Economics 13/9/10: FT's belated recognition of Irish realities

In today's FT (here), Wolfgang Munchau clearly states that (emphasis is mine): "...Irish banking sector is insolvent, and there are questions about the capacity of the Irish state to absorb those losses. ...two years have passed [since the crisis acknowledgement by the state] and nothing has been resolved.

…As we saw last week, this strategy [of shoving bad loans under the rug via Nama and quasi-recapitalizations] came badly unstuck in Ireland. The Irish government massively underestimated the scale of the problem in its banking sector. On my own back-of-the-envelope calculations, the cost of a financial sector bail-out may exceed 30 per cent of Irish gross domestic product, if you make realistic assumptions about bad debt write-offs and apply a conservative trajectory for future economic growth.

[Note: this blog has previously (here), on a number of occasions estimated the overall impact of the net losses realized by the banks to Irish taxpayers will be in the region of €62-75 billion, inclusive of Nama. Based on the Department of Finance own figures, this can be expected to amount to 38.5-46.6% of Ireland’s 2010 GDP or 48-58.1% of our GNP. Either range of numbers is significantly in excess of Munchau’s back-of-the-envelope estimate.

However, even at 30% of annual GDP, the expected hit on this economy from the banking sector debacle is simply insurmountable.

No economy on earth can be expected to withstand a 30% contraction in its GDP over two-three years, while still running a 7-8% of GDP structural deficit in every one of these years. The insolvency of Irish banks recognized by Munchau, therefore, automatically implies the insolvency of our economy, unless the banks are isolated from the rest of our economy by a removal of the blanket guarantee on the bondholders, while retaining a guarantee on depositors.]

Munchau goes on to say that: “We know from economic history that countries enter into longish phases of stagnation after a financial crisis.

[My estimates based on the IMF and OECD models of fiscal and financial crisis imply that Ireland can expect at least another 33 quarters of continued crisis pressures in Exchequer finances, house prices and asset markets, as well as a permanent decline in the potential rate of economic growth to below 1.5%]

Ireland suffered an extreme crisis. In the light of what we know, the safe assumption to make for Ireland – and Greece – is that there will not be much nominal growth in the next five years. If you make that assumption, you realise Greece will almost certainly not be in a position to repay its debts. While Ireland’s situation is marginally better, there are justified doubts about the country’s long-term solvency.”

[The above are not some idle words. They are, as I mentioned early, fully in line with the existent econometric models of crises based on historical experiences in the advanced economies in the past.]

Per Munchau: “….In Ireland, the cure would consist of nationalisation and wiping out the bondholders of Irish banks through bond-to-equity conversions.”

[Needless to say, since April 2008 I am on the record – in the press, media, on this blog, in public meetings and private briefings to the policymakers – these are exactly the first steps that need to be taken in order to begin – note, just to begin – the process of restoring order to our banking system. Irony has it – on a number of occasions, I have written to the Financial Times precisely about these issues, raised by Mr Munchau, with, needless to say, not a peep back from the broadsheet offices].

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

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

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

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

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

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

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


It's a different story for us in Ireland.

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

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

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


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

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

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

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


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

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


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

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


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

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

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

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

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

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

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

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

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


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

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

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

Economics 6/9/10: Summer of missed opportunities

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


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

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

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

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

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


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

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

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

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

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

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


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

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

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

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

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

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

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

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

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

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


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

Economics 2/9/10: Exchequer results - expenditure

So if there was no miracle happening on the receipts side, what was Minister Lenihan having in mind while drumming about the improvements in the fiscal position? Perhaps it was a dramatic turnaround on the Exchequer spending side?

Let's take a look at the year on year performance across all departments (2 charts below):
Looks like all departments are performing well in cutting back spending, save for Social Welfare and the department of Communications, Energy and Natural Resources. However, even a cursory glance suggests that something is amiss. In particular, it is pretty clear that the cuts are primarily happening on the capital side.

