Oh, and just in case you might think there are real calculations used anywhere later in the paper in relation to this table, don't be fooled - the entire computational burden here is that of adding percentages! Too bad they never attached a detailed breakdown of their costs that went to cover this glossy production...
Sunday, April 25, 2010
Economics 25/04/2010: Forfas' mathematical modeling powers
Name and shame, folks. The table below is reproduced from Forfas' "Profile of employment and unemployment" publication from February 2010. The research paper itself is not really worth covering in any depth, as it contains broadly speaking nothing new. But the table below is worth one's attention. Irony has, it is sourced as "CSO Quarterly National Household Survey, Forfás calculations". One can really see the quality of 'calculations' deployed from the sophisticated mathematical Scribbling Model developed by the 3-year olds in a Montessori University and adopted by Forfas research staff. Superb!
Oh, and just in case you might think there are real calculations used anywhere later in the paper in relation to this table, don't be fooled - the entire computational burden here is that of adding percentages! Too bad they never attached a detailed breakdown of their costs that went to cover this glossy production...
Oh, and just in case you might think there are real calculations used anywhere later in the paper in relation to this table, don't be fooled - the entire computational burden here is that of adding percentages! Too bad they never attached a detailed breakdown of their costs that went to cover this glossy production...
Saturday, April 24, 2010
Economics 24/04/2010: Greece and Ireland
The unedited version of my op-ed in today's Irish Independent (link here)
“It’s been a brilliant day,” said a friend of mine who manages a large investment fund, as we sat down for a lunch in a leafy suburb of Dublin. “We’ve been exiting Greece’s credit default swaps all morning long.” Having spent a couple of months strategically buying default insurance on Greek bonds, known as CDS contracts, his fund booked extraordinary profits.
This wasn’t luck. Instead, he took an informed bet against Greece, and won. You see, in finance, as in life, that which can’t go on, usually doesn’t: last morning, around 9 am Greek Government has finally thrown in the towel and called in the IMF.
As a precursor to this extraordinary collapse of one of the eurozone’s members, Greece has spent the last ten years amassing a gargantuan pile of public debt. Ever since 1988, successive Greek governments paid for their domestic investment and spending out of borrowed cash. Just as Ireland, over the last 22 years, Greece has never managed to achieve a single year when its Government structural balance – the long-term measure of public finances sustainability – were in the black.
Finally, having engaged in a series of cover-ups designed to conceal the true extent of the problem, the Greek economy has reached the point of insolvency. As of today, Greece is borrowing some 13.6% of its domestic output to pay for day-to-day running of the state. The country debt levels are now in excess of 115%. Despite the promise from Brussels that the EU will stand by Greece, last night Greek bonds were trading at the levels above those of Kenya and Colombia.
Hence, no one was surprised when on Friday morning the country asked the IMF and the EU to provide it with a loan to the tune of €45 billion. This news is not good for the Irish taxpayers.
Firstly, despite the EU/IMF rescue funds, Greece, and with it the Euro zone, is not out of the woods. The entire package of €45 billion, promised to Greece earlier this month is not enough to alleviate longer term pressures on its Government. Absent a miracle, the country will need at least €80-90 billion in assisted financing in 2010-2012.
The IMF cannot provide more than €15 billion that it already pledged, since IMF funds are restricted by the balances held by Greece with the Fund. The EU is unlikely to underwrite any additional money, as over 70% of German voters are now opposing bailing out Greece in the first instance.
All of which means the financial markets are unlikely to ease their pressure on Greece and its second sickest Euroarea cousin, Portugal. Guess who’s the third one in line?
Ireland’s General Government deficit for 2009, as revised this week by the Eurostat, stands at 14.3% - above that of Greece and well above that of Portugal. More worryingly, Eurostat revision opened the door for the 2010 planned banks recapitalizations to be counted as deficit. If this comes to pass, our official deficit will be over 14% of GDP this year, again.
All of this means we can expect the cost of our borrowing to go up dramatically. Given that the Irish Government is engaging in an extreme degree of deficit financing, Irish taxpayers can end up paying billions more annually in additional interest charges. Adding up the total expected deficits between today and 2014, the taxpayers can end up owing an extra €1.14 billion in higher interest payments on our deficits. Adding the increased costs of Nama bonds pushes this figure to over €2.5 billion. Three years worth of income tax levies imposed by the Government in the Supplementary Budget 2009 will go up in smoke.
Second, the worst case scenario – the collapse of the Eurozone still looms large despite the Greeks request for IMF assistance. In this case, Irish economy is likely to suffer an irreparable damage. Restoration of the Irish punt would see us either wiping out our exports or burying our private economy under an even greater mountain of debt, depending on which currency valuation path we take. Either way, without having control over our exit from the euro, we will find ourselves between the rock and the hard place.
Third, regardless of whatever happens with Greece in the next few months, Irish taxpayers can kiss goodby the €500 million our Government committed to the EU rescue fund for Greece. Forget the insanity of Ireland borrowing these funds at ca 4.6% to lend to Greece at ‘close to 5%’. With bonds issuance fees, the prospect of rising interest rates and the effect this borrowing has on our deficit, the deal signed by Brian Cowen on March 26th was never expected to break even for the taxpayers. In reality, the likelihood of Greece repaying back this cash is virtually nil.
