4/10/2013: IMF 11th review of Ireland: Growth Warnings

So IMF released its 11th review of Irish economy under the Extended Arrangement for funding.

Key points:

"Real GDP declined in the first quarter, reflecting a fall in exports and weak domestic demand. Nonetheless, fiscal results remain on track and sovereign and bank bond yields have risen relatively modestly in response to declining global risk  appetite. A range of other economic indicators are more encouraging, suggesting lower but still positive growth in 2013, though uncertainty remains. Growth projections for 2014 are also lowered given weaker prospects for consumption recovery and for trading partner growth."

So weaker than forecast growth conditions… ok… How much weaker?

"Balancing the weak GDP results for the first quarter against a range of more positive indicators, the growth projection for 2013 has been pared back by a ½ percentage point to 0.6 percent y/y, but uncertainties remain." Boom! Ugly stuff, folks. And replace 'but' with 'and' and you will get a double Boom!


"Most importantly, export growth has been cut by 1½ percentage points as data indicate a larger impact from the patent cliff and tepid recoveries in important trading partners. Lower imports dampen the impact on growth." Wait, weren't we told that patent cliff doesn't matter much cause exports are offset by imports etc?

"Domestic demand is expected to be flat, with private consumption still contracting modestly owing to fiscal consolidation and household debt reduction, cushioned by employment growth and low inflation. Fixed investment is expected to expand by some 2 percent given improving business sentiment and the uptick in housing starts, but remains the most volatile GDP component. This projection will need to be further reviewed when Q2 national accounts data become available near end September." We have that Q2 data available now… see here: http://trueeconomics.blogspot.ie/2013/09/2092013-domestic-economy-continuing-its.html and it ain't pretty…

More details here: http://trueeconomics.blogspot.ie/2013/09/2092013-h1-2013-qna-domestic-economy-vs.html Net: Gross Fixed Capital Formation (basically investment in the economy) is down 9.40% in H1 2013 compared to H1 2012, down 14.09% compared to H1 2011 and down 67.73% compared to H1 2007. The reductions in capital investment jun H1 2013 compared to H1 2007 are ten-fold the size of reductions in current Government spending at EUR17,542 million. For another comparison, reductions in personal expenditure on goods and services by households over the same period is EUR4,757 million.

"Weaker consumption and export growth are expected to dampen the pace of recovery, with growth now penciled in at 1.8 percent in 2014. Export and consumption growth are expected to benefit from a projected rise in trading partner growth with employment growth contributing to incomes and confidence. Although consumption growth is still expected to become modestly positive in 2014, the pick up is weaker because a 1½ percentage point downward revision to household saving in 2012 suggests less room for lower savings given the priority households attach to debt reduction. Public consumption is also expected to be softer than previously anticipated as the full effects of the Haddington Road Agreement feed through in 2014. Export growth in 2014 is scaled back to reflect the possibility that recent weakness could persist."

Per IMF: "Growth firms to 2½ percent in 2015 as external growth rises further and fiscal consolidation eases, but durable recovery hinges on reversing the tide of NPLs." The miracle of 3%+ growth for ever, projected back in 2010-2011 to start in 2013-2014 is now replaced by the miracle of 2.5% growth projected to start in 2015… And the new projections out to 2018 no longer feature a single year of growth expected to rise above 2.5%… but all is still sustainable, just as it was in 2010 and 2011 and 2012 and… And the dream of 2.5% growth will, per IMF, be consistent with a positive output gap of ca 0.3%, which means that that is not the expected long-run real growth rate.

In effect, IMF admits now that Ireland cannot be expected to grow sustainably at the rates in excess of 3% per annum in real terms. Say goodbye to Ireland's 'growth miracle', say hello to Ireland's Belgium decades...


Another kicker: after 2015: "…the recovery continues to rely principally on net exports as domestic demand recovery is expected to be protracted as many households continue to deleverage in the medium term. Resolution of mortgages is not expected provide significant direct support to consumption recovery, as while some households may have a reduction in debt service due under a split mortgage restructuring, they may have previously been temporarily on interest-only terms, while other households may need to adjust consumption to serving their debt even if the debt service due is reduced. Rather it is expected that progress in reducing NPLs and enhancing bank profitability will gradually enhance the terms of banks’ access to market funding and their ability and willingness to lend to less indebted borrowers—which includes the younger cohort of households—unlocking housing market turnover and reducing household uncertainty."

Wow! So the IMF is warning us that things are going to remain tough even after the mortgages crisis 'resolutions'… Not like our Government is listening… And the IMF is telling us that the economy is going to get more polarised and paralysed... where did you hear that? Oh... http://trueeconomics.blogspot.ie/2013/08/782013-sunday-times-july-28-2013.html

Employment: long-term unemployment remains a problem (we know that)… and surprisingly: "Facilitating SME examinership could aid resolution of SMEs in arrears, supporting their potential to invest and create jobs." Now, here's the key point: in all this excitement about family homes and repossessions we forgot that roughly 50% of SMEs loans are in arrears… and of the remaining 50%, unknown quantum is at risk… Hm… I wonder how that 'facilitated examinership' going to work for the employment stats and for property markets and mortgages arrears, when examiners go into the SMEs books to uncover potential subsidies to proprietor's income or when examinerships lead to cuts in employment levels?..

So back in 2011, IMF predicted Irish economy to grow 2.4% (GDP) in 2013, 2.9% in 2014 and 3.3% in 2015. This time, IMF is projecting Irish economy to grow 0.6% in 2013, 1.8% in 2014 and 2.5% in 2015. Nominal GDP was supposed to reach EUR182.5 billion by end of 2015 back in 2011 projections and is now forecast to reach EUR178.4 billion… What's being down EUR4.1 billion (one year difference) between friends, or EUR6.5 billion over three years, eh? Especially when all of this is sustainable, right?..

Still, gives us some perspective as to the whole circus going on: we are sticking to EUR3.1 billion fiscal target for 'adjustment' and washing off EUR4.1 billion in growth expectations underpinning 'sustainability' analysis… You'd think this is monkeys with abacus, but no - these are highly paid 'analysts', 'economists' on Government side, state side, sell-side at stockbrokerages and banks, ECB side, EU side, IMF side… And they all sing in unison: all is sustainable, just as they revise continuously their forecasts down and down and down. Which begs a question: at what stage will the sustainability malarky be replaced by the admission of the crisis? Presumably when GDP growth is revised to nil into perpetuity?

I will be updating charts on Irish economy forecasts from the IMF over the next few days, so stay tuned. Before that, I will be blogging more on key topics covered by the IMF review later today, also stay tuned…

19/7/2013: Reuters TV on Irish Economy & Bankruptcy Tourism

Two recent Reuters TV programmes on

• Irish Bankruptcy Tourism http://www.reuters.com/video/2013/07/15/is-holiday-over-for-bankruptcy-tourists?videoId=244230864 and 
• Whether Ireland is on the Road to Recovery http://www.reuters.com/video/2013/07/12/is-ireland-really-on-road-to-recovery?videoId=244195065&videoChannel=5

Note: both programmes feature my contributions.

7/6/2012: Sunday Times June 3, 2012

This is an unedited version of my Sunday Times article from June 3, 2012.