What the above charts do not tell us is that there is an interesting dynamic structure emerging to the cuts. This is highlighted in the next chart:
Notice the following in the chart above:

• Capital spending cuts overall have clearly dominated current spending cuts - for example, in August the ratio of capital spending cuts to current spending cuts stood at -34% for the former and -1.6% for the latter;
• Capital spending cuts are finally starting to decline in magnitude, having peaked in June at 36% and having declined to -34% in August. It looks like the state is finally beginning to spend - though still anemically - on the few capital projects it promised to deliver this year.
• Current spending cuts became shallower and shallower as the year progressed. In January 2010 current spending was 11.9% below the same period of 2009. In 5 months to May it fell to -5% compared to 5 months to May 2009. In August it is down only 1.6% on the same period of 2009.

Predictably, cuts in the net cumulative voted expenditure are also getting shallower and shallower:
So far we are down 5.8% on 2009. But this is not exactly a massive achievement, given the trends underlying cuts to date.

Another problem is that given the Croke Park agreement, there is a clear reason as to why the current spending cuts are getting weaker.

Either way - just as with receipts, I am not seeing any improvements anywhere in these numbers. If anything - Government spending is way too slow to adjust and is adjusting so far in a wrong direction.

Economics 2/9/10: Exchequer results - tax receipts

So folks, with some trepidation - given the ambitious statements concerning yet another 'turnings of the corner' by Minister Lenihan in today's 'Voice of the Irish Civil Services Gazette' (err... commonly known as The Irish Times) - I awaited the August Exchequer results.

The surprise, I must say, is all my, at least on the tax take side. Things have improved... dramatically... by what I would described as a 'nil change'. In other words, there is no improvement on the tax side.
Total tax take is now moving deeper down relative to 2009 and is nowhere near 'turning around'. It is not even stabilizing on the downward trajectory. Year-on-year total tax take is down 9%. End of July the same figure was 8.2%. Oops...

Income tax and Vat two mega tax heads:
The two are 8.2% and 6.4% behind January-August figures for 2009. A slight improvement on the gap in 7 months to July (8.4% and 6.9% respectively), but not that much of an improvement.

Corporate and excise taxes:
Corporate tax take is now on a trend of erasing the surplus on 2008 accumulated since June. This is bad, folks. In 7 months to July 2010, corporate tax receipts were 13.8% behind 2009 figure. In 8 months to August 2010 these are a massive 24.1% behind. As far as excise tax goes - receipts in 7 months to July 2010 were -3.3% behind corresponding period for 2009, by August 2010 8-months cumulative receipts gap to 2009 period shrunk to 2.7%. Good weather and more partying at home (instead of taking vacations) means booze is being consumed, while euro weakness relative to 2009 means we are buying more of it at home instead of N Ireland.

Next the 'Celtic Tiger Taxes', aka Stamps:
No sign of a serious improvement on abysmal 2009 here either. Poor showing continues with receipts down 18.2% on 2009 in seven months to July and down 11.1% on the first 8 months of the year in August. Let's see what happens in the big boost month of September.

Capital gains:
CGT was down on 2009 in the first 7 months of the year by 44.1% and down on the first 8 months of the year by 42.6%. Marginal gain in relative performance is clearly not enough to bring us even close to the extremely poor performance of 2009.

Summarizing year on year changes in all tax heads:
And to entertain our 'official analysts' favorite pass time: performance relative to targets
One noticeable and real change in monthly returns is the share of the burden that befalls our ordinary incomes:
Table below summarizes:
Nothing really to add to this except this: Minister Lenihan clearly thinks we are seeing improvements on the fiscal side. I see continuously increasing burden of Minister Lenihan's deficits on the ordinary taxpayers and consumers. In my economics books, this is bound to add pressure on Irish growth. Severe pressure.

Economics 1/9/10: Live Register

Live Register came in with no surprise - a moderate increase in the calm of August was so predictable, my forecast for unemployment to reach 13.8% in August made back in May came in bang on.

