Ireland, Spain and Portugal currently represent a major threat to the credibility of the euro, according to a number of observers, ranging from the FT to RBS. Not because of their public debts, but because of their deficits. Spanish and Portuguese deficits are expected to hit 11.4% and 9.2% respectively this year. Irish - anywhere between 11% and 18%, depending on how much of the banking liabilities will be covered by the Government. These levels are more than double Italy's deficits and almost double those of the Eurozone as a whole.
Moody’s are now talking about downgrading Portugal and Greece to junk status.
If you look at the countries that are really getting it right - Ireland is not at the races. So far we have seen largely cosmetic reductions in the deficit. As of April 2010 results, the deficit is down 4.86% year on year and up 86% still on the same period of 2008. Worse than that - most of this undramatic cut between 2009 and 2010 was achieved by reducing capital spending. Which means the cuts are not structural and we are rapidly running out of room for any future improvements.
I wrote yesterday about Bulgaria (with 1/4 the size of Irish deficit levels) slashing its public spending by 20% and hitting hard pensions and wages in the public sector (here). I forgot to mention Latvia - assisted by the IMF loan back in 2009 (USD10 billion) - cut public sector jobs by 20% and the remaining public servants took a minimum of 25% pay cut.
Replicating these cuts in Ireland, however, would only be a beginning of the process of restoring public purse to health - we need to shave off 39.5% of our ongoing spending (as of April 2010) figures to bring our finances into balance. The cuts will have to add up to 36% in order to get us down to the Growth & Stability Pact level of acceptable deficit.
At this stage, with Croke Park deal done, and with economy unable to pay much more in added taxes, and the banks still begging for money, the Government has simply run out of any options.
Wednesday, May 12, 2010
Tuesday, May 11, 2010
Economics 11/05/2010: Exchequer figures - no real relief in sight
You have to feel for some of our desperate cheerleading squad of ‘analysts’ who toil for some of our banks and stock brokers. These folks are clutching at the straws trying to find something to cheer about. Case in point – latest data from the Irish Exchequer, which was heralded as showing ‘stabilisation’ and even ‘improvement’ in ‘funding conditions’ and ‘headline deficit’.
Putting aside the fact that most of these analysts have no real idea what these terms really mean (and in some cases, neither do I, for they mean preciously nothing in the real world of economics), the fault in their logic is an apparent one:
They say: ‘Irish exchequer receipts are finally coming closer to the Budget 2010 projections. Therefore, things are improving or stabilising.’
I say: ‘Statements like this are pure bollocks, folks. Just because DofF has finally caught up (somewhat) in its forecasts with reality, does not mean reality is getting any rosier.’
Here is the evidence that I am correct. Forget the Exchequer forecasts, and look at the actual data.
Chart above shows that:
To see if things are indeed improving (or stabilizing) as our ‘analysts’ suggest, let’s put back to back receipts and expenditures for the last three years in one chart:
Clearly, our total Exchequer receipts (and recall, these are boosted by abnormally higher non-tax revenue) are now below those for April 2008 and April 2009. Indeed, only once so far in 2010 have receipts rose to above corresponding monthly levels for 2008 and 2009 – back in March, when the Exchequer booked some of the backed receipts on VAT, VRT and Excise.
Chart above shows that the Exchequer did indeed achieve some reduction in spending in April 2010. But,
This miserably low level of achievement in our battle to restore Ireland to solvency is, of course, fully visible in the above chart, once one considers the Exchequer surplus performance.
Putting aside the fact that most of these analysts have no real idea what these terms really mean (and in some cases, neither do I, for they mean preciously nothing in the real world of economics), the fault in their logic is an apparent one:
They say: ‘Irish exchequer receipts are finally coming closer to the Budget 2010 projections. Therefore, things are improving or stabilising.’
I say: ‘Statements like this are pure bollocks, folks. Just because DofF has finally caught up (somewhat) in its forecasts with reality, does not mean reality is getting any rosier.’
Here is the evidence that I am correct. Forget the Exchequer forecasts, and look at the actual data.
Chart above shows that:- Irish Exchequer tax revenue in April came in below the downward linear trend established since January 2008, which means that we are still returning tax receipts at below 2008-present average rates. Long term, things are still sliding down.
- Irish Exchequer total receipts fared better than tax revenue, but that’s because the Exchequer has managed to squeeze more out of the likes of the semistates. Don’t be fooled – the semistates do not create their own money. This is just a hidden tax on us all.
- Total expenditure, despite all the fanfare from the ‘analysts’ is heading up, and is now above the trend line again. Which (the trend line) is upward sloping. This means that long term trend is still rising for our public spending, and that we are on a seasonal upper push in public spending.
- Thus, our Exchequer deficit has gone up in April, and it did so at a rate virtually identical to April 2009. Long term deficit is still upward moving and we are now above the long term trend once again.
To see if things are indeed improving (or stabilizing) as our ‘analysts’ suggest, let’s put back to back receipts and expenditures for the last three years in one chart:
Clearly, our total Exchequer receipts (and recall, these are boosted by abnormally higher non-tax revenue) are now below those for April 2008 and April 2009. Indeed, only once so far in 2010 have receipts rose to above corresponding monthly levels for 2008 and 2009 – back in March, when the Exchequer booked some of the backed receipts on VAT, VRT and Excise.
Chart above shows that the Exchequer did indeed achieve some reduction in spending in April 2010. But,
- Good ¾ of these savings came from reduced capital investment cuts
- Cumulative savings for the first 4 months of 2010 are so far €1.346 billion, implying an annualized rate of savings of €4.035 billion. Over the same time, cumulative losses in revenue were €990 million, implying an annualized loss in revenue of €2.969 billion.
- So we are looking at (omitting timing consideration) net savings on 2009 of €1.1 billion. This would be a reduction of just 4.3% out of an annual deficit for 2009, or related to GDP – a reduction of roughly 0.6% of GDP. In other words, all the ‘right decisions’ taken by this Government are currently looking like being able to reduce or 14.3% 2009 deficit to a massively ‘improved’ 13.7% deficit? And that’s assuming that the Anglo support this year will only impact the deficit by the same €1.5 billion as last year…
This miserably low level of achievement in our battle to restore Ireland to solvency is, of course, fully visible in the above chart, once one considers the Exchequer surplus performance.
Sunday, May 9, 2010
Economics 11/05/2010: How to do fiscal austerity...
An interesting example for Ireland?
Two weeks ago, Eurostat confirmed that Bulgaria's deficit stood at 3.9% of GDP. A crisis was, therefore, unfolding in the Black Sea nation. The Bulgarian government decided to act and on the 5th of May it acted to drop public sector spending by 20% to reduce its budgetary deficit. The Government adopted an update to its 2010 budget in which spending on the part of State organisations, ministries and other public institutions is to be reduced by 20%. Flat cut across the board, with separate budgetary entities deciding on how the cuts should fall.
Clearly Bulgarians have not heard of the Croke Park 'deal' that, according to the Irish government, will help to stabilize Irish deficit (per my estimates, around 7% of GDP by the end of 2014, should all Croke Park-agreed provisions remain in place).
I will be blogging later today on the latest Exchequer results - which, recall, were received well by the banks' /stock brokerages' economists, cheering the fact that 'Exchequer revenue is now on target', without actually asking themselves the more important question: what is this target implying in terms of our solvency.
Two weeks ago, Eurostat confirmed that Bulgaria's deficit stood at 3.9% of GDP. A crisis was, therefore, unfolding in the Black Sea nation. The Bulgarian government decided to act and on the 5th of May it acted to drop public sector spending by 20% to reduce its budgetary deficit. The Government adopted an update to its 2010 budget in which spending on the part of State organisations, ministries and other public institutions is to be reduced by 20%. Flat cut across the board, with separate budgetary entities deciding on how the cuts should fall.
Clearly Bulgarians have not heard of the Croke Park 'deal' that, according to the Irish government, will help to stabilize Irish deficit (per my estimates, around 7% of GDP by the end of 2014, should all Croke Park-agreed provisions remain in place).
