7/12/2012: Irish Services Index - October 2012

The latest data on Services Sector activity in Ireland for october 2012 is very encouraging and reflective of the underlying growth signaled by previous PMI in Services readings.

Headline CSO-published monthly Services Activity Index for non-financial services in Ireland rose 3.8% m/m in October (after weak -2.4% m/m reading in September) and is now standing at 107.0 - an all-time high. Note, data for these series runs only from October 2010. Year on year the index is now up 10% on October 2012, the first time annual rate of growth hit double-digits expansion in series history. 

Removing some of the volatility, 3mo MA is now at 105.3 - the highest it has ever been. Solid upward push well beyond the already upward-sloping trend is very encouraging. 3mo MA in 3 months through July 2012 was 105.0 - also strong reading, especially compared to 98.7 3mo MA through October 2011.

Growth rates are impressive: 3mo average growth rate through October is 6.7% on annualized basis, ahead of 6.1 reading for 3mo average through July 2012 (although m/m rate is 0.63%, well below previous 3mo average of 1.2%).

Decomposition by sub-sectors is also solidly expansionary:

• Wholesale and Retail Trade index rose to 115.3 in october, up 6.2% on September (following m/m fall-off of 2.6% in September) and up 10.5% y/y - the fastest pace of annual expansion in series history. 3mo MA is at 111.8 ahead of 3mo MA through July 2012 which stood at 110 and well ahead of 3mo MA through October 2011 (104.7). Average monthly rate of growth remained 1.33% in August-October, same as in May-July 2012. Annual rate of expansion based on 3mo MA series is now at 6.8% well ahead of 6.2% recorded for 3mo through July.
• All of activity in the wholesale and Retail Trade came in from Wholesale Trade side, with Wholesale Trade index rising to a historic high of 128.7 (+8% m/, and +15.4% y/y). Wholesale activity was booming, which might be a net positive to the holidays sales season. 
• In ICT services, activity rose 1.2% m/m and 6.5% y/y to 107.7. This only partially reversed the contraction of 2.8% m/m recorded in September 2012. The annualized rate of growth in the sub-sector slowed down to 6.5% in october from 7.3% in September. Thus, 3mo MA series are less impressive in dynamics: 2012 3mo MA through October stood at 107.9, down on 111.3 3mo MA for period through July 2012, but still well ahead of the 3mo MA through October 2011 (101.7). 
• The sector is pivotal to our exports and the fact that annualized rate of growth fell to the 3mo MA of 6.1% in August-October compared to 12.5% for the 3mo period through July 2012 is a bit of a concern. Still, I am happy to take 6.1% growth in the current global environment.
• Business Services index rose to 107.8 in October, the highest reading on record, with m/m growth of 6.3% (fully reversing the slide of 1.2% recoded in September). Year on ear the series up 10.7%. 3mo MA series are showing similar performance to the core index: 3mo MA through October is at 104.5, slightly up on 3mo MA through July 2012 (104.0) and significantly up y/y (100.5 recorded in 3mo through October 2011). Surprisingly, Business Services activity m/m expansion rate has slowed down over the last 3 months from the average of +2.3% m/m in May-July 2012 to an average of +0.9% in August-October. However, annual rate of expansion picked up from +0.4% in 3mo through July to +4.2% in 3mo through October.
• Transportation and Storage sector activity rose marginally from 113.0 in September to 113.4 in October. The sector failed to recover from a 1% m/m slide in September, gaining just 0.4% m/m in October. However, annual rates of growth in the sector are now running at double digits for 7 consecutive months and the rate of expansion has accelerated to 17.6% in October 2012, marking the fastest annual rate of growth in the sub-index history.
• Accommodation and Food sector activity slipped for the second month in a row. 3.1% m/m drop in September was followed by a 0.3% slip in October. 3mo MA for the index is now at 91.6, against 3mo MA through July of 89.4 and 3mo MA through October 2011 of 87.8. The sector has been a major disappointment in terms of activity since the start of the series.
• Other Services also showed persistent weakness in recent months - the fall m/m in the subindex of 0.8% in September was moderated by a rise of 0.7% in October, but overall the index is a relative laggard in the entire Services group, performing worse than even Accommodation & Food. 

