19/12/2012: Irish National Accounts Q3 2012 - part 2

As promised in my first post on Q3 2012 National Accounts, here are the details of the main components of Irish GDP and GNP with more short-term trends focus (first post focused on cumulated changes for the 9 months from January through September 2012).

Unfortunately, these short-term series are less impressive than cumulated series. Here's why.

First, consider GDP and GNP decomposition by sector of activity, expressed in constant market prices terms:

• Agriculture, Fishing & Forestry (AFF) subsector posted €564 million worth of activity in Q3 2012, down €477.o million (-45.8%) on Q2 2012 and down €123 million (-17.9%) y/y. This marks the second consecutive quarter of y/y declines, which technically means that the sector is in a recession. AFF sector overall share of GDP is now 1.41%, so it is a minute contributor to the GDP dynamics.
• Industry activity printed at €8,868 million in Q3 2012, down €1,659 million (-15.8%) q/q and down 4.0% y/y. Only about 1/4 of the overall decline in Industry activity came from Building & Construction sub-sector which posted another fall-off in Q3 compared to Q2 (down €17 million or -3.7% q/q and down 9.9% y/y). Overall Industry share of GDP is now at 22.15% so any movement in the sector activity is significant for headline GDP and GNP.
• Distribution, Transport and Communications (DTC) sector expanded to €8,940 million in Q3 2012 (up €1,071 million or +13.6% q/q and up 1.8% y/y). The sector now accounts for 22.33% of GDP.
• Public Administration and Defence (PAD) sector showed €37 million (+2.1%) q/q expansion in Q3 2012, printing at €1,823 million. Y/y the sector is down 4.1% (just €78 million in net reductions). The sector now accounts for 4.55% of our GDP.
• Other Services - a sector accounting for 37.4% of our GDP - increased activity by €239.0 mln (+1.6%) q/q and are up 0.3% or €47 million y/y. 
• Compared to Q3 2007: Agriculture, Forestry and Fishing sector activity is down 27.4% (-€213mln); Industry activity is down 12.8% (-€1,298mln), of which Building & Construction is down 63.1% (-€765mln); Distribution, Transport and Communications sector is up 25.8% (+€1,832mln); Public Administration and Defence is down 14.9% (-€318mln); Other Services are down €980mln or -6.1%.

The above chart shows GDP and GNP prints, which posted the following dynamics in Constant Prices terms:

• GDP at constant factor cost (ex net taxes) was down to €36,043 million in Q3 2012 (-€865mln and -2.3% q/q). Y/y GDP at constant factor cost is up €272 million (+0.8%)
• Taxes net of subsidies rose to €3,998 million (+€353mln and +9.7% q/q) and are up €48mln (+1.2%) y/y.
• Thus, GDP at constant market prices was down to €40,041 million in Q3 2012 (down €512mln or -1.3% q/q) and up €320mln (+0.8%) y/y. Compared to 2007 levels, GDP is down 3.3% (_€1,3540mln).
• Net factor income from abroad contracted by €154mln in Q3 2012 (-2.1% q/q) compared to Q2 2012 to -€7,069mln. Year on year outflows are down €859 million or -10.8%. However, net outflows abroad are still up 17.2% (€1,038mln) on 2007. Currently, net transfer from Ireland abroad amount to 17.65% of our GDP.
• With reduced outflows to the rest of the world (primarily driven by falling transfer pricing by multinationals), our GNP in constant market prices still contracted by €358 million (-1.1%) q/q. In Q2 2012 it grew by €2,075mln (+6.6%) q/q. The robust growth in Q2 was partially offset by the decline in Q3. Year-on-year our Q3 2012 GNP is still up +€1,178mln (+3.7%). However, compared to 2007, Q3 2012 GNP is down €2,237mln (-6.4%).

As the result of the above, Irish GDP/GNP gap decreased slightly from 17.81% in Q2 2012 to 17.65% in Q3 2012.

Here are the components of the above expressed as indices, with Q1 2005 set at 100:

On seasonally-adjusted basis, expressed in Constant Market Prices terms:

