the changes in GDP.

The retail sales are falling in value and growing in volume - a classic scenario that is consistent with deflation. In 2013, value of retail sales dropped 0.1 percent on 2012, while volume of retail sales rose 0.8 percent. Which suggests that price declines are still working through the tills - a picture not of a recovery but of stagnation at best. Year-on-year, harmonised index of consumer prices rose just 0.5 percent in Ireland in 2013 and in January-February annual inflation was averaging even less, down to 0.2 percent.

The effects of stagnant retail prices are being somewhat mitigated by the strong euro, which pushes down cost of imports. But the said blessing is a shock to the indigenous exporters. With euro at 1.39 to the dollar, 0.84 to pound sterling and 141 to Japanese yen, we are looking at constant pressures from the exchange rates to our overall exports competitiveness.

We all know that goods exports are heading South. In 2013 these were down 3.9 percent, which is a steeper contraction than the one registered in 2012. On the positive side, January data came in with a rise of 4% on January 2013, but much of this uplift was due to extremely poor performance recorded 12 months ago. Trouble is brewing in exports of services as well. In 2012, in real terms, Irish exports of services grew by 6.9 percent. In 2013 that rate declined to 3.9 percent. On the net, our total trade surplus fell by more than 2.7 percent last year.

Such pressures on the externally trading sectors can only be mitigated over the medium term by either continued deflation in prices or cuts to wages. Take your pick: the economy gets crushed by an income shock or it is hit by a spending shock or, more likely, both.

Irony has it some Irish analysts believe that absent the fall-off in the exports of pharmaceuticals (the so-called patent cliff effect), the rest of the economy is performing well. Reality is begging to differ: our decline in GDP is driven by the continued domestic economy's woes present across state spending and capital formation, to business capital expenditure, and households’ consumption and investment.


All of the above supports the proposition that we remain tied to the sickly fortunes of the growth-starved Eurozone. And all of the above suggests that our economic outlook and debt sustainability hopes are not getting any better in the short run.

From the long term fiscal sustainability point of view, even accounting for low cost of borrowing, Ireland needs growth of some 2.25-2.5 percent per annum in real terms to sustain our Government debt levels. These are reflected in the IMF forecasts from the end of 2010 through December 2013. Reducing unemployment and reversing emigration, repairing depleted households' finances and pensions will require even higher growth rates. But, since the official end of the Great Recession in 2010 our average annual rate of growth has been less than 0.66 percent per annum on GDP side and 1.17 percent per annum on GNP side. Over the same period final domestic demand (sum of current spending and investment in the private economy and by the government) has been shrinking, on average, at a rate of 1.47 percent per annum.

This implies that we are currently not on a growth path required to sustain fiscal and economic recoveries. Simple arithmetic based on the IMF analysis of Irish debt sustainability suggests that if 2010-2013 growth rates in nominal GDP prevail over 2014-2015 period, by the end of next year Irish Government debt levels can rise to above 129 percent of our GDP instead of falling to 121.9 percent projected by the IMF back in December last year. Our deficits can also exceed 2.9 percent of GDP penciled in by the Fund, reaching above 3 percent.

More ominously, we are now also subject to the competitiveness pressures arising from the euro valuations and dysfunctional monetary policy mechanics. Having sustained a major shock from the harmonised monetary policies in 1999-2007, Ireland is once again finding itself in the situation where short-term monetary policies in the EU are not suitable for our domestic economy needs.


All of this means that our policymakers should aim to effectively reduce deflationary pressures in the private sectors that are coming from weak domestic demand and the Euro area monetary policies. The only means to achieve this at our disposal include lowering taxes on income and capital gains linked to real investment, as opposed to property speculation. The Government will also need to continue pressuring savings in order to alleviate the problem of the dysfunctional banking sector and to reduce outflows of funds from productive private sector investment to property and Government bonds. Doing away with all tax incentives for investment in property, taxing more aggressively rents and shifting the burden of fiscal deficits off the shoulders of productive entrepreneurs and highly skilled employees should be the priority. Sadly, so far the consensus has been moving toward more populist tax cuts at the lower end of the earnings spectrum – where such cuts are less likely to stimulate growth in productive investment.

We knew this for years now but knowing is not the same thing as doing. Especially when it comes to the reforms that can prove unpopular with the voters.

Box-out: 

This week, Daniel Nouy, chairwoman of the European Central Bank's supervisory board, told the European Parliament that she intends to act quickly to force closure of the "zombie" banks - institutions that are unable to issue new credit due to legacy loans problems weighing on their balance sheets. Charged with leading the EU banks' supervision watchdog, Ms Nouy is currently overseeing the ECB's 1000-strong team of analysts carrying out the examination of the banks assets. As a part of the process of the ECB assuming supervision over the eurozone's banking sector, Frankfurt is expected to demand swift resolution, including closure, of the banks that are acting as a drag on the credit supply system. And Ms Nouy made it clear that she expects significant volume of banks closures in the next few years. While Irish banks are issuing new loans, overall they remain stuck in deleveraging mode. According to the latest data, our Pillar banks witnessed total loans to customers shrinking by more than EUR 21 billion (-10.3 percent) in 12 months through the end of September 2013. In a year through January 2014, loans to households across the entire domestic banking sector fell 4.1 percent, while loans to Irish resident non-financial corporations are down 5.8 percent. One can argue about what exactly will constitute a 'zombie' bank by Ms Nouy's definition, but it is hard to find a better group of candidates than Ireland's Three Pillars of Straw.