I will be blogging later today on the latest Exchequer results - which, recall, were received well by the banks' /stock brokerages' economists, cheering the fact that 'Exchequer revenue is now on target', without actually asking themselves the more important question: what is this target implying in terms of our solvency.
Economics 09/05/2010: Abandonning the ship of fiscal reforms
Here is an unedited version of my current article in the latest edition of Business & Finance magazine.
After two years of frantic crisis management by default and piece-meal recapitalizations, last month, the Irish state has fully committed to an outright dumping of public and banks debts onto the shoulders of the ordinary taxpayers. Since the onset of the crisis in 2008 through 2014, based on the latest Budgetary projections and banks recapitalization plans, the Government will consign ca €221 billion liabilities onto Irish workers, businesses and entrepreneurs. This figure, adding to a whooping €234,000 of new debt per average household with two working parents, is the toxic legacy of our crony corporatism.
Consider the banks. Minister Lenihan’s announcement made on Super Tuesday in March means that over the next two years, the Irish taxpayers will foot a bill of some €37 billion in direct capital injections to the banks. The interest on this bankers’ loot will add up to another €12 billion over 10 years. Nama will contribute the net loss of up to €30 billion to our woes. This comprises the costs of loans purchases, bonds financing and Nama management and operations, less the expected recovery of assets and the cash flow from the undertaking. When all is said and done, Irish people will be left with a gargantuan bill of almost €80 billion for rescuing the banks, not counting tens of billions of written-down loans and ruined businesses.
If you doubt this figure, look no further than the numbers released to accompany Tranche 1 transfer of assets from the banks to Nama. These show that having paid €8.5 billion for the first instalment of loans, Nama financial wizards managed to overpay €1.2-3.1 billion compared to the actual value of the loans. On day one of its operations, therefore, Nama has managed to put the taxpayers billions deep into the negative equity. Minister Lenihan’s choice of the cut-off date of November 30, 2009 for Nama valuations implies that Irish taxpayers stand to lose over €1.5 billion on top of all other previously forecast Nama losses. This addition is a pure waste, as there is absolutely no logistical or economic reason for setting such a date in the first place.
In the mean time, taxpayers’ representatives – from our ‘public interest’ banks’ directors to legislators – continue to insist that Nama is a profit-making opportunity for the state. In a recent encounter with myself on a national radio programme, Darragh O’Brien TD who acts as a Vice-Chair of the Public Accounts Committee has gone so far as to claim that under Nama, the state will be borrowing money from the ECB at 1% and lending it to the banks at 3%, thereby earning an instant gain of 2% on the transaction. The fact is according to Nama own documentation it will be the state who will owe the banks an annual coupon payment at the rate of euribor (currently just over 1.2% for a 12 month contract). This rate will be resettable every 6 months, so looking back at historical data, Nama cost of borrowing can easily go to 4.9% - the euribor level back in 2007 or even higher. Since the banks will be holding the bonds they, not the Exchequer, will be collecting the interest payments. The Irish taxpayers, therefore, can potentially be on the hook for an additional €2.6 billion subsidy to the banks in the form of coupon payments on the bonds.
My estimates of the overall debt burden imposed by the banks onto the taxpayers are erring on a conservative side. The latest figures from the Central bank show that the entire Irish banking sector, inclusive of non-Guaranteed institutions, holds a balance of just €226 billion in customers deposits. Assuming that some 10-15% of these deposits are subject to customer demand in any two weeks period, risk-adjusted customer deposit base of Irish banking sector is roughly €192-203 billion. This is offset but loans to customers amounting to €609 billion, plus bonds in the amount of €73 billion, and short-term ECB deposits of €78 billion. Thus, the ratio of debt and short-term obligations relative to customer deposits in the Irish banking sector currently stands at more than 323%. Liquidity risk-adjusted, this figure rises to 400%. In comparison, UK’s Northern Rock had 306% loans to customer deposits ratio at the peak of its solvency crisis in 2008.
So the entire recapitalization fiasco, coupled with the continued stream of disastrous news from the Anglo and the spectacular collapse of the INBS, should have taught us one simple lesson – people who are in charge of the banking crisis management in this country are either unaware of facts or are willingly distorting the reality.
However, for all of its publicity, the banking crisis pales in comparison with the fiscal meltdown we face. As of the time of going to press, Irish workers and small businesses – the lifeline of our economy – are being held hostage by the ‘deal brokering’ between the Trade Unions and the Government. The likeliest outcome of these talks will be a public sector ‘reforms’ package which will see a deferred reversal of Government intentions to cut wasteful spending. Freezing future pay cuts in the public sector, while pushing forward a naïve (if not deceptive) agenda of ‘improved productivity’ means that while in theory we might get more for each euro we spend, in practice, the overall spending bill will remain well out of touch with our tax receipts. The structural deficit simply cannot be corrected by plastering the expenditure gap over with new work practice rules. Only a dramatic cut in overall spend, plus a significant cut in the numbers employed in the public sector will save this country from becoming Greece-sur-Atlantique.
Looking at the Government own projections for future deficits and factoring in the cost of borrowing, Ireland Inc will have to find some €92 billion from now through 2014. Factoring in deficits cumulated between January 1 2008 and December 31 2009 adds another €37.3 billion, plus interest to the above figure. All in, 2008-2014 fiscal deficits are likely to cost Irish taxpayers some €139 billion based on Government own figures. How realistic these Government projections are is a matter for another debate, but the recent revision of our 2009 deficit from the Government-published 11.7% to 14.3% of GDP by the Eurostat shows that the above estimate of the total deficits-related costs can be even higher. Either way, the fiscal crisis we face is clearly much more significant than the banks crisis.
Having invited the Unions back to the bargaining table, the Government has ex ante turned taxpayers into a bargaining chip that it can (and will) use to appease the intransigent interest groups.
Which brings us back to that top line figure of €221 billion in liabilities that Messrs Cowen and Lenihan have decided to offload from the banks and public sector and onto the shoulders of the ordinary taxpayers. Per CSO’s latest data there are 1,887,700 people in employment in Ireland today. Everyone of these workers – no matter whether currently covered by the tax net or not – will be facing an average bill of some €117,000 for the mistakes made by our past Governments’ public expenditure policies, bankers, regulators and developers.
This is, put simply, an unsustainable mountain of public and quasi-public liabilities. Something will have to give.
Back in 2008, Ireland’s top 11,714 earners (those who earned more than €275,000 in a year), paid almost 18% of all income tax. Forget the fact that many of these individuals are now broke. Doubling their tax rates would deliver less than €10 billion in tax revenue over the next 5 years – hardly a drop in the sea of new public debt being created. Quadrupling taxes on Irish median earners – those with income around €25,000 mark – will yield no more than €5 billion in new revenue through 2014. A full one third of all income earners back in 2008 were outside the tax net. These workers, with incomes below €17,000 per annum, are about to be thrown to the wolves by our policies as the Government sets out to plug the twin budget and the banks black holes. Taxed at the standard rate, they will be in for some €0.9 billion tax burden annually. So where will the rest of €205 billion come from?
In reality, the Government simply cannot avoid hiking taxes on businesses. Budget 2010 forecasts corporation tax revenue to reach €3.16 billion. Doubling the rate of tax to 25% can be expected to yield no more than €12-14 billion through 2014. So even this amount will not correct for the public sector and banks’ debts.
Super Tuesday’s announcements by the Minister for Finance signalled the beginning of an end for the dreams for a better future for this and several subsequent generations of Irish people. Remember when Mr Lenihan asked us to be patriotic in his Budget 2009 speech?
Since July 2007, the Government has shown itself incapable of understanding the nature of the crises we face. The banks, we were told, were suffering shortage of liquidity. This means that replacing dead-weight loans on their balancesheets with bankable quasi-Government bonds will do the job of restarting lending. We now know that the real problem the banks face is that of insolvency, with their balancesheets destroyed by worthless loans offset by hefty liabilities. We were told that the collapse in the Exchequer tax revenue not the excessive permanent spending habits of our State were to be blamed for the fiscal crisis. Now we can see the truth – the Irish Exchequer and economy are facing a problem of insolvency, for not even a restoration of tax revenue to its pre-crisis long-term trend will resolve the problem of excessive deficits.
