Economics 12/08/2009: An afront to our democracy

So Mr Carroll's case has been now refused the examinership by the Supreme Court. Welcome news - at least there is a remnant of sanity left in this country and it is the Judiciary. But the telling reaction to the highest court in the land verdict came from the Department of Finance. In a blatant disregard of the Supreme Court powers, a mere civil servant-run lowly department (that is but a fraction of one of the three pillars of the state) has in effect told the Supreme Court (the highest body of another pillar of this state) to pack off.

In a response penned, most likely well in advance of the Supreme Court decision, the DofF stated that (quoting the Irish Times report - here): "The Department of Finance rejected any suggestion that the Government’s plans for Nama were affected by the court ruling. “It makes no difference – Nama will proceed as planned,” said a spokesman for the Minister for Finance. “We’ve always made clear that Nama will operate in line with EU Commission guidelines, which set out the use of the long-term economic value measurement.”

So Supreme Court telling the nation that, in agreement with the Commercial Court, its assessment of Mr Carroll's assets is that these assets are not worth even 15-20% of loans advanced to the company, 'makes no difference' to the NAMA. We will still pay Euro60bn for the same assets.

Now, do the math, Mr Carroll owes the banks over Euro2bn. He has trouble paying on Euro136mln. His companies are generating around Euro27-30mln per annum - and that according to his company records, that Commercial Court, in the context of his the survival plan, identified as “lacking reality” and bordering, if not trespassing, on the “fanciful”. So here we are, the valuations of Mr Carroll's loans quality is in (this time confirmed by the highest authority in the land):

• According to the courts, Mr Carroll's loans are not worth 21.3% of their face value (in other words, a discount of 78.7% on their value will not bring the price down to the current market valuation) (Euro265mln out of Euro1.26bn = 21.3% value of assets);
• The balance sheet below illustrates clearly that even assuming 7% annual cash flow growth, plus 5% asset growth per annum for 2008-2020, a very benign interest rate environment (note we assume max cycle interest rate of 10% on Mr Carroll's borrowings in Scenario 2) and disposal of all his properties in the end of the term, the net market value of Mr Carroll's companies in 2020 will be a negative Euro5.7-7.5bn.

Now, it is the only attempt of estimate Mr Carroll's loans net worth at this stage known to me, so do take your time to read through it. The really, really scary part, that if NAMA were to buy his loans at a 50% discount, NAMA will be making a cumulative loss of between Euro2.41-2.56bn by 2020. If the discount were to 70%, NAMA resulting losses will be Euro1.19-1.34bn. At a 70% discount, folks!

And DofF still thinks we shall all p***s off: NAMA is here and there is nothing we can do about it!

This is bad news for:

• the responsible and accountable Government and governance, for our DofF in effect is stating the position of the State as 'NAMA - no matter what'; and
• the Irish democracy, for DofF has expressed absolute and public disdain for the highest court of this land.

And thus we have (courtesy of http://farm3.static.flickr.com/2452/3813875003_7e58e1ddc3_o.jpg):

Economics 10/08/2009: Industrial production blues and fun-NAMA

Brian Lucey has an open petition on NAMA on his site (here):
http://brianmlucey.googlepages.com/namapetitionandoireachtasemails
which is, in my view, spot on in terms of what each member of Oireachtas should read before the NAMA debate takes place.


Before we begin with CSO's data on industrial production - few NAMA posters are posted below, so do make sure you get to the end of this post...


CSO data on industrial production was published earlier today. Trumpets are blowing that things are turning around for Ireland Inc. But hold your horses...

On an annual basis production for Manufacturing Industries for June 2009 was 4.3% higher than in June 2008. So turnaround is here, then? Well, no... The most significant changes were in:

• Basic pharmaceutical products and preparations (+35.1%),
  
• Other manufacturing (+25.9%) and
  
• Computer, electronic and optical products (-17.7%).

What does the above mean? Pharma guys are chugging along in transfer pricing / tax optimization, but computers and electronics - hammered by exits and layoffs and the collapse in private investment worldwide - can't even master a tax optimization scheme. I mean, Table 3 in CSO release clearly shows this sector having suffered the greatest layoffs of all other sectors in proportional terms, and of all other Modern sectors in absolute and proportional terms.

The seasonally adjusted volume of industrial production for Manufacturing Industries for the three month period April to June 2009 was 2.0% lower than in the preceding three month period. This is volatile stuff, so 3-mo aggregates are a bit more telling.

The “Modern” Sector, comprising a number of high-technology and chemical sectors, showed an annual increase in production for June 2009 of 16.0% - the same transfer pricing argument holds. But there was a decrease of 16.6% in the “Traditional” Sector.

The seasonally adjusted industrial turnover index for Manufacturing Industries was 1.9% lower in the three month period April to June 2009 when compared with the preceding three month period. Now, outside the current crisis, turnover is actually less volatile than production volumes, and yet now it tracks almost 1:1 the more volatile series. What's going on? I am not sure, but one potential explanation is that we have gone into a severe enough jobs/production capacity cutting mode earlier this year to allow for some stabilization during May-August period. Of course, this means September-October turnover will make or break our stabilization. If turnover falls, new layoffs will be coming. If it rises, well, if it rises by a hell of a lot, then hiring might commence.