24/12/2013: Should Government Do More on Credit Supply? Or Do Better?

We commonly hear about the need for the Government to do something about 'credit supply' to the real economy and 'fixing the bad loans' problem in the banks. Alas, as per the IMF assessment shown in the chart below, Ireland is already well ahead of the majority of its euro area counterparts (save Spain and Slovenia) in terms of policies aimed at supporting supply of credit. And we are way ahead of everyone else in terms of policies that are designed to address the issue of bad loans.

Given having policies ≠ having effective policies or allowing policies on the books to be implemented in the real world. So may be the Government shouldn't be 'doing more' to fix credit supply and demand, but instead 'do better'?

Note: Policies aimed at enhancing credit supply include: fiscal programmes on credit (e.g. credit support schemes, etc), supportive financial regulation, capital markets measures (e.g. funding via state agencies etc), and bank restructuring (that the IMF and the Irish Government often confuse for repairing). Supporting credit demand policies include policies aimed at facilitating corporate debt restructuring and household debt restructuring.

30/7/2013: Flat demand for business credit in Q2 2013

Courtesy of the Central Bank of Ireland released last week:

Changes in Loan Demand from Enterprises

Key: 1= Decreased considerably, 2= Decreased somewhat, 3= remained basically unchanged, 4= increased somewhat, 5= increased considerably.

Top of the line analysis: the patient is still in  a comma: 

• Fixed investment (long-term investment in capital and technology) is flat two quarters running. One quarter (Q4 2012) pick up has barely brought us back 1/3 of the way for Q3 2012 contraction and on cumulated basis, we are - in Q2 2013 still below Q1 2012.
• Inventories and working capital demand is flat in Q2 2013, so no short-term build up in either on foot of any sort of positive expectations forward. Cumulated corrections up in Q3 2012 and Q1 2013 are not sufficient to compensate for declines in Q1-Q2 2012. Conclusion: we are still worse off on inventories and working capital demand than in Q1 2012.
• Debt restructuring demand is flat on Q1 2013 in Q2 2013. The only game in town when it comes to credit demand from the corporates in Ireland is for debt restructuring. 

The above does not bode well for the story about pick up in business expectations and flies in the face of the PMIs-signalled 'improvements' in both current conditions and forward outlook. Any early-stage expansion will have to be consistent with increases in demand for Inventories and Working Capital finance, while Fixed Investment will have to pick up if the businesses are expecting significant uplifts out 12 months.

6/6/2013: Domestic Economy v MNCs: Sunday Times 26/5/2013

This is an unedited version of my Sunday Times column from May 26, 2013



Over recent months, one side of the Irish economy – the side of aggressive tax optimization and avoidance by the Ireland-based multinational corporations – has provided a steady news-flow across the global and even domestic media. While important in its own right, the debate as to whether Ireland is a corporate tax haven de facto or de jure is missing a major point. That point is the complete and total disconnection between Ireland’s two economies: economy we all inhabit in our daily lives and economy that exists on paper, servers and in the IT clouds. The latter has a mostly intangible connection to our everyday reality, but is a key driver of Ireland’s macroeconomic performance and the Government PR machine.

Take a look at two simple sets of facts.

According to our national accounts, Ireland’s economy, measured in terms of GDP per capita, has been growing for two consecutive years expressed in both nominal terms and inflation-adjusted terms. Real GDP per capita in Ireland grew over 2010-2012 period by a cumulative 2.38% according to the IMF. Accounting for differences across the countries in price levels and exchange rates (using what economists refer to as purchasing power parity adjustment), Ireland’s GDP per capita has risen 5.7% over the two years through the end of 2012. Over the same period of time, Ireland’s GNP per capita, controlling for exchange rates and prices differentials, has grown by 3.3%.

Sounds like the party is rolling back into town? Not so fast. The aggregate figures above provide only a partial view of what is happening at the households’ level in the Irish economy. Stripping out most of the transfer pricing activity by the multinationals, domestic economy in Ireland is down, not up, by 5.2% between 2010 and 2012, once we adjust for inflation and it is down 2.7% when we take nominal values. With net emigration claiming around six percent of our population, per capita private domestic economic activity has fallen 4.2% over the last two years.

All in, Irish domestic economy is the second worst performer in the group of all peripheral euro area states, plus Iceland. Sixth year into the crisis, we are now in worse shape than Argentina was at the same junction of its 1998-2004 crisis.


What the above numbers indicate is that the Irish domestic economy, taken at the household level, has been experiencing two simultaneous pressures.

While aggregate inflation across the economy has been relatively benign, stripping out the effects of the interest rates reduction on the cost of housing, Irish households are facing significant price pressures in a number of sectors, reducing their real household incomes just at the time when the Government is increasing direct and indirect tax burdens. At the same time, rampant unemployment and underemployment have been responsible for lifting precautionary savings amongst the households with any surplus disposable income. By broader unemployment metrics that include unemployed, officially underemployed, and state-training programmes participants, Irish unemployment is currently running at 28% of the potential labour force. Adding in those who emigrated from Ireland since 2008 pushes the above broad measure of unemployment to close to 33%.

Lastly, the households are facing tremendous pressures to deleverage out of debt, pressures exacerbated by the Government-supported efforts of the banks to increase rates of recovery on stressed mortgages.

