16/3/2012: Greek Bailout 2 - Globe & Mail

A quick link to my article on Greek bailout-2 for Economy Lab with Globe & Mail (here) and related subsequent article on ZeroHedge on the same topic (here).


Below is the full version (unedited) of the Globe & Mail article - double the length of the print version.

With the Greek Bailout 2 on its way, has euro zone escaped the clutches of the proverbial markets? Not a chance. Greece remains the eurozone’s ‘weakest link’ and Europe remains the Sick Man of the global growth. The reasons are simple: debt, liquidity and growth. Let’s first focus on Greece, debt and liquidity, with a subsequent post dealing with Euro area growth.

Part 1:

Debt-wise, Greece is now actually worse off than when the whole mess of the second bailout began. After the PSI that, together with the ECB swap, amounts to a $138bn debt writedown, Greece is now in line for $170bn in new loans, an additional $38bn EFF ‘pro-growth’ lending facility from the IMF, and a standing $40bn reserve loans facility for its banks. As of today, the expected Greek banks bailout bill stands at $63bn. Behind all that looms another $20bn yet-to-be-announced lending package that will be required to get Greece over 2012 targets, given the deterioration in its GDP. All in, Greek debt can rise by as much as $130bn with Bailout-2, although the most likely number will be around $100bn. This would bring Greek gross external debt from 192% of GDP projected pre-Bailout 2, to over 225%, using IMF figures.

Keep in mind that Greece cannot print out of this debt, nor can it expect to grow out of it. The Greek economy is expected to shrink -3.2% this year and post just 0.6% nominal growth in 2013. Thereafter, rosy projections from the IMF are for 3.3% average annual growth out to 2016. All of this growth is expected to come from gross fixed capital formation and exports. The former will be happening, according to the IMF numbers, amidst shrinking public and private demand and zero per cent private sector credit creation through 2014. The latter is expected to add 39% to the country exports of goods and services over the next 4 years. German tourists better start coming into Greece in millions, because feta cheese sales doubling between now and 2016 will not do the trick. In other words, the rates of growth envisioned by the IMF are purely imaginary.

On the liquidity front, European periphery remains largely outside the funding markets. Even Italy is now borrowing in the markets courtesy of ECB pumping cash into the country banks. Of the top ten LTRO borrowers by overall volume, seven are from Spain and Italy. Fifteen out of top twenty banks, measured as a ratio of LTROs borrowings to their assets, are from these countries. Since the beginning of 2009, ECB has unloaded some $1.65 trillion of new funds. Much of this went into the sovereign bonds and ECB deposits.

Now, here’s the obvious problem at the end of the proverbial Cunning Plan that ECB contrived to shore up ailing banks. Euro area banks are the largest holders of Euro area sovereign bonds. This reality was the main channel for contagion from the sovereign balancesheets to the banking system of the current crisis. LTROs 1 and 2 have just made that channel about a mile wider. Mopping up the expected tsunami of bonds that will hit private markets in and around LTRO winding up dates in 2014-2015 will be a problem of its own right. Coupled with the bonds redemption cliff faced by some peripheral countries around that time will assure that the problem will be insurmountable.

Part 2:

With the Greek Bailout 2 euro zone did not escape the clutches of the proverbial markets. The reasons are simple: debt, liquidity and growth. While the previous post focused on Greece, debt and liquidity, the current post deals with the core source of the weakness in the region’s growth dynamics.

With Greek Bailout 2, Europe has run out of options for supporting its failing states and in doing so, it has run out of room for its economies to grow. Domestic savings are stagnant and, given already hefty fiscal spending bills and rising tax burdens, availability of private capital will be a major problem for investment in the medium term.

Take a look at some numbers – again courtesy of the unseasonally optimistic IMF. Between 2011 and 2014, IMF predicts PIIGs economies to grow, cumulatively by between 1.7% for Greece, Italy and Portugal, 4.8% for Spain and 5.7% for Ireland. However, in recent months IMF has been scaling back its forecasts so rapidly and so dramatically, that the above figures can become, by April 2012 WEO database revision, -0.1% for Greece, 5.0% for Ireland, 1.6% Italy, 1.5 Portugal and 3.3% Spain. Not a single Euro area member state, save for Greece is expected to see more than 2 percentage point increase in gross national savings. Coupled with fiscal consolidations planned, this implies negative growth in private savings as a share of GDP in every Euro zone country. Over the same period, General Government revenues as a share of overall economy will increase on average across the old Euro area member states (pre-2004 EU12). The much-hoped-for salvation from external trade surpluses is an unlikely source for growth: between 2011 and 2014, cumulative current account balances are likely to be deeply negative in France (-7.4% of GDP), Greece (-16.9%), Italy (-7.5%), Portugal (-15.5%), Spain (-8.2%) and only mildly positive in Ireland (+4.9%). Average cumulative 2012-2014 current account deficit for PIIGS is forecast to be in the region of -8.7% of GDP and for the Big 4 states -1.6%.