On an annual basis turnover was 0.6% lower when compared with June 2008.

Now, few interesting charts:
Taking a closer look above, compare the changes over the last four months reported relative to sector activity in 2005 (the 100 line):

• In March 2009, 8 sectors performed above their 2005 levels in volumes. In June, the number was 6.
• But in April 2009, this number was 5, while in May it was 3...

In effect, the whole manufacturing sector is sick and the disease is not new to this crisis. Read through this chart above - it is really, really telling. The same chart with monthly changes May-June (preliminary results, of course for June) - 11 sectors show no improvement, 9 show improvement.

Now step back for a bit of a broader view:
Self-explanatory, but few notes worth making:

• Capital goods are slightly up +4.66% mom in June, but that is after being slightly down -2.83% in May, so change on March 3.75%, but on April only 1.7%. Not exactly a robust start of a new cycle here, but not a disaster.
• Intermediate goods down - MNCs might be scaling back for summer.
• Consumer goods up, but no durables - weather effect?

Unfortunately, CSO can't get their act together on surveying new orders for all sectors, so we have a snapshot of what's happening in the very limited number of areas. But what the chart below really shows us is our dependence on MNCs - yeah, those American (and other countries') companies who are still trading, if only because of our tax arbitrage opportunity...

Credit for the following due to:
http://img7.imageshack.us/img7/5391/namahaughey.jpg
http://i38.photobucket.com/albums/e146/vgupload/sofew02.png

Economics 09/08/2009: Banks

A new post - the one promised a while ago - on Euro Area Banking Survey by ECB (July 2009 results), part 1 is now available on my Long Rune Economics blog here. Enjoy - most of this data has not seen the daylight in any media outlet and some of it has serious consequences for Irish banks, consumers etc... in other words - this is the bigger fish worth frying...

Economics 09/08/2009: Calling a turning point?

Forward looking update: I am working on detailed analysis of the latest ECB data on banks activity survey across the Eurozone, plus Ireland's own Earnings and Labour Costs data for Q4 2008... posts will be coming on these two, so stay tuned.

Now, I am skeptical about the 'Green Shoots' theory primarily for two reasons:

1. Relative to current fundamentals, the markets (equities) are overbought and bonds are at extremely low yields. Two possible scenarios can unfold from here on: Scenario 1 = we get growth in the US in Q3 2009, through Q4 2009 and inflation in Q1 2010. This means preciously little for Europe and Japan. Scenario 2 = we get growth in the US in Q3, then a contraction in Q4, and then out of a recession in Q1-Q2 2010 - a 'correction in the middle' scenario. Inflation will rise in Q2 2010 then. Again, Europe lagging and Japan is stagnating. Either way - I believe inflation is coming and it will be very hard hitting - 5%+ in 2010 as a peak, then up to double digits in 2011. Someone will have to pay for all this cash sloshing around courtesy of the Fed.
2. Real fundamentals - unemployment, personal disposable income, investment and so forth - bar the Government spending and printing presses - are still in a fall.

Now, I am much more comfortable with 6-months scenario of seeing the return to growth - albeit to moderate growth at the very best (especially when it comes to Europe). Here, we have Composite Leading Indicators from the OECD that do a decent job tracking trend (but not inflections necessarily) pointing to some interesting things. That said, I would be not as upbeat as OECD in interpreting these results...

• June 2009 data points to stronger signs of improvement in the economic outlook of OECD economies compared with June.
  
• Strongest recovery signals in Italy and France and clearer signals of troughs in Canada, Germany, the United Kingdom and the United States.
  
• In Japan tentative signs of improvement have also emerged.
  
• Troughs can also be observed in China and India, with tentative trough signals now appearing in Brazil and Russia.

TOk, let's take a look:

• CLI for the OECD area increased by 1.2 point in June 2009 but was 5.0 points lower than in June 2008. Now, note that in the previous recession, the CLI signal as about 1.5 years ahead of actual growth...
• The CLI for the United States increased by 1.3 point in June but was 7.2 points lower than a year ago. The same accuracy for CLI here as in the case of OECD (above) and Euroarea (below) when it comes to timing growth return... Now, note that the US has much better data available than the rest of the world, and here, things are really all over the place. Unemployment is down to 9.4%, but on the back of massive exits from the labour force. Structural unemployment has actually worsened: the number of people out of work longer than six months soared by a record 584,000 to 5 million, accounting for more than a third of all unemployment for the first time on record (chart below). While unemployment fell by 267,000 to 14.5 million, employment fell by 155,000. The labor force declined by 422,000, which means per Marketwatch, "the jobless rate declined because people dropped out of the work force, not because they got jobs". The participation rate fell from 65.7% to 65.5%. Unemployment chart below:There are some signs of improvement on jobs front, however. The average work week rose to 33.1 hours after falling to a record-low 33 hours in June. The average work week in manufacturing (a key leading indicator) rose from 39.5 hours to 39.8 hours. Total hours worked in the private-sector were unchanged. Good news, but one has to put this into perspective - a rise of 0.1 hour on a record low? Average hourly earnings rose by 3 cents, or 0.2%, to $18.56. Even better news, but again - state and local taxes are rising... Disposable income is singing the blues still. Higher working hours might see increased industrial production in Q3. Of 271 industries, 30.1% were hiring on net in July, up from 28.6% in June. In manufacturing, 22.3% of industries were hiring, the highest percentage since September.
  