In early 2008, Brian Cowen described Ireland’s predicament with a catchy phrase ‘We are where we are’. Ever since this became synonymous with gross incompetence, epic failure and outright venality of our elites.

Fast forward to May 2012. In the heat of the EU Referendum campaigns, both Government parties have paraded their up-beat assessments of the economy, their own stewardship and achievements. The factual record of the current Government on economic policies is only slightly ahead of that attained by their predecessors.

Don’t’ take my words for this. Look at just where exactly ‘we’ – Ireland – ‘are’ in the crisis after a year of stewardship by the Coalition.

We are officially in a recession. Both GDP and GNP have shrunk in the last half of 2011 and all indications are, growth is unlikely to have returned in Q1 2012 either. Should Ireland post another quarter of negative growth, we will join the club of Italy, Cyprus, the Netherlands and Portugal. This select group of the euro area countries have managed to record GDP declines in three consecutive quarters since the end of June 2011. For Ireland, this abysmal economic performance comes on foot of the overall 17.6% decline in GDP and 24.2% drop in GNP since 2007 peak through the end of 2011. This didn’t stop this Government from declaring, as its predecessors did, various ‘turnarounds’ and ‘improvements’ in the economy, as a part of their credit, even though so far, the actual record of this Government on growth is negative. Since the Coalition came into power, GDP grew just 0.7% and GNP shrunk 4.1%, investment is down 12.8%, personal consumption fell 1.6%, while expatriation of profits by the MNCs operating here rose 24.6%.

Despite accelerating emigration and ever-rising numbers of unemployed being reclassified as engaged in state-sponsored training programmes, the latest unemployment remains stuck at 14.3% exactly identical to that recorded a year ago. In May 2011, there were 444,400 people on the Live Register and 71,231 in various state training schemes, this month these numbers were 436,700 and 82,331, respectively. Year on year, numbers at risk of underemployment rose 3,131. The Government has claimed that it has helped creating some tens of thousands new jobs, ranging from MNCs-supported ‘smart economy’ workers to hospitality sector. In reality, once training programmes are added, the numbers of those drawing unemployment supports rose 3,400 over the tenure of this Coalition.

Not surprisingly, consumer demand – accounting for 52% of our overall economic activity (in comparison, net external trade in goods and services accounts for less than one half of that figure) – is shrinking. Hammered by the push toward debts deleveraging, higher taxes, losses of income due to shrinking earnings and strong inflation in state-controlled sectors, Irish consumers are running away from the shops. Retail sales, ex-motors, have fallen 2.3% year on year in April 2012 in value terms and 3.8% in volume. This marks the fourth consecutive month of dual declines in volumes and value and the steepest rates of declines since October 2011 for value series and since May 2011 for volume. Things used to be getting worse at a slower rate in retail services sector. Now they are getting worse at a faster rate.

Banks reforms are truly not paying off for the Government. The latest banks lending survey for April 2012 shows that Irish banks have uniformly tightened, not relaxed, lending to enterprises in Q1 2012, compared to no change in lending standards recorded in Q4 2011. Things have not improved in consumer lending either, with mortgages lending running at just 5% of the levels seen during the peak. Meanwhile, costs remained the same in Q1 2012 as in Q4 2011 across all sources of funding. Following the estimates of foreign analysts, mirroring this column’s earlier prediction, the Central Bank now quietly admits that more funds will be required to offset rising mortgages arrears. More capital will be called on to bring Irish banks balancesheets to Basel III standards in years to come.

We are nowhere near the end of the crisis relating to housing markets. In Q1 2012 the overall level of mortgages at risk of default or already in default has reached 15.3% of the overall outstanding mortgages, 19.3% of all mortgages balances. This compares to 11.1% for levels and 13.6% for balances a year ago.

The game of extend-and-pretend drags on, as the Government publicly makes bombastic pronouncements about ‘stabilization’ and ‘reforms’ achieved in the sector, while reluctantly admitting that mortgages books are in a mess. The strategic response to this is the Government’s hope that the EU will be forced to mutualize banks debts, shifting them off the books of the state.

Housing markets continue to contract and commercial real estate values are still declining. The latest Residential Property Price Index for April shows that overall national property prices are already 50% down on the peak. Two consecutive monthly rises in Apartments and Dublin sub-markets can be interpreted as either a nascent stabilization, or one of the already numerous ‘false starts’ soon to be followed by renewed prices contractions. Take your pick, but either way we are way off any real recovery here.

Since about mid-2011, the Government has been committing a twin fallacy of referencing our bond yields moderation as a sign of ‘improved confidence’ in its policies. In reality, after massive LTROs that saw billions of euros pumped by the Irish banks into Government bonds, Irish yields are now back at the levels seen in January 2012. Over the last 18 months, the Troika programme has seen billions of Irish bonds taken off the market. This, alongside with the lack of new issuance, has meant that our bonds yields no longer provide a signal as to the expected cost of Irish Government borrowing. Since April 2011, the volumes of Irish Government bonds held by foreign investors have fallen by some 20% - the third steepest rate of decline in Europe after Greece and Portugal. The rate of foreign investors’ exiting Irish Government bond holdings has accelerated once again in the last 2 months. Year on year, Irish Credit Default Swaps spread over Germany is up almost 8% and this week our CDS reached 720bps.

The fact is, even by the above metrics, the current relative stability of our fiscal, financial and economic conditions is being supported by exceedingly optimistic assessments of our future growth and fiscal potential. Currently, Ireland runs the highest level of Government deficits in the euro area. Even if we stick to the EU-IMF adjustment programme, based on Department of Finance projections, in 2015 Ireland’s structural deficit will be the second highest amongst the old euro area member states. And to get to this unenviable position, we will need to carry out some €8.6 billion worth of new cuts between Budget 2013 and Budget 2015, taking more than €9,500 in additional funds out of working families’ budgets.

We are where we are – in a worse place than we were a year ago. Given the rates of economic destruction experienced since the onset of the crisis in 2008, this is doubly damaging to the claimed Government credit of reforms. Economics of the crises tell us that, on average, the harder the fall, the faster is the rise in the recovery. Ireland seems to be bucking this historical trend with our L-shaped recession to-date.

CHARTS:

3/1/2012: Are we really still 'filthy rich'?

Parts of Irish media love GDP per capita comparatives within the EU27. Years after the Celtic Tiger went belly up, the Irish Times and RTE and some (though not all) Left-of-Centre alternative media trumpet our allegedly stellar performance in this metric as the evidence that more should be taxed out of the 'rich' to pay for 'vital services'. Parts of international Right-of-Centre media still refer to these comparatives as the evidence of the 'Low Tax' Irish miracle at work. Both are missing the core point I have been raising over the last decade (since moving to Ireland, really): GDP is irrelevant metric for Irish economic well-being.

Take, for example, the following 'latests' data released last month by the eurostat. In 2010, Irish GDP per capita stood at 28 percent premium over EU27 average and at 18.5% premium over EA17 (euro area). This 'achievement' made us look like the third highest income economy in EU27, and the 5th highest earning population when Norway, Switzerland and Iceland are added into the equation. Our GDP per capita was ahead of Iceland (111% of the EU27 average) and was second only to Luxembourg and Netherlands. Even more significantly, although our standing compared to EU27 did drop from 133% in 2008 to 128% in 2009 and 2010, our rank did not change. We were the 3rd highest 'income' economy in per capita terms in 2008 and we were, allegedly, that in 2010.

