14/9/2012: Another Indo 'Property Boom Cometh' Missive

An interesting article in the Indo on house prices vs debate about the property tax or site value tax - link here.

A key phrase that caught my eye is: "CSO reports show that prices increased in Dublin".

The latest CSO report we have is that covering data through July 2012, which states:

• Dublin All Residential Properties: June prices down 1.0% m/m (down 0.3% on 3 mo before June, down 16.4% on 12 month to June 2012); July prices down 0.3% m/m (down 1.2% on 3mo before and down 16.6% on 12 mo before);
• Dublin Houses: June down 0.8% m/m (0.2% on 3 mo ago, down 16.4% y/y) and July down 0.2% m/m (down 0.5% on 3mo ago and down 16.7% on a year ago);
• Dublin Apartments down m/m, on 3mo and y/y in May, June and in July down 3.9% m/m, down 8.6% on 3 mo previous and down 19.6% on 12 mo ago.

So unless Indo has either discovered some new data set from CSO, or it has some CSO data on dog houses and parking spots in Dublin (all of which might have gone up in July), then what on earth are they talking about?

14/9/2012: Russian CB raises rates

Bank of Russia hiked key refinancing rate to 8.25 by 25bps on the foot of rising inflation pressures, with current rate back at the levels seen last in November 2011. The bank also hiked overnight repo rate to 5.5% and deposit rate to 4.25%.

Inflation in agricultural commodities is the core driver as Russia raised some food tariffs and as weaker crops bit into domestic supply. Imports demand for agricultural goods and relative pressure on the ruble vis USD are additional factors.

The signal from the BR is relatively clear: although Russian economic growth has been under some pressure in H1 2012, inflation is back on the rise, hitting 5.9% in August up on record low of 3.6% back in Q2 2012. BR target is for inflation at 5-6% so the move is reactionary, rather than precautious. The balance in BR decision is between containing inflation and political fallout from rising food prices, associated pressure on the ruble, against the corporate sector demand for capital. In other words, the BR is comfortable with the overall levels of investment in the economy in the short run. This highlights the dilema faced by the Russian policymakers, who are aware that Russia needs to push up domestic investment in core areas where capital modernization is desperately required: manufacturing and industrial base, as well as basic infrastructure. This longer term objective is likely to be supported by a combination of public investment and incentives for longer term private investment. With this in mind, recent restructuring of the Russian SWF and easing of the new SWF mandate to invest in a range of financial instruments, including listed equities.

Chart for Russian CPI forecasts:

13/9/2012: Buying more time for the Euro

My recent analysis of the ECB announcement of the OMT in The Globe & Mail

11/9/2012: Inherent limit to artificial intelligence?

In a rather common departure from economics (as defined by rational expectations subset of the discipline) on this blog - here's a fascinating thinking about the artificial intelligence and the bounds of model-induced systems.

Especially close to me, as it explores that which I thought about back in 2003-2004 when I wrote an essay on the role of leaps of faith (irrational and discontinuous jumps in human creativity and thinking) as the foundation for humanity and, thus, a foundation for recognition of the property rights over uncertainty.

10/9/2012: Ireland's flop in securing European Science Funding

Departing from the IMF, European Research Council has released the list of 2012 winning projects that obtained financial support from the Council under the ERC Starting Grant results, totaling €800 million. The link to the list is here.

Now, a quick run through the headline results:

• Ireland scored 4 projects (2 each for TCD and UCD)
• Portugal (not a country we in Ireland usually associate with being the Land of Scholars) scored same as Ireland
• Israel scored 24 projects
• Austria 9 projects
• Belgium 19 projects
• Switzerland 33 projects
• Netherlands scored 51 project
• Finland 8 projects
• Denmark 13 projects
• Sweden 22 projects
• And to add insult to our injury: University of Bristol (UK) and University of Edinburgh scored 5 projects each (more than the entire country of Ireland), while University of Warwick 4 projects (same as Ireland as a whole)
• University College London scored 16 projects
• In some consolation, powerhouse of knowledge, Northern Ireland, scored none

Here's a handy chart from ERC:

But wait, it gets worse. When broken down by nationality of grantees, Ireland has 7 Irish nationals granted research proposals:

Which includes more Irish national academics working ABROAD than in Ireland:

And, among the researchers who got grants in Ireland, there are a number of non-nationals:

You can check the above in here.

So that strategy on funding and managing research in Ireland - it is clearly working marvels... oh, and do you now think Irish Universities poor rankings have nothing to do with real world outcomes?..

10/9/2012: Corporate debt iceberg

Another topic, much ignored by the Irish media and the Government and covered by the IMF in today's releases is the corporate debt.

