2/8/2012: Irish Exchequer Fog: Reality Isolated?

Let’s take a look at the Exchequer numbers for January-July period out today.

Tax revenue shows an increase from €18,633 mln in January-July 2011 to €20,313mln in same period 2012. 

This is primarily accounted for by increases in Income Tax (which are running pretty much in line almost exactly with what the USC reclassification would have yielded). The Department states that "Income tax is €159 million (2.0%) ahead cumulatively and is over 11% up on the same period last year on an adjusted basis. This is a strong performance." However, as far as I can understand the numbers, the adjustment only includes PRSI and does not cover reclassification of the entire USC (Health Levy). Which suggests that even 2% might be questionable. Per April note (link here) PRSI reclassification was 'estimated' by the department to run €300 million in 2012. It could be, in the end, 280mln or 330mln - take our guess, but it is significant.

Another 'major' factor is a rise in corporation tax of some €400 million of which more than half is accounted for by carry-over of tax from 2011 into 2012, not new tax receipts. Here's the Department note from April (linked above): "The Department is also taking this opportunity to adjust the corporation tax profile for the €251 million in receipts which were  expected in December 2011 but were  only received into the Exchequer account in January 2012". So setting aside timings of the corporation tax and netting out €251 million of carry-over, how much is corporate tax really up? The answer is - we do not know. But not by much enough to be excited about this.

There was a €200 mln odd rise in VAT - the real impact of the Budget 2012. Which means that on the net, there are very few real increases in revenues. Total taxes went up by €1,680mln odd, but on a real comparable basis, they went up less than €1,254mln over seven months! Again, this is before we clarify what exactly happened with the Health Levy. With Health Levy effects, the impact would have been probably closer to €250mln (I am using here 2009 figures for Health Levy and PRSI to estimate).

Non-tax income rose from €1,545mln to €2,355mln – of which almost €300mln is accounted for by increased revenues by the Central Bank and another €200mln odd is from the stronger receipts on the Banks Guarantee. There was €300mln interest on Contingent Capital Notes - also from banks. Sort-of the zombie giving back odd €800mln to the town it is killing. This is the 'reforms' the Government instituted to correct for the fiscal imbalances? Not quite: earlier this year the EU warned Ireland to not consider these 'revenues' as a part of long-term adjustment as they are bound to disappear in time.

Voted Current Expenditure – the stuff that this Government is supposedly cutting back – has actually increased – from €24.008bn in 2011 to €24.563bn in 2012.

Non-voted current expenditure is up more than €2 billion: from €3.556bn in 2011 to €5.573bn in 2012 – primarily driven by increases in the cost of servicing Ireland’s debt from €2.426bn in 2011 to €3.801bn in 2012. Timing effect on sinking fund contribution of €646mln also put a dent.

This means total current expenditure rose (not fell) from €27,564mln in 2011 to €30,136mln in 2012. This is very poor performance, folks.

Thus, current account deficit also increased in January-July 2012 from €7,386mln to €7,468mln.

Sinking fund transfer debit above was offset by credit to the capital receipts, which has meant that capital-related exchequer receipts rose to €1.454bn in 2012 compared to €789.9mln in 2011. Again, there is nothing miraculous here – the state simply transferred funds from one pocket to the other.

On the capital expenditure side, however, there are – on the surface – huge ‘savings’ year on year. Total capital spending amounted to €12,298mln in January-July 2011, but that was ‘cut’ to €3,112mln in same period 2012.

How were such miraculous savings achieved? Well, simple, really. In 2011 the state spent €10,655mln on “Non-Voted (Expenditure charged under particular legislation)” items and in 2012 this line of spending was only €1,775mln. 99% of these expenditures in both 2011 and 2012 relate to banks recapitalizations (and in 2012 added insurance fund support loan of €449.75mln). So the entire savings delivered by the Government amount to putting less money into Irish banks recapitalizations.

Here’s the summary of these ‘savings’.

TABLE

But wait, things are even worse! In 2011 Irish Government paid down the promissory note to the Anglo-Irish Bank in the amount of €3.085bn. This increased Government spending in that year. This year, the Government had converted the note into Government debt, and thus got to claim that there was no payment made, so instead of €3.085bn in spending, the State registered just the cost of conversion €25mln this time around.

All in, of the entire deficit reduction claimed by the media, full €8.9 billion of the ‘savings’ are simply what the Irish Government (rightly) claimed a year ago to be ‘temporary’ one-off measures. In other words, there is no reduction in deficit via expenditure side.