Now, that claim alone should put a grain of doubt into the wheels of the 'spend more, tax more' machine here. Afterall, we, in Ireland, have experienced the worst recession on record in 2008-2010. And yet, the indicator is showing us doing 'Just Grrreat!'

Of course, we know that somewhere around 20% of the GDP is expatriated with little benefit to the economy by the MNCs. And shaving off these 20% off the 128% premium we allegedly possess leaves us with an approximate GNP-linked premium of 102% - just above Italy at 101%. This would rank Ireland as 12th highest income economy in EU27. But in addition, what GNP and GDP don't measure and yet all of us know, Ireland's cost of living is well ahead of the EU27 average. Which means that while nominally we might earn slightly more than the average European, in terms of what these earnings buy us we should be much further behind. The alleged 'competitiveness gains' so much lauded by the Government help, but they shouldn't make as much of a difference to consumers, since these gains are primarily adversely impacting their earnings, not the cost of things we spend our money on. Deflation in the private sectors of economy over the last 3 years has been matched by inflation in the State-controlled sectors.

So the eurostat, handily, reports another metric of real incomes and wellbeing in the state - the Actual Individual Consumption per Capita - a measure that takes into account both public and private sources of individual consumption. And here, folks, we are much less of a 'high achiever'. In 2010 Irish AIC was 102% of the EU27 average - exactly where it should be once we control GDp for GDP/GNP gap. Which makes us 13-14th highest ranked economy in EU27. Or in other words, an average performer. Worse than that, our performance here was on par with italy (102%) and just 1 percentage point ahead of Greece. Barring the PIIGS we were the worst performing economy in the group of advanced EU27 member states.

And rebasing the data to compare against the EA17 average (euro area average) shows things are pretty much dire in Ireland. Back in 2008 we had AIC of 102% of the EA17 average. that fell to 96% in 2009 and 95% in 2008. This 7 percentage points drop in ireland's relative standing is the worst of all EA17 states. For comparison, in Greece the decline was 3 percentage points. Chart below illustrates:

Now, there's a chart RTE and Irish Times won't show you. And not only because it requires doing some research in the form of recalibrating the data, but because it won't fit the philosophy of 'Ireland is Still Rich. Tax Ireland!' that both outfits are so keen supporting.

24/09/2011: Projected trends in economic growth for 2011

In the previous post I covered the current results for Q2 2011 QNA for Ireland. As promised, here, I will focus on forward-looking signals emerging from H1 2011 data.

Please note, though I do use the term 'forecast' below, the results shown here are really more projections than formal forecasts. The difference is very important. I use data through Q2 2011 to estimate what the economy performance is likely to be, assuming no change on the trends established in H1 2011. Of course, this is subject to significant risks (identified below).


Based on Q2 2011 (preliminary - and I stress this) data, chart below shows my forecast for 2011 growth:
Using simple forward forecast based on Q1 20003 - Q2 2011 data, we can now expect:

• Agriculture, Forestry and Fishing sector real output to grow by ca 5.5-5.6% this year, well in excess of 2010 growth of 0.7%, lifting sector output closer to €3.2bn in 2011 or 3.2% ahead of 2007 (the peak year for GDP and GNP).
  
• Industry, including construction, is expected to expand by 5.0-5.1% this year, slightly below 5.2% growth rate achieved in 2009. This will put sector output in real terms 2,9% ahead of the pre-crisis peak of 2007.
• However, industry performance will come against continued double digit contraction in Building & Construction sub-sector, which is expected to shrink 17-18.5% in 2011, compounding an astonishing 30.1% decline in 2010. Bu the end of this year, the sub-sector output can be 61.3% below the level of pre-crisis peak year of 2007. Note, the peak for the sub-sector was back in 2004 and if things continue on trend, 2011 output will be a whooping 74% below that.
• Distribution, transport & communications sector is likely to post another decline this year - shrinking by some 1.1-1.2% against a decline of 2% in 2010. Relative to economy's pre-crisis peak the sector is likely to be down 16.3% in 2011.
  
• Public administration & defence sector will contract 2.4-2.5% in 2011, based on data through Q2 2011, compounding a 2.7% decline in 2010. The sector is likely to fall compounded 4.9% on 2007 and 9% on peak sector contribution in 2008.
• Other services (including rents) - the sector accounting for 51% of our overall economic acitivity (GNP) is likely to post another contraction of -0.6-0.8% this year, compounding a 2.3% fall in 2010 and down 6.6% on 2007 peak.

Hence, GDP is expected to expand by 1.5-1.6% this year on the constant factor basis if we are to use the data from H1 2011, following 0.1% contraction in 2010. This will put our GDP somewhere around 5.6-5.7% below 2007 peak levels.

Taxes, net of subsidies are continuing to fall with 3.5-3.7% decline in 2010 now expected to be followed by 1.8% contraction in 2011. The end of 2011 taxes net of subsidies will likely come in at 32-33% below 2007 levels. This, of course, is driven by the twin forces of rising social welfare costs and continued presence of other substantial transfers, plus a reduced tax take.

With this, overall GDP (in constant market prices) can be expected to rise ca 1.1-1.3% in 2011, based on preliminary data through Q2 2011 (subject to revisions and also reflective of much more robust global economic conditions pre-July 2011 amplification of the crises). This will follow on a 0.4% decrease in 2010, leaving the gross real income 9% below 2007 levels.

Net factor income outflows to the rest of the world are likely to continue rising in 2011, growing 2.4-2.6% in 2011 (assuming amplified crisis conditions do not trigger signifcant withdrawals of retained profits), leaving factor outflows up 4.3% on 2007 levels.

With that, we can expect GNP to rise 0.8-1.0% in 2011, following on 0.3% growth in 2010 and national income will be 11.2% below 2007 peak levels.

Sectoral decomposition of national income by source, so far, stands at:

• Agriculture, forestry and fishing - the flagship sector by subsidies received and attention paid to it (remember, RTE and Irish Times are so keen covering ploughing championships) - contribution to GNP will be a whooping 2.4% in 2011 a 'massive' jump on 2.3% in 2008 and 2009, but still below 2.8% average annual contribution in 2003-2005.
• Industry (including Building & Construction) will be contributing 34.9% on GNP, up on 33.5% in 2010. If this materialises, 2011 will be the best year for Industry since 2003, which, incidentally, shows just how significant the growth in MNCs-led exports-oriented manufacturing was over recent years. As Building & Construction subsector contribution shrank from 9.9% at the peak in 2004 to 2.6% in 2011, manufacturing picked up the slack, pushing Industry overall contribution from 34.1% in 2004 to 34.9% - a swing of 8.1 percentage points.
• Distribution, transport & communications sector contribution is currently running at 15.7%, behind 16.0% in 2010, and at the lowest levels since 2005.
• Public administration and defence contribution to GNP is running at 4.2%, down from 4.4% in 2010, but still ahead of 3.9% in 2006 and 2007 and ahead of 4.0% annual average for 2003-2005. In 2003-2007 sector contribution average was also 4.0%, so our austerity so far is, in relative terms, seeing an increase in spending on public administration and defence as the share of the total economic pie. Now, these two functions are not front-line vital services, last time I checked, so you would expect a rational policy would be to shrink these sub-sectors at least at the speed of reduction in GNP. So far, this is not happening. Another alternative would be to reduce them at least at the rate of decline in taxes importance in the economy. This too is not happening, as shown below.
  