So on the net, very robust index performance for Services sector activity, with good strengths in terms of 3mo MA trends in Wholesale Trade, Business Services, and Transportation & Storage, relatively steady performance in ICT services and continued weaknesses in Accommodation & Food and Other Services sub-sectors.

6/12/2012: 2008 and the Confidence Fairy

An interesting paper on euro area levels of financial stress arising from household debt (here). Do note that data on which this is based refers to 2008 survey, so is pretty dated by all possible means.

Recall that back in 2008 no one in the Official Ireland was even slightly concerned with household debt levels. I recall AIB senior banking team making rounds through the brokerage houses in late 2008 blabbing out mythological stuff like: "Irish people do not default on mortgages" and "Not a single cent from the State".

Yet, the data in the link above clearly shows that Ireland was already building up some serious payments problems:

Figure 1: Proportion of the population in a critical situation with respect to arrears and outstanding amounts by poverty status, 2008 (% of specified population) - Source: Eurostat 2008 ad-hoc module 'Over-indebtedness and financial exclusion'

Note that for the vulnerable population group, Ireland sports the 5th highest rate of stress in the EU.

But the really interesting chart is the following one:

Figure 6: Expectation for the financial situation for the forthcoming 12 months, 2008 (%) (NB: Households could also answer ‘to stay about the same’ or ‘don’t know’)

The above shows the following interesting fact: in 2008, Irish people had a pretty reasonably average ratio of optimism to pessimism. This ratio is roughly consistent with that in France, Belgium, Slovenia and the Netherlands. Our optimism for 12 months ahead was higher than the EU27 average and our pessimism levels were below those for any other bailout country. In other words, that confidence fairy was working our way... and the outcome of that was...

6/12/2012: Why was development land left out of Property Tax net?

The Government published the long-delayed and super-secret until now Thornhill Group report into the structuring of the property tax. One point that the report raises is:

"The Group notes the recommendation of the 2009 Commission on Taxation for a recurrent tax on zoned development land and suggests consideration be given to the proposal with a view to supporting proper long term planning and sustainable development. "

Now, the Government has opted for a property tax based on 'market value' assessment. However:

1. Land is property
2. Land has market value that can be assessed

Why is development land, zoned land, any other land not covered by the Property Tax?

Budget 2013 measures clearly subsidize financially-instrumented property speculators over those who invest in more efficient use of their homes. With exemption of development land from the tax net, the Budget also subsidizes land banking and land speculation. Once again, at the expense of ordinary homeowners.

5/12/2012: Pre-Budget 2013 tunes

Ireland's pre-Budget 2013 arithmetic:

• Budget 2013 Cuts & Tax hikes = €3.5 billion
• IL&P (bust state-owned 'bank') bonds repayments January 2013 = €2.45 billion
• Promo Note (IBRC - toxic loans dump) repayment March 2013 = €3.1 billion
• Interest on Government debt: 2011 = €3.9 billion, 2012 = €5.7 billion, 2013 = €8.1 billion, 2012-2013 increase of €2.4 billion
• Adding things up: -€3.5 billion adjustment + €5.55 billion 'banks' wastage + €2.4 billion increase in Ireland financing for "our partners' help" = net €4.45 billion will be sucked out of this economy by pure policy psychosis.
• 69% of the entire annual adjustment on fiscal side, even assuming it will be delivered in the end, will go to fund increases in Government debt servicing in 2013 compared to 2012. These funds will be largely remitted to Ireland's new 'best friends' - the Troika and Franklin Templeton funds.

Now, good luck listening to today's Budget 2013 announcements by our Minister for 'Friends' Finance.

4/12/2012: Irish Exchequer Returns Jan-Nov 2012

So 2013 Budget will be expected to deliver 'cuts' and 'revenue measures' to bring fiscal stance €3.5 billion closer (or so the claim goes) to the balance. Which prompted the Eamon Gilmore to utter this:
"It is the budget that is going to get us to 85% of the adjustment that has to be made, and will therefore put the end in sight for these types of measures and these types of budgets".

Right. €3.5 billion will be added to the annual coffers on expectation side comes tomorrow. €3 billion will be subtracted on actual side comes March 2013 for the ritual burning of the promo notes repayments, and IL&P - the insolvent zombie bank owned by the state - will repay €2.45 billion worth of bonds using Government money comes second week of January. I guess, something is in sight, while something is a certainty-equivalent. €3.5 billion 'adjustments' vs €5.5 billion bonfire.

