10/4/2013: IMHO Submission on the Review of Code of Conduct on Mortgages Arrears

The Irish Mortgage Holders Organisation Ltd.,
www.mortgageholders.ie
Not for profit organisation.

Submission on the review of code of conduct on mortgage arrears consultation paper CP 63

Irish Mortgage Holders Organisation, April 9th 2013.

Attention: Mr. Bernard Sherridan, Central Bank of Ireland.



Dear Mr Sheridan,

We would like to thank you and your team for meeting us recently about issues and concerns we have at the treatment by banks of Mortgage Holders.


We are very concerned by the statements made by Mr. Elderfield at the launch of the “targets” (set by government and the Central Bank) for banks, with respect to dealing with those in arrears as well as comments surrounding the changing of the Code Of Conduct on mortgage arrears to allow banks to take swifter action against mortgage holders.

It is our view that the process of mortgages arrears resolution is being facilitated in an unsupervised and unstructured way, without due regard to the need for transparency and openness which would be consistent with the best practices for arrears resolution and consumer protection. The process – as outlined to-date – leaves the mortgagees fully exposed to banks putting their own objectives and strategies ahead of the needs of the Irish economy, society and borrowers, and provides a large deficit in consumer protection.

We would like to make the following specific points regarding the review of the code of conduct on mortgage arrears notwithstanding the fact that it may already be predetermined as demonstrated by Mr. Elderfield’s comments as referenced above.


Legal standing:

In the first instance and reluctantly we have to raise the issue of the legality of the Code Of Conduct. This issue has been discussed behind closed doors for some time now and it is an issue of the utmost importance as the legal status of the code of conduct on mortgage arrears is by no means certain. We wish to reaffirm our concerns about the legality of the code which we expressed originally in our email to Governor Honohan last month.

A number of recent high court cases refer to this issue including Irish Life and Permanent v Duff where Justice Hogan raised “the somewhat troublesome issue of the precise legal status of the code of conduct”. Justice Hogan followed recent high court precedent in the Fitzell case and warned The question, for example, of what constitutes a “reasonable effort” on the part of the lender does not easily lend itself to judicial analysis by readily recognisable legal criteria. How, for example, are “reasonable efforts” to be measured and ascertained? If, moreover, non-compliance with the Code resulted in the courts declining to make orders for possession to which (as here) the lenders were otherwise apparently justified in seeking and obtaining, there would be a risk that by promulgating the Code and giving it a status that it did not otherwise legally merit, the courts would, in effect, be permitting the Central Bank unconstitutionally to change the law in this fashion’.

The Code itself has no specific legislative status. It is neither a piece of primary legislation in the form of an act of the Oireachtas nor a secondary piece of legislation in the form of a ministerial regulation issued by the Minister for Finance. The Code is not even stated to be admissible in legal proceedings. It is a Code issued under the terms of Section 117 of the Central Bank Act 1989 and therefore lenders who infringe its terms may be subject to the Central Bank’s Administrative Sanctions Procedure. This is an internal process that allows the Bank to control the conduct of and helps to define its regulatory relationship with financial service providers, but it is not one that a consumer as a borrower has any involvement in. This we believe is a matter of extreme urgency that needs addressing.


Right of Appeal:

Section 49 & 52 as proposed allows for a lender to have 3 senior staff act as an appeals board. This is completely unacceptable and allows for no independent oversight. The appeal process must be fully detached from the banks or banking sector representative institutions and vested with an independent authority acting to protect the interests of all parties involved in a dispute. The process must be made explicitly transparent and any asymmetries in representation during the dispute that may arise due to (a) nature of the processes that lead to the appeal, and (b) resources available to the parties prior to and during the appeal should be removed. In practical terms, this requires provisioning for the independent and fully funded counsel for borrowers who cannot afford such professional help, and an appeals board that is fully operationally and membership-wise independent from both borrowers and lenders.


Moratorium:

The proposed and current code is flawed in not being prescriptive in defining the periods of time over which the moratorium clock is ticking. No time is given for gathering of financial information or indeed an exchange of offers between the lender and the borrower. This will become a significant issue when the legislation is introduced to reverse the Dunne Judgement, which will lead to a significant rise in repossession applications. Lenders can initiate delays in corresponding with borrowers, as they have done on many occasions to-date, and such periods of delays will account for time eaten into a moratorium period. Borrowers, however, are not accorded similar powers. Again in the absence of prescriptive process and recording of times borrowers can be seriously and unfairly disadvantaged by losing time that is taken off them ahead of potential repossession proceedings.

Provision 37 proposes ‘Prior to completing the full assessment of the borrower’s standard financial statement, a lender may put a temporary arrangement in place where a delay in putting an arrangement in place will exacerbate a borrower’s arrears or pre-arrears situation. Such a temporary arrangement should not last for more than three months. Any subsequent arrangement should be based on a full assessment of the standard financial statement’.

This provision should state that the duration of this temporary arrangement does not count for the purposes of the 12 month moratorium on repossession proceedings. Similarly, Provision 57 should state in relation to the twelve month moratorium that ‘the twelve month period does not include any time period where a proposal for an alternative repayment arrangement is being negotiated’.


Unsolicited Contact by Lenders with Borrowers:

The Central Bank “themed inspections” as to the banks adherence to the previous rule of no more that 3 unsolicited contacts in one month was typical of light touch supervision. The lenders seem to have
had significant influence in this proposal and the Central Bank seem to have accepted the industry’s lobby position on this. In addition the Central Bank gave advance notice to banks before their “inspection”.

‘Feedback from industry would indicate that the current requirements, particularly the limit of three successful contacts, are preventing lenders from making contact and engaging with borrowers and are therefore impeding the consideration and resolution of borrower’s cases. The Central Bank does not believe that this is in the best interests of borrowers’.

There are no provisions for the engagement with mortgage holders in this feedback system. Similarly, there are no explicit, transparent and enforceable provisions to ensure that lenders engagements with the borrowers will be “proportionate and not excessive”. There are no data disclosure provisions relating to inspections and any remediation measures applied to institutions violating code of conduct.

The new unlimited contacts must not be “aggressive or intimidating”. Once again, how is it proposed to ensure this will be the case? How will it be proven that all attempts to contact the borrower have been made and that these attempts have been made within the confines of the Code-permitted procedures? The removal of this limited protection of mortgage holders is a significant regressive step in consumer protection and has left the borrowers unprotected against potential abuses by the banks.

Debt collectors acting on behalf of lenders are still unregulated within the existent structure and under the proposed code. How does this code cover their activities or can they adopt any means they deem appropriate to recover monies?