Box-out
Over the recent weeks, the heated debate about Irish banks’ liabilities has shifted its attention to the elusive bond holders. “Who are, these captains of speculation armada? The sharks of the international financial markets?” some demanded to know. Well, we can’t quite tell you who all of them are, but at least for some of the three big banks’ bond holdings we can tell. These arch-capitalists are… you, me, and the Irish Exchequer. That’s right. Per NTMA own figures, our National Pension Reserve Fund – the pot of gold at the end of the public sector employment rainbow – designed to shore up Exchequer pensions deficit has managed to get its snout deep into the Irish banks bonds feeding trough. In the 12 months between December 2007 and December 2008, NPRF has bought itself into a long position in AIB variable rate bonds - €155 million, Bank of Ireland fixed coupon bonds €205 million, Bank of Ireland variable bonds €35.5 million, hiking its overall exposure to Irish banks’ bonds from €89.2 million in 2007 to €461.7 million in 2008. Given that these long positions withstood the wholesale collapse in banks bonds prices in 2008, this was an incredibly risky bet. Then again, adding up NPRF’s balance sheet exposures to low liquidity, higher risk investment classes, such as unquoted property investments, commodities and private equity, corporate debt in Greece, plus almost €74 million worth of Greek Government bonds, etc, NPRF’s higher risk investments accounted for almost 13% of the entire investment portfolio in 2008, up from 11% in 2007 and 6.3% in 2006.
After two years of frantic crisis management by default and piece-meal recapitalizations, last month, the Irish state has fully committed to an outright dumping of public and banks debts onto the shoulders of the ordinary taxpayers. Since the onset of the crisis in 2008 through 2014, based on the latest Budgetary projections and banks recapitalization plans, the Government will consign ca €221 billion liabilities onto Irish workers, businesses and entrepreneurs. This figure, adding to a whooping €234,000 of new debt per average household with two working parents, is the toxic legacy of our crony corporatism.
Consider the banks. Minister Lenihan’s announcement made on Super Tuesday in March means that over the next two years, the Irish taxpayers will foot a bill of some €37 billion in direct capital injections to the banks. The interest on this bankers’ loot will add up to another €12 billion over 10 years. Nama will contribute the net loss of up to €30 billion to our woes. This comprises the costs of loans purchases, bonds financing and Nama management and operations, less the expected recovery of assets and the cash flow from the undertaking. When all is said and done, Irish people will be left with a gargantuan bill of almost €80 billion for rescuing the banks, not counting tens of billions of written-down loans and ruined businesses.
If you doubt this figure, look no further than the numbers released to accompany Tranche 1 transfer of assets from the banks to Nama. These show that having paid €8.5 billion for the first instalment of loans, Nama financial wizards managed to overpay €1.2-3.1 billion compared to the actual value of the loans. On day one of its operations, therefore, Nama has managed to put the taxpayers billions deep into the negative equity. Minister Lenihan’s choice of the cut-off date of November 30, 2009 for Nama valuations implies that Irish taxpayers stand to lose over €1.5 billion on top of all other previously forecast Nama losses. This addition is a pure waste, as there is absolutely no logistical or economic reason for setting such a date in the first place.
In the mean time, taxpayers’ representatives – from our ‘public interest’ banks’ directors to legislators – continue to insist that Nama is a profit-making opportunity for the state. In a recent encounter with myself on a national radio programme, Darragh O’Brien TD who acts as a Vice-Chair of the Public Accounts Committee has gone so far as to claim that under Nama, the state will be borrowing money from the ECB at 1% and lending it to the banks at 3%, thereby earning an instant gain of 2% on the transaction. The fact is according to Nama own documentation it will be the state who will owe the banks an annual coupon payment at the rate of euribor (currently just over 1.2% for a 12 month contract). This rate will be resettable every 6 months, so looking back at historical data, Nama cost of borrowing can easily go to 4.9% - the euribor level back in 2007 or even higher. Since the banks will be holding the bonds they, not the Exchequer, will be collecting the interest payments. The Irish taxpayers, therefore, can potentially be on the hook for an additional €2.6 billion subsidy to the banks in the form of coupon payments on the bonds.
My estimates of the overall debt burden imposed by the banks onto the taxpayers are erring on a conservative side. The latest figures from the Central bank show that the entire Irish banking sector, inclusive of non-Guaranteed institutions, holds a balance of just €226 billion in customers deposits. Assuming that some 10-15% of these deposits are subject to customer demand in any two weeks period, risk-adjusted customer deposit base of Irish banking sector is roughly €192-203 billion. This is offset but loans to customers amounting to €609 billion, plus bonds in the amount of €73 billion, and short-term ECB deposits of €78 billion. Thus, the ratio of debt and short-term obligations relative to customer deposits in the Irish banking sector currently stands at more than 323%. Liquidity risk-adjusted, this figure rises to 400%. In comparison, UK’s Northern Rock had 306% loans to customer deposits ratio at the peak of its solvency crisis in 2008.
So the entire recapitalization fiasco, coupled with the continued stream of disastrous news from the Anglo and the spectacular collapse of the INBS, should have taught us one simple lesson – people who are in charge of the banking crisis management in this country are either unaware of facts or are willingly distorting the reality.
However, for all of its publicity, the banking crisis pales in comparison with the fiscal meltdown we face. As of the time of going to press, Irish workers and small businesses – the lifeline of our economy – are being held hostage by the ‘deal brokering’ between the Trade Unions and the Government. The likeliest outcome of these talks will be a public sector ‘reforms’ package which will see a deferred reversal of Government intentions to cut wasteful spending. Freezing future pay cuts in the public sector, while pushing forward a naïve (if not deceptive) agenda of ‘improved productivity’ means that while in theory we might get more for each euro we spend, in practice, the overall spending bill will remain well out of touch with our tax receipts. The structural deficit simply cannot be corrected by plastering the expenditure gap over with new work practice rules. Only a dramatic cut in overall spend, plus a significant cut in the numbers employed in the public sector will save this country from becoming Greece-sur-Atlantique.
Looking at the Government own projections for future deficits and factoring in the cost of borrowing, Ireland Inc will have to find some €92 billion from now through 2014. Factoring in deficits cumulated between January 1 2008 and December 31 2009 adds another €37.3 billion, plus interest to the above figure. All in, 2008-2014 fiscal deficits are likely to cost Irish taxpayers some €139 billion based on Government own figures. How realistic these Government projections are is a matter for another debate, but the recent revision of our 2009 deficit from the Government-published 11.7% to 14.3% of GDP by the Eurostat shows that the above estimate of the total deficits-related costs can be even higher. Either way, the fiscal crisis we face is clearly much more significant than the banks crisis.
Having invited the Unions back to the bargaining table, the Government has ex ante turned taxpayers into a bargaining chip that it can (and will) use to appease the intransigent interest groups.
Which brings us back to that top line figure of €221 billion in liabilities that Messrs Cowen and Lenihan have decided to offload from the banks and public sector and onto the shoulders of the ordinary taxpayers. Per CSO’s latest data there are 1,887,700 people in employment in Ireland today. Everyone of these workers – no matter whether currently covered by the tax net or not – will be facing an average bill of some €117,000 for the mistakes made by our past Governments’ public expenditure policies, bankers, regulators and developers.
This is, put simply, an unsustainable mountain of public and quasi-public liabilities. Something will have to give.
Back in 2008, Ireland’s top 11,714 earners (those who earned more than €275,000 in a year), paid almost 18% of all income tax. Forget the fact that many of these individuals are now broke. Doubling their tax rates would deliver less than €10 billion in tax revenue over the next 5 years – hardly a drop in the sea of new public debt being created. Quadrupling taxes on Irish median earners – those with income around €25,000 mark – will yield no more than €5 billion in new revenue through 2014. A full one third of all income earners back in 2008 were outside the tax net. These workers, with incomes below €17,000 per annum, are about to be thrown to the wolves by our policies as the Government sets out to plug the twin budget and the banks black holes. Taxed at the standard rate, they will be in for some €0.9 billion tax burden annually. So where will the rest of €205 billion come from?