Which brings us back to our own problems. What Greek saga has clearly demonstrated is that no matter how severe the crisis might get, one cannot count on the EU’s Rich Auntie Germany to race to our rescue. We have to get our own house in order. Unions – take notice – more deficit financing risks making Ireland a client of the IMF, because in finance, as in life, what can’t go on, usually doesn’t.
“It’s been a brilliant day,” said a friend of mine who manages a large investment fund, as we sat down for a lunch in a leafy suburb of Dublin. “We’ve been exiting Greece’s credit default swaps all morning long.” Having spent a couple of months strategically buying default insurance on Greek bonds, known as CDS contracts, his fund booked extraordinary profits.
This wasn’t luck. Instead, he took an informed bet against Greece, and won. You see, in finance, as in life, that which can’t go on, usually doesn’t: last morning, around 9 am Greek Government has finally thrown in the towel and called in the IMF.
As a precursor to this extraordinary collapse of one of the eurozone’s members, Greece has spent the last ten years amassing a gargantuan pile of public debt. Ever since 1988, successive Greek governments paid for their domestic investment and spending out of borrowed cash. Just as Ireland, over the last 22 years, Greece has never managed to achieve a single year when its Government structural balance – the long-term measure of public finances sustainability – were in the black.
Finally, having engaged in a series of cover-ups designed to conceal the true extent of the problem, the Greek economy has reached the point of insolvency. As of today, Greece is borrowing some 13.6% of its domestic output to pay for day-to-day running of the state. The country debt levels are now in excess of 115%. Despite the promise from Brussels that the EU will stand by Greece, last night Greek bonds were trading at the levels above those of Kenya and Colombia.
Hence, no one was surprised when on Friday morning the country asked the IMF and the EU to provide it with a loan to the tune of €45 billion. This news is not good for the Irish taxpayers.
Firstly, despite the EU/IMF rescue funds, Greece, and with it the Euro zone, is not out of the woods. The entire package of €45 billion, promised to Greece earlier this month is not enough to alleviate longer term pressures on its Government. Absent a miracle, the country will need at least €80-90 billion in assisted financing in 2010-2012.
The IMF cannot provide more than €15 billion that it already pledged, since IMF funds are restricted by the balances held by Greece with the Fund. The EU is unlikely to underwrite any additional money, as over 70% of German voters are now opposing bailing out Greece in the first instance.
All of which means the financial markets are unlikely to ease their pressure on Greece and its second sickest Euroarea cousin, Portugal. Guess who’s the third one in line?
Ireland’s General Government deficit for 2009, as revised this week by the Eurostat, stands at 14.3% - above that of Greece and well above that of Portugal. More worryingly, Eurostat revision opened the door for the 2010 planned banks recapitalizations to be counted as deficit. If this comes to pass, our official deficit will be over 14% of GDP this year, again.
All of this means we can expect the cost of our borrowing to go up dramatically. Given that the Irish Government is engaging in an extreme degree of deficit financing, Irish taxpayers can end up paying billions more annually in additional interest charges. Adding up the total expected deficits between today and 2014, the taxpayers can end up owing an extra €1.14 billion in higher interest payments on our deficits. Adding the increased costs of Nama bonds pushes this figure to over €2.5 billion. Three years worth of income tax levies imposed by the Government in the Supplementary Budget 2009 will go up in smoke.
Second, the worst case scenario – the collapse of the Eurozone still looms large despite the Greeks request for IMF assistance. In this case, Irish economy is likely to suffer an irreparable damage. Restoration of the Irish punt would see us either wiping out our exports or burying our private economy under an even greater mountain of debt, depending on which currency valuation path we take. Either way, without having control over our exit from the euro, we will find ourselves between the rock and the hard place.
Third, regardless of whatever happens with Greece in the next few months, Irish taxpayers can kiss goodby the €500 million our Government committed to the EU rescue fund for Greece. Forget the insanity of Ireland borrowing these funds at ca 4.6% to lend to Greece at ‘close to 5%’. With bonds issuance fees, the prospect of rising interest rates and the effect this borrowing has on our deficit, the deal signed by Brian Cowen on March 26th was never expected to break even for the taxpayers. In reality, the likelihood of Greece repaying back this cash is virtually nil.
Which brings us back to our own problems. What Greek saga has clearly demonstrated is that no matter how severe the crisis might get, one cannot count on the EU’s Rich Auntie Germany to race to our rescue. We have to get our own house in order. Unions – take notice – more deficit financing risks making Ireland a client of the IMF, because in finance, as in life, what can’t go on, usually doesn’t.
Friday, April 23, 2010
Economics 23/04/2010: As Greece crashes, Finns are talking gibberish
“
So far, so good.
Per FT, “his comments came amid the most serious crisis in the euro’s 11-year history, with
Oops! Did he really say that? At 117% of GDP at the end of 2009, and pushing toward 130% by the end of this year, Greek debt is ‘REALLY BIG’, folks. This is precisely why Greek bonds are trading now at the yields close to those of junk-rated Pakistan!