In this environment, real disposable incomes of households net of tax and housing costs are continuing to fall despite the increases recorded in GDP and GNP. The Irish Government, so keen on promoting our improved cost competitiveness when it comes to the foreign investors is presiding over the ever-escalating costs of living at home.

In 2012 consumer prices excluding mortgages interest costs stood the highest level in history and 1.2% ahead of pre-crisis peak of inflation recorded in 2008. Much of this is accounted for by the heavily taxed and regulated energy prices.

Sectoral data reveals the story of rampant annual inflation in state-controlled parts of the economy. Of ten broader categories of goods and services, ex-housing, reported by CSO, all but one private sectors posted virtually no inflation over 2012 compared to the average levels of prices in 2006-2008 period. Food and non-alcoholic beverages prices declined 1.4%, clothing and footware prices are now a quarter lower, costs of furnishings, household equipment and routine household maintenance are down 13%, and recreation and culture services charges are down more than 2.7%. Restaurants and hotels costs are statistically-speaking flat with price increases of just 0.4% on 2006-2008 average. The only private sector that did post statistically significant levels of inflation was communications where prices rose 3.5% by the end of 2012 compared to pre-crisis average. But even here postal services charges lead overall inflationary pressures.

In contrast, every state-controlled and heavily taxed sub-sector is posting rampant inflation. Alcoholic beverages and tobacco prices are up 12.3%, health up 13.4%, transport up 11.4%, and education costs are up 30.4%. Energy costs are up 32.5% and utilities and local charges are up 14.9%. While energy costs rose virtually in line with increases in global energy price indices, the state still reaped a windfall gain from this inflation via higher tax revenues, and higher returns to state-owned dominant energy market companies: ESB, Bord Gais and Bord na Mona.

The state extraction of funds through controlled charges and taxation linked to these charges is rampant. Over 2009-2012 period, indirect taxes, state revenues from sales of services and investment income – all linked to the cost base in the underlying economy rose from EUR 24.8 billion in 2009 (44.3% of total state revenues) to EUR 25.2 billion in 2012 (44.5% of total state revenues). This was despite significant declines in imports and consumption of goods in the domestic economy and declines in government own consumption of goods from EUR 10.4 billion in 2009 to EUR 8.56 billion in 2012. For those who think this extraction is nearly over now, let me remind you that IMF forecast increases in Government revenues for Ireland over 2014-2018 are set to exceed revenues increases passed in all budgets since 2008.


The price and tax hikes on Irish households leave them exposed to the risk of future increases in mortgages costs. Government controlled prices are sticky to the downside, which means that the once prices are raised, the state regulators and policymakers are unwilling to adjust prices downward in the future, no matter how bad households budgets can get. The reason for this is that semi-state companies reliant on regulated charges have significant market and political powers, especially as they act as prime vehicles for big bang ‘jobs creation’ and ‘investment’ announcements that fuel Irish political fortunes. At the same time, the state uses revenues obtained directly via dividends payouts and indirectly via taxes on goods and services supplied by the semi-state companies as substitutes for direct taxation. Absent deflation in state-controlled sectors, there is very little room left in the private sectors to compensate households for any potential future hikes in mortgages by reducing costs of goods and services elsewhere.

And mortgages costs are bound to rise over time. In 2008, new mortgages interest rates averaged around 5.2% against the ECB repo rate average of 3.85%, implying a lending margin of around 135 basis points. Since January 2013, ECB rates have averaged 0.7% while Irish mortgages rates averaged around 3.4%, implying a margin of 270 basis points. At this stage, we can expect ECB rates to revert to their historical average of around 3.1% in the medium-term future. At the same time, according to the Troika, Government and Central Bank’s plans, Irish banks will have to increase their lending margins. Put simply, current average new mortgages rates of 3.4% can pretty quickly double. Ditto for existent mortgages rates.

Based on CSO data, end of 2012 mortgages interest costs stood at the levels some 14.5% below those in 2007-2009 period and 29.6% below pre-crisis peak levels.  Reversion of the mortgages interest rates to historical averages and adjusting for increased lending margins over ECB rate would mean that mortgages interest costs can rise to well above their 2008 levels, with inflation in mortgages interest payments hitting 50%-plus over the next few years.


The dual structure of the Irish economy, splitting the country into an MNCs-dominated competitiveness haven and domestic overpriced and overtaxed nightmare, is going to hit Ireland hard in years to come. The only solution to the incoming crisis of rampant state-fuelled inflation in the cost of living compounding the households insolvency already present on the foot of the debt crisis is to reform our domestic economy. However, the necessary reforms must be concentrated in the areas dominated by the state-owned enterprises and quangos. These reforms will also threaten the state revenue extraction racket that is milking Irish consumers for every last penny they got. With this in mind, it is hardly surprising that to-date, six years into the crisis, Irish governments have done nothing to transform state-sponsored unproductive sectors of the domestic economy into consumers-serving competitively priced ones.