Here are few charts and some analysis.
Per chart above, seasonally adjusted LR rose from 452,500 in July to 455,000 in August, an increase of 2,500. Added cost to the Exchequer - ca €63mln per annum. Added cost to the economy - 2.5 times that. Added cost to the society - much greater than the latter. Added cost to those who lost their jobs and their families - incalculably high.

So far, year on year to August 2010 there was an unadjusted increase in the Live Register of
30,198 (+6.9%). This compares with an increase of 34,403 (+8.0%) in the year to July 2010. Now, that doesn't look like a stabilization to me.

There was an increase of 700 males and 1,900 females in the seasonally adjusted series in August. Which means services are tanking faster than manufacturing.

The average net weekly increase in the seasonally adjusted series in August 2010 was 625, which compares with a weekly increase of 1,700 in the previous month. Chart below illustrates
Both monthly and weekly increases are now below 6 months moving average lines, both of which are still trending up. Momentum suggests moderate mean reversion in September/October. Which brings us to unemployment levels.
Standardised unemployment rate in August was 13.8%, and all indications are it will continue to rise.

Finally, charting the changes together:

My suggestion that latest breakdown between men and women joining LR shows jobs destruction in services sectors is supported by the CSO analysis of detailed data.

Overall,

• Craft and related (25.5%) was the largest occupational group on the Live Register in August,
  
• Plant and machine operatives (15.4%) second largest, followed by
  
• Personal and protection service (10.7%) and
  
• Clerical and secretarial (10.7%).
  

Six of the nine occupational groups showed monthly Live Register increases in August:

• Largest percentage increase was in the Professional group (+1.2%)

In the six months to August 2010 Professional (+26.8%) group also showed the largest increase, followed by Clerical and secretarial (+14.6%) and Sales (+ 11.9%). The smallest percentage increase was in the Managers and administrators group (+1.0%).

Per CSO: "There were increases in six of the nine occupational groups in the six months to August for males on the Live Register. The largest percentage increase was in the Associate, professional and technical group (+12.0%), with the largest decreases in the Managers and administrators and Personal and protective service groups (both -0.8%). For females there were increases in all occupational groups in the six months to August 2010. The largest percentage increase was in the Professional group (+43.3%) followed by the Other occupation group (+25.8%)."

Live Register duration also rose, for males and females in 6 months to August 2010, suggesting severe pressures in the jobs market continue.

Of greater interest will bee changes in the labor force participation - to be shown in QNHS results. I suspect we will see severe contraction in overall number of people working or seeking work in the country.

Economics 1/9/10: Retail Sales

Today's retail sales figures continue to provide the backdrop to my previous analysis of the Irish economy as the one still facing strong headwinds and showing no real signs of a recovery. After months of 'turning the corner' statements (by now clearly deserving to be serialized in The Simpsons or perhaps in the Sponge Bob) and the drone of the ESRI data on 'consumer confidence' improvements, people still continue to vote by withdrawing their spending.

Here are the charts and the results.

Overall volume of retail sales (i.e. ex-price effects or ex-deflation that is ruining retail sector jobs that is) contracted 0.1% yoy in July 2010. There was a monthly decrease of 0.2% - steeper than the annual decrease. We now have 3 months of continued declines.

Ex-Motor Trades the volume of retail sales shrunk by an impressive 2.5% in July 2010 yoy and -1.0% mom. Year-on-year and mom volumes rose in Motors, Fuel and Food, and decreases in everything else.

Stop for a second and think. Volume is just the bulk of stuff we buy. If the retail sector were to stop losing jobs and start growing again, increased volumes of sales (not that we have them anyhow, but give it a thought nonetheless) must be accompanied by non-falling value of sales.
Oops... the value of retail sales collapsed by 3.2% in July 2010 yoy and fell -0.6% mom. Ex-Motor Trades things were even worse: sales values fell 4.9% yoy and -0.6% mom. In fact, per CSo own admission: "only Motor Trades and Fuel showed year-on-year value increases in July 2010. All other sectors showed year-on-year declines in the value of retail sales" And boy these declines were rather large:

• Non Specialised Stores (-1.5%)
• Department Stores (-7.3%)
• Pharmaceutical Medical & Cosmetics (-10.6%)
• Clothing, Footwear and Textiles (-5.7%)
• Other Retail (-8.8%)
• Bars (-13.8%)
  

In mom terms, Motor Trades, Non-Specialised Stores and Electrical Goods showed increases in
the value of retail sales in July 2010. All other sectors showed mom value decreases in July 2010.

