18/2/2012: Mortgage Arrears Q4 2011

The Central bank of Ireland has published Q4 2011 stats for mortgages arrears. And it's a trend-breaking one. Not quite touching my forecast from Q3 2011 data for 114,000 mortgages at risk (see definition below), but jaw-dropping 108,603 and counting mortgages that were written off since Q34 2010 when more detailed records were first published - closer to 102,200.

Now, let me run through the core details of the data.

The number of outstanding mortgages accounts has fallen from 786,745 in Q4 2010 to 768,917 in Q4 2011 - a drop of 2.19% or 17,247. In previous quarter, yoy decline in mortgages numbers was 1.94% or 15,325. The outstanding balance of mortgages has dropped from €116,683.25 mln in Q4 2010 to €113,477.28 mln in Q4 2011, so yoy Q4 2011 decrease in mortgages balances was 2.75%, against 2.55% decrease yoy in Q3 2011.

Of all mortgages, 17,825 mortgages were in arrears 91-180 days in Q4 2011, an increase of 7.39% qoq and 35.35% yoy. In Q3 2011, qoq increase in same type of mortgages was 5.6% and yoy increase was 33.62%. So the rate of mortgages in arrears 91-180 days category is accelerating in qoq and yoy terms. Mortgages in arrears 91-180 days have accounted for €3,273.8 mln in Q4 2011, which is 7.02% ahead of Q3 2011 and 34.37% ahead of Q4 2010. This means than we are now seeing smaller mortgages (in absolute size) on average entering into arrears. Amounts of arrears in this category rose 10.04% qoq and 13.61% yoy in Q4 2011 to €89.15 mln. This represents another acceleration from Q3 deterioration.

Mortgages in arrears over 180 days (usually seen as mortgages that are extremely highly unlikely to ever rise from the ashes) now stand at 53,086 up 14.5% qoq and 69.4% yoy. Yep, that right, in Q4 2010 there were just 31,338 mortgages in this category. Compare these dynamics to Q3 2011 when same category of mortgages in arrears rose 15.8% qoq and 65.32% yoy. So the dynamics are slightly shallower on qoq but are sharper yoy. Balance of all mortgages in arrears over 180 days now stands at €10,667.02mln - up 14.56% qoq and 72.34% yoy. The dynamics are very much the same as with the number of mortgages - qoq slightly slower growth, yoy accelerating growth.

So total number of mortgages over 90 days in arrears is now 70,911, up 12.61% qoq and 59.32% yoy. In Q3 2011 the quarterly rate of increase in these mortgages was 12.92% and yoy increase was 55.59%. Balance of all mortgages over 90 days in arrears is now €13,490.8mln - up 12.7% qoq and 61.62% yoy, compared to Q3 2011 increase of 14.14% qoq and 58.69% increase yoy. Total amount of arrears registered is €1,117.12mln which is 12.7% ahead of Q3 2011 and 61.62% higher than Q4 2010.

 The above means that a massive 12.29% of all mortgages accounts in Ireland are now in arrears 90 days or over by total volume of mortgages in arrears and 9.22% by the number of mortgages accounts in arrears.

Now, take all mortgages in arrears 90 days or over, add to them those mortgages that were restructured, but are currently not in arrears and the mortgages currently in the process of repossessions. Call this 'mortgages at risk of default, in default or defaulted' or for short, mortgages at risk. Chart below illustrates the stats:

 In Q4 2011 total number of mortgages 'at risk' stood at 108,603 - a number that represents 14.12% of all mortgages in the country. This represents an increase of 8.35% qoq (in q3 2011 qoq rate of increase was 4.44%) and 35.25% yoy.