• Other services are likely to contract in their importance in the economy in 2011 (to ca 51.1% of GNP) following a contraction from 53.5% in 2009 to 52.1% in 2010. Large share of these services are exportables, which highlights the fact that not all of our exporting activities are booming.
• Taxes net of subsidies are likely to come in at 11.3% of GNP in 2011, down from 11.6% in 2010 and reaching the lowest level on the record since 2003. 2003-2007 average here is 14.5%, 2008-2010 average is 12.4%, so current state of taxes net of subsidies is worse than any recorded sub-period.
  

Again, to stress, one metric for sustainability of public spending would be to have public administration and defence spending contracting faster than the rate of contraction in taxes. And again, this is simply not happening. Since 2007 taxes have fallen from 15.0% of domestic economy to 11.3%. In the same period, public administration & defence contributions have increased from 3.9% to 4.2%.

Again, to stress, these 'forecasts' or rather 'projections' are based solely on preliminary figures for H1 2011. They are not strictly speaking forecasts, but rather annualized reflections of performance between January 2011 and June 2011. The risks to these are to the downside:

• Decreasing rate of growth in the US and the euro area materialising since May-June 2011 is not reflected in the projections above
• Signs of significant slowdown in broad leading economic indicators (PMIs, investment etc) are not reflected in the projections above, and
• Preliminary data can see significant revisions in time - in Q1 2011, preliminary estimate for GNP decline was estimated at 4.3% and it was revised to 3.0% decline in the current release, so the swings can be quite significant.
  

22/06/2011: DofF latest fiasco

A very revealing article in today's Irish Times - link here and a HT to Prof Brian Lucey - states that "The memo from a senior official in the department rejected the assertion from UCD economist Morgan Kelly of a possible 60 per cent fall in values over nine years. It also advised Mr Cowen, who was minister for finance at the time, that he should warn against overreacting to falling house prices. The document, drawn up by economist John McCarthy in July 2007 and sent to the former taoiseach pointed out that the housing values remained above 2006 levels."

This is another piece in a long string of evidence trickling down from the Merrion Street that points to the nature of advice and analysis conducted by the DofF. In Summer 2007 Irish property markets started showing signs of significant stress and by August we experienced the first slowdown in the rate of growth in stamp duty receipts. National average asking prices for homes, according to Daft.ie, posted seasonally unexpected decline of 0.34%mom in March, bouncing off the historic peak in February 2007. This was followed by another seasonally unexpected decline of 0.44% in April, rebound of 0.69% in May, a decline of 0.09% in June (again out of line with seasonal patterns) and a drop of 0.56% in July. The signs of some sort of sickness in the market were already visible, therefore, at the time the DofF note was issued.

Of course, DofF can be excused for not spotting the turning point in the property market - after all, virtually all data through July 2007 was at the very best inconclusive. But, the report leaves several issues worth addressing:

1. By August it was clear that the global financial markets were suffering significant pressures, which warranted some DofF attention, including on the side of the property markets;
2. What was DofF's business in advising the Minister to 'warn against overreacting to falling house prices'? Should, in an ethical society, the Minister for Finance make any calls whatsoever on private asset markets? Or should, in a functional economy, DofF job cover the need for preparing a policy response to the potentially dangerous situation developing in the major sector of the economy? In other words, was DofF doing its job advising the Minister on a PR exercise, and was it not doing its jobs in not preparing for the contingency of a property market collapse?

Of course, all of this remains academic compared to the brutish bullying stupidity of Mr Cowen's boss who famously barked in response to Prof Morgan Kelly’s articles in 2007 that: “Sitting on the sidelines, cribbing and moaning is a lost opportunity, I don’t know how people who engage in that don’t commit suicide.” (see full record here).


Oh, and just in case you might think DofF has learned any lessons from the July 2007 note debacle? Think again. Per same Irish Times report: "According to fresh analysis conducted by department economist Ronan Hickey – and published yesterday – house prices had fallen by 40 per cent from their 2006 peak by the fourth quarter of 2010." (emphasis is mine)

Err, what a wonderful revelation that is. In fact, the DofF 'analysis' is so ground-breaking that it simply confirms the data released by CSO last month - see report on that here.

But don't blame Mr Hickey for this - blame Irish Times bizarre reporting style. Mr Hickey didn't carry any 'fresh analysis' that Irish Times claims he did. instead, Mr Hickey clearly and transparently quotes from a now discontinued time series data from ESRI and ptsb index that were publicly available for ages now.

You can see this in his own paper/presentation/post available here. Just go to page 10 to see this 'fresh analysis'. Again, Mr Hickey is not doing anything wrong here, it's just the excited Irish Times failing to read his paper reporting old news and new news.

What is, however, amazing about Mr Hickey's paper/presentation/post is that this very information and the same analysis is being provided for free on a number of blogs around the country. In many cases, blogs analysis is actually way better, more data-intensive and detailed. Yet, in age of austerity, the Gov see fit to spend thousands on wages of PR-spin economists working for DofF.

05/03/2011: Our economic meltdown

Our latest paper on Irish economic meltdown (forthcoming in the refereed economics journal Panoeconomicus) is available on ssrn web page for downloads:

Gurdgiev, Constantin, Lucey, Brian M., Mac an Bhaird, Ciaran and Roche-Kelly, Lorcan, The Irish Economy: Three Strikes and You’Re Out? (March 3, 2011) - download here.

15/01/2011: Consumer Sentiment in Ireland

Per this week's data release by the ESRI, Irish consumer confidence suffered another set back in December 2010 - updated chart:
Overall, Consumer Sentiment Index declined to 44.4 in December from 48.4 in November, and relative to 53.3 in December 2009. The November reading remains above the all time low in July 2008 of 39., but way below 67.9 local peak achieved back in July last year.

The decline in index was across the board with

• a strongly negative move in the Index of Current Conditions - to 68.5 in December, compared with 76.6 in November, and
  

• Expectations index staying at 28.1, down from 29.4 in November.

According to the ESRI: “The majority, over 70 per cent [would have been nice to put an exact number here, but what can you expect - it's ESRI], of reported that their finances had worsened rather than improved during the past year.”

All thanks for that to Leni & Co for spectacularly reducing middle class' disposable incomes to bail out systemically unimportant banks and public sector elites.

Economics 13/9/10: Our crises are more than academic

This is an unedited version of my article in the Irish Mail on Sunday.

Adjoining the famed Moscow Conservatory there is a trendy Vieneese-styled café set in a quiet side-street of a bustling city center. Kofemania is a little microcosm of today’s young and upwardly mobile Moscow. On a late night break from the week of the Irish Trade Mission here, I was meeting a group of friends. Half a dozen of us, from different walks of life, crammed into a small booth were having a lengthy chat about life in general and our futures in particular. In our late 30s-early 40’s, one way or another, we can all relate to the topics of our children and our own and their futures.

For the first time in my life, I found myself being a deeper pessimist in the company of my Russian friends.

