20/8/2012: Hungary - a country that can't?..

An interesting blogpost by Professor Steve Hanke on Hungarian economy's adventures in the crisis land.

Here's another look at Hungary (all data is via IMF WEO). Green boxes show ranges of values required for Hungary to effectively converge in economic development with top EU12 states and those that are consistent with long-term sustainability of public finances.

Fron the first chart it is clear that Hungary did well during the period from 1997 through 2006 in terms of real economic growth, but severely underperformed in terms of external balances. In fact, for the period 1995-2017 (incorporating IMF latest forecasts) Hungary operates within its means (in terms of current account balance) in only 4 years.

While current account deficit remained steady at worse than -7.0% of GDP in 1998-2008, little of this relates to investment supports. In fact, current account deficits vastly exceed the portion of the economic investment not financed by savings.

Per chart above, it is also clear that Hungarian investment has declined precipitously, as a share of GDP, from the peak 27.65% in 1998 to 23.54% in 2008 and fell to around 18% from 2012 on. Meanwhile, savings too trended down over the period 1995 through 2017. The economy is becoming less and less capable of generating investment-driven growth (and that is ignoring the issues of credit supply in the banking system etc).

Hungary's Government debt was relatively benign, compared to many european counterparts during the period of 1997-2006. However, the metric used (debt around 60% of GDP) ignores the reality of an economy that is still in catching up with the more advanced European states (including some post-transition economies, such as Czech Republic and Slovenia) in terms of income per capita and other macroeconomic parameters. Such catching up can only be aided by lower debt to GDP ratios and more investment.

In line with external deficits highlighted above, Hungary has run some extremely severe imbalances on both structural government deficit and net government borrowing (ordinary deficit) sides, as shown in the chart below. In terms of government deficit, Hungary was in the red, on average by 3.48% of GDP in the period pre-accession to the EU. Between 2001 and 2007 the deficit averaged massive 6.92% annually, declining to 2.3% of GDP in 2008-2012. The benign level of current deficit (2012 expected deficit of 3% of GDP comes on top of surplus of 3.96% in 2011) is only highlighting the fact that short-term corrections are no substitute for longer-term prudence. Between 1995 and 2012, Hungarian Government was operating within 3% deficit criterion for only 2 years.

Cumulated, the twin current and government deficits from 2000 on through 2012 are severe:

All of this suggests that Hungary suffers (at 80.45% of GDP in 2011) from a classic debt overhang problem exacerbated by the long-term poor performing fiscal deficits and current account dynamics. That these effects should be felt even at the level of debt traditionally considered to be relatively benign (Hungary's 5-year average Government debt through 2012 stands at 78% of GDP compared to 62% for the 5 year period between 2003 and 2007) is probably best explained by the country relatively lower ability to sustain even these levels of debt.

20/8/2012: ECB yield cap - more questions than answers?

So ECB is discussing putting an upper bound on euro area yields. One question: what 'bounds'?

Here's a chart (courtesy of http://rwer.wordpress.com/2012/08/19/graph-of-interest-rates-1995-to-2011-for-german-france-italy-spain-portugal-ireland-and-greece/ ) showing interest rates 1995-2011 for a number of euro area states.

Should the 'ceiling' be set at Greek, Italian, Spanish and Portuguese (GISP) yields pre-1995 (around 10% or above) or German, Irish and French (GIF) yields pre-1995 (around 6.0%) or 1999-2008 average (of ca 4.2%) or what? What should be a benchmark? The delusion of the euro turning ECB-targeted gospel or the (already optimistic) pre-euro rates reality? And can euro area finances be sustained at even around 6% yields?

After all, these are hardly trivial questions. Yields must reflect fiscal and monetary realities. Setting an artificial ceiling on them by definition means evading that reality (otherwise constraint will not bind). Does Italian reality justify 6% yield target? Does French reality do same? Is the current level of Greek yields reflective of the reversion to the fundamentals-warranted long-term historical mean (perhaps with some moderate overshooting in the short run) or should Greece really be treated distinctly from Germany, France, and even Italy?