In reality, the Government simply cannot avoid hiking taxes on businesses. Budget 2010 forecasts corporation tax revenue to reach €3.16 billion. Doubling the rate of tax to 25% can be expected to yield no more than €12-14 billion through 2014. So even this amount will not correct for the public sector and banks’ debts.
Super Tuesday’s announcements by the Minister for Finance signalled the beginning of an end for the dreams for a better future for this and several subsequent generations of Irish people. Remember when Mr Lenihan asked us to be patriotic in his Budget 2009 speech?
Since July 2007, the Government has shown itself incapable of understanding the nature of the crises we face. The banks, we were told, were suffering shortage of liquidity. This means that replacing dead-weight loans on their balancesheets with bankable quasi-Government bonds will do the job of restarting lending. We now know that the real problem the banks face is that of insolvency, with their balancesheets destroyed by worthless loans offset by hefty liabilities. We were told that the collapse in the Exchequer tax revenue not the excessive permanent spending habits of our State were to be blamed for the fiscal crisis. Now we can see the truth – the Irish Exchequer and economy are facing a problem of insolvency, for not even a restoration of tax revenue to its pre-crisis long-term trend will resolve the problem of excessive deficits.
Box-out
Over the recent weeks, the heated debate about Irish banks’ liabilities has shifted its attention to the elusive bond holders. “Who are, these captains of speculation armada? The sharks of the international financial markets?” some demanded to know. Well, we can’t quite tell you who all of them are, but at least for some of the three big banks’ bond holdings we can tell. These arch-capitalists are… you, me, and the Irish Exchequer. That’s right. Per NTMA own figures, our National Pension Reserve Fund – the pot of gold at the end of the public sector employment rainbow – designed to shore up Exchequer pensions deficit has managed to get its snout deep into the Irish banks bonds feeding trough. In the 12 months between December 2007 and December 2008, NPRF has bought itself into a long position in AIB variable rate bonds - €155 million, Bank of Ireland fixed coupon bonds €205 million, Bank of Ireland variable bonds €35.5 million, hiking its overall exposure to Irish banks’ bonds from €89.2 million in 2007 to €461.7 million in 2008. Given that these long positions withstood the wholesale collapse in banks bonds prices in 2008, this was an incredibly risky bet. Then again, adding up NPRF’s balance sheet exposures to low liquidity, higher risk investment classes, such as unquoted property investments, commodities and private equity, corporate debt in Greece, plus almost €74 million worth of Greek Government bonds, etc, NPRF’s higher risk investments accounted for almost 13% of the entire investment portfolio in 2008, up from 11% in 2007 and 6.3% in 2006.
Economics 09/05/2010: What sort of EU leadership?.. Part 2
Underlying the unworkable logistics of the Euro-bond that Brussels is planning to deploy to contain the spillover of the fiscal crises in PIIGS, there is a pesky issue of the past record of the currency block management of its finances.
Here are some historic comparisons from the IMF latest GFS report worth highlighting.
Now, spot the odd ones in the above chart? That's right - the non-Euro zone countries are the ones with the lowest indebtedness of households in their economy. In other words, no matter how much the Euro area leadership talks about the US being the cause of the current crisis, data simply shows that the US - despite all its problems - has had far less of a bubble in overall debt terms than Euro area. The only reasons Germany does not figure amongst the countries with the weakest households are:
Oops. Not exactly. While Americans were buying homes (fueling their own bubble), Europeans were buying... homes and public sector spending goodies. But may be, just may be, Euro area members were more prudent in buying homes than the Americans, who stand accused of causing the financial crisis of 2007-2009?
It turns out that this was simply not true. Chart above shows just how far more leveraged were the Euro area states compared to the US in terms of two main parameters of house prices sustainability.
And the same is true for overall asset valuations.
Oh, and those prudent lenders - the Germans and the rest of the Euro pack banks?
It turns out the US banks were actually much better off throughout the bubble formation period in terms of their lending and profitability than... hmmm... Germany and Belgium. Who could have known, judging by Mrs Merkel's hawkish statements as of late?
Now, take a look at the total external indebtedness of the Euro area... Recall, the US and Euroarea both have relatively similar GDP...
So suppose the EU Commission issues common bonds (and assume it places them in the market) to underpin PIIGS plus Belgium, the Netherlands and Austria - the sickest puppies of the Euro area. That would require bonds issuance to the tune of 20-30% of these countries outstanding public debt. Which means that the unified bond issuance volumes will be in the region of USD1 trillion, pushing Eurozone's combined indebtedness to over USD25 trillion. Does anyone really think this is a 'solution' to contagion or a surrender?
Here are some historic comparisons from the IMF latest GFS report worth highlighting.
Now, spot the odd ones in the above chart? That's right - the non-Euro zone countries are the ones with the lowest indebtedness of households in their economy. In other words, no matter how much the Euro area leadership talks about the US being the cause of the current crisis, data simply shows that the US - despite all its problems - has had far less of a bubble in overall debt terms than Euro area. The only reasons Germany does not figure amongst the countries with the weakest households are:- Germany's exports oriented economy which in effect is a 'beggar thy neighbor' economy reliant on someone else assuming credit to buy German goods; and
- Germany's costly reunification coupled with poor demographics, which assured that over the last 20 years German consumers had virtually no improvements in their standards of living.
Oops. Not exactly. While Americans were buying homes (fueling their own bubble), Europeans were buying... homes and public sector spending goodies. But may be, just may be, Euro area members were more prudent in buying homes than the Americans, who stand accused of causing the financial crisis of 2007-2009?
It turns out that this was simply not true. Chart above shows just how far more leveraged were the Euro area states compared to the US in terms of two main parameters of house prices sustainability.
And the same is true for overall asset valuations.Oh, and those prudent lenders - the Germans and the rest of the Euro pack banks?
It turns out the US banks were actually much better off throughout the bubble formation period in terms of their lending and profitability than... hmmm... Germany and Belgium. Who could have known, judging by Mrs Merkel's hawkish statements as of late?Now, take a look at the total external indebtedness of the Euro area... Recall, the US and Euroarea both have relatively similar GDP...
So suppose the EU Commission issues common bonds (and assume it places them in the market) to underpin PIIGS plus Belgium, the Netherlands and Austria - the sickest puppies of the Euro area. That would require bonds issuance to the tune of 20-30% of these countries outstanding public debt. Which means that the unified bond issuance volumes will be in the region of USD1 trillion, pushing Eurozone's combined indebtedness to over USD25 trillion. Does anyone really think this is a 'solution' to contagion or a surrender?
Economics 09/05/2010: What sort of EU leadership?.. Part 1
Prepare to be afraid, ye the financial markets – those always-on-time and forever-effective super leaders of the Eurozone have concocted a Plan. A Plan to deal once and for all with the frightening levels of their own governments’ insolvency. A Plan code-named Bondzkrieg!
The troops of illiquid and insolvent PIIGS will be backed by the armies of the liquid, but pretty much nearly as insolvent the rest of EU. The attack, commencing possibly as early as on Monday next will be a two-pronged strategy: a pincers manoeuvre.
Part 1 will, per latest reports from the EU16 summit, require an issuance of Euro Commission Bonds. These will be backed by the EU16 states’ guarantees and something that is called ‘an implicit ECB guarantee’. Sounds terrifying, folks:
The second prong of the EU attack on the markets is the incessant blabber about the need to set up an EU-own rating agency. Here, the promised might is clearly unmatched by any sort of internal capability:
Mrs Merkel have stated this Friday: "Those who created the excesses on the markets will be asked to pay up -- those are in part the banks, those are the hedge funds that must be regulated ... those are the short-sellers and we agreed yesterday to implement this more quickly in Europe." Obviously, over a decade of fiscal recklessness across the PIIGS was never a problem for Mrs Merkel. And she is supposed to be the reasonable one?
All I can say, folks, forget any hope for growth in Europe with this sort of leadership.
