2/2/2012: Sunday Times 29/01/2012 - irish property bust

This is an edited version of my Sunday Times article from January 29, 2012.

In a recent Annual Demographia International Housing Affordability Survey of 325 major metropolitan areas in Australia, Canada, Hong Kong, Ireland, United Kingdom and the United States, Dublin was ranked 10th in the world in terms of house prices affordability. The core conjecture put forward in the survey is that Dublin market is characterized by the ratio of the median house price divided by gross [before tax] annual median household income of around 3.4, a ratio consistent in international methodology with moderately unaffordable housing environments.

Keep in mind, the above multiple, assuming the median household income reflects current unemployment rates and labour force changes, puts median price of a house in Dublin today at around €175,000 – quite a bit off the €195,000 average price implied by the latest CSO statistics. But never mind the numbers, there are even bigger problems with the survey conclusions.

While international rankings do serve some purpose, on the ground they mean absolutely nothing, contributing only a momentary feel-good sensation for the embattled real estate agents. In the real world, the very concept of ‘affordability’ in the Irish property market is an irrelevant archaism of the era passed when flipping ever more expensive real estate was called wealth creation.

What matters today and in years ahead are the household expectations about the future disposable after-tax incomes in terms of the security and actual levels of earnings, stability of policies relating to household taxation, plus the demographic dynamics. None of these offer much hope for the medium-term (3-5 years) future when it comes to property prices.

Household earnings are continuing to decline in real terms (adjusting for inflation) in line with the economy. The CSO-reported average weekly earnings fell 1.2% year on year in Q3 2011 once consumer inflation is take out. But the average earnings changes conceal two other trends in the workforce that have material impact on the demand for property.

Firstly, reported earnings are artificially inflated because the workforce on average is becoming older. Here’s how this works. Younger workers and employees with shorter job tenure also tend to be lower-paid, and are cheaper to lay off. Thus, the rise in unemployment, alongside with the declines in overall workforce participation, act to increase average earnings reported. This explains why, for example, average weekly earnings in construction sector rose 2.5% in Q3 2011 year on year, while employment in the same sector fell 4.1% over the same period. This means that fewer potential first-time buyers of property are having jobs, and at the same time as the existent workers are not enjoying real increases in earnings that would allow them to trade up in the property markets.

Secondly, the real world, rising costs across the consumer expenditure basket, further reducing purchasing power of households, is compounded by the composition of these costs. One of the largest categories in household consumption basket for those in the market to purchase a home is mortgage interest. This cost is divorced, in the case of Ireland, from the demand and supply forces in the property markets and is influenced instead by the credit market conditions. In other words, the 14.1% increase in mortgage interest costs in the 12 months through December 2011, once weighted by the relative importance of this line of expenditure in total consumption is likely to translate into a 2-3% deterioration in the total after-tax disposable income of the average household that represents potential purchaser of residential property.

And then there are effects of tax policies on disposable income. One simple fact illustrates the change in households’ ability to finance purchases of property in recent years: between 2007 and 2011 the overall burden of state taxation has shifted dramatically onto the shoulders of ordinary households. In 2007, approximately 46% of total tax collected in the state came directly out of the household incomes and expenditures. In 2011 the same number was 58%.

The above factors reference the current levels of income, cost of living and tax changes and have a direct impact on demand for property in terms of real affordability. In addition, however, the uncertain nature of future economic and fiscal environments in Ireland represents additional set of forces that keep the property market on the downward trajectory. For example, in Q3 2011 there were a total of 116,900 fewer people in employment in Ireland compared to Q3 2009. However, of these, 113,700 came from under 34 years of age cohort. Unemployment rate for this category of workers, comprising majority of would-be house buyers, is now 20.4% and still rising, not falling. Given the long-term nature of much of our current unemployment, no one in the country expects employment and income growth to bring these workers back into the property markets for at least 3 years or longer. Without them coming back, only those who are trading down into the later age of retirement are currently selling, plus those who find themselves in a financial distress.

Tax uncertainty further compounds the problem of risks relating to unemployment and future expected incomes. Government projections that in 2013-2015 fiscal adjustments will involve raising taxes by €3.1 billion against achieving current spending savings of €4.9 billion are rightly seen as largely incredulous, given the poor record in cutting current spending to-date. Thus, in addition to already draconian pre-announced tax hikes, Irish households rationally expect at least a significant share of so-called current expenditure ‘cuts’ to be passed onto households via indirect taxation and cost of living increases.