Now, these are not the results of 'improving consumer confidence' are they?

Overall, retails sales suggest that Q2 consumer spending will be a likely positive contributor for GDP growth, but Q3 will do the opposite. Of course, there is a catch here - the RSI data covers only sales of goods, but not of services, yet consumption expenditure on the latter accounts for 55% of the total consumption spending. Indications are - based on Live Register results showing contraction in services employment - services sales might be even weaker. Another sign of hidden weaknesses is in the ex-Motors sales. Ex-Motor volumes posted Q1 growth of 1.2%, followed by a preliminary estimate of 1.1% growth in Q2. The latter has been now revised down to a miserly 0.3% for Q2. Since then, ex-motor sales have been falling in both July and August.

Economics 31/8/10: IL&P reporting

The ‘healthiest of the sick’, IL&P reports its numbers today. Here are the headlines:

• Operating loss is €10mln in H1 2010, down from a loss of €51mln H1 2009 – causes – lack of further deterioration on 2009 figures on the bank side and serious gains on the life insurance side.
• Operating profits on the life side are €92mln (up from €84mln in H1 2009)
• Bank operating loss of €131mln – equivalent to that in H1 2009. Its clear that 'healthy' IL&P is bleeding heavily on ptsb side.
• Ptsb is one of the largest mortgages lenders in the country, so their mortgages book should be – on average – performing above other banks. Here are some data: arrears > 90 days to the end of June 2010 in Irish residential mortgage book increased to 5.2% of the portfolio (H12009 figure was 3.9% so there was a significant jump). Non-performing mortgages are at 6.9% of the total loan book, up on 4.9% at the end of H2 2009. 32% of arrears cases are related to 100% mortgages – a predictable result as (a) 100% interest-only mortgages are of more recent vintage, hence written against younger families with higher probability of unemployment, and (b) these types of mortgages are more likely to involve purchases of buy-to-rent properties .
• Bad debt provisions are at €150mln compared with €189mln in H1 2009, highlighting the fact that more realistic provisioning earlier in cycle usually helps to underpin the book better than the AIB-style denials. Overall provisions balance is up €141mln to €618m.
• Margins are down to 0.81% (2009 full year margin was a poor 0.83%) despite hikes in the mortgage rates.
  
• As IL&P needs to raise ca €1.3-1.8bn more in bonds (good luck to them trying), higher cost of borrowing is going to further depress margins. So expect even more mortgage rates hikes from IL&P in months ahead. The bank has currently a €8 billion reliance on the ECB, unchanged. Hefty for a minnow.
• Bank’s loan to deposit ratio was down to 240% from 246% - far, far away from the prudential banking model that would imply LTDs of 95-100%.

Economics 30/8/10: Euro area growth indicator slows in August

Eurozone's leading growth indicator, Eurocoin has fallen once again to 0.37 in August from July already anemic reading of 0.4. This means that my updated forecasts for Euro area growth remain in the range of 0% - 0.26%, with mid-range forecast of 0.20% for Q3 2010.

Chart below illustrates:In the mean time, continued pressures on Euro area economies and unbalanced nature of recovery (with Germany powering ahead, while the rest of Europe stagnates or continues to decline) are taking their toll on public confidence in European institutions.

Overall voters confidence in EU has dropped to record lows in most countries according to the Eurobarometer published on August 26th. Just 49% Europeans think that their country's membership of the EU is a "good thing" – lowest in 7 years. Trust in EU institutions has dropped to 42% from 48% recorded in Autumn 2009. Latest survey results are most likely impacted by the survey timing - carried out in May 2010 - at the peak of sovereign debt crisis worries. But it is unlikely that August events would have done much to repair this. PIIGS, plus Cyprus, Lux and Romania lead in terms of declines. Confidence in all PIIGS countries declined 10-18% yoy.