• Personal Consumption of goods and services rose €160mln (+0.8%) q/q and is up €367mln (+1.8%) y/y. However, this is not the first time that personal consumption increased since the beginning of the crisis. For example, it rose €335mln in Q1 2010-Q3 2010 and by €420mln in Q3 2011-Q4 2011. 
• In real, seasonally-adjusted terms, our personal consumption of goods and services is now at the levels between Q4 2005 and Q1 2006. However, some of this 'support' for consumption is coming from significant price increases in state-controlled sectors, which are not linearly reflected in GDP deflators (price adjustments).
• Net expenditure by central and local government decline €4 million to €6,204 million in Q3 2012 compared to Q2 2012 (-0.1% q/q) and is now down €172 million y/y (-2.7% y/y).
• While Personal Consumption fell €3,013 million (-12.8%) in 2007-2012 Q3 on Q3, Government spending declined €1,132 million (15.4%) over the same period of time. At annualized rates, this means a decline of personal consumption contribution to GDP of some €12 billion per annum and a decline of Government spending contribution to GDP of some €4.5 billion per annum.
• Irish Government expenditure in real terms is running at the levels comparable with Q1-Q2 2006, or a quarter ahead of where personal consumption rests. However, any biases induced to personal consumption upside from state-controlled price increases also act to generate superficially lower government spending reported here (as this is Net expenditure by the government, excluding taxes and receipts). In other words, the true difference between Government and private spending is most likely much wider than one quarter.
• Gross domestic fixed capital formation improved in Q3 2012 compared to Q2 2012, rising to €3,962mln (+€315mln or €8.6% q/q), which resulted in an annual increase of €323mln (+8.9%) y/y. Still capital formation is down €7,432 million (-65.2%) on Q3 2007.
• Our fixed capital formation is now running at just 40% of Q1 2005 levels.
• Exports of goods and services rose 1.3% (+€567mln) in Q3 2012 compared to Q2 2012 (increase of €2,788mln or +6.7% y/y). Imports are up €1,005mln (+3.0%) q/q and are up €1,742 mln (+5.3%) y/y. Compared to Q3 2007, exports are now up 17.3% (+€6,598mln) and imports are down 1.2% (-€404mln).
• Irish exports now account for 108.01% of our GDP and our imports are at 83.38% of GDP.

In seasonally-adjusted terms:

• Irish GDP rose €310mln (+0.8%) q/q and €1,464mln (+3.7%) y/y, but GDP remains deeply below Q3 2007 levels (-€4,632mln or -10.1%).
• Irish GNP shrunk €245mln (-0.7%) q/q and is up €1,909mln (+6.0%) y/y. GNP remains deeply below Q3 2007 levels (-€6,357mln or -15.8%).

18/12/2012: QNA Q3 2012: Q1-Q3 cumulated results

Some positive news today on a major front with the release of Q3 2012 preliminary QNA estimates. Headlines are good, predominantly. Here is a post covering cumulated Q1-Q3 data for 2007-2012. More detailed analysis of dynamics in QNA components later tonight.

In Q1-Q3 (9 months) cumulated period:

• Irish GDP in Constant Market Prices rose from €119.261 billion in 2011 to €120.246 billion, implying y/y growth rate of 0.826%.
• Irish GNP also increased, from €94,721 million in 2011 to €97,557 million in 2012 yielding a y/y growth rate of 2.99%.
• In nominal terms (current market prices), Irish GDP was up from €119.123 billion to €123.299 billion (+3.506% y/y), while Irish GNP increased from €94.493 billion to €99.645 billion (+5.452% y/y).

Two charts to illustrate the above:

Here's for those who feel relaxing at today's reading:

• Compared to peak, Irish GDP in constant prices terms is still 5.37% below the level attained for Q1-Q3 2007, while in current terms it is 12.15% down on the peak.
• Compared to peak, Irish GNP in constant prices terms is down 7.96% and in current market prices terms it is down a massive 17.04%.

Domestic demand has continued deterioration over the first 9 months of 2012, so domestic economy is still contracting overall:

• Final Domestic Demand in constant prices terms fell in the nine months from January 2012 from €90.515 billion in 2011 to €88.987 billion (-1.69% y/y).
• Final Domestic Demand in current prices terms also fell in the nine months from January 2012 from €91.188 billion in 2011 to €90.991 billion (-0.21% y/y).
• Final Domestic Demand in constant terms is currently down 22.02% on 2007 (Q1-Q3) cumulative levels and is down 27.83% in current prices terms.

More on sub-series dynamics later tonight.

18/12/2012: 2013 Outlook: 1.0

Looking into 2013, three international media outlets recently asked me for my comments on the global economic outlook for the next year. Here is the latest iteration of my thoughts on the topic:

Euro Crisis:

In 2013, euro area crisis focus will remain on the peripheral countries, with Spain and Portugal taking the front seat from Greece in terms of potential risks in the first half of the year. In particular, Spanish and Portuguese budgetary dynamics, rising unemployment and continued economic recession are likely to act as destabilizing factors in relation to both the ECB OMT programme and the ESM funds. 

