19/6/2012: IMF raises more funds at Los Cabos

IMF has secured some serious money at Los Cabos G20. From Christine Lagarde statement today:

"A number of IMF member countries have today announced pledges to boost IMF resources, completing the effort launched jointly at our Spring Meetings in April 2012 by the International Monetary and Financial Committee (IMFC) and G-20 (see Press Release No. 12/147). Countries large and small have rallied to our call for action, and more may join. I salute them and their commitment to multilateralism. As a result, total pledges have risen to US$456 billion, almost doubling our lending capacity."

Here's a table. Stars mark countries that contributed at G20 meeting in Los Cabos:

Keep in mind - contributions totals are new contributions on top of existent ones, so IMF is not running out of money. Spain will make things worse, but it too will not put IMF over the top... not yet. 


You can read the above as the 'good news': IMF got more fire power to deal with the crises. You can also read it as the bad news: in desperately seeking its next debt fix, Europe has de facto surrendered its last bastion of geopolitical influence - the IMF - to the new economies. The road that led us to Los Cabos marks that change from the Euro area being the controlling power over the IMF, if only in conjunction with the US, to it becoming the largest borrower from the IMF. With this change, we might as well recall that ten years ago, Brussels leaders were talking about this being a European Century.

18/6/2012: Told ya so... Greek tax collection slumps during elections

Yesterday, I commented that during the elections, Greeks have stopped pushing through austerity measures so as not to aggravate the electorate. When challenged to explain what I meant I said that during the elections, Governments pay their debts to businesses on time, pay suppliers on time, stop enforcement actions on taxes due and stop tax reforms. Here it the confirmation that this has happened: link. Note Novotny saying that Greek tax collection is virtually halted during elections and will now be restarted and recent austerity measures are said to add hundreds (if not thousands) of unexpected euros to tax bills.

Update 25/6/2012: this just in - Greece exceeded targets for hiring civil servants and effectively suspended structural adjustments for two months during elections (link). 

18/6/2012: Irish Trade in Goods: April 2012

In the previous post (here) I highlighted some concerns emerging from April 2012 data on trade in goods. Now, let's take a look at actual data. All data is seasonally adjusted.

April imports volume came in at €3,561 million, down 22.5% or €1,034 million on March 2012 and down 27.61% or €1,358 million on April 2011. Historical average for monthly imports is €4,417 million, while crisis period average is €4,121 million. 12mo MA is €3,945 million. All of this means that current April imports are seriously under-trend and we can expect either an uptick going forward or continued weakness. The former would imply recovery in exports, the latter would imply continued slowdown in exports.

Compared to same period 2010, Imports are now running down -15.64%.

April volume of exports was €6,993 million down €713 million or -9.25% m/m and down €584 million or -7.71% y/y. Exports in April were down 3.08% on April 2010. Current level of imports is significantly below historical average of €7,289 million and crisis period average of €7,407. 12mo MA is €7,647.

Trade surplus has risen on foot of rapid fall off of imports despite a rather pronounced drop in exports. Trade surplus stood at €3,432 million, up €320 million (+10.28%) m/m and up €774 million (+29.12%) y/y. Compared to April 2010, April 2012 trade surplus for goods trade is up 14.63%.

Average monthly surplus is €2,872 million and crisis period average is €3,286 million. 12mo MA is ahead of both at €3,702 million.

January-April 2012 imports are down 7.2%, exports are down 0.9% and trade surplus is up 7.6% year on year.

Imports intensity of exports (or ratio of exports €€s per € of imports) is now at 196.4 - up on March level of 167.7 and up on 154.0 in April 2011. Historical average ratio is 168% and crisis period average is 182%. 12mo MA ratio is 195 and January-April 2012 average ratio is up 6.6% y/y.

The CSO has not reported any terms of trade indices since December 2011.

18/6/2012: Irish Trade: April 2012 disappoints

Irish trade stats for trade in goods are out for April. The numbers are, frankly put, alarming.