Mr Vanhanen “insisted the crisis must not be allowed to disrupt plans by
So hold on, Mr Vanhanen. You say that these countries are undertaking reforms only in order to comply with the euro entry rules, not because these are the right things to do? What hope do we, the Eurozone taxpayers, have that once admitted into the club these countries will not turn Greek? None, certainly, judging by Mr Vanhanen remark.
My humble advice – if you are a politician with no expertise in economics or finance, don’t give interviews.
Economics 23/04/2010: Further details on Irish deficit numbers
More detailed analysis from the Eurostat on reclassification of the Irish deficit is available now. The link to the document is here. Go into Ireland file, spreadsheet for 2009.
Here is what is now apparent from the Eurostat analysis (italics are mine):
"In normal circumstances, under the National Pensions Reserve Fund Act, an amount equivalent to 1% of GNP (about €1.5bn) is paid by the Exchequer into the NPRF every year, in 12 equal monthly instalments. In May 2009, the total due to be paid under this arrangement for the remainder of 2009 and 2010 was paid in one tranche, in order to allow NPRF to fund the bank equity purchase entirely from liquid assets. (The actual 'extra' amount paid at this time was some €2.5bn, given the amount already paid or due to be paid under the normal Exchequer- NPRF funding arrangement.) The impact on Government D4_pay in 2009 is therefore the cost of borrowing this extra €2.5bn earlier than it would otherwise have to have been borrowed..."
In other words:
Here is what is now apparent from the Eurostat analysis (italics are mine):
"In normal circumstances, under the National Pensions Reserve Fund Act, an amount equivalent to 1% of GNP (about €1.5bn) is paid by the Exchequer into the NPRF every year, in 12 equal monthly instalments. In May 2009, the total due to be paid under this arrangement for the remainder of 2009 and 2010 was paid in one tranche, in order to allow NPRF to fund the bank equity purchase entirely from liquid assets. (The actual 'extra' amount paid at this time was some €2.5bn, given the amount already paid or due to be paid under the normal Exchequer- NPRF funding arrangement.) The impact on Government D4_pay in 2009 is therefore the cost of borrowing this extra €2.5bn earlier than it would otherwise have to have been borrowed..."
In other words:
- The Government has by-passed voted-in Budgetary procedures to inject €2.5 billion in additional funding into Anglo by front-loading future NPRF funds into 2009 provision. There was no Dail vote on this.
- The Government pretended that the additional 2010 funds injected were not borrowed for under General Government Balance, thereby de facto claiming a right to transfer future expected receipts into 'liquid' current receipts. There was never any Dail vote to allow for this, as far as I know.
- This is not the only time that the Government exceeded its remit in by-passing the Dail vote in relation to recapitalizations. One can argue that the entire Anglo recapitalization was planned and committed in advance of the Dail vote on the issue.
"7. Special purpose entities included here are those where government has a significant role, including a guarantee, but which are classified outside the general government sector (see the Eurostat Decision and accompanying guidance note for details). Their liabilities are recorded outside the general government sector (as contingent liabilities of general government)."
Per table 2 in the same spreadsheet, the above does not cover the Guarantees which amount to over €281 billion in 2009 (line 5). And in fact, these refer to Nama. Now, notice that 'imputations relating to the financing costs should be included' in line 4, which does count as a full General Government liability. Guess where the euribor cost of Nama bonds should be entered? Thus, Irish deficit might also include the 1.25%-odd payments to the banks from Nama bonds, or, assuming €35 billion issuance of these bonds - €437.5 million in additional deficit not accounted for in the Budget 2010.
Now, recall that in 2007 euribor has reached well over 4%. Suppose we go to a 3-3.5% euribor pricing on Nama bonds, rolled over annually. In subsequent years, if Eurostat retains this classification of liabilities, up to €1,225 million will be added to our deficits courtesy of Nama.
Per table 2 in the same spreadsheet, the above does not cover the Guarantees which amount to over €281 billion in 2009 (line 5). And in fact, these refer to Nama. Now, notice that 'imputations relating to the financing costs should be included' in line 4, which does count as a full General Government liability. Guess where the euribor cost of Nama bonds should be entered? Thus, Irish deficit might also include the 1.25%-odd payments to the banks from Nama bonds, or, assuming €35 billion issuance of these bonds - €437.5 million in additional deficit not accounted for in the Budget 2010.
Now, recall that in 2007 euribor has reached well over 4%. Suppose we go to a 3-3.5% euribor pricing on Nama bonds, rolled over annually. In subsequent years, if Eurostat retains this classification of liabilities, up to €1,225 million will be added to our deficits courtesy of Nama.
Thursday, April 22, 2010
Economics 22/04/2010: Ireland's deficit tops Greece
Updated below
Breaking news: Eurostat just revised Irish General Government Deficit figures from 11.7% officially reported in Budget 2010 to a whooping 14.3%, raising our deficit above revised Greek figure. Here is the link to the note.