The chart below shows the extent of debt overhang in Ireland:

Here's what IMF has to say on that (emphasis mine):
"Despite an overall decline in corporate debt, an increasing number of firms are facing difficulties covering interest payments on debt. Interest coverage ratios [ratio of earnings before interest and taxes (EBIT) to interest expenses] have declined, with the interest coverage for the median firm having decreased from 6.9 in 2002 to 0.8 in 2009, and with an increasing number of firms not generating sufficient income to cover interest payments on outstanding debt. ... Moreover, the interest coverage is markedly lower for SMEs, with a median of 0.8 compared to 1.9 for large firms. The decline in firm profitability associated with depressed demand is playing an important role in the reduction in interest coverage ratio. This suggests that financing constraints are particularly important among SMEs and in property-related sectors."

In other words, whatever supply of credit is doing, demand for credit is severely constrained by deterioration in firms' financial sustainability.

Although "Leverage for the median firm (which is a small firm) has fallen to 46 percent of equity, with the usage of bank debt showing a similar decline. The data also indicate that trade credit and other non-debt liabilities play an important role in the financing of SMEs, together with internal financing from retained earnings." Although leverage overall has dropped, debt affordability has fallen off the cliff:

Why? "The decline in firm profitability associated with depressed demand is playing an important role in the reduction in interest coverage ratio. This suggests that financing constraints are particularly important among SMEs and in property-related sectors."


So what can be done? Here's the list of IMF outlined options:


"Credit guarantees or subsidies on SME loans can in principle stimulate SME financing. ... Until recently, Ireland was one of the few OECD countries without some form of loan guarantee scheme. ...However, the international experience with SME lending schemes is mixed. ...Moreover, the historical experience shows that credit guarantee schemes can only be effective when there are competent, financially sound banks, with adequate staff to effectively screen and monitor SME loans. ...

Government support for SMEs will need to be complemented with progress in improving the operational capacity of banks to work out loans. The restructuring of SMEs on a case-by-case basis is resource intensive yet important to ensure that where a viable core business exists, that it has the possibility to invest and grow, and contribute to broader economic recovery.

Considering the number of SMEs, it would not be appropriate to rely principally on court-based bankruptcy procedures. Rather, banks will need to build their capacity to design and implement work outs though out-of-court workout processes. Drawing on international expertise may well be needed to help major banks build capacity in this area.

The government could also explore ways to facilitate the securitization of SME loans. However, liquidity premia currently demanded by market participants even on senior
tranches, plus the inability of the Irish government to offer substantial credit enhancements
on such securitizations given the low sovereign credit rating, imply that, at least for the
moment, the market for securitization of SME loans is limited."

So, in other words: NOTHING can be done on the scale required. We are boxed into the corner with SMEs debt overhang too. All state resources and economy's resources wasted on rescuing the banks bondholdres, folks. No powder left for the rest of the economy. Sit tight and pray for a miracle.



Aside: An interesting observation via the IMF concerning the links between the negative equity and property values and firms formation: "With depressed home prices it has become more difficult to finance a new firm using home equity, which has hampered job creation."

10/9/2012: Insane path of Irish 'wealth'

Another interesting chart from the IMF reports today:

Now, look at the red line - Net Wealth in Ireland, which has dropped to levels below those in Q1 2002, while housheolds' total taxes (VAT and Income taxes combined, excluding other) has ballooned from €17.96bn in 2002 to €23.54bn in 2011. So let's do a simple mental exercise: net wealth is down ca 30%, household taxes are up ca 31%... and we are supposed to:

• Deleverage our own debt
• Deleverage the banks-related debts of the Exchequer

What a better illustration of madness can one find? Oh, wait, I know - the Armchair Socialists' one: "Ireland is a very wealthy country and we must tax wealth to extract funds for the Government". Alas, we are rich... rich as we were more than 10 years ago. Since 2002, folks, it's not the wealth of ours that grew, but the appetite of the State for our wealth.

10/9/2012: Irish Households Debt Overhang: IMF note

IMF published today three papers relating to Ireland's economy. Each of interest on its own merit and I intend to blog about them.

However, here's a chart that actually summarizes pretty well both the extent of the Irish crisis and the sorry state of affairs expected as we exit it:

Here's IMF's explanation for the household deleveraging process out of what is - by the standards of the chart above - a historically unprecedented debt overhang.


"Under the current forecast, households would reduce debt gradually from about  210 percent of disposable income to 185 percent by 2017. Building on the forecast of the
savings rate, the debt path is calculated based on the IMF desk forecast for a muted recovery
of disposable incomes at below GDP growth. Further, the debt path assumes that households use about half of their savings to retire debt, and new lending growth remains moderate, increasing from 1.6  percent of GDP in 2012 to 5.3 percent by 2017."