As chart above shows, there is deterioration in mortgages performance even amidst those mortgages that have been restructured.  Total number of restructured mortgages in Q4 2011 was 74,378, which represents an increase of 6.66% qoq and 25.58% yoy. In Q3 2011 there was a qoq decrease of 0.15%. Of the restructured mortgages, 36,797 were not in arrears in Q4 2011 - an increase of 1.16% qoq and 4.52% yoy. However, while number of restructured mortgages not in arrears rose by 421 in Q4 2011 (qoq), the number of total restructured mortgages rose by 4,644. Which means that some 4,223 restructured mortgages went into new arrears in Q4 2011. Overall, percentage of mortgages that are restructured but are not in arrears has dropped from 59.44% in Q4 2010 to 49.47% in Q4 2011. Restructuring of mortgages now works for less than 50% of restructured mortgages - and that is only within 2 years of the beginning of the entire data on these!

Now, do keep in mind that restructuring was quite severe in many cases. See bottom of CBofI release on this here. And it doesn't seem to work all too well for just over 50% of those entering new temporary arrangements. So what will happen to these families when the 'temporary' arrangements expire?

17/2/2012: ECB Swap Creates a New Structure of Seniority

This week marked a significant point of change in the very fabric of the fixed income markets. On Friday, the ECB announced that it has completed the swap on the old Greek bonds it held on its books for new bond.

The ECB swap in effect exchanged old Greek bonds for bonds of identical structure and nominal value, implying that the ECB has received the full face value of the bonds it has purchased in the markets at the discount on the face value. The ECB will also not forego the coupon payments due on the bonds, implying that over time, ECB will book profit from its purchases of Greek bonds. It is worth noting that this is based on the reports in the media, citing various official sources. The ECB has no inclination of clarifying any details of the transaction.

The ECB also precluded National Central Banks (some of which do hold Greek bonds) from participating in the swap. However, the ECB has signaled that it might (again, no commitment or compulsion) distribute the profits earned from the Greek bonds purchases to the national central banks of the countries contributing to the bailout.

Currently, the ECB holds some €219.5 billion worth of sovereign bonds (primarily those of PIIGS states) that it has began accumulating since May 2010.

The greatest significance of today's swap is not, however, in the fact that the ECB is likely to make a tidy profit from its operations designed to help Greece. No, the real significance is that in one step, the ECB has completely re-shaped the seniority structure of sovereign bonds issued by all of the euro area governments.

Before the swap, the seniority of bonds was established under the bonds terms and conditions alone, implying equal treatment of all bondholders, with any variation in sovereign bonds security arising from any potential (and highly costly and uncertain) court actions by investors against the sovereigns. Now, the structure has ECB as the holder of the Super Senior bonds with ECB seniority imposed over and above all other bondholders.

In addition, by not bringing into the swap National Central Banks, the ECB threw open the possibility of another sub-tier of seniority emerging over time. In the case of imposition of Collective Action Clauses by Greece or any other sovereign, such clauses will automatically imply non-zero probability of a loss on bonds held by the NCBs. Arguably, they too might follow the ECB line and demand, collectively or separately (as Germany, the Netherlands and Finland are currently already doing) that their holdings of bonds should also be exempt from such a clause. This means that ECB swap opens up a possibility of a new tier of security forming - the tier subordinated to Super-Senior ECB holdings. This can take a form of a Senior tier or Senior Secured tier (if collateral or other security arrangements are put in place, e.g. some sort of an escrow account etc).

The unknown at this stage is the issue of seniority of non-euro area sovereigns holding euro area government bonds. In particular - will China and Japan, the US and Australia etc demand some sort of Senior or even Super-Senior seniority now that the ECB has elevated itself to the level of IMF?

This means that any private investor in Government bonds (note, these are themselves senior to special Government-issued bonds, such as postal certificates, domestic savings bonds etc) is now left a holder of the Junior or Subordinated bonds, despite the fact that on the 'box' the bonds are identical to those held by the ECB, NCBs, Foreign Governments, etc.

The entire market for euro area bonds is now wholly mispriced when risk-return relationships are concerned. Just like that, in a blink of an eye, the European system destroyed legal and financial order and undermined private property rights.


Note: The above arguments are taken from the simple investment risk perspective. Legal perspective is yet to be defined and I welcome any comments on this and/or links to it.

17/2/2012: Struggling Households

Last week we saw the release of the special module from QNHS on Response of Households to the Economic Downturn – Pilot module Quarter 2 2011. This is undoubtedly a topic of much interest to economists, but also to the general public. The results are mixed - some surprises, and some 'I've told you' moments.