The Central Bank will have failed to provide symmetric protection of the interests of the borrowers and the lenders unless it allows for explicit, enforceable and transparent safeguards to protect many vulnerable people who are in arrears and will be set upon by lenders who have been given a free rein.


Unsustainability: 

Many actions taken by the bank to repossess property are predicated on a decision by a lender that a loan underlying the property is unsustainable. The Code should include prescriptive rules defining what is sustainable and what is not sustainable. This may involve some sort of expenditure guidelines. These rules and guidelines should be transparent, public, enforceable and compulsory for all banks, and applicable to all borrowers.


Trackers:

It is vital that provision 12 (d) is not changed unless there is a clear system for borrowers to seek advice to ensure that any removal off a tracker is of benefit to the borrower. Such advice should be delivered on a professional basis and borrowers in need of funding for procuring such advice should have access to such funding. Page 4 of the consultation paper suggests that the removal off a tracker might have merit if in the interest of the borrower. This determination cannot be solely in the remit of the lender nor can it be left subject to the appeal system that incorporates explicit conflict of interest between the appeals process and the bank interests per note above.


Engagement:

Our experience, confirmed by the experience of other organisations working on behalf of the borrowers in distress, is that lenders do not respond in a timely manner to borrowers proposals or engagements, which is unacceptable. What happens to a lender who does not engage, who does the borrower appeal or complain to, other than the bank, which is alleged to engage in the abuse of the system?

Engagement by lenders with borrowers can be painfully slow, tedious and difficult leaving the borrower exhausted, their financial resources significantly reduced and without a resolution. There needs to be a clear code of conduct enforcement by the central bank on lenders for their behaviour and engagement and such enforcement should be transparent, effective, verifiable and not based on an ad hoc system of inspections, criteria and judgements.


Borrower representation and advice:

Even in normally functioning bankruptcy regimes around the world, those in debt are at a significant disadvantage compared to the might of creditors. They face corporate strength and power that can crush any debtor financially, emotionally, socially and psychologically. Observed by passive regulators, as in Ireland, compounded by the insolvency regime that is both under the current statutes and in its ‘reformed’ reincarnation nothing short of draconian, leaves the debtor in great peril.

When this financial crisis happened it was the citizen who suffered where the regulated entities and regulators enjoyed protected pay, conditions and functionality. Now, the very same citizen is facing the immense power of the state backing the already significant powers of the banks when it comes to the personal debts.

Bankers have a Banking Federation that represents them. Bankers are also availing of the weaknesses in the Irish competition laws to sustain and even consolidate their market powers at the expense of the taxpayers. They discuss issues and present their views publicly and to the government rather effectively and are assisted by a receptive media. They tend to be in sync with government announcements and findings and have direct access to the Social Partnership process and all other avenues of policy formation.

Debtors lack any statutory or institutional power. They need assistance and protection, care and support. This is best achieved by a coming together of advocates and organisations that provide services and assistance to debtors. Organisations and bodies such as MABS, The Irish Mortgage Holders Organisation, Flac, Phoenix Project and others are providing exceptionally effective and professional services to debtors usually on the basis of voluntary engagement of experts and ordinary citizens, and in the majority of cases, with no cost to the state. These and other organisations have a combined knowledge, experience and passion of their volunteers to help those is debt.

Mabs has been effectively assisting debtors for the last few decades and they have experience and a national foot print from where services and supports could be head quartered.

Yet, even with these organisations behind them, Irish debtors do not have the resources needed to deal with aggressive and disruptive creditors. With many commentators and practitioners expressing concerns and uncertainty as to how the new personal insolvency act will work there is a need to address the imbalance that exists today between debtors and lenders, as well as prevent the exacerbation of this imbalance threatened by the new legislation.

The new Insolvency regime will add additional hurdles for debtors, allowing vultures prey on the hundreds of thousands of households saddled with excessive debts, while providing little certainty to the debtor or any chances for a renewal to the economy.

Successive governments have chosen to ignore the one constant support debtors have had which is Mabs, in favour of diluting their effectiveness and giving banks and creditors a strengthened hand. Successive governments have also opted to ignore all other organisations currently working on the frontlines of the debt crisis. Despite the governments’ best efforts these organisations continued to offer a better balance and chance for debtors to be represented and protected effectively. These organisations deserve to be recognised as the de facto debtors’ representatives and be allowed to fund professional provision of services to debtors by linking arrears and insolvency resolution savings delivered to the economy at large via their efforts to the resources available to them to achieve such savings.

The insolvency bill raises a serious question of how those deeply in debt will be able to afford professional representation to assist them deal with their debt in favour of those with cash flow who can avail of professional services. This will promote a two tiered system leaving the most vulnerable to fend for themselves in unchartered waters full of predatory creditors and commercial service providers.

What would be helpful to debtors in the years ahead would be a number of organisations that compete to provide a full suite of services to debtors including legal, financial, negotiation, mental health, conveyancing and creditor payment services. These organisations should be modelled around Mabs, with Mabs established on a stand alone basis with an independent Board filled with experienced directors. A Board with a strategic plan that addresses the needs of debtors in the years to come.

Mabs is currently funded from the department of social protection to the tune of EUR18,5 million per annum. This funding could be directed towards the new organisation and additional funding could be raised by charging creditors as is done in many other jurisdictions. Many consumer credit counselling services agree voluntary payment arrangements with creditors on behalf of debtors and facilitate the cash transactions for a fee. A truly independent and well-resourced Mabs can act as a coordinator and supervisor over other organisations that compete with each other for representation of debtors in the
process of developing systemic resolution to the debtor arrears or insolvency.

Given the disproportionate powers granted to the banks by the new legislation, existent debtors’- representing organisations will undoubtedly try their best to help but they are not adequately funded to achieve significant scale and scope of their operations to fully function as representatives of families and people in difficulty. Indeed, majority of them are not funded at all. There is an urgent need to consolidate these organisations’ efforts, provide them with proper supervision and supports, and allow them to raise resources to deliver meaningful and effective change.


Yours sincerely,
David Hall
Dr. Constantin Gurdgiev
Directors
Irish Mortgage Holders Organisation.
Dublin, Ireland
April 9, 2013

THE IRISH MORTGAGE HOLDERS ORGANISATION LIMITED is Registered in Ireland No: 517549 Directors: Arthur Mullan, David Hall, Lucy Cronin, Tracy Mullan, Constantin Gurdgiev

2/4/2013: Talkin of Gettin Things Really Wrong...

When Washington Post gets things badly wrong...