Italian political and budgetary dynamics are likely to show serious strains in the early part of 2013, with growth deterioration pushing Italian risks up in the second half of the year.

By the second half of the year, Greece also is likely to return to the top of the risk charts in Europe, posting continued deterioration in economic conditions, catastrophic upward creep in unemployment and new evidence of non-sustainable medium-term fiscal dynamics. 

Aside from the three weakest countries, Ireland will likely remain at the bottom of the peripheral risks ranks with stagnant economic activity and relatively stable unemployment. Latest credible headline forecasts on Ireland's performance for 2013 are here, and these (IMF's ones) are optimistic, in my view. Ireland's risk is likely to rise toward the end of 2013 as reformed personal insolvencies regime starts adversely impacting banking and household balancesheets on mortgages writedowns side. Budgetary performance in Ireland will also come under significant pressure as targets set out in Budget 2013 are likely to show signs of stress in the second half of 2013. Nonetheless, Irish situation will remain at the back burner of European attention as Italy and Spain (which together will have to raise some €500 billion in bonds in 2013) are likely to be the main drivers of risks.

In all peripheral countries, continued slowdown in the rate of unemployment growth will be consistent with massive exits from the workforce and rapid deterioration in employment. This will put more strain on the fiscal dynamics and growth.

On the core EA17 side, German political cycle is likely to introduce more uncertainty. Elevated levels of protectionist rhetoric during German elections campaigns of 2013 are likely to adversely impact euro area's capacity to continue kicking the proverbial can of 'peripheral solutions' down the road, potentially exposing internal divisions within the euro area and amplifying crisis impact on euro area economies and markets. Strong euro is likely to weigh on German exports and, although, I do not expect a full-blow recession in Germany in 2013, growth is likely to be subdued and labour markets pressures will start appearing.

Two countries with potential for generating unexpected newsflows are Belgium and the Netherlands. Belgian and Dutch economies are currently struggling with excessive debt levels - a struggle that is neither new, nor abating. In particular, Belgium can experience a twin shock of continued and deepening economic contraction and a political crisis, pushing the country into another period of political uncertainty. The Dutch economy is clearly open to the threats of prolonged economic recession, political instability and household debt crisis amplification. The Netherlands are currently on negative watch for the country Aaa ratings and this can easily translate into a ratings downgrade should negative growth persist well into 2013. This is consistent with projections of 20-25% decline in property prices in an economy that is a debt bubble that has been deflating relatively softly.

The US:

The US Fiscal Cliff is likely to remain a threat into Q1 2013, with only patchwork solutions emerging, supported by the Fed's QE4. I do not expect to see a structural bipartisan resolution of the underlying deficits and debt crises in 2013, which means that the Fed will retain accommodative monetary stance to support sub-trend yields on Government debt. The downside risk to the above 'muddle-through' scenario of Washington stalemate is the effect of the general upward tax creep during the first year of the second Presidential term. Expiration of tax breaks and tax increases at the federal, state and local levels will weigh on the economy, holding back recovery. Capex is likely to see a false start in H1 2013, with fiscal cliff and debt stalemate pushing domestic investment back down in H2 2013. This means that 2013 growth is likely to peak around Q2-Q3 2013 and slow once again in subsequent quarters. Still, owing to aggressive monetary stance and internal households' deleveraging dynamics, the US economy is likely to significantly outperform other G7 economies in 2013.

Global economy:

Globally, the BRIC economies are expected to outperform advanced economies in terms of economic growth and structural macroeconomic stability risk parameters both in 2012 and in 2013. In this sense, the BRICs overall position in the global economy in 2013 is likely to remain as the core centre for generating growth. However, within the BRIC group, at least three of the four economies, namely Brazil, China and India represent potential sources for 'grey swan' high-level macro risk events.

China represents the biggest 'grey swan' in the global growth risks context. Chinese economy is yet to embark on significant banks' and households' balancesheets repairs and this risk is coincident with the political dislocation created by the change of leadership. New, more conservative and less economically-capable leadership is likely to continue the course of attempting to prop-up insolvent banking and property markets. Military-industrial spending and funding for insolvent local authorities are likely to see gradual increases. Upside to this policy stance is that domestic demand is likely to remain relatively strong. Downside is the reduction in the rate of growth in private investment and crowding out of private investment with public spending. 

The greatest downside risk for China, the region and the global economy remains the Chinese property bubble (now firmly contaminating Hong Kong and Singapore, as well as spilling into Australia and New Zealand) and the levels of indebtedness in the corporate sector, with a knock on effect to the assets quality on Chinese banks' balancesheets. Repairing Chinese banking sector will require major restructuring of industrial enterprises-connected banks and smaller banking institutions. The Government might have some appetite for aggressively engaging with this, but the resources expanded on repairing banking sector will be wasted in a liquidity trap. 