Summary of the findings as follows (via CSO):

• Overall, 79% of households cut back their spending on at least one of the listed items as a result of the economic climate in the two years before the survey. Which is not surprising, given the duration and the depth of the recession. In every economy there are always those (not necessarily the rich) who have relatively stable incomes even during the downturns.
• More than half (56% of all) households cut back their spending on groceries.
• More than half (57%) cut back spending on going out.
• Similarity in the two cut backs above suggest that much of these impacted the same households which were forced to cut on both - highly discretionary (going out) and necessary (food) items.
• Almost two thirds (64%) of households cut back their spending on clothing and footwear.
• Spending on health insurance was reduced by 15% of households and 11% of households cut back spending on pension contributions. This highlights the dangers for the Exchequer from the current course of Irish policy to continue increasing indirect tax charges and semi-state charges. Health and Pension Levies are undoubtedly likely to have the adverse impact on both expenditures, thus increasing the Exchequer exposure to health and pensions liabilities in the future. Note, the results of the survey do not cover changes in demand since June 2011.
• One fifth of households delayed or missed paying their bills (21%) in order to meet their outgoings on basic goods and services. 
• One in ten delayed or missed loan repayments and a further one in ten delayed or missed paying their credit card bill.
• In the two years prior to the survey 45% of households spent some or all of their savings to pay for BASIC goods and services over the last 2 years. And this in the environment of the elevated 'savings' across the nation.
• 62% of households reduced the amount being saved.
• The most financially impacted are families with 2 adults and children, which highlights the plight of the middle classes in Ireland.
• One in ten households borrowed money from family or friends to pay for basic goods and services in the two years prior to the survey. Unfortunately, we have no idea how many received transfers from the family members in kind or in cash, not in form of debt.

There were some clear differences in the behaviour of households depending on the age of the household reference person, whether or not they were working and whether or not there were children in the house.

• Cutbacks were far more likely in a household where the reference person was aged less than 55 years. Among households where the reference person was aged less than 35 or between 35 and 54 years, three quarters had cut back on clothing and footwear, compared with half of households where the reference person was aged 55 or older.
• While 64% of households where the reference person was younger than 35 had cut back spending on groceries, this compares with 42% of those where the reference person was 55 or more.
• Some 81% of households where the reference person was unemployed reported that they had cut back their spending on groceries in the previous two years, compared with 57% of households where the reference person was working.
• Households with children were more likely than those without children to cut back their spending on groceries, clothing and footwear, going out, and lessons or classes

The above age- and household- related results are not surprising. Older households tend to have lower unemployment rates, higher security or stability of income, greater savings cushions to offset cutbacks. Families with children face far smaller share of their income in the form discretionary spending, which means they generally will be forced to make more painful cuts. Families with children also have smaller savings cushions.

Overall, the picture of the household financial and consumption patterns revealed in the report shows that Irish households are facing severe recession and that the economy is unlikely to benefit from significant increases in 'confidence'-related spending and investment for a long time, including in the first few quarters of any upturn in national income, as households will most likely only slowly return to higher levels of consumption, preferring to rebuild lost savings and to repay family loans.

Crucially, the above changes are taking place while majority of Irish households are still struggling under the massive debt overhang. Going forward, this implies that (1) any hikes in interest rates will drive households deeper into cutting spending and using savings for necessities, (2) any increases in future income are likely to be consumed by debt repayments, without benefiting national consumption.

17/2/2012: Harmful Competition? Not so fast...

In recent years there has been much said about the dangers of competition in the banking sector across the EU and specifically in Ireland. Unfortunately, for the proponents of the argument that less competition will be a good thing, the facts are simply not stacking up in their favor.

Since 1997 ECB has published what is known as Herfindahl Index for European banking systems. The index is a measure of the size of banks in relation to overall sector, thus indicating the actual amount of competition in the national banking system. At 1.0 Index reading, the national banking system is fully monopolized by a single firm. Closer to zero, the system is characterized by the smaller, more directly competing banks.

