Economics 30/06/2010: The curve is getting curvier

This wasn't supposed to be news, folks. ECB has pre-announced that it will be closing down its 12 months lending facility some time ago, and the readers of this blog would have known this much - see here. So what's the rush to shout 'Stop!' now, then?

Well, it turns out that in the best European tradition, Euro area banks have conveniently decided not to do much about their deteriorating loan books, preferring the Ponzi scheme of monetizing their poor loan books via ECB funding, and ignoring all warning lights.

Per Bloomberg report today: the ECB said it will lend banks €131.9bn more under its 3-mo lending facility. European banks tomorrow will have to repay €442bn in 12-mo funds, assuming ECB wants to preserve the remaining shreds of monetary credibility and shuts down the pyramid game. So, promptly a week after Bank for International Settlements' dire warning that zero interest rates are leading to shortening maturity of banks & sovereign debts, inducing greater maturity mis-match risks for both, we have a roll over of 1/3rd of the ECB quantitatively-eased banks debts into a much shorter maturity instrument.

ECB said that Euro area-wide, 171 banks asked for the 3-mo funds at 1%, with banks allowed to borrow in the market at about 0.76% euribor and rising (again, the theme picked up by this blog ahead of general media attention: here).

And there is not a chance sick-puppies, like Irish, Greek, Spanish or Portuguese banks, can borrow at the euribor rates. Instead, as the Indo reports today, Fitch ratings agency estimates that the Irish banks borrowed a whooping 12% of the €729bn the ECB has lent to all Euro area banks in 2009. Some of this is accounted for by the IFSC-based facilities. But some, undoubtedly, is held by the Irish banks, and their own IFSC affiliates. Not surprisingly, Irish banks shares have been running red in days preceding July 1...

The liquidity fall-off curve is getting curvier for Irish banks, to use Bertie Ahearne's model of dynamic analysis.


Bloxham morning note reports on an interesting development: the Arms index - an index measuring overall bullishness (for values <1.0)>1.0) of the stock markets "rose to one of the highest levels in at least the last seventy years yesterday rising to over 16 before closing at 5.88". This is an extreme move and at these valuations it is consistent with the overall markets bottoming. As Bloxham note states, "what is fascinating is that yesterdays extreme reading was in fact higher than the 11.89 found at the absolute bottom of the 1987 crash. The pullback in February 27^th 2007 also ended on an extreme reading of 14.84." Here's the chart - again, from Bloxham's note:
Exceptional!

Economics 29/06/2010: Digital economy rankings 2010: Ireland details

Updated: here is the link to the actual report.

Ireland results, as promised.

High level stuff first:
Good move - 1 rank improvement overall, improvements in 3 sub-categories, but slipping in 3 other.

Compared to peers:
Note: New Zealand has shown remarkable consistent gains over the last 10 years, moving to top 10 position this year for the first time.

Next, consider all categories changes in the case of Ireland:
Very strong across the board, offset by significant deterioration in connectivity and technology infrastructure score (driven by new measurements of quality of broadband and mobile communications introduced in this year's rankings). Weak performance in consumer & business adoption - primarily on the back of economic crisis. Also weak performance in social & cultural environment, driven by education system shortcomings.

So to summarize:

• Ireland ranks 17th in connectivity & technology infrastructure, though broadband penetration remains low
• Ireland ranks 17th in business environment in tough market conditions
• Ireland ranks 17th in social & cultural environment despite low innovation scores compared to regional average
• Ireland ranks 22nd in legal environment, the main detractor is electronic ID implementation
• Ireland is in 21st place on Government policy & vision, the major challenge is in ICT spend
• Ireland is doing well and placed at 8th in consumer & business adoption
• Ireland has the lowest score drop in Western Europe from last year, which is only -0.02 (7.84 to 7.82)
• Ireland moved 1 rank up overall compared to 2009 (18 to 17), consumer & business adoption moved 4 ranks up and social & cultural environment up by 3 ranks
• Ireland has made a lot of progress in Government policy & vision scoring 8.40 and up 6 ranks, the progress is highest (+1.10) of all in Western Europe
• Broadband quality and affordability the weakest of connectivity category, scoring low on the quality and drop in affordability measurement
  

Economics 29/06/2010: EIU/IBM report on e-readiness

Global Digital Economy 2010 rankings are being launched today by the Economist Intelligence Unit (EIU) and IBM's Institute for Business Value. Here are some early results - I will be blogging on more in-depth analysis over the next few days.