Let's do one final exercise: if we subtract one-off measures from the capital side, total - current and capital accounts exchequer deficit in the first seven months of 2011 was €8.24bn, in the same period of 2012 it is €7.35bn adding to it the reclassification measures and corporate tax carry over implies like-for-like deficit in 2012 of €7.78bn. Which means 'savings' of ca €426mln. 

Of these €306mln is accounted for by timing differences and cuts to voted capital spending which the Government is going to more than undo using the latest 'off-balancesheet' stimulus. And an unknown amount is due to Health Levy reclassification, let's say ca €250mln so far (an under-estimate for 2009 figures, but...) for which the Department does not appear to adjust the numbers. All in, Irish Exchequer finances have most likely deteriorated on comparable terms by around €80million in 7 months through July 2012 compared to 2011.

These are then the colossal savings that the headlines like "Ireland Cuts Deficit in Half" simply mis-represent.


Update: Someone highlighted that the Health Levy was incorporated into the PRSI receipts. My view of the Health Levy is based on this document.

2/8/2012: Inverting reality?

I have to share with you this:

The link to the RTE piece on this research is here. 


The link to my analysis of Irish Manufacturing PMIs which, according to the KBC Bank Ireland/Chartered Accountants Ireland Business Sentiment survey, is the sector constrains growth as opposed to domestic services that allegedly support growth is here.


Updated: Today's Services Sector PMI release for Ireland confirms my criticism of the Confidence Survey with Service sector posting a third consecutive month of decline in activity 49.1 in July from 49.7 in June. Thus, we now have: 3 consecutive months of expanding PMI on Manufacturing side, 3 consecutive months of contracting PMI on Services side. Largest decline in Services (44.5) was in domestically-focused Business Services segment.

2/8/2012: Latest Euromoney Country Risk Survey results

Recent Country Risk survey by Euromoney shows some interesting trends relating to the Russian economy. Here are the headlines:

"The five economies of the Brics have seen an aggregate ECR score loss of 6.4 points this year, lowering the average score by 3.1 points to 56.8. South Africa (-2 points), Brazil (-1.9) and India (-1.6) have endured the worst declines in sentiment, resulting from concerns about export market conditions, amid waning demand for commodities and increased domestic security risks. However, all five have seen large declines in their economic assessment scores, as contributors have reassessed their expectations for global growth and have acknowledged the slowdown in China’s breakneck pace of expansion."

Moreover: "Four of the five Brics (Russia the exception) have also endured lower political risk scores – led by India (down 0.9 points) and China (-0.8)."

Summary of scores changes:

Specifically on Russia:

"ECR economists still regard Russia as the weakest of the Brics, ranking 60 in the world, despite the three main ratings agencies placing India below Russia. India might have a lower economic assessment than Russia, but its political and structural risk assessments are more favourable, according to ECR contributors, with particularly large gulfs in the scores for government non-payments/non-repatriation, information access/transparency, institutional risk, the regulatory and policy environment, and demographics – factors seemingly not being reflected in the various credit ratings. This might be due to the comparative security provided by Russia’s status as one of the world’s largest energy producers."

Despite this, current survey shows little deterioration in Russia's risk score with June 2012 risk assessment on par with China:

See more on the survey results here.

Disclosure: I will be joining Euromoney survey panel starting with the next survey.

2/8/2012: A hell of a non-event

After all the hype and the pomp of recent weeks, today's ECB council and Mario Draghi's subsequent pressie were anti-climatic. Nay, they were outright bizarre, given the 'priming' achieved over the last week. The timeline of the whole fiasco is below - for the fun of it taken off twitter (please note: no tweets affiliations provided due to the way the data was extracted, so apologies to all).

The headline conclusion is as follows:

Sig Draghi's 'Big Bang':

1. ECB 'may' address the seniority issue of ECB over private holders of PSI bonds - an issue that should've addressed more than 3 months ago, 
2. ECB 'might' buy some Spanish/Italian bonds but ECB won't tell how much or when, 
3. It is up to 'Governments' to do something about all of this and apply to EFSF, but
4. ECB will now 'plan modalities' like the rest of the EU has been planning over the last 3 years.