Chart with Argentina: GDP per capita adjusted for PPP differences (prices and exchange rates)

Box-out: 

Remember Ireland’s ‘exports-led recovery’ fairytale? The premise that an economy can grow out of its banking, debt and growth crises by expanding its exports has been firmly debunked by years of rapid growth in exports of goods and services, widening current account surpluses and lack of real growth in the underlying economy. Recent data, however, shows that the thesis of ‘exports-led recovery’ for the euro area is as dodgy as it is for Ireland. In 2010-2012, gross exports out of the euro area expanded by a massive 21.4%. Over the same period GDP grew by only 2.8%. Stripping out positive contributions from the private economy side (Government and household consumption, plus domestic investment), net exports growth effectively had no impact on shallow GDP expansion recorded in 2010 and 2011. The latest euro area economy forecasts for 2013 across 21 major research and financial services firms and five international economic and monetary policy organizations show a 100% consensus that while exports out of the euro area will continue to post positive growth this year, the euro area recession will continue on foot of contracting private domestic consumption and investment. Median consensus forecast is now for the euro area GDP to fall 0.4% in 2013 on foot of 2.1% drop in investment, 0.8% contraction in private consumption and a relatively benign 0.3% decline in Government consumption. The same picture – of near zero effect of exports on expected growth – is replayed in 2014 forecasts, with expectations for investment followed by private consumption expansion being the core drivers for the euro area return to positive GDP growth of ca 1.0%. Sadly, no one in Europe’s corridors of power seem to have any idea on how to move from fairytale policies pronouncements to real pro-growth ideas.

24/4/2013: Credit demand conditions in Irish banks: Q2 2013

All's quiet in the Irish Banking 'sector' Zombieland, per CBofI latest missive (link):

Good news: there was an improved demand for Fixed Investment in Q4 2012. Since then, Q1-Q2 2013 shows zero growth in demand. Non-news: Operating capital is now again tight (Q4 2012 and Q2 2013) against zero change in Q1 2013. Bad news: restructuring demand is up again after posting zero growth in Q1 2013.

So on business credit demand side: no real economic activity growth is signalled by investment demand, poorer conditions in operating capital signalled by the respective demand increase (albeit very moderate rate of increase) and credit restructuring pressures are slightly up as well.

On households side:

House purchases credit demand is up, at weak and moderating rate. Nothing dramatic, really, but good-ish sort of news. 

Basically, things are flat. Again, you can read this as a somewhat positive (things are not getting worse), or you can treat it as somewhat negative (given rates of contraction in credit during the crisis, real recovery should see demand and supply spiking rapidly up). My view is - the above confirms the proposition that Irish economy is at near-zero real growth trendline and the banking sector remains a drag on growth.

03/07/2011: SMEs and Corporate Credit: April 2011 data

In the previous post I looked at the latest data on lending rates and volumes for Irish households, which, among other things, showed

• lack of any significant easing in rates themselves (except for consumer credit), and
• lack of any uptick in credit issuance (in fact, there has been contraction in lending volumes in 3 out of 4 categories examined)

Here, let's take a look at business lending. First, loans up to € 1 million in volume (primarily loans that are focused on SMEs). Keep in mind the objectives of:

• creating Nama
• pumping countless billions into IRL-6 zombies
• setting aside specially designated funds within AIB & BofI for small business lending, and
• increasing various seed programmes (EI) and targeted tax reliefs

were to increase supply of credit to Irish SMEs.

Top line numbers for loans under €1 million are:

• Average rates charged on loans under €1 million in volume with up to 1 year fixed duration (or floating) has risen from 4.27% t0 4.74% between March 2011 and April 2011. The rate now stands just-shy of 4.906% historical average and 4.801 average for crisis period of January-2008 through present. 12mo MA is now below April 2011 rate at 4.087%. Volatility of these rates has risen from 1.002 standard deviation for historical period to 1.302 standard deviation for the crisis period. In short, there are no signs of any improvement in the rates charged during the crisis.
• At the same time, volume of non-financial corporate loans under €1 million with floating or up to 1 year fixed rates has fallen from €404 million in March to €250 million in April 2011. Volumes of new loans written in this category now stand well below historical monthly average of €919 million, crisis period average of €832 million and 12mo MA of €448.4 million.
• Fixed-rate loans (with rate fixed for more than 1 year) also became more expensive in April (6.17%) than in March (5.86%). These are now well above the historical average rates of 5.234%, the crisis average of 5.329% and the 12mo MA of 5.008%. Volatility of these rates also rose during the crisis.
• Volumes of over 1 year fixed smaller loans has shrunk to €45 million in April, down from €64 million in March and down on historical average of €160 million, crisis period average of €110 million and 12mo MA of €70.25 million.
  

So to sum this up, small businesses are seeing higher charges and shrinking volumes of loans across both types of loans under €1 million in volume. Anyone wondering why the hell all the above measures are failing to deliver on the promise?

But wait, what about larger loans? Next, consider loans issued to non-financial corporations that are over €1 million in volume:

• Rates charged on loans of €1 million and more that are floating or under 1 year fixed have fallen from 3.51% in March to 3.22% in April and are now standing well below 4.407% historical average, 4.01% crisis period average, but above 12mo MA of 3.048%. Volatility of these loans rates have risen during the crisis from historical 1.159 standard deviation to a standard deviation of 1.518 during the crisis.
• So more of those loans should be pursued by businesses, you'd think? Not really. At least not when it comes to actual issuance of these loans. Volume of larger loans issued on floating or fixed up to 1 year rate basis has fallen in April to €626 million, down from €1,119 million in March. Both numbers pale in comparison with historical average of €3,948 million and crisis period average of €4,654 million and both are below 12mo MA of €1,784 million.
• Rates charged on loans of €1 million and more in volume with fixed interest rate over 1 year have also declined from 2.30% in March to 2.27% in April. The rates are now well below 4.054% average over historical period and 3.666% average over crisis period. 12mo MA is also higher than the current rates - at 2.772%. Lower rates here again come with higher volatility.
  