Now, give it a thought, folks.

1. Irish crisis in mortgages is well in excess of anything represented in the above chart;
2. Irish deleveraging over 9 years (2009-2017) will yield mortgages debt reduction of just 25 percentage points even if we use half of our entire savings to pay down the debts;
3. This painful deleveraging will still Ireland's mortgages markets in wore shape in 2017 than the second worst peak  of the crisis (the UK) back in 2007.

And here's the chart showing that all the debt paydown to-date has had zero effect on arresting the degree of Irish households leveraging (debt/asset value ratio) as underlying asset values of Irish properties continue to fall:

It is clear from the above that the Irish Government is out to lunch when it comes to dealing with the most pressing crisis we face - the crisis of severe debt overhang on households' balancesheets.

9/9/2012: Ireland's stellar exports performance?

Three charts that put to the test one of our greatest claims to fame - the claim that Ireland is one of the world leaders in exports performance.

Charts above clearly show that Ireland's performance in exports growth was rather spectacular in the 1990s, strong in 2000-2004 period and below average in 2005-2009 period. However, in 2010-2012 period - the very period when, according to our Government we are experiencing dramatic growth in exports - Ireland's exports performance is, in fact, well below the average for our peers.

As the result of this, despite an absolutely massive collapse in imports, Irish current account performance (external balance that is supposedly - per Government and official analysts, and the likes of Brugel think-tank heads - going to rescue us from the massive debt overhang we have) is underwhelming:

9/9/2012: September Euro area bonds supply

September 2012 bonds supply and auctions for euro area countries (via Morgan Stanley):

9/9/2012: Some pretty big moves in CDS markets

Here are the moves in sovereign CDS since April 1, 2012 through last week.

7/9/2012: Theobroma cacao is not a placebo to cognitive ability

One of really cool studies that really shows economics is much more than dismal science:

The paper by Savastano, titled "The Impact of Soft Traits and Cognitive Abilities on Life Outcomes" (link here) "combines neuroscience, psychology, and behavioral economics to empirically analyze the extent to which academic achievement, the relative weight of rationality vs. fairness in decision-making, and life satisfaction are affected by cognitive ability, persistent personality traits, and short-term stimuli based on psychological priming techniques."

The paper sets an experiment: "Prior to undertaking a course exam and playing the role of the respondent in an ultimatum game, a group of Masters and PhD students were stimulated either emotionally (via chocolate tasting) or rationally (via mathematical problem solving)."

The experiment involved "a chocolate tasting ...on a sample of 83 graduate students who were asked to play the role of the respondent in a one-shot ultimatum game against a computer. A sub-sample of 50 students also undertook one of their exams of their M.Sc or first year of the PhD program in Economics right after receiving the treatment. Students were also asked to complete a standard Big Five Test which was complemented by an Emotion Regulation (ER) Tests to allow disentangling broader aspects of their personality." Other controls were implemented as well.

The core questions were:

1. "how personality traits (Big Five and ER scores) and cognitive abilities (proxied by past school performance) affect educational outcomes, namely the exam score for the two subsamples of students who, respectively, had chocolate or were rationally stimulated prior to undertaking this stressful activity;
2.  the nexus between short-term and long-term determinants of life satisfaction, as well as the extent to which personality traits can help to explain subjective assessment of well-being; and
3. the relationship between personality traits and cognitive abilities on the threshold value of acceptance of the ultimatum game, therefore on rational choices.

Core results are:

1. "This analysis brings good news for “chocolate and its derivatives” lovers. Theobroma cacao is not a placebo; it is statistically confirmed that the brown nectar provides individuals with a shot of positive energy that helps them feel happier. 
2. "If a piece of chocolate is also associated with “positive” soft personality traits, one can also experience some form of persistence in life satisfaction, or other life outcome. 
3. "Like any other external and exogenous shocks, the long-term effects are the sum of different factors, and the relative weight associated to it. There can be a positive relationship between a positive (negative) shock and its short-term impact. 
4. "However cognitive abilities, enduring positive personal traits and rationality help to mitigate the effects in the long-run, when individuals use reappraisal and revise their initial expectations, which together lead to more rational choices. 
5. "It appears that the homo economicus hypothesis is justified in the long term, but subject to the weight of emotionality in the short- run.

If you might think this is all just esoteric academism, don't. The author provides an example of where this knowledge can be applied to specific industry outcomes analysis, e.g. farming.