Outcomes:

1. Draghi has managed to bid down Italian and Spanish bonds
2. Draghi manages to further undermine his & ECB's credibility
3. The idiots who bought into peripherals on foot of expectation Draghi was about to start buying them based on his July 26th speech should have seen it coming: Draghi: In the speech on July 26th in London, I made no reference to a bond-buying programme

*DJ Draghi: Govt Council May Consider Undertaking Further Non Standard Measures #wsjeuro
*DRAGHI SAYS INVESTOR CONCERNS ON SENIORITY WILL BE ADDRESSED
*DJ Draghi: Will Design Appropriate Modalities for Such Measures Over Coming Weeks #wsjeuro
*DRAGHI SAYS ECB MAY TAKE MEASURES TO ENSURE POLICY TRANSMISSION
*DRAGHI SAYS TENSIONS IN FINANCIAL MARKETS AMONG RISKS
*Markets rally Mario Draghi on comments about eurozone. IBEX and MIB up by around 2%
*Draghi: Governing council may undertake outright open market operations of a size adequate to reach its objective. But no firm commitments
*DJ Stoxx 600 Index Up 1% As Draghi Speaks #wsjeuro
*DJ Draghi: Inflation Likely to Decline Further in 2012, be Below 2% in 2013 #wsjeuro
*So is Draghi strategy to bid down IT+ESP bonds to buy them cheaper?
*Oh, the Italian 10-year yield just tightened several bps
*Draghi talked markets by 5%. Delivered a delay. Huge blow to credibility
*IBEX and MIB rally losing steam as ECB chief Mario Draghi statement continues
*FTSE goes from up 50 to Negative on Draghi NON comments
*DJ Draghi: Sees Significant Progress on Fiscal Consolidation in Recent Yrs #wsjeuro
*DRAGHI SAYS IMPORTANT FOR BANKS TO BOOST THEIR RESILIENCE. Yes. with all those epic earnings
*RT @EKourtali: aaand : Italian, Spanish 10-year yield spreads over German bunds reverse earlier tightening (tradeweb)
*WAAAAAAR RT @djfxtrader: #Germany's Bundesbank to DJ-WSJ: No comment on #ECB Council Decision
*DJ Stoxx 600 Index Slides Into The Red on Draghi Comments; Down 0.2% #wsjeuro
*The Market Rally Has Now Completely Vanished Amid Mario Draghi's Press Conference read.bi/N0Vn3x
*FTSE, DAX, CAC, MIB, IBEX now in negative territory as ECB boss Mario Draghi fails to deliver on eurozone action pledge
*Draghi: we have discussed possible reductions in interest rates, unanimous decision this wasn't the time #wsjeuro
*Press conference Mario Draghi: Introductory statement to the press conference via ECB PR bit.ly/Qzrdon
*Draghi: first thing is that govts have to go to the EFSF. As I've said several times the ECB cannot replace govts #wsjeuro
*LIVE: Draghi implies that seniority and EFSF/ESM measures have to happen before the ECB takes action. read.bi/Ncwtuj
*Draghi: ECB may undertake outright open market intervention of a size adequate to reach its objectives #wsjeuro
*"Many of the details [of seniority and EFSF use] will be worked out by the [ECB]" in the coming weeks. read.bi/NLo06l
*ITA +20bps SPA +10bps since Draghi started
*Draghi: the effort will be focused on the shorter part of the yield curve #wsjeuro
*"This effort is going to be focused on the shorter part of the yield curve...which will introduce discipline on the longer part." -Draghi
*DJ Draghi: This Effort is Very Different from Previous Bond-Buying Program #wsjeuro
*Markets not happy. CAC-40 turned negative having been up 1.2% earlier in #Draghi's press conference. #wsjeuro
*"I'm a little surprised by the amount of attention this received in recent press." -Draghi on saying no to ESM bank license. "Not up to us."
*The current design of the ESM does not allow to be recognized as a suitable counterparty. (for ECB repo) -Draghi
*Oh man the Spanish 10-year did not like that ESM remark. Nor Italy.
*Euro sinking like a stone. Down 200 pips since peak at start of press conference.
*SPANISH TWO-YEAR NOTE YIELD 14 BPS LOWER AT 4.80%
*Euro /Dollar breaks 1.2200
*Meanwhile... Italy Govt Bonds 10 Year Gross Yield 5.934%
*EURO EXTENDS DECLINE AGAINST YEN; WEAKENS 0.5% TO 95.42
*Markit iTraxx Europe already widened 5bps since start of Draghi speech - now at 159.5bps
*Draghi: You shouldn't assume we will or will not sterilize SMP purchases. The committees will have to tell us what is right.
*Draghi: Endorsement to do whatever it takes to preserve euro has been unanimous, but clear Mr Weidmann, BuBa have reservations #wsjeuro
*Spain CDS already 22bps wider at 560bps
*Spain's IBEX35 share index now down by almost 5% after ECB chief Mario Draghi failed to deliver on his eurozone action pledge.
*Italy Govt Bonds 10 Year Gross Yield 6.00%
*FTSE MIB -2.44%
*FTSE MIB -3.00% -- Italy Govt Bonds 10 Year Gross Yield 6.055% -- ITALY 10 - GERMANY 10 SPREAD 473bps
*IT GETS WORSE: US Futures sliding harder after Mario Draghi flop read.bi/NLpsFS
*Draghi: Even if we were ready to act now, there are not grounds to do so bit.ly/QzAPzq
*Italy Govt Bonds 10 Year Gross Yield 6.129%
*Spanish stock market has plunged 600 points in last few minutes, now down 5% pic.twitter.com/JHQZDAtl
*Draghi on whether ECB willing 2 buy private sector assets - "no reason to be specific on what other options are" - eh, left it open?
*DJ Draghi: Statement on Bond Buys Wasn't a Decision, it was Guidance #wsjeuro
*Draghi stresses bond-buying language: "MAY DECIDE" if conditions are met #wsjeuro
*Italy 10-Yr Erases Gains, Yield Rises 23bps to 6.16%
*EMU epitaph: "I want to stress the ECB remains the guardian of price stability and that remains its mandate." - Draghi.
*Bond market to Draghi: If you'd like to buy bonds, we'll make them cheaper for you... bit.ly/QzLfPG
*RT @edwardnh: Draghi has lost all credibility now. The ECB is going to do nothing. Watch yields rise.
*Draghi: it is pointless to go short the Euro. Well, if you went short the euro when Draghi started speaking you are up 200 pips
*Draghi: "It's pointless to go short on the euro because the euro will stay." The first point hardly implies the second.
*Trichet: "Speculating on Greece defaulting is a certain way of losing out" July 27, 2011. And then... bit.ly/NVWP6b
*FTSE MIB -3.17%
... and some more
*Spanish 10s hit 7% bit.ly/QA24Ks
*Priceless! RT @FGoria: S&P: Portugal 'BB/B' Ratings Affirmed; Outlook Remains Negative On Exposure To Spain