  
• The Euro area’s CLI increased by 1.5 point in June but stood 1.6 points lower than a year ago. Now, that sounds misleading - as in - we are closer to trend than the US or OECD... true, but the problem, of course is that our trend is soo low, it would be considered a majour downturn for the US economy to run at our long term growth rates...
  

• Oh and take a look at Japan - the sickest economy in the universe. Now, note that those years above 100 - that was actually pure stagnation. Yet, CLI still gunned for growth there.
  

• The CLI for the United Kingdom increased by 1.1 point in June 2009 but was 0.9 point lower than a year ago. The UK is much closer to a recovery, unless, of course we have a double dip as in 2000-2003...
  
• The CLI for Germany increased by 1.7 point in June but was 6.6 points lower than a year ago. To be honest, there is no way the CLI for Germany can stay off the rising path from now on - the sheer collapse of exporting activity there was so deep earlier this year, you would have to put those Germans through another world war to get any worse destruction of productive capacity than we saw. So is CLI really meaningful here at all? And then, spot that double dip in previous episode.
  
• The CLIs for France and Italy, after having increased by 1.4 and 2.2 points respectively in June, are now above the level reached a year ago, by 2.7 points in the case of France and 4.8 points in the case of Italy. Well, France is appearing to do just fine here - national consumption-driven economy (as opposed to the German exporting model) is underpinning more stability in the downside part of the cycle. There is also massive spending by the French government on everything under the sun. But the question is - are we in a double-dip here? Once stimulus runs out, and assuming the Germans are not going to stand by and watch the French issuing more debt in their name, something will have to give. It won't be a devaluation of the Euro, and it won't be unionised wages. And it certainly won't be Sarko cutting his populist spending sprees... Now, Italy is to Europe what Japan is to the world, so frankly, after 30 years of disastrous growth, who cares that Italy is in a 'recovery'? Can they themselves even notice that they are? Without Berlusconi trumpeting around Rome about his super-human manly and stately powers? I'll check in 10 days and will report from there...
  

So here we are.

• In my view, we can call a global recession turning point somewhere around now;
• But the meaning of this statement is hollow unless there is a return to real growth - not the corrective 3-4% for half-a-year and then 1% for the rest of our lives, but 3-5% trend - and this is unlikely, especially given the necessary therapy we will have to undergo to cure inflationary hangover of Obama-nomics, Brownist Monetarism and Trichetisation of the Euro;
• Individually, the US is probably past the turning point now and is accelerating rapidly (though the risk of a double dip, in y view is somewhere around 30% now);
• UK is also past the turning point and probability of a double dip is also around 30%;
• Euroarea is not going to see real growth for years to come and probability of a double dip is around 40%.

The CLI for China increased 1.4 point in June 2009 but was 3.7 points lower than a year ago. The CLI for India increased by 1.2 point in June 2009 but was 3.4 points lower than in June 2008. The CLI for Russia increased by 1.2 point in June but was 17.7 points lower than a year ago. In June 2009 the CLI for Brazil increased by 0.4 point but was 11.4 points lower than a year ago. So BRICs are for now decoupling from each other and there is possibility that a new bubble is forming in equity markets in Brazil and Russia...

Happy hunting.

SCAMA - a joke that's touching reality

From http://img218.imageshack.us/img218/9136/scama.gif

Economics 07/08/2009: Live Register - unemployment's deeper roots

Before we begin on Live Register - I would recommend an excellent post by Myles on Irish automotive sales - read it here.

So Live Register is in, prompting some cheerful commentary as per slowdown in the rate of increases in unemployment. Ahem... not that I noticed.

To be honest - there are some signs of a slowdown in the rate things deteriorate, true, but these are:

1. Hardly well-underpinned and can be easily reversed (see Female trends below); and
2. Are pure mathematical (non-fundamentals-driven) in nature, as things must be asymptotically converging to some longer-term equilibrium at some point in time.

So here are the details:

First CSO statement: "The seasonally adjusted Live Register total increased from 412,900 in June to 423,400 in July, an increase of 10,500. In the year to July 2009, there was an unadjusted increase of 197,495 (+82.9%). This compares with an unadjusted increase of 197,781 (+89.6%) in the year to June 2009. [So so far we are still in worse dynamics than in 2008 - pretty bad, wouldn't you agree?]