Six years into this shambolic 'austerity heroism' and we are, where we are:

1. On expectations forward, the Government will still have fiscal deficit of 7.5% of GDP in the end of 2013, should Gilmore's 'end in sight' hopes materialise. That is set off against pre-banks measures deficit of 7.3% in 2008. In fact, the 'end' will not be in sight even into 2017, when the IMF forecasts Irish Government deficit to be -1.8% - well within the EU 3% bounds, but still consistent with Government overspending compared to revenues.
2. Overall Government balance ex-banks supports in Ireland in 2012 will stand around 8.3% of GDP. In 2013 it is expected to hit 7.5% of GDP. The peak of insolvency was 11.5% of GDP in 2009, which means that by 2013 end we have closed 4 percentage points of GDP in fiscal deficits out of 8.5 percentage points adjustment required for 2009-2015 period. In Mr Gilmore's terms, we would have traveled not 85% of the road, but 47% of the road.

But wait, there's more. Here's a snapshot of the latest Exchequer returns for January-November 2012:

• Government tax revenue has fell 0.5% below the target with the shortfall of €171 million and although tax revenues were €1.96 billion ahead of same period (January-November) 2011, stripping out reclassifications of USC and the delayed tax receipts from 2011 carried over to 2012, this year tax receipts are running up 4.5% year on year.
• Keep in mind that target refers not to the Budget 2012 targets, but to revised targets of April 2012. 
• Meanwhile, Net Voted Government Expenditure came in at 0.6% above target. 
• So in a sum, on annualized basis, expenditure running 1.03% ahead of projections and revenue is running 0.86% below target. All of the sudden, the case of 'best boy in class' starts to look silly.

Things are even worse when you look at the expenditure side closer.

• Total Net Voted Expenditure came in at €40,635 million in 11 months through November 2012, which is €26 million above last year's, and  is 0.6% ahead of target set out in April. In other words, Ireland's heroic efforts to contain runaway public sector costs have yielded savings of €26 million in 11 months through November 2012.
• All of the net savings relative to target came in from the Capital side of expenditure, which is 20.5% below t2011 levels(-€629 million). Now, full year target savings on capital side are €562 million, which means that capital spending cuts have already overcompensated the expenditure cuts by €67 million. 
• On current expenditure side things are much worse. Relative to target, current spending is running at +1.7% (excess of €654 million). It was supposed to run at -1.6% reduction compared to 2011 for the full year 2012, but is currently running at +1.6% compared to Jan-Nov 2011. The swing is over €1.2 billion of overspend.
• Recall that in 2011 Irish Government expropriated €470 million worth of pensions funds through the 0.6% pensions levy in order to fund its glamorous Jobs Initiative. It now has cut €629 million from capital spending budget or €405 million more than it planned. In effect, thus, the entire pensions grab went to fund not Jobs Initiative, but current spending by the state.
• The savage austerity this Government allegedly unleashed saved on the net €26 million in 11 months. Pathetic does not even begin to describe this policy of destroying the future of the economy to achieve effectively absolutely nothing in terms of structural adjustments.
• The overspend took place, predictably, and at least to some extent justifiably by Health and Social Welfare. However, two other departments have posted excess spending compared to the target: Public Expenditure & Shambles-- err Reforms -- posted excess spending overall, while Transport, Tourism and Sport has managed to overspend on the current spending side of things.

On the balance side of things, stripping out banks measures and capital cuts, but retaining reclassifications of revenues and carry-over of revenues from 2011 into 2012, overall current account balance deficit was €9.626 billion in 2012, contrasted by the deficit of €9.712 billion in 2011. This suggests that the Government has managed to reduce the deficit on current account side by €86 million,

Laughable as this sounds, stripping out carry over revenues from 2011, the deficit on current side of the Exchequer finances was €9.45 billion in 2011 and that rose to €9.97 billion in 2012. Which means that the actual current account deficit is not falling, but rising.

