13/10/2011: Mortgages report - offensive & ineffective failure

Inter-Departmental Mortgage Arrears Working Group report, released yesterday is a truly abysmal document that neither delivers meaningful solutions to the problems it sets out to tackle, nor provides any really new solutions that were not already discussed in the Cooney report of 2010.

Let’s consider the ‘solutions’ advanced by the Report. Let us also juxtapose these ‘new’ proposals against the existent means for alleviating stress on households finances arising from the excess debt or lack of debt affordability, which are enumerated in the Report.

An excellent additional analysis of the report is provided by Namawinelake blog (here) and I am broadly in agreement with its author conclusions.

Note that, unlike the Report authors, I view two problems as separate, but related.

The problem of debt overhang is the problem of too much debt carried by the household preventing this household from accumulating pensions and precautionary savings, reducing its ability to provide insurance cover for catastrophic losses of income due to illness or unemployment, restricting reasonable investments in household members’ education and skills (children education, but also adult education – both of which require outlays from the household finances), extending care for incapacitated relatives, saving for potential investment in family business etc.

The problem of debt servicing is the problem whereby debt to income ratios rise to levels whereby debt financing becomes unbearable for the household. This can arise due to any of the following factors or a combination of several factors, such as: loss of income due to unemployment, loss of income due to wage cutbacks or decline in bonuses and commissions, loss of income due to higher taxation burden, loss of income due to illness, increase in expenses due to birth of a new child or arousal of new dependency from, for example, ill close relative, etc.

What solutions does the Report propose?

Solution 1: Forbearance.

This is not a new solution and the Report states that as a part of the “wait and see approach” already adopted by the Government, they are not always appropriate. In other words, one of the solutions presented by the Report is already deemed by the very same Report not to be sufficient. Forbearance is ‘extend and pretend’ type of a ‘solution’ that temporarily reduces the mortgage burden in the hope of short-term return to affordability. It does not deal with the problem of excessive debt carried by the household. Instead it actually exacerbates the problem by accumulating retained interest and extending over time the period of principal repayment, as in the case of forbearance households are mostly excluded from counting their repayments against the principal. It is a very short-term measure (extending the period of forbearance will have a compounded effect of increasing the overall debt level of the household).

As an extension of the Forbearance scheme, the Group notes that Deferred Interest Scheme has already been introduced in the state. The Group fails to provide any meaningful assessment of the scheme claiming that it is too new to allow for such assessment. In reality, deferring interest repayment implies accumulation of higher debt over time through compounding and roll up of interest into the future and has exactly the same shortcomings as the general forbearance scheme discussed above.

Another major issue with both schemes is that they do not alter life-time affordability of the mortgage, which is reflected in their temporary nature. Temporary nature of these schemes, in turn, implies that households entering into these arrangements cannot be expected to meaningfully engage in the economy as savers and consumers. They are suspended in a debt hell limbo for the duration of the scheme and face uncertain future as to their ability to return to normal functioning.

What we need is: conversion of the existent mortgages pool into non-recourse mortgages only for the amount of negative equity. To deliver this, mortgages outstanding should be seen as split between those covering 90% of the current value of the asset (10% cushion provided for future decreases in valuations) and the residual. The 90% current value of the mortgages is recoursed against the value of the home. The excess amount of mortgages outstanding is non-recourse.

Solution 2: Mortgage Interest Supplement.

A measure that provides cash flow support to households that are on public assistance due to unemployment or disability. The Group identifies this scheme as in the need of alteration and suggests that mortgage-to-rent (MTR)schemes (see below) can be used to move long-term recipients of MIS off the temporary measure. This implicitly suggests that the Group sees MTRs as a long-term default option.

Amazingly, the Group provides un-backed and un-specified estimates for writing down the entire pool of negative equity or writing down the most severe negative equity cases (2006-2008 mortgage originations) at €14 billion and €10 billion. The Group states in a blanket fashion that “scheme would not be an effective use of State resources and would not solve the problem”.

Worse than that, the Group has managed to produce not a single meaningful or even token debt relief measures. The Group “examined the proposal to increase mortgage interest relief to 30% for First Time Buyers in 2004-08 but it was considered that this change should not be recommended. The proposal would give increased relief in an indiscriminate manner as it would give benefits to all who took out mortgages in the relevant years, regardless of their economic circumstances. The proposal would cost the Exchequer approximately €120m in a full year and it would not be appropriately targeted at those who need the support.”

This is an extraordinarily bizarre statement. The Group on objective – as stated – included to consider measures “to reduce the drag on the economy from a significant cohort of over-indebted people whose spending is constrained by mortgage debt obligations.” And yet, the Group passed on the only solution they considered to deliver some relief here. Reducing effective cost of mortgages interest financing would have improved significantly many, more stretched, households cash flows, especially for those early into the process of mortgages repayment. In other words, it would have had a compounded effect of reducing interest payments when these payments are the largest proportion of the mortgage itself, potentially improving repayment of capital. The scheme would have had no adverse impact on moral hazard and would have been politically acceptable as a partial compensation for tax increases suffered by the very same households. It is cheap (could be financed for 6 years out of just one unsecured unguaranteed bond repayment by Anglo due this November at €737 million) and effective in reducing the most egregious share of the debt incurred – interest charges. It also could have served as a buffer for future interest rate increases, thus effectively helping more, in the longer term, those on the adjustable rate mortgages who are currently subsidising tracker mortgage holders.

The fact that these considerations were omitted by the Group shows that the Group was not fit for purpose – its members had no sufficient financial insight into the debt issues and mortgages finance to make any reasonable assessment of the situation.

What we need is: extended Interest Tax Relief scheme covering all first-time mortgages for principal residences issued in 2004-2008 with extension for 5 more years at 50% of the total interest paid. The cost of this scheme should be in the neighbourhood of €250 million per annum and it should be financed through writedowns of unsecured bondholders in Irish banks.

Solution 3: Introduce New Bankruptcy Legislation.

This is hardly a new solution and as such the Group was expected to provide more robust guidance as to the terms of reform of existent bankruptcy laws. The Group correctly identifies one major part of the problem with existent legislation as: “Given the full recourse nature of mortgages there is no current insolvency option for many mortgage holders who are in difficult or unsustainable mortgages – they could face permanent bankruptcy”. In other words, the problem is in the full recourse nature of the mortgages and the long-term or permanent nature of the bankruptcy.

The Group comprehensively fails to address both sides of the problem in its recommendations.

With respect to the length of the bankruptcy status and associated claim on the debtor income, the group states:

“The group understands that the automatic bankruptcy discharge period under the judicial process could be set as low as 3 years”. In other words, the Group fails to make any proposal as to the length of bankruptcy period. It simply defaults to 3 years as the only option because it is what it being discussed elsewhere.