This lacklustre performance comes on top of the on-going and accelerating banks deleveraging that will further choke of credit supply to the real economy. Hence, broad money supply across ECB controlled common currency area is declining and ex-ECB deposits, banks balance sheets have shrunk some $660bn in Q4 2011 alone, roughly offsetting the effect of the LTRO 2. You can bet your house the real retail cost of investment is going to continue rising through 2012 and into 2013, exerting a massive drag on growth. Thereafter, unwinding of LTROs will lead to a spike in the benchmark ‘risk-free’ sovereign rates, once again supporting inflation in the cost of business investment.

With all of this, PIIGS are going to be squeezed on all sides – fiscal, monetary / credit, and the real economy – both in the short run and in the medium term. Spain is the case in point with the latest spat with the EU on widening deficits. This week’s news that the EU decided to back down on its own targets for Spanish deficits does not bode well for the block’s credibility when it comes to fiscal discipline. But it signals even worse news for anyone still holding their breath for Europe to show signs of an economic recovery.

If anything, the last two weeks of the Euro crisis are reinforcing the very predictions I made some months ago – Europe’s governments are incapable of sticking to the austerity targets they set for themselves, and are unable to spur any growth momentum to substitute for austerity. In other words, Europe is now firmly stuck between half-hearted dreaming for Keynesianism by default and fully-pledged monetarism by design. As the ‘Third Way’ – this combination of policies is the fastest path to economic hell.

15/3/2012: Irish Building & Construction Sector Q4 2011

About six months ago I was told by a 'person in the know' that there is huge construction boom about to happen in Ireland as multinationals are allegedly fighting over each other over suitable new office facilities. May be. Or may be not. I am not in the business of building stuff, so would have to wait for a credible flow of news and data to confirm such a shift in the trends. Today's CSO stats on activity in Construction and Building sector is not exactly pointing to a massive uptick.

Let's take a look.

First, data for construction & building ex-civil engineering:

• Value index remained flat at 20.9 in Q4 2011, same as in Q3 2011. Year on year index is down 8.3%. 6mo average is now 0.2% ahead of previous 6mos average and year on year, 6mo average is down 12%. No improvement here. 
• Value of construction and building ex-civil engineering is now down to 18.4% of the peak level.
• Volume index also remained falt at 18.8 in Q4 2011 and Q3 2011, while year on year Q4 2011 index is down 5.5 on Q4 2010. 6mo average for the most recent 6 months is up 0.5% and year on yer last six months activity is down 9.2%. No improvements here either.
• Volume of construction and building ex-civil engineering is now 18.0% of the peak.

Chart to illustrate:

As annual rates of change suggest - things are getting worse at a slower speed.

In terms of civil engineering output:

• There was a substantial jump in civil engineering output value in Q4 2011 - up 27.7% qoq although still down 11.8% yoy. Latest 6mos average is 10.8% ahead of previous 6mo average and down 16% year on year.
• There was also a measurable increase in volume of civil engineering activity up 27.8% qoq inQ4 2011, although still 9.1% down yoy. 6mo average through December 2011 is 11.1% ahead of preceding 6mos period and 13.3% below the same period in 2010.

So some improvements here in quarterly series and dramatic ones, but still down yoy:

Lastly, residential v non-residential construction activity:

• Value of residential construction activity declined to  9.7 in Q4 2011 from 9.9 in Q3 2011. Value of residential construction sector activity is now 91.0% below its peak and is 90% below 2005 levels. Yar on year value of activity is down 21.1%. 
• Volume of residential sector activity slipped marginally to 8.9 inQ4 2011 from 9.0 in Q3 2011. Year on year the index is down 15.2% and relative to peak it is down 91.5%. Volume of construction activity in the residential sector is now down 91% on 2005 levels.
• Abysmal does not even begin to describe these results and there is no improvement in year on year performance since Q4 2006 in value and since Q1 2006 in volume terms.
• Non-residential activity in value terms improved slightly from 62.7 in Q3 2011 to 63.6 inQ4 2011 - marking second consecutive quarter of improvements. Yoy activity in Q4 2011 was up 1.1% - first yearly rise since Q4 2008. Relative to peak value of non-residential construction activity is still down 48.3%.
• Non-residential construction volume index also improved, marking third quarter of gains in a row, rising from 56.6 in Q3 2011 to 57.8 in Q4 2011. Annual rate of increase is now 4% and this is the first such gain since Q3 2007.