So here are two charts:

Both show that

1. Higher Herfindahl Index reading (lower degree of competition) does not coincide with more stable or less crisis-impacted banking systems
2. During the period of bubble formation there was a reduction, not an increase in banking sector competition in Euro Area, so greater competition did not cause or contribute to the bubble inflation. In fact, the evidence is rather suggestive of the opposite effect.
3. In Ireland, competition pressures in the banking sector actually declined significantly in the years preceding the crisis (2001-2007) and it had subsequently dropped even more dramatically during the crisis.
4. Ireland's banking sector, at any time in the data period covered, was characterized by the levels of competition comparable to those found in Austria, Spain, and France, well below those of Germany, Italy, Luxembourg and the UK and relatively comparable to those in Sweden

So no, 'harmful competition' in Irish banking sector did not cause our crisis, nor did it even contribute to it.

16/2/2012: Some recent press links

Several links for housekeeping:

My article in the Globe & Mail Economy Lab on Greek deal: Greece: the Jig is Just About Up

And article by Brian Milner from the Globe & Mail main pages quoting me: Setback puts Greece and euro zone in danger

And my comments to the story on irish economy for Finnish newspaper Talous Sanomat

Lastly - Seeking Alpha covers my article in the Globe & Mail: link here

16/02/2012: Spanish & French bonds auction

Spain's bond auction results:

• €2.268bn - 3 year bond, 4% coupon, yield 3.332 against previous auction 2.861% with cover of x 2.2 against previous cover of x1.6.
• €0.733bn - 3 year obligacion, 4.4% coupon, yield 2.966 against previous auction 4.984% with cover of x 4.4 against previous cover of x2.4.
• €1.073bn - 7.5 year obligacion, 4.3% coupon, yield 4.832 against previous auction 5.352% with cover of x 3.3 against previous cover of x2.1.

Original target for sales €3-4 billion. Raised €4.074 billion - slightly ahead of target, with improved yields and cover. No allocation map to tell how much of take up was due to banks buying.

Dynamics similar to January 19th auction:

• €1.3bn - 4 year bond, 4.25% coupon, yield 4.021% against previous auction 3.912% with cover of x 3.2 against previous cover of x1.7.
• €2.3bn - 7 year bond, 4.6% coupon, yield 4.541% against previous auction 5.110% with cover of x2 against previous cover of x1.1.
• €3.0bn - 10 year bond, 5.85% coupon, yield 5.403% against previous auction 6.975% with cover of x2.2 against previous cover of x1.7.

And French auction results:

• €5.025bn - 5 year bond, 1.75% coupon, yield 1.93% with cover of x 1.99
• €2.09bn - 2 year bond, 3% coupon, yield 0.89% against previous auction 1.05% with cover of x 2.4 against previous cover of x2.1
• €1.34bn - 3 year bond, 2.5% coupon, yield 1.09% with cover of x 3.0

Via @ForexLive 

13/2/2012: Now - a Greece comparative that doesn't work in our favor

Sometimes those 'We are not Greece' comparatives work our way, sometimes (fortunately enough rarely) they take us in the opposite direction. Take a look at the following two charts from DB Research (hat tip to Zero Hedge). Note: you might want to click on the charts to enlarge.

Chart one clearly shows Ireland's impressive performance with low interest rates, bubble-fueled domestic growth. The chart below shows Ireland's disastrous growth performance since the bubble burst. What's the point, you ask? Ok, half of the period of our rapid decline has been the period of exports boom, the period of our growth has been the period of domestic growth. Irish exports have been on the tear since quarter  9 in the second chart. And yet, the miracle is not happening - the exports-led recovery is still not here.

And look at Greece. And Portugal. And Spain. And Italy. And compare to Ireland. Scary? Glance back at chart 1 above and spot the fall we've taken. Some might say as the consolation that we are still ahead of all the PIIGS in actual national income (do keep in mind - the above charts are GDP, not much more adversely impacted GNP). Ok, let's put it in simpler terms: Greece has fallen from the 10th floor to the 5th floor balcony. We have fallen from the 20th floor to the 10th floor roof terrace. We are still five stories above Greece, but, man it has to hurt more.