What we need is a two-tier approach to the bankruptcy reforms:

Tier 1: Emergency level legislation covering mortgages taken prior to 2009 which will have automatic release after 12 months of compliance with court-ordered repayment schedule and zero recourse thereafter. In the case of non-compliance with repayments, the bankruptcy period can be extended to 3 years and then to 5 years. There should be no recourse on assets outside the mortgage, but access to bankruptcy should be granted only to those unable to pay their mortgages through current income as supplemented by a reasonable drawdown of existent assets. For example, a household savings should not fall below 20% of annual pre-tax income so as not to deplete insurance buffer against household loss of income in the future due to illness or unemployment. The households can be required to sell any other property assets they hold if this releases funds to aid repayment of mortgage. The legislation should apply only to primary residences and can be staggered to reduce its applicability to ‘trophy’ homes, so that only part of the family home mortgage under, say, the threshold of €500,000 can be covered by such process.

Tier 2: Long term legislation covering all mortgages taken since 2009 that will include, 3 year term for automatic release, recourse against other assets and restriction on mortgages issued in the state to non-recourse mortgages only, for all new mortgages going forward.

Instead of robust proposal for reforming the bankruptcy law, the Group report produces extraordinarily woolly wish list of non-judicial process proposals for dealing with defaults.

This includes a non-judicial settlement process that is not backed by any compulsion on behalf of the lender to engage in such a process or to deliver any specific targeted means for reducing overall debt burden of the household. Instead of specifically calling for lenders being required to write down some minimum share of debt, or some debt linked to, say, income and affordability metrics, the proposal simply waffles on about “mortgage lenders will need to make allowance within their mortgage solutions, on a case by case basis, to make some funds available to facilitate unsecured debt settlement”.

And there’s more: “Uncertainty exists as to how the courts will deal with an income earning bankrupt – it could require them to make payments to the creditors beyond the discharge period.” Now, this begs a question: why on earth did we need the Group report if all it can tell us is that the courts will decide? And how can the report make a claim that this entire strand of bankruptcy resolution has any whatsoever validity as a tool for alleviating currently draconian bankruptcy conditions if it is left up to the courts to decide?

Another ‘measure’ proposed by the Group is Debt Relief Order (DRO), which will “allow persons with “no assets – no income” to fully write-off unsecured debt within a short period of time”. How? No information is given. How long is the ‘short period of time’? Unspecified. But the Group refers to the UK DRO equivalent of €17,000. So, let’s summarize this ‘measure’ – under DRO, once you are bled dry, the Government will facilitate (legislatively, presumably) an up to €17,000 writedown of your debt alongside the loss of your home, your assets and your income, while levelling you with the very same bankruptcy burdens as above. The whole mechanism would constitute a reasonable measure only in a lunatic asylum.

Solution 4: Mortgage to Rent Scheme (MTR)

This implies converting existent mortgage to a lease with the mortgage holder losing all future claim on equity in the property.

The problem is that, as the Group states: “The group recommends the introduction of two mortgage to rent (MTR) schemes aimed at those people who would qualify for social housing if they lost their home and where their house is appropriate to social housing”

So explicitly, there is no cover for anyone who does not qualify for social housing. In brief – you are either broke or you are not covered. Which automatically means the scheme does no work to alleviate constraints on future savings and investment, pensions provision, education investment etc.

“The schemes should be subject to an initial review after 12 months and a value for money review after 24 months” In other words, the scheme is non-permanent and cannot be considered a solution to the long term problem. It is simply ‘extend and pretend’ type of a solution with the worst possible outcome – all future uncertainty is loaded onto the mortgage holders.

A person entering the scheme, in effect, surrenders any legal claim on the asset and any leverage for dealing with the default-related loss once he/she signs the papers as the state can simply deny the benefit in 12 months or later.

Worse than that, “There may be a mortgage shortfall that will still need to be dealt with” in other words, the negative equity component of the mortgage remains unaddressed, i.e. it remains the liability of the original borrower. This provision is simply mad, given the Group set out to resolve the problem of defaulting mortgages.

Solution 5: Trade-down Mortgages (TDM)

Trade down mortgages is in itself not a solution to the debt crisis, but an affront to those currently struggling under the weight of debt. It ignores the fact that majority of those heavily indebted (relative to their incomes) are younger families who bought their first homes – small, usually out of town, lower-end-of-the-market dwellings trading down from which is an equivalent to telling them to pitch a tent in a bog and call it a “more modest home”.

Worse, the proposal admits that the scheme would increase, not decrease, the overall debt burden carried by the mortgage holder as LTVs are going to rise and not just by the amount of negative equity carried over, but also by the closing costs which the Group has no grace to advocate forgiveness for. Negative equity is then crystallized into real debt. In medical terms, it is like advocating cutting both limbs for a patient with one gangrened arm!

The Group’s brain-dead - and I cannot call it any other – ‘logic’ is such that they actually state: “While the increased LTV is relevant, so long at the mortgage holder can afford the new mortgage and the ratio is not so high as to be a disincentive to the mortgage holder, it is a secondary factor”. In other words, higher debt is a secondary issue from the Group’s point of view, despite the fact that it clearly contradicts their own objective of reducing the negative debt effects on the economy.

What we need here is an explicit cap on carry over of negative equity under TDM scheme. In other words, cap the amount of negative equity to be carried to new ‘smaller’ dwelling mortgage to not exceed 10-20% of the total new loan, with additional ceiling on combined new mortgage not to exceed 110% of the current value of the new property bought. This will provide both an incentive to engage in trade down for the household and a finite cap on debt limits. It will also reduce future default risk for lenders.

Solution 6: Split Mortgages (SM)

Split mortgages proposal allowing the household to split existent mortgage into ‘affordable’ part to be subject to continued repayment and the ‘unaffordable’ part to be either warehoused until repayment environment (income) improves or until the mortgage holders is forced into other types of arrangements.

This, of course, presents a number of problems. Firstly, it is another extend-and-pretend measure not dealing with debt overhang, as the overall level of debt carried by household remains identical to pre-restructuring. Secondly, it introduces an incentive for the banks to hold mortgagees in constant fear of foreclosure, especially if the property prices rise or if the banks find capital to writedown the foreclosed mortgage. Thirdly, there is no provision for the interest rate relief in the scheme, implying that interest rate will roll up on both sides of the split mortgage. This means, the banks can ‘warehouse the principal’ while forcing households to pay interest on full amount of the mortgage. In other words, effective interest rate payable on mortgages will rise and the present value of the lifetime debt will rise as well.

The Group failed to see any of these possibilities in their report.

What we need here is a New Beginning type of a solution with added caveat that the warehoused part of the loan does not involve roll up of interest for 3 years and that the part of the loan due for continued repayment be structured in such a way as to payments covering at least 50:50 the interest due on overall mortgage and repayment of the principal. In other words, at least every €1 of each €2 of repayment has to be used to reduce principal amount under mortgage. Furthermore, we need protection of borrowers from increases in the interest rates, with warehoused mortgage converted to fixed rate or tracker mortgage at inception.

Overall, therefore, the Keane report utterly and comprehensively fails to deliver any new and/or meaningful measures for dealing with the crisis. The Report is extremely weak on analytical details (using nothing more than publicly available data from the CB of Ireland, without even applying CBofI own model for dynamics of future mortgages distressed available from the PCAR/PLAR exercises). It is a lazy, write-off piece of work by people who appear to have no understanding of the realities of the problems they discuss.