Remember, we are supposed to generate robust exports growth in order to even sustain the misery of the ongoing austerity. April 2011 SPU envisioned exports growth of 6.8% in 2011 and 5.7% in 2012. Budget 2012 envisioned 2011 exports expansion of 4.6% and 2012 exports growth of 3.6%. April 2012 SPU set 2011 achieved exports growth of 4.1% - down massive 2.7 percentage points on year-ahead forecast of April 2011 and down 0.5 percentage points on Budget 2012 assumption. But more significantly, April 2012 SPU revised 2012 projected exports growth to 3.3%. So within a year, exports forecast for 2012 has dropped from 5.7% to 3.3%.

Even more realistic IMF is projecting exports growth of 3.0% this year (see the first table here).

And the latest data is not encouraging. For tarde in goods only, January 2012-April 2012 period total volume of imports is down 7.17% y/y, while total volume of exports is down 0.87%. Not up 3.3%, but down almost 1%. Trade surplus is up 7.7%, but that is due to fall-off in imports that can mean only two things: either imports accelerate much faster than exports in months ahead as MNCs rebuild their diminishing stocks of inputs, or imports do not accelerate as MNCs cut back exports output. Not a good thing.

And worse. In January 2012, seasonally adjusted exports grew robust 14.1% y/y, but in February they shrunk 9.8%. This was followed by 1.5% growth again in March and now it is followed up by a massive 7.7% contraction in April. Thus average rate of growth in exports in the first four months of 2012 is -0.59%. Things are volatile in goods exports, but that is an alarming trend.

I will deal with detailed exports and trade stats for goods for April in the second post - stay tuned.

18/6/2012: Russian Ruble Note

For the ongoing Irish trade mission to Russia, IRBA issued the following note to our members concerning the current FX environment relating to Russian ruble (click on individual slides to enlarge):

17/6/2012: Stability & Greek elections

Quote of the week:

Pamela McCourt: "Stability in language is synonymous with rigor mortis. - Ernest Weekley, lexicographer". To EU & its 'national' elites: watch what you wish for, for it just might happen.

And in light of the Greek elections results, 'stability' in the euro area is, indeed, a form of rigor mortis. Need proof? Here's the EU statement on the Greek elections results, quoted in full [emphasis mine]:

"The Eurogroup takes note of the provisional results of the Greek elections on 17th June, which should allow for the formation of a government that will carry the support of the electorate to bring Greece back on a path of sustainable growth.

The Eurogroup acknowledges the considerable efforts already made by the Greek citizens and is convinced that continued fiscal and structural reforms are Greece’s best guarantee to overcome the current economic and social challenges and for a more prosperous future of Greece in the euro area.

The Eurogroup reiterates its commitment to assist Greece in its adjustment effort in order to address the many challenges the economy is facing.

The Eurogroup therefore looks forward to the swift formation of a new Greek government that will take ownership of the adjustment programme to which Greece and the Eurogroup earlier this year committed themselves.

The Eurogroup expects the Troika institutions to return to Athens as soon as a new government is in place to exchange views with the new government on the way forward and prepare the first review under the second adjustment programme."

So you have to be a bit of an optimist to read any of the above as a commitment by the Eurogroup to any sort of change in the Greek bailout terms. And absent significant and rapid changes in the programme, there is not a snowballs' chance in Hell that Greece is going to satisfy these conditions in the medium term. Stability of status quo reaffirmed in the Greek elections results is, in fact, the death warrant to the yet-to-be formed Greek Government.

16/6/2012: IMF Report on Ireland: Public Sector Pay Reforms

Continuing with analysis of the IMF Article IV report on Ireland, the first post dealt with headline assessments of economic performance and risks, the second post dealt with mortgages distress. In the present post, I am focusing on the IMF analysis of our public sector pay and pensions.

Box 5 on page 25 of the report [ as usual - emphasis and comments are mine]:

"Ireland’s compensation for public employees rose by 3.5 percentage points of GDP (and GNP) in the pre-crisis boom." [In other words, public sector compensation costs rose faster than GDP and GNP growth during the boom.]

"During 2000–08, the gross exchequer pay bill rose 118 percent in nominal terms, driven by staff numbers rising 35 percent and average pay increases of 61 percent. In ESA95 terms, by end-2008, compensation had risen to 11.2 (13) percent of GDP (GNP) and one-third of primary current spending, above European levels, especially the original 11 Euro Area economies." [Not only our public sector remuneration rose above that of the EA11 average, but it has done so during the period when public services delivered to the population actually contracted due to previous privatizations and the expansion of private services substitutes (e.g in education and health, as well as transport etc). The cost of maintaining diminished public services provision also rose despite the fact that we had progressively lower proportion of old age population that requires more extensive and more expensive public services.]