So on the net, some positive moves in non-residential construction which still require continued confirmation to the upside in the next 1-2 quarters in order to call the market bottom and a year or so more of consistent rises to call the upswing trend. Negative newsflow for residential, although some moderation in the rate of decline.

15/3/2012: What's up with 'collateral'?

An interesting point made today by Michael Noonan that carries some serious implications with it (potentially).

"You could take it that the ECB were never particularly happy with the level of collateral provided by the promissory notes and would like stronger collateral," Mr Noonan said in an interview with RTÉ." (as reported on the Irish Times website).

What can this mean? Collateral for the Notes themselves is Government guarantee plus letters of comfort to the CB of I. In other words, the Notes collateral can only be enhanced by making them fully-committed formalized Government debt - aka bonds. Now, Noonan in the recent past had implicitly linked Promo Notes to ESM.

And herein rest the main problem. Right now, Promo Notes are quasi-governmental obligations and as such are ranked below ordinary Government bonds (hence collateral quality concern of the ECB). Although the Notes are counted into our total debt, they are still not quite as senior as other forms of debt. This, in turn, has marginal implications in the valuation of our bonds. Although at this point this is academic, should we return to the markets, potential buyers of Irish Government bonds will consider them as secondary, since the Notes are not traded in the market and represent a tertiary (quasi- bit) claim on the state after ordinary bonds (secondary) and EFSF-IMF-EFSM (soon to become ESM) debt (so-called super-senior obligations of the state).

By converting these notes into ESM funding, the Government will in effect risk making these Notes super-senior, exceeding in seniority those of ordinary Government bonds. Now, the total amount of debt under the Notes - principal plus interest - is €47-48 billion or roughly-speaking 30% of our GDP and ca 27% of our Government debt. This is hardly a joking matter.

It can have material implications for our ability to access bond markets in the future (both in terms of amounts we can raise and rates we will be charged). But more ominously, it can fully convert quasi-public debt into super-senior public debt.

This will satisfy ECB's concerns about the quality of collateral, but it will also mean that these notes will be put beyond any hope of future further restructuring.

15/3/2012: Irish Industrial production & Turnover for January 2012

Industrial production & turnover figures are out for January 2012. CSO headline: "Industrial Production increased by 0.7% in January 2012".behind the headline, things are not so rosy. Here are the details.

Industrial production index for Manufacturing rose in volume terms from 109.6 in December 2011 to 110.3 in January 2012 - that's on of the ca 0.7% increases mom. Series are extremely volatile, so stripping short-term effects:

• Yoy index is down 0.18%
• Compared to same period in 2007 index is down 3.35% - implying that with all records busting exports, industrial production volumes in Manufacturing remain below pre-crisis levels.
• Compared to 2005, manufacturing activity is only 10% up
• Comparing 3mo average for Nov-2011 - January 2012 to 3mo average for Aug 2011-Oct 2011, the index is down 7.5%
• Comparing last 3mo average to same period a year ago, the index is down 2.9%

Still, good news, index did not fall in January.

All Industries index increased from 107.5 in December 2011 to 108.3 inJanuary 2012 - the core 0.74% rise, but:

• Yoy index is down 0.5% and it is down 4.2% on January 2007
• Comparing 3mo average for Nov-2011 - January 2012 to 3mo average for Aug 2011-Oct 2011, the index is down 7.4%
• Comparing last 3mo average to same period a year ago, the index is down 3.2%
• In 7 years, Industrial output rose by just 8.3 cumulative in volume

Modern Sectors fared much better - in monthly terms the index went up 4.9% in January 2012, and year on year the index is up 4.1%. That said:

• Comparing 3mo average for Nov-2011 - January 2012 to 3mo average for Aug 2011-Oct 2011, the index is down 9.5%
• Comparing last 3mo average to same period a year ago, the index is down 3.2%
• In 7 years, Industrial output rose by just 27.2% and since January 2007 the index is up 8.5% cumulative in volume

So some shorter-term pain, but overall, nice performance. Of course the trend (as shown in the chart below) is clear-cut and strong.

