13/02/2011: IMF's statement on Iceland

I twitted about the latest conclusions from the IMF on the state of Icelandic economy post-banks collapse. Here are the exact details of the IMF statement and the statement itself. Emphasis and comments in brackets are mine:

"Financial sector restructuring is moving forward [in contrast, one may add to Ireland's]. Savings banks and non-bank financial institutions are being recapitalized [in Ireland's case, recapitalizations of the banks have been predominantly wiped-out by the continued writedowns, so net increases in actual capital have been negligible], and the supervisory framework is being strengthened by amendments that will be enacted in the coming months [no serious far-reaching amendments have been introduced in Ireland since the beginning of the crisis and the marginal ones that were are yet to be enacted].

"Moreover, recent agreements to restructure the debts of households and small enterprises will help put households, corporations and banks on a more secure financial footing, which is essential for a sustainable recovery [this stands in contrast with what has been happening in Ireland. In addition this directly and indisputably puts the blame for the policy errors in the Irish case onto our Government and EU shoulders, for it is clear that within the EU/IMF deal framework, the IMF was basing its policy proposals on their experience in Iceland].

“Policy discussions focused on the strategy to liberalize capital controls, fiscal and monetary policies, and financial sector reforms [none of these issues are even on our agenda].

Here is the actual press release from the IMF

13/02/2011: Public Sector Earnings - the need for change hasn't gone away

A quick run through the numbers in employment and pay rates for the public sector for 2010.

A note of caution: these figures do not cover commercial semi-states or local authorities. Thus, per DofF accounts statement, there were 380,953 people on the direct Exchequer payroll in 2010, which includes 277,540 employees and 103,413 pensioned individuals. These exclude commercial semi-state employees 52,300 per latest figures available (Q3 2009) and employees of the regional bodies 37,000 (Q3 2009). The combined figure, therefore, is closer to 470,253 (of course, this omits those who are on semi-state pensions and who are in the receipt of pensions from local authorities and bodies).

Now, on to the numbers.
So HSE accounts for 36.8% of the total numbers in employment and on pensions as well as for 40.2% of the total pay bill. Education & Science account for 32.6% and 33.03% respectively. The third largest employer on the Exchequer balance sheet is Garda Siochana with 6.74% of the total employment and pensions numbers and 7.11% of the total wages and pensions bill.

Now, let's take a look at private-public sector comparatives at the aggregate levels:
Self-explanatory, really. But some more detailed comparisons are here:
The above figures relate (except for Exchequer balance sheet average employees) to CSO data for Q3 2010 on earnings and labour costs.

Next by the departments:

Enjoy the absolutely absurd outliers - the Appeals Commissioners - enjoying the total staff of 4 being paid, on average, 107,500 per annum. If one of these 4 employees a receptionist or staff worker, on, say 40,000 that would make the other 3 earning on average 130,000... that's of course is a pure hypothetical. Then there's the cost of our "International Cooperation" workers - hard at labour, the 190 employees here earn a meager wages of just 78,874 per annum on average. One can understand high earnings in highly professionally-concentrated services, such as for example the Attorney General (75,713 pa - still high, but we can give them a break), but what does the President's Establishment do to earn on average (for its 22 staff) 67,955 - which is in excess of average earnings in ALL subcategories of employment reported in the table above?

In fact, lets take as a benchmark the highest average earnings in the economy by sub-category (omitting public sector employment) - those earned in Information & Communication sub-category (50,203pa). Of the 38 sub-groups on the total Exchequer payroll, 23 sub-groups earn more on average than the highest earning economic group in the private sector. 16 sub-groups actually exceed by more than double digits (in percentage terms) the average annual earnings of the highest paid sub-categories in the private economy, as shown in the table below:
That, folks, takes some doing to achieve...

12/02/2011: Just how much are the bondholders in Irish banks worth to the taxpayer?

In recent weeks the question of bondholders and the extent of our banks exposure to the bonds-linked debts has been hotly debated in the media and by the political parties.

Many supporters of the Government position have repeated, in their defence, the claim that at this moment in time there are virtually no unpaid bond holders left, so applying ‘burden-sharing’ haircuts to their bond holdings will produce little gain, while causing much of pain to Ireland’s ‘reputation’.