"The authorities’ immediate crisis response included pay cuts and a hiring moratorium, followed by a multi-year agreement with unions on staffing reductions and efficiency-enhancing reforms. After a breakdown of the tripartite Social Partnership Agreement in early 2009, public wages were cut by 13.5 percent, on average, over two years." [The IMF does not distinguish between cuts and pensions levy, although, as I pointed out on a number of occasions before, pensions levy is in effect a cut as well, since it is not ring-fenced.]

"The cuts were progressive, with those earning over €100,000 facing net pay reductions of up to 30 percent. In March 2010, the government struck a new multi-year deal (Croke Park Agreement (CPA)) with public sector unions, protecting workers against layoffs and further wage cuts, in exchange for a validation of the 2009–10 pay cuts and cooperation on voluntary retirements, redeployments and other efficiency measures (such as reform of non-core-pay entitlements) to help achieve targeted pay bill savings. Other measures since adopted or in progress include: for new entrants, a 10 percent additional reduction in salaries and a unified (less generous) public service pension scheme; for public service pensioners, a 4 percent average levy; and a €200,000 salary cap." [IMF fails to point out that the salary cap does not hold. However, IMF is correct in pointing out the progressivity of pay cuts. IMF also fails to note that at least some of the reductions have been achieved by effectively undercutting new staff and temporary staff pay and employment.]

"By end-2011, these measures had delivered net annual savings of €1.7 billion. Lower pay rates and staffing levels have helped reduce the net exchequer pay bill by €2.5 billion, but there has been a €0.8 billion increase [emphasis is from IMF] in the net pensions bill, the latter driven by a 53 percent rise in pensioner numbers since 2008 (mostly reflecting demographic trends, but also the

impact of early retirements). With additional net pay and pensions savings of €0.2 billion projected for

2012 and €0.6 billion over 2013–15, the ultimate annual savings by 2015 are €2.5 billion (or 0.7

percentage points of GDP). Nonetheless, as a share of GNP, the net exchequer pay and pensions outlay in 2015 is projected to be 0.4 percentage points below the 2008 level, representing a relatively modest decline." [It is clear that the IMF is not impressed by the dynamics in either pay or pensions savings. I would like to see a more detailed assessment of the 'demographics' trend that could have resulted in a 53% increase in the number of pensioners since 2008, but my suspicion is that it is completely imaginary.]

On the positive side: "The authorities’ approach, thus far, has helped keep industrial peace, protect frontline services, raise public sector productivity, and deliver agreed savings in a durable way. The cuts in employment have been strategic rather than across-the-board, focusing on the health sector while protecting teacher numbers given the rising number of school-going children. A similar targeted approach is being adopted on the pay side: by reining in hospital and police overtime costs (through smarter rostering) and sick pay. The authorities are also currently reviewing options in relation to out-of date allowances." [The focus on healthcare cuts relative to education is also consistent with IMF-favored, and I must agree with them here, adjustment path that stresses the need for skills retainment and investment during structural adjustments. It is also reflective of our younger demographics. Alas, the real issue, ignored by the IMF, is the currently inadequate healthcare system in Ireland, as well as the fact that majority of health costs cuts took shape via increases in involuntary private health substitution and costs. Shifting burden of healthcare onto those who cannot pay it (the middle class) while pretending that they are the 'wealthy who can afford private insurance' is a false 'saving' as it simply reduces the overall private spending and investment in the economy already starved of both, while faking non-tax 'revenues' increases and health sector balancesheet improvements.]

15/6/2012: IMF Review : Mortgages Arrears & Household Wealth

In the previous post I promised a closer look at the IMF analysis of the household wealth and mortgages in Ireland. Per Article IV consultation paper:

Mortgage arrears continued to rise as some households struggle with high indebtedness. 