Excerpt: "Ireland had its budget deficit revised even more [than Greece] -- to 14.3 percent from the initially reported 11.7 percent. Irish Finance Minister Brian Lenihan said this was a result of a technical reclassification associated with government support provided to the banking sector. "It is important to note that the underlying 2009 general government deficit for Ireland is 11.8 percent of GDP, which is broadly similar to that projected in December's budget," he said. "There is no additional borrowing associated with this technical reclassification. This is a once-off impact, and will not affect the government's stated budgetary aim of reducing the deficit to below 3 percent of GDP by 2014," Lenihan said."
That would be putting a brave face on what now amounts to the most deficit-ridden country in the EU!
One question remains to be answered - given that all 2009 recapitalization funds for banking sector came from NPRF, what 'technical reclassification' yielded this massive upward revision?
Update: There has been a lot of talk in the blogosphere about the 'silver lining' to today's news. In particular, one argument is making rounds that goes as follows: "Since our deficit has increased for 2009 to 14.3%, then the reduction to 10.6% envisioned in the Budget 2010 will be even more impressive to the markets".
Here is why this argument is fallacious:
Breaking news: Eurostat just revised Irish General Government Deficit figures from 11.7% officially reported in Budget 2010 to a whooping 14.3%, raising our deficit above revised Greek figure. Here is the link to the note.
Excerpt: "Ireland had its budget deficit revised even more [than Greece] -- to 14.3 percent from the initially reported 11.7 percent. Irish Finance Minister Brian Lenihan said this was a result of a technical reclassification associated with government support provided to the banking sector. "It is important to note that the underlying 2009 general government deficit for Ireland is 11.8 percent of GDP, which is broadly similar to that projected in December's budget," he said. "There is no additional borrowing associated with this technical reclassification. This is a once-off impact, and will not affect the government's stated budgetary aim of reducing the deficit to below 3 percent of GDP by 2014," Lenihan said."
That would be putting a brave face on what now amounts to the most deficit-ridden country in the EU!
One question remains to be answered - given that all 2009 recapitalization funds for banking sector came from NPRF, what 'technical reclassification' yielded this massive upward revision?
Update: There has been a lot of talk in the blogosphere about the 'silver lining' to today's news. In particular, one argument is making rounds that goes as follows: "Since our deficit has increased for 2009 to 14.3%, then the reduction to 10.6% envisioned in the Budget 2010 will be even more impressive to the markets".
Here is why this argument is fallacious:
- Today's revision of deficit for 2009 represents a reflection by Eurostat that cash injected into the Anglo Irish Bank by the state was borrowed via general spending fund in the open markets and as the result constitutes deficit financing. If so, where do you think this year's banks recapitalization will come from? Uncle Sam? or may be Angela Merkel? These recapitalizations are not, repeat not factored in the Government Budgetary projections per Budget 2010. The Eurostat rulling means that should the Government borrow the €10-12 billion to recapitalize the banks in the markets this year, this too will be reflected in our deficit. Now do the math - Government budget allows for €18.7 billion in General Government Deficit or 11.6% of GDP in 2010. If we add to this the lower bound of recapitalization estimates, our deficit rises to over €28 billion or a whooping 17.4% of GDP. Even if the Government wrestles out of the NPRF more cash to plug the banks balancesheet black hole, and assuming that our borrowing for banks purposes goes up by just half of the announced requirement, our Gen Gov Deficit will reach 14.7% of GDP. At which point we can all shout 'Eat our shorts, Greece!' once again.
- Today's revision clearly shows that the Government has been caught red-handed in attempting to avoid labeling our true General Government liabilities as such. This is about as reputation-destroying as Greece's use of financial derivatives in the past.
- An argument of a 'silver lining' assumes that as a one-off increase, this deficit revision does not matter going forward. This, in effect, is equivalent to saying that no cyclical deficit matters, no matter how big it is. Of course, such an argument is absolutely devoid of any anchoring in finance or economics. Cyclical deficits add up to total deficits. Total deficits - cyclical or not - add up to the total debt. This is exactly how Greece got itself into the bin!
Wednesday, April 21, 2010
Economics 21/04/2010: De-capitalizing Credit Unions
Per latest leaks from the financial regulators: In order to allow credit unions greater flexibility in re-scheduling loans, Section 35 of the Credit Union Act 1997 is amended to increase the proportion of the loan book of individual credit unions comprising loans of greater than five years duration, subject to appropriate liquidity provision and accounting transparency.
This, in effect, is the plan for de-shoring up capital reserves at the Credit Unions, which so far have the lowest level of financial transparency in operations amongst all financial institutions licensed to conduct retail business in the country. Whatever hides underneath that iceberg, one can only wonder. However, it is now clear that our regulators are concerned with the unions' ability to re-negotiate non-performing loans and to, thereby, avoid calling in loans on ordinary households.
Credit unions under this provision will be allowed to extend loans maturity, providing relief to the households who cannot repay their debts. However, unless householders' problems leading to delinquency on loans are temporary and short-term in nature, this measure will simply dig a deeper debt hole for already financially distressed families.