"Ireland doesn’t look likely to cause problems anytime soon. It’s been paying back the 2010 bailout from the E.U. faster than it had too [sic], which has pushed bond rates way down."
http://www.washingtonpost.com/blogs/wonkblog/wp/2013/03/30/cyprus-luxembourg-italy-or-malta-which-country-will-unravel-the-euro-zone/

Sorry, what?! Ahem... no... WHAT?!

25/3/2013: Cyprus is unique in its problem... oh, wait...

So you'd think Cyprus is the 'bad boy' in grossly-overweight-financial-services club? Oh... right:

Source

Now, wait, I am sure the Department of Spin is going to come after me pointing that 'Ireland's figures include IFSC'... my reply... so what? Cypriot figures include Sberbank & VTB... and, unlike the-best-in-the-class Ireland, Cyprus is just starting to deleverage its financial services sector.

23/3/2013: IMF 9th Review of Ireland's Programme

IMF Completed 9th Review with Ireland:

"Ireland’s strong policy implementation has continued and positive signs are emerging. Real GDP growth was 0.9 percent in 2012, and employment rose slightly over the year, although unemployment remains high at 14.2 percent. Further deepening its market access, Ireland issued €5 billion of 10 year bonds at 4.15 percent in March."

"The 2012 fiscal deficit of 7¾ percent of GDP was well within the 8.6 percent target. In 2013, the fiscal deficit is projected at 6¾ percent of GDP, moving toward the target of below 3 percent by 2015.  Public debt is expected to peak at 122½  percent of GDP this year and decline in later years provided growth picks up from the 1 percent rate projected in 2013."

"Financial sector reforms have continued to advance, but banks remain weighed down by nonperforming loans at about 25 percent of total loans." Per Mr. David Lipton, First Deputy Managing Director and Acting Chair:

"…problem loans remain high and accelerating their resolution is a key to economic recovery. The recent establishment of mortgage loan restructuring targets for banks is therefore welcome, and it will be supported by reforms announced by authorities that facilitate constructive engagement between banks and borrowers, promote the efficiency of repossession procedures as a last resort, provide banks with the right incentives through provisioning rules, and by sound implementation of the personal insolvency reform. Progress with resolution efforts for SME loans is also a priority.

“Building on the strong budget outturn for 2012, sound budget execution remains critical in 2013, including continued vigilance on health spending and a successful introduction of the property tax...

“Prospects for Ireland’s exit from official support have improved, yet continued strong policy implementation remains paramount given risks to medium-term growth and debt sustainability. Timely and forceful delivery on European pledges to improve program sustainability, especially by breaking the vicious circle between the banks and the Irish sovereign, would go a long way toward Ireland’s durable exit from drawing on official support.”

21/12/2012: Slight upgrade for Ireland

Nice small present for the Day After (yep, that 'End of the World' thingy passed peacefully): Euromoney Credit Risk survey gave Ireland a small, but welcome upgrade:

Note that Ireland is just one of 3 countries receiving an upgrade.

Not a hugely significant development, but a nice step - 1 place up in the global rankings, now to 45th highest risk country (meaning there are 44 countries that rank less risky than Ireland). Do note, however, that our systemic risk scores in Structural Assessment has slipped, while Credit Ratings and Debt Indicators remained static.

19/12/2012: Mr Grinch Travels in Threes

It hasn't been a good month or so for irish banks... Right, true, AIB & BofI sold some paper around, covered bonds that is. And this triggered a veritable drooling of happiness from some (mostly sell-side) analysts. But then the mortgages defaults figures for Q3 came in... Boom! The IMF started sounding alrams about risks in the stalled banking sector... Boom-Boom! And now, Moody's weighing in too...

"Announcement: Moody's: Irish Prime RMBS performance steadily worsened in October 2012

Global Credit Research - 19 Dec 2012
Irish Prime RMBS Indices -- October 2012
London, 19 December 2012 -- The performance of the Irish prime residential mortgage-backed securities (RMBS) market steadily worsened during the three-month period leading to October 2012, according to the latest indices published by Moody's Investors Service.

From July to October 2012, the 90+ day delinquency trend and 360+ day delinquent loans (which are used as a proxy for defaults) reached a new peak, rising steeply to 16.52% from 15.19% and to 7.91% from 6.58%, respectively, of the outstanding portfolios. Moody's annualised total redemption rate (TRR) trend was 2.95% in October 2012, down from 3.40% in October 2011.

Moody's outlook for Irish RMBS is negative (see "European ABS and RMBS: 2013 Outlook", 10 December 2012,http://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBS_SF309566). The steep decline in house prices since 2007 has placed the majority of borrowers deep into negative equity. Falling house prices will increase the severity of losses on defaulted mortgages (see "High negative equity levels in Irish RMBS will drive loan loss severities to 70%", 16 May 2012 http://www.moodys.com/viewresearchdoc.aspx?docid=PBS_SF285527). The rating agency expects that the Irish economy will only grow 1.1% in 2013 (see "Credit Opinion: Ireland, Government of", 07 November 2012 http://www.moodys.com/research/Ireland-Government-of-Credit-Opinion--COP_423933). In this weak economic recovery, it will be difficult for distressed borrowers to significantly increase their debt servicing capabilities and so arrears are likely to continue increasing.

On 15 November, Moody's downgraded nine senior notes and placed on review for downgrade one senior note out of five Irish RMBS transactions, following the rating agency's revision of key collateral assumptions. The downgrades reflect insufficient credit enhancement for notes rated at the country ceiling. All notes affected by this rating action remain on downgrade review pending re-assessment of required credit enhancement to address country risk exposure. Moody's also increased assumptions in eight other transactions, which did not result in any rating action due to sufficient credit enhancement. (See PR: http://www.moodys.com/research/Moodys-takes-rating-actions-on-5-Irish-RMBS-transactions--PR_259945).

As of October 2012, the 19 Moody's-rated Irish prime RMBS transactions had an outstanding pool balance of EUR48.97 billion. This constitutes a year-on-year decrease of 7.1% compared with EUR52.69 billion for the same period in the previous year."

So, that's EUR48.97 billion of trash which are 7.91% fully destroyed and decomposing (EUR3.87bn) and is showing signs of severe rot at 16.52% (EUR7.96bn). With 70% expected loss, at EUR8.28bn expected writedown, swallowing all funds allocated under PCARs to mortgages arrears?

Who says there's just one Mr Grinch? Comes Christmas time, its IMF & Moody's & bad, bad, bad, moral-hazardous households that just can't pay their mortgages... Time to raise those AVR mortgages costs, then, to cover the losses on errm... mortgages...