The second downside risk is a long-term unravelling of the Chinese competitive advantage. Increased domestic demand and re-orientation of growth drivers toward internal markets imply upward pressure on wages and downward pressure on productivity. At the same time, current recovery in Chinese trade flows with the rest of the world is mainly concentrated in the cost-sensitive sectors of basic manufacturing. To regain trade-based growth momentum, China requires continuous move up the value chain in exports, a movement that is constrained by domestic refocusing of its economy. While 2013 is unlikely to be a catalyst year for Chinese economic crisis materialization, the imbalances continue to build up and it is only a matter of time before China is propelled to become the source of global risk rivaling in this role the euro area.

Brazil, currently the darling of the Latin American growth story, is severely exposed to two risks, both of which can materialise in 2013, although once again, the probability of these is relatively low. 

The first risk relates to the heavy dependence of Brazilian investment story on oil revenues potential. Structural moderation in oil prices is likely to make much of Brazil's oil reserves unviable from commercial exploration perspective before production begins on its offshore fields. This risk can materailize in 2013 if oil prices were to settle into a long-term trend around USD80 or lower. 

The risk of oil price shock to Brazil is likely to coincide with revaluation of the Brazilian economy's fundamentals. In simple terms, Brazil, traditionally driven by extraction and agri-food sectors, has experienced robust levels of growth in recent years based on aggressive, debt-financed public investments. Such investments are capable of producing ROI only in the environment of continued growth and, by them selves, are not growth-generative beyond the initial investment spending push. Brazil can surprise world economy by posting sub-expectations levels of growth (below 3.5% against currently forecast 4.2%) and above-expectations rates of inflation (above 5.5% against currently forecast 4.9%). Brazil's economy is heavily reliant on imports of capital and foreign investment with investment exceeding national savings by a factor of 2.5% of GDP in 2012 and the gap expecting to accelerate to 2.8% in 2013, while current accounts are posting sustained deficits since 2008. Current account deficits for Brazil are expected to rise in 2013 from 2.6% of GDP in 2012 to 2.8% in 2013 and are forecast to reach 3.3-3.4% of GDP in 2014 and 2015. All of this strongly suggests that Brazil is currently experiencing build up of external and internal imbalances, consistent with the fact that Brazil's government has managed to post both structural and ordinary fiscal deficits in every year since 1996

In terms of growth, I expect Russia to outperform Brazil in 2013, although the current gap in growth rates is likely to close substantially. In 2011-2012, Brazil average real growth rate of GDP is likely to reach 2.1% against Russia's 3.9%. In 2013, my forecasts suggest Russian growth of 3.7-3.8% against Brazil's 3.5-3.6%, against global growth of 3.6% projected by the IMF for 2013.

This is an impressive performance in the case of Russia, given that the country currently enjoys GDP per capita (adjusted for purchasing power parity differences) of D17,698 (as measured in International dollars) against ID12,038 for Brazil, ID9,146 for China and ID3,851 for India. Russia will continue closing its income gap with the euro area in 2013-2017. In 2010, Russian GDP per capita (adjusting for price difference and exchange rates variation) stood at 47.9% of the euro area. This is expected to rise to 54.1% in 2013, reaching 60.7% by 2017, according to the IMF projections. Russia's relative position as the wealthiest economy of all BRICs is further reinforced by the fact that aggregate investment and savings in the country are set to remain ahead of those in Brazil in 2013, continuing the trend established since the beginning of the Great Recession, and this trend remains independent of the Government sector. 

Strength of Russian public finances (with the country posting the only positive general government balance in 2012 and 2013 of all BRICs, while having the lowest overall gross government debt to GDP ratio at just under 9.9% of GDP) is further reinforced by a 3.4% current account surplus - the largest of all BRIC economies. The combination of these factors means that Russian economy will have sufficient internal surpluses to fund significant reforms of its domestic sectors, envisioned in the reforms programmes unveiled by the Government in 2011-2012 and stretching into 2020. These reforms include: 

• enhancing Russia's institutional capital by enacting deep reforms of tax codes, public administration and corruption, judiciary reforms and law enforcement reforms
• dramatically increasing the rate of technical, labour and TFP productivity growth
• facilitating transition of agriculture, modern manufacturing, telecommunications and financial services to post-WTO accession platforms

In the shorter run, 2013 developments are likely to benefit from recent improvements in financial instrumentation, namely the push by the Russian authorities to expand clearance systems access for Russian government and corporate bonds.