Global Top 10:
Sources: all charts and tables are from IBM analysis of EIU/IBM e-readiness rankings, 2010.

Western Europe results:

• Overall, regional digital economy score declined in 2010 – from 7.86 in 2009 to 7.70 this year
• The biggest score decline this year in the connectivity & technology infrastructure (-0.99), which is highest drop of all regions
• Sweden, Finland, Ireland and Spain are up in their overall ranks compared to last year
• The strength lies in all categories being at the top of all regional averages. Also, Western Europe average is higher than Major markets. The score increased for business environment (+0.20) & Govt policy (+0.18) from last year
• Western Europe dropped in all other 4 categories compared to last year (Connectivity, Social environment, Legal environment and Consumer & business adoption)
  

Note that Western Europe leads the rest of the world in terms of regional scores. This, however, in part is due to the inclusion of three smaller economies in North American region: Bermuda, Jamaica, Trinidad and Tobago.
Clearly, there are two well-defined tiers in Western European regional grouping - countries that score between 1 and 12 globally (challenging top 10 positions in the world) and those lagging at around mid-20s and low 30s.


Ireland results to follow, so stay tuned.

Economics 28/06/2010: Watch out for VIX

Short-term VIX options and VIX itself are starting this week on the upside... is risk contagion spreading from sovereign bonds to corporate?
An interesting view here.

Let's put this on record - I think we are now in 50:50 chance of a new recession - Euro area, UK and US, plus Japan. Time horizon - 6 months.

Economics 28/06/2010: Knowledge economy blueprint worth the ink

A quick post on two articles relating to science, research and knowledge economy Ireland.

Sunday Business Post printed an excellent article by Professor Colm Kearney of TCD School of Business on the policies for developing a real knowledge economy. The link is here. As those of you who follow my writings would know, I have campaigned for a long time now for proper recognition of the non-hard science fields of social sciences, business research and humanities as contributors to the 'knowledge economy'. See links here, here, here, here, here, and probably most succinctly - here.

Professor Kearney's article is certainly worth a read for anyone interested in the economic future of this country.

Note: Professor Kearney, unbeknown to many in Ireland, advised Australian Government during the period when Australia established one of the most progressive economic and fiscal environments which has resulted in its economy being able to weather the latest global crisis remarkably well.

One just hopes Professor Kearney gets drafted into a policy-making framework in this country, with some real power to change things.

The second story, related to the subject was also published by Sunday Business Post (here). It relates to the issue of collapsing funding for research in Irish leading academic institution - TCD. In the article in early 2009 published by the Sunday Business Post (here) I warned that it is only a matter of time when thousands of Irish post-docs - funded by the EU, Irish Government and minor private sector grants - are going to face a chop. Jobless PhD - as labeled them - are the direct cost of our short-sighted policies for pursuing lab-coats based innovation and knowledge economics.

Economics 28/06/2010: G20 to euribor: beware of the central banks

Update: with a slight delay on this blog's timing - Reuters picks up the same thread here.


Another Monday, another set of pear shape stats.

First, we had a farcical conclusion to a farcical meeting of G20. If Pittsburgh summit was a hog wash of disagreements, Toronto summit had a consensus view delivered to us, mere mortals who will pay for G20 policies. This consensus was: G20 leaders called for

• austerity, but not too much (not enough to derail growth, but enough to correct for vast deficits - an impossible task, assuming that public deficit financing has much of stimulating effect in the first place);
• generating economic growth (with no specifics as to how this feat might be achieved);
  
• increased tax intake (to help correct for deficits); and
• no changes to be made to the global trade and savings imbalances.

In other words, G20 decided that it is time to have a 4 course meal without paying for one.

Then , on the heels of these utterly incredible (if not outright incompetent) pronouncements by G20, Bank for International Settlements (BIS) came in with a stern warning to the Governments worldwide to cut their budget deficits "decisively", while raising interest rates. Funny thing, BIS didn't really see any irony in cutting deficits, while raising the overall interest bill on public debt. Talking of Aesopian economics - let's pull the cart North and South, in a hope it might travel West.