• The monthly increase in the seasonally adjusted series consisted of an increase of 5,100 males and an increase of 5,500 females. [Females now outnumber males - a sign that more dual unemployed families are being hatched under the nurturing light of our Government policies, and that better quality jobs are now being destroyed at a faster rate];
• The average net weekly increase in the seasonally adjusted series in July was 2,100, which compares with a figure of 3,000 in the previous month. [Sounds better, until you recognise that last months basis was 4 week, this month's basis is 5 weeks];
• The standardised unemployment rate in July was 12.2%. This compares with 10.2% in the first quarter of 2009, the latest seasonally adjusted unemployment rate from the Quarterly National Household Survey. [But it also shows that the rate of increase - by 0.3 percentage points per month - has been steady since May];
• In the month, the estimated number of casual and part-time workers on the Live Register was 37,415 males and 32,138 females [Which means nothing - nada - because many, if not a majority, of these workers are now facing hidden forms of unemployment, aka working, but not being paid on time!]
  

Now, few charts:
Note slight acceleration in females (more on this in a sec) and basically imperceptible changes in the slopes? So much for the 'green shoots'.The real disgrace is in the unemployment rate - back to April 1995 now. Less than 14 months of economic destruction and 12 years of new jobs creation erased. Surely, Bertie would say that the doomers-and-gloomers should now hang themselves.Weekly changes in the LR plotted above. Again, one note of caution - the averaging was done on 4 weeks basis in June and 5 weeks basis in July. If it was done on 4-weeks basis, the weekly average in July would be 4,286, still below 5,530 in June. Then again, July is a much slower month in general for any sort of business strategy change, let alone for mass layoffs. Let's wait till October/November... Again, note females - the average weekly change also declined, but at a much shallower rate, pointing to the pressures on female employment rising relative to males.Now, to monthly rate of growth (chart above). The rate at which females are signing is up in monthly terms. This is the evidence of really bad news to come. Recall that layoffs happen sectorally and sequentially (meaning last in = first out). Females' job tenure is shorter than males' over economy, so if new sectors come on-line for mass layoffs, and these sectors are not dominated by males (like construction in the past), we should see an uptick in female unemployment rising faster first, followed by males in the same sectors. While there is no certainty as to whether this is what's happening, that blue line trending up in the chart above is a reason for concern and suspicion that a new wave of unemployment increases might be gaining mass.
Last chart is showing monthly figures deviations from the 3-mo Moving Average in total LR. This was converging toward the long run trend between January 2009 and May 2009 (the blue graph heading toward zero), but it now diverged again in June and July. Last time we crossed the long run trend line was in September 2008, which marked a smaller peaking cycle of April-August 2008. Duration of the last cycle was just 4 months. The current cycle is into 10th month and now apparently diverging further once again.

Other cycles were equally short-lived (2 months in 2007, 4 months in early 2008).

All of this makes me very conservative to call and 'improvement' - the series, in my view, are suggesting:

• At least 60% chance of serious deterioration in September-November 2009; and
• A very significant sign of long-term unemployment rising through the roof.
  

Economics 06/08/2009: Travel Figures, Budget, ECB

Travel figures are in - abysmal showing for tourism and leisure industry here. As predicted, the fall off in foreign visitors to Ireland continues, while the number of Irish people traveling abroad is showing signs of stabilizing.

Per CSO:

• Overseas visits to Ireland fell 15.1% to 636,600 in June 2009 compared to the June 2008.
• Visits by residents of the two main visitor markets declined substantially, Great Britain was down 19.8% to 260,700 and Other Europe fell by 12% to 219,600.
• Irish residents made 709,900 overseas trips in June 2009, 7.6% fewer than in June 2008.
• In the first six months of 2009, overseas trips by Irish residents totaled 3,439,300 or 9.8% less than in the same period in 2008.
  
• Six months total visits to Ireland from abroad fell by 10.7% to 3,304,100.

So here we go - jobs are being lost, hotels are shutting down, airlines are cutting services (and revenue), while DAA is raising charges, the Government is raising taxes and our venerable retired bureaucrats (the ones with IMF appointments on their CVs) are penning idiotic missives about how the crisis is the fault of the ordinary folks (SBPost) and how tariff protection of internationally trading sector is a great way to build Irish economy.

Sadly, Michael O'Leary is on vacation or I would have brought to you his explicative in the address of the Leinster House on the latest CSO release. Instead - a picture:

Market to watch: RWR-Reit index and US financials.


How long the circus of our Exchequer meltdowns can continue, one of you asked.

In May this year I wrote in a related note (here): "Cowen also stated that "we have a way out that is working". Remember the brilliant German movie Downfall about the last days of the Third Reich? (See a reminder/spoof here). Say no more... our unbeloved leader is in a state of delusion that is equivalent to awaiting the arrival of a miracle weapon (which does not exist) as the real enemy tanks are crushing your city."

That was then. Now, we pretty much know that the Government has deployed all its imaginary weapons and divisions against the enemy. The latest signs from the Cabinet pronouncements (and this includes their advisers) suggest that the Government has assumed the enemy away.