The risks to the above forecasts are to the downside and focus primarily on changing trends in world gas prices, alongside the risk of continued stagnation in major trading partners (euro area) or continued economic growth slowdown in China feeding through to moderation in prices for basic energy and industrial commodities. However, these risks are less likely to impact ver significantly the Russian economy in 2013 and are more present on the longer-term horizon of 2014-2015.

18/12/2012: A Cosmic Great Depression is on, now...

No, this is not a joke, but, put in econo-astronomical terms, the Universe is amidst a Great Depression.

Here's a chart:

Admittedly, the time series above are not compatible with international GDP metrics and neither CEPR (for Europe) nor NBER (for the US) have called this business cycle, but... per Royal Astronomical Society:
"In the largest ever study of its kind, the international team of astronomers has established that the rate of formation of new stars in the Universe is now only 1/30th of its peak and that this decline is only set to continue..."

"Much of the dust and gas from stellar explosions was (and is still) recycled to form newer and newer generations of stars. Our Sun, for example, is thought to be a third generation star, and has a very typical mass by today's standards. But regardless of their mass and properties, stars are key ingredients of galaxies like our own Milky Way."

And here's the worrying bit: "By looking at the light from clouds of gas and dust in these galaxies where stars are forming, the team are able to assess the rate at which stars are being born. They find that the production of stars in the universe as a whole has been continuously declining over the last 11 billion years, being 30 times lower today than at its likely peak, 11 billion years ago.

Dr Sobral comments: "You might say that the universe has been suffering from a long, serious "crisis": cosmic GDP output is now only 3% of what it used to be at the peak in star production!"

'If the measured decline continues, then no more than 5% more stars will form over the remaining history of the cosmos, even if we wait forever. The research suggests that we live in a universe dominated by old stars. Half of these were born in the 'boom' that took place between 11 and 9 billion years ago and it took more than five times as long to produce the rest. "The future may seem rather dark, but we're actually quite lucky to be living in a healthy, star-forming galaxy which is going to be a strong contributor to the new stars that will form."

Now, what do we short to get a hedge on this macro?

17/12/2012: Christmas Message from the IMF

Full IMF statement on Programme Review for Ireland is linked here. Very positive, per usual, with some cautionary note at the end. I will quote that part, you can read the platitudes.

"Looking ahead, however, a more gradual economic recovery is projected, with growth of 1.1 percent in 2013 and 2.2 percent in 2014, with public debt expected to peak at 122 percent of GDP in 2013. This baseline outlook is subject to significant risks from any further weakening of growth in Ireland’s trading partners, while the gradual revival of domestic demand could be impeded by high private debts, drag from fiscal consolidation, and banks still limited ability to lend. If growth were to remain low in coming years, public debt could continue to rise, in part reflecting the potential for renewed bank capital needs to emerge."

Irish Government Budget 2013 is built on the assumed growth of 1.5% (0.5 ppt ahead of IMF forecast) in 2013 and 2.5% in 2014 (0.3 ppt ahead of IMF forecast). Government debt is forecast by the Budget 2013 to peak at 121% of GDP, against IMF forecast of 122%.

Mr. David Lipton, First Deputy Managing Director and Acting Chair, said: "Vigorous implementation of financial sector reforms is needed to revive sound bank lending in support of economic growth. Key steps forward include arresting the deterioration of banks’ asset quality, reducing their operating costs, and lowering funding costs through orderly withdrawal of guarantees. The personal insolvency reform being adopted should facilitate out-of-court resolution of household debt distress, especially if complemented by a well functioning repossession process to help maintain debt service discipline and underpin banks’ willingness to lend."

Note the renewed emphasis on repossessions.

And to top it all, the IMF repeated a call for 'breaking the link between banks and the sovereign'. This marks a series of similar statements seemingly addressed at the EU leadership and I won't be surprised if the Fund were to focus on this issue much more as the EU continues to prevaricate on restructuring Irish debt.

So ehre we have it, folks - homes repossessions and debt relief for the sovereign. Prepare for the Benchmarking 3.0 once that 'debt relief' is delivered, then.