In many ways, BIS got a point: “...delaying fiscal policy adjustment would only risk renewed financial volatility, market disruptions and funding stress” said BIS general manager Jaime Caruana. Extremely low real interest rates distort investment decisions. They postpone the recognition of losses by the banks, increase risk-taking in the search for (usually fixed) yield, perpetuating nearly economically reckless financing of sovereigns that cannot get their own finances in order, and encourage excessive levels of borrowing by the banks.

Continued water boarding of the western economies with cheap cash through Quantitative Easing operations by the CBs risks creation of zombie banks and companies with sole purpose in life to suck in liquidity from the markets. Alas, the problem is - shut these zombies down and you have no means for monetizing public debt in many countries, especially in the Eurozone. Boom! Like the main protagonists in Stephen King's movies, governments around the world now need zombies to rush into their disorganized homes before the whole plot of deficit financing blows up in their face.

BIS also warned that many economic experts and central banks are underestimating inflation risks. And this is just fine, assuming you are dealing with short term investment horizons. However, for a Central Bank to ignore the possibility of a restart of global inflation - fueled by the emerging markets growth and later also supported by accelerated inflationary pressures in the advanced economies following the re-flow of liquidity out of the bank vaults into the real economy once writedowns are recognized and banks balancesheets stabilise - is a very dangerous game. inflation, you see, is sticky.

And inflation might be coming. Look no further than the Fed (here) and the US Administration insistence on the need for continued debt-financed stimulus.

Or, look no further than the movements in the interbank lending markets:

So the long term Euribor is up, up and away despite all the Euro area leaders' talk about fiscal solidarity funds and tough austerity measures. Think: why? Either the interbank markets don't believe in Euro area's ability to get its own house in order (which they certainly don't) or they believe that future inflation will be higher (which of course they do)...

Hence, shorter maturities are in an even more pronounced push up:

While dynamically, the trends are deteriorating:
Now, think about the Irish banks (Spanish, Portuguese, Greek - etc) that are on life support of interbank markets and ECB. Can they sustain these credit prices?.. While facing continued writedowns?.. Don't tell I did warn you about these.

Economcis 27/06/2010: US retail sector - lessons for Ireland?

A very interesting perspective on the consumer side of the US economy in a recent post on Seeking Alpha (here):

"Let’s compare and contrast 2007 and 2010:

• We have lost 7.8 million jobs since then.
• The unemployment rate is 9.7% versus 4.5%.
• Total unemployed workers are now 15.7 million versus 6.5 million.
• Real personal income less government transfers is lower by 6.5%, or $624 billion.
• Real retail sales have rebounded just 4% from their lows and are still down 9% from the 2007 peak.
• Consumer credit for February showed another sharp retrenchment of -5.6B.
• Consumer bankruptcies for March were the highest level since 2005.
• There is a glaring $1.5 TRILLION hole in the consumer balance sheet.
• Home foreclosures surged 19% last month and are at their highest level since 2005.
• The consumer’s largest asset (housing) is down 33% since 2007."

And a chart:
The index closed down at 89.49 this Friday.

This has three implications for Ireland:

1. US problems on consumer side pale in comparison with those found here. We had much deeper contractions in housing asset prices, much greater exposure to housing in the overall composition of household assets portfolios, much more severe acceleration in unemployment, much deeper collapse in disposable after-tax incomes (courtesy of twin forces: Government tax policies and indirect tax hikes, plus wages compressions), lack of compensating increases in Government transfers, more restrictive personal bankruptcy laws, greater consumer leveraging, and steeper fall-off in credit availability;
2. As I wrote before (here), household investment is the core leading indicator of recoveries and recessions; and
3. Our cohort of official commentariate on matter economic has been very eager to drum up the stories about 'return of consumer spending' in recent weeks.

To remind you - here are our latest retail sales stats:
In my view, what we are seeing is a temporary uplift in sales of some items that are overdue replacement (due to amortization) after 3 years of collapsed sales. This, folks, is not a recovery. It is a dead-cat-bounce... When you hit concrete at 100mphs, the bounce can be substantial. But it hardly qualifies as a 'structural improvement'. Looks like some folks might be deluding themselves...