2/8/2012: A bit of an Olympic bubble?

Hosting Olympics is considered to be a great boost to the economy and yield long term benefits from infrastructure investments, branding of the host city etc. Right?

Here's a study (link):

"Summer Olympics bring hundreds of thousands of visitors and generate upward of $10 billion in spending for the host city. This large influx of tourism dollars is only part of the overall impact of hosting the Olympic Games. In order to host the visitors and sporting events, cities must make sizable investments in infrastructure such as airports, arenas, and highways. 


Additionally, the publicity and international exposure of a host city may benefit international trade and capital flows. 


Proponents argue that this investment will pay off through increased economic growth, but research confirming these claims is lacking. 


This paper examines whether hosting an Olympiad improves a city's long‐term growth. 


In order to control for the self‐selection of cities that host Olympic Games, this paper matches Olympic host cities with cities that were finalists for the Olympic Games, but were not selected by the International Olympic Committee. A difference‐in‐difference estimator examines post‐Olympic impacts for host cities between 1950 and 2005. 


Regression results provide no long‐term impacts of hosting an Olympics on two measures of population, real Gross Domestic Product per capita and trade openness."

2/8/2012: One hell of a chart!

One hell of an awesome chart, folks:

Clearly shows the strong, sustained break-out in Irish manufacturing PMI which started around April 2012, ending the period of sub-50 average readings between June 2011 and March 2012. And this amidst a massive slowdown in global trade and euro area economies.

1/8/2012: Manufacturing PMI for Ireland: July 2012

In the previous post I highlighted the relative performance of Irish manufacturing PMI for July compared to other countries (link here). In this post, let's take a look closer at the Irish Manufacturing data.

July Manufacturing PMI for Ireland came in at 53.9 - up on 53.1 in June, signaling strong and accelerating expansion in the sector. This marks the strongest reading in 15 months (PMI registered 56 in April 2011). More significantly, PMI has now been above 50 (expansion territory) for 5 consecutive months.