17/12/2012: Don't write manufacturing off - part 2

In the previous post I reproduced the summary chart from McKinsey research paper on the future of manufacturing (linked in the post). Here is a more detailed version of the same:

Again, few points worth raising in Ireland's development context: given our openness to trade and limited domestic markets, as well as strong access to global labour markets, we should be prioritizing development that focuses on:

1. Trade intensity (with intensities at around and above 50%)
2. Value intensity (with intensities at around and above 30%)
3. R&D intensity (with intensities at least in double digits)
4. Labor intensity (with intensities at least in double digits)

From the above 4 criteria, equally weighted, our priorities (scores in brackets reflect sum of values across the above 4 criteria), we have:

• Computers and office machinery (155)
• Semiconductors and electronics (132)
• Medical, precision, and optical (123)
• Furniture, jewelry, toys, other (105)
• Other transport equipment (94)
• Textiles, apparel, leather (92)
• Machinery, equipment, appliances (82)
• Chemical (80)
• Motor vehicles and parts (77)
• Electrical Machinery (76)

Interesting view?

17/12/2012: Don't write manufacturing off

Here is an amazing (yep, amazing) report from McKinsey on the future of Manufacturing: http://www.mckinsey.com/insights/mgi/research/productivity_competitiveness_and_growth/the_future_of_manufacturing

And here is a really fascinating eye-opening chart from it:

What are the interesting bits in the above?

1. The US retained its position as number 1 manufacturing source in the world (note - with recent emergence of on-shoring trend for US manufacturing, this is likely to stay)
2. China moved - predictably - quite fast in the league table
3. India's performance has been relatively weaker than that of China - not surprising 
4. Russia - in 2000 only 21st in the world is now 11th
5. Brazil moved from 15th in 2000 to 6th
6. Indonesia moved from 20th in 2000 to 13th
7. Germany dropped from the 2nd in 1980 to the 4th
8. Italy rose from the 6th in 1980 to the 5th
9. France dropped from the 5th to the 8th
10. In 1980 and 1990, EU had 5 countries in the top 10, in 2000 - 4 countries and the same number in 2010 - a rate of relative decline
11. Big loser is Canada, rising from 10th in 1980 to 9th in 2000 and falling to 15th in 2010.

Here is another revealing chart, mapping 5 broad categories of manufacturing sectors based on specific inputs intensities:

Let's give it a thought. Ireland is a location most suited for R&D intensive and labour (skilled) intensive sectors, as we have neither sufficient capital, nor access to cheap energy (sorry, the renewables bugs - these are not cheap and not abundant). We also want to aim for high trade intensity and high value density. Which means priority sectors for us should be:

• Motor vehicles, trailers, parts
• Other transport equipment
• Electrical machinery
• Machinery, equipment, appliances

Tier 2 priorities (mostly driven by imported capital due to their high capital intensities) should be:

• Chemicals
• Computers and office machinery
• Semiconductors and electronics
• Medical, precision, and optical

Interestingly, and rather counter contrary to the perceived effects of the web-based economy, R&D intensive areas of the economy remain manufacturing:

These are just some of the fascinating insights. I will try blogging on the report some more in later posts.

17/12/2012: More spin on Promo Notes 2012

Here's the latest saga on Anglo Promo Notes 'non-payment' in March 2012:

This relates to the past here on the topic.

The point raised, allegedly, by the Department of Finance is as follows: Promo Note was 'settled' not in cash, but by issuance of a bond, so that

1. Irish Government issued a bond (which is to say borrowed money) to the IBRC
2. IBRC took the bond to the 'market' to obtain cash in exchange for it
3. Absent a 'market' for this bond, Bank of Ireland took the bond on for one year and paid the IBRC €3.06 billion (presumably, Bank of Ireland borrowed the funds to do so from the ECB using the bond as the collateral)
4. The IBRC paid down the ELA with the money.
5. ELA was written down by the required amount in 2012.

Let's re-narrate this in more simple terms:

1. Irish Government official went to a restaurant for a working lunch without having any money
2. The official, upon consuming lunch, wrote an IOU for €100 covering the bill to her lunch companion who had a credit card with him.
3. The credit card was maxed-out, so the second official called his bank and arranged for a 1-day overdraft facility from the bank to cover the bill, using as security the IOU from his lunch companion.
4. The credit card owner then used the credit card new facility and paid €100 bill.
5. The restaurant recorded payment of €100 bill.

Now, two questions:

Question 1: was the bill paid? Answer: yes. Proof: if no, then the restaurant could claim that no payment was received, so no tax is due on the proceeds from this payment. I doubt the Revenue will be so keen to allow this.

Question 2: did the original official pay the bill? Answer: it depends on which scenario will take place in 1 day: Scenario A: Original official does not intend to settle the debt (IOU) - in which case she defaults on loan from the second official and no payment by her was made under the IOU agreement. Scenario B: Original official honors her commitment, and the original IOU was a form payment.

However, Question 2 is purely academic from the standpoint of whether the lunch was paid for or not - it was paid. Full stop.