Economics 27/06/2010: G20 - real stats and real issues

As G20 leaders undertake another attempt at injecting some balance into global economic order - with last meeting in Pittsburgh focused on stimulus strategies, while the current one in Toronto focusing on austerity - it is worth taking a look at the stakes.

Bank of Canada estimates that disorderly (or uncoordinated) exit from global stimulus phase of the recession can lead to a loss of up to USD7 trillion worth of output, primarily concentrated in the advanced economies.

However, the story is more complex than the simple issue of whether G20 nations should opt for a fiscal solvency or for a continued monetary and fiscal priming of the pump. Here are the key stats on the leading global economic blocks, revealing the structural imbalances that suggest the real problem faced by the advanced economies is the debt-driven nature of their fiscal and private sector financing.
First chart above shows Current Accounts for the main blocks, including the G20. Two things are self-evident from the chart. Firstly, the crises had a crippling effect on the overall trade flows from the emerging economies to the advanced economies, though this came about mostly at the expense of countries outside Asia Pacific. Second, crisis notwithstanding, IMF forecasts (data is from IMF April 2010 update to WEO database) the trend remains for unsustainable trade deficits for the Advanced Economies. European (read: German) surpluses of the last two decades are going to be wiped out in the post-crisis scenario, but it is clear that the US, as well as other advanced economies, will have to face a much more severe adjustment toward more balanced current account policies in years to come.

These adjustments will have to involve government finances:
Chart above shows government deficits, highlighting the gargantuan size of the fiscal measures deployed by the US and European countries, as well as a massive stimuli used in some 'Tiger' economies and China, over the latest crisis. This puts into perspective the size of the austerity effort that has to be undertaken to bring fiscal policies back to their more sustainable path. You can also see the relative distribution of these adjustments - the gap between the red line and the blue line. This gap is accounted for, primarily, by the UK, Japan and US and is much smaller than the overall Euro area contribution to G7 deficits.

But there is more to the deficits picture than what is shown above. Expressed in terms of percentages of GDP, the figure above obscures the true extent of the problem. So let's look at it in absolute dollar terms:
Now you can clearly see the mountain of debt (deficit financing) deployed in the crisis. Someone, someday will have to pay for this. It will be you, me, our children and grandchildren. Can anyone imagine that things will get back to pre-crisis 'normal' any time soon with this level of deficit overhang on the side of Governments alone?

What is even more disturbing in the picture is the position of Advanced Economies in the period between the two recessions. It is absolutely clear that Advanced Economies have lived beyond their fiscal means, even at the times of plenty, running up massive deficits in the years of the boom.

This puts to the test our leaders (EU and US) claims that the banking system reckless lending was a problem. The banks were not shoving cash at the Clinton-Bush-Obama administrations, or at European Governments. Instead, just as the banks were hosing their domestic economies down with cheap cash, courtesy of low interest rates, Western governments were hosing down their friends and cronies with deficit financing. The two crises might have been inter-related, but both fiscal profligacy and banks reckless risk-taking are to be blamed for our current woes.

Irony has it, neither the banks, nor the political profligates have paid the price for this recklessness.
Hence, the dire state of the governments' structural balances. As chart above shows, in the entire period of 20 years there was not a single year in which advanced economies (G7 or G20 or the Euro zone) have managed to post a structural surplus. Living beyond ones means is the real modus operandi for the advanced economies' sovereigns. Expressed in pure dollar terms:

Now, on to the levels of economic activity:
As I remarked on a number of occasions before, the whole idea of the Advanced Economies decoupling from the world is really a problem for the Euro area first and foremost. want to see this a bit more clearly?
Look at G7 plotted above against the Euro area and ask yourself the following question. G7 includes Japan - a country that is shrinking in its overall importance in the global economy. This contributes significantly to the widening gap between the world income and G7 income. But the region in real trouble is the Euro zone. Again, this puts Euro area problems into perspective:

• Anemic growth
• Poor relative performance in terms of absolute levels of activity

In short - decay? or put more mildly - Japanese-styled obsolescence? Whatever you might call it, the likelihood of the Euro area being able to cover its debts and reduce its deficits is low. Much lower than that for the US and the rest of G7 (ex-Japan).