• Volumes of these loans, however, fell precipitously, reaching €45 million in April, down from €169 million in March. Historical monthly average of new loans of this type issued stands at €632.3 million, while crisis period average is €488.5 million and 12mo MA is €190 million.

Lastly, let's take a look at the spreads between the rates based on loan volume:

• Spreads on corporate loans under €1 million, flexible rate & under 1 year fixed over and above those for over €1 million, should - in theory - be negative, unless there is a selection bias of SMEs predominantly taking smaller loans. At any rate, we would expect the spread to be moving in the direction of lower spreads if Government 'get credit flowing to SMEs' policies were working. Alas, in April 2011, the spread stood at 1.52pp up from March 0.76 percentage points and well above the historical average of 0.499pp and crisis period average of 0.791pp. It was also above 12mo MA reading of 1.039pp. Spread volatility has declined marginally during the crisis. So no, Government policy does not help selecting in favor of smaller corporate borrowers and does not provide support for working capital lending.
  
• Spreads on corporate loans under €1 million with fixed rate (>1 year duration) over and above similar loans of volume in excess of €1 million stood at 3.9pp in April up from 3.56pp in March. The spread is now massively above historical average of 1.180pp and crisis period average of 1.663pp, as well as 12mo MA of 2.237pp. Spread volatility has risen during the crisis. Again, no evidence here that SMEs are getting any support from Government policy 'instruments' listed above when it comes to gaining smaller loans as opposed to larger corporates access to credit.

02/02/2011: Credit and Deposits of Irish residents: January 2011

Let's get back to the credit stats released yesterday by the CBofI. This is the second post (earlier post - here - focused on foreign depositors flight), so let's update the core charts and review some monthly changes in the data.

Credit side:

• Irish households credit contracted mom by €948mln in January 2011 (a drop of 0.73%) against a monthly contraction of 5.29% in December 2010 - so deleveraging has slowed down
• Year on year, Irish households total outstanding debt fell to €129,370 mln in January 2011 or yoy decline of €10,392mln (7.44%) while in December yoy decline was 6.97%.
• Irish household's outstanding mortgages amounted to €99,289mln, down in January by €289mln (-0.29%) against a monthly drop of 7.05% in December 2010
• Year on year, mortgages were down 9.78% (or €10,766mln) in January against a yoy decline of 9.65% in December 2010.
• Non-financial corporations outstanding debts amounted to €92,652mln in January up 0.1% mom (+€90mln), but down 35.67% yoy (-€51,363mln).
• Total private sector credit fell 0.57% (-€1,908mln) mom in January (December 2010 saw mom decline of 0.98%) and fell 10.6% yoy (-€39,427mln) in January (December 2010 saw yoy decline of 10.73%).

So on credit side by category:
And growth rates:

Next, deposits for Irish residents (remember - non-resident deposits were highlighted in the previous post linked at the top):

• Total private deposits down 0.82% mom (-€1,387 mln) in January and yoy down 9.05% (-€16,613 mln). Steep. Deposits were down 2.24% mom in December 2010 (8.41% yoy).
• Households deposits contracted 0.7% mom in January (-€663mln) and 5.56% yoy (-€5,531mln). There go our 'savings rates', folks. In December 2010, yoy drop was 4.57% so things are accelerating downward. Month on month deposits were down 0.71% in December 2010.
• Non-financial corporations deposits rose 0.12% (VAT carry overs and seasonal receipts and payments, especially for MNCs being most likely drivers) month on month (+€41mln), but were down 16.57% yoy (-€6,670mln). In December 2010 corporate deposits were down 4.93% mom and 17.42% yoy.
  

Now, let's consider the degree of leverage we carry in this economy:
As charts above show:

• Leverage rose 0.26% mom and fell 1.7% yoy in January 2011 across the entire economy. In December, leverage rose 0.51% mom and fell 3.44% yoy
• Overall leverage trend is up and currently this economy is leverage 199.32%
  
• For households, leverage fell 0.03% mom and 1.99% yoy in January 2011, having fallen 0.04% mom and 2.79% in December 2010. So deleveraginng is slowing down
• Currently Irish households are leveraged 137.69%
• Non-financial corporations leverage was formidable 275.93% in January, down 0.02% on December 2010 and 1.99% on January 2010. In December 2010 corporate leverage was down 0.04% mom and 2.79% yoy. So deleveraging is slowing down for corporates as well.

Deposits composition by maturity:
Clearly, longer maturity has fallen off the cliff and a slight bounce in longer maturities this month follows a catastrophic drop off in months before. This cliff is a clear indication that households are moving cash into shorter maturities - either to withdraw deposits all together or as a form of short term precautionary savings. So:

• Overnight deposits were down -0.9% (-€788mln) mom and -4.42% yoy (-€3,998mln) in January
• Deposits with maturity up to 3 months were down -1.26% (-€197mln) mom and -6.16% (-€1,011mln) yoy in January 2011
• Deposits with maturity up to 2 years were up 1.15% (+€780mln) mom and down -16.67% (-13,374mln) yoy.

Finally, credit cards debt fell 1.84% mom (€53.48mln) and -5.8% (-€175.81mln) yoy in January 2011. Good news for one of the most expensive forms of debt.

2/02/2011: Irish interest rates

For the last post on monthly data release from the CBofI, let's take a look at the interest rates environment at the retail level.