Traditional sectors continued to take the beating: down from 88.7 in December to 82.2 in January - a mom drop of 7.4% - the steepest in 4 months. The things are bad:

• Yoy volume of production in Traditional Sectors is down 8.2%
• Comparing 3mo average for Nov-2011 - January 2012 to 3mo average for Aug 2011-Oct 2011, the index is down 6.1%
• Comparing last 3mo average to same period a year ago, the index is down 4.2%
• In 7 years, TraditionalSectors volume fell 18% and since January 2007 the index is down 22.9% cumulative in volume

Relative contribution of Traditional Sectors to the economy compared to Modern Sectors is shrinking and the rate of contraction accelerated in January 2012, as shown in the chart below:

Things are worse on the turnover indices side with price deflation took bites out of the value of our economic activity:

• Manufacturing sectors turnover fell from 107.8 in December 2011 to 98.1 in January - a decline of 9% mom. It is now down 3.8% yoy and 14.3% below January 2007. The index is down 2% on 2005. Over last 3 months the index actually up on average 2.8% compared to 3mo average for August-October 2011 and 5.0% above the index reading a year ago, back in November 2010-December 2011.
• Other broader sector - Transportable Goods Industries turnover also fell mom - down 8.8% and is down 3.9% yoy. The pattern of changes is pretty identical to that in Manufacturing.

Looking forward, New Orders index for all sectors came in at a disappointing 98.5 - the lowest reading since April 2011 and 3.7% below January 2011 levels. The index is down 8.9% yoy and 15.8% on January 2007. The historical trend remains firmly downward, but shorter-range trend since january 2010 is strongly up. 

Yoy, New Orders declined 1.9% in Food Products (mom decline of 5.7% in January), rose 5.0% in Beverages (mom rise of 1.2%) and increased 5.5% in Chemicals and Chemical products (+2.7% mom). There was a huge fall off in New Orders in Basic Pharmaceutical Products and Preparations - down 6.9% yoy and 26.4% mom. Computer, electronic and optical products are down 4.3% yoy and 1.2% mom. Do note the patent cliff sighted above - dramatic - and will translate into trade figures as well. Please keep in mind - Government has been saying they have prepared for this.We shall see once trade data & QNAs come in for H1 2012.

So some headline improvements, but overall, weak data.

14/3/2012: Daily CDS moves

On the foot of yesterday's widening, CDS for Belgium and Italy posted very significant, close to 5%+ tightening. Portugal is now clearly euro area's 'second weakest prey' and the lions are out, still hungry after Greece:

Nice tightening on Germany - down 5.34% and that amidst rising US yields. Albeit, of course, it is harder now to price CDS post-Greek fiasco, so demand is probably being compressed while supply is on the rise due to adverse impact on overall demand/supply balance in pricing CDS as insurance contracts (which they are not, not after Greece).

All data courtesy of CMA.

13/3/2012: Agility of ECBleese

One has to simply admire the ECB's 'guarded optimism' of things improving, yet worsening at the same time. Here's the recent statement from Frankfurt full of pearls, like (emphasis mine):


"March 2012 ECB staff macroeconomic projections for the euro area, which foresee annual real GDP growth in a range between -0.5% and 0.3% in 2012 and between 0.0% and 2.2% in 2013. Compared with the December 2011 Eurosystem staff macroeconomic projections, the ranges have been shifted slightly downwards."


So: "According to recent survey data, there are signs of a stabilisation in economic activity, albeit still at a low level. Looking ahead, we expect the euro area economy to recover gradually in the course of this year."


Now, wait... is it 'shifting slightly downwards' from already unpleasant levels, or is it 'stabilizing'?




Then we have:


"Euro area annual HICP inflation was 2.7% in February 2012, according to Eurostat’s flash estimate, slightly up from 2.6% in January. Looking ahead, inflation is now likely to stay above 2% in 2012, mainly owing to recent increases in energy prices, as well as recently announced increases in indirect taxes. On the basis of current futures prices for commodities, annual inflation rates should fall again to below 2% in early 2013. Looking further ahead, in an environment of modest growth in the euro area and well-anchored long-term inflation expectations, underlying price pressures should remain limited."