Like its Irish counterpart, Russian economy had a tough couple of years since the global financial crisis hit the country in the second quarter of 2008. However, amidst the crisis Russia has managed to deploy significant economic reforms – financed by a prudent fiscal policy during the boom. Their austerity programmes are offset by tax cuts, disposals of state assets and continued capital stimulus.

Since the beginning of 2010, the country economy has expanded at approximately 5% annual rate of growth, despite enduring the worst drought and wildfires in over 200 years. Moscow is enjoying a robust revival: city economy is up some 8% in real annualized terms since January this year, the local authority no longer runs a deficit and capital investment programme was underpinned just two days ago with a robust 12-yea bond placement for ca €500mln yielding less than Irish Government debt, despite being denominated in rubles. People are spending, taking holidays abroad, buying cars, and are genuinely almost over the “recession gloom” when it comes to their outlook for the future. There is even a pick in investment in second homes in Spain and France taking place as a friend of mine, running a specialty real estate agency has told me. Tight credit conditions during the crisis are easing gradually, but steadily and not a single of my friends has switched their banks accounts to foreign intermediaries or altered the mix of currencies they hold - a sure bet that they do not expect significant pressure on the ruble or a ramp up in inflation that currently runs modest (by Russian standards) 5.5-5.7%.

My fiends are fully convinced that their lives are going to be just fine and their kids future will only get better. The generational game of renewal and raising of expectations – the hallmark of any society that enjoys a sense of confidence in its future – is well underway in Moscow.


It's a different story for us in Ireland.

This week’s admission by Alan Dukes, that the bank’s final expected loans losses can top €39 billion became the final straw for many people here, as well as for myself. Follow up admissions by the Government that the fiscal reforms of quangoes, promised back in 2008, are not happening made it clear that the policy path we are taking hardly amounts to much more than a waiting game in a hope for a miracle of the externally driven turnaround.

Over a year ago, I publicly estimated that the total losses in the Anglo will reach up to €38.6 billion. My total estimate of the net losses in Irish banking crisis since March 2009 has remained around €50-53 billion. There’s little to be gained from having gotten the estimates right. The sheer extent of the economic destruction that befell Ireland over the last three years is now hitting my own home, hard.

A third year into an economic equivalent of the Perfect Storm, the reality of our economic collapse remains unchanged. Worse – the storm, using Bertie Ahern’s turn of phrase, is only getting stormier.


All in, the combination of banking and fiscal hell we are currently living through will exact an economic toll unseen by this country since the age of the Famine. Courtesy of the consistent and persistent policy failures spanning the last decade and continuing to-date, my own family, like a million other ordinary taxpayers’ families in Ireland have been turned into an army of serfs bound by the state to the rapidly sinking Titanic of our banking and fiscal policies. The very hope of seeing my children living in a world of higher social and economic standards – that cornerstone of any family raison d’etre – is now under a real threat.

Within the last 12 months, the new wave of unemployment is wiping clean the ranks of professional, highly educated younger services sectors workers. The social mobility ladder that provides hope for our and our children future has collapsed.

Tens of thousands of students are now actively seeking to emigrate out of Ireland. Five years ago, less than one in ten in my Trinity classrooms intended to go abroad in search of starting careers. This summer, the number rose to about three quarters. By my estimates, over 200,000 people have left this island in the last 24 months and some 300,000 more are on the verge of emigrating, held back by the shackles of negative equity and rapidly rising debt.

For our middle class, just as for my own children, education was supposed to be a sure bet for achieving a steady progression to economic and social well being. Today, this is no longer the case.


Both myself and my wife hold advanced post-graduate degrees and have achieved above average careers with over 15 years of steady growth. Yet, back in the Autumn of 2008 both of us have almost simultaneously lost our main jobs. Four subsequent months, spent living in the hell of uncertainty, were some of the toughest periods we ever endured. Throughout these months, the fear for the future backed by our steadily declining savings was compounded by the complete absence of any leadership from our policymakers.

This fear still remains a part of our daily lives. Hope for a recovery today is contrasted by the vacuous and occasionally outright insulting statements from high podia about imminent ‘turnarounds’ and ‘patriotism’, and the ‘hard choices’ allegedly being made the country leadership that is painfully unable and patently unwilling to make any real decisions.


The crisis we face is not a temporary, but a structural one. In order to unwind a roughly 700,000 strong-army of surplus workers who are out work or grossly under-employed, Ireland will have to more than triple our entire exporting sector – a feat that even during the Celtic Tiger era would have taken some 25 years to achieve.

By the time my children finish their education, some 20 years from now, our family will have spent over two decades in a state of perpetual struggle to pay for the legacy of our banking sector collapse and fiscal policy fiascos, to cover the costs of bankers and bond holders bailouts and to unwind a massive pile of private and public debts accumulated through the erroneous and egregious policies we have pursued since 2001-2002.


To finance ever-increasing social welfare and public sector pay bills, a family like ours will be pushed into massively higher taxes on income, property and everyday necessities.

The numbers are frightening. Frightening to the point of getting me worried about even my own family ability to endure this crisis.

Nama and banks rescues alone will add some €110,000-120,000 to our family debt pile through state-accumulated liabilities. Property and assets collapses in the end will contribute another loss of €300,000 to our net worth. The benefits of free education and children-related allowances will be gone, implying a life-time loss of roughly €120,000 for our family. At current yields, the debt accumulated through the deeply flawed banks recapitalizations and Nama, plus egregious current spending deficits will impose an annual interest bill of €12,000-15,000 on our family by 2014. Interest on the state debt alone will cost us every year the same as our children’s education.

American philosopher and writer, Ayn Rand once said that: “It only stands to reason that where there's sacrifice, there's someone collecting the sacrificial offerings. Where there's service, there is someone being served. The man who speaks to you of sacrifice is speaking of slaves and masters, and intends to be the master.” Recall Minister Lenihan’s statements about the need for ‘patriotism’ in his two Budget 2009 speeches. With the events transpiring around us today, Rand’s words are now no longer a catchy turn of a phrase.

Our pensions – supported solely by our personal savings – will be a shadow of their current expected value as funds returns will remain stagnant over the years of painfully slow growth, caused by the disastrous policy choices. Inflation, imported from the rest of the Eurozone, will mean that the real value of our savings will be declining over time.

Our healthy demographics – normally a reason for optimism in economic future – can end up driving this economy deeper into slow growth scenario. By the time my children will be finishing their university degrees, today’s middle-age workers will see their pension ages extended in order to reduce the exchequer pensions liabilities. This means that twin peaks of new job markets entrants between 2020 and 2030, Irish workforce will swell with educated, but inexperienced professionals unable to locate a job because their retirement age parents have no option but to continue working into their seventies.

This scary trend is well underpinned by today’s reality, including that of my own household. Save for a sizeable mortgage, our family is completely debt-free for the moment. Myself and my wife have good private sector jobs and earn well above the average family income. On the paper – we are doing fine.

Our future liabilities are massive, courtesy of the Government mismanagement of fiscal balances since 2003, the Croke Park deal, the Social Partnership-led pillaging of the growth years, the banks rescues, Nama and the chronic lack of real reforms in the state-controlled sectors.