Updated: more questions:

Suppose ECB does effectively cap bond yields. Then what? Will this restore growth to the Euro area? No. Deleverage households or corporates? No. Reduce pressure on taxes? Potentially marginally. Increase Gov's capacity to borrow to 'stimulate' economy? No. Reduce pressure on Governments to reform & incentivise more public spending? Yes. Decrease the Sovereign liquidity trap? Maybe. Increase banking sector liquidity trap? Possibly.

So the price of getting better sleep for politicians will be what? Real economy still in deep deleveraging & Governments slipping back into comfort zone of tax-borrow-spend economics? A logical denouement to the failed economic analysis that see sovereign debt crisis as the main source of economic decline in the euro area.

20/8/2012: China's 'This Time It's Different' turn?

Two charts and a table that are really self-explanatory. All via http://macromon.wordpress.com/:

This time, it's clearly very different...

19/8/2012: Gaffe of the week?

An interesting revelation comes the courtesy of one of our Senators: 

"It's very hard work. You have two-and-a-half to three weeks' work in one week. We start at 8 in the morning and don't finish until 5 or 6. That's a lot more work than a day at home."

In other words, Mrs Fidelma Healy Eames (Senator) has found herself working 2.5-3 times the normal week's work load by taking up work lasting from 8 am through 5-6 pm. Let's do the maths: 10 hours day span for working day is 2.5-3 times normal weekly time implies that 'normal' working hours for Mrs Eames are in the region of at most 10/2.5=4 hours. 

But let's give Mrs Eames some benefit of the doubt and suppose that she worked the horrific hours seven days a week with no lunch or other breaks, in which case her work load on her trip to Rwanda and Kenya was running at (7 days x 9 or 10 hours per day) = 63-70 hours per week. If that is 2.5-3 times the normal work load, our Senator undertakes back at home (in Ireland), her statement suggests working week of 21-28 hours per week in Ireland. 

By the way, average paid working hours in Civil Service and Defence sector in Ireland in Q1 2012 stood at 34.6 hours per week. And that is skewed down by part time workers taking lower hours.

18/8/2012: Irish Services Activity June 2012 & Q2 2012

Some interesting stats for Q2 2012 and June on Services sector activity in Ireland from CSO.

Headline stuff:

• The seasonally adjusted monthly services value index declined 1.3% in June 2012 m/m and there was an annual increase of 5.6%.
• Transportation and Storage (+4.6%), Other Services (+0.8%) and Accommodation and Food Service Activities (+0.1%) showed m/m increases in June 2012. 
• Wholesale and Retail Trade (-3.4%), Information and Communication (-2.7%) and Business Services (-0.3%) showed m/m decreases.
• Transportation and Storage (+14.7%), Information and Communication (+13.5%), Other Services (+4.5%) and Wholesale and Retail Trade (+3.2%) showed y/y increases in June 2012 when compared with June 2011. 
• Accommodation and Food Service Activities (-2.0) and Business Services (-0.3%) showed y/y decreases.
• Overall June monthly reading is the second highest in the series (since October 2009) with y/y growth in June at third highest since October 2010

Charts:

And Q2 2012 results (a bit more descriptive) are:

• Overall Services Sector activity is up 2.6% in Q2 2012 compared to Q1 2012 and up 5.2% on Q2 2011 - solid results.
• Wholesale & Retail Trade and repairs of vehicles & motorcycles services index is at 108.4 - up 0.5% q/q and 4/5% y/y, primarily driven by Wholesale Trade services (up 1.2% q/q and 10.7% y/y).
• Information and Communication services index is up 2.2% q/q, and up 11.5% y/y in Q2 2012.
• Business Services up 3.3% q/q, but down 0.5% y/y marking a third consecutive quarter of y/y contractions, albeit at much slower pace than -2.1% recorded in Q1 2012.
• Transportation and Storage services were up 9.2% q/q and up 13.4% y/y in Q2 2012.
• Accommodation and Food services were up 1.5% q/q, but down 2.6% y/y. Q2 2012 marked the fourth consecutive quarter of y/y contractions in the sub-index.
• Other services posted a rise of 4% q/q and 1.6% y/y, breaking the 5 consecutive quarters of y/y declines.