So: "Looking ahead, we are firmly committed to maintaining price stability in the euro area, in line with our mandate. To this end, the continued firm anchoring of inflation expectations – in line with our aim of maintaining inflation rates below, but close to, 2% over the medium term – is of the essence."


And again, one can ask: 2.6-2.7% currently and staying above 2% in 2012 - that is medium term or short term? And why would inflation de-accelerate if the growth is to pick up per forecasts in 2013? Why would commodities price inflation taper off if global growth and indeed Euro area growth are to stabilize and even improve?


Then, of course, there's that statement that 'underlying price pressures should remain limited'. Followed by: "The March 2012 ECB staff macroeconomic projections for the euro area foresee annual HICP inflation in a range between 2.1% and 2.7% in 2012 and between 0.9% and 2.3% in 2013. In comparison with the December 2011 Eurosystem staff macroeconomic projections, the ranges for HICP inflation have been shifted upwards, notably the range for 2012."

13/3/2012: Irish PMIs - signaling continued weakness

An unedited version of my Sunday Times article from March 11, 2012.

This week, NCB along with Markit released the set of Purchasing Managers’ Indices (PMI) for the Irish economy, covering both Manufacturing and Services sectors. These indices are the best, albeit imperfect, leading indicator for growth, exports, corporate profits and employment in this economy and the picture they are presenting is that of continued weakness in Q1 2012 on the foot of deterioration recorded in Q4 2011. A picture that further confirms my earlier observation that Irish economy has entered a period of heightened volatility along a flat-line trend of near-zero growth.

Overall, headline reading for Manufacturing PMI shows that February activity in the sector remained broadly stable. The index of 49.7 was not significantly different from 50 – the level that marks zero growth. This marked the fourth consecutive month of below 50 index results, consistent with a shallow contraction in the sector. In contrast, Services sector index rose in February to a growth-signaling 53.3. This marked the break with previous two months when the index readings were below 50. With 6 months moving average at 50.9, the surveys of purchasing managers suggest that Services are, broadly speaking, on a flat growth trend.

The core drivers for the two sectors’ performance have been changing in recent months.

In Manufacturing, new orders that generally lagged growth in new exports since November 2011 are now the main driver of activity to the upside. New exports have fallen into contraction territory in February for the first time in three months, while overall new business posted flat performance for the first time after three months of declines. This signals that consumer goods producers, rather than MNCs-led goods exporters, drove the overall change in the sector activity. In longer-term trends, new orders are still signaling contraction at 48.3 and new export orders are stagnant at 50.0 on average over the last six months. It appears that our exports-led recovery has run out of steam in Manufacturing – having posted shallow expansion over the last 12 months, as exports growth fell to zero since September 2011 and new orders have been on the declining trend since June 2011.

In contrast, Services show continued exports-driven growth. Thus, new business orders came in at a relatively positive 53.5 in February underpinned by faster growth in new exports at 55.2. Although weak performance of the new business activity in the sector was present in virtually all months since March 2011, this February indicator was the strongest in seventeen months. Overall, new exports posted on average modest growth at 52.5 in 12 months through February 2012 a slowdown on 53.4 average recorded over the last 2 years.

All of this suggests no uptick in the overall economic growth as measured by GDP and GNP in Q1 2012. More critically, the data signals potential deterioration in the underlying external trade balance for Ireland. The reasons for this are two-fold. On the one hand, slower activity in Manufacturing has resulted in slowdown of inputs purchases in previous months, meaning that firms have been exhausting their stocks of inputs into production. This, in turn, sustained suppressed levels of imports over the last ten months that contributed positively to overall trade surplus and our GDP in the past. Going forward, either imports must accelerate to support exporting activity or exports must drop, which is likely to show up in the national accounts as a negative for GDP.

On the other hand, continued collapse in profit margins in both sectors will put pressure on value added in the economy, further undermining any growth momentum we might have. Contrary to the reports from the CSO, which uses aggregated data skewed by larger firms’ and multinationals’ earnings, both manufacturing and services PMIs have been showing sustained decreases in profit margins over much of the crisis.

Thus, input costs inflation in Manufacturing accelerated in February to the highest levels since June 2011, driven by higher raw materials and energy costs, compounded by a weaker euro. We are now in a third consecutive month of rising costs in Manufacturing. In fact, last time trends showed a decline in inputs costs was in December 2009. At the same time, producers continued to cut their gate prices in February for the seventh month in a row. In the last 12 months, average index reading for input costs inflation stood at a massive 61.9 against output prices being close to flat at 50.9. Much the same is taking place in Services sector, where inputs costs remain on inflationary path since December 2010 and output charges have been showing uninterrupted deflation since August 2008.