Dynamics are also encouraging: 12mo MA is now at 50.2, 3mo average through July is at 52.7 up on 3mo average through April 2012 of 50.4, up on comparable period of 2011 (49.4) and even on same period of 2010 (53.1). 6mo MA is at healthy 51.6. All readings are above historical average of 51.0.

However, headline PMI is still statistically not significant as chart below illustrates:

One positive in the above is that the series on core PMI, Output, New Exports Orders and New Orders have broken out of the flat pattern set June 2011 and are now expanding at significantly higher rates.

• New orders sub-index rose to 55.8 - very strong reading, given the 12mo MA of 50.2 and statistically significant. This too marks the highest reading since April 2011.
• Output sub-index is now at 54, down slightly on 54.6 in June, but still strong positive reading and also statistically significant. Output has now expanded for three consecutive months and is running ahead of 12mo MA and 6mo MA. 3mo average is ahead of previous 3mo average. All dynamics are strong and positive.
• New exports orders sub-index posted massive jump to 56.7 from 52.5 - marking the first statistically-significant reading in 4 months. This sub-index is now in expansion mode for 6 consecutive months.

Alas, the rest of the series are less impressive:

What worries me in the data above, though the word 'worries' is a bit too strong here, given the impressive numbers generated, are the following trends:

• Output prices have fallen 47.0 while input prices have declined 47.8 in July which suggests that profit margins have dropped.
• Increased production levels drove down the backlogs of work, despite increases in new orders.
• Increased output also drove up increases in purchasing of inputs (imports).

1/8/2012: Global Manufacturing PMIs for July

The summary of July 2012 Manufacturing PMI readings to-date:

Two things worth highlighting:

• Overall the readings are exceptionally poor across the board.
• Of all advanced economies so far reporting, Ireland shows by far the most positive indicator reading at 53.9. This is some huge achievement and the credit here goes primarily to the MNCs trading out of Ireland.

More detailed analysis of Irish PMI is to follow, so stay tuned.

1/8/2012: Sunday Times July 29, 2012

An unedited version of my Sunday Times article from July 29, 2012. Please note - this is the last article for the Sunday Times for at least some time to come.

As markets attention shifted from the issues of economic growth to the more immediate crises in Spain, Italy and, once again, Greece, our policy-makers have been basking in a rare spot the sunlight. This week, Irish Credit Default Swaps – insurance contracts on Government bonds – have traded out of the range of the top-10 highest risk economies in the world, for the first time in a number of years. The core driver for this was not something that happened in Ireland, however. Accelerating costs if insuring Italian bonds, helped by margins hikes and ratings agencies warnings, plus the return to CDS markets of Greek bonds have pushed out of the markets spotlight.

With improvement in Irish bonds and CDS contracts relative performance compared to our peers in the peripheral Europe, it has been all too easy for Irish policymakers to forget that the economy is still stalled in the no-man’s land between recession and stagnation. In the short run, the news from the real economy here remain abysmal. But more worryingly, the news continue to reinforce the reality of the entire crisis, compounding already disastrous declines in household wealth, pensions, income and jobs prospects. This compounding means two things for the future. In the near term, it spells no prospect for a recovery in the domestic side of the economy. In the longer run they mean decades of depressed economic growth and a massive black hole of Ireland’s Lost Generation – those born in the late 1960s and into the early 1990s.

The future is truly bleak for the generations of the 30-50-year olds due to the historically massive debt bubble implosion that severely impacted their family balancesheets. The future is grim for today’s 20-year olds who have entered their careers amidst the recession.

Here are the facts.

Irish residents of the cohort of 30-50 years of age are the ones who are carrying the main weight of the household debt accumulated during 2000-2007 period when they either entered the property markets or traded up. According to the data trickling from the banks, these are the families that vastly (some 80% plus) dominating the ranks of high Loan-to-Value Ratio mortgages written against the property valuations that have all but collapsed. This week’s data release by the CSO shows that, measured using mortgages drawdowns, Irish property prices have fallen now 50% on average and 56% in Dublin compared to their peak. Property prices now stand at 35.2% below 2005 levels in terms of comparable data, and are closer to 2000-2001 levels – nominally – based on non-CSO data. And all signs are, the prices are yet to find their bottom.