13/2/2012: Sunday Times 12/2/2012: The perils of long-term unemployment

This is an unedited version of my article in Sunday Times, 12 February, 2012.

The conflicting nature of the most recent data on unemployment in Ireland paints the picture of an economy bouncing at the bottom of the Great Recession. However, underlying trends in long-term unemployment represent the single greatest threat to our growth potential in years to come.

The latest Live Register figures reflect two months of consecutive and robust declines in the numbers drawing unemployment assistance. In December 2011, seasonally-adjusted Live Register dropped 3,600 (the third largest monthly decline since the beginning of the crisis). This was followed by a 3,200 decline in January 2012, marking the fourth biggest downward adjustment in the series since January 2008. Yet, January 2011 Live Register total remains just 2.1% below the peak of 449,200 attained in September 2010.

Since 2009, net emigration form Ireland totalled some 76,400 and gross emigration amounted to 236,800 according to CSO. Absent the officially registered emigration, Irish Live Register would have been closer to 522,900 in January 2012. In other words, the Live Register improvements now conceal, not reveal, the true extent of joblessness and underemployment in the country.

In contrast to the Live Register data, more direct evidence on the job markets conditions is provided by the monthly Purchasing Managers Indices (PMI) surveys published by NCB Stockbrokers. These make for a rather depressing reading. January Services PMI employment conditions registered a deeply contractionary 44.5, exacerbating declines posted in December 2011. January marked the sharpest rate of decline in the services sectors employment in 21 months. In Manufacturing employment index rose in December to 50.5 before falling again to a contractionary 49.5 in January 2012. Manufacturing employment index is now 4.1% below January 2011, marking the fourth drop in the past five months.

These are the short-term signs of the labour market that remains in continued distress. And further deterioration in the underlying jobs and employment dynamics can be expected in the medium term.

Firstly, dramatic increases in the cost of laying off workers under Budget 2012 are likely to translate into an overall stabilization of the Live Register figures at a cost of the deterioration in the quality of jobs (wages and bonuses, and promotional opportunities losses) and hours of work as employers will be seeking cuts to their cost bases through lower pay and fewer billable hours. Budget 2012 makes it less likely that employers will be taking on new workers any time soon.

Secondly, the already rampant rise of the long term structural unemployment will continue unabated. Here Ireland is in the league of its own when compared to other European economies. In Q3 2011 our long-term unemployment stood at 8.8% - the third highest in the EU27. Over the period covered we have experienced a sharpest increase in long-term unemployment in Europe.

Matters are even worse when it comes to very long-term unemployment – defined as unemployment spells in excess of 24 months. With a rate of 5.4% in Q3 2011 we are now the second worst performer in Europe in terms of overall very long-term unemployment rate, and we are the absolute worst in the EU27 in terms of increases in very long-term unemployment since the beginning of the crisis.

Long-term unemployment exacts tremendous social and economic tolls. International research shows that long-term spell out of work leads to reduced life-time earnings (with estimates of up to 20% loss in earnings years after the return to the job market), higher probability of future unemployment (in some studies reaching over 2.3 times higher probability of unemployment that average), and rapid and profound deterioration in human capital of the unemployed. These effects also hold for those entering the workforce during the periods of elevated long-term unemployment, such as the current Irish graduates.

In today’s environment, rising long-term unemployment in Ireland, threatens to reinforce already adverse future trends in productivity growth. A study by the European Commission from 2006 has shown that across EU27, over the next 25-30 years, ageing workforce will require greater use of skills-driven productivity growth. The last thing we want is to lose the skills of the current generations of young workers and students to long-term unemployment.

In terms of timing of the policy responses to the long-term unemployment, therefore, it is critical that we do not delay the necessary structural reforms.