Banks bailouts are already having a direct effect on our family. Amidst historically low interest rates, our mortgage has grown throughout 2010 and is likely to rise even more comes 2011, just as the negative equity continues to bite deeper and deeper into our ‘investment’ which value has shrunk roughly 40% since the time we bought into it. By my estimates, the spreads between the ECB base rate and the average variable rate mortgage charges will rise from 2.5-3% today to 4% by the end of the next year. After that, the ECB will start hiking its rates, with a distinct possibility of our mortgage finance costs more than doubling within a span of 15 months.


As an economist, I am all too familiar with the long term nature of the fiscal, house prices and banking crises that were are experiencing today.

Based on what we know about fiscal crises, our debt to GDP ratio will peak at over 125-130% around 2015-2017. At these levels, any economy, even a highly competitive one, would suffer a catastrophic decline in long term prospects for growth.

In the end, Ayn Rand was right – the sacrifices and patriotism of our politicians’ speeches has turned the people of this country into serfs to the vested interests of Social Partnership and banks’ elites. They speak of a sacrifice, intending to be the masters. My family, and millions of other ordinary people around this country are now just meaningless pawns in their game for survival.

Economics 6/9/10: Summer of missed opportunities

This is an unedited version of my column in the current edition of Business & Finance magazine.


To those of us who practice economics in the real world of markets and private enterprises, the homo economicus is a species endowed with the picture of the past but a vision of the future. To academics, economic reasoning is almost exclusively descriptive. This difference is not about the power or accuracy of forecasts. No one, familiar with the field would ever vouch in economists ability to deliver reliably accurate and useful predictions of specific outcomes.

Last few weeks offer a somewhat unusual, quasi-experimental insight into the future for Ireland Inc. July and August are the doldrums months in the giant global markets. Whatever happens around these months in Ireland, therefore, says more about our own capabilities and failures than what takes place in the rushed days of September and October.

So here is a picture of Ireland, then, in the Petri dish of our own policies.

Courtesy of the independent analysts first, followed by the IMF’s July report, we have learned that Irish Government deficit is doing the opposite of what the Government has hoped. Department of Finance projections for 2010 pencilled in 11.6% borrowing requirement for the Exchequer. May forecasts by the independents was for a figure ‘closer to 20%’. IMF July prediction is 19.9%. And that is before the latest spill of Anglo and INBS ‘bad’ loans news.

Overall tax receipts are now running €1,536mln below 2009 numbers for the first seven months of this year, and are still way off 2008 numbers by €5,520mln on 2008. This means we are now 8.22% below 2009 and 24.35% on 2008. Vat is €483mln or 6.9% below 2009, and €2,453mln or 27.5% behind 2008. And this is after the massive Vat boost from automotive sales increases driven predominantly by the vanity 2010 plates. Income tax shows a similar pattern: down €537mln on 2009 (-8.45%) and €1,060 on 2008 (-15.4%).


On the expenditure side, savage cuts to capital investment account for virtually all ‘savings’ achieved to date. This is fine, were the Government to undertake significant reforms in the current spending in the forthcoming Budget. However, all indications are that it will not do anything of the sorts.

The Machiavellian Croke Park deal enshrined in stone the very structure of pay and employment practices that makes up for one third of our gargantuan public spending bill. We even had a veritable drama performance befitting Abbey from the ICTU/SIPTU/CPSU leaders who worked tirelessly to ‘sell’ the deal to their members. The end result was the complete shedding of public sector liabilities onto the shoulders of ordinary taxpayers.

Social welfare reforms can at the very best be minimal in the current climate of chronic and continuously rising unemployment. In addition, timing of Liver Register increases suggests that many of the unemployed are close to exhausting their job seekers’ benefits and redundancy payments, pushing them deeper into the welfare trap. Add to this the fact that de facto the ruling coalition has no political capital left to fight its corner on a deep reform, and you have only one conclusion to make about the next Budget: prepare for savage tax increases all ye who hold a job!

This signal to the rest of the world and our own entrepreneurs and the workers in the productive (i.e. exporting) sectors is inescapable. Pro-business Ireland will hike your taxes to make you pay for the ‘industrial peace’ achieved in the public sector wards.

And it is highly unlikely that such policies can lead any significant stabilization of the Exchequer finances at any rate. Tax increases have been significant since the beginning of the crisis, yet tax revenues continue to decline. The fabled ‘stabilization’ across some tax heads to-date has been nothing more than the slowdown in the rate of tax receipts decline. There is no tax receipts uptick. Meanwhile, expenditure side remains worryingly sticky. The end game here is that the IMF (and even our own stockbrokerages – not exactly the paragons of critical assessment of the Government’s official position) are now predicting 2015 deficit to remain at ca 5.3% of GDP, more than 1.8 times the size of the deficit we promised to deliver to the EU Commission back in December 2009.

To put even more sparkle into Ireland Inc’s already shining portrait of competitiveness, the semi states are now desperately searching for any possible ways to beef up their revenues. Electricity costs went up to support such environmentally insane practices as drainage of bogs and burning of peat. As Richard Toll of ESRI summarised one side of Minister Ryan’s policy Bermuda Triangle – we are dumping a massive subsidy to producers of some of the most polluting energy the mankind can have. Transport costs are continuing to rise. All state-controlled sectors continue to show positive inflation through the entire crisis.


The other two sides of the said triangle are equally internecine. Firstly, hiking energy costs – one of the most frequently cited obstacle to our cost competitiveness – during a recession is equivalent to an economic sabotage. Secondly, the only real beneficiaries of this scheme will be semi-state companies, where ‘jobs creation’ costs multiples of what it costs in functional exporting sectors. In other words, given the ESB average rates of pay and value added in this economy, spending €85 million that latest price hikes will net the company in straight subsidies can ‘create’ roughly 3 times fewer jobs than using the same funds to support, say, a new pharma or IT firm entry into this market.

In the mean time, Irish banking sector continued to take on water. Losses in AIB and Bank of Ireland came to cumulative €3.9billion in the latter and a whooping €2bn in just six months for the former. Within days after their respective H1 2010 results announcements, both banks were exposed as having underreported their true loss by a cumulative €817 million thanks to a timing loophole. Anglo and INBS popped their ugly heads out of the somnambulistic slumber to ask taxpayers for €1.9 billion more in funds. Hence, within a span of just 4 months (post March banks pledges made by Minister Lenihan), Irish taxpayers were presented with more than €2.7 billion in new liabilities. At this rate, banks demands on our cash, that Messrs Cowen, Lenihan and, now, Honohan claim to be ‘one-off’ measures, will be running at an annualized rate of €8 billion – or over 26% of our entire 2010 tax take forecast by the Department of Finance.

All of the Ireland’s six state-guaranteed banking institutions remain firmly behind the reality curve when it comes to provision for future losses. Something that the Government appears to accept without a challenge, suggesting that instead of being an active large shareholder (and in the Anglo and INBS cases – the sole shareholder), our state is just letting the banks go on with the business of denying the obvious. Even the stockbrokers at this stage have stopped covering the banks with deeper analytical notes, resorting instead to a quick overview of the interim announcements.