Now, let's control for banks measures:

• In 2011 Irish state spent €2.3 billion bailing out IL&P, plus €3.085bn repaying promo notes for IBRC and €5.268bn on banks recaps. Total banks contribution to the deficit was thus €10.653 billion, This implies that overall general government deficit ex-banks was €10.716 billion in 2011.
• In 2012 we spent €1.3 billion propping up again IL&P (this time - its remnants) which implies ex-banks measures deficit of €11.668bn
• Wait a second, you shall shout at this point in time - 2012 ex-banks deficit is actually worse, not better than 2011 one. And you shall be right. There are some small items around, like our propping up Quinn Insurance fallout cost us €449.8mln in 2012 and only €280mln in 2011. We also paid €509.5 million (that's right - almost the amount the Government hopes to raise from the Property Tax in 2013) on buying shares in ESM - the fund that we were supposedly desperately needed access to during the Government campaign for Fiscal Compact Referendum, but nowadays no longer will require, since we are 'regaining access to the markets'. We also received €1.018 billion worth of cash from our sale of Bank of Ireland shares in 2011 that we did not repeat on receipts side in 2012. And more... but in the end, when all reckoned and counted for, there is effectively no real deficit reduction. Nothing dramatic happened, folks. The austerity fairy flew by and left not a trace, but few sparkles in the sky.
• Aside note - pittance, but hurtful. In 2012 Department for Finance estimates total Irish contributions to the EU Budget will run at €1.39 billion gross. For 2013 the estimate is €1.444 billion. That is a rise of €59 million. Put this into perspective - currently, the Government has run away from its previous commitment to provide ringfenced beds for acute care patients at risk of infections, e.g. those suffering from Cystic Fibrosis. I bet €59 million EU is insisting this insolvent Government must wrestle out of the economy to pay Brussels would go some way fixing the issue.

In the mean time, our interest payments on debt have been steadily accelerating. In January-November 2011 our debt servicing cost us €3.866 billion. This year over the same period of time we spent €5.659 billion plus change on same. Uplift of 46.4% in one year alone.

So here you have it, folks. This Government has an option: bring Irish debt into ESM, for which we paid the entrance fees, and avail of cheap rates. Go into the markets and raise the cost of funding our overall debt even higher - from €6.17bn annual running cost in 2012 to what? Oh, dofF projects 2013 cost to be €8.11 billion - a swing of additional €1.94 billion. So over two years 2012 and 2013, Irish debt servicing costs would have risen by €3.89 billion swallowing more than 1/2 of all fiscal 'adjustments' to be delivered over the same two years.

At this stage, there is really no longer any point of going on. No matter what this Government says tomorrow, no matter what Mr Gilmore can see in his hazed existence on his Ministerial cloud cuckoo, real figures show that Europe's 'best boy in class' is slipping into economic coma. 

3/12/2012: Current crisis systemic risk comparative

THE LIBERALIZATION AND MANAGEMENT OF CAPITAL FLOWS - an IMF paper released today has an interesting chart putting into perspective the extent of the euro area crisis in comparative terms to other crises (click on the image to enlarge):

The above clearly shows that to Q3 2011, the euro area crisis has been

1. Systemically separate from the preceding global financial crisis of Q1 2008 - Q1 2010, 
2. Much smaller in magnitude than the preceding crisis,
3. As measured by the crisis indicator - comparable in magnitude to the early stage of the Asian-Russian crises and ERM crisis, as well as to the early stages of the Scandinavian crisis
4. However, the spillover from the euro area crisis to the global economy remained more limited than contagion in previous crises, as illustrated by the systemic crisis indicator.

Another interesting feature of the chart is that it shows that the Age of Moderation (1990-2007) was actually a period with four systemic crises: the Scandinavian crisis of the 1990s, the ERM crisis, the Asian and Russian crises, and the dot.com bubble

Lastly, the above shows that both, the IMF systemic crisis indicator and Equal-weighted crisis indicator are not sufficient in providing lead-up signals for systemic stress build up.

3/12/2012: Austerity Dictionary

Brian Lucey has published a collection of twitter-sourced Austerity Dictionary - link here. Most worthy of reading.

3/12/2012: Ireland's Manufacturing PMI for November 2012

NCB Purchasing Manager Indices for Manufacturing for Ireland are out this morning with a deserved upbeat soundings on foot of the core data showing continued growth in the sector. Here are some details, both worth a positive overall note and some warning signs of potential tightness ahead.