Using Central Bank data on outstanding credit for house purchases, the implied loss in household wealth relating to the current crisis is currently running at over €90 billion. Taking into the account downpayments, stamp duty and VAT expenditures incurred by the households in purchasing their homes, the true volume of economic losses in the system is closer to €120 billion.

In a normally functioning economy, correcting for the bubble by assuming that house prices appreciation should be running on average at the rate of general inflation, Irish households – purchasers of homes during 2001-2007 period – should have had their net worth rise by a cumulative of ca €45 billion, providing an average retirement support of roughly €35,000 per person in the cohort of 30-50 year olds.

Put differently, even if we cancel out the entire negative equity component of current mortgages, Irish households would require a decade of savings (in excess of debt and remaining mortgages repayments) at roughly 10% annual savings rate to recover the amounts of pensionable wealth they have lost since the onset of the crisis. Adjusting for higher current and future taxes, increased risk of unemployment, and expected higher mortgages interest costs once the extraordinary ECB measures to support liquidity in the euro area banking sector are wound down, Irish middle-age middle class households have been thrown back decades in terms of their ability to finance pensions.

The effects of these wealth declines, however, imply that younger generations will also feel tremendous burden of the crisis. Here is how this intergenerational contagion works.

Firstly, absent pensions provisions, current 30-50 year olds will be delaying their retirement, preventing upward mobility of earnings and career prospects for the younger workers. Secondly, even prior to the crisis Irish pensions system was grossly underfunded with the country facing some of the largest unfunded future liabilities bills in the OECD. These liabilities represent the costs of maintaining current levels of public health, pensions and social welfare provisions commitments under the existent tax system. They do not account for the private pensions shortfalls.

The crisis most likely raised these costs by a significant percentage as pensions-poor households will be forced – in years to come – to rely more extensively on public system. Today’s younger workers will be paying for this through their taxes directly, while indirectly facing additional costs in terms of reductions in expected future benefits. Thirdly, international evidence clearly shows that younger workers entering their careers at the time of a recession experience on average depressed levels of life-time earnings and elevated levels of future unemployment.

It might fashionable today in the Irish media to talk about banks’ customers vs taxpayers squeeze in relation to the high cost of adjustable rate mortgages and trackers subsidization. The reality of our collective insolvency runs much deeper than the immediate crisis within the banking sector. Take a simple exercise in projecting future losses on life-time earnings for current generation of the 20-30 year-olds. On average, these workers could have expected their life-time earnings decline by 8-10 percent compared to those of workers entering the workforce outside a normal recession. At current average earnings, the overall life-time income losses that can be expected by the younger generation amount to some €145-180,000 in current value terms. Per Census data for 2006 population distribution, and using the CSO projected labour force participation rates through 2041, the above range implies a cumulative loss of earnings to the tune of €64-117 billion for the economy as a whole.

Pair these earnings losses for the younger generation with the wealth declines experienced by the middle-aged cohorts and the Lost Generations of Ireland are now on track to a full-blow intertemporal bankruptcy. Both, psychologically and economically, this is a truly disastrous legacy of the boom. And this legacy remains largely hidden behind the rhetoric of our politicians and the media pretending that the negative equity, the wealth destruction and the long-term consequences of the Great Recession will be gone once Ireland’s economy returns to growth. Truth is – the Lost Generations are already here. And they are us.

Box-out:

It appears that the euro zone authorities are frantically pushing through the latest magic bullet solution to the Euro area sovereign debt crisis – the promise of a banking license for the European Stabilization Mechanism (ESM) fund. As conceived, the ESM will have lending capacity severely restricted by the capital held. The banking license, it is argued, will allow the ESM to borrow cheap funds from the ECB (just as the commercial banks are currently doing) and lend these funds out into the distressed banking system for recapitalization of troubled banks. The theory goes that while the markets will not accept leveraging of the ESM capital in excess of ca 7:1, the ECB will have to lend to a ‘bank’ and this can raise the ESM total effective lending capacity from €500 billion to €1 trillion. The problem, of course, is that as with all other previous ‘magic bullet’ solutions, the latest idea is likely to have more disastrous unintended consequences than the original problem it tries to address. Under normal operations the ECB does not lend unlimited amounts to any given bank and when it does lend, the loans are less than 12 months in duration. Thus, should the ESM attempt to borrow via a banking license from the ECB, the entire euro area monetary system will become a farcical cover up for indirect and vast lending to the banks and the sovereigns of the euro zone. Hardly a hallmark of a responsible, and reputationally and legally well-run monetary policy.