And the news have implications for the banks. Recall that in theory credit unions should have been the most conservative lenders in the nation. If they are now experiencing significant pressures on their consumer loans, what can be said about the banks who hold jumbo mortgages, top-up mortgages and car loans leveraged up to 6-8 times peak 2007 income?
How long can this charade last?
This, in effect, is the plan for de-shoring up capital reserves at the Credit Unions, which so far have the lowest level of financial transparency in operations amongst all financial institutions licensed to conduct retail business in the country. Whatever hides underneath that iceberg, one can only wonder. However, it is now clear that our regulators are concerned with the unions' ability to re-negotiate non-performing loans and to, thereby, avoid calling in loans on ordinary households.
Credit unions under this provision will be allowed to extend loans maturity, providing relief to the households who cannot repay their debts. However, unless householders' problems leading to delinquency on loans are temporary and short-term in nature, this measure will simply dig a deeper debt hole for already financially distressed families.
And the news have implications for the banks. Recall that in theory credit unions should have been the most conservative lenders in the nation. If they are now experiencing significant pressures on their consumer loans, what can be said about the banks who hold jumbo mortgages, top-up mortgages and car loans leveraged up to 6-8 times peak 2007 income?
How long can this charade last?
Monday, April 19, 2010
Economics 20/04/2010: IMF report on global financial stability
IMF's GFSR report for Q1 2010 is out today, and makes a fantastic, albeit technical reading of the global financial system health. Ireland features prominently.
First, Ireland, alongside with Austria, the Netherlands and Belgium are the four leading countries responsible for contagion of markets shocks to the rest of the Euro area. Own fundamentals drove, per IMF team, Irish sovereign bond spreads more than those for any other country in the common currency area, dispelling the Government-propagated myth that our crisis was caused by the US and the global financial markets collapse. Chart below - from the report - illustrates:
Between October 2008 and March 2009, Ireland's contribution to cross-Euro contagion was 12.3% of the total Euro area distress probability - second highest after Austria (16.7%). For the period of October 2009 - February 2010, the picture changed. Greece came in first in terms of distress contagion risk - at 21.4%, Portugal second with 18.0%. Ireland's role declined to 8.1% - placing us 6th in the list of the worst contagion risk countries. A positive achievement, beyond any doubt. But again, IMF attributes the entire probability of the risk of contagion from Ireland to the Euro zone down to domestic fundamentals, not external crisis conditions.
This progression has not been all that rosy for the sovereign bonds:
Notice that Ireland's term structure of CDS rates has barely changed in Q4 2009-Q1 2010. Why is that so? Despite the Budget 2010 being unveiled in between, the markets still perceive the probability of Ireland defaulting on sovereign debt in 5 years times relative to 1 year from now as pretty much unchanged. This would suggest that the markets do not buy into the Government promise to deliver a significantly (dramatically and radically) improved debt and deficit positions by 2015! In other words, the Budget 2010 has not swayed the markets away from their previous position, leaving Ireland CDS's term structure curve much less improved than that of the other PIIGS.
Here is another nice piece of evidence. Guess who's been hoovering up ECB lending?
And if you want to see just why Irish banks will be raising mortgage rates regardless of what ECB is doing, look no further than this:
The chart above, of course, covers 2008 - the year when Anglo posted spectacular results and AIB raised dividend. Imagine what this would look like if we are to update the figure to today. Also notice that in terms of return on equity, Irish banks were doing just fine with low margins back in 2008 and before. The reason for this is that our lending model allowed for that anomaly: banks were literally sucking out tens of billions of Euro area cheap interbank loans and hosing down a tiny economy with cash. As long as the boom went on, it didn't matter whether the bankers actually had any idea why and to whom they were lending. Now, the tide has gone out, and guess who's been swimming naked?
Interesting note on the equity markets. looking at historic P/E ratios, the IMF staff concludes that back in February 2010 "For advanced economies, equity valuations are within historical norms". Except for Ireland, which deserves its own note: "Forward-looking price-to-earnings ratios of Ireland appear elevated due largely to sharp downward revisions in earnings projections."
So, read this carefully: Irish stocks were overvalued - based on forecast forward P/Es - back in the time of the paper preparation. Using z-scores (deviation of the latest measure from either the historical average or the forward forecast based on IMF model) for Irish equities are: +2.1 for shorter horizon (a simplified 96% chance of a downward correction) and +0.9 for longer term forecasts (roughly 63% chance of downward adjustment). In other words, the market is overpriced both in the short term and in the long run. Worse than that, we have the highest short and long term horizon over pricing in the world!
In housing markets, our price/rent ratio z-score is +1.1 (74% probability of deterioration), which means we are somewhat close to the bottoming out but are not quite there. How big is the 'somewhat' the IMF wont tell, but it looks like we are still 1.1 standard deviations above the equilibrium price. Price to income ratio - the affordability metric is at +0.8 stdevs, so prices might still have to fall further to catch up with fallen incomes (57% probability).