Looking at independent analysis, through the cycle losses in banking institutions are expected to total €50-53 billion in total. This implies additional losses in the system of ca €22-25 billion, split between Anglo further losses of €9-12 billion, INBS losses of additional €2-2.3 billion, AIB further demand for capital in excess of already pre-announced to the tune of €8 billion, Bank of Ireland’s additional €2 billion and EBS €1 billion.

These estimates are based on the balancesheet analysis performed by the banking expert, Peter Mathews and my own modelling using past property and asset markets busts in the OECD, plus updated information from Nama and banks’ own results. The fact that the two estimates virtually converge by institution and in the aggregate gives us more comfort that they are closer to reality than the ‘hit-and-run’ numbers being produced by the banks and official analysts.

All in, my prediction is that Ireland’s state and quasi-state (e.g. Nama) debt pile will grow to over €210 billion by 2014, which puts into perspective the latest ‘successful’ auction of Irish bonds. At the yields achieved, financed with benchmark 10 year bonds, the debt accumulated through the deeply flawed banks recapitalizations and Nama, plus egregious current spending deficits will impose an annual interest bill of €11,310 million our economy. That’s right – by 2014 we are risking paying out more than 33% of our entire 2009 tax revenues in interest charges on the debt.

Adding insult to the injury, the Government has passed every opportunity presented to it so far to impose meaningful reforms on Irish banks. The latest missed opportunity came with the extension of the banking guarantees through December 31, 2010.

At the point of granting this measure to the banks – this time around absent the duress of an immediate crisis – Minister Lenihan could have simply required the banks to adopt deep changes in their operational models and strategies. Such a list could have included the following Nine Steps Reform Plan:

1. Require banks to negotiate significant haircuts on subordinated and senior bond holders, including debt for equity swaps. Time frame – 3 months;
2. Require banks to prepare detailed equity issuance proposals. Time frame – 1 month
3. Require banks to prepare binding estimates of expected future losses through 2012 (3 months) which can serve as a benchmark for board performance on annual basis going forward;
4. Require banks to reform their boards and board members reimbursement to be tied into long term performance by the bank (3 months);
5. Require banks to create independent strategy, risk and operations oversight and advisory committees with the power of direct reporting to the Boards and external strategy and risk audits of the annual results (3 months);
6. Require the banks to commit to a full root and branch reform of upper management (3 months);
7. Force banks to accept salaries and bonus caps on all senior management and board members (1 month);
8. Require banks to achieve conversion of existent outstanding mortgages to a tracker rate of euribor plus 225 bps (allowing the banks a ca 140-155 bps margin on all loans) whenever such a conversion is requested by the mortgage holder (6 months);
9. Actively engage in the process of renegotiating mortgage contracts terms (e.g. maturity and payment schedules) with distressed households, under direct oversight of the Financial Services Ombudsman

At the time of public debate concerning the Guarantee extension, I made the above proposal public and brought it to the attention of several senior members of the ruling coalition. Despite this, and despite a clear cut need for deep reforms of the banks operations and strategies, Minister Lenihan simply opted to walk away from using another opportunity to change the way Irish banks are run.


All in, the summer of 2010 has proven to be a season of missed opportunities and foregone reforms. Whether in academic, or in practical economic analysis terms, this sets the stage for only one outcome to the rest of the year. Instead of engaging pro-actively in building the future of this economy, our leaders have taken to a role of being passive observers on a sinking Titanic of domestic non-exporting economy. The cost of this inaction is likely to manifest itself through a Japan-styled long term recession and a rising burden of the state and its clientele (the banks and semi-states-dominated sectors) on the society at large.

Economics 1/07/2010: Live Register - no recovery here

Live Register figures for June are truly depressing, folks. Regardless of what our QNA numbers telling us about real GDP growth, unemployment is continuing to climb.
We are now at 444,900 and climbing. In the year to June 2010 there was an unadjusted increase of 37,420 (+9.0%), down from an increase of 43,788 (+11.1%) in the year to May 2010. But that offers little in terms of consolation - most of people on LR in 12 months to May are still there - unemployed or underemployed.
A snapshot of weekly numbers above. Depressing. The average net weekly increase in the seasonally adjusted series in June 2010 was 1,450, which compares with a weekly increase of 1,650 in the previous month. But unadjusted things are looking much worse (figure above).

There was an increase of 4,800 males and 1,100 females in the seasonally adjusted series in June. Undoubtedly strengthening contraction in construction activity in June is not helping here.
The standardised unemployment rate in June was 13.4%. This compares with 12.9% in the first quarter of 2010, the latest seasonally adjusted unemployment rate from the Quarterly National Household Survey. We are firmly on track to reach 13.7% before the end of this year.

Rates of change in LR are also accelerating - a disheartening feature:
As I said in my previous post on QNA data (here): we are having a fake recovery.

Economics 05/06/2010: Economics of Fiscal Stimulus

This is an unedited version of my article for June-July issue of the Village Magazine.

Weeks into a new round of ‘talks’ over the public sector reforms and Ireland’s Policy Kindergarten squad is getting more agitated by the issue of cuts in the Government expenditure. The logic of their arguments, led by the likes of Tasc, the Irish Times, and an army of Unions-employed ‘economists’, is perverse: “In order to get the economy back on track, we need to borrow more and spend on public services and wages.”

There are three basic arguments why stimulating Irish economy though increased public spending won’t work in the current conditions even in theory, let alone in practice. These are: the structural nature of the fiscal crisis we face, the size of the debt we face, and the lack of evidence that stimulus can work in a country like Ireland.

Structural deficits

Economists distinguish two types of deficits: cyclical and structural. The first type of deficits occurs when a temporary economic slowdown leads to an unforeseen decline in revenue and acceleration of certain components of spending (e.g. unemployment insurance and social welfare). By its definition, the cyclical deficit will be automatically corrected once economy returns to its long term growth path.

In contrast, structural deficits are those that arise independently of the short term changes in economic growth. They are the outcome of unsustainable increases in permanent spending and/or decline in the long term growth potential that might arise from a severe crisis.

In the case of Ireland, both of the latter factors are at play. Various estimates of the extent of structural deficits carried out by the likes of IMF, OECD, the European Commission, ESRI and independent analysts range between one half and two thirds of the 2009 General Government deficit, or 7-9.5% of GDP.

Reckless expansion of Government spending in the period of 2001-2007 is the greatest cause of these – not the collapse of our tax revenue. In the mean time, our economy’s long-term growth rate has declined from the debt-and-housing-fueled 4.5% per annum to a Belgium-like 1.8% per annum.

In 2000, General Government Structural Balance stood at roughly -0.5% of GDP. By 2008 this has fallen to almost -11% courtesy of a massive build up in permanent staff increases in the public sector, rises in welfare rates, explosion in health spending and creation of a gargantuan army of quangoes and supervisory organizations.

Forget, for a second, that majority of these expenditures represented pure waste, delivering nothing more than top jobs for friends of the ruling class, plus scores of jobs for public and quasi-public sector workers. Between 1981 and today Ireland has recorded not a single year in which Government structural balance was positive. Windfall stamps, VAT and capital gains tax receipts over 2001-2007 have masked this reality, as Goldman Sachs structured derivatives masked the reality of Greek deficits.

We are not getting any better

Over the recent months, the Government has been eager to ‘talk up’ our major selling points. Ireland, it goes, is a country with stabilized public finances and low debt to GDP ratio.