The troops of illiquid and insolvent PIIGS will be backed by the armies of the liquid, but pretty much nearly as insolvent the rest of EU. The attack, commencing possibly as early as on Monday next will be a two-pronged strategy: a pincers manoeuvre.
Part 1 will, per latest reports from the EU16 summit, require an issuance of Euro Commission Bonds. These will be backed by the EU16 states’ guarantees and something that is called ‘an implicit ECB guarantee’. Sounds terrifying, folks:
- What is exactly an ‘implicit ECB guarantee’? A sort of ‘we might print mucho Euro notes, should Brussels default’ stuff? What kind of nonsense is this? The best the ECB can do is promise to monetize the EU Common bond in the same way it monetizes Greek junk bonds. Yet, the latter has not stopped contagion, only accelerated it by undermining the ECB credibility.
- What will back these Common bonds? The solvency of the EU nations guaranteeing them? But wait – isn’t the problem the EU is facing is precisely the very lack of solvency? How is it going to work then? A severely indebted and deficit ridden pack of nations issues new debt to cover up the old debt problems? Well, that did work for the Russian Government a miracle back in 1998. Without actually resolving the problem of excessive and long-running deficits, and without either restructuring (default) or deflating (devaluation which is a de facto default) the existent pile of debt, the new EU-wide bond issue will simply transfer Greek-style problems of the PIIGS to the rest of EU. Given that we are talking about roughly a €1 trillion worth of junk, the entire pyramid scheme concocted by the EU is going to collapse unless Germany is good for underwriting the entire EU16 with its economic might. Trouble is – Germany can’t. It has little prospect of growth and its’ current economy simply cannot carry the burden of the rest of EU16 obligations.
- What will be the seniority of these bonds? If the new bond is subordinated to the existent state bonds (as implied by a ‘guarantee’ proviso), these bonds will have no meaning. If it will be senior to existent member states’ debt, then issuing them to pay down sovereign debt will be equal to deflating seniority of sovereign issues already outstanding. Which, in common English, is called defaulting on existent debt.
- How can these bonds be priced? Normally a bond is priced by a combination of factors. Some are exogenous – such as global liquidity and portfolio driven demand. Some are endogenous – such as analysis of what the sovereign deficit is for the issuer, what debt burden the issuer is paying and what prospects for economic growth (and other components of future default probability) does a sovereign face. Finally, expected Forex positions for sovereign currency in which the bond is denominated are taken into account. Care to guess what any of these endogenous variables might be for the EU16? Right – they are totally meaningless. Will EU bond be written against EU own debt (which is nil) or against guarantors’ debt (sovereigns already overloaded with debt)? Will the Forex rates relate to the ECB rate which the ‘sovereign’ issuing the bonds (the EU Commission) cannot control (due to ECB independence)? Will EU ability to repay these bonds rest on Euroarea economic growth? If so, what does this mean, since the EU Commission collects revenue from EU27, of which 11 member states are not a party to issuance of the bond! Will, for example, UK government assume liability to the Eurozone-issued bonds by committing its own economy to the risk of a call on the bond should, say, Belgium decide to default?
The second prong of the EU attack on the markets is the incessant blabber about the need to set up an EU-own rating agency. Here, the promised might is clearly unmatched by any sort of internal capability:
- The EU itself cannot certify own annual accounts, despite having only in-house own auditors. Even these are refusing to sign off on EU accounts for over a decade now. How can the same institution produce a credible rating agency that will be entrusted with providing assessment of the EU credit worthiness?
- Can the EU-imposed metrics be seriously treated as fundamental benchmarks for solvency? Give it a thought – the EU oversees a union of member states bound by own sovereign treaty to uphold the Maastricht Criteria targets. The EU has failed to enforce these in the case of Greeks, Portuguese, Spaniards, French, Italians, Belgians and so on. In other words, the EU cannot enforce its own rules, let alone police economic and fiscal performance parameters required to issue any sort of risk assessments. In fact, this year Euroarea deficit is expected to reach 6.6% of GDP and in 2011 -6.1% - way above the 3% the block set as its own rule. Debt to GDP is heading for double digits, before we add banks supports. Letting the EU run a rating agency is equivalent to letting an alcoholic run a bar!
- The entire idea of an EU rating agency traces back to Merkel’s and Sarkozy’s desire to shift blame for the Greek (and indeed PIIGS) debacle off the shoulders of the European governments and Brussels and onto the shoulders of ‘speculators’ and the Big-3 rating agencies. Of course, the logical inconsistency of the EU attacks on the Big-3 is painfully obvious. The Big 3 are accused for failing to properly recognize and publicize risks to the systemic solvency of financial institutions in the case of ABS/MBS and so on. Yet, the minute the rating agencies actually do their jobs – as in the case of PIIGS in recent months – they are standing accused of… well… doing the jobs only to well? Can anyone have any trust in a ‘rating agency’ set up by the very people who are simply and evidently incapable of a simple logical argument?
Mrs Merkel have stated this Friday: "Those who created the excesses on the markets will be asked to pay up -- those are in part the banks, those are the hedge funds that must be regulated ... those are the short-sellers and we agreed yesterday to implement this more quickly in Europe." Obviously, over a decade of fiscal recklessness across the PIIGS was never a problem for Mrs Merkel. And she is supposed to be the reasonable one?
All I can say, folks, forget any hope for growth in Europe with this sort of leadership.
Wednesday, May 5, 2010
Economics 05/05/2010: Third Force's Burn-out Bench
The news stream is getting thicker and thicker with Irish financials and sovereign / fiscal debacles stories. Reuters is reporting (hat tip to Brian) (here) that the Third Force now looks more like a Burn-out Bench and that there is little prospect for growth or profitability for BofI and AIB.
All's fine, as far as the arguments go, except, there is that silly ending to the article putting blame for the crisis on 'too much competition' in the Irish banking sector. I'd say this pure rubbish. Here is an earlier note I wrote on that subject. In simple terms, it does not matter what profit margins could have been were we to have lower competition. Irish banking crisis was caused by excessive willingness to take risks, spurred on by the Government, the Regulator, the Central Bank and ECB. May be there was too much competition amongst the incompetent cooks in that kitchen?
Oh, and Nouriel Roubini puts a clear number on the fear of European contagion: "European banks hold claims of US$193 billion on Greece and more than US$1 trillion of further claims on Portugal, Ireland and Spain. It cannot be ruled out that the ECB will eventually have to resort to more aggressive measures such as buying government bonds in the secondary market in order to stop the contagion."
So the next stage of contagion can cost Germany (and make no mistake - Germany will be paying for this in the end) upwards of 5 times what the Greek bailout will cost.
All's fine, as far as the arguments go, except, there is that silly ending to the article putting blame for the crisis on 'too much competition' in the Irish banking sector. I'd say this pure rubbish. Here is an earlier note I wrote on that subject. In simple terms, it does not matter what profit margins could have been were we to have lower competition. Irish banking crisis was caused by excessive willingness to take risks, spurred on by the Government, the Regulator, the Central Bank and ECB. May be there was too much competition amongst the incompetent cooks in that kitchen?
Oh, and Nouriel Roubini puts a clear number on the fear of European contagion: "European banks hold claims of US$193 billion on Greece and more than US$1 trillion of further claims on Portugal, Ireland and Spain. It cannot be ruled out that the ECB will eventually have to resort to more aggressive measures such as buying government bonds in the secondary market in order to stop the contagion."
So the next stage of contagion can cost Germany (and make no mistake - Germany will be paying for this in the end) upwards of 5 times what the Greek bailout will cost.
Tuesday, May 4, 2010
Economics 04/05/2010: Why Anglo case is irreparable
A funny way of arguing financial returns that some of our senior 'bankers' have has been highlighted in the latest comments of the Politician-turns-Banker Mr Alan Dukes reported in today's Irish Times (comments and emphasis are mine):
“The [EU] commission came back with a whole series of questions [concerning Anglo's 'business plan' - whether a zombie can have a business plan is a matter for another debate] and we are now rejigging the restructuring plan to deal with the issues the commission has raised. One of the things we are looking at is what would be the situation if we liquidated the bank immediately? Total disaster. A total non-runner. [ Am I the only person concerned with the fact that apparently the 'new plan' will be a re-jigging of the old version or that Mr Dukes has already decided that, while the bank is still looking into liquidation option, he is sure that it will be a total disaster and a non-runner?]