So nicely solid results from the sector, albeit subject to some caveats due to the nature of the data series.

18/8/2012: Tax Progressivity in Sweden 1968-2009

Very interesting research on tax progressivity using Swedish data:

Bengtsson, Niklas, Holmlund, Bertil and Waldenström, Daniel paper "Lifetime Versus Annual Tax Progressivity: Sweden, 1968-2009" (June 29, 2012, CESifo Working Paper Series No. 3856: http://ssrn.com/abstract=2098702) looked at the evolution of tax progressivity in Sweden from both annual and lifetime perspectives.

Per authors, "a fundamental problem with conventional assessments of tax burdens is that they typically rely on annual cross-sectional outcomes. Incomes vary over the life cycle, with young people often being low-income earners regardless of whether they will be high-paid surgeons or low- paid clerks in the future. Old-age pensioners typically do not pay payroll taxes, even though they may well earn more than younger individuals in the labor force. Capital gains are typically observable and taxed when they are realized rather than when they accrue, and such one- shot realizations may not accurately depict the lifetime income status or lifetime tax burden. Accounting for lifetime variations in both income and the ability to pay taxes is important for making a balanced assessment of the trade-off between the equity and efficiency of the tax system."

The paper looks at the implications of studying tax progressivity in an annual versus a lifetime perspective by exploiting a "rich data source with register information on the taxes paid and benefits received by a large and nationally representative sample of individuals".

The authors use a panel covering a 42-year period "to compute measures of “life- time tax progressivity”, relating information about actual lifetime tax payments and actual lifetime incomes for various parts of the distribution of lifetime incomes… The richness and size of our data – a sample size of approximately 200,000 individuals per year – allow us to compare narrow in- come segments at the top of the income distribution, such as percentiles and tenths of percentiles. Such focus is of particular relevance when pinpointing the differing impacts of labor and capital taxation."

Another major contribution of the study is "providing a comprehensive assessment of how the redistributive properties of the Swedish tax system have evolved in recent decades. The Swedish tax system has undergone major changes over the past 40 years. The overall tax burden has increased, and government tax revenues have gradually become more dependent on social security contributions and value-added taxes. Some specific reforms are particularly noteworthy. In 1971, the traditional system with joint taxation of married couples was replaced by a system in which each spouse pays taxes on his or her own income. The tax reform of 1991, called the “tax reform of the century” for its groundbreaking impact, involved substantial cuts in marginal income taxes along with the introduction of a dual income tax system in which earned income and capital income are taxed at different rates. More recent reforms include the abolition of the wealth tax as well as the introduction of a system with earned income tax credits."

Core results are:

First, the study finds that "lifetime tax progressivity is lower than tax progressivity in almost any single year. This finding is primarily due to the considerable within-life redistribution, where, e.g., the amounts received as student or old- age support almost offset the taxes as income earner."

Second, the authors "show that the discrepancy between annual and lifetime tax progressivity reflects the transitory nature of low-income status rather than the transitory nature of high income. Many of the individuals earning low or zero market income thus do not permanently belong to the bottom of the income distribution; they can be workers who are temporarily outside the labor market, unemployed, in educational programs or on sick leave. These individuals appear to be greatly “favored” by the tax-cum-benefit system when using annual data as opposed to lifetime estimates. By contrast, transitory high-income shocks, such as those caused by large realized capital gains, fall mainly on those who have already high permanent incomes. At the top of the income distribution, annual progressivity estimates therefore correlate highly with lifetime tax burdens."

Third, the authors "document the evolution of Swedish tax progressivity and find that it has followed an inverted U-shape over the past four decades, increasing sharply in the 1970s and dropping in the 1990s and 2000s. …When only actual taxes are considered, the primary source of the variation in progressivity appears to be changes in the tax system, in particular the tax reforms of 1971 and 1991, rather than trends in the distribution of market incomes. The dramatic rise in unemployment – and thus associated transfers – during the economic crisis of the 1990s increased the degree of tax-and-transfer progressively."

Moreover, "comparing Sweden’s experience with progressivity with that of Great Britain and the U.S., taxes in Sweden appear less progressive, primarily due to the high levels of income and payroll taxes paid by low-income earners."

Lastly, the study "decomposition of tax bases, in which we include not only different income taxes but also pay- roll, wealth and consumption taxes, reveals drastic restructuring over the study period. In particular, payroll taxes have become increasingly important, whereas capital taxation (including taxes on capital income, real estate, and wealth) has diminished substantially."

A neat summary in charts:

18/8/2012: What the IDA forecasts don't tell us?

I waited for several days before posting about the latest mystery of Irish statistics. 

This presentation from IDA contains the following chart:

Now, IDA is correct in highlighting the Current Account as a key to our recovery 'policies'. For a number of reasons:

1. In virtually all debt overhang recessions in the past, return to positive surpluses on current account were required as a necessary, albeit not always sufficient, condition to restore economy to a stable path
2. In Ireland, we have witnessed some significant improvements in the Current Account so far during the Great Recession

Alas, the above chart is a mystery to me. Let me explain.

Firstly, it cites CSO as the source of the chart. I have contacted CSO about their 'forecasts' for 2012-2017 period for the Current Account and their reply was: 

"Having consulted with my colleagues they assure me that they do not produce forecasts, let alone five year forecasts. Furthermore, my colleague suggested that the figures might be derived from a paper published by the Dept. of Finance (page 9): http://budget.gov.ie/budgets/2012/Documents/Economic%20and%20Fiscal%20Outlook.pdf It should be stressed, however, that these figures are the department's and not the CSO's."

Now, here are two forecasts for Ireland's Current Account known to me, sourced from the updated IMF database (July 2012 update to WEO database) and the above link from the Department of Finance:

Clearly, no source, bar IMF projects anything beyond 2015. Also, clearly, even the IMF projections appear (one can't really properly read IDA chart) to be as 'upbeat' as IDA's chart in 2013-2017 projections range. 

But wait, recall that IMF is providing a forecast, based on their central tendency scenario. They also provide useful assumptions and data that went into their scenarios assessments which allow us to compute historical confidence intervals for their own forecast. And, ahem, it turns out the IMF 'central' tendency forecast - illustrated above - firmly falls outside the reasonable 90% single tail confidence interval (adjusting for sample size, but caveating this). In other words, it is improbable, were historical Irish performance on current account balance to be out guide. The same applies to the stress-testing metric on current accounts used by the IMF - the primary current account balances (current account ex-interest payments).

So the IMF forecasts above assume massive change in Irish current account performance relative to history, the change that - may be IDA can expand on this - is supposed to come in the environment of adverse global trading conditions, pharma cliff hitting Irish exports, and re-orientation of trade flows worldwide away from North-South shipments of higher value added goods and services toward South-South flows.

But wait, things are actually worse than that. DofF forecasts deviate from the average for the above sources ex-DofF by a cumulative 1.7% of GDP and from those by the IMF by a cumulative of 2.5% of GDP for the period 2011-2015, which means that DofF forecasts are even less probabilistically likely to materialise than those for the IMF.

Even were the IMF to materialise, Ireland's current account surplus in 2012-2017 will be 2.78% of GDP on average - an impressive swing from a recent historical performance, yet contrasted by the economy with ca 120% debt/GDP metric on Government side alone! Anyone out there really thinking this is going to be a silver bullet for our economy?

So things are a bit less rosy than the IDA seems willing to admit to the prospective Foreign Direct Investors and the media. 

16/8/2012: €1.05 trillion bad loans + €2-2.5 trillion deleveraging problems

I twitted about the PWC stats on non-performing loans based on German newspaper report earlier today, and here's WSJ article on same. Frightening numbers.

16/8/2012: Italy's 'this time, it's different' moment

This time it's different for Italy now... according to an excellent article by Charles Wyplosz here. Read the whole thing, Wyplosz is excellent on the basics of the Italian situation.

Update: new link to the article.

16/8/2012: Financial Repression - Round 2

Financial repression continues to gain speed in Ireland: link here.