• Household’s net wealth peaked in mid-2007, but has since declined by 37 percent largely due to the collapse in housing prices. 
• By 2011, households’ deleveraging efforts have reduced debt by 13 percent from its end 2008 peak. 
• Declining incomes have, however, meant the overall household debt burden has eased by only 3 percentage points to 208 percent of disposable income in 2011, although there has been some relief from lower interest rates. 
• Income declines, especially on account of the rise in unemployment, have also driven the increase in the rate of mortgage arrears on principal private residences to 10.2 percent of mortgage accounts and 13.7 percent of mortgage balances at end March 2012. 
• The share of mortgages that have been restructured—predominantly through payments of only the interest due or somewhat more—rose to 12.6 percent at end March 2012, but more than half of restructured loans are in arrears, indicating that deeper loan modifications are needed in some cases.

 More charts from the IMF:

In IMF news, rental yields are now closer to stabilization levels, but house prices are averaging 10 times average disposable per capita income, implying ca 4 times average disposable per-family income. In my view, prices will need to reach 3-3.5 times before the property market becomes affordable in the current conditions. This, however, is a longer-term target, with intermediate target being most likely even lower at 2.5 times (given credit conditions and general economic conditions). Also note, the above do not account for upcoming property taxes and for future reductions in disposable income due to tax increases.

Meanwhile credit condition remain horrible:

Chart above clearly shows that although interest costs and interest rates have declined, deleveraging did not take place. This stands in sharp contrast to the US and UK, where deleveraging of the households was more aggressively underpinned by bankruptcies and repossessions. Another issue is that declines in interest rate burden apply primarily to tracker mortgages.

Charts below highlight rapidly accelerating problems with mortgages defaults:

Chart above shows the decomposition of restructured mortgages, highlighting the extent of significant changes in the overall mortgages burden under restructuring (interest only 35%, below interest-only payments at 14%, payment moratorium at 4% and hybrid at 5%, implying that at the very least well over 50% of all restructured mortgages are not delivering on capital repayments).

15/6/2012: IMF Review of Irish Economy: Q2 2012

IMF latest outlook for Ireland. Not so cheerful reading after all. Quoting from the report:

• Growth prospects for 2012 remain modest at about ½ percent, unchanged from the fifth review. 
• Consumption is projected to decline by 1.7 percent as real household disposable income further weakens while the savings rate will likely remain elevated as households continue to reduce high debt burdens, although retail sales data for April suggest downside risks. 
• The decline in fixed investment is expected to continue, in part owing to fiscal consolidation, though at a slower pace than in 2011.  

Summary table:

Further quoting from the report [emphasis and comments mine]:

• An external recovery underpins the projected strengthening in growth in coming years, with support from a gradual revival of domestic demand, but there are significant risks. 
• Net exports are expected to continue to be the main contributor to growth in 2013–14, with support from further gains in competitiveness over time. [Albeit exports contribution to growth will effectively drop like a brick - from 4.5% in 2011 to 1.2% in 2017]
• Consistent with Ireland’s major banking crisis and ongoing fiscal consolidation, the revival in domestic demand is projected to be a protracted process, with a stabilization of demand in 2013, followed by a gradual pick up to about 2 percent growth by 2015–17. 
• Overall, growth is projected to average 2½ percent in 2013–17, which is low in relation to the scale of underutilized resources. [Re: unemployment staying very high and underinvestment continues rampant through the period].

There are, however, a range of interconnected risks to this outlook: 

• An intensification of euro area stress would heavily impact Ireland’s growth and the debt outlook through exports, and also through household and business confidence and spending, with adverse effects on financial sector health. [Not exactly 'just feta', then?]
• The gradual resumption in private consumption and investment growth starting in 2013 hinges on a combination of a bottoming out of housing prices, some pick up in lending to SMEs and the younger cohort of households with less debt [note stress on cohorts effects - supporting my continued insistence that, in effect, the current crisis and lack of Government support for deleveraging of households mean lost generation of highly indebted households], well targeted private debt restructuring over coming years, and public confidence that the crisis is being overcome, which will allow some easing in precautionary savings. [That is a motherload of 'ifs' there - all showing no sign of materializing any time soon.]
• Banks’ capitalization has been greatly strengthened, but their underlying profitability remained weak in 2011, reflecting the low quality of loan portfolios which include significant legacy assets. These factors could hinder a renewal of lending to households and SMEs including by limiting access to funding.
• Gradual recovery and slow reductions in unemployment could imply higher structural unemployment, limiting potential growth in the medium-term, and ongoing high youth unemployment could risk sustained high emigration. [Clear warning on human capital side].