First up - lending rates:

As of November 2010 (latest data available):

• House purchases lending floating rate was at 2.95% (up 0.34% mom and 13.03% yoy - note, these are percentages, not percentage points); rates for over 1 year fixed were 4.10% average (up 0.24% mom and 14.53% yoy)
• Consumer credit rate was 6.06% floating (up 1% mom and 30.32%yoy)
• Non-financial corporations faced a floating rate for <€1mln loans of 4.49% (up 10.86%mom and 13.96%yoy) and over 1 year fixed rate for same level of loans of 5.14% (up 4.26%mom and 18.16%yoy)
• The trends are up for all two borrower types year on year
  

Now, deposits:
So for deposit rates:

• Household deposits attracted an average rate of 1.75% (up 6.06% mom and 17.45% yoy)
• Non-financial corporations attracted an average rate of 1.25% (down 0.79% mom and up 39.98% yoy)

Now, consider the difference between deposit rate and borrowing rate:
For households, the gap between earnings on savings and cost of financing mortgages (I used house purchase, floating rate or up to 1 year fixed) has moved in favor of savers until November 2008, and there after switched in the direction of favoring borrowers. The switch is extremely volatile and since August 2010 the direction has changed once again. Thus, since August 2010 the banks are moving into more aggressively charging mortgage holders and rewarding relatively more savers.

Corporate rates differential has been moving in the direction of penalizing corporate deposits holders. This process in now being reinforced since July 2010.

So here we have it - deposit rates are becoming less attractive to the corporates, just as more and more of them abandon Irish banks... who would have thought that charging our customers out existence can be a bad thing?

Finally, using CBofI breakdown on loans by type and maturity, I conducted a simple exercise - what happens if the interest rates on new and ARM mortgages charged by banks go up by 1 percentage point (incidentally - PTSB is doing just that, apparently). By my calculation, added cost of interest finance will translate into roughly additional €1.67bn being taken out of the economy. That's like having another Leni's tax hike over again for Irish households.

2/02/2011: Irish termed deposits and credit cards

In the previous two posts I updated data on credit and deposits levels and flows. In this post, let's tidy up by taking a look at deposits by maturity and credit cards.

First deposits by maturity:
Clearly, longer term maturity is exiting, medium term maturity deposits are now shrinking as well, while short term maturity deposits remain steady. This suggests that

1. Irish depositors are exiting Irish banks when longer term savings mature;
2. Irish pool of savings available for investment - remember, banks can more safely lend out of longer maturity deposits than out of shorter maturity ones (lower risk of maturity mismatch) - is also shrinking.
3. Overall, overnight deposits have increased 2.11%mom in December 2010, but fell 4.35% yoy
4. Up to 3 months deposits fell 4.33% in December 2010 mom and 2.77% yoy
5. Up to 2 years deposits fell 9.64% mom and 17.32% yoy.
   

Not very good trends.

On credit cards, the picture is What the data suggests is:

• Irish credit cards balances are declining, but this decline is relatively mild - down 0.81% mom in December 2010 (latest data) and -6.28% yoy.
  

1/02/2011: Growth rates in credit and deposits

Having looked at the levels of credit and deposits through December 2010 in the previous post (here) lets take a look at the rates of change.
Credit growth rates above clearly show the following trends:

• Household loans rate of contraction has accelerated from 4.8% yoy in October and November to 5.2% in December. Thus December 2010 marked the worst month in the entire series history since 2004.
• Rate of decline in mortgages lending was also accelerating to 1.9% in December from 1.7% in November and 1.6% in September and October.
• Rate of decline in credit for non-financial corporations eased in December to 1.6% yoy from 2.4% in November.

Next, deposits rates of change:
The chart above shows:

• A dramatic exist from Irish banks by non-financial corporate deposits. This flight is accelerating - having gone from -9.2% yoy fall in July, to -13.1% in August, -14.8% in September, -15.4% in October, -14.9% in November and a whooping -16.1% in December.
• Household deposits are also accelerating in the rate of decline from -2.4% in October to -4.5% in November and -4.7% in December

To highlight these dynamics and to dispel the myth of 'savings are rising' often perpetrated by some banks analysts, let's come back to the data on deposits. In December 2008-January 2009 there was a discrete jump in household deposits to the tune of just over €12.4bn. This jump is never really noticed by the analysts, but it reflects addition of the credit unions to the database. These are not new deposits, but rather the deposits that were held in institutions previously not covered by the dataset.

Now, let' remove this 'hump' and see what the banking sector deposits really look like today:
The chart abvoe does exactly this. And it clearly shows that:

• Over 2010, Irish households have suffered a loss of savings, not a gain, pushing our deposits to the comparable level of December 2007
  
• Over the entire crisis total private sector deposits have fallen to the levels comparable to those in May-June 2006.

And yet, we keep hearing (admittedly whimpered) calls for taxing 'sky-high' deposits/savings to 'release spending into consumption markets'.

1/02/2011: Credit supply and deposits in Ireland

CBofI released monthly data for December 2010 on credit supply and deposits in the Irish financial institutions.