So the question is – just how much of bonds is left for a potential haircut and what such a haircut might save for the country.

There is a lot of confusion in this area, some caused by the fact that the Central Bank does not readily publish any real information about the six banking institutions covered by the extended guarantee. I personally heard a number of times the following two figures used as an estimate of the total bonds-backed debt still outstanding: €15bn senior bonds and €6bn subordinated bonds.

This implies that total bonds outstanding amount to €21bn and any savings that can be had from these would be on average around: 40% senior debt haircut + 70% subordinated debt haircut, to the total amount of €10.2bn maximum.

However, the figure of €21bn is simply not a true or correct estimate of the total bonds still remaining outstanding.

The table below provides what we know officially (note: the last column refers to the unpublished document that was Minister Lenihan’s clarification of his own statement on record to the Dail, not published previously).

So per table above, the total amount of bonds outstanding for the six guaranteed credit institutions is €50bn. Of this

• ca €28.1bn is guaranteed senior bond debt - standard haircut assumption for CDS pricing – 40% or €11.24bn;
• un-guaranteed senior debt roughly of €11.7bn (we can assume a haircut of 50%, which is smaller than the simple average of the senior guaranteed and subordinated un-guaranteed debt), to the potential savings of €5.85bn;
• subordinated debt (all un-guaranteed) of €10.2bn (which can be subject to a 100% write-off, but let’s assume it is haircut at 70%) generating potential for savings of €8.4bn.
  

So total scope for savings under relatively normal (by market pricing) haircuts is a cool €25.49bn (with a full hit on un-guaranteed debt we can save €33.14bn) – more than the cost of rescuing Anglo to-date (€23.9bn).

Note: hat tip to P.D. for providing the two documents referenced in the table above.

Update: related story today here clearly shows that the markets now expect significant haircuts and that any resistance by the ECB to such haircuts is, at this stage, irrelevant from the markets/investors perspective.

4/02/2011: Another glitch in our 'knowledge' economy?

Anyone reading this blog more than once or twice would know by now - I've got plenty of deficit cutting credentials. But sometimes, the absurdity of cuts and associated policies can get even to a hawk like myself. So here we go, again.

Here's an extract from the HEA to administrators and heads of schools in Irish Universities, dated, per my source, from January 19th last:

"As you are aware the Employment Control Framework for the higher education sector expired on the 31st December 2010. A revised framework for the sector, which will operate until 31 December 2014, is currently being drafted. Some further reductions in the number of posts that may be filled will be required under the new Framework. We will inform you as soon as possible of the revised reduced targets for your institution.

Pending finalisation of the revised Framework I wish to advise that all proposals for recruitment of staff, both contract and permanent and regardless of source of funding (core grant, research grant or non-exchequer), must be submitted in advance to the HEA."

Ok, so HEA are requiring explicit approval for all hires. sounds reasonable? Sure, if we are talking about the normal course of business. But imagine the following situation:

A researcher gains a very large EU research grant that requires hiring research assistants and post-doctoral researchers. The funds have nothing to do with the Irish Exchequer deficit. The job is specified and milestones are set in... err... kind of set in stone. But HEA approval requires time - as I've heard, up to 3-6 months. Now, imagine the researcher blowing through the milestones and losing a grant. Some savings to the Exchequer? Nope - actually - a loss. Exchequer loses income tax from the hires who never materialized, from the purchasing done for the purpose of research and so on.

And there's an added danger - if such uncertainty is present in the market for new researchers and promotion, the brighter academics might discount Ireland as a good research location. After all, academic market is truly global, folks.

Is that a serious problem? Yes, a number of researchers I have heard of are currently in this predicament with one being just a few days from giving an offer to a junior research staff.

Now imagine another scenario - also, per my sources close to playing out. A major corporation decides to provide a grant to an Irish University for research. The grant stipulates hiring certain number of researchers and other staff. Oops... the letter goes out to the corporate headquarters, saying that HEA approval is needed. What's the likelihood that the grant is going to travel to the UK? Or another jurisdiction, where fiscal cuts might be in place, but policymakers have some finesse to understand that when the money comes from outside the state coffers, hiring decisions should be made by those managing these funds...