Business conditions continued to improve in the Irish manufacturing sector during November, marking the ninth consecutive month of such increases, though there were slower rises in output and new orders.

Overall PMI was running at 52.4 in November, slightly up on October 52.1. November reading was the highest since July 2012. Strictly-speaking, both October and November indices were statistically indistinguishable from 50.0, however, with the last index reading that was statistically significantly above 50.0 was July 2012 and the last time this happened before then was April 2011.

Not to rain too much on the parade, 12mo MA through November 2012 is at 51.1 and 6mo MA is at 52.4, both encouraging. 3mo MA through November is 51.2 and this is behind 3mo MA through August 2012 which as 52.6. In other words, last 3mo activity does not seem to signal any significant improvement on June-August period, although both 3mo averages are ahead of 50.9 reading that represents the 3mo average between March and May 2012.

Likewise, looking at actual quarterly averages: Q1 2012 came in at 49.8 (contraction), Q2 at 51.5 (expansion at shallow rates), Q3 at 52.2 (another shallow expansion) and Q4-to-date at 52.25 (no material improvement on Q3).

Let's take a look at core subcomponents:

• Actual Output levels expanded in November at 53.8, down on 54.4 expansion in October, but up strongly on output growth of 51.0 and 51.3 recorded in August and September. 12mo MA is at 51.5. Both October and November readings were significantly above 50.0 line - adding some statistical support to the output growth signals. 6mo MA is now at robust 53.3 and 3mo MA is at 53.2, identical to the 3mo MA through August 2012. Q4-to-date reading is at strong 54.1 and up on 52.1 average for Q3 2012, 51.4 average for Q2 2012 and 50.2 average through Q1 2012. Good news, despite slower growth rate recorded m/m.
• New orders also moderated the rate of expansion to 52.1 in November, from 52.7 in October. 12mo MA is now at 51.4 and 6mo MA at 53.1, the latter being statistically significantly different from 50.0. 3mo MA is at 52.4 down from 53.7 3mo average through August 2012. On quarterly basis, Q1 average stood at 49.9, Q2 2012 average rose to 52.0, with Q3 2012 average hitting 53.3, and Q4-to-date average sliding back to 52.4.
• Growth in new orders seemed to have been driven by growth in export orders, up from 51.8 in October to 52.1 in November. Both months expansions were statistically insignificant. New export orders improvement, however, in m/m terms was more significant than improvement in overall new orders. 12mo MA for export orders stands at 52.3, with 6mo MA at 52.5. 3mo MA at 50.8 - signaling weakness in the overall sub-index performance, against 3mo MA of 54.2 recorded in June-August 2012. On quarterly basis: Q1 2012 average reading was 51.9, rising to 52.8 in Q2 and Q3, before sliding to 52.0 in Q4-to-date.

 Per Markit/NCB release: "According to respondents, slower growth of new business enabled manufacturers to work through outstanding business. Backlogs of work decreased for the twenty-first month running, albeit at a reduced rate." This is illustrated below:

As you know, I usually run more detailed comparatives on input/output prices and profitability in a separate post, once Services sector data comes in. But some reflections here:

• Output prices contracted in November, posting a reading of 49.7 down from 51.7 in October. This is the first contraction in the series since August 2012. Overall, trends in output prices are not encouraging for Irish manufacturers. 12mo MA is at 49.1, with 6mo MA at 50.3. Q1 2012 average is at 47.3, Q2 2012 average at 49.4 and Q3 average at 50.2, while Q4-to-date average is 50.7.
• Meanwhile, Input prices continued robust inflation trend set o since August 2012. In November, input prices subindex stood at 59.0 down slightly on 60.7 in October and 60.6 in September. 12mo MA is at 58.0, 6mo MA at 55.8, 3mo MA through November is at 60.1 and previous 3mo MA through August was at 51.4. In quarterly averages terms, Q1 saw average subindex reading of 60.4, Q2 at 57.9, Q3 at 55.1 and Q4-to-date at 59.9.
• Continued widening gap between input prices (cost) inflation and output prices (revenue) deflation suggests two possible pressures in the sector: (1) rising transfer pricing - as opposed to actual activity - in the sector by the cost-base-driven MNCs, and (2) shrinking profit margins for Irish firms and profit-base-driven MNCs.