“...The best prospect of getting some value out of it and reducing the total cost to the taxpayer is keeping the good bank of it, because eventually it could be sold on to the benefit of the taxpayer. If you just do a wind-down, it is losses all the way. Whereas if you can make a good bank of it, which should be a quarter of the size of the whole bank, at least you have got something viable and that can be sold off to the private sector in the fullness of time.”
Our senior banker is clearly confusing gross return with net return here. Let me illustrate:
Suppose Anglo separation into two banks - bad and good -
Mr Dukes says that: since €A>0 then taxpayers win from the option of splitting the bank into 2 parts.
I say that:
In other words, Mr Dukes should really have read up on
“The [EU] commission came back with a whole series of questions [concerning Anglo's 'business plan' - whether a zombie can have a business plan is a matter for another debate] and we are now rejigging the restructuring plan to deal with the issues the commission has raised. One of the things we are looking at is what would be the situation if we liquidated the bank immediately? Total disaster. A total non-runner. [ Am I the only person concerned with the fact that apparently the 'new plan' will be a re-jigging of the old version or that Mr Dukes has already decided that, while the bank is still looking into liquidation option, he is sure that it will be a total disaster and a non-runner?]
“...The best prospect of getting some value out of it and reducing the total cost to the taxpayer is keeping the good bank of it, because eventually it could be sold on to the benefit of the taxpayer. If you just do a wind-down, it is losses all the way. Whereas if you can make a good bank of it, which should be a quarter of the size of the whole bank, at least you have got something viable and that can be sold off to the private sector in the fullness of time.”
Our senior banker is clearly confusing gross return with net return here. Let me illustrate:
Suppose Anglo separation into two banks - bad and good -
- Yields the value of the 'Good' Anglo at €A at the time of disposal t-years from now
- Winding down 'Bad' Anglo costs €B by the time of disposal t-years from now
- In the mean time (between now and disposal) the cost of running 'Good' Anglo will be €C
- While the current value of the 'Good' Anglo, without a workout (a fire sale, if you may prefer to call it, or a shorter winding up over 5 years as I would prefer to label it) implies the value of it of €D today.
- Also suppose that if we wind down Anglo today (or in the near future), the cost of winding down is €E.
- Assume that present value adjustment (bringing the value of the bank and the level of costs incurred back to today from the date of disposal) is PVadj<1. pvadj="F(Interest">
Mr Dukes says that: since €A>0 then taxpayers win from the option of splitting the bank into 2 parts.
I say that:
- if (€A-€C-€B)*PVAadj>€D-€E then taxpayer loses from the rapid winding down and gains from the breaking up of the bank (Mr Dukes preferred solution)
- otherwise, taxpayers gain from the opposite action of completely winding down the bank as soon as possible
In other words, Mr Dukes should really have read up on
- PDV methodology of computing real returns; and
- Net Present Value framework for carrying out comparative valuations.
Monday, May 3, 2010
Economics 03/05/2010: World Debt Wish 6
Final part of the series presents two tables, which are largely self-explanatory.
The first table compares Irish Gross External Debt Liabilities to those of other 36 Most Indebted Countries, reporting these countries' GED as % of Irish GED. No adjustments for GDP etc are taken:
You can judge by yourself if Ireland is really economically mightier than Australia, or Argentina, or Brazil and so on...
The second table does two things:
First I reproduce the raw numbers for Ireland and for the group of 36 Most Indebted Countries across three categories of debt, total debt and GDP/GNP. I then compute the relative weight of Ireland in every one of these categories. Column 4 in the top part of the table shows the results as percentages. Thus, Ireland's General Government Debt accounts for 0.96% of the total General Gov Debt incurred by all 36 countries. Ireland's banks' debt accounts for almost 4% of the total banking sector debt for all 36 countries - a hefty weight for the country that has GDP share of the Group of 36 that is only 0.37% or GNP share that is just 0.30%. You can judge for yourselves if the private sector (other than banks) in Ireland is really that healthy to carry us out of the recession, but the figure of 5.88% representing the share of Irish real economy debt as a percentage of the real economy debt for all 36 countries is scary! Especially realizing that this makes our economy leveraged to the tune of 1960% compared to the rest of the world. Imagine having that level of LTV on your house?!
The second part of the table above shows Irish debt levels as percentage of Irish GDP and GNP. Our headline figure here is the level of absolute (not relative to other nations) level of leverage - that of 1,326% or x13.26 times if we are to continue imagining that MNCs-dominated sectors really do carry all activities billed through Ireland here in Ireland (in other words, if we are to use our GDP as income measure). Alas, were we to step down to earth and use our GNP as a metric for income, our level of leverage is reaching a frightening 1,617% or x16.17 times annual income. Compared to that, world's most indebted 36 nations have leverage of just 119%!
Still feel like sending some foreign aid to the Highly Indebted Poor Countries (HIPCs)? Or, for that matter, to Greece?
The first table compares Irish Gross External Debt Liabilities to those of other 36 Most Indebted Countries, reporting these countries' GED as % of Irish GED. No adjustments for GDP etc are taken:
You can judge by yourself if Ireland is really economically mightier than Australia, or Argentina, or Brazil and so on...The second table does two things:
First I reproduce the raw numbers for Ireland and for the group of 36 Most Indebted Countries across three categories of debt, total debt and GDP/GNP. I then compute the relative weight of Ireland in every one of these categories. Column 4 in the top part of the table shows the results as percentages. Thus, Ireland's General Government Debt accounts for 0.96% of the total General Gov Debt incurred by all 36 countries. Ireland's banks' debt accounts for almost 4% of the total banking sector debt for all 36 countries - a hefty weight for the country that has GDP share of the Group of 36 that is only 0.37% or GNP share that is just 0.30%. You can judge for yourselves if the private sector (other than banks) in Ireland is really that healthy to carry us out of the recession, but the figure of 5.88% representing the share of Irish real economy debt as a percentage of the real economy debt for all 36 countries is scary! Especially realizing that this makes our economy leveraged to the tune of 1960% compared to the rest of the world. Imagine having that level of LTV on your house?!The second part of the table above shows Irish debt levels as percentage of Irish GDP and GNP. Our headline figure here is the level of absolute (not relative to other nations) level of leverage - that of 1,326% or x13.26 times if we are to continue imagining that MNCs-dominated sectors really do carry all activities billed through Ireland here in Ireland (in other words, if we are to use our GDP as income measure). Alas, were we to step down to earth and use our GNP as a metric for income, our level of leverage is reaching a frightening 1,617% or x16.17 times annual income. Compared to that, world's most indebted 36 nations have leverage of just 119%!
Still feel like sending some foreign aid to the Highly Indebted Poor Countries (HIPCs)? Or, for that matter, to Greece?
Economics 03/05/2010: World Debt Wish 5
This is the fifth post in the series covering world debt issues. In the previous posts I provided analysis of the aggregate debt levels for 36 largest debtor nations (here) and for the Government debt (here), the banks debt (here) and the country level data (here). This post puts things into comparative perspective.
Before we begin, however, let me quote from today's Financial Times: "On my estimate, the total size of a liquidity backstop for Greece, Portugal, Spain, Ireland and possibly Italy could add up to somewhere between €500bn ($665bn, £435bn) and €1,000bn. All those countries are facing increases in interest rates at a time when they are either in recession or just limping out of one. The private sector in some of those countries is simply not viable at those higher rates."
Notice the numbers Wolfgang Munchau quotes above, and the countries he includes in the end-game rescue package. Ireland, figures in marginally - the last in line. Yet, what you are about to witness puts a different order on the potential default scenario within the PIIGS.
First the so-called 'good news' - per our Government's repeated boasting, Ireland is a country with sound public sector debt levels. Oh, really?