Updated charts and some analysis:
Irish private sector credit continued to contract in December, having fallen 0.98% mom and -10.7% yoy in total. Overall, credit outstanding fell €3.33bn in December mom and €40.23bn yoy.
Credit has fallen across all categories, except one:

• Household credit fell 4.72% (-€6.49bn) mom and 6.41% (-€8.98bn) yoy
• Mortgages credit fell 7.05% (-€7.55bn) mom and 9.65% (-€10.63bn) yoy
• Non-financial corporations credit fell 2.63% (-€2.5bn) mom and 37.08% (-€54.34bn) yoy
• Insurance and pension funds sector credit rose 5.36% (€5.66bn) and was up 26.18% (€23.09bn) yoy
• Combined non-financial sectors and households credit fell a massive €63.32bn in 12 months to the end of December 2010.

Onto deposits next:

Headline figure is that total deposits fell 2.24% (-€3.86bn) mom and 8.41% (-€15.46bn) yoy. This was backed by deposits declines across two out of three core components:
So:

• Household deposits rose 0.71% (€669mln) mom but fell 4.57% (-€4.53bn) yoy
• Non-financial corporate deposits were down 5.18% (-€1.83bn) mom and 17.64% (-€7.17bn) yoy
• Insurance and pension funds sector deposits fell 6.29% (-€2.7bn) mom and 8.57% (-€3.77bn) yoy
• Non-financial sector and household deposits fell €11.693bn in 12 months through December 2010.

The relative changes in deposits and loans outstanding implied changes in the ratio of loans to deposits - an instrument for the leveraging taken on by the economy at large.

Overall, Irish economy achieved a very modest reduction in the ratio in 2010:

• Total private sector credit to deposits ratio fell 2.53% in 12 months to the end of December 2010 reaching 198.81%
• Lowest deleveraging took place in the household sector, where the ratio fell 1.93% in 12 months and currently stands at 138.56%
• Highest degree of deleveraging was achieved in the non-financial corporate sector, where the ratio declined 23.6% yoy in December (though it rose by 2.69% mom) reaching 275.68%
• Insurance and pensions funds sector actually increased overall leverage ratio by 38% in 12 months to the end of December, reaching the ratio of 276.6%

Overall, outstanding loans exceeded domestic deposits by 98.81% in the end of 2010.

Economics 31/7/10: Credit flows in Ireland

Central Bank quarterly was published yesterday. Here are some updated charts on credit flows (data through May). The main conclusions are:

1. Private sector credit continues to contract and is again accelerating in the annual rate of decline (-10.4% yoy in May as compared to -9.3% declines in April and March).
2. Mortgage credit contractions are steadily declining (-1.8% in May against -1.6% in April & 1.4% in March).
3. Non-mortgage credit is accelerating in the rate of decline (-12.8% in May compared to -11.4% in April)
   
4. Nama - now through 50% of the loans purchases - has had no positive impact on credit supply. If anything, as charts for households lending show blow, it is being accompanied by a dramatic increase in the cost of borrowing for ordinary families.

Charts:
Aggregate private sector credit above. Disastrous trends of the last 2 year continue unabated, despite the already significant contraction in the credit supply. This suggests that we are in a continued downward spiral when it comes to business and household investment (future capacity is under continued pressure down and the only thing that provides some positive support to capital side is, most likely, MNCs own inter-company investments). This goes to explain why one cannot accept earlier DofF projections for 2013-2015 potential rates of growth. We are in a situation very similar to Japan in the mid-1990s, where existent production is being driven at the expense of capital stock.

Mortgages:Clearly, no signs of moderation in the rates of decay anywhere here. But the picture is more sluggish than that for non-mortgages lending:
The reason for the different dynamics is that it is easier for households to cut back on smaller credit demand than on massive mortgages burden. Hence, non-mortgages lending is a leading indicator for what we can expect to follow in the mortgages markets. Not exactly a bright future for the housing markets, then.

Deposits side of our financial system:
Notice that deposits are down, mom, across the board, except for shorter term maturity corporate deposits. But yoy all deposits are down. Combined decline in all deposits in volume since January 2010 is €1,869 mln, or 3.4%. Not a small change. All deposit rates are down year on year - we are being paid less to save, but are charged more to borrow.

Loans stats next.
Loans for house purchases are falling, while mortgages rates are rocketing. The orange line above shows just what is happening with the cost of financing one's own home in Ireland, courtesy of our regulators (keen on talking about 'moral hazard'), all the special 'Working Groups' aiming to address the problems in the housing markets, and Nama. Remember - our Government (by now pretty much every minister in the cabinet) had sworn to us that Nama will restore functional banking. May be this is what they had in mind...

Last year I predicted that the game in the mortgages markets will play as follows:

• Once Nama starts transfers, incentives for the banks to play a Good Fella will diminish - repossessions will remain low, but rates will rise. We now can see this happening around us.
• Once Nama completes transfers, banks will go in earnest at rebuilding their margins & capital, meaning - repossessions will accelerate dramatically and rates will rise to the levels where the burden of financing mortgages will become a driver for more repossessions.
• 3-6 months after the above stage, banks will start hoarding repossessed property on their books. They will be forced to start selling it ca 6-9 months after February 2011 (completion date for Nama purchases).
• Combined effect of massively more expensive mortgages credit and inflow of repossessed properties into the market will drive prices in housing markets even further down.
  

So far, we are through the 1st bullet point and getting closer to the second one.

Meanwhile, in the land of short term loans, rates are more steady and credit supply is falling gently.
Now, let me ask you this question. What should be the priority here? Making sure people are not being skinned to pay for their homes, or making sure that credit cards rates and car loans are being underpinned by more stable interest rates?

Credit to non-financial corporations is continuing to slide. Year on year, shorter term (working capital) credit is now off a massive 19.3%. Longer term credit is off 2.7% yoy. What does this tell me about the economy?