Last month, Eurostat exposed the lie behind the ‘stabilized public finances’ story. It turns out our Government has decided to sweep under the carpet billions of cash it borrowed in 2009 to recapitalize Anglo. Courtesy of this, our deficit for 2009 was revised to a whooping 14.3% of GDP – topping that of Greece.

But Irish General Government deficit this year is expected to come in between 11.7% and over 12% of GDP, depending on who is doing the forecasting – Department of Finance or ESRI. And this is before we factor in March 2010 statement by the Minister for Finance, promising over €10 billion for the banks this year. This means that, as the rest of the world is coming out of the recession, our fiscal deficit for 2010 is expected to either match or exceed the revised level achieved in 2009. Some stabilization.

Irish Government debt is expected to reach 78-82% of GDP by the end of 2010 – on par with Eurozone’s second sickest economy, Portugal. With Nama and banks recapitalizations factored in, Irish taxpayers will be in a debt hole equal to between 117% and 122% of GDP by 2011 and to 137% by 2014. At the point of the Greek debt crisis implosion last year, Greece had second highest debt to GDP ratio in the EU at 117%, after Italy with a massive 119%.

In totality, current crisis management approach by the Irish State is going to cost every Irish taxpayer in excess of €117,000 in added tax liability. Neither Iceland nor Greece come close.

Economy on steroids

Still think that we should be stimulating this economy through more borrowing?

Take a look at the private sector debts. In terms of external debt liabilities, Ireland is in the league of its own amongst the advanced economies. Our overall debts currently are in excess of the critically high liabilities of the HIPCs to which we are sending intergovernmental aid. And rising: in Q3 2009, our external debt liabilities stood at a whooping USD 2.4 trillion, up 10.8% on Q3 2007. Of these, roughly 45% accrue to the domestic economy – more than 6 times our annual national income.

Ireland’s share of the world debt is greater than that of Japan and more than double that of all BRICs combined, once IFSC companies are included. Over the next 5 years, the entire Irish economy will be paying out around €206,000 per each taxpayer in interest on this debt. Adding more debt to this pile is simply unimaginable at any stage, let alone when the cost of borrowing is high and rising.

These figures show that the main cause of the current crisis is not the lack of liquidity in the system, but an old-fashioned problem of insolvency.

This problem is directly related to the actions of the Irish state. Over the last decade, there was a nearly 90% correlation between the average increases in the Irish tax revenues plus the rate of economic growth and the expenditure growth on capital and current spending sides. In effect, courtesy of the ‘Boom is getting boomier’ Ahearn/Cowen team Ireland had two bubbles inflating next to each other – a private sector borrowing bubble and a public sector spending one. Government’s exuberant optimism, cheered on by the Social Partners – the direct beneficiaries of this ‘fiscal policy on steroids’ approach – explains why during Brian Cowen’s tenure in the Department of Finance, Irish structural deficit doubled on his predecessor’s already hefty increases.

But what went on behind the glossy Exchequer reports was the old-fashioned pyramid scheme. Some got rich. Temporarily, we had an army of politically connected developers and bankers stalking the halls of premier cars dealerships and property auction rooms.

Permanently, an entire class of public employees reaped massive dividends in terms of shares in privatized enterprises that cumulated in their pension plans. Current claims that because the values of some of these payoffs have declined over time (often due to the intransigent nature of the unions in the semi-state companies, staunchly resisting change and productivity enhancing reforms) is irrelevant here. Prior to their privatization, these companies were called 'public' assets. Creation of any, no matter small or large, private gains to their employees out of the companies' privatizations or securititization through pensions funds liabilities of their assets in favor of employees, therefore, is nothing more than an arbitrary, unions-imposed grab of the public asset.

Benchmarking, lavish pensions and jobs security – also paid out of the economy leverage (just think of the NPRF - explicitly created to by-pass the illegal, under the EU rules, taxation of economy for provisioning for future public sector pensions liabilities) – was a cherry on top of the cake. Public companies management got dramatically increased pay and a permanent indemnity against competition through a regulatory system that was all but a client of their semi-state companies.

From our hospital consultants to our lawyers, academics and other professionals – a large army of state-protected, often non-competitive internationally professional elites collected state-subsidised pay so much in excess of their real productivity that we became the subject of diplomats’ jokes.

Our state’s response to this was telling. Just as the country was borrowing its way into insolvency, our Government gave billions to aid developing nations. That was the price our leaders chose to pay to feel themselves adequate standing next to Angela Merkel and Nicolas Sarkozy at the EU summits. Incidentally, as the country today is borrowing heavily to cover its basic bills, Brian Cowen still sends hundreds of millions of our cash to aid foreign states and has recently decided to commit over €1,000 million – full year worth of the money he clawed out of the ordinary families through income levies – to the Greek bailout package.

Economics on Steroids

Still think more state-centred economy is the solution to our problem? Irish economists, primarily those affiliated with the Unions are keen on talking about the ‘positive multiplier’ effect of deficit-financed stimulus. Sadly for them, there is no conclusive evidence that borrowing at 5 percent amidst double-digit deficits and ‘investing’ in public services does any good for the economy.

Firstly, one has to disregard any evidence on fiscal stimulus efficiency coming out of the larger states, like the US, where imports component of public and private expenditure is much smaller than in Ireland. The US estimates of the fiscal stimulus multiplier also reflect a substantially lower cost of borrowing. Even if Ireland were to replicate US-estimated fiscal stimulus effects, higher cost of our borrowing will mean that the net stimulus to Irish economy will be zero on average.

Second, international evidence shows that for a small open economy, like Ireland, the total fiscal multiplier effect starts with a negative -0.05% effect on economic growth at the moment of stimulus and in the long run (over 6 years) reaches a negative -0.07-0.31%. Add the cost of financing to this and the long-term effect of deficit financed stimulus for Ireland will be around -2.3% annually.

Third, no one on the Left has a faintest idea what the new spending should be used for. Simply giving borrowed cash to pay the wage bill in the public sector would be unacceptable by any ethical standards. Any investment that is bound to make sense would have to focus on our business centre – Dublin, where infrastructure deficit is acute and potential demand is present. Alas, this will not resolve the problem of collapsed regional economies. Pumping more cash into the ‘knowledge economy’ absent actual knowledge infrastructure of entrepreneurship, private finance, skills and without a proven track record of exporting potential, is adventurist even at the times of plenty.

In short, the idea that expanded deficit financing will support any sort of real recovery in the economy is equivalent to arguing that pumping steroids into a heart attack patient can help him run a marathon.


Ireland needs severe rethinking and reforms of the grossly inefficient and ethically non-sustainable spending and management practices of our public sectors. It should start with significant rationalization of expenditure first and then progress to a more deeply rooted revision of the public sector objectives and ethos.

Ireland also needs a significant deleveraging of what is a basically insolvent economic structure. This too requires, amongst other things, a significant reduction in overall public spending. Far from ‘borrow to spend’ policies advocated by the Left, we need ‘cut to save’ policies that can, with time, yield a permanent increase in the national savings rate, productive private investment and improved returns on education and skills. Otherwise, we might as well give our college graduates a one-way ticket out of Ireland with their degrees, courtesy of Tasc and the Unions.