They have borrowed up some €25bn on the estimated liability of of over €35bn (counting recapitalization demands) that in their view will get them (alongside NPRF cash and left-overs from 2008) through this year. The Government is so short-termist that they have no clue / plan/ idea as to what happens after.

From this vantage point - anything is possible. Note the latest ECB statement today:

ECB stated that there are “increasing signs that the global recession is bottoming out”. Eurozone economy's pace of contraction is “clearly slowing”. Compared to July when it was noted that the activity “should decline less strongly” than in Q1 2009 - the latest statement suggests the ECB is already pacing potential interest rates increases in months to come.

And then in Q&A, Trichet did leave open a possibility that growth outlook for the Eurozone might be revised upward in the forthcoming ECB Staff Macroeconomic Projections before September meeting. The forecast update might move growth from current -0.3% expected for 2010 to 0% or even the consensus level of 0.4%. Another issue is timing - the ECB used to forecast return to growth for Q2 2010. This time around, no mentioning of Q2 anywhere, suggesting they are moving for growth to resume in Q1. And then there was Trichet's view that deflation is temporary and that by the end of this year we shall see inflation.

All of this points to a rising interest rates environment sometime in 2010, possibly as early as the end of Q1 2010 if inflation firms up and growth resumes in Q1. Remember, all that quantitative easing will have to go somewhere - i.e into price increases. When that happens, Mr Cowen will be sweating profusely in his air conditioned Merc, because the la-la land of endless borrowing will be over in a second.

Before then, he will pile cash reserves through aggressive borrowings from the ECB to make sure he can pay public sector wages and keep unions from completely imploding. The ICTU/SIPTU have already sensed the weakened leadership and are ganging on Mr Cowen's positions left, right and center. The problem is that comes Q1 2010, the QE will be over, as will be the Lisbon vote, so Mr Cowen will face the real problem of having no cash left by, approximately Q2 2010 or possibly the end of Q2 2010 - depending on how his borrowing will go down in the next few months.

What bothers me most, however, is why on earth no one in the markets realising this?

Economics 05/08/2009: Irish Exchequer - back into the furnace for a fresh meltdown

On to the Exchequer Returns for July 2009, then. As I predicted well back in February-March 2009, we are on track to reach the milestone of the total tax receipts falling below €31-32bn for 2009. I have not changed this prediction and I am still sticking to it.

The latest data is a disaster across the board:

• Tax Revenues are down 17.57% yoy in nominal terms, total revenue down 16.82% due to the increase in non-tax revenue, constituting, among other things a massive rip off of Irish consumers at the Dublin Airport and Dublin Port;
• Total current expenditure is up 4.55% yoy in nominal terms;
• As a percentage of GDP, tax revenue used to be 12.19% in 2008, now it is down to 10.99% thanks to the fall off in tax receipts, but overall current receipts declined from 12.41% of GDP to 11.29% - a bit shallower, as the Government continues to squeeze consumers and businesses for non-tax cash;
• Current expenditure has gone through the roof - rising from 14.18% of GDP in 2008 to 16.21% in 2009 - the real cost of public sector excesses (once social welfare increases are factored out);
• Current account deficit ballooned to €8.364bn in January-July 2009, an increase of 155% yoy. This used to account for 1.76% of the nation GDP in 2008. Now it is 4.92% and rising;
• Capital account deficit has gone to €8.075bn in January-July 2009 up 135.3% yoy, and as a share of GDP reaching 4.75% so far, as compared to 1.85% in 2008;
• Subsequently, overall Exchequer Deficit now stands at a whooping €16.44bn - up almost €10bn on 2008, or 145%. The ED now accounts for 9.67% of GDP, up from 3.61% in 2008. Remember that wishful thinking of a single-digit deficit for 2009? Gone in a blink of an eye;
  
• As a percentage of GDP our total annual borrowings have reached 14.72% in January-July 2009, up from 5.8% in 2008.

Table below summarizes these gruesome stats, but what is already clear from this data alone is that despite Mr Lenihan and other officials heralding the turn around in Irish public finances that was 'recognized by international markets', their own data shows that this turnaround was about as real as Mars Attacks was a documentary.
Now onto details.

Tax Heads:

• Customs, Excise, VAT and CAT down 21-26% yoy;
• Income tax and VAT - two taxes paid by consumers - are rising in overall share of total tax revenue, as Mr Lenihan loads the burden of his Government's unwillingness to cut public sector waste onto the shoulders of average families;
• CGT down a whooping 69.35% yoy despite resurgent markets;
• Stamps down 64.12% yoy predictably;
• Unallocated tax receipts up 55% - presumably on the back of the Revenue going after middle classes to milk out every single penny left in their accounts - anecdotal evidence shows exactly such a predatory behaviour with Revenue officers querrying any out of line items such as medical expenses from families with 3-4 kids;
• Corpo tax is up stron 31.55%, but not because of any green shoots on business front - simply due to changes in the scheduling.
  