Most of the research on the policy solutions to this problem is focused on the structural and institutional aspects of the labour markets. A number of recent studies from the UK, Italy, and the US, as well as more broadly-focused studies across the advanced economies show that long duration strong unemployment protection, and high cost of hiring and laying off workers, along with rigid systems of wage setting can act as structural barriers to dealing with the long-term unemployment. This point has been most recently flagged in the case of Ireland by the OECD report from June 2011. High minimum wage and strong collective bargaining have been linked to segmentation of the labour force and increased job instability for the younger and less-skilled workers. Systemic reforms of social welfare and wages-setting mechanisms are clearly an extremely painful, but necessary part of the comprehensive solution.

On the enabling side of the policy equation, the focus should be on enhancing the human capital of the unemployed and incentives for private sector jobs creation, not public investment-driven policies.

Immediate labour market measures should be developed for the long-term younger unemployed. The Government, consistent with the advice from the IMF and OECD is pursuing so-called active labour market programmes in this area. These are primarily represented by the ‘push’ policies designed to force young people off the unemployment benefits and into state-run training programmes. According to the Nobel Laureate James Heckman training schemes designed to de-list people from the unemployment rosters had zero effect on labor markets outcomes in the 1990s. More recent research for European countries experiences prior to 2008 confirms the same. In Ireland the real impact of FAS programmes on long-term unemployment both before and during the crisis has been negligible.

OECD data very clearly shows that Ireland spends more than the Nordic countries as well as high income EU countries on direct jobs creation and state training. In total, Ireland spent 0.87% of GDP or 1.10% of GNP in 2010 on all active labour markets programmes, compared against 1.06% in the Nordic countries and 0.70% in the rest of the high income EU states. It is clear that we are simply not getting a good value for money out of this expenditure.

Instead of relying on active labour markets programmes alone, Ireland should focus on facilitating formal education access for long-term unemployed, especially to undergraduate and MSc programmes closely aligned with business and industry interests and featuring large component of direct industry-related teaching. Retraining grants and supports can be linked with mobility grants to assist mobility of those moving off unemployment benefits.

For the very young at-risk of future unemployment, financial incentives to stay in school can be developed via social welfare systems.

There is strong evidence to support the view that private sector jobs creation can be assisted through carefully targeted tax breaks and deferrals. These require extremely close monitoring, strict conditionality and enforcement, while assuring that there is no older workers displacement. Another significant measure would be to suspend minimum wage for all workers under-25 years of age, but this policy cannot be expected to generate sustainable, higher quality jobs.

Reducing USC rates for self-employed below those for PAYE workers to reflect the reality of their restricted access to social benefits would provide some support for early-stage entrepreneurship and skills-based self-employment.

The last thing the Government should do in the current environment is to use scarce taxpayers cash on direct physical capital investment as such measure would subsidise capital-intensive, not skills-enhancing activities which will cease the minute Government cash dries up once again.

Both the IMF and the OECD provide very clear-cut suggestions as to the core composition of the structural labor markets reforms based on three pillars: welfare reforms, labour markets reforms and activation systems enhancement. Augmenting these with more direct measures to incentivise private sector jobs creation mentioned above would be a net benefit in combating long-term unemployment.

Table: Spending on active labour market programmes, 2010, % of GDP

	Ireland (GDP)	Ireland (GNP)	Nordic Countries	Other OECD Europe	OECD non-Europe
Public employment service and administration	0.18	0.23	0.30	0.17	0.07
Training	0.37	0.47	0.26	0.22	0.09
Direct job creation	0.26	0.33	0.03	0.08	0.05
Other active measures	0.06	0.08	0.46	0.23	0.07
Active Labour Market Programmes, total	0.87	1.10	1.06	0.70	0.28

Source: OECD, Employment Outlook 2011, table 3.2

Box-out:

As the farcical show of Greek negotiations and austerity talks continued its merry-go-round through this week, the ECB has caused some excitement by opening up the discussion on allowing some writedowns of the Greek bonds it holds. The EFSF bonds swap would see ECB converting Government bonds the Central bank bought in the markets, for higher rated EFSF bonds, writing down its purchase discount, which in the case of Greek bonds stands around 31% of the face value of debt bought. The move has been gathering momentum and driving the bond prices up since the mid-week in a hope it will be extended to other peripheral bonds. Yet, no one in the markets seemed to notice a simple paradox. In order to create any real lasting effect on bond yields, such monetization would require a de facto injection of hundreds of billions in cash into the Euro area economy. The upside of this would be further cheapening of the credit for the peripheral states. The downside will be an even greater liquidity trap via EFSF and a sharp rise in the future interest rates on Euro denominated debt of the ordinary households and companies. With 4-4.5% ECB rates on offer and double-digit retail rates on banks loans, ECB would be robbing Paul and Jane to pay off Governments across the EU weakest states. This we now call Europe’s greatest hope for salvation?