In short, there is absolutely no catalysts in the foreseeable future for property markets reversing their precipitous trajectory. No matter what ‘affordability’ ranking Irish property markets achieve, the demand for property is not going to grow.

This, of course, brings us to the projections for the near-term future. The latest CSO data for the Residential Property Price Index released this week shows that nationwide, property prices were down 16.7% in December 2011 compared against December 2010. Linked to the peak prices as recorded by the now defunct PTSB-ESRI Index, the latest CSO figures imply that nationally, residential property prices have fallen from the peak of €313,998 in February 2007 to ca €166,000 today (down 47% on peak). In Dublin, peak-level average prices of €431,016 – recorded back in April 2007 – are now down to close to €195,000 (almost 55% off peak).

Using monthly trends for the last 4 years, and adjusting for quarterly changes in average earnings and unemployment, we can expect the residential property price index to fall 11-12% across all properties in 2012. Houses nationwide are forecast to fall in price some 12-14% - broadly in line with last year’s declines, while apartments are expected to fall 11-12% year on year in 2012, slightly moderating the 16.4% annual fall in 2011.

More crucially, even once the bottom is reached, which, assuming no further material deterioration in the economy, can happen in H2 2012 to H1 2013, the recovery will be L-shaped with at least 2-3 years of property prices bouncing along the flat trendline at the bottom of the price correction. After that, return toward longer-term equilibrium will require another 1-2 years. Assuming no new recessions or crises between now and then, by 2015-2016 we will be back at the levels of prices recorded in 2010-2011. Between now and then, there will be plenty more reports about improving affordability of housing in Ireland and articles about the proverbial foreign investors kicking tyres around South Dublin realtors’ offices.

Chart: Residential Property Price Index, end of December figures, January 2005=100

Source: CSO and author own forecast

Box-out:

Ireland’s latest shenanigans in the theatre of absurd is the fabled ‘return to the bond markets’ with this week’s swap of the 2 year 4.0% coupon Government bond for a 4.5% coupon 3-year bond. The NTMA move means we will be paying more for the privilege to somewhat reduce the overall massive debt pile maturing in 2014, just when the current Troika ‘bailout’ runs out. So in effect, this week’s swap is a de fact admission by the state that Ireland has a snowball’s chance in hell raising the funding required to roll over even existent debt in 2014 through the markets. Which, of course, is an improvement on the constant droning from our political leaders about Ireland ‘not needing a second bailout’. Of course, as far as our ‘return to the markets’ goes – no new debt has been issued, no new cost of financing the state deficits has been established in this swap. The whole event is a bit of a clock made out of jelly – little on substance, massive on PR, and laughable from the functionality perspective.

2/2/2012: Euro area credit supply remained constrained in Q4 2011

ECB's Bank Lending Survey (BLS) for January 2012 is out, showing dramatic failure of the December 2011 LTRO to kick start supply of credit to the real economy.

According to the BLS, credit standards by euro area banks tightened in the fourth quarter of 2011 on:

• loans to non-financial corporations (35% of euro area banks report tighter lending to NFCs in net terms, up from 16% in  the preceding quarter),
• loans to households for house purchase (29% of the euro area banks reporting net tightening of lending to households, up from 18% in the preceding quarter), and 
• loans for consumer credit (13%, up from 10% in the preceding quarter). 

Looking ahead, euro area banks "expect a further net tightening of credit standards, albeit at a slower pace than in the fourth quarter of 2011" in Q1 2012.  There is no easing of lending conditions on the horizon.

Overall rise in the net tightening  of credit standards was caused by:

• "the adverse combination of a weakening economic outlook" and 
• "the euro area sovereign debt crisis, which continued to undermine the banking sector’s financial position",
• In addition, "increased market scrutiny of bank solvency risks inQ4 2011 is likely to have exacerbated banks’ funding difficulties."

Euro area banks also reported a net decline in the demand for loans to NFCs in Q4 2011, albeit at  a slower pace than in the previous quarter (-5% in net terms, compared with -8% in Q3 2011).

• Banks indicated a sharp fall in the financing needs of firms for their fixed investment. 