The failure of this report is so comprehensive and represents such a direct affront to the nation burdened with unprecedented debt overhang that the entire report must be binned – publicly and irrevocably – by the Government and a new, independent and broadly authorized commission should be set up to produce real measures aimed at alleviating both problems:

Problem 1 – financial sustainability of currently distressed borrowers, and

Problem 2 – overall debt overhang in the household economy.

Some of the possible measures aiming at dealing with the above problems are already outlined in my comments above. More proposals will follow on this blog in the future. Stay tuned.

12/10/2011: Euro area industrial production for August

This morning, release of Industrial Production (volume) indices across the EU was interpreted as a positive surprise on the otherwise bleak economic news horizon. To be honest, there is a good reason for this. August 2011 data, compared with July 2011, shows seasonally adjusted industrial production rising by 1.2% in the euro area 17 and by 0.9% in the EU27. In July, adjusted figures show that production grew by 1.1% and 0.9% respectively. Year on year, August 2011 compared with August 2010, industrial production increased by 5.3% in the euro area and by 4.3% in the EU27.

But some details are omitted in the release and become more visible once you look at the updated eurostat database. Here are the breakdowns of numbers:

For All Industries (Mining and quarrying; manufacturing; electricity, gas, steam and air conditioning supply; construction) as opposed to eurostat release-focus of All Industries, less construction, the data we have covers only the period through July 2011. Here we have:

• Euro area production rose 1.8% monthly and 3.96% yoy in July, 
• Belgium posting an increase of 0.1% mom and 3.13% yoy, 
• Denmark +1.15% mom and +0.34% yoy
• Germany -1.04% mom and +7.91% yoy (German data is for August)
• Ireland -6.73% yoy (latest data is for June)
• Greece -14.0% yoy (latest data is for June)
• Spain 1.01% mom and -1.52% yoy
• France +0.69% mom and +4.98% yoy
• Italy -1.12%mom and -2.39% yoy
• Netherlands +2.34% mom and +2.26% yoy
• Austria -1.3%mom and +4.58% yoy
• Poland +0.99% mom and +6.10% yoy (latest data is for August)
• Portugal +1.21% mom and -4.04% yoy (latest data is for August)
• Finland +0.94% mom and +2.88% yoy (latest data for August)
• Sweden +0.32% mom and +4.49% yoy (latest data is for August)
• UK -0.64% mom and -1.30% yoy

Charts illustrate:

Note that euro area average index for 2008 stood at 105.05, declining to 90.73 in 2009 and rising to 94.57 in 2010. 2011-to-date average index is 97.12, still miles below the 2008 levels.

Looking closer at overall index subcomponents. Let's take Manufacturing first.

• Euro area 17 manufacturing index is up 1.6% mom and 6.44% yoy - strong showing. The index averaged 102.91 in 2011-to-date, against 107.27 average in 2008 and 97.53 average in 2010. Again, it appears we are still way off the 2008 levels of activity.
• Denmark -4.33%mom and +1.87% yoy
• Germany -1.01%mom and +9.42% yoy
• Ireland +3.69% mom and +11.52% yoy
• Greece -2.63% mom and -11.62% yoy
• Spain +2.84% mom and +1.03% yoy
• France +0.74% mom and +5.06% yoy
• Italy +4.03% mom and +3.56% yoy
• Poland +2.15% mom and 6.06% yoy
• Portugal +6.56% mom and +0.10% yoy
• Finland +3.05% mom and +3.25% yoy
• Sweden -2.57% mom and +7.65% yoy
• UK -0.33% mom and +1.52% yoy

Strong showing on manufacturing side is also replicated by robust growth in New Orders sub-index:

• Euro area up 2.38% mom and +8.47% yoy in August, with 2011-to-date average index at 105.8 against 110.09% 2008 average and 98.84 2010 average. The gap is both narrower and is closing more robustly.
• Denmark (-4.78%mom), Germany (-0.43%mom), Greece (-0.36%mom), Portugal (-0.17%mom), Sweden (-2.33%mom) and the UK (-0.88%mom) posted monthly declines in the index in August
• Ireland (+1.4%mom), Spain (+2.44%mom), France (+1.08%mom), Italy (+4.87%mom), the Netherlands (+0.13%mom), Poland (+2.05%mom) and Finland (+2.16%mom) have posted monthly increases.

12/10/2011: Starting on the right footing

Two longer-term points to start the day (and renewing the EFSF debate) right, folks.

Point 1 - Global macro and long term - excellent posts today from the Guardian (here) and from barry Eichengreen for Project Syndicate (here) both dealing with EFSF as a non-solution to the crisis, regardless of the size. Both post, just as all other analysis I've read so far can benefit from one additional reality check. What happens if/when the EFSF in its enlarged form gets implemented?

The focus of everyone's analysis so far has been the banks and the sovereign yields/ratings. Let's take a peek further ahead, to say 2014. With EFSF in place, some €500bn+ of liquidity has been pumped into the markets. The banks have taken some significant share of recapitalization funds and dumped these into Government bonds, EFSF bonds, and risky assets around the world. The Governments, having received a boost from the sovereign bond markets via their own banks are back on track to 'stimulating' the economy and the households are now fully pricing in not only their still intact gargantuan debt levels, but also future Government-assumed liabilities in EFSF. The ECB balancesheet is loaded with EFSF paper and short-term lending is rampant, implying that unwinding short term liquidity supply becomes impossible for the ECB without risking a massive liquidity crisis in the banking system. Next trace of post-EFSF world is... stagflation in the Euro land:

• Banks rising capital means margins on loans will rise, while private investment capital is now being courted by the banks at the same time as the corporates go for more debt and equity.
• Governments borrowing resumed means rates are pressured up to sustain euro valuations, which means policy rates are supported to the upside.
• ECB coffers full of EFSF paper means policy rates are supported to further upside.
• States-supported banking sector in Europe means lending supply down, compounded by higher capital calls.
• Taxes on ordinary income and wealth up, means no growth, compounding interest rates effects, despite Government 'stimulus'.

With European economy bifurcated into state-dependent sectors kept alive via debt issuance and private sector economy still on the death bed, as rates creep up to (retail levels) double digits for prime borrowers,wat takes place?

1. Heavily indebted households are being squeezed on both ends of their budget constraint;
2. Heavily debt-dependent European corporates are desperately trying to raise funding via equity issuance which runs against banks looking for more equity investors. Resulting capital crunch puts any hope for recovery on ice.
3. ECB, unable to unwind short-term funding to the banks and holding vast supply of EFSF-linked paper keeps the rates higher than Taylor rule would imply.

The problem, is that absent a direct and robust writedown of private debts and some sovereign debts, and restructuring of the banking sector, EFSF or any other similar measure, no matter how large it will be, will not be able to break the dilemma of "either banks go bust or economy goes bust".

Which brings us to Point 2: What needs to be done in restoring the banking sector to health?

Instead of focusing on immediate funding and capital issues, we need to focus on the actual causes of the disease:

Cause 1: too much debt in the system (real economy) highlighted here.

Cause 2: insolvent banking institutions nursing massive losses going forward.