What beats me is why can't the Exchequer simply allocate funds to universities and let the academic and administrative staff manage these funds in line with each university/school/department own objectives? Why is there such a need to micromanage fiscal adjustments.

Oh, and while we are at it, here's another question. If we stop renewing and issuing new contracts for post-docs, how fast will the reality of unemployed phds arrive to our shores? And what will happen to our knowledge economy's grand plan for doubling phds output?..

4/02/2011: Can economy function with shut banks?

Last night on Vincent Browne's programme, Prof. Antoin Murphy (TCD) - an excellent scholar of economic history - stated that absent the Government Guarantee of 2008 and/or in the case of a 'default' by Ireland on its debts, the banking system will collapse precipitating the 'ATMs with no cash' crisis.

According to Prof. Murphy - such an outcome would be more disastrous than loading up some €185bn worth of banks debts onto ECB and our own CBofI and pushing Irish taxpayers into even more debt to the tune of ca €100bn.

I do not wish to engage (for the lack of time and space now) in the arguments as to which outcome (debt death spiral or cashless ATMs) is the worse one. Nor do I wish to argue here (for the very same reasons) as to whether a 'default' (I prefer - restructuring) of our banks debts will trigger a crisis leading to the total shut down of the banking system in the country.

But let me provide you with the following summary of the economist's opinion on the matter of an economy's viability in the case of a systemic banking crisis with no cash circulating via the banking system (a hat tip to B. Lucey):

Quote (original source here):

"Since banks create money under fractional-reserve banking, we would expect the closure of banks severely to disrupt the functioning of an economy. The Irish experience in 1970 an interesting counterexample. In that year, a major strike closed all Irish banks for a period of six and a half months. All the indications from the start, moreover, were that this would be a long closure. As a consequence of the strike, the public lost direct access to about 85 percent of the money supply (M2). Irish currency still circulated, of course, British currency was also freely accepted in Ireland, and some North American and merchant (commercial) banks provided banking facilities. Increases in Irish and British currency and in deposits in these banks, however, accounted for less than 10 percent of M2.

Somewhat remarkably, checks on the closed banks continued to be the main medium of exchange during the dispute. Despite the increased risk of default, individuals continued to be willing to accept personal and other checks. [The author] summarizes the situation as follows: “a highly personalized credit system without any definite time horizon for the eventual clearance of debits and credits substituted for the existing institutionalized banking system.”

According to [the author], it was the small size of the Irish economy (the population of Ireland was about 3 million at that time) and the high degree of personal contact that allowed the system to function. Stores and pubs took over some of the functions of the banking system. “It appears that the managers of these retail outlets and public houses had a high degree of information about their customers—one does not after all serve drink to someone for years without discovering something of his liquid resources. This information enabled them to provide commodities and currency for their customers against undated trade credit. Public houses and shops emerged as a substitute banking system.”

Presumably as a result of this spontaneous alternative banking system, economic activity in Ireland was not substantially affected by the banking strike. Detrended retail sales did not differ much on a month-by-month basis from average levels in the absence of banking disputes, and a central bank survey concluded that the Irish economy continued to grow over the period (although the growth rate fell)."

The paper referred to in the above citation is: A. Murphy, “Money in an Economy without Banks: The Case of Ireland,” The Manchester School (March 1978): 41–50.

Once again, let me repeat, I do not believe that such a cashless economy is a good idea, nor do I believe that the banks debt restructuring will lead to a significant disruption in supply of cash or access to deposits, especially if such restructuring is pre-planned, with liquidity buffers set in place by the CBofI. But I find it interesting that a superb economic history researcher - Prof Murphy - would argue the inevitability of something happening today which did not happen in the less financially and economically advanced 1970.

Yes, the conditions have changed - we are less personal of a society today than back in the 1970s. But we also have much stronger presence in the country of other banks and we have access to the global markets (currently shut by the insolvent banking system). We also have, presumably, our European partners, who can help, and most importantly - for now - significant funding buffer in the form of NPRF. The CBofI has printed enough cash already to cover a large share of our deposits (except it chose to dump this cash into the banks balance sheets instead). In fact, between CBofI cash printing for the banks and NPRF and pre-borrowed money, Irish state has potential access to more cash than the 80% deposits base for deposits at a risk of flight (those with demand withdrawal terms of <3mo and overnight).