In contrast with the latest QNHS results for Q4 2011, the PMI data shows tightening, not easing conditions for jobs creation and employment in both sectors of the Irish economy. In Manufacturing, February marked a 46^th consecutive month of falling inventories and in Services, with exception of just one month, this trend prevails for all periods since August 2007. This implies that both sectors continue to run spare productive capacity and are basically holding out on significant cuts in production and employment only in a hope of a turnaround in some near-term future.

In contrast with PMI data, this week’s QNHS data showed quarter-on-quarter seasonally adjusted rise in employment by 10,000 with increases in seasonally-adjusted employment taking place across a number of sectors such as Industry, Accommodation and food service activities, ICT, Financial, insurance and real estate activities, Public Administration, and Human health and social work activities.

Alas, more comprehensive reading of the CSO data shows that the headline 10,000 figure was driven by a number of factors completely unrelated to actual jobs creation.

Real employment in Q4 2011 relative to Q3 2011 was up not by 10,000, but by 2,300, with full-time employment falling by 700 and part-time employment rising by 3,000. Which suggests that seasonal adjustments made to the data could have been impacted by significant changes in employment since the beginning of the crisis and not by actual jobs creation. Critically, the number of part-time workers who consider themselves not to be underemployed fell 2,800, while the number of part-time workers who reported being underemployed rose 5,800. Year-on-year changes clearly show that overall employment remains on a decline and the only growth category of workers since Q1 2011 is that of underemployed part-timers.

The above suggests that most, if not all, of the new jobs showing up in the seasonally-adjusted data represent additions arising from the JobBridge training initiative and reflect the effects of past employment contractions on seasonal adjustment. This is further reinforced by age and occupational analysis of the CSO data.

Reinforcing the above conclusions, PMI data for Services has been signalling not a growth, but a contraction in employment over the last 10 months, with February 2012 reading of 47.9. In fact, Services employment has been on a continued uninterrupted decline since March 2008, excluding only one month of increases in April 2011. Manufacturing employment activity has been now declining in five of the last six months, clearly contradicting seasonally adjusted data from QNHS.

Correlations between new exports orders, new orders and employment data from PMIs very clearly show that in January-February 2012 we have moved into a jobless recovery territory in Services, characterized by positive annual growth in exports and declining employment. In Manufacturing, where exporting boom has been now running over 3 years, we are in the jobs destruction and stagnant exports territory for the last two months running.

CHARTS: PMI-signalled Economic Activity: Manufacturing and Services

Source: Author own calculations based on NCB and Markit data

* Q1 2012 data is based on January-February averages

Note: In charts, negative values show contraction in activity, positive values signal expansion

Box-out:

In recent weeks we have seen some significant disagreements emerging within the Troika. Whilst the ECB remains silent on the issue of sustainability of Irish Government debts, the IMF appears to believe that we should be allowed to restructure at least some of our banking sector liabilities. The EU Commission in its March 2012 review of Ireland’s participation in the bailout programme clearly thinks that further deterioration in our growth conditions and/or renewed credit crunch  “could require additional fiscal tightening later in the year”. This clearly shows that the EU Commission will require Ireland to bring its fiscal performance back in line with the targets set out in the programme by enacting new cuts should any deterioration materialise. However, the IMF review of Ireland’s participation in the programme, released at the very same time as that by the EU, states that should growth slowdown lead to Ireland jeopardizing its programme commitments on the deficit side this year, the Government can let the targets slip this time around, “to avoid jeopardizing the fragile economic recovery as envisaged under the program.” You know something is amiss within the Troika, when the IMF starts cautioning its overzealous partners not to derail recovery for the sake of sticking to fiscal targets.

13/3/2012: CDS moves

On the day Fitch upgraded Greece to B-/Stable from selective default rating, some PIIGS continued to get hammered: 5 year CDS moves with implied probability of default:

Courtesy of CMA.

And per @forexlive - here's analysis of the Fitch move:

"Fitch has begun rating Greece’s new issues at B-, which is deeply into ‘junk’ territory. To put that in perspective, it’s eight notches below Ireland, which Fitch has rated at BBB+ and six notches below Portugal at BBB-. It’s also below Rwanda, Argentina and Ukraine. The current yield on the new 10-year benchmark is 19.01%."