1. Capital investment is going nowhere fast, with any rosy figures on volumes we might hear over the coming weeks being most likely driven by the MNCs own in-house investment flows; and
2. Companies have no capacity to refinance shorter term credit obligations, resulting in a cash flow pressures and lack of operating capital.

Not exactly a success story for our financial system administrators and regulators, then.

Economics 11/06/2010: Private Sector Credit data

Central Bank data released yesterday show Private Sector (non-financials) credit fell 9.3% in Q1 2010, to €355 bn. Total outstanding mortgages volume fell €1.2 bn to €146.4 bn. Two thirds of the total amount of credit decline came from writedowns on existing loans, which means that there is continued pressure on loans (keep in mind that Nama transfers are not yet in the data). Charts below update, as usual:
Aggregates first
Notice the rise of securitizations - banks shifting stuff off their balance sheets at an aggressive rate.
Chart above shows monthly flows. There is some improvement here, but absent seasonality corrections it is hard to say what exactly is going on. However, it does appear that the latest monthly transactions uptick is not in line with pre-crisis dynamics for Non-Financial Corps, but in line for Households:Year on year changes:
Clearly, yoy things remain bleak, although the rate of contraction is getting reversed for households. This is a seasonally consistent result, so I would not be reading too deeply into it.

Economics 02/11/2009: Central Bank Credit Data - Renewed Crisis Dynamics

So Irish Central Bank monthly data – out last Friday – provides some more fodder for thought about what is going on with credit flows in the country most dependent on ECB repo window (see here).

First consider the aggregates on money supply side:
This clearly shows that whilst M1 money supply has expanded by just under €3bn (or 3.4%) between August and September 2009, M2 money supply has contracted by over €4.1bn or 2.11%. The contraction is primarily driven by the decline in deposits with set maturity of up to 2 years which have fallen by a whooping €7.43bn or 7.9%. Part of this was probably used to deleverage shorter-term debt securities (up to 2 years in maturity) – which have declined by €2.66bn or just under 5.5%. But whatever happened with the rest of deposits is hard to explain out of the CB data. Deposits with medium term maturity constitute the most stable measure of future lending capacity in the credit sector and this decline does not signal much needed stabilization in future lending conditions.

Now to more detailed data on consolidated balance sheet. First, liabilities side:

The above chart clearly shows that all liabilities, save for Non-Government Deposits and Government Deposits with the Central Bank, are still trending up. Net external liabilities are certainly in reversion after June local trough and are now dangerously reaching for February 2009 crisis levels. Bad news?

Well, aggregates are showing something very similar:
Total liabilities are now in excess of the non-Government credit volumes once again for the second time this year. First this condition was observed in January-February 2009. Next, we have crossed once again to the situation of private sector credit falling below total liabilities in August 2009. September 2009 re-affirmed the trend as the gap between two time series widened to the second highest level in 2009 so far with January gap of €27.7bn and September gap of €22.0bn. So non-Government credit flows are no longer covering total liabilities… Bad stuff? Wait…
On the assets side, the above shows that save for Government debt which is converted through accountancy double-entry into Government Credit (up 77.9% year to date in September), not much else is rising, with fixed assets down 14% year to date, interest earnings on non-government credit down 49.6%, official external reserves up 11.35%.

On private sector credit decomposition:
Total private sector credit (PSC) has declined from the peak achieved back in November last year to current €378.1bn or 6.4%. This is dire and the decline is actually accelerating since beginning of September. Table summarizes:
The same is true for non-mortgage credit and mortgage credit. Importantly, the data on mortgage credit and non-mortgage borrowing shows that there is no deleveraging in sight for Irish households. Residential mortgage lending today continues to remain at well above the peak markets level for house prices. In 2007, average monthly level of mortgage debt in Ireland stood at €131.1bn. In September 2007, the level was €136bn or 8.83% below the latest level recorded in September 2009. Thus, as negative equity pressures continue to increase due to falling house prices and as rents continue to destroy yields on property, Irish mortgage holders are simply prevented from deleveraging in the credit cycle by falling incomes and rising taxes.

This does not bode well for the short-term prognosis for the Irish financial system (reliant heavily on low default on mortgages assumptions amidst a full blown meltdown of the development loans) and for the Irish construction sector and property markets (reliant on some sort of a return of the buyers to the collapsed market for properties). It also does not support any hope of the stabilization in the property-related tax revenues.
Hence, although credit contraction has set in firmly back in June (with credit to private sector posting negative growth in yoy terms since then), mortgages credit is lagging (implying that we are yet to witness true crunch on mortgages – something that is likely to happen once the banks set out in earnest to rebuild their margins by hiking mortgages rates post-Nama) and non-mortgage credit is back on the rise (potentially reflecting accumulation of credit arrears by financially stretched households).

The same picture, of building pressure on the arrears side can be glimpsed from the changes in trends for credit cards spending. New purchasing using credit cards has lagged repayments in January-August 2009. In September, more charges were incurred than paid down. The same (albeit on a vastly smaller scale) took place in business cards. Hence, balances are now rising across all credit card debts, as shown in the chart below.

Net result of all of this: outstanding indebtedness of Irish private sectors is no longer declining. The rate of growth in overall debt levels has hit 0 in May 2009, bounced back to positive territory in June-July 2009 and failed to hit negative (deleveraging territory) since then.