The net demand for loans to households  declined further in Q4 2011, "broadly in line with previous expectations and with actual figures quoted in the previous survey round (-27% in the last quarter of 2011, compared with -24% in Q3 2011 for loans for house purchase, and -16% in the last quarter of 2011, compared with -15% in the third quarter for consumer credit).

For Q1 2012 banks expect a sizeable drop in the net demand for housing loans, while the decline in net demand for consumer credit is expected to remain in the same range.

Despite a massive LTRO in December 2011, "euro area banks reported a slight easing of access to wholesale funding in the last quarter of 2011, compared with replies from the previous survey,
although still a large number of euro area banks  (in net terms) continued to report significant
difficulties. ... Looking ahead, banks across the euro area overall expect some improvement  in access to wholesale market funding in the next quarter, potentially reflecting the anticipated effectiveness of non-standard measures taken by the ECB."

Banks also indicated that "sovereign market tensions led to a substantial deterioration of their funding conditions through balance sheet and liquidity management constraints, as well as through other, more indirect, channels. Banks also reported that vulnerabilities to risks stemming from the sovereign  crisis have significantly contributed to the tightening of credit standards, although some parts of the banking system were in a position to shield their lending policies from the impact of the crisis."

"...On the impact of new regulatory requirements on banks’ lending policies, banks’ replies point
to a further adjustment of risk-weighted assets and capital positions during the second half of 2011, to a larger extent than in the first half of the year and more than envisaged in July 2011. The same
applies for the impact of regulation on the net tightening of credit standards. In the coming months
banks indicate a further intensification of balance sheet adjustments and related constraints on the
bank lending channel."

30/1/2012: Irish Long-term Unemployment Saga

Unemployment figures, by age - distinguish youth and adult unemployment - have been preoccupying many analysts in recent weeks. Loads of media attention has been paid - internationally, if not in Ireland - to the plight of youth unemployment. In the next several posts, I will take a closer look at the data for EU27, including Ireland. All of the data comes courtesy of the Eurostat and covers the latest available period Q3 2011.

First, let's take a look at long term unemployment (defined as unemployment spell of 12 months or more) and very long-term unemployment (defined as 24 months or more).

Table below summarizes the data:

As you can see, we are not exactly a good performer. Prior to the crisis, Irish long-term unemployment averaged just 1.4% of the active age population - 23rd lowest in the group of EU27 plus Norway. In Q3 2011 our long-term unemployment stood at 8.8% - the third highest in the sample of 28 states. Over the period covered we have experienced an increase in long-term unemployment of 7.4 percentage points - the steepest rise in the EU27+Norway.

Matters are even worse when it comes to very long-term unemployment, where our rate has moved from  0.7% average for Q3 readings pre-crisis to 5.4% in Q3 2011 - an increase of 4.7 percentage points. Only Slovakia (6.0%) is worse performer than Ireland in terms of overall very long-term unemployment rate and we are the absolute worst in the EU27 + Norway group in terms of increase in very long-term unemployment.

Here is a chart to illustrate some of the above:

\Broken down by gender:

Long-term unemployment rates for men and women:

Ireland used to rank 22 in the EU 27+Norway in the size of its long-term unemployment pool amongst the males prior to the crisis. By Q3 2011 we had the highest rate of male long-term unemployment. We fared much better in terms of long-term female unemployment, moving from the lowest unemployment in the sample of countries prior to the crisis to 9th highest position. However, in both male and female long-term unemployment, Ireland experienced the largest and second largest, respectively, increases during the crisis.

Things are even worse for Irish very long-term unemployed figures. Prior to the crisis, very long term unemployment amongst Irish males averaged 1.0% (22nd highest in the EU27+Norway). In Q3 2011 that number rose to 7.5% (the highest in the EU27+Norway). This increase was the largest in the sample of countries over the period.

Very long-term unemployment amongst the females in Ireland averaged just 0.4% in pre-crisis period - third lowest in the EU27+Norway sample. In Q3 2011 this rose to 2.4% - 10th highest reading in the sample. Ireland's rate of increase in female very long-term unemployment was the fastest in the EU27 + Norway group of countries.

In the next post we will take a look at the unemployment figures by age.

30/1/2012: Dublin gets horrific ranking on economy

Dubious distinction for Dublin - identified as the World's 4th Worst-Performing City (see link here): and here are the snapshots of our 'neighborhood' in the rankings:

Source: http://www.businessinsider.com/the-10-worst-performing-cities-in-the-world-2012-1#

Between, I am puzzled by the pic selected for Dublin. Can't think of where it was taken...