First, Ireland, alongside with Austria, the Netherlands and Belgium are the four leading countries responsible for contagion of markets shocks to the rest of the Euro area. Own fundamentals drove, per IMF team, Irish sovereign bond spreads more than those for any other country in the common currency area, dispelling the Government-propagated myth that our crisis was caused by the US and the global financial markets collapse. Chart below - from the report - illustrates:
Between October 2008 and March 2009, Ireland's contribution to cross-Euro contagion was 12.3% of the total Euro area distress probability - second highest after Austria (16.7%). For the period of October 2009 - February 2010, the picture changed. Greece came in first in terms of distress contagion risk - at 21.4%, Portugal second with 18.0%. Ireland's role declined to 8.1% - placing us 6th in the list of the worst contagion risk countries. A positive achievement, beyond any doubt. But again, IMF attributes the entire probability of the risk of contagion from Ireland to the Euro zone down to domestic fundamentals, not external crisis conditions.This progression has not been all that rosy for the sovereign bonds:
Notice that Ireland's term structure of CDS rates has barely changed in Q4 2009-Q1 2010. Why is that so? Despite the Budget 2010 being unveiled in between, the markets still perceive the probability of Ireland defaulting on sovereign debt in 5 years times relative to 1 year from now as pretty much unchanged. This would suggest that the markets do not buy into the Government promise to deliver a significantly (dramatically and radically) improved debt and deficit positions by 2015! In other words, the Budget 2010 has not swayed the markets away from their previous position, leaving Ireland CDS's term structure curve much less improved than that of the other PIIGS.Here is another nice piece of evidence. Guess who's been hoovering up ECB lending?
And if you want to see just why Irish banks will be raising mortgage rates regardless of what ECB is doing, look no further than this:
The chart above, of course, covers 2008 - the year when Anglo posted spectacular results and AIB raised dividend. Imagine what this would look like if we are to update the figure to today. Also notice that in terms of return on equity, Irish banks were doing just fine with low margins back in 2008 and before. The reason for this is that our lending model allowed for that anomaly: banks were literally sucking out tens of billions of Euro area cheap interbank loans and hosing down a tiny economy with cash. As long as the boom went on, it didn't matter whether the bankers actually had any idea why and to whom they were lending. Now, the tide has gone out, and guess who's been swimming naked?Interesting note on the equity markets. looking at historic P/E ratios, the IMF staff concludes that back in February 2010 "For advanced economies, equity valuations are within historical norms". Except for Ireland, which deserves its own note: "Forward-looking price-to-earnings ratios of Ireland appear elevated due largely to sharp downward revisions in earnings projections."
So, read this carefully: Irish stocks were overvalued - based on forecast forward P/Es - back in the time of the paper preparation. Using z-scores (deviation of the latest measure from either the historical average or the forward forecast based on IMF model) for Irish equities are: +2.1 for shorter horizon (a simplified 96% chance of a downward correction) and +0.9 for longer term forecasts (roughly 63% chance of downward adjustment). In other words, the market is overpriced both in the short term and in the long run. Worse than that, we have the highest short and long term horizon over pricing in the world!
In housing markets, our price/rent ratio z-score is +1.1 (74% probability of deterioration), which means we are somewhat close to the bottoming out but are not quite there. How big is the 'somewhat' the IMF wont tell, but it looks like we are still 1.1 standard deviations above the equilibrium price. Price to income ratio - the affordability metric is at +0.8 stdevs, so prices might still have to fall further to catch up with fallen incomes (57% probability).
Economics 19/04/2010: INBS - Titanic hits the ocean floor...
INBS has reported a €2.49bn loss for FY 2009 on the loan book just under €11bn, with roughly €8.5bn of this attributable to development and investment in property markets. Provisions amounted to €2.8bn, so in other words, the Kingdom of Irish Local Finance has managed to pile up an impressive 25.5% impairment charge on the book that has already taken a hit in 2008. Between 2008 and 2009, INBS has managed to post impairments of 30%.
Actually, here is a better view: 96% of all losses are on commercial development books, which means INBS has been lending money to folks whose default rates are currently running at more than 33% yoy! These are recognized default rates, which conceal the fact that many of the INBS' loans (just as in the case of other banks) would really be deep in red, were they not re-negotiated and switched into 'interest holiday' loans back in 2008-2009. Now, remember the numbers released by Nama? 2/3rds of the loans not paying interest. Apply that to the INBS books - the expected impairment charge for 2010-2012 will be around €5.7bn. And that's only for the non-householders' loans...
The numbers are truly outstanding by all possible measures.
INBS's administration expenses rose to €46mln from €45mln in 2008, and the bank has managed to accumulate €7 million in professional fees as one-off expenses, presumably relating to the management efforts to shore up the hull of a sinking boat.
Per Irish Times report, CEO Gerry McGinn said the greatest management challenges were in relation to the commercial loan portfolio. "The society has manifestly been seriously under-resourced in many areas of its business activities and support functions, but most especially in commercial lending," he siad.
Under-resourced? As if throwing more cash at staff and consultants would have prevented them from issuing so absurdly poorly priced and analyzed loans?
At this stage, especially given Mr McGinn's denial of the reality (that the INBS is a burnt-out force with not a modicum of decorum to pretend that it can act as a functional lender) any more taxpayers cash directed to the INBS would be a pure and gratuitous waste!