To deal with both we need a systematic approach to restructuring the banking sector and household balancesheets. The latter is a tough call - expensive and hard to structure. But it will be impossible without the former and via netting of balancesheets it can be aided by the former. So here's the broadly outlined roadmap for restructuring Europe's banking sector:

Resolving Euro area banking crisis requires bold and immediate action. An independent panel, under the aegis of ECB and EBA should review the operational, capital and risk positions of top 250 banks across the Euro area and independently stress-test the banks based on mid-range assumed scenarios of sovereign bonds haircuts of 75% loss on Greek bonds, 40% loss on Portuguese bonds, 20% loss on Irish bonds, and 10% loss on Italian and Spanish bonds. In addition, risk weightings must reflect specific bank's dependency on ECB / Central Banks funding. 

The banks should be divided into 3 categories based on this stress test assessment: Solvent and Liquid banks (SL), with post-stress capital ratios of 8% and above and ECB/CB funding covering no more than 15-20% of the assets, Solvent but Illiquid banks (SI) with capital ratios of 6-8% and ECB/CB funding covering no more than 30% of the assets, and Insolvent and Illiquid banks (II) with capital ratios below 6% and ECB/CB funding covering more than 31% of the assets base.

SL banks should be required to raise additional funding in the private markets and de-leverage post capital raising to Loans to Deposits ratio (LDR) of no more than 110% over the next 5 years. 

SI banks are to be restructured, stripping back some of the non-performing assets, reducing LDRs to 100% over the next 2 years and recapitalizing them through public injection of funds from the EFSF-styled vehicle warehoused within the ECB with a mandate to unwind the vehicle through a 50% writedown of liabilities to EFSF (debt write-offs via cancelation of some of the real economic debts held by these banks - debts of households and non-financial corporations) and 50% recoverable from the banks over the period of 15 years. Public funding for recapitalization must follow full writedown of equity and non-senior debt and partial haircuts on senior debt.

II banks are to be wound down via liquidation - their performing assets and deposits sold and non-performing assets written down against capital and lenders' liabilities (bonds). 

If followed, this approach will deliver, within 12-18 months a fully cleansed banking sector for the Euro zone and improve debt overhang in the real economy, while encouraging new banks formation and competition.

11/10/2011: Central Europe: a Catalyst for empowering the EU

On September 9th, GE and Malopolska Regional Development Authority sponsored on of the three plenary sessions at the Krynica Economic Forum 2011, that I chaired, on the future development of the CEE region: "EU 2020 for CEE: a Catalyst to empower the CEE Region?"

This is the edited transcript of the session proceedings.

The objective of the session was to continue building on previous Economic Fora dialogues concerning the long-term development agenda for the CEE region, and how it fits into the EU frameworks and the EU perspective in terms of development and investment, structural funds, and core policy platforms.

The plenary session, chaired by Dr. Constantin Gurdgiev (Head of Research with St Columbanus AG and Adjunct Lecturer in Finance, Trinity College, Dublin), consisted of:
Mr. Ivan Miklos, deputy PM and the Minister for Finance in Slovakia
Mr. Zoltan Csafalvay, the Minister of State for National Economy of Hungary
Mr. Johannes Hahn, the EU Commissioner for Regional Policy
Mr. Ferdinando Beccalli-Falco, the President and CEO of GE Europe and North Asia
Mr. Stephen Gomersall, the Chairman of Hitachi Europe and
Mr. Pedro Pereira da Silva, CEO of the Jeronimo Martins Group.

Economic development, competitiveness and regional experience

Minister of State for National Economy of Hungary, Mr. Zoltan Csafalvay opened the discussion about the CEE regional development in the context of broader EU economic and social development. Minister Csafalvay stressed that although we perceive the traditional divide across Europe to be along the East-West axis, the current crisis shows that this divide is superficial. Instead, "...if we look at the competitiveness gap between Northern and Southern part of Europe, you can see this in productivity, level of flexibility, innovation, and even in economic freedom there is a gap between Northern and Southern part of Europe."

CEE countries are also performing very well during this crisis. For example, the ongoing fiscal consolidation in Hungary in 2011 also coincides with "a very strong pro-business agenda, including cutting taxes, introducing flat tax, reducing red tape, increasing the flexibility of the labour market and reforming the public sector."

Deputy Prime Minister of Slovakia, Mr Ivan Miklos further developed the theme that the lesson from the CEE region past experiences is that coming out of the current crises, "the EU states need to provide fiscal consolidation... [and] deep structural reforms. These are the main pre-conditions for increasing competitiveness." There are two approaches for dealing with the crises currently on the table. The first one is via a political and fiscal union with euro bonds, "which mean to have stronger and stronger coordination and centralization. The other approach is to have more strict and enforced rules, based on competition. I'm strongly convinced that the second approach is a much better approach, because ...in current conditions, a political union will, in my opinion, be politically unsustainable. Economically this kind of policy is not creating a good environment for necessary fiscal consolidation and structural reforms. ...I'm convinced, and the story of the reforms in CEE countries is a strong evidence, that what we need in Europe, is more competition, because we need deeper and more comprehensive structural reforms."

These points were echoed by Minister Csefalvay who stressed the need to increase competitiveness of Europe as a whole, while retaining competition between countries and regions within Europe. The main challenge is "to find a point where we can increase the competitiveness of Europe's single market is certainly a core point, and energy, transport and R&D focus are important. But, if we want Europe to be competitive on the global stage, we should maintain tax competition between member states, competition between different social and economic models, between what different business environments can offer."

EU Commissioner for Regional Policy, Mr Hahn touched upon the issue of policy cohesion and the regional leadership within the context of the need for accelerating economic recovery. "The question we are asking ourselves today is how we should use this investment to transform Europe's economy, so we can recover from the crisis... The answer to that lies in the Europe 2020 strategic framework. There is a need to continue working on removing the obstacles to a competitive economy and this means investing in better transport, energy, water, wastewater treatment, etc." In addition, Europe's success will depend on the capacity to invest in education, research and development, fostering innovation, supporting clusters and information technology developments. "Europe needs to identify paths of smart specialization. Countries of the CEE region have to see that investing in people and in better products and technology is not a luxury..."

Technological innovation is the driving force for the future of CEE economies and for Europe at large and EU regional and cohesion policies are here to help. "For instance for 2007-2013 cohesion policy will spend more than 86 billion euro on R&D and innovation, in particular for small and medium size enterprises. There are significant differences across the regions. Germany for instance invest 28% of it's total cohesion policy allocations in R&D, Poland and Hungary invest 15% and Slovakia only 10%. This is something we have to change... Don't forget that Europe has a negative technological trade balance of  38%. So we import more patents from outside Europe than we export ...[because] we are yet to bridge the gap between basic research" and business innovation. This is where the regional cohesion policy will move in the next years.

 From R&D focus to innovation-supporting services and technologies

There is significant role to be played by the core infrastructure systems development in facilitating human capital-intensive innovation-based economy that the policy frameworks like Europe 2020 envision. This infrastructure - bridging existent gaps in energy, water, wastewater, transport, education and healthcare - can serve as both the source of competitive advantage and the originator of innovation.
To deliver such supports, the economies of scale from regional cohesion and integration in infrastructure development and investment should be used as a significant point of strength, as stressed by Mr. Ferdinando Beccalli-Falco, the President and CEO of GE Europe and North Asia. These economies of scale reach beyond physical investment, to the heart of institutional competitiveness and the potential of the common market.