30/1/2012: Fake Doctors Treating Fake Disease in Greece

There are many 'expert' voices in the media saying Greece should exit the Euro zone in order to return to growth. This, as I commented earlier today, is a gross oversimplification of the reality.

There is simply no evidence whatsoever that Greece can grow on its own any faster or more sustainably than it did within the Euro. In fact, the evidence presented below shows that the only period during the last 30 years in which Greece was able to somewhat marginally close the gap in growth between itself and the Advanced Economies group is the period immediately following its accession to the Euro.

It is a fallacy of 'alternative expectations' to believe Greece will be enabled to grow its economy under post-euro devaluation beyond achieving a 1-2 years-long 'bounce'. Analysts who expect Greece to recover on the back of exiting the euro & devaluing are deluding themselves for two major reasons:

1. Greece has no fundamentals for growth & its debt overhang will remain, unless it defaults hard. Even with a default, removing debt overhang is not going to deliver growth to Greece beyond simple mechanical post-depression bounce, as Greece lacks all fundamentals for growth - institutional, cultural and historical. 
2. However, with a hard default option, post-Euro, Greece will not be able to borrow & absent Government spending Greece has no capacity to grow. This is clearly shown in the charts below which highlight that in 23 out of the last 29 years, Greece has managed to achieve growth only with accompanying fiscal imbalances. 

In summary, Greece never once had any fundamentals to grow on its own without massive subsidies either via loose monetary policy or overinflated expectations relating to the country accession to the European common structures. Greece is not about to get real growth-driving fundamentals within or outside the euro area.

In short, all those talking about 'Greece must exit euro zone to achieve growth' are nothing more than fake doctors treating a patient who himself is faking a disease. Greece's problem is not the Euro. It's problem is Greece itself.

Here are the charts proving the point.

Fiscal imbalances:

Structural failure:

External insolvency:

Rotten growth fundamentals:

And lastly, rotten growth record

QED.

28/1/2012: Spin of 'great investment destinations' - Malta

For 'Malta is a great investment destination' crowd. Here is a quick stats summary based on IMF WEO:

So let’s summarize the above:

Malta is poor, has moderate inflation, which is of course consistent with low growth. Malta’s exports of goods and services are growing very slowly – if it is such a great trading location, can someone explain this? Malta performs well in unemployment terms, but this conceals the fact that Malta’s population is either too old or too young or too long unemployed to actually count as being in the workforce. Hence, Malta is second worst performer in the euro area in terms of actual employment rates.

Malta’s public finances are in line with majority of other Accession States, so it is doing decently well (though not spectacularly) in terms of Government deficit and structural balance. It is not exactly a stellar performer when it comes to Government debt, but it is extremely poor performer when it comes to external balance – current account. Which, of course, is the exact opposite of the evidence required to support the premise that Malta is a success in terms of attracting foreign investment, or being a great destination to trade from.

You can tell, I hate spin!

28/1/2012: Eurocoin for January 2012

The latest leading indicator for euro area growth -Eurocoin - for January continues to signal recessionary dynamics, albeit at moderating rates of decline.

January Eurocoin rose to -0.14 from -0.20 in December 2011. Here are some charts:

Eurocoin is now in the negative territory for four consecutive months. 3mo MA is at -0.18, 6mo MA at -0.07, crossing into negative for the first time since the last recession. In January 2011 the indicator stood at +0.48. Quarterly rate of growth is now at -0.17 implying annualized contraction of -0.56%.

There is now, due to persistent negative reading, more consistency in eurocoin and ECB repo rate, but inflation-growth remain unbalanced when it comes to applying Taylor rule to ECB rate policy.

All in, the rates decision based on the leading indicator performance should be to stay put and await more significant moderation on inflation side. Mild bout of inflationary recession is still on the cards for the euro area for Q1.

26/1/2012: Rip-off Ireland - Sunday Times, 22 January 2012

This is an edited version of my Sunday Times column from January 22, 2012.

Back in 2004, with much fanfare, Fine Gael launched its ripoff.ie campaign that highlighted a large number of cases where policy-related or regulated price structures and practices have resulted in our cost of living falling well out of line with other Euro area economies. In 2009, Fine Gael launched a policy paper that was supposed to end Rip-off culture, including in state controlled sectors, once and for all.