Actually, here is a better view: 96% of all losses are on commercial development books, which means INBS has been lending money to folks whose default rates are currently running at more than 33% yoy! These are recognized default rates, which conceal the fact that many of the INBS' loans (just as in the case of other banks) would really be deep in red, were they not re-negotiated and switched into 'interest holiday' loans back in 2008-2009. Now, remember the numbers released by Nama? 2/3rds of the loans not paying interest. Apply that to the INBS books - the expected impairment charge for 2010-2012 will be around €5.7bn. And that's only for the non-householders' loans...
The numbers are truly outstanding by all possible measures.
INBS's administration expenses rose to €46mln from €45mln in 2008, and the bank has managed to accumulate €7 million in professional fees as one-off expenses, presumably relating to the management efforts to shore up the hull of a sinking boat.
Per Irish Times report, CEO Gerry McGinn said the greatest management challenges were in relation to the commercial loan portfolio. "The society has manifestly been seriously under-resourced in many areas of its business activities and support functions, but most especially in commercial lending," he siad.
Under-resourced? As if throwing more cash at staff and consultants would have prevented them from issuing so absurdly poorly priced and analyzed loans?
At this stage, especially given Mr McGinn's denial of the reality (that the INBS is a burnt-out force with not a modicum of decorum to pretend that it can act as a functional lender) any more taxpayers cash directed to the INBS would be a pure and gratuitous waste!
Friday, April 16, 2010
Economics 20/04/2010: Fas training for ex-Dell workers
Last week, media report (Silicon Republic, 16/04/10, 300 out of 1,900 former Dell workers received FAS training) provided some evidence that was supposed to show us just how effective Fas training systems can be.
"The Steering Committee responsible for advising on the implementation of the European Globalisation Adjustment Fund (EGF) for the 1,900 former Dell workers in Limerick has revealed that 300 have received FAS training so far... The committee ...is chaired by Oliver Egan, assistant director general in FAS. Another meeting is scheduled for towards the end of this month."
So hold on - so far, we know, there were meetings. And more meetings will happen.
"The Minister for Labour Affairs, Dara Calleary TD, commented: “There is a lot which has been done already and is being done with EGF support in the mid-west and which is perhaps only now starting to become visible”."
What is Minister on about here? (italics are mine): "In relation to concrete measures the Minister highlighted:
"I have committed to reviewing the overall programme in June to ensure that we are maximising the reach of the programme and to identify any additional or innovative measures that might be further considered,” Mr Calleary said. Really? So far, there are no indications that the review is going to be effective in assessing Fas' effectiveness in designing, administering and deploying these programmes.
"The Steering Committee responsible for advising on the implementation of the European Globalisation Adjustment Fund (EGF) for the 1,900 former Dell workers in Limerick has revealed that 300 have received FAS training so far... The committee ...is chaired by Oliver Egan, assistant director general in FAS. Another meeting is scheduled for towards the end of this month."
So hold on - so far, we know, there were meetings. And more meetings will happen.
"The Minister for Labour Affairs, Dara Calleary TD, commented: “There is a lot which has been done already and is being done with EGF support in the mid-west and which is perhaps only now starting to become visible”."
What is Minister on about here? (italics are mine): "In relation to concrete measures the Minister highlighted:
- The guidance service FAS provided to more than 1,900 former workers to date with some 300 persons receiving training in 2009 [note: this is a standard practice for large scale layoffs. How many of these 'graduates' actually found a job?]
- That in the first quarter of 2010, training and educational activity has increased with more than 200 EGF clients currently enrolled in evening classes, more than 250 EGF clients are registered with the Limerick City Adult Education Service [is that registration a pre-condition for some additional unemployment or other financial support?];
- That both Limerick Institute of Technology and University of Limerick have implemented a broad range of educational programmes for EGF clients [how many are enrolled? what types of programmes? what is the expected completion date?];
- That more than 150 clients having availed of EGF training support grant administered by FAS to date [so we have 1,900 workers laid off enrolled total, 300 completed Fas training, 150 are receiving a special subsidy, 100 more are 'registered'];
- That Fas runs a community-based initiative for more than 100 EGF clients [community-based initiatives rarely lead to gainful employment];
- That some 225 clients are registered with the City and County Enterprise Boards and are undertaking start-your-own-business programmes [Who administers these programmes? What are graduation rates and what are the success rates for new entrepreneurs?];
- The commencement of a dedicated EGF internship programme in partnership with the medical devices sector which will see more than 80 clients attending a series of workshops in April with successful candidates progressing into the full internship programme in June 2010 [This is perhaps the closest that Fas would ever come to giving these workers real hope of a gainful employment].
"I have committed to reviewing the overall programme in June to ensure that we are maximising the reach of the programme and to identify any additional or innovative measures that might be further considered,” Mr Calleary said. Really? So far, there are no indications that the review is going to be effective in assessing Fas' effectiveness in designing, administering and deploying these programmes.