The need for transforming the current policies and institutional frameworks is exemplified by the CEE region. "There is a huge potential in this area. GE organized a seminar in Budapest where we were discussing the unification of the energy system of CEE in order to gain the economies of scale and create competitiveness. This was in 2007. What happened? Nothing. We repeated in 2008. What happened? Nothing." The core obstacle is not availability of funding, but the lack of common regional framework and the lack of will to invest in newest technology, not just catching-up but leading in technological capital. "...When we use these funds, let's try to use them to create the newest, most up-to-date technology, to make sure that we are not just buying technology which quickly becomes obsolete."

This is a part of addressing the European and CEE regional competitiveness challenges. "Competitiveness in Europe nowadays is represented by high level of education and by the creation of new technology, not the cost of manufacturing. When GE bought Tungsram in the late 1980s the differential in cost between Western Europe, or the United States, and Hungary was huge. Today, the reason why Tungsram can survive is because we are introducing the latest technology. Cost is not the name of the game anymore." To enhance this potential at the regional level requires re-prioritization of EU policy agenda. "The European budget today consumes a considerable percent in agricultural subsidies, which support a sector that accounts for just 3 percent of the total GDP. The new budget should be dedicated more to technology and education development." This will also benefit the CEE region, which has strong base of human capital.

The stress, placed by Mr Ferdinando Beccalli-Falco on harnessing CEE region potential in human capital, R&D and technological innovation, within the broader EU policy frameworks and budgetary supports, was complementary to the focus on institutional and 'soft' innovation (policy and business process development) raised by other speakers. These points were further expanded by Mr. Pedro Pereira da Silva the CEO of Jeronimo Martins Group who focused in his contribution on the need to see CEE region as the source of talent, creative workforce and business innovation.

"Over the last two decades we've been a part of the process of transformation in our industry and we have seen a remarkable transfer of know-how in the CEE region, massive investments and economic modernization. As an example: it took 15 years in Poland to open 350 hypermarkets; the same takes 25 years in Spain. So everything happens much faster, more dynamically, with more competition in the CEE region than in the other parts of Europe."

"As we see from the euro area experience, today we have much more risk, more uncertainty, we also are seeing slowdown in investment. You can see this as a challenge or as an opportunity." Until now, CEE countries have been focused on internal development but "the next stage will be regional consolidation in production and distribution sectors." This represents yet another, but related, regional opportunity as CEE economies become more closely integrated within the region.

Mr. Stephen Gomersall, the Chairman of Hitachi Europe took a more specific approach to the issue of regional integration - the perspective of the foreign direct investors in the region, building on the contributions by Minister Csafalvay  and Deputy Prime Minister Ivan Miklos concerning the importance of interconnecting public policies with private sector competitiveness. "...From our point of view those are key factors for bringing more investment into Europe."

Firstly, according to Mr Gomersall, although CEE countries do have a deficit in infrastructure, "they have strong macro-economic frameworks, and young and vibrant workforce. The region also has the advantage of investing in infrastructure at a time when much more sophisticated and efficient solutions are available. So you can get a much bigger effect from the investment."

Secondly, alongside the contributions from Mr. Beccalli-Falco and Mr. da Silva, Mr Gomersall said that, "from an investment perspective, growth comes from empowering the private sector. Governments play a vital role in providing the framework for national development, for regional development, and as sponsors of innovation, but there are four key factors I would mention for growth and for business. The first is a stable economic environment, the availability of credit, stable currency and a climate conducive to foreign investment. The second is a secure and stable energy supply... [with] the right mix of energy sources... The third factor - good intercity and regional transport links, ...and an efficient IT environment." In at least two of those areas, according to Mr Gommersall, policy framework and IT deployment, "Poland is already a very strong player and becoming a leader in Europe in implementing, for example, e-government technologies".

Thirdly, "new infrastructure development will require very large investments. The EU programs and structural funds are of enormous importance, but there is also the need for private finance, so projects need to be not political or social projects, but based on solid economic returns and optimal efficiency." CEE region needs "innovative methods for blending public and private finance ...to deliver public services, for example in energy and transport. ...Many of these projects are trans-national: cross-border. For example, Lithuanian's nuclear power project involves investment from four nations and a unified or at least interconnected grid. Without regional cooperation, it will be much more difficult to make this investment efficiently. So, the coordination of policies and projects at the regional level makes enormous sense."

Regional policy and investment platforms

Overall, the panel was in consensus on the need for developing more competitive economic models, including regional models, especially in the areas of human capital and services. The question that remained is whether the CEE can act as a functional regional platform for competitiveness and innovation-supporting technologies and best practices.

Mr Gomersall referred to the specific example of Poland that shows the intrinsic resources available within the CEE region that can be used to drive both the policy dimension of stimulating competitiveness and for merging investment and technology platforms to deliver on regional objectives. "It's well known that the level of scientific education in Poland is high, and therefore the propensity in Poland to adopt new technology solutions is also high. We've been working with a number of government and private partners here in Poland for the development of biometric technologies. These are means of ...ensuring the security of business transactions, and transactions between the government and citizens online. Poland has actually proven to be the most fertile ground for the development of these technologies EU-wide." Mr. Ferdinando Beccalli-Falco added that from GE experience, "the human capital is  already here, [in the CEE region, and] the tradition for the development of technology is here."

Mr. Zoltan Csefalvay pointed out that despite the demand for the latest technological investments in the area of infrastructure in the CEE region, little funding is available in these areas. "If you look at the future financing period 2014 to 2020, there is an EU-wide investment facility for infrastructure development and transport development. Of 49 transportation projects identified under this, only two are related to Hungary." The lack of prioritization of CEE regional investments by the EU implies the need, according to Mr Csefalvay, "to place Central and Eastern Europe in the centre of the European debate."

The central issue is how can CEE translate the points of national excellence to a regional framework? Can focusing on the more specific areas for investment such as, for example, energy or infrastructure or healthcare reshape the regional framework for development and avoid the differentiation between local competition and regional competition and global competition. According to Mr Beccalli-Falco, "the initiative to create a unified regional energy system" is a strong positive. "Where we find a roadblock is in the political will to do it. I am afraid there is not enough vision to understand the advantages that such a system could bring."

Mr Pedro Pereira da Silva focused on the three key concepts that, in his view, will drive regional growth within the CEE and indeed across Europe. "Innovation, efficiency and competition for me are the three key words we need to focus on in the EU". For CEE states "a key point, is that extra effort is needed on the education side to support talent capital, which really makes a difference."

Mr. Gomersall echoed these views while focusing more on specific example of large scale regional infrastructure integration in transportation systems: "Obviously EU funds and national development funds are limited and therefore it's important to ensure that they are used in the most efficient manner for the future development ...and not just for social stabilisation. ...[However] the volume of new capital coming in from the private sector, particularly from the United States, Japan, China, South Korea, etc, is far in excess of the funds from the European Union. So, the key point is really to create a climate which will continue to attract that investment and make it profitable, and that includes, obviously, taking further steps on the single market and deregulation."