Table below illustrates
Now departmental expenditure (voted only):

• Clownish numbers from D of Agriculture - spending up 35.12% yoy as the country is going into tail spin. Agriculture used to account for 2.3% of total voted expenditure. It now holds a 3.08 share. Soon, we will have agriculture - contribution to GDP 3%, as a burden on the Exchequer 6%;
• Only 5 departments show double digit reductions on 2008 spending - the minimum target for any serious fiscal stabilization programme in my view. Significantly, CMNR - down 32.16% on 2008, FA - down 19.28%, Transport - down 14.87% and AST down 14.51% are the only ones close or at the target (my minimum target for cuts is in the order of 15-20%);
• CRGA is down 6.05%. When this Government came to power, Brian Cowen has promissed the nation to put Irish at the heart of this Government's policies. Clearly, he is not too enthused about the objective... And yet, seriously speaking, the Department is miles away from serious change: at 6.05 reduction in expenditure, it is 9th ranked in taking appropriate measures out of 13 departments (15 less SFA and H&C);
• Incidentally, H&C are doing their job - they are up only 1.5% yoy despite having to face more demand for free medical services, defaults on medical payments and beraing some of the social welfare costs increases too - Mary Hearney is doing her job;
• Neither Finance Grou (down 9.06% only) nor D of Taoiseach (down 10.25%) are leading in the right direction.

Table illustrates
Non-voted current expenditure is often overlooked by analysts, but the figures relating to the burden of our debt (just 18 months into the fiscal 'solutions' to our crisis) are telling. Interest on bonds now accounts for 10.2% of our entire tax revenue (up from 6.32% in 2008). Total cost of financing these bonds now amount to 13.55% of entire tax intake (up from 8.46% in 2008). We are already drowning in a sea of debt.

Two other notables in the table above:

• Total non-voted current spending rose 19.24% yoy, with elections cost up 7.54% in 2009 and Oireachtas Commission costs up 6.69% - someone is living large out there in the public sector la-la-land;
• Nat Devel Finance Act spending is also up - 125%, now that is a current expenditure item, not a capital one.
  

Finally, let us take a look at the tax heads performance against the April Budget 2009 profile (remember - the profile is only just 3 months old, so you shouldn't expect much deterioration in the calm and more predictable summer months, if, that is DofF can actually do forecasting). Ahem, not really good:

• Income Tax 2.8% behind target, with a shortfall (cumulative) of €185mln;
• VAT is 6% behind target (as one could have predicted in the wake of our disastrous policy proposed and pushed through by the DofF boffins of raising VAT in a small open economy with competitive retail just across the border;
• Corpo and Excise are ahead of target because the boffins cannot forecast the least volatile and inter-linked (via imports of inputs) tax heads;
• Stamps 17.3% below target - which is predictable, unless you are DofF forecaster. You see, they think, alongside with our bankers, that people will simply bottom-out of not buying property etc. Alas, the bottom in the markets for investment and consumption is a Zero expenditure at home. We have some room to travel there still;
• CGT and CAT heads are now 16.7% and 14.4% below target; so
• Across CGT, CAT and Stamps, DofF boffins average monthly error under Budget 2009 (April) estimates is now around 6.1% per month! Wow - and that is for very well paid job-secure workers who have no other responsibilities aside form Budgetary estimates?
• So total tax receipts are now 3% below target. Linear projection implies another 5.2% in deterioration over DofF projections through December - an annual fall off the target of ca 8%, bringing tax revenue to €31.6bn not €34.4bn as envisioned in DofF's April 2009 framework.

Table below illustrates

And now to the conclusion: it is simply impossible to believe that these numbers can be interpreted by anyone - international or domestic markets participants, shy of the DofF own employees and the delusionary Government we have - as a confirmation that this Government has done anything to address the fiscal crisis. The July stats are simply a loud confirmation of what we knew all along - taxing yourself out of the fiscal overhang does not work! Never will!

Economics 05/08/2009: AIB Statement

AIB’s half-year report to June 30:

• a loss for the period €786 million;
• impaired loans at 8.1% of total loans;
• criticised/troubled loans were at 25% of total gross loans (or in other words, counting the roll overs of the past, AIB is not pushing for ACC Bank levels of stress, which should really make a day for the jokers of the CBFSAI who, as retired Mr Hurley would say ‘rigorously stress tested the bank’);
• bad debt charge of €2.4bn, 3.58% of average customer loans, of which ROI loss was €1.5bn and operating profit was down 33%;
• the bank said it expects customer loan demand to remain weak and deposits hard to get;
• AIB said the establishment of Irish "bad bank" NAMA will be a material event that will influence the future outlook for the bank;
• Costs are 7% lower, and so is income, cost income ratio down from 49.2% to 48.3% (37.5% headline) – an idiocy for a bank operating in the severely contracted growth environment that can only be explained by a side-room deal with the government not to lay off workers in exchange for recapitalisation injections

Now to my favorite – the denial of the obvious. A year ago almost to date, I recall AIB’s Eugene ‘Can’t See Anything Wrong With Me Self’ Sheehy said that Ireland does not have a problem with mortgages arrears. Oh, yes, he did.

So crunching through the report data, table above shows changes in impairments across the book. Home mortgages are recording a pretty hefty rise in arrears. And the table below shows just how severe is the problem in ROI.