Some revealing stats on savings and investment:
Clearly, chart above shows the opening of the gap between the need for demographically-driven savings growth in the advanced economies, where ageing population is desperately trying to secure some sort of living for the future, and the lack of real savings achieved. It also shows the downward convergence trend in rapidly developing economies, where younger population is finally starting to demand better standard of living in exchange for years of breaking their backs in exports-focused factories.

Yet, as savings rose during the peak in advanced economies (pre-crisis), investment was much less robust and it even declined in rapidly developing economies:
Why? Because of two things: much of domestic savings in Advanced Economies, especially in Europe, was nothing more than the Government revenue uplift during the boom. In other words, instead of European citizens keeping their cash to finance future pensions, Governments were able to increase expenditure out of booming tax revenues and borrowing against the booming savings rates. Ditto in the USofA (although to a smaller extent). In the mean time, Asia Pacific Tigers started to finance increasingly larger proportion of fiscal imbalances in Advanced Economies, driving down their domestic investment pools and shifting their domestic savings into foreign assets. Which, of course, is an exact replica of the Japanese global investment shopping spree of the 1980s - and we know where that has led Japan in the end...

So the scary chart for the last:
The big question for G20 this time around will be not the stated in official press conferences and statements - but will remain unspoken, although evident to all involved: Given that over the last 20 years, advanced economies financed their purchases of exports from the rapidly developing countries by issuing debt monetized through savings of the developing countries, what can be done about the current twin threat of excessive debt burdens in advanced economies and the shrinking savings in emerging economies?

This is a far bigger question that the USD7 trillion one posited by the Bank of Canada. It is a question that will either see some drastic changes in the ways world economy develops into the next 20 years, or the permanent decline of the advanced economies into Japan-styled economic and geo-political obsolescence.

Economics 25/06/2010: eurozone leading indicators down

Eurocoin, CEPR-Bank of Italy leading economic indicator of economic activity in the Eurozone is down for the fourth month in a row, signaling continued pressure on economic growth:
As the result, I am revising my forecast for Eurozone growth for Q2 2010 to between 0.2% and 0% with the risk to the downside from that.

Negative weights coming from declining industrial production activity and composite PMIs, falling consumer sentiment in Germany, France, Italy and Spain, and equity markets declines. Robust growth in exports provides sole positive support.

Economics 25/06/2010: One for the Calendar

This will be interesting:

• Brian 'Nama-crusher' Lucey v Nama 'Tin Man'
• Colm 'Save the Irish Middle Earth' McCarthy v 'Spend your money on Government stuff' Man
• Plus Vincenzo 'Take no prisoners' Brown, Antoin 'History of economic thought' Murphy, etc

I would have attended, if not for the Trade Mission to Russia...

Economics 24/06/2010: Irish exports & trade stats

Trade stats are out today for Ireland. Here are few illustrations and trend discussions.
Clearly, exports have rose in April, after a seasonally adjusted decline in March. We are now again above the trend line, and since January 2009, the trend line is flatter than over the entire sample, which means exports performance remains relatively strong. However, this does not mean things are great. April 2010 exports are down 9.9% on April 2009 and up only 2.22% on April 2008. They are down 6.6% on April 2007. Exports were down 7.7% in March 2010 in year on year terms. So despite flashing above the long run trend line, exports are still under pressure.

Imports have posted significant rise. Imports increased by 8% between March and April 2010.

In Q1 overall, exports fell from €21,911m to €20,789m down -5%. This was driven by:

• Organic chemicals falling by 17%, Computer equipment by 42% and Other transport equipment (including aircraft) by 85%, offset by
• Exports of Medical and pharmaceutical products increase of 8% and Metalliferous ores increase of 75%.
  

Over the same period, imports decreased from €12,527m to €11,030m, down -12%:

• Computer equipment decreased by 54%, Other transport equipment (including aircraft) by 42% and Electrical machinery by 11%.
• Imports of Petroleum increased by 25%, Medical and pharmaceutical products by 19% and Road vehicles by 30%.
  

Trade balance remained flat in April relative to March:
Trade balance is now below long-term trend line. Between April 2009 and April 2010 trade balance fell a whooping 25.7%, much larger drop than the decrease between March 2009 and March 2010 -9.5%. However, trade balance is extremely healthy compared to 2008 - up 38.4% on April 2008.

Terms of trade stats are not updated from December 2009:
But, due to our exports reliance on imported inputs (see my earlier post on IMF statement today), there is basically no relationship between Ireland's terms of trade and our exports activity:
Geographic snapshots for top 30 countries by volume of exports in Q1 2010:
US down, UK down. Total EU exports down. Euro zone down in double digits. All double-digit gains are in the smaller trading partners (less than 1% of total trade volumes).

Economics 24/06/2010: IMF statement on Irish fiscal policies

IMF released today its Concluding Statement for the 2010 Article IV Consultation from May 31, 2010.

1. Through assertive steps to deal with the most potent sources of vulnerability,

Irish policymakers have gained significant credibility.

2. Along the complex and long-haul path to normalcy, retaining policy credibility will require active risk management. The appropriately ambitious fiscal consolidation plan demands years of tight budgetary control. Likewise, the weaning of the banking sector from public support and its eventual return to good health will proceed at only a measured pace. In the interim, unforeseen fiscal demands may occur. …With limited fiscal resources for dealing with contingencies, maintaining a steady policy course will require mechanisms for oversight and transparency, and high quality communication to minimize risks and sustain the political consensus and market confidence.

[The really significant bit here is the IMF voicing their position that “maintaining a steady policy course will require mechanisms for oversight and transparency, and high quality communication”. In a diplomatic world of IMF’s statements, neutered by the ‘consultative’ bargaining with the Government, this is likely to mean the following: “Ireland has no mechanism for transparency and oversight (enter Nama). Ireland has no quality communications mechanism, with the preference given to ‘hit-and-run’ announcements of successive cash injections into the banks preceded by no policy debates, and followed by meek Dail talking shops in which discordant voices of fiscally and financially unqualified opposition and backbenchers bicker over minutiae, missing the big picture.”]

3. Ireland is likely to emerge from its output contraction into a period of relatively modest growth potential and high unemployment. Current Irish and global conditions make forecasts subject to much uncertainty. Various indicators point to a return to economic growth during this year, but following its earlier steep fall, GDP in 2010 is projected to be about 1/2 percent lower than in 2009. As the post-crisis dislocations are undone, annual growth rates should rise gradually to about 3.5 percent by 2015. After peaking around 13.5 percent this year and, absent additional policy measures, a sizeable structural component will likely keep unemployment at around 9 percent in 2015.

[Now, these numbers fly in the face of our budgetary projections – see table from the Budget 2010 estimates submitted to the EU Commission. And they imply much more significant challenge on fiscal consolidation side than what the Government has been aiming for.]

4. The improved global outlook will help, but to a limited extent. With some reversal in the earlier loss of competitiveness and improvements in the global economy, exports will lead the recovery. But spillovers to the domestic economy will be limited because of exports’ heavy reliance on imports, their tendency to employ capital-intensive processes, and the sizeable repatriation of profits generated by multinational exporters.

[I’ve been saying this for some time now. Exports will not get us out of this corner. More importantly, since our exports rely on inputs imports so heavily, we are staring at the situation where positive effects from the weaker euro on exports will be offset by the negative effects of rising cost of imported inputs. Also notice – this statement clearly puts IMF at odds with the Government, in so far as the IMF is explicitly stating here that for fiscal balance, it is Irish GNP, not GDP that matters most. Again, good to see another one of my long term concerns validated.]

5. Moreover, home-grown imbalances from the boom years will act as a drag on growth. The unwinding of these imbalances—arising from rapid credit growth, inflated property prices, and high wage and price levels—will limit the upside potential.

Financial sector weakness, fall in real estate prices, and high unemployment could continue to reinforce each other.

[In other words, as I have recently pointed out in the press and on the blog – the twin credit and asset markets crisis is likely to last long time. Years in fact. And this really blows apart the entire Nama strategy of getting the transferred loans back to the par with 10% (or was it not 5% before that?) appreciation in property values.]