Mr. Beccalli-Falco concluded the panel discussion with a comment summing up the core areas for investment and policy development at the regional levels, mentioned by other speakers: "I'd like to say that my three concepts, are: continue to focus on education, full utilisation of the European funds, and support foreign direct investments, which, as was said by others, are much bigger than what is contributed by Europe. If we can combine these three things together, I think that Central and Eastern Europe is going to become a highly productive, highly competitive area in the world."

11/10/2011: Industrial Production & Turnover: Ireland August 2011

Production for Manufacturing Industries for August 2011 surprised to the strong upside rising 11.4% higher on August 2010 (unadjusted basis) and 1.2% (seasonally adjusted) over three months from June through August, compared to 3 months prior to June. Industries volume of production rose 10.4% year on year in August, also a strong gain. Monthly increase in volume in Manufacturing (3.6%) was the strongest monthly gain recorded since 9.0% increase in September 2010, and 4.4% monthly gain in Industries was also the strongest since September 2010 monthly rise of 6.9%.

Manufacturing and Industry indices, as shown above, rose well above the shorter-term average. However, the core break out from the previously established pattern of volatility around the flat trend was in the Traditional Sectors. Specifically, Modern Sector volume of production expanded by 10.2% year on year and 0.9% monthly. These were the strongest yearly gains in the series since December 2010 and introduce a break from annual contractions posted in three months between May and July. Traditional Sectors posted a massive 16.7% jump in volume of production in monthly terms - the largest monthly gain on the record and 10.8% annual rate of growth - also the strongest growth on record.

As the result, the gap between Modern and Traditional sectors activity by volume has closed substantially in August, from 43.3 in July to 30.3 in August posting the shallowest gap since August 2010.

Equally importantly, the seasonally adjusted industrial turnover index for Manufacturing Industries

was 7.0% higher in August 2011 when compared with August 2010, and 4.9% higher mom. The annual rate of growth in August was the highest since February 2011 and the monthly rate was the highest since May 2010.

Again, as per chart above, both series now have broken well above their flat recent trend, although the breakout is consistent with volatility in the Q4 2010-Q2 2011.

Another encouraging sign is that Modern Sector employment grew from 64,700 to 66,000 between Q2 2011 and Q1 2011, although it remains below 66,300 in Q3 2010. All other sectors employment expanded from 129,600 to 129,900 Q2 2011 to Q1 2011 and All Industries employment grew from 194,300 in Q1 2011 to 195,900 in Q2 2011.

In 3 months between June 2011 and August 2011, in year-on-year terms, the following notable gains and declines in volume activity were recorded in:

• In Food products and Beverages there was 0% growth in volume - an improvement on preceding 3 months period which recorded a yoy contraction of 5.4%, with Food Products contracting 2.4% yoy (improving on 8.5% yoy contraction in 3 months from May through Jul 2011), while Beverages grew by a substantial 12.2%, building on 10.6% yoy expansion in May-July.
• Textiles and wearing apparel volumes declined 28.5% yoy
• Printing and reproduction of recorded media sub-sector volumes shrunk 14.7%, a slight improvement on 15% contraction recorded in yoy terms for May-July period.
• Chemicals and chemical products grew 27.3% (there was 23.9% rise recorded in May-July period), while Basic pharmaceutical products and preparations sub sector volumes grew 2.0% offsetting 2.9 contraction in May-July.
• Computer, electronic, optical and electrical equipment sector volumes contracted 10.9% yoy, virtually unchanged on 11.0% decline recorded in May-July, primarily driven by Computer, electronic and optical products which account for 90%+ of total value added in the sector and which declined in volumes by 10.5% yoy (worse decline than 10.1 contraction in May-July)
• Machinery and equipment not elsewhere classified expanded by 19.1%
• Transport equipment grew by 14.8%
• Other manufacturing contracted by 8.8%
• Electricity, gas, steam and air conditioning supply volumes were up 1.5% yoy
• Capital goods sector volumes posted another contraction of 1.0% yoy, improving on 1.3 decline recorded in may-July
• Intermediate goods production volumes fell 13.2%, also better than 14.1% decline in May-July
• Consumer goods production grew 3.0%, reversing 1.8% decline in May-July, of which durable goods production volumes were up 12.2% although these account for 1/32nd of the total value added in the category, non-durable goods grew by 2.9%.
• 
  

10/10/11: The Gathering

According to the latest CSO data, 6,037,100 foreign visitors came to Ireland in 2010 and in January-July 2011, there were 3,696,000 overseas visitors to Ireland. Of the above, in the same two periods, 935,500 visitors (2010) and 594,700 visitors (January-July 2011) from overseas to Ireland came from North America a rise of 13% on January-July figures for 2010.

In 2009 (the latest for which data is available via CSO), visitors from North America spent €620mln excluding international airfares during their trips to Ireland. The number of visitors in the same period from North America amounted to 980,000, implying per-person per visit spend of €632.65.

Given that since 2009 continued deflation in domestic economy has reduced the costs of travel to Ireland, suppose the number above applies in today's terms. Let us, therefore, assume that per-visit per-person spend for North American visitor to Ireland is somewhere around €650.00.

"Global Irish Forum" promised to increase these numbers by 325,000 additional visitors in 2013 or ca €211.25mln for the year 2013.

This means that the GIF promises to yield a whooping:

• 5.38% increase in the total number of visitors on 2010;
• 5.13% increase in the total number of visitors on projected number of visitors in 2011;
• 34.74% increase in the total number of visitors from North America in 2010;
• 31.88% increase in the total number of visitors from North America projected for 2011 based on January-July data
• 5.45% increase in the total spending by visitors to Ireland on 2009 annual levels

Over the period during which GFI guests wined and dined in Dublin contemplating this dramatic economic stimulus, Irish state moved 3 days closer to repaying €737mln of yet another Anglo unsecured, un-guaranteed bonds to largely foreign investors. The cost of these bonds will be equivalent to repeating the achievements of The Gathering for 3 years, 5 months 26 days 9 hours and 36 minutes, not accounting for costs and inflation.

In the end of the GIF the delegates also agreed another substantial measure for boosting the Irish economy and improving Irish society - the Diaspora Awards, which will be carried out at the expense of the Irish taxpayers and will comprise annual gathering of the best and the brightest minds who have concocted the idea of The Gathering.

07/11/2011: Is Ireland a Poster-Boy for "Austerity & Growth" paradigm?

My article on the real dynamics in Irish economic 'recovery' and 'austerity miracle' is available on LISWire: http://liswires.com/archives/1359. 

07/10/2011: Tax returns - truth and DofF-ised surreality

In his statement, following the publication of Exchequer returns for September (here), Minister for Finance, Michael Noonan stated (emphasis mine): "Tax receipts in the period to end-September were 8.7% above the same period in 2010 and slightly ahead of expectations. Although the minor surplus is due to some favourable timing factors and receipts from the Pension Levy introduced to fund the Jobs Initiative, it is encouraging that overall tax revenue is growing again. Individual tax-head performance has been mixed. VAT receipts are weaker than expected but income tax is performing well." The Minister further positioned improved tax and fiscal performance within the context of Irelands 'return to economic growth'.