Lastly, per chart above, employment:

• Employment subindex expanded to 53.5 in November, a robust rise on 51.9 in October, but behind 54.1 reading reached in September. Overall, employment index is now ahead of 50.0 line for nine consecutive months. 12mo MA is at 52.3, 6mo MA at 53.3. 3mo MA through November is at 53.2, slightly down on 53.4 3mo MA through August 2012. In quarterly terms, Q1 saw subindex average 50.0, Q2 2012 - 54.4, Q3 2012 - 52.8 and Q4 2012-to-date averages at 52.7. In other words, there seem to be robust hiring signal coming from the sector in the last 9 months.

Net conclusion: good PMI readings, especially considering that Euro area continues to tank and global trade slowdown is yet to be reversed. Some tightness on profit margins and weakening new orders growth rate are to be watched. However, the two warning signals above are likely to be offset by the stocks rebuilding in months ahead, should new orders hit a slowdown.

Updated:
Manufacturing PMIs across the euro zone contracted for a sixteenth consecutive month in November, with last month's reading at 46.2, up on 45.4 in October. November marks the slowest pace of contraction in eight months, but the downturn remains strong. New exports continued decline, while Italy PMI is down to a 3mo low of 45.1 and Spain is at 45.3.


The Markit/HSBC China Manufacturing PMI for November rose to 50.5, up from 49.5 in October hitting for the first time in 13 months the 50.0 mark.

1/12/2012: Greek Deal 3.0

If you need to read anything at all on Greek 'Deal' 3.0 signed in November this year, go no further than this post from Yanis Varoufakis. Lethally direct & brutally correct assessment, in my view.

If you want to understand why 120% debt/GDP ration by 2020 or 2022 is not attainable absent OSI, see my note here.

1/12/2012: Irish banking Reforms: are things getting better?

In the previous post, I discussed changes in irish banking system systemic stability in 2012 (January-November). But here's a longer range view - from September 2010 on through November 2012.

Now, keep in mind: since September 2010, Irish banks had

1. Massive recaps (2011-2012)
2. Full reform and deleveraging programmes, approved by the EU and Irish authorities
3. Rounds of increases in charges on customers to beef their own interest margins
4. Vast subsidies from the ECB and CBofI
5. Subsidies from the Government via deposits (see here)
6. According to the Government, BofI (largest bank) has completed its deleveraging programme, while AIB (second largest bank) is ahead of target
7. Massive sales of riskiest assets to Nama that crystalized losses and led to recaps, which are now completed
8. According to the Government have bee operating in more benign environment of property prices stabilization
9. Benefited from a 88% rally in Government bonds which they stuffed onto their balancesheet over 2010-present like there is no tomorrow

and so on. In other words, there are tomes and tomes of Government sponsored propaganda to suggest that things are going honky-dory in the banking sector in Ireland. Here's what Head of the Department of Finance had to say this week about the banking sector 'progress' (emphasis is mine):

"With PCAR capital investments and the Bank of Ireland sale, confidence started to return to the banking sector. [this refers to 2011]"

"In 2012 we have witnessed further tangible signs of stability. …Even though non-performing loans continue to grow; here again there are tentative signs that in the mortgage arrears area the growth in new arrears has been arrested. 

The banks still have a lot of work to do to roll out sustainable mortgage solutions, but this process is underway.

Importantly, confidence is returning to our banking system following its recapitalisation.  Deposits across the Irish system are up 2.5% with stronger growth recorded by AIB, BOI and PTSB (which are up 5.3%).

We are in a situation now where the domestic banking system is getting stronger, albeit from a very weak starting point.

• The large scale balance sheet restructuring has been completed;
• BOI have completed the disposal of non-core portfolios
• AIB have substantially completed their disposals. 
• The funding gap has been significantly reduced and the drawing on Eurosystem funding by our government supported going-concern banks continues to decline, and is now less than €60 billion (excluding IBRC).
• Importantly, as I said earlier deposits are growing and the banks are back in the funding markets."

So, in other words, we should expect Ireland's banking system to have performed well in progressing since 2009-2010 lows?