In short, I can't read much of any conviction in the IMF view that the above risks will not overwhelm the economy in its current weak state.

Worse: "The structure of government debt, in particular the promissory notes, is a further challenge. ... [the] lack of burden-sharing on senior bank debt as part of the resolution process added to government debt, exacerbating the political difficulties with the annual payments of €3.1 billion due on the notes until 2023. In these circumstances, the authorities settled the payment due at end March 2012 by placing a long-term government bond with a face value of €3.5 billion with IBRC. The underlying set of transactions was complex and it is not expected that future promissory note payments can be financed in this manner. A more durable extension of the debt service schedule on promissory notes, matched by corresponding stability in the Eurosystem funding of IBRC, is needed to ensure the political sustainability of the substantial medium-term fiscal consolidation planned, and to significantly reduce market financing requirements in the medium term and thereby facilitate regaining market access."

So the 'Bad Cop' IMF is, as I always said before, still playing our side in the game against our wonderful 'European partners' who are screwing Ireland. Hmmm...

On debt: "Debt sustainability remains fragile, especially with respect to medium-term growth prospects. The debt path is projected to peak at 121 percent of GDP in 2013 and to decline to 111 percent of GDP by 2017. The upward shift in the gross debt path compared with the previous review reflects higher cash balances, which are expected to reinforce prospects for regaining access to market funding. The debt outlook remains sensitive to weaker growth, with debt rising to about 133 percent of GDP by 2017 if growth were to stagnate at 1⁄2 percent. Although the disposal of state assets and the planned sale of Irish Life could modestly lower the debt path, this may be offset to some extent in the next few years by potential outlays for restructuring the credit union sector."

Chart: 

Now, Green Jerseys love the number of 117% don't they... oops... IMF is sticking to 121%. Recall, Green Jerseys said in the past that debt < 120% is sustainable. Goodie, then...

IMF's overall review conclusions are:

• Ireland’s policy implementation has been consistently strong during the first half of the EU-IMF supported program, yet considerable challenges remain.
• The Irish economy remains weak, with real GDP broadly flat in the last three years.
• Labor market conditions may be beginning to stabilize, yet they remain adverse.
• The lack of employment opportunities is seen in the rising share of involuntary part-time employment, vacancy rates among the lowest in Europe, and the long- term unemployment share rising to 60 percent [note that this fully corresponds to my estimates and analysis of the 'broader' unemployment figures for Ireland - something that the Government comprehensively ignores.]
• Inflation continues to rise and is now closer to the euro area average [with energy accounting for three quarters of the increase and core inflation (mostly transport and insurance) contributing the remainder - in other words, IMF is noticing our Government's valiant efforts to gouge consumers by hiking state-controlled prices.]
• The current account was broadly balanced at 0.1 percent of GDP in 2011, and the unwinding of competitiveness losses continues. [Good news, but although a continued gradual decline in Ireland’s market share in goods exports suggests further improvements may be needed]
• Bank funding pressures appear to be easing as the overall level of deposits in the banking system has stabilized
• Mortgages - see follow up post, but core conclusion is that household deleveraging is simply not happening fast enough (see my forthcoming Sunday Times article on this)
• The PCAR banks are highly capitalized but report low profitability mostly due to weak loan quality [As warned in my Sunday Times columns]
• Exchequer situation - see follow up post but headline conclusion is: 
  Final data confirm the 2011 general government deficit was well within the program ceiling and Fiscal developments in the first four months of 2012 were in line with expectations.

15/6/2012: Q1 2012 Construction Sector Activity for Ireland

Having dealt with leading indicator for Construction sector activity - Ulster Bank PMIs - in the previous post, now's the time to update the latest actual outrun figures from the CSO that cover Q1 2012. Keep in mind - core conclusion in the previous analysis showed no signs of uptick in activity in the sector, with housing and commercial real estate construction activity continuing to shrink.