Fast-forward to today. Since elections, having abandoned its pro-consumer agenda, Fine Gael has done marvellously in playing a ‘responsible’ possum to Irish vested interests.

According to the CSO, year on year, consumer prices in Ireland rose 2.5% through December 2011. The range of these price changes across sectors, however, was dramatic.

Clothing and footware prices were up 0.4% in 12 months through December, Furnishings, Household Equipment and Routine Household Maintenance prices fell 1.9%, Recreation and Culture deflated by 0.6% and Restaurants and Hotels costs fell 0.9%. Health costs rose 2.6%, Transport by 1.6%, Education by 8.9%.

Majority of these price hikes have nothing to do with private firms ‘profiteering’. Per Purchasing Manager Indices, tracking the changes in input and output prices for goods and services, Irish firms and MNCs have experienced sustained shrinking of the profit margins since the beginning of the crisis, as consistent with deflation. Instead, the largest price increases, and ever expanding profit margins, took place in the sectors that, in the past, Fine Gael have correctly identified as being state-controlled parts of the Rip-off Ireland.

Food and non-alcoholic beverages prices are up just 5.9% in the last 10 years, cumulatively. State-controlled Tobacco prices are up 69.6% and Alcohol 21.6%. Housing, Water, Electricity, Gas and Other Fuels – single largest category of consumer spending – is up 64.4% on December 2001, with 90% increase in Energy Products costs, 63.3% increase in Utilities and Local Charges, and 99.1% increase in Mortgage Interest costs. In the last five years, Rents have fallen 8%, while Mortgage Interest rose 11.3% despite the fact that ECB rates have dropped 2.5 percentage points over the period. Electricity prices are up 28.3% in 5 years and 11.5% in the last year alone, despite the fact that natural gas prices – the main generation source for Irish electricity – have declined worldwide.

While Fine Gael cannot be blamed for the full extent of price hikes since 2001 or 2006, the current Government bears responsibility for failing to address state-controlled inflation since taking the office.

The above sectors are indirectly controlled by the state via regulation, state ownership of banks and enterprises, and indirect tax measures. But what about those costs more directly set by the Government?

Health costs are up 56.5% on December 2001, Education is up 81.5%. In Health, the core drivers of inflation have been Hospital Services (up 40.2% since December 2001 and 9.8% in 2011), Dental Services (up 20.6% in 5 years, but down 0.3% in the last 12 months). Meanwhile, prescribed drugs prices are down 11.3% on 2006 and 4% in the last 12 months. Health insurance costs are up 75.7% and 22.9% since December 2006 and in the last 12 months, respectively. This in a country with younger population and well-established trends in terms of demand for healthcare. In contrast, vehicles insurance – privately provided and similar in predictability of total claims risks – inflation since December 2006 amounts to just 9% and 0.9% in the last 12 months.

Same story of the state-led rip-off is replicated in the Transport sector. Here, overall costs are up 9.3% in the last 5 years, but bus fares are up four times as much. Privately controlled costs of buying vehicles have declined 15.4%, while state-set motor tax rose 14.3%. Ditto in Communications, where telecoms services costs are up 5.8% in the last 5 years, but postal services up double that.

In two sub-sectors of education where the Government has least power to influence prices – Primary Education and Other education and training – inflation is the lowest. The highest price increases are in the third level education, with prices up 50.1% in just 5 years (13.4% in last 12 months alone).

The above clearly shows that the Government and the semi-state bodies and enterprises it owns, along with the banks are at the heart of the extortion racket that is our cost of living. Over the recent years, rapid deflation in prices and costs in the private economy has been offset by the rampant inflation in prices and costs in the state-controlled and regulated sectors. In majority of cases, this inflation was directly benefiting state and semi-state employment, management and Government coffers. In all cases, the costs were directly impacting Irish consumers who are left with no meaningful choice, but to comply with the pricing structures set in the markets.

CHARTS:

Sources: CSO database and author own calculations

Meanwhile, Budget 2012 clearly shows that the Government is hell-bent on extracting ever-higher rents out of consumers through taxes and charges.

For example, the Government has introduced increased mortgage interest relief that amounts to €52 million in help for most indebted-households. But the very same Government refuses to intervene in the banks’ internecine policies of shifting the burden of losses from trackers onto the adjustable rate mortgagees. The households that the Government finds in the need of increased mortgage interest relief will be liable for the new Household Charge. And, if Minister Noonan has his way, mortgagees who default on their loans will pass into outright debt slavery to the banks.