Yep, markets have a strange 'memory'...

12/3/2012: Summary of latest CDS moves

A neat summary from 9/3/2012 note by markit for 5-year CDS:

And let's leave it without a comment.

H/T to @EconBrothers 

12/3/2012: Why the 'trackers deal' is bad news for Irish mortgagees

The news galore surrounding the Promissory Notes (usually reported cheerfully with the customary references to unnamed sources as to the eminence of the 'deal') and so-called 'lobbying' by the Irish Government to restructure more broadly (un)defined 'banks debts' is continuing to gain momentum day after day, with no actual real signs of anything tangible being done. 


But the real news here is what is being 'rumored' and 'discussed', not the actual feasibility of the 'deal'.


Per reports and Ministerial statements, Ireland is lobbying ECB / EU Commission /EU in general (whatever that means) to allow the country to alter the burden of the IBRC Promissory Notes and, crucially, as per last night news - restructure loss-making tracker mortgages on the balancesheets of its banks.


Minister Noonan stated yesterday on RTE that the discussions on the promissory notes also included the possibility of 'shifting' loss-generating (for banks) tracker mortgages off banks balancesheets into IBRC. The problem, of course, is that these mortgages account for ca 53% of all mortgages held/issued by the Irish banks in relation to the residential property. The rates of default on tracker mortgages is lower than that for ARMs


The banks are complaining loudly that their funding costs exceed the tracker mortgages returns due to low ECB financing. So the real issue here is that the banks are facing state-imposed 'reforms' that are in effect forcing them into future losses on tracker mortgages. The current losses are due not to the actual tracker mortgages problems, but due to the banks prioritizing bonds and debt repayments (raising cheap funding to do so) while complaining about losses on tracker mortgages.

Alas, something is seriously off in this argument for the following reason. Irish banks largely fund themselves at ECB rate via LTROs and normal repo operations. What 'funding costs' they have in mind, beats my understanding of their operations. So the whole issue is a red herring. The banks simply make too small of a margin on these mortgages to use them to cross-subsidize market funding access. That's the real story - the story of the potential loss, not actual loss.


How bogus the issue is? Bank of Ireland doesn't even bother to identify specific losses or any issues relating to tracker mortgages in its latest interim report.


So overall, the issue is a bogus concern for mortgagees covering up the real desire of the Government to provide yet another rescue line of taxpayers' funds to the banks. In other words, the move of tracker mortgages will do absolutely nothing to alter the conditions of loans repayments or costs of these mortgages to the mortgagees. Nor will it reduce the mortgagees debt. Instead, it will simply shift lower margin products off banks balancesheets, allowing the banks to gouge their ARM holders with higher margins over the ECB rate without direct comparative (transparent) pricing to tracker mortgages. More opacity, higher margins, no help for tracker mortgagees, shifting more burden of banks bailouts onto ARM mortgagees - that is, in the nutshell, what Minister Noonan's game plan appears to be.

12/3/2012: Social partnership is Ireland's institutionalized corruption

This is an unedited version of my article for the current edition of the Village magazine.

Illegal corruption – in its various forms and expressions – is hardly a rarity in Irish society. So much we know. Perhaps less well understood, are the legally permitted forms of corrupt behaviour that contribute to social and economic degradation and undermine democratic institutions and state legitimacy.

Economists identify corrupt activities to include illegal abuses of the system, such as bribery, cartels,  explicit collusion, price fixing, and embezzlement. But corruption also includes activities that fall into grey areas of the law – tacitly allowed: cronyism, nepotism, patronage, implicit collusion, and influence-peddling.

Over the years, the Irish state recognised that both types of these activities exist in the realm of private and semi-state business, and in order to restrict the former forms of illegal corruption, has decided unofficially – of course – to give the perpetrators of the latter quasi-legal ones the strongest political representation in the land – direct access to policy formation. In recent decades our Government and elites Left and Right, went so far as to institutionalise the arrangement.

Since 1987, Social Partnership has constituted a closed shop with membership restricted to select organisations, representing certain subsets of Irish society. Since this membership restriction is codified and since Partnership is explicitly concerned with fixing prices for some forms of capital and inputs into production (for example – wages, that serve as the compensation for human capital, and via planning restrictions linked to State-determined development agenda, to land), it is both de jure and de facto a cartel. That it is a public cartel, as opposed to a private one, does not change its corrupt and corrupting nature.