25/11/2012: Irish Current Account and Government Debt

In the previous post I highlighted the problem presented by the EU Budget changes in the near future to the sustainability of Irish debt dynamics. I referenced expert opinions on the role of current account surpluses in determining these dynamics. here is an example from early 2011 (emphasis is mine):

"... this dependency [2010 bailout] of Ireland on foreign support is difficult to understand given that the country has not lived continuously above its means in the past.  Ireland has run a current account deficit (which means the country uses more resources than it produces) only for a few years; and if one totals the current account balances over the last 25 years, one arrives at a foreign debt of about €30 billion.  This should not be too difficult to finance given that it represents only about 20% of the country’s GDP of €150 billion. Moreover, Ireland is on track to run a current surplus this year and should thus not have any need for additional foreign funds."

Here's a problem - the above, as I noted in the previous post is based on some rather unpleasantly non-sustainable assumptions. Here's the arithmetic, based on IMF WEO data.

As chart above shows, Irish cumulated current account balances for the period 1980-2009 totalled -€39 billion, that's where the 'about €30 billion' miracle figure coming from. Alas, over the same period of time, Ireland received €39.4 billion worth of net transfers from the EU, which counted as a positive addition to the current account. Netting these out, Irish real 'external balance' cumulative for 1980-2009 was -€78.4 billion. Worse than that, net of EU subsidies, Ireland have run external deficits in every decade from 1980 through 2009. In other words, using the expert turn of phrase, Ireland used more resources than it produced in every decade through 2009. 

Now, was it true that Ireland 'has run a current account deficit only for a few years'? Why, here's a chart plotting Ireland's current account balances:

Gross of EU transfers, Ireland run current account deficits in 1980-1986, 1989-1990, and 2000-2009, which means that it run deficits over 19 out of 30 years between 1980 and 2009, which is more than 63% of the time. Ireland run current account deficits almost 58% of the time in the period of 1980-2012. Hardly 'a few years'. More importantly, removing EU net subsidies, Ireland has managed to run current account deficits every year between 1980 and 2012 except in 1996 and 2010-2012. That means that Ireland was using more resources than it produced in 29 out of 33 years since 1980, or 88% of the time.

For the last bit, let us recall that back in the 1990s (the period of Ireland's rapid recovery from debt overhang of the 1980s) Irish current account surpluses relative to General Government Debt stood at 26.8% (using 1999 level of General Government Debt and the cumulated current account surpluses, inclusive of EU transfers throughout the decade of 1990-1999). For the period of 2010-2017, the IMF projections imply the same ratio of less than 17.5%. 

Let's take a closer look at these comparatives. Irish debt peaked (for 1980-1999 period) in 1987 at 109.24% of GDP and was deflated on foot of a current account surpluses cumulated at 26.8% ratio to 1999 debt trough. For the period of 2000-2017, the debt will peak at 119.31% of GDP in 2013 and is expected to deflate at a maximum surplus rate of 17.5% (all based on IMF projections) before we allow for EU budgetary reductions for 2014-2022 period (which can bring this number closer to 14%). 

Again, one has to wonder if the argument that current account surpluses can really be viewed as a serious enough potential source for wrestling Ireland out of the debt trap. And that is before we start worrying about the potential drivers for these surpluses, such as:

• The 1990s exports boom driven by a combination of very robust US and UK growth expansions during the 1990s;
• The 1990s convergence race for Ireland to catch up with the EU capital and income levels - something that is now firmly exhausted as the potential for growth; and
• Significant net transfers from the EU during the 1987-1999 period that totalled some €12.6 billion which in 2014-2022 are likely to turn into net contributions to the EU from Ireland.

24/11/2012: EU Transfers to Ireland - boom or bust?

There's been some debate recently as to the size and importance of EU subsidies to Ireland and the EU budgetary allocation in the context of Irish economic growth. Here are the facts.

First up, the summary of EU subsidies, contributions and net subsidies:

Next, using the IMF WEO database, the netting of the EU Net Receipts out of of our GDP and GDP per capita:

Factoring in the net receipts into growth equation:

The above clearly shows that lower volatility in receipts has contributed to smoothing of the GDP growth rates in most periods, but exacerbated 1991 and 2001-2002 slowdowns. EU net receipts also helped fuel (not significantly, though) 2004-2006 bubble and failed to provide any support for the economy in 2008-2010 collapse.

The reason for small effect of supports in recent years is very clear from the charts below:

However, the most dramatic effect the subsidies had was registered on the side of our external balance. Recall that international 'experts' love the idea of Irish Current Account surpluses as the driver for sustainability of our debt. Herein, however, rests the problem:

The logic of 'experts' arguments is that Ireland can sustain current levels of Government debt because we have potential to generate current account surpluses vis-a-vis the rest of the world. And their evidence of that rests on their reading of past (1991-1999) current account positions. Alas, once we net out net transfers from EU from these... the picture changes. In the entire pre-2010 history, Ireland generated current account surplus (net of EU subsidies) in only one year, namely 1996. When one realises that debt sustainability for Ireland requires current account surpluses to be in excess of 3% on average over the next 10-15 years, one has to be slightly concerned by the prospect (as 2014-on suggests under the current EU Budget proposals) that Ireland will no longer be a net recipient of EU subsidies. Here's what happens were Ireland to become net contributor to the EU budget in 2014-on at a rate of 1/2 of 2009-2011 annual subsidy received. Our average annual CA surplus (per IMF projections for 2013-2017) should run at 3.585% of GDP, but factoring in EU potential budgetary changes it is likely to run at 2.825% of GDP. And since the path of the CA surpluses is expected to decline (as IMF projects) in 2016-2017, then it is unlikely that the CA surpluses will be in excess of 3% over the period through 2022. So what about that 'sustainability' of Irish debt levels, then?

5/11/2012: Lehman Bros & Irish ISEQ - II

And a bit more on indices dynamics:

Some interesting longer term trends from the major indices and VIX revealing the underlying structure of the Irish and the euro area crises. Note: data covers period through September 2012.

Starting from the top, here are indices of major stock prices, normalized back to February 2005 for comparative purposes. Relative to the peak, currently, CAC40 stands at around -41.9%, while FTSE MIB is at -62.5%, FTSE Eurotop 100 at -31.7%, FTSE ALL Shares at -11.22%, DAX at -8.41%, S&P500 at -6.15% and IBEX35 at -48.5%. Meanwhile, 'special' Ireland's ISEQ is at -66.9%.

Chart Index 1.0 and Index 1.1.

Clearly, Ireland is the poorest performer in the class.