12/2/2012: A road map to a cooperative solution for Greek crisis

Papandreou: 'this is a battle between the markets and democracy'.

Greek political discourse - mirroring the received wisdom of the crowds has been reduced to a blatant, and populist lie.

The battles in Greece today are between democracy and European/ECB dogma of preserving the status quo of existent statist system, of which patronage by the State of some markets participants is just an element. Here's why:

1. The markets did not impose ANY conditions on Greece - EU/ECB did. The markets simply refuse to be conned any longer into subsidizing the Greek state through cheap credit. This is the basic right of any participant in the markets - to refuse investing or lending to anyone, just as it is the right of any baker to refuse selling bread to someone with no money and no desire to pay on credit.
2. The markets investors are the injured party - excluding the bottom-fishing hedge funds who bought Greek bonds very recently at hefty discounts. The investors are the only ones who were first deceived by the Greek Governments cooking books and fudging numbers in official statistics. The investors should have known better, but that is not a valid defense of the case against them - they were deceived by fraudulent data reporting by the Greek State (yes, right - politicians, Governments, civil servants). The markets/investors are also the only ones who have to take any writedowns. The ECB and the European Union are taking no writedowns on Greek bonds, and are, in fact, lending Greece 'rescue funds' at a profit. 

I am pointing this not to prevent imposition of losses on Greek bonds investors. They deserve to lose and they should lose more than 70-75% of the face value of their investments in Greek bonds.

I am writing this to point that the battle we are facing in Athens today is between people pushed to a breaking point by the policies of the Governments past, and the EU/ECB.

And there is a way out, folks. Here's what should be done:

1. Impose full losses on Greek bondholders to bring debt/GDP ratio in Greece to 75%. Do same for banks bondholders in Ireland and Spain, and combine these sovereign and banking measures to achieve the same in Portugal and Belgium. Seniority under these arrangements should be as follows: private sector debt holders take the first hit, followed by the public debt holders.
2. All PIIGS bonds held by the ECB are to be transferred into a separate holding fund. This fund is to run between 2012 and 2021. Bonds are to be held in the fund not at face value, but at purchase value to instantaneously reduce debt overhang in these countries. Note: this imposes no loss on ECB until the fund is wound up.
3. The ECB Special Fund (outlined in (2) above) is to monitor the conditions of compliance with real (not the currently identified) reforms aiming to restructure PIIGS economies to put them on the path of private sector-driven growth and fiscal sustainability over 10 years horizon.
4. No coupon payments or principal repayments to be accepted by the ECB on these bonds between 2012 and 2021 to reduce debt overhang drag on the participating economies and improving their fiscal capacity to implement reforms.
5. The bonds held in the ECB fund are to be automatically written down to zero face value in 2021 as long as the participating country meets conditions of implementing the reforms.

The above proposal will eliminate or severely restrict the problem of moral hazard, as countries participating in the programme will be subject to strict reforms programme implementation. The plan will also reduce the burden of repayment of debt on the countries that do stick to the conditions of the reforms. The plan will also bring, gradually, these countries economies to more competitive institutional, fiscal and regulatory environment. In other words, the proposal contains both the sticks (under items (2), (3) and conditionality) and the carrots (items (4) and (5)).

In other words, the fund, as outlined above, would satisfy core objectives of the crisis resolution framework:

• Allow for meaningful change and reforms
• Create an incentive to participate actively in reforms for the countries engaged with the fund
• Reduce moral hazard problem
• Help to establish popular support for reforms by providing real, tangible improvement in the economies ability to sustain reforms

We can't keep fighting battles driven by noble objectives, but based on faulty logic that simply serves the very same elites that have created this crisis. We need to find a cooperative solution to the problems we face.