Note the increase in the relative importance of defaulting mortgages in Ireland in qoq terms – from 66.26% of the total impaired mortgages pool to 80.2%!

And for overall stressed and impaired loans:

Department of Finance I: We love Ourselves and our Bosses

So Department of Finance has released its Capacity Review, 2009 a 61-page long document that is a gem of obtuse, double-speak bureaucratise, can't-get-my-head-out-of-that-rare-end-of... language that only a human pickled for decades in some sort of a secret Soviet Preservative can produce. It is, as I said, a gem and it is available here.

First, the off-the-starting-line analysis - the fact that this document was actually published is not a testament to the Department's 'openness' or 'transparency', but to the arrogance of its managers, who think that its contents actually present some sort of a strategy blueprint for the future and a fair assessment of its capabilities as of today.

Now, to the details (italics are mine):

Page 4 of the Executive Summary reads "The outcome of the consultation process and the discussions of the steering group for the review highlight 5 key messages which should shape and guide the future development of the Department’s role and capability. These 5 messages are:

1. The Department must continue to rise to the new challenges it faces, not because it is not
already doing a lot of things well, but in view of the combined impact of the internal and external
challenges set out in Chapter 5. [So, things are fine folks, we are just going to be doing what we've been doing to date. No need to stare. Oh, and by the way - the Department is clearly aiming to rise to the challenges, which should really be the same as in 'should be doing it's job', but hey - that would be too prosaic for warranting a Capacity Review...]

2. The Department must take a stronger outcomes-focused leadership role within the public service. This means taking a lead role and exercising central co-ordination and oversight in a more proactive and direct way in future. However, this must NOT mean micro-management or an over emphasis on process management. [Hold on, who appointed the DofF to the function of leadership within the Public Service?]

3. The quality of the Department's staff and a culture of excellence in performance are integral to meeting the challenges; these must be supported and enhanced through significant organisational and cultural change. [And that change would be?.. Oh, sorry - that would be a matter for another Strategic Review, then...]

4. Resources need to be continually deployed to match emerging priorities as has recently arisen in the financial services area. This includes the identification of functions the Department should not be performing or should be doing in different ways; and [Yes, you read it right - the DofF will be identifying itself those functions it should not be performing... Like a sovereign Legislature of sorts, not a Civil Service department (reporting to the elected Government)...]

5. Delegation and accountability must travel hand in hand, internally and externally. This should
allow for necessary streamlining of management grades. [This amazing - delegation and accountability normally start with the ability to hold the job, then with promotion - at least in the private sector. But in DofF - both are all about the management grades... This is our public sector culture at its worst].

And now to Staretegic Recommendations (note the word - recommendations):

Recommendation 1: Take a pro-active role in the modernisation of the Public Service
...In partnership with the Department of the Taoiseach, implementation of the Government Decision in relation to the Task Force on the Public Service must be a key task of the Department of Finance. [It is a real testimony to the arrogant, self-serving nature of the Public Sector in this country that DofF needs a statement of the bleeting obvious - it is required to implement the Government Decision, without questioning it, and without an external Capacity Review... They are being paid to do their job, they are not being recommended to do it!]

Recommendation 2: Lead e-Government
This recommendation complements (1) – progress in this area is crucial to the delivery not only of Public Service Reform and Modernisation and [sic] but also to development of the economy and society overall. [Without the DofF efforts on e-Goverment, it is clear that the entire humanity will suffer irreversible damages... This is from a Department that cannot produce a simple excel format for its own expenditure and revenue statements, reliant on a pdf format that is so far into the Stone Age version, you can't read it as a table into any spreadsheet...]

Recommendation 3: Take a more pro-active role in co-ordinating the State’s response to all spending proposals emerging from Social Partnership and any negotiations which ensue [The real masters of this country - the Social Partners... that routinely bite the dust on disagreements with the Trade Unions only to be resurrected like Phoenix from ashes to arrive at another carving up of the taxpayers' wealth pie between various cronyist interests... And this is a great benchmark of policymaking to pin your country's Fiscal and Financial Stability on?]
Recommendation 4: Support the development of a modern and sustainable Pension System
The Department of the Finance must continue to work with other Government Departments to meet the key pensions policy challenge of ensuring self-sustainability over the long term in a situation where the task of financing increased spending demands on the pensions system will fall to a diminishing proportion of the population. [Here is an amazing statement - the DofF should be fully aware that Public Sector pensions are not sustainable and that they cannot be made self-sustainable, for in order to pay for them, some grades and employees will be required to contribute more than 100% of the own salaries to pension funds.]

Recommendation 5: Ensure the maintenance of financial stability, the repair and long-term viability of the banking system and the reform of financial regulation [This does not refer directly to NAMA, but it talks about minimising the risk to the Exchequer. Incidentally, the word 'taxpayer' is not mentioned in the entire document even once. This is also an important recommendation from the point of view of human capital resources that DofF does not possess - discussed below]

Recommendation 6: Optimise Civil Service Training and Development [AKA, blabber]


(II) STRUCTURE

Recommendation 7: Develop a more flexible team based organisational structure [all about processes - not goals or objectives, but processes].