Now, it is worth noting that Ireland's stock market is also 'distinguished' by a very 'special' characteristic of being the riskiest of all markets compared, with STDev of returns at 36.45 (on normalized index). Compared to the French market (STDev=22.34 for the period from the start of 2005 through today), Italian market (STDev = 28.95), FTSE Eurotop 100 (STDev = 18.90), FTSE All Shares (STDev = 13.70), German DAX (STDev = 23.05), S&P500 (STDev =14.55) and Spanish market (IBEX STDev = 23.70), Ireland is a risky gamble. Given that the direction of this bet, in the case of Ireland has been down from May 2007, virtually uninterrupted, the proposition of 'patriotic investment' in Ireland's stocks is an extremely risky gamble.

Normalizing the indices at their peak values (set peak at 100), chart below clearly shows the constant, persistent underperformance of the ISEQ.

Chart Index2.0

Now, let's take a look at the core driver of global fundamentals: risk aversion as reflected in VIX index. In general, rising VIX signals rising risk aversion and should be associated with falling stock valuations. Once again, for comparative reasons, we use indexed series of weekly returns for 1999-September 2012. Up until the crisis, Irish stock prices behaved broadly in line with the same relationship to VIX that holds for all other major indices. Chart below illustrates this for FTSE Eurotop 100, but the same holds for other major indices. VIX up, risk-aversion up, stock indices, including ISEQ, down.

Chart VIX1.1

Around Q1 2009 something changed. ISEQ lost any connection with 'reality' of the global markets and acquired life of its own. Or rather - a zombie life of it own. No matter what the global appetite for risk was doing, Irish stocks did not have much of a link with global investment fundamentals.

Another interesting point of the above chart is that Lehman Brothers were not a trigger for Irish crisis (as many of us have been saying for ages, despite the Government's continued assertions to the contrary). Irish market peaked in the week of May 21st, 2007, Lehman Brothers folded on September 15th, 2008, with most of the impact in terms of our indices occurring at September 15th-October 6, 2008, some 16 months after Irish markets began crashing. Prior to Lehman Brothers bankruptcy, ISEQ dropped from a peak of 147.3 to 61.6, while following the Lehman Brothers and until the global stock market trough of March 2, 2009, ISEQ fell to roughly 31.9 reading. So even in theory, Lehman bankruptcy could have accounted for no more than 29.7 point drop on the normalized ISEQ, while pre-Lehman drivers collapsed ISEQ by 85.7 points. 

More revealingly, ISEQ steep sell-offs through out the entire crisis have led, not followed, sell-offs in major indices. In other words, if Lehman caused the global market meltdown, then ISEQ 'caused' Lehman bankruptcy. Which, of course, is absurd.

There are many other stories that can be told looking at the Irish Stock Exchange performance, especially once higher moments to returns distribution are factored in, but I shall leave it to MSc students to explore.

5/11/2012: Lehman Bros & Irish ISEQ

Here's an interesting little factoid. The theory - usually advanced by the Irish Government - goes that Lehman Brothers bankruptcy has been a major driver of the Irish crisis. I have disputed this for ages now and more and more evidence turns up contrary to that when more and more data is considered.

Now, here's a new bit.

Suppose Lehman Bros did contribute significantly to the Irish crisis gravity. In that case, given Lehman Brothers bankruptcy contributed adversely to the global markets, we can expect a dramatic contagion from the global markets panic to Irish markets. One way to gauge this is to look at the changes in correlations between the measure of overall 'panic' in the international markets and the behaviour of the returns to Irish stock market indices.

Let's take ISEQ index for Irish markets and VIX for a measure of the panic sentiment in the global markets. Let's take weekly returns in ISEQ and correlate them to weekly changes in VIX. I use log-differencing in that exercise and 52 weeks rolling correlations.

What should we expect to see? If the 'Lehmans caused Irish crisis or worsened it' theory holds, we should expect correlation between ISEQ weekly returns and changes in weekly VIX readings to be negative (VIX rising during the crisis signals rising risk aversion in the markets). For Irish markets to be influenced significantly, or differently from other markets around the world, such negative correlations should be larger in absolute value than for other countries.

What do we see? Here is a table of averages:

Contrary to the hypothesis of 'Lehmans caused Irish crisis', we see that throughout the period of the crisis, ISEQ suffered shallower, not deeper, spillover from global risk aversion to equity valuations, save for Spanish IBEX index. In other words, evidence suggests that Irish 'disease', like Spanish 'disease' was driven more by idiosyncratic - own market-specific - factors rather than by global panic.

Here's the chart, showing just how consistently closer to zero ISEQ correlation to VIX was during the post-Lehman panic period:

And here is a chart showing skew in the distribution of weekly returns which shows that during the crisis, Ireland's ISEQ suffered less from global markets 'bad news' spillovers (at the point of immediate global markets panics, such as Lehmans episode), but exhibited  a much worse negative skew than other peers in the period from June 2010 through Q1 2012.

29/10/2012: BAML note on Ireland's Troika Review

A glowingly positive, albeit un-detailed, under-researched and rather tenuous on the subject covered, note from BA Merrill Lynch on Ireland's latest quarterly Troika review (link). This suggests that (1) all that matters for Ireland is 'exiting' Troika bailout, (2) OMT take up of a whooping €24bn of banks debts is just a matter of technicality, to be resolved in early 2013 (oh, we wish) and (3) the ECB is somehow going to find it plausible to support the banking-fiscal systems tie up that according to ECB and the rest of Troika is performing well without ECB/OMT/ESM support.

Now, what logic can lead BAML to conclude any of the things above remains a mystery.

My own view on the Troika review is provided here.

22/10/2012: Financial Crises: Borrowers Pain, Creditors Gain

A very interesting paper on the effects of the financial crises on imbalance of power (and thus the imbalance of the incidence of costs) between the borrowers and the lenders. The paper is a serious reality check for Irish policymakers in the context of the 'reforms' of the Personal Insolvency laws currently being proposed. In fact, the Irish proposed 'reforms' actually tragically replicate the very worst implications of the study summarized below.

"Resolving Debt Overhang: Political Constraints in the Aftermath of Financial Crises" by Atif R. Mian, Amir Sufi, and Francesco Trebbi (NBER Working Paper No. 17831, February 2012 http://www.nber.org/papers/w17831) shows that "debtors bear the brunt of a decline in asset prices associated with financial crises and policies aimed at partial debt relief may be warranted to boost growth in the midst of crises. Drawing on the US experience during the Great Recession of 2008-09 and historical evidence in a large panel of countries, [the study explores] why the political system may fail to deliver such policies. [The authors] find that during the Great Recession creditors were able to use the political system more effectively to protect their interests through bailouts. More generally we show that politically countries become more polarized and fractionalized following financial crises. This results in legislative stalemate, making it less likely that crises lead to meaningful macroeconomic reforms."