There are more direct inflation-linked or inflation-raising taxes, such as VAT. Increase in the VAT rate simultaneously pushes up the overall tax component of all goods and services sold in the state that are taxable at the higher rate (an increase in inflation of some 9.5% for those items) and increases the costs of all goods and services that are dependent on intermediate inputs. Excise tax on tobacco comes against the Revenue Commissioners’ analysis showing that tobacco taxes have reached, even before Budget 2012 measures are factored in, the point where higher taxes harm receipts and fuel black markets. And Carbon Tax quadrupling from €5 per ton to €20 per ton has been responsible for some 2% rise in inflation in fuel and related activities. Motor tax increases, accounting for double the share in an average household expenditure that accrues to bus fares, are going to directly drive up the cost of transport.

Increases in State charges for hospital beds are expected to raise the cost of healthcare for middle class patients by some €268 million in full year terms. Health insurance levy hike further compounds this inflationary grab-and-run approach to policy. Secondary education ‘savings’ are likely to see parents being forced to cover much of the gap in funding out of their own pockets. Third level measures, while relatively modest in size, will compound massive inflation already accumulated in the sector over the last 5 years.

By the metrics of the Budget 2012, the current Government didn’t just mothball its pre-election ideas on reducing the reach of the State-sponsored Rip-off Ireland, it has actively moved to embrace the cost-of-living increases through indirect taxation and encouraging avarice of the semi-state commercial bodies and dominant near-monopolies. All of which means that the path to economic recovery we continue upon is the path of deflationary spiral in private sector economy, with mounting unemployment and businesses insolvencies, offset by the unabated cost increases when it comes to the meagre services the State does supply or control.

Box-out:

Following an almost 11% month on month decline in trade surplus in October, Irish exporters have posted a record-breaking return to health in November, bucking all expectations. The market consensus was for the Irish trade surplus (merchandise trade only) to decline marginally to ca €3.4 billion in November. Instead, the trade surplus rose – on seasonally adjusted basis – to €4.31 billion – the highest on record. In 11 months through November, cumulative merchandise trade surpluses now amount to €40.53 billion or 1.6% ahead of the same period in 2010. As before, the core drivers of trade surplus were exports increases in Organic Chemicals, and Medical and Pharmaceutical products, while indigenous exports rose significantly during the last year in Dairy products category. The latest data highlights the resilience of the Ireland-based MNCs’ exporting capabilities, providing continued contrast to the majority of our counterparts in the Euro area ‘periphery’ who have been posting dramatic slowdowns in exports and deepening trade deficits since the beginning of Q4 2011.

26/1/2012: IMF's latest statement on Greece

Here's an interesting statement:

Given widespread press speculation and rumors regarding IMF views, the following can be attributed to an IMF spokesman, William Murray:

"To ensure debt sustainability for Greece, it is essential that a new program be supported by a combination of private sector involvement and official sector support that will bring debt to 120 percent of GDP by 2020. The Fund has no view on the relative contribution of private sector involvement and official sector support in achieving this target. In line with this view, the IMF has not asked the ECB to play any specific role."

So IMF is making a pre-emptive announcement of 'neutrality' on the issue of the day - who'll be blamed when Greek PSI talks eventually end up in the courts and Greek debt/GDP ratio shoots past 150% mark.

And here's IMF own December 2011 report on Greece (available here)"

Page 13:
"The previous July 21 financing package [agreed for Greece] would not work. Public debt would peak at 187 percent of GDP in 2013 and fall to 152 percent of GDP by 2020. Net external debt would peak at 128 percent of GDP in 2012 and fall to 96 percent of GDP by 2020. These already weak downward trajectories would not be robust to shocks.

The precise outcome of the PSI exercise has an important bearing on public debt dynamics and how robust any improvement would be (the external debt sustainability analysis shows a similar pattern):

• With near-universal participation in a debt exchange targeting a 50 percent face value haircut and offering a low coupon, and European support at an interest rate of about 4 percent, debt could be brought to 120 percent of GDP by 2020 (the maximum level considered sustainable for a market access country). The trajectory would also be less susceptible to shocks (including to the official sector funding cost), although a longer period of time would be required to bring debt-to-GDP below 120.
• However, with low participation in the debt exchange and a significant amount of hold outs to be amortized with European support—a real risk under a purely voluntary approach (i.e., an approach not involving any measures to induce higher participation levels)—debt could stick above 145 percent of GDP in 2020. Moreover, the trajectory would no longer be robust to the usual range of shocks.  