1/8/2012: Some interesting notes on Debt and Growth

Some interesting long-term relations between Government debt and economic growth. No comment, but few stats and charts:

First - levels of debt and levels of growth:

Weak, negative relationship above.

Now, rates of change in debt y/y and growth:

Much stronger negative relationship above. Of course, we would expect that negative growth would lead to growth in debt/GDP ratio due to stimuli and due to simple fact of shrinking GDP.

Here's the matrix of average rates:

What do we have?

• Both debt and economy expanding (pro-cyclical expansion): 144 episodes in 1980-2012 period, debt growth on average is 3.172%pa against GDP growth on average of 2.086%pa.
• Recession counter-cyclical growth in debt against contracting GDP: 43 episodes, average growth rate in debt 8.847% and average growth rate in GDP is -2.389%. 
• Countercyclical contraction in debt during economic growth periods: 123 episodes, with average contraction in debt of -2.582% and corresponding (accompanying) expansion in the GDP of 3.782%

So conclusions: during expansions, debt shrinks, but by less than economy grows. During contractions, debt expands but by more than the decline rate in the economy. Worse than that - pro-cyclicality dominates counter-cyclicality. There are more episodes when debt grows during economic expansion than when debt grows during economic contractions. The average rates of debt expansion during economic expansion are greater than the average debt contraction rate during economic expansions. The gap is on average annually of ca 0.6% of GDP in terms of debt growth exceeding debt contraction during episodes of economic growth.

It is worth to note that EA12 are not unique by a significant margin when compared to Advanced economies sample:

1/8/2012: Some sub-trends in the irish Live Register for July 2012

So, now that you've been fed the 'great news' story by the Irish 'analysts', and having, hopefully read my first post on the subject of Live Register numbers (link here), you might wonder - what sub-trends dominate the time series relating to irish unemployment in July.

Trend 1: long-term unemployment is now at all time high. Here's an honest down the line analysis from the CSO: "The number of long term claimants on the Live Register in July 2012 was 200,086. The number of male long term claimants increased by 4,160 (+3.0%) in the year to July 2012, while the comparable increase for females was 5,864 (+11.1%) giving an overall annual increase of 10,024 (+5.3%) in the number of long term claimants." Let me add to this: July 2012 figure of long-term unemployed is up 837 m/m.

"In July 56.5% (260,237) of all claimants on the Live Register were short term claimants. The comparable figure for July 2011 was 59.6% (280,222). The annual fall of 19,985 (-7.1%) in the number of short term claimants consisted of a decrease of 14,140 (-8.8%) in the number of male short term claimants and a decrease of 5,845 (-4.9%) in female short term claimants."

Now, when you think about it, the long term unemployed numbers include (or are net of) those who lose their benefits due to duration and changes in family circumstances. They are also net of those who leave the LR deciding to emigrate. These effects are much less pronounced for the shorter-term unemployed. And yet, the long term unemployment continues to rise. Not, that is something you won't hear in the Irish media either. Never mind, the 'experts' Irish broadcast editors pick for their panels are smart & do original research, aren't they?

Youth unemployment next: Per CSO "In the year to July 2012 the number of persons aged 25 and over on the Live Register decreased by 1,340 (-0.4%), and the number of persons aged under 25 decreased by 8,621 (-9.7%). Annual decreases in persons aged under 25 have occurred in all months since July 2010. The percentage of persons aged under 25 on the Live Register now stands at 17.5% for July 2012, down from 19.0% in July 2011 and 20.3 % in July 2010." These are NOT seasonally-adjusted figures, so y/y comparatives is all that matters and the news is decent here - at a headline level. Alas, we have no idea whether the young unemployed are getting new jobs or simply emigrate, though given the reduction in LR benefits for the younger workers, most likely they have a stronger incentive to emigrate. They also have a much better ability to do so, due to visa restrictions differences by age and lack of debt chain holding them back in Ireland.

One related sub-theme is that of the quality of employment out there. No direct gauge for it in the LR, but a glimpse via the numbers of casual and part-time signees on LR. per CSO: "There were 88,041 casual and part-time workers on the Live Register in July, which represents 19.1% of the total Live Register. This compares with 18.3% one year earlier when there were 85,865 casual and part-time workers on the Live Register. In the year to July 2012 the number of casual and part-time workers

increased by 2,176 (+2.5%)..." So while it is much better to have a casual or part-time job than not to have one, the trend remains the same - that of deteriorating, not improving quality of opportunities.