Note: there is an excellent post on this topic available from Economic Incentives blog (here), although our numbers do differ slightly due to my numbers resting on explicit model for Health Levy revenues and some rounding differences. In addition, my post focuses on comparatives, including to pre-crisis dynamics and returns. I also attempt to cover slightly different questions as outlined below. Furthermore, Economic Incentives blog post also covers the issue of distorted timing on DIRT payments in April and July that I omit in the following consideration.


Another note: over the last 4 years we became accustomed to brutish spin from the previous Government when it comes to painting the tape on Ireland's 'progress' and 'recovery'. The current Government, however, is much more subtle in presenting the positive side of the 'recovery' and Minister Noonan's statement quoted above shows this. However, the real issue here is that in the name of transparency, DofF should be reporting actual figures that are comparable year on year. It's their job and they are failing to deliver on it.


The above statement, of course, raises the following three questions:

1. Did Ireland's tax revenue performance for 9mo through September deliver a significant enough change on 2010 and/or pre-crisis performance to warrant the above optimism?
2. Is Ireland's tax revenue performance attributable to 'return of growth'? and
3. Are the overall tax revenues really 'growing again' in any appreciable terms worthy of the Ministerial claim?

Table below summarizes the data on tax revenues through September 2011, including adjustments to tax heads that reflect:

• USC charge conversion from Health Levy to Income Tax measure: prior to 2011, health levy was collected within PRSI contributions, without being classified as Income Tax. In 2010, the levy collected amounted to €2.02bn for the year as a whole. Using distribution of income tax revenues across months for 2008-2010 average, I estimate that 65.9% of Health Levy would have been collected through September 2011 and account for this in the Income Tax ex-USC line. This is an imperfect estimate that errs on the downside of the overall USC impact as it disregards changes to the Health Levy rates & bands applied. In other words, my estimate assumes that USC incorporated into Income Tax today carries within it unchanged revenues from the Health Levy as per 2010.
• Pensions levy of €457mln is aggregated in the official figures into Stamp Duty returns and the table below provides for this in the line on Stamps ex Pensions levy. Note that the target for Pensions levy receipts was set at €470mln, so there is a shortfall on the target of €13mln which I do not account for in the relevant figures, making my ex-levy estimates erring on cautious side.
• Lastly, the total tax revenue ex-USC Health and Pension Levies incorporates the €122mln delayed payment

So let me run through the above:

• Income Tax revenues, once the Health Levy is factored out (revealing better comparatives to 2010 and before) are up 7.65%, not 25.7% in January-September 2011 compared to same period of 2010 that the DofF claims. Compared to 2009, Income tax revenues are up just 0.6%, not 17.5% implied by DofF numbers. See any significant uptick in the economy feeding through to significant rise in tax revenues? Well, stripping out tax rates increases and tax bands widening, I doubt there is anything but continued contraction in like-to-like revenues here.
• VAT is still tanking compared to 2010 (-2.0%) and to 2009 (-7.7%) as correctly reflected by DofF data. And VAT revenue gap is widening from H1 2011 to Q3 2011 as compared against 2010.
• Corporation tax revenue is falling - down 6.1% on 2010 and down 21% on 2009 and that is amidst historically record levels of exports! So if you know some evidence that 'exports-led recovery' is taking place, it is not showing up in the Exchequer receipts.
• Excise is down 1.4% on 2010 and 2.5% on 2009 and that dynamic is worsening from H1 2011 to Q3 2011.
• Stamps are down 1.4% once we factor out the hit-and-run on Pensions, not up 58.7% as DofF claims.
• CGT, CAT are down in double digits
• Customs are up as DofF shows.
• So total tax revenues are up 1.17% in comparable terms to 2010, not 8.7% as DofF claims and relative to 2009 total tax receipts are down 5.37%.

Relative to target figures are also severely skewed by USC reclassifications and Pension Levy receipts and show, in the end, that in comparable terms we are not delivering on targets. Of course, USC reclassification is reflected in the targets, so without netting out USC, total tax receipts are 0.69% behind the target as set in the Budget, not 0.7% ahead of it as DofF claims. And that is inclusive of timing error of €122mln and excluding USC reclassification change.

So what about our cumulative 'progress' since the crisis on-set in delivering on fiscal stability? Let's compare each year achievements to 2007 levels of total tax revenues:

Again, per table above, the entire set of draconian, growth-retarding tax hikes that have hit households since 2008 delivered virtually no improvement on the crisis dynamics. The shortfall on tax revenue for 9 months January-September period relative to same period pre-crisis (in 2007) in 2010 was €9,290mln and it currently stands at €9,030mln - an improvement of €260mln or less than €30mln per month!

Can anyone still claim that Ireland's public finances are on track to achieve some meaningful targets whatsoever? As Seamus Coffey (in the blog post linked above) points out: "I must say that I cannot see the justification for greeting the figures in such glowing terms" as those used by Minister Noonan and the DofF. I agree.

06/10/2011: Has ECB done a sensible thing, at last?

Like a heavily Photoshopped version of Bill Gates can be expected to last, oh about a nanosecond in convincing the generation i-Apple of the need to buy Microsoft products, so did the interest rate’s junkies expectation that the ECB is about to drop rates to where Ben “The Helicopter” Bernanke has them proved to be short-lived.

Today’s decision  by the ECB not to alter the existent rates was both a shock to all those incapable of making a living in the real economy stagnated of cheap liquidity and to those who were expecting the ECB to miraculously discover some latent propensity to fuel inflation.

Yet, the decision was perfectly in line with ECB’s policies to-date. Worse, it was in-line with rational ECB policies to-date – the type of policies that should be predictable from the long-run perspective. ECB has held its nerve this time around. Here’s why.

Chart below shows the historical path relating ECB rates to the leading indicator for real growth in the euro area, eurocoin.

At the depth of the crisis back in 2009, rates consistent with the current eurocoin reading were justifiably lower than they are today because they were coming on the foot of severe contractions in economic activity from the tail end of 2008 and into 2009. In addition, monetary policy at the time was accommodative of growth recession, rather than of the banking and financial services crisis or the sovereign crisis. Today, the picture is different. While eurocoin has entered the period of signalling potential for renewed recessionary dynamics, the looming growth crisis is not underpinned by the change in economic fortunes for the euro area, but by a set of structural weaknesses (fiscal, banking and credit supply-related, depending on the specific country). Easy monetary policy can help, but it cannot restore the euro area economies to structural health. Instead, alleviating the pressure on growth through monetary tools can only delay the necessary adjustments in structural parameters. ECB is not about to do this and, perhaps, for a very good reason.

This means that the current leading indicators scenario should be compared not against 2008-2009 period, but against pre-crisis periods where eurocoin had also fallen to the current levels around zero. This is the period of December 2002-June 2003 and the underlying ECB repo rate at that time was around 2.5%. Get it? The policy-consistent move for ECB today would be from around 3% down to 2.5%, not from 1.5% to 1%. Given we are at 1.5%, the most consistent move would be to stay put. And this is what the ECB chose today.