Substitute 'Promo Note' for 'lunch' and you have it. Promo note 2012 was paid. QED

16/12/2012: Europe's Social Welfare State gets German Warning

"If Europe today accounts for just over 7 per cent of the world’s population, produces around 25 per cent of global GDP and has to finance 50 per cent of global social spending, then it’s obvious that it will have to work very hard to maintain its prosperity and way of life."

Wonder what 'extremist' right-wing 'demagogue' said this? Why, Angela Merkel...

Read the full story here.

But here is some data from the OECD


Estimates of real public social spending and real GDP (Index 2007=100) and public social spending in percentage of GDP (right scale), 2007-2012

Source:

Projected public social spending as a % GDP and as a % “trend GDP” and real GDP, 1980-2012  (select countries):

Source for above: http://www.oecd-ilibrary.org/social-issues-migration-health/is-the-european-welfare-state-really-more-expensive_5kg2d2d4pbf0-en

And here is the latest OECD data (2009, published 2012):

Back in 2009, Ireland ranked 18th in the OECD in terms of private spending on Social Expenditures as % of GDP and 14th in the OECD in terms of public spending. We ranked 15th in terms of overall Social Expenditures. In comparison, Swiss spent 19.4% of their GDP, against Ireland spending 25.8%.

Setting aside Irish case, Ms Merkel has a point. EA12 average public spending is 26.8% of GDP against the OECD average of 22.1%, while private spending average is 2.4% against the OECD 2.5%. In other words, EA12 spend more publicly, less privately, on social expenditure.

16/12/2012: A Bucket of the Bad with a Pinch of the Ugly

I wanted to post this chart for some time now, but kept forgetting about it. The chart comes from RBS research on banks from November 2012 and is based on data through Q3 2012.

The interesting bits - beyond the overall apparent weakness of the European banks, as highlighted in the headline, is which banks are the weakest. Basically: Mediobanca leads, with Danske and Banco Popolare in second. Which brings us to the irony of Danske's latest marketing push for becoming a bank for the 'New Normal' (see here). Oh, the irony...

16/12/2012: Stop the nonsense on 'non-payment' of Promo Notes 2012

In recent weeks, the Irish Government has engaged in a willful and undeniable distortion of fact. Here is one example of a senior Minister on the record saying that : ""[The Government] didn't pay the promissory note this year…"
http://www.herald.ie/news/rabbitte-rules-out-31bn-payment-for-anglo-debt-3321386.html

The same was repeated today on RTE programme.

The Ministers must know that according to the official exchequer accounts, the Promissory Note due 2012 was paid in full.

In the Budget 2013 Economic and Fiscal Outlook (official document released by the Department of Finance: http://budget.gov.ie/budgets/2013/Documents/Budget%202013%20-%20Economic%20and%20Fiscal%20Outlook.pdf) contains the following references to repayment of the Promissory Note 2012:

Page C.19, explanatory note to Table 10 (reproduced above): "The 2012 IBRC Promissory Note payment was settled with a Government bond…"

In Table 10 above, 2012 item for "Promissory Note Repayment of Principal" enters -€3.1 billion, fully confirming the repayment was made.

Page C.22 Table 13 clearly identifies 2012 Promissory Notes repayment as being "Non-cash payment in 2012 of IBRC promissory note" and states in the explanatory note below the table that "In 2012 the annual promissory note payment to IBRC was made with a Government bond". The same is entered on page C.5 under the Table 1.

The details of the bond settlement scheme are here:
http://www.finance.gov.ie/viewdoc.asp?DocID=7195

ECB position on what transpired vis the Promo Notes in March 2012 is outlined here: http://www.ecb.int/press/pressconf/2012/html/is120404.en.html quoting from Mario Draghi's responses to press query regarding the note payment (emphasis mine):
"we take note of the scheduled end-March redemption of the promissory notes and a subsequent reduction in Emergency Liquidity Assistance provided by the Central Bank of Ireland. We expect that the future redemptions will be met according to the schedule to which the government has committed itself."

The above was confirmed less than a week later: Few days after repayment of the March 2012 note, Joerg Asmussen, a member of the ECB's executive board, was speaking in Dublin where he "reiterated the ECB's view that Ireland must continue to repay the Anglo Irish Bank promissory note". Asmussen clearly did not believe that Ireland did not pay 2012 installment on the notes.
Soruce: http://www.rte.ie/news/2012/0411/ecb-official-warns-irish-banks-on-debt.html


The transaction of 'non-payment of cash payment' involved Irish State issuing a €3.06bn bond that was funded by Nama for the period of time it took Bank of Ireland to deliver approval by shareholders. Thereafter, the bond was transferred to the Bank of Ireland for 1 year. Which means that comes April 2013, Irish Government must have some sort of an agreement in place as to what to do with this bond. Either the Bank of Ireland agrees to hold it longer, or the bond has to be sold to another holder.