Chart above shows General Government Debt as percentage of GDP. Note, I decided to play 'fair' with Brian Lenihan here - he seemingly cannot understand the GDP/GNP gap, so let us not challenge him too much in his job and use GDP as a benchmark. Per chart above, as of Q4 2009 we had a 62% ratio of GGD to GDP. This puts us into a 'sound' fifth position in the group of world's most indebted 36 nations, behind such 'sound' public finance countries as
Nothing to brag about here, folks. Fifth. And rising faster than France's or Italy's or Belgium's...
Chart above puts us into comparison in terms of banks' debt - need any explanation here? Oh, yes, we are the most indebted nation in the world by that metric. Worse than this. Suppose we chop off the IFSC (roughly 60% of the banks & 'other' credit institutions' debt). We end up being - the 3rd most indebted banking system in the world.
Of course, in the end it will be the real economy of Ireland - including our corporates and households - who will be paying for Brian Cowen's policies (GGD) and for the banks (Gross Banks Debt), so perhaps here Ireland is doing well? There has to be hope somewhere?
Oops, not really. In terms of private (non-banks and non-Exchequer) sectors debt Ireland Inc is actually in worse shape than it is in terms of banks and the Exchequer (which of course begs a questions - what are we doing rescuing banks while the real economy sinks?). Notice that we occupied this dubious first place in the world back in the days of 2003 as well, and part of this is IFSC as well - pension funds and investment funds. But the amount of debt we piled on since then is purely spectacular.
And so now, down to the main figure - the combined external debt liability of Ireland relative to other most indebted nations:
I bet the unions who are calling for more borrowing to finance more growth (the irony of ironies is, of course, that they were so loudly opposing 'growth for growth sake' during the Tiger years) want Mister Lenihan to pull out the state cheque book...
Now let me slightly digress from Ireland and focus on the US. Per above data:
Before we begin, however, let me quote from today's Financial Times: "On my estimate, the total size of a liquidity backstop for Greece, Portugal, Spain, Ireland and possibly Italy could add up to somewhere between €500bn ($665bn, £435bn) and €1,000bn. All those countries are facing increases in interest rates at a time when they are either in recession or just limping out of one. The private sector in some of those countries is simply not viable at those higher rates."
Notice the numbers Wolfgang Munchau quotes above, and the countries he includes in the end-game rescue package. Ireland, figures in marginally - the last in line. Yet, what you are about to witness puts a different order on the potential default scenario within the PIIGS.
First the so-called 'good news' - per our Government's repeated boasting, Ireland is a country with sound public sector debt levels. Oh, really?
Chart above shows General Government Debt as percentage of GDP. Note, I decided to play 'fair' with Brian Lenihan here - he seemingly cannot understand the GDP/GNP gap, so let us not challenge him too much in his job and use GDP as a benchmark. Per chart above, as of Q4 2009 we had a 62% ratio of GGD to GDP. This puts us into a 'sound' fifth position in the group of world's most indebted 36 nations, behind such 'sound' public finance countries as- Greece (93%)
- Belgium (74%)
- Italy (65% - getting dangerously close to Ireland)
- France (63% - virtually indistinguishable to Ireland)
Nothing to brag about here, folks. Fifth. And rising faster than France's or Italy's or Belgium's...
Chart above puts us into comparison in terms of banks' debt - need any explanation here? Oh, yes, we are the most indebted nation in the world by that metric. Worse than this. Suppose we chop off the IFSC (roughly 60% of the banks & 'other' credit institutions' debt). We end up being - the 3rd most indebted banking system in the world.Of course, in the end it will be the real economy of Ireland - including our corporates and households - who will be paying for Brian Cowen's policies (GGD) and for the banks (Gross Banks Debt), so perhaps here Ireland is doing well? There has to be hope somewhere?
Oops, not really. In terms of private (non-banks and non-Exchequer) sectors debt Ireland Inc is actually in worse shape than it is in terms of banks and the Exchequer (which of course begs a questions - what are we doing rescuing banks while the real economy sinks?). Notice that we occupied this dubious first place in the world back in the days of 2003 as well, and part of this is IFSC as well - pension funds and investment funds. But the amount of debt we piled on since then is purely spectacular.And so now, down to the main figure - the combined external debt liability of Ireland relative to other most indebted nations:
I bet the unions who are calling for more borrowing to finance more growth (the irony of ironies is, of course, that they were so loudly opposing 'growth for growth sake' during the Tiger years) want Mister Lenihan to pull out the state cheque book...Now let me slightly digress from Ireland and focus on the US. Per above data:
- US public sector debt is only a notch above the 36 countries average;
- US Gross bank's debt is by leagues and bound lower than the 36 countries average;
- US private sector debt is just above the average for the 36 most indebted countries, which implies that
- US total economy debt is below the average for the 36 countries.
Economics 03/05/2010: World Debt Wish 4
This is the fourth post in the series covering world debt issues. In the previous post I provided analysis of the aggregate debt levels for 36 largest debtor nations (here) and for the Government debt (here) and the banks debt (here). The current post looks at the country-level data.
Chart above plots the evolution of the Gross External Debt for top 10 debtor nations. The US, predictably leads the way. Remember - these are absolute debt volumes, not relative to GDP. UK comes in second. While the UK Gross External Debt has actually declined in the duration of the crisis, that of the US remained on the rising path, with current GED levels in the US above the 2007 bubble peak. The same is true of the third (France) and fourth (Germany) countries.
Ireland is a remarkable member of this list, coming in ranked 8th largest debtor nation overall in the world in Q4 2009 - up from the 10th in Q4 2003. This clearly shows that in the Irish case, the debt bubble has been forming in the economy well before 2003. My previous research suggests that Irish debt bubble has started forming back in 1998-1999, the last year when our current account registered positive balance, as chart below illustrates:
What's even more interesting is that in 2009 Ireland held 4.1% of the total debt of the 36 most indebted countries, while producing less that 0.37% of the same group of countries' combined GDP. This implies that our economy's dependence on debt is 11 times greater than that of the group of 36 most indebted nations. Put into household finances perspective, we have managed to borrow ourselves into a complete corner, whereby our indebtedness is systemically important to the world, while our economic existence is not. If not for the euro, folks, we would have bailiffs from the IMF calling in.
Having borrowed more than Japan and Belgium, we are also leagues ahead of other, much larger economies in terms of GED:
Think of it: Irish debt is
Couple of scatter plots showing Q4 2003 position against Q4 2009 one:
Predictably, the US and UK are outliers, so let's zoom on the data ex-US & UK:
Majority of the 36 countries which are world's largest debtors locate above the 1-1 line, implying that between 2003 and 2009 total debt levels have risen in these countries. Countries that are above the regression line have above-average propensity to increase indebtedness between 2003 and 2009. Ireland sticks out like a sore thumb - sporting the largest Gross External Debt increase of all comparators, relative to the starting position in Q4 2003. The overall relationship between the starting debt levels and the current ones is extremely strong - something to the tune of 98% of variation in current debt positions is explained by the starting ones, which simply means that all 36 countries are habitual addicts to debt. Again, Ireland is the leading addict in the club.
A caveat, of course is due here - the figures for Ireland do include IFSC, but hey, why shouldn't they - IFSC is our economic miracle, isn't it? It provides jobs in Ireland. It pays taxes in Ireland. It pays rents to Irish developers...
Of course, do recall that GED includes 3 sectors in it - Banks, Government and the rest of the economy. Banks and Government, as I've shown in the previous post, are linked:
But the link is not particularly strong: correlation between GGD & Banks Debt was +0.49 in 2003 - positive, but not exceptional. It rose to +0.55 in 2009, reflecting the crisis measures transferring taxpayers wealth to the banks. But this too is not dramatic. A relatively modest increase in correlation between 2003 and 2009, plus the fact that we already had a positive correlation back in 2003 highlight pro-cyclicality of fiscal policies worldwide.
Now, let's put the GEDs together, for comparatives:
Ireland is the member of USD1 trillion debt club, despite having a substantially smaller income than any of the countries around it. Even removing IFSC out of this equation still leaves us in the club, pushing our total debt to the 12th position worldwide.