By the way, in the long run, since eurocoin is the leading indicator of activity, there is a negative relationship between inflation and the growth projections it provides: higher growth signal into the future tends to coincide with lower inflationary pressures today. Or put differently, falling eurcocoin now is not necessarily a signal for well-anchored short-term inflationary expectations, something that coincides with the stated ECB concern expressed in today's statement.

Of course, ECB targets are set based on inflation, not leading growth indicators, although the two are strongly correlated with lags. Here, the same picture applies:

And the same logic holds. So based on inflationary dynamics, the ECB repo rate should be around 2.0% to 3.0% and falling from above 2% levels, but not below 1.75%. Given the starting position at 1.5%, a rational move would be to stay put. 

No surprise, then in today's decision. It could have gone like 25:75 - with lower chance for an irrational knee-jerk rates lowering reaction on the foot of the immediate crisis, and higher chance of what has been delivered.

Perhaps the only disappointing bit to today's ECB call is that the central bank will continue supplying unlimited liquidity to the insolvent banking sector under unlimited 1mo lending extended through July 2012. Perhaps the ECB had no choice, but to do that. Or may be a better option would have been to start properly assessing the quality of collateral pledged by the banks at the discount window. That would have achieved two things - simultaneously - both being good in the long run for the euro area banking sector:

1. It would have continued provision of supports to the banks with better quality assets (aka solvent but stressed banks), and
2. It would have put pressure on member states to purge their sick banks and drastically restructure the banking markets (getting rid of Dexia-esque zombies).

On top of that, ECB announced renewal of LTROs (12-mo and 13-mo) with delayed interest cover - in effect a heavy duty support for really stressed banks. Last time ECB did this was back in December 2009 and those operations were designed to shore up banks in the wake of the Lehman Bros bust.

Instead of applying some pressure on euro area's clownish 'leadership' in the banking sector, the ECB choose to call for some unspecified efforts by the banks to voluntarily shore up their balance sheets and retain earnings to provide cover for losses on their sovereign bonds exposures to weaker euro area countries. In the current climate, and with ECB providing unlimited liquidity, this is equivalent to suggesting that zombies should get out into the yard and work-off some of their rigor mortis. Good luck.

05/11/2011: Live Register surprises on improvement side

According to the latest Live Register data, standardised unemployment rate in September 2011 was 14.3%, down slightly from a rate of 14.4% in August and in line with the latest seasonally adjusted unemployment rate from QNHS (14.2%) for Q2 2011. The average unemployment rate during 2010 was 13.6% while the average rate for 9mos of 2011 to-date is 14.2%.

On a seasonally adjusted basis there was a decrease of 5,400 (-1.2%) on the Live Register in the month to September 2011 bringing the seasonally adjusted total to 442,200. Per CSO: "This decrease follows four consecutive months of relatively low increases in the seasonally adjusted series. Over the last twelve months the seasonally adjusted Live Register has remained in the relatively narrow range of

441,600 to 447,900". Importantly:

• We now have the largest decrease in seasonally adjusted LR since September 2007.
• Year on year LR declined 5,700 or 1.28% against previous month year-on-year increase of 1,200 (+0.27%)
• Q3 2011 average LR is now up 0.39% on Q2 2011 and 0.15% down on Q3 2010.

The above suggest significant decreases in LR, although the source of these decrease is unclear, as exits from benefits and/or emigration would reflect positively on LR figures, while having an adverse impact on overall economy.

Charts above illustrate the two trends - one of moderating decrease in LR and the other chart showing just how significant the drop of 5,700 is compared to historical monthly changes.

On a seasonally adjusted basis there were monthly decreases of 3,000 males and 2,400 females on the Live Register in September 2011 which implies that female unemployment (of lesser vintage than average male unemployment) is somewhat sticker for now. The same is confirmed by the annual data, with the number of female claimants increasing by 2,834 (+1.9%) to 155,453 over the year, while the number of male claimants decreasing by 7,810 (-2.7%) to 281,988.

The number of long term claimants on the Live Register continued to increase over the year with 41.9% of claimants in September 2011 on the Live Register for one year or more, up on 33.4% in September 2010.

Trends for national v foreign workers on LR and for casual and part-time LR signees are illustrated below:

So on the net - the new data is encouragingly strong on monthly decline side, but requires further confirmations in October-December to raise confidence that we are witnessing a sustained trend. It also requires cross-referencing to changes in the labour force that can only be performed using QNHS results for Q3.

05/10/2011: Ireland's 'Sustainable' Deficit through September

With Exchequer results for September (see earlier posts on the details of tax returns and tax burden), here's the update on overall Exchequer deficit for nine months through September 2011.

Overall 2011 Exchequer deficit currently stands at €20.66bn with ex-banks deficit at €12.31bn, implying net reduction in deficit ex-banks of €1.069bn on 2010 levels and absent pensions levy / expropriation 'measure', the deficit reduction achieved through September is now just €612mln.

This hardly represents a significant drop in our overall fiscal imbalances. Cumulative deficits for 2008-present are now at €76.76bn or €42,146 per each employed person or €54,990 per each full-time employed person in Ireland (per Q2 2011 QNHS numbers, not counting Nama debts, Government promisory notes and interest on these soon to be due). 

So a run-of-the-mill family of 2 full-time employed workers is now facing, on top of massive mortgage and Government-monopolized/regulated utilities and services bills, plus gargantuan costs of childcare, education, and health care, an additional debt pile of €109,000 on average, courtesy of the serial failure of the state to control its own spending habits. 

As the 'Green Jersey' crowd would say: "It's all sustainable" cause 'exports will save us' and we have 'jobs programmes' alongside 'homes retrofitting'/'windmills-potential' economy. Sure...

05/10/2011: Tax burden distribution: Q3 2011

Tax profile for September yielded another sign of continued shift in tax burden onto the shoulders of ordinary households, courtesy of:

1. Continued underperformance in corporate tax returns despite booming exports activity
2. Continued graft of household budgets under the USC and levies.

Overall tax burden in Q3 2011 has shifted as follows:

• Q2 2011 share of Income tax receipts in total receipts was 39.52%. Q3 2011 share of Income tax receipts in total receipts was 38.40% against Q3 2010 share of 33.20% and Q3 2007 share of 28.04%
• Q2 2011 share of VAT receipts in total receipts was 33.22%. Q3 2011 share of VAT receipts in total receipts was 33.17% against Q3 2010 share of 36.81% and Q3 2007 share of 37.41%
• Q2 2011 share of Corporation tax receipts in total receipts was 9.32%. Q3 2011 share of Corporation tax receipts in total receipts was 8.52% against Q3 2010 share of 9.86% and Q3 2007 share of 7.39%
• Q2 2011 share of Excise receipts in total receipts was 14.4%. Q3 2011 share of Excise receipts in total receipts was 13.4% against Q3 2010 share of 14.77% and Q3 2007 share of 13.79%
• Stamps, CGT and CAT combined share in Q2 2011 was 2.64% against Q3 2011 share of 5.67% and 4.73% in Q3 2010 and 12.67% in Q3 2007.

Charts to illustrate: