22/1/2013: Irish Property Prices: 2012

Per CSO's Residential Property Prices Index released today, property prices in Ireland registered a fall of 4.5% in the year to December 2012.

The spin of 'good news' is seemingly abating in the wake of the figures. While I will cover detailed trends in the next post, here is a snapshot of annual series. Do, please, let me know if you see much of 'return to growth' in house prices:

To summarise the above and extend to the begging of the CSO series:

-- Overall RPP Index fell in 2012 to the annual level of 65.7 down from 75.4 in 2011 and down 49.5% on peak. In 2011 relative to peak RPP Index stood at a 42.0% discount. Y/y rate of fall in the annual index in 2012 was 12.86%, statistically identical to 13.10% drop in 2011. Surely, this is not a 'bottom has been reached' set of figures, no?

-- Houses nationally sub-index fell in 2012 to 68.6 against 2011 level of 78.4 (posting y/y decline of 12.5% in 2012, marginally and virtually dental to 13.0% fall in 2011). Again, please, tell me that decline of 13% followed by 12.5% is some sort of 'bottoming out'. Annual series for national house prices is now at 47.7% below peak having fallen 40.2% relative to peak in 2008-2011.

-- Apartments nationwide dropped from 57.8 in 2011 to 47.8 in 2012, with annual rate of decline in 2012 of 17.3% showing acceleration on 16.4% y/y drop in 2011. Again, the clear 'bottoming-out' of prices for Irish apartments is now in sight. These have fallen 52.7% relative to peak in 2011 and are now at 60.9% below peak.

-- Dublin property prices have posted a drop from 67.9 annual 2011 index reading to 58.3 in 2012 - a decline y/y of 14.14% which follows 2011 y/y drop of 13.9%.

To summarise, the 'bottoming-out' of Irish property prices in 2012 has resulted in prices declines across all four core categories (the few with a potentially sufficient numbers of sales to make any meaningful conjectures about). Not one category saw an annual increase in prices. And, to add an insult to the injury, y/y rates of decline in the prices in 2012 were worse than in 2011 in one case, marginally better in one case, and practically identical in two series. 

21/1/2013: Blackrock Institute Survey on Growth Conditions

Blackrock Investment Institute released latest summary of survey results for global growth outlook. Here are the charts by regions:

MENA:

 Western Europe & North America

 Latin America:

 Asia:

And summarising overall optimism levels for Western Europe and North America:

Good to see decent (not spectacular) performance for Ireland in the above (chart 2 and table above). Note: analysis is based on the surveys of professional economists.

21/1/2013: An Uncomfortable Question

Let's ask our Government an uncomfortable question: 

The Government claims (legitimately, to some extent) that 

1. The economy has stabilised & fiscal situation has improved significantly and
2. The Croke Park agreement 1.0 delivered what it required in terms of savings. 

Thus, by (1) & (2) things are going according to the MOU-sealed plan (signed within the confines of the Croke Park 1.0) and there are no new urgent pressures or shocks arising. 

In that case, why does the Government need Croke Park 2.0 with another round of EUR1bn 'savings'?

The idea that we need structural reforms in the public sector is not exactly hot on the Government's agenda. Furthermore, that idea was already, allegedly, reflected in the Croke Park 1.0 which was a 'success' per Government official accounts. Lastly, all structural reforms were supposed to deliver on targets set within the MOUs and these are consistent with the Croke Park 1.0.

So which side of the Government is talking porkies? The side that claims Croke Park 1.0 has delivered on reforms and changes and savings needed or the side that claims we need Croke Park 2.0?

21/1/2013: Fitch: Ageing Costs: The Second Fiscal Crisis

One theme I've been tracking over some time now is the longer-term state liabilities.

Here's a note from Fitch on the matter:

"Without the implementation of mitigating reforms the median country analysed in our new report today is projected to see its budget worsen by 0.6% of GDP by 2020 and 4.9% of GDP by 2050. Consequently, many of these countries would experience escalating government debt-to-GDP ratios, with the average EU27 debt-to-GDP projected by Fitch to rise by 6.9% by 2020 and 119.4% by 2050."

and...

"According to the model, Japan, Ireland and Cyprus face the largest jump in ageing costs over the next decade..."

 http://www.fitchratings.com/creditdesk/press_releases/detail.cfm?pr_id=780121&cm_mmc=Twitter-_-AgeingCosts-_-NRAC-_-20130121

Here's a summary table:

And a chart summarising policy pressures:

Guess how we are doing in terms of mitigating pensions pressures? Oh, not too well to begin with and are getting worse:

So what measures does Fitch list as Ireland's mitigation means so far planned?

"Tax relief on private pension contributions; Abolition of exemption from contribution to public pension scheme for low-wage earners; Pension levy on public sector wages; Reduction in pension tax privileges. Eligibility age for various pension schemes increased."

20/1/2013: Minister for Reform thinks... out loud...

In the week when  it was revealed that ca 2 months after first detecting contamination in beef samples taken at retail levels, and after a 5 days delay between confirmation of the contamination receipts and notification of the retailers and the public of the event, the Irish food safety standards are, apprently, beyond reproach.

Read and laugh: http://www.irishtimes.com/newspaper/breaking/2013/0117/breaking28.html

But in case this disappears into the domain of password protected archive, here are few quotes from the duo of the Irish Times journalists (might one assume that it took two journalists to write this up, as whilst one was laughing beyond her/his control, the other one was typing, and that these duties were rotated as required):

"Ireland has the best oversight system in the world for food production, Minister for Public Expenditure Brendan Howlin has insisted in the Dáil in the ongoing controversy over the discovery of horse meat in a beefburger. He was responding to Fianna Fáil leader Micheál Martin who questioned why Minister for Agriculture Simon Coveney was only told on Monday of the findings of tests carried out on burger meat in November and again in December, both of which proved positive for horse meat content. Mr 
Martin asked the Minister if he believed it was acceptable that Mr Coveney was only told three days ago. Department of Agriculture officials were informed on December 21st."


The Irish Times references the timeline of the events as follows: Department of Agriculture was notified of the contamination on December 21st. Minister for Agriculture was notified on January 14th. FSAI received confirmed re-test results from Germany of January 11th. What the Irish Times article does not state (it simply falls outside the questions raised by Micheal Martin, TD) is that the public and the retailers were notified of contamination only on January 16th. 

And to all of this, Minister for 'Reforms' had only one thing to answer: 

"Mr Howlin said... there had been criticism of Ireland, but the traces were only found because of Ireland's very high standard of oversight for food production, the best in the world I would say."

Err, and of course he then proceeded to accuse the UK of not having same high standards of testing as Ireland does.

Per other report (here), "Minister Howlin said that he believes Ireland has a high standard of oversight of food production, “the best, I would say, in the world”. He reiterated that this is not a public health issue and said it it is an issue that doesn’t relate to food safety, but relates to food standards."

Err, and of course he then proceeded to accuse the UK of not having same high standards of testing as Ireland does. So we now have a Minister for Reforms who thinks that 

1. food standards are unrelated to food safety, and 
2. that a system that allowed potentially contaminated meat to remain on supermarket shelves and continue flowing into the retail chain since December 2012 through mid-January 2013 is 'the best... in the world'.

No other comment needed.

20/1/2013: Euromoney Credit Risk Data: Q4 2012

All of the G10 countries, with the notable exception of Sweden, saw their risks rise in 2012, according to the latest results from Euromoney’s Country Risk Survey – and not just because of the problems affecting the debt-ridden euro zone sovereigns.

ECR (Euromoney Country Risk survey data for Q4 2012 is out and the results are quite interesting. Broadly they confirm the risk dynamics traced by the survey through the entire 2012, suggesting that qualitatively little has changed over 12 months to signal the improvements in the global economic environment.  Here are some top-line results:

• Of G10 countries, all but one (Sweden) saw further deterioration in ratings.
• G10 ratings deteriorations were not only driven by the continued euro area crisis, but are also present in the case of Japan, the US, and the UK own dynamics.
• Japan and the US continued "on a downward trend, as various economic and political problems continued to raise alarm bells among economists and country-risk experts regarding their medium-to-long term fiscal viability…"
• "Japan’s crippling debt problems, stunted growth and deflation have seen its score fall to 65.5 out of 100 and to 32nd out of 185 countries surveyed – a new record low, when 20 years ago Asia’s former powerhouse was ranked the world’s safest sovereign."
• US scores were down 1.6 points over 2012 to 74.7. 
• "…The US is far from a substantial risk – it is, after all, the 15th safest sovereign in the world, according to the survey. However, US politics has had a decidedly negative influence on its risk profile – all six of the political risk indicators were downgraded in 2012".
• On December 'deal' reached by the US Congress and the White House: "The two sides in the debate must still find common ground to negotiate $110 billion of spending cuts (the “sequester”) without bringing the US economy to a grinding halt. A budget must be agreed, while raising the $16.4 trillion debt ceiling even further presents another, even more perplexing, question of how to ensure medium-to-long term fiscal sustainability in light of adverse demographics – the weakest of the country’s structural factors, according to the survey."

Realting to two major themes I have been highlighting for some time now:

1. The fallout of the euro area from the global growth & growth environment clusters; and
2. The relative rise in risk quality in the 'Southern' growth clusters, leading to relative convergence in risks between the deteriorating 'North' (advanced economies of the West) and the improving 'South' (the middle income and some emerging economies of Asia-Pacific and Latin America)

we have this:

• "Risk differentials between the G10 and the emerging market regions narrowed by between two and three points in 2012, to 25 points for the Middle East and to 30 points each for Asia and Latin America." This is a notable result, coincident with one major theme in global risk changes that I have highlighted for some time now.
• "Differentials between the eurozone and emerging markets saw even larger shrinkage, highlighting that, although traditional markets are still safer, their comparative advantages have diminished."
• "Some of the emerging markets became safer in 2012: those that were largely decoupled from Europe’s debt problems – growing rapidly in many cases – and with fewer domestic issues." 
• "Latin America saw three distinct patterns emerging. Brazil, Chile and Colombia continued their long-term ascent in the global rankings, despite having their economic scores shaved by a slowdown in China paring back commodity demand. Argentina and Venezuela struggled with their domestic crises, which caused both countries to slide further down the rankings. Mexico, Peru, Uruguay and Bolivia all emerged on the radar, benefiting from strong policy management, good growth and other factors."

A special place in the risk rankings 'hell', however is reserved for the euro area:

• "Eurozone countries, …saw shrinking levels of confidence as Slovenia, Cyprus, Spain and Italy endured the largest falls in country risk scores of any of the countries surveyed worldwide, weighed down by creaking banks, rising debts, contracting economies, and the political and structural dimensions to the crisis."
• "The eurozone score fell by 3.1 points, the largest drop of any of the main geographical or economic regions."
• In the case of largest downgrades within the euro area: "All four saw their risks continue to rise during the fourth quarter, despite some progress in tackling their fiscal problems. Bond yields fell and credit default swap (CDS) spreads tightened, suggesting the risks had eased, but ECR has had reason to doubt CDS signalling." Which is the theme consistent with my analysis of CDS in the past.
• Of the peripherals: "Italy, down 14 places in the global rankings this year (to 51st place), Spain (an 18-place faller to 58th), Cyprus (down 11 to 42) and Slovenia (plunging 15 places to 37th) all failed to convince country-risk experts that the worst of the crisis was over."
• The crisis is now perceived to have spread from purely financial and fiscal dimensions to political and structural: "The systemic banking sector and sovereign debt problems stretching across the single currency area have invariably influenced economic risk assessments. However, the political and structural elements to the crisis have resulted in broadly equivalent falls in scores for each of the three measures of risk, on a euro-wide basis."

• On ECB actions: "...in the absence of growth and amid justifiable concerns about the political commitment to budget consolidation and reform – highlighting the risks of policy execution failure – fiscal projections have proved wildly optimistic, deferring the prospect of outright debt reduction for many countries." In other words, while ECB can talk as much as it wants (OMT, the inevitability of the euro etc), end-game is set by real actions. And these are now increasingly in question.
• "Peripheral country risk remains high, even in Greece, which has seen its ECR score stabilize this year, yet on a score of just 34 points and languishing in 110th place on the ECR scoreboard, the country’s problems are far from over… All of Greece’s economic and political factors, 11 in all, score less than five out of 10 as another future debt rescheduling looms. The much-feared Grexit is still not out of the question either, although the markets have been calmed by the progress achieved to date."
• "Debt resolution programmes in Spain, France and other countries are all being questioned."

You can see (subscribers only) the data and play with interactive charts and maps here and the overall site for the data is www.euromoneycountryrisk.com.

19/1/2013: Euro area banks need EUR400bn in capital: OECD

An interesting article via Euromoney (January 14, 2013) on European banks facing EUR400bn in capital shortfall estimated by the OECD.

A quote:

"A chief gripe is the extent to which European banks have refused to acknowledge their losses and write down bad loans, echoing the comedy of errors that has blighted Japan in recent decades.

... the European Banking Authority’s (EBA) financial stress test in June 2011 – which determined the capital-raising target for the regional banking system for 2012 – was based on an excessively benign treatment of the coverage ratio.

The median coverage ratio of the 90 European banks examined in the test was just 38% to meet the 9% core tier 1 capital ratio target. By contrast, the coverage ratio -  which indicates the amount of reserves banks have set aside relative to a pool of non-performing loans - for US banks equated to 67% in the first quarter of 2011, according to the Federal Deposit Insurance Corporation. ...

In a November report, before the Draghi ‘put’, Deluard noted: “In its mild form, European banks’ refusal to recognize losses could lead to a Japanese ‘lost decade’: banks evergreen their loans [ie, rolling over loans to borrowers who are unable to pay], regulators agree to play the ‘extend and pretend’ game, and the credit creation mechanism is permanently clogged."

And this week "the OECD, headed by Angel Gurria, added to the chorus of criticism – in contrast to the EBA’s upbeat assessments – by stating that the ratio of core tier 1 capital to unweighted assets of eurozone banks falls well short of 5% “in many cases”. On this benchmark, European banks face a €400 billion capital shortfall, or 4.5% of the eurozone’s GDP."

The OECD’s concern echoes that of the IMF, the Bank of England and the Basel Committee: "banks have inflated their asset values, despite the EBA’s self-congratulatory claim in July 2012 that banks in the region had reached a minimum 9% of the best quality core tier 1 capital to risk-weighted assets, in excess of the current international requirements."

And as OECD points out, the problem is much more than just 'peripheral' banks - the problem is Germany and France.

Here are two slides from my recent presentation on banking sector (I was planning to present more on this at the Irish Economy conference on February 1, but the session on banking got canceled, so will be posting the full slide deck here in few days time - stay tuned).

19/1/2013: Asia & CEE risk metrics: January 2013

Asia and CEE risk metrics (via Byblos Bank Research) (click on the image to enlarge to see the full table):

19/1/2013: Ireland's cost of funding

An interesting chart in today's IMF review of Greece:

Now, that's right - prior to Bailout 2.0, Greece led the euro area in terms of its overall Government debt financing burden as % of GDP and Ireland ranked 3rd in these dubious (in virtue) rankings. After Bailout 2.0, Greece funding costs are now below euro area average (ranked 7th) and Irish ones are ranked 2nd highest after Italy.

Now, note that this means that Ireland has the highest debt financing costs of all countries in Troika bailouts. In other words, with hefty subsidy to our cost of funding via EFSF et al, we are coming out very poorly. What will happen if we 'regain access to the markets' at costs higher than those under the Troika bailout?..

Although approximate, a deal to bring Irish debt financing costs to euro area average would see the Government benefiting from savings of ca 2.3% of our GDP annually or ca EUR3.73 billion making measures passed in Budget 2013 in their entirety unnecessary.

18/1/2013: Some Lessons from the US Recovery

This is an unedited version of my article that appeared in Sunday Independent, January 6, 2013.



Basking in West Florida’s sunshine, downtown Venice is a sleepy affair – a quaint and quiet boulevard full of historic trees, if not historic buildings, leading beaches free of crowds and full of sea birds. An unlikely mirror to the US economy, in many ways, it nonetheless shares in the dynamics of the country’s leading economic indicators.

According to the majority of the forecasters, 2013 is going to be the year when the US economy is set to take off onto a new growth trajectory, pushing inflation-adjusted GDP by some 3-3.5%. Pent up economic capacity, capital investment and jobs creation, held in check since the end of 2007, should act as the major drivers for the world's largest economic engine. Meanwhile, four years of relatively robust deleveraging of the American households will be an economic lubricant, facilitating expansion of private sector credit.

In reality, these forecasts are not new. Year after year, since the end of the last official recession in June 2009, the US and international analysts have predicted that over the next 12 months the economy will post a real recovery, comparable to the exits from all previous recessions. Year after year their forecasts were proven to be overly optimistic. Instead of escaping the near-zero growth dynamics, the US economy continues to struggle with finding a solid ground.

In the likes of Venice, this translates into a strange split in the overall economic activity, best exemplified by the local property market. Robust sales of new construction homes are offset by the stagnant secondary market, reflecting the bifurcation of the American fortunes. Those who accumulated debts in the 1997-2007 bubble are still fighting for survival. Meanwhile those who entered either jobs or retirement since 2008 are enjoying robust savings on new, high quality, lower priced dwellings.

Much the same applies to the rest of the US. Headlines suggest that house prices are on the rebound, and mortgages lending is up. Mortgages rates are near historic lows, despite the fact that banks lending margins are near historic highs. Corporate debt issuance is up and unemployment rolls are slowly inching down.

The US markets had a blast of a year in 2012. with Nasdaq came up some 15.9%, DOW went up 7.26% and S&P 500 rose 13.4%.  The Small Cap stocks index, Russel 2000, ended 2012 up 14.6%. Despite the still unresolved fiscal deficit overhang, the breaching of the debt ceiling, and ballooning Federal debt, the US Government borrowing costs were sustained at a superficially low levels. Helped by high risk aversion amongst the global investors and the aggressive monetary easing by the Federal Reserve, the US 10 year Treasury bonds yields came down from 1.88% to 1.76%, while 5 year Treasuries yields compressed from 0.83% to 0.72% over the year. US 10-year bonds gained 1.86% in return terms in 2012, while 30-year Treasuries rose 1.5%.

Economic competitiveness gains in the US have been spectacular in 2012. On top of historically weaker dollar boosting exports and lowering demand for imports, the 'shale revolution' saw energy costs plummet. The US manufacturing is now experiencing a new on-shoring trend with corporates bringing back manufacturing capacity previously located outside the US. The most recent example of this is Ford's plan to build a new USD773 million factory in Michigan. Ford has now committed USD6.2 billion for investment in the US manufacturing over 2013-2015. The WTI-Brent spread (the differential in the cost of oil between the US and Europe) has declined USD18.39 per barrel (some 20% of the overall price) compared to 2001-2010 average as the US ramped up production from shale deposits to 6.99 million barrels per day - the highest level of crude output since 1993.

However, as in Ireland’s case, improved US competitiveness is yet to translate into a broader economic recovery. According to the Current Population Survey data, American median annual household income remained stagnant between January and November 2012. The November 2012 median household income was 4.4% lower than at the end of 2008-2009 recession and the beginning of the current ‘economic recovery’. 2012 incomes are some 6.9% below those reached at the end of 2007 and 7.6% lower than in January 2000. On top of this, the latest ‘fiscal cliff’ compromise raised taxes on virtually all working Americans, reducing disposable household incomes by some 2% by some estimates. The deal is estimated to cost the US economy 1% of GDP annually, starting with 2013.

Weak and narrowly focused on specific subsets of the economy (financials, ICT, exports-oriented sectors) economic growth in the US has been unable to lift the real economy out of the L-shaped ‘recovery’. In other words, the main lessons to be learned by Ireland’s policymakers from the US ‘recovery’ of 2012 are unpleasant ones. Firstly, gains in competitiveness and exports growth are not capable of propelling the economy onto a growth path. Secondly, even with fully-deployed monetary and fiscal policies tools, the debt crises are unlikely to lead to a J-shaped or even a U-shaped recovery any time soon. Thirdly, ‘green shoots’ in various pockets of the economy are not necessarily going to lead to a widespread recovery.

Even when these sources of stabilization are supported by expansionary monetary policies, debasement of the domestic currency and massive accumulation of debt – policies not available to Ireland – they are simply not enough.

In the case of Ireland, these lessons mean that in 2013 we will most likely remain stuck in near-zero growth scenario, with continued contraction in domestic consumption and investment.  Even if Ireland delivers on GDP growth of 1.1% in 2013, as forecast by the IMF, the associated uplift in our economic fortunes will be negligible, as all growth will remain concentrated in the MNCs-dominated exports sectors. Real GNP – a much better measure of our economic activity – is more likely to post a 0.1-0.3% rise, while Gross National Income (GNI) per capita is likely to stay at the levels some 22-23% below those attained in 2007. In fact, current inflation-adjusted GNI per capita in Ireland stands below 2000-2001 levels, implying that in real terms, Irish economy is now marking 12th year of the so-called ‘lost decade’.

With zero employment growth, our unemployment rate will stay static at around 14.5% only thanks to rampant emigration and the expiry of unemployment assistance supports for long-term jobless.

In other words, like the Western Florida’s economy, the Irish economy will continue bifurcating into the pockets of continued stability, underpinned by the Multinationals, amidst the general landscape of continued economic stagnation. Subtract Florida’s beaches and sunshine, and the 2013 economic outlook for Ireland is more pain, punctuated by the delirious Government pronouncements of turnarounds and recoveries that the rest of us will struggle to connect to the everyday reality on the ground.

Sunday Independent, January 6, 2013.

18/1/2013: Iceland's U-shaped Recovery

Back in December, there was quite a bit of controversy stirred around by a short note about the failures of the so-called Icelandic model for dealing with the crisis. The note - a blogpost (and I have no link to it right now) - was alleging that much of the reforms in Iceland were not voluntarily chosen by the Government (which is true), did not result in significant debt relief for homeowners (due to mortgages markets structure differences) and did not produce significant improvements in the economy.

At the time, some readers of the note in Ireland went on to accuse myself of 'talking up' Iceland to promote my 'personal agenda'.

Aside from the above accusations being complete and unadulterated bulls**t (I never said Iceland did everything right or that all of Iceland's policies should be adopted in Ireland), they were based on the reading of one blog post.

Not to stir up any controversy, here's a link to the Danske Bank note on Iceland's economy from December 2012. I am not going to make any judgements here - just read the note. I am reproducing few charts below for those unwilling to read through the entire report.

Quote:

"The recovery of the Icelandic economy has been challenged by the deteriorating conditions in the European trading partners, which account for a large share of the Icelandic exports. It looks like growth in Iceland will perform above most of Europe over the next few years and that its recovery will continue but the level is still well below the pre-crisis level. We expect growth rates of 2.5% y/y in 2012 and 2.2% in 2013. It is also worth noting that recent national account revisions showed that growth in 2011 was adjusted down.

While investment activity and inventories have been rather volatile recently, private consumption has held up relatively well and 2012 should show about 3.8% y/y growth. We expect it will slow somewhat in the following years, to a growth level just below 3%. Investment activity should be fairly solid too and we expect growth rates of about 8-9 % y/y in 2012 and 2013, perhaps with a slightly increasing trend.

Inflation remains above the central bank’s 2.5% target, and has been so for a while, but inflationary pressures have eased somewhat in 2012 and we expect this trend to continue. Our forecast for the GDP deflator is currently 3.7% y/y in 2012 and 3.1% in 2013.

As the economy has been undergoing recovery, the labour market has improved significantly too. While we do not see this trend ending, we do expect it to slow gradually  as the unemployment rate comes down. Consequently, our year-end unemployment rate forecast is 5.8% for 2012, falling to 5.3% in 2013"

Here you go: Iceland's U-shaped recovery and Danske's forecasts for 2013-on:

And for the commentariate loving to accuse me of just dropping numbers to 'fool the readers' - I am not giving a commentary on the above precisely because you accuse me too often of commenting. 

17/1/2013: Transparency & Budgetary Processes

An interesting statement by Nessa Childers, MEP:

I completely agree - all budget-related submissions and proposals should be made public and the Department of Finance should publish them all on their site, linked to Budget documentation. This issue is not only about transparency and lobbying (which are very important), but also about public access to ideas and potential foregone options presented to the Government.