The latest Eurocoin leading indicator reading clearly suggests that unemployment and economic performance will remain leading causes of concerns across the EU (Eurobarometer recorded 48% of EU citizens being primarily concerned with rising unemployment, while economic crisis in general is a cause for concern for 40%). For the first time Eurobarometer also included Iceland, now a candidate for EU accession. Only 19% believe accession will be a good thing for their country and only 29 percent believe their country will benefit from EU membership.

Another interesting result was that when asked what they associate the EU with – most of the respondents said free travel and the euro, followed by peace and, amazingly, "waste of money" (23%). The latter category was led by Austrians (52%), Germans (45%) and Swedes (36%). Just 19% of respondents said the EU stands for democracy, a drop of seven points yoy. Just 10% of respondents in Finland, UK and Latvia identified "democracy" as a principle that is linked to the EU objectives. Romania (33%), Bulgaria (32%) and Cyprus (30%) were the countries with most positive view of the link between democracy and the EU. Overall, in no country did 'democracy' figure as the EU core objective for more than 1/3 of the population.

Support for EU acting as a policeman of financial markets was much stronger. 75% of the respondents said more coordination of economic and financial policies among member states would be effective in fighting economic crisis. 72% back a stronger supervision by the EU of international financial groups (though this majority increased just 4 points since 2009).


Perhaps encouraged by the public support for greater coordination, French and German authorities continue to move in the direction of enhanced harmonization of their tax systems. French budget minister Francois Baroin visited his German counterpart Wolfgang Schaeuble, making an announcement that "Germany is a model which should be a source of inspiration for [France]." Baroin also stated that France "intends to accelerate the harmonisation of both fiscal systems, on corporate as well as personal income taxes". President Sarkozy has requested the French court of auditors to issue a report (due for early findings release at the end of September) looking at areas of fiscal convergence with the German system. The report is due by the end of the year, but a pre-report will be published at the end of September. It is likely that France might move to abolish wealth tax as Germany did back in 1997. Per reports: "in the longer term, Paris is also looking at harmonising Vat, which is higher in France – 19.6% compared to the German 19%" and "capping the EU budget" to give national Governments more opportunities to slash domestic deficits. Mr Schaeuble indicated that Berlin wants consensus on European harmonisation on bank profits taxation - a subject for the next ministerial meeting between the French and German finance ministers in September.

Economics 27/8/10: The path & cost of banks bailouts

On the foot of today's comment in the Financial Times, here are few quick estimates as to the extent to which current policy on banks recapitalization is bleeding the economy dry.

As estimated by myself (comfortably within the S&P projections), Ireland will stand to lose net:

• Nama - net loss of (mid-range) €12-19bn;
• Banks - net losses are €50-55.6bn.

These are mid-range estimates.

My estimates translate into:

• Anglo Irish Bank expected supports are likely to exceed the overall decline in our GDP by a factor of more than 1.5 times (constant prices GDP fell €20.26bn between 2007-2009). Thus Anglo alone will cost Irish economy more than the entire Great Recession;
  
• The bailout will cost us €23,422-34,880 per each person in our labour force as of Q1 2010. Mid range estimate loss is €27,121. Note, labour force includes both employed and unemployed.
• The entire bailout of the banking system can end up costing Ireland in excess of x3 times the total economic loss incurred during this Great Recession.
• Anglo alone will cost us the equivalent of providing unemployment benefits for 2 years to over 1.25 million Irish workers.
• Anglo bailout would cover current Live Register costs for more than 6 years
• The banking bailout would have covered over one half of all outstanding mortgages in the nation once we adjust for interest accruals (a note to our FR: that's one hell of a real moral hazard, Mr Elderfield, much more real than any aid to mortgage holders you can ever fathom)
• The cost of bailout risks running at over €69,000 per family of 2 able-bodied adults either employed or unemployed
• 'Repairing' the banks Government-way can cost 35% of constant prices 2010 GDP or 43.2% of 2010 Gross Disposable National Income, using mid-range estimates for the expected bailout
  