Economics 16/04/2010: The incoming train II
It is a good feeling to be ahead of the curve, especially when the curve is drawn by the likes of FT. Per today's FT Deutschland report: the ECB is warning about a new crisis, a return of global imbalances in the coming years. In its monthly report the ECB warns: “At the current juncture, global imbalances continue to pose a key risk to global macroeconomic and financial stability . . . The stakes are high to prevent a disorderly adjustment in the future that would be costly to all economies.” Jurgen Stark is predicting that we have entered a new stage in the financial crisis – a sovereign debt crisis which means that “dealing with [the resulting severe macroeconomic imbalances] will represent one of the most daunting challenges for policymakers in modern history.”
My own take on the same topic was published here.
Another issue, also raised repeatedly on this blog, is discussed in Joachim Fels' (Morgan Stanley) piece on FT Alphaville (here). Fels makes a claim that countries with a high degree of inflation aversion (Germany) might have an incentive to quit. Fels suggests three warning points for the crisis to develop:
Greece asking for the pledged money won't do. If you think in terms of game theory, once that happens in earnest (and it might be today or over the weekend), Germany will face the following two options:
My own take on the same topic was published here.
Another issue, also raised repeatedly on this blog, is discussed in Joachim Fels' (Morgan Stanley) piece on FT Alphaville (here). Fels makes a claim that countries with a high degree of inflation aversion (Germany) might have an incentive to quit. Fels suggests three warning points for the crisis to develop:
- First, any signs of moral hazard emerging in the fiscal policies in the euro area
- Second, ECB failure to raise interest rates on time to cut inflationary pressures, and
- Third, the political pressure rising against the Euro in Germany.
Greece asking for the pledged money won't do. If you think in terms of game theory, once that happens in earnest (and it might be today or over the weekend), Germany will face the following two options:
- Grant request for assistance in full and thus pre-commit itself to the common currency at the sunken cost of an exit of ca 10-12 billion euro that it will commit to Greek deficits financing;
- Exit now, saving the aforementioned money, but destroying its political capital within the EU.
Thursday, April 15, 2010
Economics 15/04/2010: Greece problems back to the frontline
So, as I have predicted in the interview with BBC World Service (excerpt here), the markets have little faith in the Greeks and, indeed, in the EU’s ability to effectively underwrite Greek crisis.
Greek bond yields are now rising again on the investors’ view that German, French and Irish legislators might veto the deal. And in Germany there is a growing movement to challenge the Greek deal in a constitutional court, as being an illegal subsidy. The yield on Greek two-year bonds jumped 66bps yesterday reaching 6.99% and 5-year CDS rose 56bps to 436bps.
And FT’s Daniel Gros argues that the EU package is unlikely to solve anything, as the country needs about €30-50bn annually, depending on the future deficits path assumptions. Either way, 3-year package of up to €45bn won’t cut it. And the interest bill savings are also too thin – under the EU proposed deal, Greece will be facing an interest rate of ca 5%, which will provide the country with only €900mln in annual savings relative to market rates. Going lower to 4% - something opposed by Germany – will raise savings to ca €1,350 million per annum – still short of what is needed. Per Gros: the Greek problem is not one of liquidity but of insolvency.
And the IMF is severely constrained in what it can do in Greece by the fact that it can only lend 10-12 times the reserves position that Greece holds with IMF. And this means, at a maximum €15 billion.
So here we go – for all who thought the story is over, the most likely thing is that the actual story is just beginning.
Greek bond yields are now rising again on the investors’ view that German, French and Irish legislators might veto the deal. And in Germany there is a growing movement to challenge the Greek deal in a constitutional court, as being an illegal subsidy. The yield on Greek two-year bonds jumped 66bps yesterday reaching 6.99% and 5-year CDS rose 56bps to 436bps.
And FT’s Daniel Gros argues that the EU package is unlikely to solve anything, as the country needs about €30-50bn annually, depending on the future deficits path assumptions. Either way, 3-year package of up to €45bn won’t cut it. And the interest bill savings are also too thin – under the EU proposed deal, Greece will be facing an interest rate of ca 5%, which will provide the country with only €900mln in annual savings relative to market rates. Going lower to 4% - something opposed by Germany – will raise savings to ca €1,350 million per annum – still short of what is needed. Per Gros: the Greek problem is not one of liquidity but of insolvency.
And the IMF is severely constrained in what it can do in Greece by the fact that it can only lend 10-12 times the reserves position that Greece holds with IMF. And this means, at a maximum €15 billion.
So here we go – for all who thought the story is over, the most likely thing is that the actual story is just beginning.
Tuesday, April 13, 2010
Economics 13/04/2010: As bad as Northern Rock back in 2008?
So we have some more clarity on the state of our credit flows, courtesy of the latest monthly report from the Central Bank. And boy are we sick. At the height of the financial crisis, Northern Rock had 303% loans to deposits ratio. Ireland Inc? 269% absent risk adjustments on short-term deposits, and 323% once short term deposits risk of call-in is set at 10%.
Ouch! Irish financial system doesn’t resemble Quinn Insurance – it resembles Anglo!
Ouch! Irish financial system doesn’t resemble Quinn Insurance – it resembles Anglo!
Subscribe to:
Posts (Atom)