Here is NTMA Issuance Circular for that bond: http://www.ntma.ie/erratum-2015-bond-offering-circular/

Now, note: the coupon on that bond is 4.5%, far less than 5.5% issued in August 2012, after significant improvements in Irish secondary markets bond yields, so 4.5% Promo Notes Bond is a 'better' deal than ordinary bonds. Which means that Bank of Ireland was buying a dodo. Of course, Nama effectively backstopped Bank of Ireland, which simply borrowed money from the ECB to fund the bond.

All of this stuff I explained back in April 2012. But here's a bit worth repeating: in 2012 Promo Notes carried no interest (the last year of a two years holiday), while in 2012 the state paid 4.5% on 3,629.92 million bond. Thus, the cost to the taxpayers of Minister Noonan's 'non-payment' was €163.35 million annualized.

Which means that were Minister Noonan to repeat the exercise comes March 2013, he will be increasing the interest bill on Promo Notes by the above amount on top of the already hefty €1.9 billion one scheduled for 2013.

14/12/2012: Irish external trade in goods: October 2012

Irish trade in goods stats are out for October 2012 and here are the core highlights (aal seasonally adjusted):

• Imports of goods in value have fallen from €4.482bn in September to €4.188 billion in October, a m/m decline of €294mln (-6.56%) and y/y increase of €327mln (+8.47%). Compared to October 2010, imports are up 16.43%
• Imports were running close to historical average of €4.404bn in October, but below pre-crisis average of €4.673bn and ahead of crisis-period average of €4.126bn. Year-to-date average through October was €4.109, so October imports were relatively average.
• Exports increased from €7.349bn in September to €7.468bn in October (up €119mln or +1.62%). Year on year, however, exports are up only €7 million or +0.09% and compared to October 2010 Irish exports of goods are down 1.48%.
• Year-to-date average exports are at monthly €7.687bn which means October exports were below this, although October exports were very close to the crisis period average of €7.433bn.

• Overall, the rise of €423mln in trade surplus can be attributed as follows: 71.2% of trade surplus increase came from shrinking imports, while 28.8% came from rising exports. Not exactly robust performance, especially given exports are up only 0.09% y/y.
• Trade surplus expanded by 14.4% m/m after a rather significant drop off in September. However, october trade surplus at €3.28bn was still the second lowest reading in 7 months.
• Year on year, trade surplus in October actually fell €321 million or -8.91% and compared to October 2010 trade suplus is down 17.65%. These are massive declines and worrying.
• Trade surplus in October 2012 stood ahead of the historical average of €2.903bn and ahead of pre-crisis average of €2.513bn - both heavily influenced by much more robust domestic consumption in years before the crisis. Crisis period average of €3.307 is slightly ahead of October 2012 reading. However, average monthly trade surplus for 12 months through October was more robust (€3.578bn) than that for October 2012.

Here are some charts on the relationship between exports, imports and trade balance:

Accordingly with the above, imports intensity of exports rose slightly in October on foot of a steep fall-off in imports, rising 8.75% m/m. However, the metric of 'productivity' of irish exporting sectors is now down 7.72% y/y and down 15.38% on October 2010. During crisis period, Exports/Imports ratio averages 182.4%, while YTD the ratio averages 188.0%. In October 2012 it stood at 178.3% well behind both longer term trend metrics.

Lastly, the above relatively poor performance of exporting sector came amidst two forces, both representing adverse headwinds for Irish exporters:

1. Global trade slowdown
2. Term of trade deterioration.

October 2012 on October 2011, saw decreases in the value of exports of Chemicals and related
products - down -€253 million (or -6%), and a decrease of €513 million in Organic chemicals, "partially offset by an increase of €208 million in Medical and pharmaceutical products" per CSO. Further per CSO: "The value of exports increased for Miscellaneous manufactured articles (up €91 million), Mineral fuels (up €54 million), Machinery and transport equipment (up €47 million) and Food and live animals (up €39 million)... The larger increases were for imports of Food and live
animals (up €116 million), Mineral fuels (up €96 million) and Machinery and transport equipment (up €92 million)."

So to summarize: headline rise in tarde surplus is driven more than 3/4 by drop off in imports, with exports performing poorly on y/y basis and m/m basis. However, we have to be cognizant of the adverse headwinds experienced by irish exporters in global markets and by the continued effect of pharma patent cliff.