Recommendation 8: Streamline the Management Structure of the Department
The top management structure should be de-layered over time from the current sixteen positions at Assistant Secretary level and higher. This will involve both a greater degree of direct responsibility for the two top posts and a greater delegation of responsibility to the next management layers (Assistant Secretaries/Directors). [Notice, over time... indeterminate and ultimately not goal-posted - a train to nowhere].

Recommendation 9: Streamline requests for returns from other Departments and Offices
The Department of Finance should take further steps to eliminate duplicate requests for returns and statistics from Departments by increasing internal coordination and the management of such information. ICT has a crucial role in this area. [The fact that DofF employs no statisticians, and that its own staff ability to process and manage data in modern ways (see my comment on its disclosure documents format) is legendary for being poor, I guess 'streamlining' is really a secondary problem - getting basics right would be a much higher priority].
Recommendation 10: Develop HRM function; reorganise Corporate Services Division
[Yeah, folks, they have no HRM and CSD is their word for Services to DofF employees - in case you though it is about services provision for private sector...]

I skip 11 - too much Orwelian speak for a human being to wade through...
Recommendation 12: Increase delegation of work and accountability at all levels to allow for a more balanced structure and the development of staff at all levels The organisational re-design ...must be underpinned by fundamental changes in the approach to delegation of work and accountability for decision-making in the Department not only to remove the requirement for senior management to be occupied by day-to-day operational and routine decision-making and
allow more time to be directed at high-level strategic issues and planning but also to develop and provide opportunities for staff. The HRM function recommended at 10 above should support this by facilitating Divisions to build capacity at all levels. [I would have thought that this is about accountability for getting things wrong, but oh, no - we can't have that in our public sector. It is about who is accountable for making sure the loo has TP in it in ample supply - a Principal Officer or a Director?]

Recommendation 13: Enhance communications
The Department should further develop both its internal and external communications to reinforce roles and responsibilities and to optimise the flow of information to and from Departments, staff and external customers [This is like telling a elephant to be more graceful in polka dancing].

Recommendation 14: Enhance and support Mobility Policy
[No - not mobility of key specialists from the private sector to the desperately under-skilled 9more on this below) DofF - mobility of its own staff, lest they become bored of their menial tasks before Recommendation 12 takes hold at that TP-in-the-loo supply function junction].

Recommendation 15: Access to Specialist Skills
The Department should consider designating a greater range of posts for the redevelopment of specialist skills within the specialist areas of ICT, economic, accounting/actuarial and HR disciplines [Yeah, right... finally they are admitting they have no expertise in economics, accounting and actuarial sciences... but more on this below]
Recommendation 16: Pro-active staff-development
...a specific commitment to on-the-job training and mentoring of staff, including those who are newly recruited, promoted or assigned. Performance issues must be addressed and remedied at the earliest possible stage. [You mean there is no performance assessment in place already? There are no adequate remedy strategies in place? Newly recruited staff is not encountering a commitment to on-the-job training? How long has DofF been in operation? Months? Weeks? Days?]


Before we move on to the beefier parts of the Review, here are some facts:

• 70% (table 4.4) of DofF employees thought they were doing a good job, even though they were concerned with losing institutional memory and lacked the skills to do core work. Preciously incongruous!
• (table 3.1) shows that DofF has more chiefs per employee count than the rest of the core Civil Service - they all are Chiefs, because the taxpayers are their Indians...
• Assistant Principals' grade - the core of the DofF - per page 28 upwards of 10% appear to have no degree level educational attainment and less than half have MA or MSc or MBS qualifications.
  
• Principal officer level only 20% seem to have any qualifications in economics, and there are only 4 degree holders in banking or banking and finance or finance or accounting;
  
• Administrative Officer level 23% have “single” degrees in economics and 28% “joint”. There appears to be nobody with MSc-level qualifications in accounting/finance, actuarial studies or statistics.
  
• There are no qualified PhDs, or Doctoral level graduates of any kind mentioned in the document.
• There are no CFA, QPA, CPA, no certified professionals mentioned at all.
  

Yeah, right... so let us take out the Degrees in Underwater Basket Weaving:
MSc in Economic Policy Analysis - a joke that wouldn't get you employed in a small regional bank as a bank teller in a proper country... -2
MSc in HRM - well, they've admitted this function is not working anyhow so -5
Industrial relations - since Social Partners are all about that, cut this out too as a non-core thing for DofF -1
MSc in Others (apparently from Rosswell or Plant Mars) -2
MSc in Public Management / Public Administration / Public Service Studies - you can get that one by literally going to work in the public sector and doing not much else -12
Training and Education - what is this? a secondary school? -2

So total number of MSc holders = max 84 relevant/remotely relevant to the job... not exactly an overly-educated (but certainly a well paid) bunch... that is supposed to lead the Public Sector in reforms and blah-blah-blah in the age of knowledge economy...

End Part 1