Nationals v Non-Nationals breakdown shows a slight decline in the proportion of LR recipients who are non-nationals. The fact that this decline has been very shallow and the fact that the numbers of national on the LR is declining at a similar percentage rate as that of non-nationals suggests that emigration is most likely fairly evenly spread between the two categories.

So much more 'speculative' analysis, if you want, but all pointing to either little change or deterioration in the underlying conditions relating to the labor market in Ireland.

1/8/2012: Live Register - Hidden Unemployment Rising

There's a boisterous chatter in the Irish media (unwilling to have any reality voices on the air anymore due to reasons unknown) about the latest headline numbers coming out of the Live Register for Ireland (July 2012 data released today).

Some of it is part-true. Some of it is part-spin. None of it is fully true. So in the next couple of posts I will be uncovering what the figures really do tell us. Stay tuned.

Let's start from the headline numbers:

• Standardized (Live Register-implied) unemployment rate remains intact at 14.8% in July, same as in June. The SUR is now between 14.7% and 14.8% every month since January 2012 and 14.8% is the highest point reached since the beginning of the crisis (hit first in February 2012). So headline story is: Irish Unemployment Remains at Record High for the Crisis.
• Last time we had 14.7-14.8% unemployment as measured by the Live Register was back in March-April 1994. Oh, that's right, 1994! Good news, folks, I guess is that it is still off 17.0 absolute record achieved back in December 1986-January 1987, though with a major caveat (see below).
• Want more 'good news'? Ok: crisis period average SUR is 13.5% and STDEV is 1.33, which means that the current rate of unemployment is more than 1/2 STDEV above the crisis period average.

Chart to illustrate the good news:

Bet you your local friendly radio presenter and their guests didn't mention the above, in fear of undermining your confidence in the economic turnaround.

But, hey, let's keep looking into the data:

• Overall numbers on Live Register (seasonally-adjusted) are currently at 437,300 (July) down 9,900 on July 2011 (-2.214%). This is good. M/m decline in July 2012 is 2,300 which contrasts with m/m rise in June of 2,500. Which is sort-of good: m/m decline is a good thing, m/m decline that doesn't fully offset previous m/m rise is not so good.
• Y/y June 2012 LR posted a decline of 6,200 (-1.39%) and this is now bettered by July decline of 9,900 (-2.21%). Which is good.
• 3mo average LR through July is 0.13% higher than 3mo average through April 2012. Not so good. Year on year, 3mo average LR is 1.77% lower in July. Which is good.

So the above is a mixed bag story. Yet, the story is hardly complete. You see, there are some 76,533 workers out there who are 'engaged' in State-sponsored Live Register Activation Programmes. The CSO has the following to say about them: "Persons on activation programmes are not counted as part of the monthly Live Register." Ugh? That's right - they get paid LR supplements. They don't work for actual pay. They are not unemployed and are not in receipt of state unemployment benefits. Let's add them to the LR, shall we?

Taking into account the numbers engaged in the LR Activation Programmes:

• There were 513,833 individuals in Ireland on LR as of June-July 2012 (note, Activation Programmes participation is reported with one month lag, just to make life hell for anyone trying to compile real figures).
• The above number represents an increase m/m on June's 501,516 (some 12,300 up). Year on year, the number of those in receipt of LR benefits is now up (not down) 1,680 (+0.33%) and that is worse than June y/y figure (up 1,429, or +0.29%).
• Recall that official Standardized Unemployment Rate is 14.8% on 437,300 LR recipients. This implies that counting those in Activation Programmes the real 'unemployment' rate is around 17% (17.4% more precisely, but there's a grey area of estimation errors around there).
• So the main headline, really, should be - total (official + hidden) unemployment in Ireland is up m/m and up y/y. Not down. Up!

Now, do me a favour (cause I can't find time to do this myself) - check with your local friendly radio / TV station and press - see if any of the 'incisive' analysts/guests/hosts/editors/journalists give you that sort of a breakdown on the numbers? 

Now don't take me wrong - some of these programmes are good, and it is generally positive that people are drawn to them. But until they gain full paying jobs post-completion, they remain unemployed. The Government has no right to write them off as 'not unemployed' by excluding them from the LR.