11/02/2012: Labor Productivity - some cross-EU comparatives

There has been much of talk about Euro area (and EU27) competitiveness trends recently in the media. Some of the commentary I've seen references the issue of decoupling in competitiveness across EU states. In light of this, I decided to take a look at productivity trends. Using eurostat data, I was able to:

1. Take eurostat main series for per person aggregate (total) productivity index that sets 2005=100
2. Rebase the index to Q1 2000=100 and recompute entire set of EU27 countries, plus EA17 and EU27 aggregates
3. Obtain via (1) and (2) above new set of productivity indices that reflect dynamics in per person productivity since Q1 2000 through Q3 2011
4. Note: data is seasonally adjusted and I am only reporting countries where data is hours adjusted as well.

Here are the core charts (I added Ireland and EU 27 average in every chart):

So few trends are apparent:

• Ireland performs - since the beginning of the crisis extremely well in terms of productivity improvements and levels - much due to the massive destruction of its employment base (I commented on this effect a number of times before). Overall - this is remarkable performance albeit at huge cost.
• Spain has posted some significant increases as well, mostly due to destruction of employment - much more so than Ireland.
• Italy is performing poorly as does Greece. In fact, Greece is the third worst performer in the entire EU27 in terms of productivity growth since the beginning of the crisis (Q1 2008).
• Portugal improvements appear to be largely consistent with the pattern for Spain.
• Finland clearly leads the pack (after Ireland) in the group of Small Open Economies (SOEs)
• Strong trends in growth in East-Central Europe (ex Hungary and Slovenia) 

Now, let's take a look at cumulative growth in productivity since the beginning of the crisis - note: green boxes mark countries that outperform EU27 average by more than 1/2 STDEV, while red boxes mark those countries that underperform the EU27 average by more than 1/2 STDEV:

And similar analysis for cumulative growth in productivity since Q1 2000:

 So is there 'decoupling' going on in terms of labor productivity? Not really. Here's what's happening:

• Spain shows highest gains in total productivity since Q1 2008 but weak (roughly average) gains since Q1 2000
• Ireland shows second highest gains since Q1 2008 and above average (6th highest in EU27) gain since Q1 2000
• Slovakia doing spectacularly well, albeit, of course, from low levels, as is Estonia (though not too great during the crisis period)
• During the crisis, Belgium, UK, Greece, Hungary, Italy, lux & Sweden all posted below average (more than 1/2 STDEVs) performance
• Since Q1 2000, Italy and Lux were the only two statistical underperformers.

So unless we go beyond Q1 2000 (the period for which we don't really have coherent comparable data) there is no 'decoupling' going on in labor productivity. There is shallow growth in it on average, but no dramatic 'decoupling'. In other words, much of core Europe is pretty poor in terms of labor productivity growth, while East-Central Europe and Ireland are performing pretty well.

11/02/2012: Globe & Mail 9/02/2012

Here's the link to my latest article for Economy Lab with Canada's Globe & Mail.

10/2/2012: Two charts for a Friday night pint

Two charts for some Friday night thinking instead of (or even while) drinking. One courtesy of Lorcan Roche Kelly flagging it on twitter (link here):

No, it's not Nouriel Roubini references that are of import in the above - entertaining as they might be - it's the likely pending reversal in the series that some techies have noticed. Hope you are not too long into the weekend...

Second chart is my own. I took a simple ratio (expressed in %) of General Government Deficit to Structural Deficit to highlight the extent of the spending related to excess over structural imbalances, in other words - to show some pro- and counter-cyclicality. Underlying data came from IMF WEO.

Some points worth noting: US has been running expansionary (in excess of structural) deficits since 2007 and these have peaked in 2009. UK started slightly later - in 2009 and will be running these through the entire forecast period. Here's an interesting thing - for all the austerity claims in the UK, ordinary deficits are expected to run above structural deficits all the way through 2016.