Virtually none of these were there in 1970... and still, the economy did not collapse after losing some 85% of cash from circulation!

3/02/2011: Services PMI for Ireland

NCB released their PMI for January for Irish Services sector. Headline news is good:

• After contracting in December, Irish Services sector showed modest growth, signaled by PMI rising to 53.9 (up from December contractionary 47.4)
• January reading of 53.9 was ahead of 12 months average of 51.5 and well ahead of Q1 2010 reading of 47.6
• January 2011 reading, however was below Summer 2010 peak readings of 55.4 and 55.7 in June and July

Or over the entire series history:
And a more recent snapshot with the core driver of increase:

New business orders have actually fallen in January, with a reading of just 47.7, marking 5th consecutive month of declines. 12-months average was 50.0 but Q1 2010 reading average was 47.1, so realistically speaking, the latest reading is not an improvement.

Historically, you can see where we are from here:

Other sub-components showed weaknesses, with exports orders being trend breakers and the driver of the positive improvement in overall PMI reading:

Hence:, quoting from the NCB report:

• New Export Business In contrast to the trend seen for overall new business, new export orders rose markedly over the month, with the UK a key source of new work. New export business has now expanded in the sector in sixteen of the past seventeen months
• Backlogs of Work Falling new business alongside increased activity led to a further reduction in backlogs of work during January, extending the current sequence of depletion to forty-one months
• Providers expect economic conditions in Ireland to improve over the coming year, leading to higher new business and subsequently increased activity. According to respondents, export markets will remain a key source of growth over the year. The level of optimism in the service sector improved to the highest since last September

• Input cost inflation accelerated over the month, but remained much weaker than the long run series average. Where input prices increased, panelists mentioned higher fuel costs as well as rising taxes [My comment - the wedge between input and output prices points to severe pressures on services providers' margins]
• Irish service providers were unable to pass on higher cost burdens to their clients during January. Intense competition was the main factor leading firms to cut charges, which fell at a substantial pace that was steeper than that seen in the previous month
• Profitability at Irish services companies continued to decline over the three months to January, extending the current period of decline to thirty-seven survey periods. Moreover, the pace of reduction was the sharpest since the three months to February 2010, with panelists reporting a combination of lower sales and strong competition

• Employment continues to be a bad performer with jobs losses continued
  

So on the net Services have jumped into expansion zone, but the recovery at the very best is jobless and volatility of the series implies that it will take several months of continued robust improvements in index sub-components to provide comfort in the sector improvements overall:

2/02/2011: Dependency ratios

Looking over LR data earlier tonight, I decided to update the charts for dependency ratios, based on a combination of LR and QNHS. Here are some charts.

From the top: in Q1 1998 there were 1,619.8 thousand persons aged 15 years or older in Ireland that were not in full-time employment and 1,237.4 thousand of the same age category persons who were in full time employment - a ratio of 1.3. By Q1 2000 this ratio fell to 1.1. The same was attained in Q1 2005. This ratio declined to 1.0 in Q4 2005 and stayed there until Q4 2008. Then in Q 12009 the ratio rose to 1.3. As of Q3 2010, there were 2,075.9 thousand 15 year old and over persons who were not in full time employment in Ireland. Against this, there were 1,436.8 thousand persons of the same age category in full time employment. The implied ratio there for has rise to 1.4. Chart below illustrates:
Not scared yet? Ok, another shot:
Oh, and another angle:
The above shows just how bad is the dependency ratio getting in Ireland during the current crisis.

2/02/2011: Live Register for January

Live Register was out today for January with some positive news. The headline figure shows a seasonally adjusted decline in LR of 6,900. Unadjusted, LR rose 5,598 over the same month. It's hard to argue just how accurate are seasonality adjustments off the trend line, but let's stick to seasonal figures, so we can at least feel somewhat better about our predicament.

Charts below shows the slight decline in LR-implied rate of unemployment and the drop in LR itself:
So LR-implied unemployment rate is down from 13.6% in December to 13.4% in January.