This cartel actively and with State support promoted policies that led to gross distortions of the markets and of competition between the market players; and also led directly to the relegation of the State’s duty of care to consumers and ordinary investors. An unobservable, but nonetheless equally distorting feature of the system is the effect this system had on preventing formation of competitive enterprises and entrepreneurship, as Social Partners colluded to restrict and re-allocate (to their benefit) investment and employment opportunities, and re-shape the space of new policy ideas formation, formulation and expression.

Social Partnership rubber-stamped a policy of ‘Never at Fault, Never Responsible’ for our financial regulatory and supervisory regimes. It trumpeted the culture of unaccountability in the public and protected private sectors. Without Social Partnership support, it is hard to imagine the State sustaining the very regimes that led to open, but never-prosecuted violations of the law (e.g. breaches of regulatory liquidity-requirements), ethical codes (e.g. loans-for-shares machinations and misclassifications of deposits), MiFID (Markets in Financial Instruments Directive) requirements (e.g. the mis-selling of investment products by at least four banks in Ireland, explicitly uncovered two years ago) and violations of prudential ethics in financial regulation (e.g. resistance to full public-data disclosure and investor-suitability testing and protection in the case of property transactions).

Neither the Unions, nor any other Social Partners stood up at the Partnership Table in support of the handful of whistleblowers pointing to the above failures. The ‘straw man’ argument is that the Unions always advocated ‘more regulation’. Alas, history shows that other priorities miraculously took precedence time and again over the proper regulation of finance, the protected professions, quangos and pretty much every other aspect of Irish governance. These, of course, were pay and conditions for the Unions’ members, slush-funds for ‘training’ and ‘research’ activities, and state-board appointments, including to the boards of financial regulation and supervision bodies. Having been bought by the ‘robbers’, the self-appointed ‘cops’ have, since the late 1980s, stayed nearly silent lest they damage the regulatory charade performed by the Government and rubber-stamped by their own members in charge of the regulatory bodies.

The Unions, of course, were neither unique, nor the most active participants in regulatory capture of the state by vested interests. Irish semi-state companies, banks, protected professions and public sector own (outside the Unions-led) self-interests were. Nonetheless, by deploying the rhetoric of ‘integrity’ and by relying on the arguments that their actions ‘protected the vulnerable’, the Unions were some of the most damaging – ethically speaking – players in the game.

In effect, the Irish state didn’t just tolerate corruption, it actively managed and encouraged it. Even debating the merits of the form of corruption embodied by Social Partnership shows how instrumental ethics replaces real values when the cancer of corruption metastases. Social Partnership is simultaneously a collusive cartel, a conduit for influence peddling, a vehicle for patronage and a price-fixing mechanism. Its goal is to preserve the status quo of wealth and income distribution, skewed in favour of the Partners.

It should come as no surprise that in 2011, Ireland ranked 19^th in the Transparency International Corruption Perception Index (CPI) – the lowest of all small open economies in the Euro Area, bar Estonia and Cyprus. As the Moral Sages of our Left ardently decry market economics, its flagships – New Zealand (ranked 1^st in the world), Singapore (5^th), Switzerland (8^th) and Hong Kong (12^th) – are less corrupt than the Social Partnership-governed Ireland. In Political Risk Services International Risk (PRSIR) rankings, Ireland is placed between 26th-31^st in the world – alongside Uruguay, the UAE, Botswana, Israel and Malta. The only euro area country that scores below us for overall political risks is Estonia.

Higher corruption overall is associated with a significantly lower quality of economic institutions. The correlation between the CPI score, the Economist Intelligence Unit Country Risk Assessment score, the IMD World Competitiveness score and the PRSIR score is in excess of 0.9 or, in statistical terms, nearly perfect. This shows the costs we pay for corruption in terms of economic institutions quality.

In 2011, in Ireland, trust in the Government as measured by the Edelman Trust Barometer – another metric of democratic institutions quality that correlates strongly with CPI – stood at 20%, against an average of 52% for the 23 countries surveyed in the report, making Ireland the lowest ranked country in the study. On the back of 2011 elections, the reading rose to 35% in 2012 and remains significantly below the 43% global average. As of today, of all institutions of the society – private and public – the Irish Government has the lowest trust of its people compared to businesses and NGOs, and equivalent to that of the Irish media.

Years of institutionalised corruption, sanctioned by the State and sanctified as Ireland’s panacea for industrial conflict and policy stalemate – Social Partnership – have definitely come home to roost.