Thus, securing a sustainable debt position will depend on whether PSI negotiations deliver the targeted €100 billion in debt reduction, in particular on the ability of the features of the exchange to deliver near-universal participation."

So in other words, why issue pre-emptive statements now? Because a month ago IMF has already washed its hands on Greece, basically saying that, 'look, if all goes really well, things might get to sustainable scenario (assuming Greece delivers on all structural reforms and privatizations and there are no slippages in growth and external balances, etc), but we don;t quite believe they will...'

25/1/2012: Return to the Bond Markets

According to the report in FT Alphaville (link here) Ireland has 'returned' to the bond markets by carrying out a swap of a 4% coupon 2014-maturing bond for a 4.5% coupon 2015-maturing bond. This reduces 2014 outgoings on redemption of maturing bonds and forces more maturity into 2015, which has more benign profile. But the switch comes at a price - the coupon is up 12.5% on previous.

In effect, if this is less of an Ireland's 'return to the bond markets', more of Eddie 'The Eagle' Return to the Olympics type of an event. Much pomp (official announcements and Government statements to follow), no circumstance (Ireland still cannot fund itself outside the Troika agreement), and even less real substance (avoiding a total blowout in 2014 is now clearly an objective for policy measures). But hey, let it be a much needed 'green jerseying' distraction, as FT Alphaville suggests, to the gruesome reality of Ireland torching another €1.25 billion worth of taxpayers' funds on that pyre called IBRC/Anglo.

24/1/2012: Residential property prices - 2011 highlights

Latest Residential Property Price Index (RPPI) from CSO posts another monthly decline in the price series and marks deep drops in the property prices in 2011. Here are top of the line figures - end of year readings:

And updated Nama valuations referencing:

So to summarize (note - there will be more detailed analysis of this data coming up in later posts):

• All properties index is now 31.1% below January 2005 levels
• Houses are now down 28.3% below January 2005 levels
• Apartments are now down 46.5% below January 2005 levels
• Dublin all properties are now down 39.3% below January 2005 levels
• Rates of decline (monthly) are greater than 1.5% (12mo average) for 3 months in a row for all properties and for houses.

24/1/2012: Europe's Latest Non-Leadership on ESM/EFSF

Another heated non-debate is sweeping Europe. In the latest round of bizarre, outright Kafkaesque rhetorical contortions, European leaders are now engaged in a heated discussion on the 'enlargement' of ESM. Alas, the whole thing is clearly heading for the same outcome as Europe's previous rounds of 'solutions'. Here's why.

Recently, as reported in German press (here) Angela Merkel started to yield on the idea that the 'permanent' ESM fund should be increased from €500 billion to closer to €1 trillion by, among other things, allowing for concurrent running of existent €250 billion EFSF facility and the setting up of the new ESM.

Sadly, this 'solution' is really a complete red herring, despite all the hopes the EU is pinning onto it. In fact, it so much of a fake, the markets are simply likely to laugh their way through it.

The EFSF is designed to run out of time in the end of 2013. ESM is designed to start the earliest in mid-2012. Which means that even in theory, combined ESM/EFSF can last not much longer than 12 months. In practice, however, even this is not going to happen.

Firstly, EFSF is becoming increasingly funded through short term debt issuance and this means that as we hit 2013, the rate of EFSF paper maturing is going to accelerate. To roll this into longer-dated paper will require more than just re-writing the statutes of the EFSF. It will require EFSF raising funding at the same time as ESM is raising funding. The likelihood of this being a successful market funding strategy is zero.

Secondly, ESM capital basis of (meagre) €80 billion is not going to be fully invested on the initiation of the fund. Which means ESM even in theory is not going to come out on day 1 and borrow full €500 billion capacity. In practice, it can't be expected to raise even 1/4 of that in the first year of operations.

Which means that even running concurrently, EFSF+ESM duo will not constitute a fund with anything close to €750 billion capacity. And this means that European leadership is clearly in line for winning the Global Non-Leadership Prize again this year. IMF, insisting on the concurrent running of EFSF/ESM as well, is going to be a runner up.