Here's the chart:

In reality, courtesy of Euromoney surveys, we know that Irish banking system stability has deteriorated, not improved, between September 2010 and November 2012, and this deterioration was the second largest amongst 37 European countries.

1/12/2012: Ireland - still the second worst banking sector in EA

Another Euromoney risk survey on and the results for the banking sector are out:

Ireland's banking sector zombies are ranked as 4th least safe in the entire Europe of 37 countries. Next to Greece (3rd least safe), and Macedonia (1 place ahead of Ireland - 5th least safe). Iceland, having defaulted and demolished its banks, ranks 7th least safe. Note, Ireland remains the second weakest banking sector in the EA17.

Of course, our 'leaders' would say that yes, things are bad, but they are improving... hmm...

Are they? Well, sort of. Ireland's score (higher score, greater systemic stability) have risen in 11 months of 2012, but the rise was far from spectacular. Ireland's improvement in the score is 7th largest in the sample, behind that for Iceland.

Ireland's gap to the peers (Advanced Small Open Economies) in overall score is about 4.4 points. 11 months of heroic Government reforms have yielded a gain of 0.2 points in Irish position, and the deterioration in the overall euro area climate has resulted in a decline in the average ASOE score of 0.07 points. This means the spread improved in favour of Ireland by less than 0.3 points in 11 months - a rate of 'reforms' that can close the current gap, assuming continued deterioration in ASOE average, over  161 months. In other words, unless the 'reforms' in Ireland's banks start bearing fruit much faster than they have done in 11 months of 2012 so far, it will take us 13.4 years to reach ASOE average levels of banking system stability.

1/12/2012: Irish Government deposits with Zombie Banks

On the foot of the analysis of deposits from Irish Residents, one might ask a question if the Irish Government deposits within the Irish banking system are significantly skewed in favour of the Covered Group of banks (Irish domestic banks largely owned by the Government).

The hart below plots the ratio of Irish Covered Banks Deposits from Irish Residents as a percentage of all same category deposits within the Domestic Banks group:

And the subsequent chart plots Government deposits in Domestic group and within Covered group:

Per first chart above, it is pretty clear that Irish Government deposits are biased in favour of the Covered banks and that this bias has risen dramatically during the current crisis (since the beginning of 2008). Of course, the effect of this bias is two-fold:

1. This represents a direct subsidy from the Exchequer to the Covered Banks at the expense of non-Covered banks, and
2. This results in lowering the deposit rates that Covered Banks must charge to attract depositors.

Now, some more detailed stats on the same subject:

• In October 2008, 75.49% of all Resident Deposits within the Domestic System were banked at the Covered Institutions. This represented a decline of 0.505% on September 2012 and a drop of 3.67% on October 2011.
• Share of Covered Banks in total Domestic Resident deposits was down on 3mo average basis (q/q and y/y) and on 6mo average basis
• In October 2012, share of Covered Banks in total Domestic banking system resident deposits was down 3.67% on October 2011, down 7.44% on October 2010 and down 6.56% on October 2009.
•  While total share of Covered Banks in domestic deposits has declined, in Government deposits their share has risen. In October 2012 Covered Banks' share of Government deposits rose to 91.992% (up 1% m/m and 0.8% y/y). The said share is no up 1.92% on October 2010.

Let's take a look at longer term series:

• Prior to 2008, average share of Covered Banks in total resident deposits was 78.7% and this fell to 75.3% for the average from 2008 through present, with 3mo average through October 2012 share now at 75.7%.
• Prior to 2008, average share of Covered Banks in Private Sector resident deposits was 75.7% and this fell to 73.6% for the average from 2008 through present, with 3mo average through October 2012 share now at 72.8%.
• Prior to 2008, average share of Covered Banks in Government deposits was 81.5% and this rose to 92.4% for the average from 2008 through present, with 3mo average through October 2012 share now at 90.9%.

While Private Sector seemingly is diversifying away from Irish banking zombies, Irish Government is increasingly subsidizing them. Given the Government simultaneously deposits with the banks that it owns and guarantees, one wonders if such apparent and blatant subsidization of the domestic covered institutions through deposits holdings by the Government is (1) consistent with competition rules present in the EU, and (2) consistent with good practices of risk management.