Pre latest CSO data:

• In Q1 2012 Value of all activity ex-Civil Engineering has fallen to 18.7 against 20.6 in Q4 2011. Quarterly rate of decline therefore is -9.22% for value against the annual rate of decline of -13.4%. Y/y rate of decline accelerate from Q4 2011 when it was 8.4%. Over last 6 months the index declined -5.07% compared to previous 6 months and -10.88% y/y. Q1 2012 marks an absolute record low activity by value in the broader construction sector ex-civil engineering.
• In Q1 2012 Volume of all activity ex-Civil Engineering fell to 16.7 from 18.5 in Q4 2011, marking another record low for the series. Year on year, the index has fallen 13%, which represents the sharpest contraction in four consecutive quarters. Quarter on quarter the index is down 9.73%. Things are getting much worse, rather than less worse. Over the last six months, average index reading fell 5.38% compared to previous six months average and year on year last six months average is down 9.51%.
• Relative to peak, value of construction production ex-civil engineering now stands at just 16.45% of the peak levels and volume of activity is now at 15.70% of the peak levels, both showing record declines.

For Civil Engineering sub-sector - the very same trends are true, with one exception - the rate of declines in activity slowed, not accelerated, in Q1 2012. Alas, we are thus in the case of getting worse more slowly, which is, as I like pointing out, not the same as getting better.

Value of Residential Construction fell to 9.4 in Q1 2012 against 9.7 in Q4 2011. The index declined 1.4% y/y and is now down, on average 4.5% in the last six months compared to previous six months. Year on year, average activity in the last six months fell 18.03%. Now, keep in mind, Residential Construction is now running at 91.75% below its peak pre-crisis levels.

Volume of Residential Construction fell to 8.5 from 8.8 in Q4 2011, a decline of 15% y/y. Average activity for the last six months was down 4.95% on previous six months and down 15.61% on same period a year ago. Relative to peak, volume of residential construction is now down 91.76%.

Per chart above, Value of Non-Residential construction declined to 53.8 in Q1 2012 from 62.4 9n Q4 2011, marking annual decline rate of 12.4%. Average six months activity is now down 5.53% on previous sexi months period and is down 5.83% on the same period a year ago. Relative to peak, non-residential construction value is down 56.37%.

Volume of Non-Residential construction activity dropped to 47.8 from 56.6 in Q4 2011. Annual rate of decline in Q1 2012 of -12% comes on foot of an annual increase of 3.3% in Q4 2011. 6mos average through Q1 2012 is now 5.43% below the previous 6mo period and is 4.31% below same period a year ago.

Chart below illustrates annual changes.

So the very same trends shown by the PMIs are present in the actual data. Once again, where's all that pinned up demand for new offices and facilities, for retrofits of facilities and for fit-outs that were supposed to come with the 'robust jobs creation' by the MNCs?

15/6/2012: Irish Construction PMIs - no sign of that MNCs jobs creation, again

What is going on in Irish construction sector, folks? The latest statements from the Irish development authorities and the Government and its 'experts' would make you believe that MNCs are killing each other trying to rush into building new space to house those thousands of workers that are allegedly being hired by them. Of course, we know the latter is balderdash (see here) when it comes to date through 2011, but can it be true for trends since 2011? After all, the Government aims to create tens of thousands new jobs in 2012 in the MNCs-sectors.

Ok, here are two posts on latest construction sector activity. First one on Construction Sector PMIs (courtesy of the Ulster Bank) and the second one on CSO data.


Take a look at the latest (May 2012) Construction Sector PMIs:

Suppose there was a rush in activity in MNCs-sectors. That would translate in some uptick in construction activity in Commercial sector. Right? In May 2012 Commercial sector Construction PMI stood at 46.8, which is (1) signal of rather significant rate of contraction m/m, (2) marks the lowest reading in the sub-index since November 2011, and (3) is worse than shallower rate of contraction signaled by 48.4 reading in April.

In fact, May 2012 reading is below 3mo and 6mo MA readings. So the rate of decline has accelerated in May compared to 3mo average and 6 mo average.

As dodgy as the activity is across all Construction-related sub-categories, it is the Commercial sub-sector activity that is signaling worsening of the already poor trend.

So, where are those thousands of new jobs going to be housed? Per Ulster Bank (emphasis mine): "Those panellists that recorded a decline in overall construction activity during the month mainly linked this to falling new business. New orders at Irish constructors decreased for the fifth successive month. Where firms were able to secure new business, they reported that this was often dependent on prices being reduced."