Lastly, let me note that the alternatives to this 'blank cheque' recapitalization approach always existed and were known to the Government: see links here & here. Members of the cabinet were briefed as to the above-linked proposal and were provided with full cost estimates of these proposal. In at least one case, one cabinet member sought analysis/appraisal of the above proposal from official advisers, with evaluation returning 'no objections to the numbers cited' according to my source. In other words - they couldn't find anything wrong with it at least on the basis of quick evaluation.

Economics 27/8/10: Manifesto I (?)

I will continue posting on this and will aggregate all ideas in my Long Term blog, with a banner link on my main page as well. All suggestions welcomed & will be published, some will make it to the list as well (as always - with proper attribution). So engage with me on this one!


Given the current market and economic conditions and the dire lack of credible economic policies (from any political party) aimed at moving Irish economy out of the combination of:

• deeply rooted crisis in public finances;
• structural collapse of the banking sector;
• stratospherically high and increasingly long-term unemployment levels;
• lack of significant gains in competitiveness (not limited to the area of wages competitiveness, but including basic utilities costs, and costs of living and doing business relating to state-controlled sectors);
• malfunctioning markets for provision of domestic services - dominated and restricted by the excessive market power of the incumbent state-owned and state-regulated oligopolies;
• a clear predominance of policy measures that are designed to saddle ordinary families and individuals (consumers and taxpayers) with the full cost of stabilizing vested interests and elites (manifesting themselves in rising tax burden, falling provision of public services, lack of reforms in banking and public sectors); and
• continued devastation of private entrepreneurship and businesses, contracting investment and lack of confidence in the future of the economy and broader social progress

it is now time to ask:
Is Ireland's electorate ready for an alternative political and popular movement that would put the interests of consumers and taxpayers at the top of governance and policy agenda?

Irish democracy cannot be surrendered to the vested interests, no matter how broadly-based, and elites (no matter how meritocratic or mobile they might be).

The current crisis has clearly shown that the corporatist state - where a group of vested interests colludes with the Government and state structures to set economic and social parameters for development priorities - is morally, politically and economically bankrupt.

The only two ways forward from this status quo are

• a generations-long and exceptionally deep crisis of stagnation and declining standards of living, or
  
• a path of structural reforms aimed at realigning the current political system to serve the interests of consumers and taxpayers - aka - the ordinary citizens and residents of this land.
  

Such a reform can only be achieved by creation of a radically different alternative to the existent structures. A new popular movement can champion the rights of consumers and taxpayers to counterbalance existent system that promotes the interests of the vested pressure groups and elites.

It is therefore, clear to me that at this point in time Ireland is on the cusp of either opting for change or electing to undertake decade (if not decades) long descent into the nightmare of economic stagnation.

In my view, the agenda of such a movement should include the following reforms:

1) Banking reforms:

• Banks should be recapitalized following Swedish model (imposing haircuts/equity swaps on bond holders; accepting correct amounts of writedowns; equity taking by the State in the name of taxpayers; equity to be held in a Trust for individual taxpayers until disbursal; at disbursal - equity sales proceeds to be rebated, net of cost to the taxpayers)
  
• Nama to be reversed
• Anglo Irish Bank and INBS to be shut down and their liabilities and assets to be wound up within 5 years
  
• All banks boards and senior management teams replaced within 3 months
• All banks middle management teams reassessed and rebuilt within 12 months
  
• FDIC insurance scheme to be set up for the future needs of the sector
  
• No future bailouts constitutional amendment to be put to a referendum to prevent a possibility of any future calls on taxpayers wealth from any private sector firm
  

2) Fiscal reforms:

• Flat tax to be enacted on all incomes (preliminary estimates suggest 15-17% tax rate) with no discretionary deductions, but a generous upfront deduction of 1/2 of the median wage to be made available to all earners, plus 1/5 median wage deduction per child.
  