But deleveraging to reduce the loan-to-deposit ratio and banks’ risk aversion will constrain lending and the pace of economic recovery, at least in 2010–11. Higher than expected losses, uncertainties in global regulatory trends, and renewed financial market tensions—that may restrict access to funding—create downside risks. In this environment, the targets for SME lending need to be combined with strong prudential safeguards as the non-performing loans of this sector have grown rapidly.

[So unlike the Irish Government, IMF sees banks deleveraging impacting adversely the real economy, higher margins pushing homeowners deeper into insolvency, higher banks charges and banking costs destroying operating capital capacity in the economy, etc. All the things we’ve been warning the Government about – Karl Whelan, Peter Mathews, Brian Lucey, myself – but to which our policymakers paid no attention whatsoever.]

7. Three restructuring priorities deserve attention:

NAMA should schedule an orderly disposal of the property assets acquired aimed to reduce the large overhang of property in state hands, restart market transactions and, thus, help normalize the property market. Oversight of NAMA operations, which is provided for in the legislation, is desirable.

[Thank you, IMF, for supporting exactly the criticism that myself and others have been levying against Nama. Nama needs transparency, oversight, clear business plan. Unfortunately, the legislation does not provide for proper oversight. Nama is an insider-run institution with no meaningful oversight capacity given to anyone, save for the Minister for Finance. Of course, the IMF is saying this indirectly. If the legislation did provide oversight systems sufficient enough, why is the IMF concerned about the need for oversight of Nama operations?]

Mindful of the moral hazard risks, narrowly-targeted support measures for vulnerable homeowners would limit the economic and social fallout of the crisis. …This process will be aided by an overdue shift to a more efficient and balanced personal insolvency regime.

[Again, everything here is a repeat of what we, the critics of the Government approach to the crisis, have been saying for months now. Including the need for reforming our atavistic bankruptcy laws (the calls that have been falling on Government’s deaf ears for some months now) and the need for a support package for homeowners in negative equity and distress (the calls that the Government is responding to by preparing to introduce new taxes on the same homeowners already stretched financially).]

10. Looking ahead, substantial challenges remain. Following the already sizeable consolidation in 2009 and 2010, further consolidation measures, although not as large as that already achieved, of at least 4.5 percent of GDP are required to reach the 2014 target. If GDP growth outcomes are weaker than those currently foreseen by the authorities—a clear possibility within the current range of scenarios—the additional effort needed may even be greater. Staying on target is critical to retain the hard-earned credibility. But the risk of “consolidation fatigue” and, hence, a fraying of the necessary social cohesion cannot be ruled out. For this reason, greater specificity on further proposed measures is necessary. Sustainable expenditure savings will be central, including through efficiencies in public services. Broadening the tax base for revenue enhancement will also be necessary.

[This is clearly the heaviest-edited section of the statement from the point of view of ‘consultative’ additions added by the Government. The language clearly states that the IMF does not believe Government current plans for reducing the deficit to 3% target by 2014. Just month and a half ago, IMF showed its estimates of Government deficit and they are clearly above 5% mark in 2015. Yet, a month ago the Government already had in place plans to further reduce the deficit by 4.5% before 2014. So either the IMF is saying that the Government will require a fiscal adjustment of 4.5% on top of previously announced 4.5% - to the total of 8.8% of GDP or roughly speaking €14.5 billion in total between now and 2014, or their numbers do not add up – per link above.

The really important stuff in this statement is just what risks concern the IMF. The risk of ‘consolidation fatigue’ – referring most likely to the Croke Park deal that effectively shut down any new savings in the public sector wage bill through 2014 would be one. The risk of the Government falling off the target – the risk reinforced by the continued delusionary rhetoric emanating from the ‘turnaround is upon us’ crowd. The risk of weaker growth than forecasted in the Budgetary estimates (table above).

Note that the IMF insists on central role in the adjustment to be played by ‘sustainable expenditure savings’. This is certainly divergent from the approach adopted so far, with tax measures and capital spending cuts (one-offs) being responsible for the lion’s share of fiscal adjustments.]

[On the net, the IMF is clearly seriously concerned about the ability of the Government to achieve meaningful consolidation of the budgets. On the day when Irish Government 10-year bond yields hit 5.38%, this concern means that means that IMF polite wording is just catching up with the bond markets’ clear and loud vote of low confidence in Ireland’s ability to match its tough rhetoric with equally resolute actions.]