Basic idea: having raided actual pensions funds, the Irish Government is to issue special annuities (priced accordingly to reflect State's 'grudging acceptance' for now of the pensions tax break) for insurance and pensions providers.

The good part of the idea is, as Fitch points in the note, added funding stream for the Government.

The bad parts are, as Fitch does not bother to note:

• Deleveraging economy means that funds will be taken out of the already diminished private investment stream, should the annuities be successful in raising such funds;
• Risks of claims exposure to Ireland for Ireland-based providers will now be amplified by more assets tied to Ireland (de-diversification);
• The new funding is debt, priced more expensively than what we can avail of from the Troika programme and subsequently from the ESM (at least access to and the cheapness of the ESM funds was the Government-own rationale for convincing the voters to back the Fiscal Compact earlier this year - something that the rating agencies have confirmed, as I recall);
• The new funding is still debt, which means that the new 'source' is not going to help restoring Irish public finances to sustainability path;
• Payments on these annuities will be subject to the same seepage out to imports (consumption of recipient households) as any other income and thus will have lower impact on our GDP, and an even worse impact on our GNP, than were the annuities structured using foreign governments' bonds;
• Share of the Irish state liabilities held by domestic investors will rise, which automatically implies riskier profile for both: Exchequer future funding and pensions;
• The latter (pensions funding risk profile deterioration) will also induce higher expected value of future unfunded liabilities (basically, as risk of pensions funding rises, probability of claims on state in the future to fund public pensions rises as well), and so on.

But, hey, why would the Irish State bother with any of these concerns when they've found another quick fix to €3-5 billion of our cash?

And on a more macro level, financial repression is back on the EU agenda too. The latest spike in French rhetoric about the need for 'own-funding' of the EU operations (link here) is just that, have no doubt. The idea is to give EU some central taxation powers so, as claim goes, it reduces the 'burden' on national governments. So far so good? Not exactly. Neither the French, nor any other Government in Europe at this stage is planning to 'rebate' (or reduce) internal tax burdens to compensate for EU new tax burden. In other words, the Governments ill simply pocket the 'savings'. Which, to put it simply, means the new 'powers' will simply be new taxes for the already heavily over-taxed and recession-weakened economies of Europe.

All in the name of deleveraging the State at the expense of the real economy. And that is exactly what the financial repression is all about.

Updated: And just in case we need more 'creative' thinking, here's an example of financial suppression: It turns out Nama (Irish State Bad Bank - don't argue that SPV thingy, please) should use public purse to suppress normal price discovery processes in Irish property markets. Right... you really can't make this up. Irish elites are now so desperate for relevance, they are fishing that Confidence Genie anytime anyone is feigning some attention to what they have to say.

15/8/2012: Total Insolvency in Greece Meets Total Denial in Europe

And so as predicted here back in February, Greece is now in a complete meltdown when it comes to fiscal targets (report here). The only thing that is keeping this Euro charade still rolling is seemingly endless willingness of the European 'leaders' to deny the reality of Greek complete and total insolvency.

13/8/2012: Telling tales about our 'Productivity'?

IDA recently used the following chart in the context of Irish competitiveness comparatives to the rest of EEC:

According to the above, Irish labour productivity per person employed is at 136.9% of the EU27 average, which makes us the second most productive economy in the Euro Area and the third most productive in the EEC. Of course, the thing that jumps out in the chart is the massive over-performance in output terms by two other 'special' countries: Luxembourg and Norway. This should ring lots of alarm bells when it comes to trusting the above data to base actual comparative assessments on.

It turns out that adjusting our productivity performance for GDP/GNP gap so as to remove the portion of our output that has absolutely no anchoring in Ireland (net after-tax factor payments to foreign investors) implies Irish productivity index at around 102-106% of the EU27 average, placing us below-to-just-above Germany and ahead of Greece.

I wouldn't argue that that is indeed where we are positioned, but rather that the chart used by IDA is simply reflective of vastly over-inflated real productivity of our workforce, just as it is for Norway (petro-dollars economy) and Lux (an economy with massively undercounted non-resident workforce and an industrial scale 'dry cleaning laundry' for European, EEC & Eastern European corporates).