• Provision of strong (current level -10%), but life-time capped welfare provisions. Life-time cap will allow any able bodied adult in the country to have access to a cumulative maximum of 7 years of welfare provisions over their life time. Provision of welfare supports to those unable to work due to health or family circumstances (e.g caring for the disabled relative etc) to continue without life-time limits.
  
• Strong support for the disabled and the elderly must continue
• Wages for politicians and all senior servants earnings are to be tied to the National Disposable Income (NDI) on per capita basis (pcNDI): Taoiseach=3.5 times pcNDI; Ministers=3 times pcNDI; senior civil servants=max 2.7 times pcNDI; TDs/Senators=2.5 times pcNDI and so on. If the country earns more in disposable income, then those running it should get a reward, otherwise, they will automatically bear the same burden as the rest of economy. No bonuses to be allowed and all pensions to be converted to Defined Contribution plans.
  
• Benchmark Government spending to 35% of GDP, with emergency spending not to exceed 37% of GDP in any given year, and a balanced budget over every 3 year period. This allows for small emergency spending boosts in recessions, but prevents spending sprees in elections etc
  
• All quangoes, except those with immediate independent oversight authority (e.g FR and Competition Authority) are to be abolished and their functions transferred to respective departments. Responsibility for governance and management must rest with the executive branch of the state - i.e. Government.
• There should be no taxation without representation - self-employed individuals who are fully tax compliant should have access to same unemployment benefits as anyone else.
• Tax system should be fully reformed to simplify existent taxation and ensure full compliance. This will include, in addition to the flat income tax - abolition of all indirect charges and taxes, other than direct user fees which will be fully ring-fenced to provide revenue necessary to maintain specific service (e.g. bin charges, water rates etc). VRT will be abolished. Any excise taxes will be set at a level required solely to support provision of services directly associated with the underlying consumption charged. For example, petrol levy will apply only to the amount required to support environmental programme related to CO2 abatement and improvement of the environment. It will not be allocated into the general budget. There will be a fully transparent tax on land values (LVT), but not a property tax. The revenue from LVT will be split 50:50 between central & local authorities and local authorities will be allowed a discretion to vary their rate of LVT within reasonable parameters. For example, if LVT is levied at 1% pa, then local authority can be allowed to charge between 0.25% and 0.5% as it deems suitable, while the central government will collect 0.5%. CGT and CAT will be abolished for all investments held for 5 years or longer to encourage longer term savings and investment.
  

3) Governance reforms:

• Core change to the Government model will be transparency and accountability based on automatic systems of disclosure and control that are not subject to tampering by individual ministers/politicians or civil servants
  
• Transparency: all state data/decisions/discussions not subject to secrecy of the state considerations will be published on the web and made accessible free of charge to all residents of the state. Commercially sensitive data will be published with exclusion of sensitive information and identifiers, until the time when it can be published in full. All data requested under FOI will be released free of charge to the requestee and will be automatically published also on the public web portal to remove any need for future FOI requests
• Accountability: performance and productivity metrics will be designed for all branches of public sector and wages and earnings in the public sector will be tied into these.
  
• Any attempts by public employees or office holders to undermine the principles of transparency and accountability in dealing with the public will be punished on the basis of publicly available procedures. All disciplinary actions against aforementioned employees or office holders will be made publicly available.
• Local authorities will be reformed, reducing the overall number of local authorities to 7, covering: West & North West, South, Greater Cork, Greater Dublin, Greater Limerick, Greater Galway and Border & Midlands.
• Seanad will be reformed (subject to referendum) to give it real powers of the upper chamber comparable to the US Senate. It will be elected directly by the people of Ireland, with equal representation of 5 senators from each of the 7 geographic region outlined above.
• Dail will be reformed - there will be no expenses, no additional pay for work in special committees (every TD will be required, subject to seniority to carry such work as a part of their duties). The number of TDs will be reduced to roughly 2/3rd of the current. TDs will be entitled to a defined contribution pension top up to their existent private pensions with the state matching 1:1 every euro they put into their pension.
• Members of the cabinet will have no drivers, state cars and there will be no Government jet. Members of the cabinet will qualify for a car allowance equivalent to €10,000 per annum. All members of the Oireachtas and Government traveling on official business will be reimbursed only to the full cost of the ticket for economy flight on any flight under 5 hours of length and business class for flights of longer duration. No employee of the State will be entitled to any travel reimbursement in excess of an economy class ticket.
  