Now, you might say that there can be 'expectations' of future activity that are not fully reflected in the above figures. Yep. "Irish construction firms remained optimistic that activity will be higher in 12 months’ time than current levels, with sentiment improving from that registered in April. That said, positive expectations largely reflected the fact that a rise in activity is likely given the low levels currently being recorded." So, yes, firms are still giddy (they've been 'optimistic' now for many months, in fact over a year), but they are not giddy about hordes of new orders arriving. Instead they are optimistic about the prospect of continued attrition wiping out more of their competitors or that they might pick some jobs as the derelict unfinished sites start crumbling down in earnest. Nice one.

15/6/2012: Some probabilities for post-Greek elections outcomes

Some probabilistic evaluations of post-Greek elections scenarios and longer range scenarios for the euro area:

In considering the possible scenarios for Ireland’s position for post-Greek elections period, one must have an explicit understanding of the current conditions and the likelihood of the euro area survival into the future.

Short-term scenarios:

In my opinion, there is currently a 60% chance that Greece will remain within the euro area post elections, but will exit the common currency within 3 years.  Under this scenario, the ECB – either via ESM or directly – will have to provide support for an EU-wide system of banking deposits guarantees, and new writedowns of Greek debt, as well as full support package for Spain’s exchequer and banks. Ireland, in such a case, can, in the short term, benefit from some debt restructuring. Part of the package that will allow euro area to survive intact for longer than 6-12 months will involve increased transfer of structural funds to stimulate capital investment in the periphery, including Ireland.

On the other side of the spectrum, there is a 40% probability that Greece exits the euro area within 12 months either in a unilateral, unsupported and highly disorderly fashion (20%) or via facilitated exit programme supported by the euro area (20%). In the latter case, Ireland’s chances to achieve significant writedown of our debts will be severely restricted and our longer term membership within the euro area will be put in question. In the former case, post-Greek exit, the euro area will require very similar restructuring of debts and real economy transfers as in the first option above. Here, there is an equal chance that the EU will fail to put forward reasonable measures for preventing contagion from the disorderly Greek default to other countries, including Ireland, which would constitute the worst outcome for all member states involved.

Longer-term scenarios: 

In terms of longer horizon – beyond 3 years, the scenarios hinge on no disorderly default by Greece in short term, thus focusing on 80% probability segment of the above short term scenarios.

With probability of ca 30%, the coordinated response via ECB/ESM to the immediate crisis will require creation of a functional fiscal union. The union will have to address a number of structural bottlenecks. Fiscal discipline will have to be addressed via enforcement of the Fiscal Compact – a highly imperfect set of metrics, with doubtful enforceability. Secondly, the union will have to address the problem of competitiveness in euro area economies, most notably all peripheral GIIPS, plus Belgium, the Netherlands (household debt), France. As mentioned in the short-term scenario 1 above, growth must be decoupled from debt overhang and this will require simultaneous restructuring of real economic debt (corporate, household and government), operational system of banks insolvencies, and investment transfers to the peripheral states. The reason for the probability of this option being set conservatively at 30% is that I see no immediate capacity within euro area to enact such sweeping legislative and economic transformations. Much discussed Eurobonds will not deliver on this, as euro area’s capacity to issue such will not, in my view, exceed new financing capability in excess of 10% of euro area GDP.

The second longer-term scenario involves a 60% probability of the euro area breakup over 2-5 years. This can take the form of a break up into broadly-speaking two types of post-Euro arrangements.

The first break up arrangement will see emergence of the strong euro, with Germany at its core. Currently, such a union can include Finland, Benelux, Austria, and possibly France, Slovakia, and Slovenia. The remaining member states are most likely going to see re-introduction of national currencies. Alternatively, we might see reintroduction of 17 old currencies. Italy is a big unknown in the case of its membership in the strong euro.

In my view, once the process of currency unwinding begins, it will be difficult to contain centrifugal forces and the so-called ‘weak’ euro is unlikely to stick. Most likely combination of the ‘strong’ euro membership will have Germany, Benelux, Finland and Austria bound together.

Lastly, there is a small (10 percent) chance that the EU will be able to continue muddling through the current path of partial solutions and time-buying. External conditions must be extremely favourable to allow the euro area to continue in its current composition and this is now unlikely.