Mortgage recourse:

"The higher level of recourse and tougher rules for declaring bankruptcy are likely to prevent borrowers from declaring default. As a result, debtors in European countries are more likely to absorb financial shocks internally than declare default. …We investigate this …by comparing the change in default rates across Europe and the United States during the 2007 to 2009 global housing crisis. Since the bankruptcy regime is relatively more lax in the United States, one would expect a larger increase in default rates." Controlling for rates of decline in house prices and the level of indebtedness of the borrowing households (LTVs at origination) the authors test explicitly data for US, U.K., Spain, France and Ireland from 2007 to 2009 using data from the European Mortgage Federation. 

Figure 1 

"The change in default rate (red bar) for USA between 2007 and 2009 is 5.9 percentage points. While the default rate level in 2007 is not shown in Figure 1, it is quite low and similar across the five countries (0.4%, 1.2%, 0.7%, 1.9%, and 2.1% for France, Ireland, Spain, the United Kingdom and the United States, respectively). …All European countries in Figure 1 have high recourse and tough bankruptcy laws relative to the United States. The very large increase in default rates for the US is consistent with the notion that lower level of recourse and easier bankruptcy legislation helps indebted borrowers declare default. …A collective look at the three housing market variables in Figure 1 shows that the United States experienced the highest increase in default rates by far, despite some of the European countries experiencing very similar (if not stronger) decline in house price (e.g. Ireland) and having similar housing leverage (Ireland and the United Kingdom)."

  

The Political Response to Financial Crises and Debt Overhang:

                                                

"The 2007-2009 US financial crisis provides an interesting case study to examine the political tug of war between debtors and creditors. …[In the US], housing assets were the main asset for low net worth individuals, and their housing positions were quite levered. As a result, the collapse in house prices disproportionately affected low net worth individuals. Mian, Rao, and Sufi (2011) show that at the 10th percentile of the county-level house price distribution, house prices dropped by 40 to 60% depending on the house price index used. This decline would completely wipe out the entire net worth of the median household in lowest quintile of the net worth distribution. CoreLogic reports that 25% of mortgages are underwater; for the low net worth individuals in the US, this effectively means that their total net worth is negative." 

"It is in this context that Mian, Sufi and Trebbi (2010a), henceforth MST, document the political economy of two major bailout bills that were passed in the US Congress in 2008. The first of these bills, the American Housing Rescue and Foreclosure Prevention Act (AHRFPA), provided up to $300 billion in Federal Housing Administration insurance for renegotiated mortgages, which translated into using public funds to provide debtor relief… At the same time, creditors--i.e., the shareholders and debt-holders of large financial institutions--pushed a second bill which was closely tied to protecting their own interests [the $700 billion Emergency Economic Stabilization Act (EESA) which eventually led to TARP]…"

"While both debtors and creditors were effective in passing legislation in their favor, there were two important differences in the magnitude of their effectiveness. First, the debtor friendly bill provided fewer resources ($300 billion versus $700 billion) than the creditor friendly legislation… [despite the fact that] debtors faced substantially larger losses …than creditors in the face of the US housing crisis. Second, while the creditor friendly EESA bill was fully implemented and executed, the housing legislation was a miserable failure. As of December 2008, there were only 312 applications for relief under the program and the secretary of Housing and Urban Development was highly critical of the program. … When Obama Administration …implemented the Home Affordability Modification Program under AHRFPA, their initial goal was to help 3 to 4 million homeowners with loan modifications. In July, 2011 President Obama admitted that HAMP program has “probably been the area that's been most stubborn to us trying to solve the problem.”" 

"It is worth noting that one of the main reasons for the ineffectiveness of the HAMP program has been the lack of cooperation from creditors. The initial legislation made creditor cooperation completely voluntary, thereby enabling many creditors to opt out of the program despite qualifying borrowers. In fact, as Representative Barney Frank noted, banks actually helped formulate the program in the summer of 2008."

Need I remind you that in Ireland's reform bill to alter the draconian personal insolvency laws currently on the books, the banks not only have an option of voluntary participation, but an actual veto on resolution mechanism deployed.

"Cross-country evidence on financial crises and change in creditor rights The seminal work of La Porta et al (1998), followed by Djankov et al. (2007), introduced cross-country index of “creditor rights” from 1978 to 2002. The index captures the rights of secured lenders under a country’s legal system. A country has stronger creditor rights if: 

1.  there are restrictions for a debtor to file for reorganization [In the case of Ireland's Insolvency Law reform, this factor is actually made worse than in the current legislation since the reform law is going to force debtors to undergo a period of compulsory arrangements dictated solely by the banks before they can file for bankruptcy]; 
2. creditors are able to seize collateral in bankruptcy automatically without any “asset freeze” [again, my reading of Ireland's 'reform' proposals suggests automatic seizure of assets once bankruptcy is granted]; 
3. secured creditors are paid first [as is the case in Ireland]; and 
4. control shifts away from management as soon as bankruptcy is declared.  

"Overall, while creditor rights promote the origination of more credit, a financial crisis that results from excessive debt tends to reduce creditor rights. These results highlight a fundamental tension between the benefits of stronger creditor rights ex-ante and the debt overhang costs associated with giving creditor too much power in the financial crisis state of the world. Ex-post relaxation of creditor rights is not the norm after a financial crisis. …More specifically, we show that financial crises are systematically followed by political polarization and that this may result in gridlock and anemic reform. …Financial crises polarize debtors and creditors in society. On the one hand, debtors are weakened by a fall in the value of assets they hold. On the other hand, creditors become more sensitive to write-offs during bad times …and possibly more reluctant to converge onto a renegotiated platform because of their increased reliance on the satisfaction of the original terms of agreement."

22/10/2012: Is Ireland a 'Special Case' in the Euro area periphery?

Since the disastrously vacuous summit last Thursday and Friday, there has been a barrage of 'Ireland is special' statements from Merkel and other political leaders. The alleged 'special' nature of Ireland compared to Greece, Portugal and Spain is, supposedly, reflected in Irish banks being successfully repaired and Irish fiscal crisis corrected to a stronger health position than that of the other peripheral countries.