Average weekly dynamics are looking pretty strong (in part, these are due to 4 weeks month - December, for example covered 5 weeks):
Monthly rate of change:
Also looks strong.

These are all headlines so far. Now, let's dig a little deeper:
Number of LR signees who are non-Irish nationals rose 1,882 to 78,527 in January 2011 - an increase of 2.46% mom and a decline of 3.52% yoy. Number of Irish nationals on LR rose 3,716 in January 2011, a rise of 1.03%mom and 2.42%yoy. So as chart above clearly shows, the two series are moving in the opposite directions. There were 4.64 Irish nationals on LR per each non-Irish national in January 2011. The same number for January 2010 was 4.37.

Another alarm bell is ringing for the increasing number of those in part-time and occasional employment (presumably not all happy to undertake less than full employment). This number rose from 82,058 in December 2010 to 83,232 in January 2011, with monthly increase of 1.43% and a year on year rise of 8.29%.

2/02/2011: Irish interest rates

For the last post on monthly data release from the CBofI, let's take a look at the interest rates environment at the retail level.

First up - lending rates:

As of November 2010 (latest data available):

• House purchases lending floating rate was at 2.95% (up 0.34% mom and 13.03% yoy - note, these are percentages, not percentage points); rates for over 1 year fixed were 4.10% average (up 0.24% mom and 14.53% yoy)
• Consumer credit rate was 6.06% floating (up 1% mom and 30.32%yoy)
• Non-financial corporations faced a floating rate for <€1mln loans of 4.49% (up 10.86%mom and 13.96%yoy) and over 1 year fixed rate for same level of loans of 5.14% (up 4.26%mom and 18.16%yoy)
• The trends are up for all two borrower types year on year
  

Now, deposits:
So for deposit rates:

• Household deposits attracted an average rate of 1.75% (up 6.06% mom and 17.45% yoy)
• Non-financial corporations attracted an average rate of 1.25% (down 0.79% mom and up 39.98% yoy)

Now, consider the difference between deposit rate and borrowing rate:
For households, the gap between earnings on savings and cost of financing mortgages (I used house purchase, floating rate or up to 1 year fixed) has moved in favor of savers until November 2008, and there after switched in the direction of favoring borrowers. The switch is extremely volatile and since August 2010 the direction has changed once again. Thus, since August 2010 the banks are moving into more aggressively charging mortgage holders and rewarding relatively more savers.

Corporate rates differential has been moving in the direction of penalizing corporate deposits holders. This process in now being reinforced since July 2010.

So here we have it - deposit rates are becoming less attractive to the corporates, just as more and more of them abandon Irish banks... who would have thought that charging our customers out existence can be a bad thing?

Finally, using CBofI breakdown on loans by type and maturity, I conducted a simple exercise - what happens if the interest rates on new and ARM mortgages charged by banks go up by 1 percentage point (incidentally - PTSB is doing just that, apparently). By my calculation, added cost of interest finance will translate into roughly additional €1.67bn being taken out of the economy. That's like having another Leni's tax hike over again for Irish households.

2/02/2011: Irish termed deposits and credit cards

In the previous two posts I updated data on credit and deposits levels and flows. In this post, let's tidy up by taking a look at deposits by maturity and credit cards.

First deposits by maturity:
Clearly, longer term maturity is exiting, medium term maturity deposits are now shrinking as well, while short term maturity deposits remain steady. This suggests that

1. Irish depositors are exiting Irish banks when longer term savings mature;
2. Irish pool of savings available for investment - remember, banks can more safely lend out of longer maturity deposits than out of shorter maturity ones (lower risk of maturity mismatch) - is also shrinking.
3. Overall, overnight deposits have increased 2.11%mom in December 2010, but fell 4.35% yoy
4. Up to 3 months deposits fell 4.33% in December 2010 mom and 2.77% yoy
5. Up to 2 years deposits fell 9.64% mom and 17.32% yoy.
   

Not very good trends.

On credit cards, the picture is What the data suggests is:

• Irish credit cards balances are declining, but this decline is relatively mild - down 0.81% mom in December 2010 (latest data) and -6.28% yoy.
  