In the next post, I will look at the debt levels relative to countries' GDP, so stay tuned.
Chart above plots the evolution of the Gross External Debt for top 10 debtor nations. The US, predictably leads the way. Remember - these are absolute debt volumes, not relative to GDP. UK comes in second. While the UK Gross External Debt has actually declined in the duration of the crisis, that of the US remained on the rising path, with current GED levels in the US above the 2007 bubble peak. The same is true of the third (France) and fourth (Germany) countries.Ireland is a remarkable member of this list, coming in ranked 8th largest debtor nation overall in the world in Q4 2009 - up from the 10th in Q4 2003. This clearly shows that in the Irish case, the debt bubble has been forming in the economy well before 2003. My previous research suggests that Irish debt bubble has started forming back in 1998-1999, the last year when our current account registered positive balance, as chart below illustrates:
What's even more interesting is that in 2009 Ireland held 4.1% of the total debt of the 36 most indebted countries, while producing less that 0.37% of the same group of countries' combined GDP. This implies that our economy's dependence on debt is 11 times greater than that of the group of 36 most indebted nations. Put into household finances perspective, we have managed to borrow ourselves into a complete corner, whereby our indebtedness is systemically important to the world, while our economic existence is not. If not for the euro, folks, we would have bailiffs from the IMF calling in.Having borrowed more than Japan and Belgium, we are also leagues ahead of other, much larger economies in terms of GED:
Think of it: Irish debt is- x2 times greater than Australia,
- x2.5 than Canada,
- x3 Hong Kong & Denmark,
- x5 Greece
- x2 the combined debt of Brazil, India & Russia which have combined 2009 GDP more than x44 times that of Ireland!
Couple of scatter plots showing Q4 2003 position against Q4 2009 one:
Predictably, the US and UK are outliers, so let's zoom on the data ex-US & UK:
Majority of the 36 countries which are world's largest debtors locate above the 1-1 line, implying that between 2003 and 2009 total debt levels have risen in these countries. Countries that are above the regression line have above-average propensity to increase indebtedness between 2003 and 2009. Ireland sticks out like a sore thumb - sporting the largest Gross External Debt increase of all comparators, relative to the starting position in Q4 2003. The overall relationship between the starting debt levels and the current ones is extremely strong - something to the tune of 98% of variation in current debt positions is explained by the starting ones, which simply means that all 36 countries are habitual addicts to debt. Again, Ireland is the leading addict in the club.A caveat, of course is due here - the figures for Ireland do include IFSC, but hey, why shouldn't they - IFSC is our economic miracle, isn't it? It provides jobs in Ireland. It pays taxes in Ireland. It pays rents to Irish developers...
Of course, do recall that GED includes 3 sectors in it - Banks, Government and the rest of the economy. Banks and Government, as I've shown in the previous post, are linked:
But the link is not particularly strong: correlation between GGD & Banks Debt was +0.49 in 2003 - positive, but not exceptional. It rose to +0.55 in 2009, reflecting the crisis measures transferring taxpayers wealth to the banks. But this too is not dramatic. A relatively modest increase in correlation between 2003 and 2009, plus the fact that we already had a positive correlation back in 2003 highlight pro-cyclicality of fiscal policies worldwide.Now, let's put the GEDs together, for comparatives:
Ireland is the member of USD1 trillion debt club, despite having a substantially smaller income than any of the countries around it. Even removing IFSC out of this equation still leaves us in the club, pushing our total debt to the 12th position worldwide.In the next post, I will look at the debt levels relative to countries' GDP, so stay tuned.
Sunday, May 2, 2010
Economics 02/05/2010: World Debt Wish 3
Having covered the aggregate debt levels (here) and Government debt (here), now its time to move on to Banks. And some surprising stuff the numbers are throwing:
The UK is clearly an outlier in the entire global series. This is, of course, due to two factors - firstly, the international hub position of London, and secondly - the over-reliance of European and other non-US economies on banks lending (as opposed to the much more significant role played by equities and bonds in the US). Irish reliance on banking sector is also formidable. Also notice that
Taking out the UK, as an influential outlier:
The remarkable part of the above picture is that virtually no banking sector amongst the top 10 debtor nations has managed to deleverage to anywhere near pre 2006 levels. The crisis, folks, has not gone away - it has been covered up with a thick layer of state-issued liquidity. In other words, printing presses, not structural reforms, what has been working over time to 'resolve' the crisis. And this can only mean two possible outcomes: high inflation or renewed crisis. Since the former relies at least on some recovery in consumer ability to take on new debt, the only way we can avoid a double-dip crisis scenario is if consumers have deleveraged more than the banks did during the last two years. I will be moving on to the real economy sector in my later posts, but for now let me give you an idea of the findings - there was virtually no deleveraging of consumers. Instead, the real economy is now deeply in debt itself.
Back to the banks for now. Chart above shows that the story of banks deleveraging is even worse in the second tier of debtor nations. In fact, with exception of Belgium, no banking system amongst the 11th-20th ranked debtor nations has managed to reduce the levels of debt incurred during the bubble formation.
Chart below once again highlights the nature of the UK banking system
Zooming onto the main group of countries (ex-UK):
All of the banking sectors in top 36 debtor countries are carrying more debt today than they did in Q4 2003. And Ireland once again stands out as the most debt-dependent country in the group when it comes to the rate of growth in banking liabilities since 2003.
So let us summarize the findings so far:
The UK is clearly an outlier in the entire global series. This is, of course, due to two factors - firstly, the international hub position of London, and secondly - the over-reliance of European and other non-US economies on banks lending (as opposed to the much more significant role played by equities and bonds in the US). Irish reliance on banking sector is also formidable. Also notice that- Irish banking deleveraging began in 2008, similar to other countries;
- Recall from the previous post that Governments ramp up of liabilities in most countries, unlike Ireland, has began with a lag to banks deleveraging.
Taking out the UK, as an influential outlier:
The remarkable part of the above picture is that virtually no banking sector amongst the top 10 debtor nations has managed to deleverage to anywhere near pre 2006 levels. The crisis, folks, has not gone away - it has been covered up with a thick layer of state-issued liquidity. In other words, printing presses, not structural reforms, what has been working over time to 'resolve' the crisis. And this can only mean two possible outcomes: high inflation or renewed crisis. Since the former relies at least on some recovery in consumer ability to take on new debt, the only way we can avoid a double-dip crisis scenario is if consumers have deleveraged more than the banks did during the last two years. I will be moving on to the real economy sector in my later posts, but for now let me give you an idea of the findings - there was virtually no deleveraging of consumers. Instead, the real economy is now deeply in debt itself.
Back to the banks for now. Chart above shows that the story of banks deleveraging is even worse in the second tier of debtor nations. In fact, with exception of Belgium, no banking system amongst the 11th-20th ranked debtor nations has managed to reduce the levels of debt incurred during the bubble formation.Chart below once again highlights the nature of the UK banking system
Zooming onto the main group of countries (ex-UK):
All of the banking sectors in top 36 debtor countries are carrying more debt today than they did in Q4 2003. And Ireland once again stands out as the most debt-dependent country in the group when it comes to the rate of growth in banking liabilities since 2003.So let us summarize the findings so far:
- Irish Government debt position is by far not the strongest today - in absolute terms, our General Government Debt levels rank 13th highest in the world, up from 19th back in 2003 Q4.
- Irish Government debt has been rising faster than that of the other 36 most-indebted countries between 2003 and the end of 2009.
- Irish banking sector debt position is 8th highest in the world, up from 10th highest in Q4 2003 - in absolute dollar terms.
- Irish banks deleveraging has in effect resulted in a swap of private liabilities for public liabilities, with no net reduction in overall economy's debt levels.
- Global debt levels remain at extremely high levels and deleveraging has not taken place to the extent needed to resolve the crisis.
- Private (ex-Banks and ex-Government) sectors debt remains at virtually peak level consistent with the bubble.
- Banks deleveraging also has fallen short of what would be required to bring the debt levels down to more realistic levels.
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