I am not going to make a comment on the banking system's functionality in Ireland compared to other states. But on the fiscal front, let's take a look. Per IMF:

• In 2012 we expect to post a Government deficit of 8.30% of GDP against Greece's deficit of 7.52%, Portugal's 4.99% and Spain's 6.99%. We are 'special' in so far as we will have the highest deficit of all peripheral countries.
• In 2013, Ireland is forecast to post a Government deficit of 7.52% of GDP against Greece's 4.67%, Portugal's 4.48% and Spain's 5.67%. Once again, 'special' allegedly means the 'worst performing'.
• In 2012, Ireland's structural deficit would have fallen from 9.31% of potential GDP in 2010 to 6.15% - a decline of 3.16 ppt. For Greece, the same numbers are 12.12% to 4.53% - a decline of 7.59 ppt or more than double the rate of austerity than in Ireland. For Portugal, these numbers are  8.96% to 4.09% - a decline of 4.87 ppt of more than 50% deeper reduction than in Ireland. For Spain: 7.32% to 5.39% - a drop of 1.93 ppt or shallower than that for Ireland.
• In 2013 in terms of structural deficit, Ireland (5.38% of potential GDP deficit) will be worse off than Greece (-1.06% of potential GDP), Portugal (2.28%) and Spain (3.52%)

Now, run by me what is so 'special' about Ireland's fiscal adjustment case?

Can it be that we are 'lighter' than other peripherals on debt?

• 2010 Government debt in Ireland stood at 92.175% of GDP and this year it will be around 117.743% - up 25.255% of GDP. For Greece this was respectively 144.55% of GDP in 2010 and 170.731% in 2012 - a rise of 26.181%, marginally faster than that for Ireland. For Portugal, gross Government debt was 93.32% of GDP in 2010 and that rose to 119.066% in 2012, an increase of 25.746%. Again, not far from Ireland's. And for Spain, these numbers were 61.316% to 90.693% - a rise of 29.377%. So while Spain is clearly the worst performer in the class, Ireland, Greece and Portugal are not that far off from each other.

Wait, what about economic reforms and internal devaluations? Surely here Ireland, with its exports-focused economy is a 'special' case?

• In 2012, Ireland is expected to post a current account surplus of 1.813% of GDP, against deficits of between 0.148% and 2.909% for the other three peripheral countries. This, of course, is not the legacy of Irish reforms, but of the MNCs operating from here.
• However, in terms of current account dynamics, Ireland is not that special. Between 2010 and 2012, Greece will reduce its current account deficit by 4.294 ppt, Ireland will improve its external balance by 0.674 ppt, Portugal by 7.105 ppt and Spain by 2.278 ppt. So Ireland is the worst performing country of four in terms of current account dynamics, while the best performing in terms of current account balance.

Now, do run by me what can it possibly mean for Ireland to be a 'special' case compared to Greece, Portugal and Spain?

12/10/2012: Irish Savings Myths

Last night at the Dublin Chamber dinner, Taoiseach Enda Kenny made a rather common, but egregious in its nature statement that Ireland has the highest savings rate in the OECD at 12% GDP. Speaking before him, the President of the Dublin Chamber, Patrick Coveney, made a similar statement, but referenced 14% savings rate. Both speakers were identifying a high savings rate as being an impediment to consumer spending and recovery.

In addition to the above, the Chambers President made another startling juxtaposition. In his speech he said that:

1. Savings are too high and we need to 'do something' to reduce these;
2. Investment is too low
3. In the future, investment (via bank lending) will remain low.

Let me deal first with the last set of claims. In the Irish economy, savings are used to pay down debts (thus supporting deleveraging of the households and companies, and preventing collapse of our banks) and invest in economic activity. Reducing the debt-repayment component of savings would require a default/restructuring of private debts. The remainder of our savings goes to finance investment (direct equity & direct lending to businesses) and deposits in the banks (which in turn normally finance lending). So which part of our savings would Patrick Coveney like to cut? The banks bit (precipitating collapse of the banks) or the investment bit (precipitating further decline in investment)?

I am not even going to ask Mr Coveney as to what he might suggest that the Government should do to cut our savings rate. Impose huge wealth taxes, or go straight to a large-scale expropriations of 'excessive' savings? Both will do wonders to Ireland's reputation abroad, let alone to the dynamics of future investment at home.

Instead, lets move on to the myths both speakers were keen on repeating - the myths of our allegedly massively high savings rates. All of the data below is taken from the IMF WEO database.

Let us rank Ireland's gross savings rate compared to all other advanced economies (higher rank means lower savings rate):

Contrary to what our Taoiseach and Mr Coveney were saying, Ireland's savings rate in 2010-2014 is estimated by the IMF to be... the 5th lowest in the sample of 33 advanced economies around the world. May be it is the highest in the Euro zone? Oh, no - it is actually the fourth lowest in the Euro zone.

So what about this year then? Oh, that would be exactly the same as for the 2010-2014 average:

But wait, you might say, surely we are saving as an economy more today than in the past? Oops...

As above shows, during the 1980-2011 period, average savings rate in Ireland stood at 18.63% of GDP. In 2012 it will be 10.82% of GDP. In 2011 it was 10.59%, in 2010 11.53% and so on. Not even close to the historical average! And not close to our peers all of whom have much higher rates of savings: Israel at 18.94%, Finland at 19.84%, Belgium at 21.38%, Austria at 25.23%, Netherlands and Hong Kong at 26.29%, Luxembourg at 26.57%, and so on.

And yes, Mr Coveney, savings and investment are linked in Ireland:

And the gap between savings and investment in Ireland - explained in part by the banks claims on our savings via loans repayments:

... well that gap is currently at the advanced economies average and it was below that average during the crisis so far. 

In other words, there is no 'excess' savings in Ireland. As this economy continues to struggle with the banks debts (ah, the Chambers dinner was sponsored by one of the Pillar Banks) our savings-investment gap is forecast to rise above the advanced economies average in 2013-2017. That is the illustration of the Taoiseach's famous dictum that he won't have 'defaulter' written on his forehead. So clean forehead for our Taoiseach means no investment for businesses. Simples...

2/7/2012: Sunday Times 24/06/2012: Pharma Cliff is Here

This is an unedited version of my Sunday Times article from June 24th.

Since the beginning of this crisis back in 2008, Irish Governments have been quick to point to our exceptional and exemplary trade performance as the sole hope for the recovery. As we know, five years into the crisis, that recovery is still wanting. However, our exports have expanded significantly.

The latest Irish trade in goods statistics, released this week by the CSO and covering the period through April 2012 come on foot of the last week’s release of the more detailed trade statistics for Q1 2012. Both are presenting an alarming picture.

April 2011 Stability Programme Update (SPU), the official Government report card to the Troika, envisioned exports growth of 6.8% in 2011 and 5.7% in 2012. Budget 2012 revised 2011 exports growth estimate to 4.6%. By April 2012 – the latest SPU publication – actual 2011 growth outrun was 4.1%, down a massive 2.7 percentage points on a 9 months-ahead forecast from April 2011. April 2012 SPU also revised 2012 projected exports growth to 3.3%. More realistic IMF is now projecting exports growth of 3.0% this year as per its latest Article IV report on Ireland released last week.