1/02/2011: Growth rates in credit and deposits

Having looked at the levels of credit and deposits through December 2010 in the previous post (here) lets take a look at the rates of change.
Credit growth rates above clearly show the following trends:

• Household loans rate of contraction has accelerated from 4.8% yoy in October and November to 5.2% in December. Thus December 2010 marked the worst month in the entire series history since 2004.
• Rate of decline in mortgages lending was also accelerating to 1.9% in December from 1.7% in November and 1.6% in September and October.
• Rate of decline in credit for non-financial corporations eased in December to 1.6% yoy from 2.4% in November.

Next, deposits rates of change:
The chart above shows:

• A dramatic exist from Irish banks by non-financial corporate deposits. This flight is accelerating - having gone from -9.2% yoy fall in July, to -13.1% in August, -14.8% in September, -15.4% in October, -14.9% in November and a whooping -16.1% in December.
• Household deposits are also accelerating in the rate of decline from -2.4% in October to -4.5% in November and -4.7% in December

To highlight these dynamics and to dispel the myth of 'savings are rising' often perpetrated by some banks analysts, let's come back to the data on deposits. In December 2008-January 2009 there was a discrete jump in household deposits to the tune of just over €12.4bn. This jump is never really noticed by the analysts, but it reflects addition of the credit unions to the database. These are not new deposits, but rather the deposits that were held in institutions previously not covered by the dataset.

Now, let' remove this 'hump' and see what the banking sector deposits really look like today:
The chart abvoe does exactly this. And it clearly shows that:

• Over 2010, Irish households have suffered a loss of savings, not a gain, pushing our deposits to the comparable level of December 2007
  
• Over the entire crisis total private sector deposits have fallen to the levels comparable to those in May-June 2006.

And yet, we keep hearing (admittedly whimpered) calls for taxing 'sky-high' deposits/savings to 'release spending into consumption markets'.

1/02/2011: Credit supply and deposits in Ireland

CBofI released monthly data for December 2010 on credit supply and deposits in the Irish financial institutions.

Updated charts and some analysis:
Irish private sector credit continued to contract in December, having fallen 0.98% mom and -10.7% yoy in total. Overall, credit outstanding fell €3.33bn in December mom and €40.23bn yoy.
Credit has fallen across all categories, except one:

• Household credit fell 4.72% (-€6.49bn) mom and 6.41% (-€8.98bn) yoy
• Mortgages credit fell 7.05% (-€7.55bn) mom and 9.65% (-€10.63bn) yoy
• Non-financial corporations credit fell 2.63% (-€2.5bn) mom and 37.08% (-€54.34bn) yoy
• Insurance and pension funds sector credit rose 5.36% (€5.66bn) and was up 26.18% (€23.09bn) yoy
• Combined non-financial sectors and households credit fell a massive €63.32bn in 12 months to the end of December 2010.

Onto deposits next:

Headline figure is that total deposits fell 2.24% (-€3.86bn) mom and 8.41% (-€15.46bn) yoy. This was backed by deposits declines across two out of three core components:
So:

• Household deposits rose 0.71% (€669mln) mom but fell 4.57% (-€4.53bn) yoy
• Non-financial corporate deposits were down 5.18% (-€1.83bn) mom and 17.64% (-€7.17bn) yoy
• Insurance and pension funds sector deposits fell 6.29% (-€2.7bn) mom and 8.57% (-€3.77bn) yoy
• Non-financial sector and household deposits fell €11.693bn in 12 months through December 2010.

The relative changes in deposits and loans outstanding implied changes in the ratio of loans to deposits - an instrument for the leveraging taken on by the economy at large.

Overall, Irish economy achieved a very modest reduction in the ratio in 2010:

• Total private sector credit to deposits ratio fell 2.53% in 12 months to the end of December 2010 reaching 198.81%
• Lowest deleveraging took place in the household sector, where the ratio fell 1.93% in 12 months and currently stands at 138.56%
• Highest degree of deleveraging was achieved in the non-financial corporate sector, where the ratio declined 23.6% yoy in December (though it rose by 2.69% mom) reaching 275.68%
• Insurance and pensions funds sector actually increased overall leverage ratio by 38% in 12 months to the end of December, reaching the ratio of 276.6%

Overall, outstanding loans exceeded domestic deposits by 98.81% in the end of 2010.