• No member of the Oireachtas or employee of the state will be exempt from any of the standard tax codes or laws of this land. There can be no privilege for the servants of the public that the public itself cannot claim.
• All state purchasing will be carried on-line, made public and transparent.
  
• State will purchase services, such as health care, care for the elderly, disabled etc for those who cannot afford them, but the State will not own service providers. Instead, public companies will be mutualized or privatized and forced to compete directly for the custom of the people. Transition to such an arrangement will require significant reforms, but also support for current employees in training them in running a private/mutual/non-profit etc enterprises. This support will be provided.
• Higher education will be fees-based, with fees set by universities and overseen by the Department for Education. The State will set up (with participation of charities and other private agencies) a number of funds that will administer financial aid to students based on need (with an objective of creating an equal opportunity for all qualified students to undertake studies) as well as merit (with an objective of rewarding real achievement).

In the name of sanity, I should pause for now. I will continue posting on this and will aggregate all ideas in my Long Term blog, with a banner link on my main page as well.

All suggestions welcomed & will be published, some will make it to the list as well (as always - with proper attribution). So engage with me on this one!

Economics 25/8/10: Derivatives time bomb?

An interesting number popped out today from the dark depths of the past (hat tip to Ed).

With my emphasis, quoting from the article published in December 2008 by the Chartered Accountants Ireland (linked here) titled "Financial Derivitives (sic), Villian (sic) or Scapegoat" written by Grellan O'Kelly (who worked at the time in the Policy Section of the Financial Institutions and Funds Authorisation Department of the Financial Regulator):

"...when looking at the outstanding derivative positions (notional values) of our main banks as reported in their annual reports, the amounts are extremely small when compared to the total global amounts. A recent BIS survey2 on global OTC positions shows that global notional amounts come to a staggering $516 trillion. The most recent disclosures from our two main retail banks show that their gross notional exposures amount to €640 billion, only 0.17% of the total. ...noting that access to accurate data on derivative products is not always publicly available."

The article contains the usual caveat that "Any views expressed in this article are made in a personal capacity and are not intended to represent the views of the Financial Regulator." Nonetheless, it would be good to get some comment from the FR on this. After all, €640bn might be a small level of exposure to derivatives from the point of view of global banks, but for BofI and AIB to have such an exposure... is roughly 170% of the total 2009 asset base of all Irish banks combined.

For now, I cannot confirm whether this was a typo or not.

The problem is that unwinding even the straight forward swaps can be extremely costly. Buffet's unwinding of lost contracts against reinsurance claims cost Berkshire some $400mln back in 2008. In the case of interest rates swaps written against property, De Montfort University research in June 2010 has estimated that for a book of £143bn of interest rate swaps in the UK (57% of the total existing UK £250bn book of loans is estimated to be hedged by derivatives - here), the cost of unwinding these positions runs into ca £10bn.

So applying the UK estimate to our potential exposure, the cost of unwinding those €640bn in derivatives can be to the tune of €45bn.

Of course, this is just an estimate, but it gives some perspective to the numbers.

But let's ad some relative comparatives (hat tip to Conor for both):

• Ireland accounted for 0.17% of global estimates of OTC derivatives but only 0.03% of Global GDP (based on CIA fact book and CSO data)
• €640bn is 4.12 times our 2008 Gross Value Added (ca €155bn)
  

I am totally at a loss as to this figure - given its size - so any comment on its validity will be appreciated.