As poor as the above prospects might be, the reality is even more alarming. For trade in goods only, January-April 2012 period total volume of imports was down 7.2% on the same period of 2011, while the volume of exports was down 0.9%, not up 3.3% as forecast in the Budget and the latest SPU. So far, average rate of growth in exports in the first four months of 2012 is -0.6%, down from the same period 2011 average growth rate of 7.4%.

Our trade surplus in goods is up 7.7%, but that is due to the fall-off in imports, especially in Machinery and Transport Equipment and in Chemicals and Related Products categories. The decline in imports, while boosting temporarily our trade balance, can mean only two possible things: either imports will accelerate much faster than exports in months ahead as MNCs rebuild their diminishing stocks of inputs, or MNCs will cut back their exports output even further. Either way, there will be new pressure coming from the external trade side.

The latest decreases in exports are driven by the rapid shrinking of two sub-sectors.

In the first four months of 2012, Medical and Pharmaceutical Products exports have fallen to €7.93 billion from €9.01 billion a year ago – a decline of almost 12%. And this trend is accelerating with 21% drop in April 2012 compare to 12 months ago. The patent cliff, or in common terms, production cuts as drugs go off patent, is now biting hard with blockbuster drugs, such as Lipitor and Viagra either going or scheduled to go soon into competition with generics.

Organic Chemicals have also shrunk in April compare to a year ago, although the first four months of the year exports are still up on 2011.

These two sectors are the giants of Irish exports. In 2010, exports of Medical and Pharmaceutical Products and Organic Chemicals accounted for 49% of our total shipments of goods abroad. By 2011 this number rose to 50%. At the same time, in 2010 and 2011 the two sectors trade surplus (the difference between the value of exports and imports) was close to 88% of our total trade surplus in goods. So far, in the first 4 months of 2012, the same holds, with two sectors contribution to trade surplus now reaching above 95%.

Given the on-going contraction in the sectors activity revealed in April data, and given steady, even rising, share of their contribution to our overall trade in goods, one has to ask a question as to why other sectors of exporting activity are not taking up the slack created by declining pharma sales?

The answer is, unfortunately, as worrying as the stats above.

Since about 2007, when the effects of the upcoming patent cliff started to feed into the decision makers’ diaries, Irish trade development and FDI policy has shifted in the direction of promoting bio-pharmaceutical and biotechnology investment and trade. Much hope was placed on these two sectors stepping up to the plate to replace revenues that were expected to be lost in the pharma sector.

These are yet to bear fruit and, given the accelerating competition worldwide for biotech business and investment, our time maybe running out. The main obstacles to the bio-pharma and biotech sectors development here in Ireland are regulatory, policy and institutional.

One key focus of biotechnology sector research pipeline worldwide is on stem-cell research – the area restricted in Ireland by the lack international (rather than national) standards. The same applies to a number of other areas of R&D intensive sector. Analysis by Pfizer, published two years ago, spelled exactly why Ireland is not at the races when it comes to clinical research, an area that covers huge R&D related spends of major pharmaceutical and biotech companies. We lack competitiveness in terms of providing unified and transparent research infrastructure, absence of a systemic ‘knowledge-sourcing’ opportunities, protracted and unpredictable research approval and trial processes, high cost of sourcing patients for trials, cost and bureaucratic burden relating to regulatory inspections and compliance, and lack of PR and communications platforms that can be used outside Ireland.

Back in 2010, the Research Prioritization Steering Group was set up to review priorities for Ireland’s research funding. Published this March, the Group report marks a significant departure from the previous funding approach for bio-medical sciences, re-focusing funding toward commercialization and jobs creation, away from ‘pure’ science and early stage research. This shift in the approach is both radical and reflective of the realities in the biotechnology and other core high technology sectors to-date. During the previous decade, the state spent €7.3 billion on R&D supports under Government Budget Appropriations or Outlays on R&D, helping to employ some 340 PhDs and 171 non-PhD researchers in the state sector alone in 2010 (down from 431 and 197, respectively in 2008). Yet there is preciously little in terms of exports generation that came from these programmes, and today Ireland has no serious indigenous or FDI-supported start-ups culture in bio-pharma or modern medicine and healthcare.

As competition for the sector investment heats up, and as MNCs-led pharma exports continue to shrink, Ireland needs to move fast to create institutional and regulatory systems that can make us attractive to biotech firms. One simple step would be to reinstate a national bioethics council and integrate organizational systems relating to biotech R&D. The role of the Government’s Science Advisor should become more assertive, outputs-focused and linked directly to providing better information to the Government and policymakers on both the strategic aspects of R&D policies and actual outcomes. Alongside, we need to put in place systems for better assessment of returns on investment in R&D as well as processes that would allow us to act on such evaluations. If entrepreneurship and jobs creation were to become core objectives for R&D backing, we should consider merging commercialization functions of the Science Foundation Ireland with exports development capabilities of the Enterprise Ireland. This should leave SFI dealing solely with pure research, reducing duplication in the system of commercialization supports.

The latest trade figures, taken on their own, should sound an alarm bell in the corridors of power.

Box-out:

In an economy that is importing pretty much everything it uses for capital investment, having an investment ‘stimulus’ is equivalent to taking each euro of Government spending and sending over a half of it abroad – in aid of imports manufacturers in Germany, France, the UK and further afield. The end result of such a transaction would be a gross gain to the economy from employing lower-skilled domestic workers installing imported capital, minus the value of imports, plus the returns to the installed capital. Given the low value-added of low skilled labour, the net result would most likely be a loss to the economy due to close-to-zero returns on the above transaction and high cost of financing such a stimulus in the current funding conditions. In Ireland, the above negative return is likely to be increased further by the politicized nature of our public ‘investments’. Thus, in my view, the ESRI is correct in its assessment, published this week, of the undesirability of a fiscal stimulus in the current conditions. Minister Howlin, in his response to the ESRI arguments claimed that “…the social imperative of getting people back to work is … a far more important [priority] in the current climate.” His statement betrays disdain for evidence and economic illiteracy of frightening proportions. The Government should not and can not be in the business of wasting people’s resources, including the resources of the unemployed taxpayers, on feel-good ‘policies’. Yet Minister Howlin disagrees, even when the wastefulness of his own belief is factually evidenced by research. The Government should have economically sensible programmes for dealing with the curse of long-term unemployment. These, however, should not come at the expense of creating apparent waste.