15/3/2013: IMF Assessment of the Euro Area Banking Sector Risks - part 1

Today's releases of the horror flicks starring Irish financial sector are up and running, folks.

As noted in the previous note - premiering Q1 2013 article on euro area banking sector analysis from Euromoney Country Risk surveys (link: http://trueeconomics.blogspot.ie/2013/03/1532013-irish-banks-still-second.html) - the IMF has released today 2013 Financial System Stability Assessment Report for European Union report.


This is the first blog post on the report and associated technical papers, and it covers the Technical Note on Progress with Bank Restructuring and Resolution in Europe.


From the top-line conclusions by the IMF (all quotes marked, italics within quotes are mine):

1. "The European Union (EU) banking system restructuring is under way, but is far from complete. Some bank restructuring has started, and the level Tier 1 capital ratios of EU banks have been substantially increased."
2. "But system-wide, capital ratios have been met partly by deleveraging or recalibrations of the risk weights on activities."
3. "Consolidation in the banking sector has been slow, with banks rarely closed."
4. "Nonperforming loans are building up in banks’ balance sheets, and addiction to central bank liquidity remains high especially for banks in peripheral countries."
5. "Despite the EBA recapitalization exercise having led to €200 billion of new capital or reduction of capital needs by European banks, fresh capital is difficult to attract in an environment where prospects for profitability are uncertain."
6. "Several hurdles impair restructuring and resolution in Europe, and urgent progress needs to be made:

• "First, EU bank resolution tools need to be strengthened, aligning them with the Financial Stability Board Key Attributes for Effective Resolution. Fast adoption of the EU resolution directive is welcome, but enhancements are warranted. Swift transposition should follow." [We are still ages away from having any effective resolution tools and any sort of functional regulatory consolidation, let alone functional and effective supervisory consolidation.]
• "Second, restructuring of nonperforming loans (NPLs) should be facilitated [more on this below]. The legal framework should not slow down restructuring and maximize asset recovery. In several EU countries, such as Italy, Greece and in Eastern Europe, bankruptcy reforms lag behind in that, for instance, current practice does not allow the seizure of collateral in a reasonable timeframe. Banks should also manage more actively their NPLs, possibly allowing a market for distress assets to emerge in Europe." [Note the absence of Ireland in the list of laggards above. It is generally strange that the IMF is avoiding passing any judgement on the only case of actual reforms that has impacted only one of the peripheral countries.] 
• "Third, further evolution of the General Directorate for Competition’s (DG COMP) practices will be needed in systemic cases to ensure consistency with a country’s macro-financial framework and support viability of weak banks, recovery of market access, and credit provision. Increased transparency would give added credibility and accountability." [Again, we are ages away from delivering on these.]
• "Fourth, disclosure should be significantly enhanced and harmonized by the EBA, to restore market confidence. In particular, interpretable metrics regarding the quality of banks’ assets, in terms of NPLs, collateral, probability of defaults (PD) and loan recovery rates (LGD) are key for assessing the strength of banks and restoring confidence in the banking system." [see comment above]

Summary: what needs to be done is, largely, nowhere to be seen, yet...

Update:


And when it comes to much of hope of the forthcoming regulatory changes altering the status quo of the dysfunctional regulatory system, don't hold your breath, folks.

The Big Hope is on the forthcoming EU resolution directive aiming to create coordinated system of responses to any future structural financial crises. Here's IMF view on that one:

• First, polite stuff: "A critical new EU resolution directive is in preparation. As a national approach to resolution may well not be appropriate in the EU given the importance of cross-border banking, and the failure of existing cross-country coordination mechanisms, the European Commission (EC) has taken steps to harmonize and strengthen domestic resolution regimes. This should help avoid regulatory arbitrage and make orderly resolution effective and efficient for cross-border banks. In June 2012, the Commission issued a draft directive for harmonized crisis management and resolution framework in all EU countries. The Irish Presidency will make the adoption of the resolution framework a top priority and plans to adopt it during the first part of 2013. The new national resolution regimes endow EU countries with strong early intervention powers and resolution tools. The transposition of the directive into national laws should be accelerated relative to the current deadlines (01/2015, and 01/2018 for bail-ins)."

I wrote about this Directive recently (http://trueeconomics.blogspot.ie/2013/02/2422013-eus-banking-union-plan-can.html) and was not too enthusiastic. Alas, here's IMF's less pleasing assessment, although dressed up in polite language of 'suggestions':

• "Box 1. Proposed Resolution Directive––Risks and Areas for Enhancements

1. Resolution of banks is undermined by the absence of a more effective EU-wide framework to fund resolution. Binding mediation powers for the EBA and mutual borrowing arrangements between national funds face inherent constraints (in particular, the EBA cannot impinge on the fiscal responsibilities of EU member states).
2. Passage of the directive will substantially enhance the range of tools available to resolution agencies in the EU. But the scope of the directive should be widened to include systemic insurance companies and financial market infrastructures. The European Commission launched a consultation at the end of 2012 on this issue. All banks should be subject to the regime, without the possibility of ordinary corporate insolvency proceedings.
3. The breadth and timing of the triggers for resolution should be enhanced by providing the authority with sufficient flexibility to determine the non-viability of the financial institution (including breaches of liquidity requirements and other serious regulatory failings, not just capital/asset shortfalls). There should be provision for mandatory intervention in the event a specified solvency trigger is crossed.
4. The directive affords less flexibility for using certain resolution powers than the key attributes. For instance, it does not permit exercising the mandatory recapitalization power and the asset separation tool on a standalone basis. Also, bail-in safeguards should not prevent departure from pari passu treatment where necessary on grounds of financial stability or to maximize value for creditors as a whole.
5. Depositor preference should be established for insured depositors2, with the right of subrogation for the DGS."

Thus, to sum up the best-hope response of the EU - it is useless, largely toothless and predominantly weak. And to add to this - it will only be fully functions in 2018! You might as well think we live in a Natural History museum, where urgency of response is differentiated by months, rather than minutes.




Next post will cover the issue of Non-Performing Loans.

15/3/2013: Irish banks - still the second sickest of the sick euro area banking sector

In anticipation of the today's release (16:00 GMT) by the IMF of the 2013 Financial System Stability Assessment Report for European Union, Euromoney Country Risk analysts have published an interesting article Country Risk: Five years on, banks still inflict chronic pain on eurozone. Here are some of the very insightful charts - including an update on the previously covered banks stability scores (see here for January 2013 post and here for Q3 2012 data).

Let's start with the aforementioned chart on banks stability scores:

Pretty poor showing here for Ireland. Unlike the rest of the economy, we clearly have not 'decoupled' from the peripherals in terms of banking sector health and that is given:

1. Unprecedented and incomparable by the rest of the EZ standards levels of support for banks in Ireland;
2. Lack of any progress on mortgages crisis; and
3. Longer duration of the banking crisis in Ireland than in any other peripheral state.

We had the second weakest banking sector in the EZ throughout 2011-2012 and we still do. So much for the theory that Irish banks are 'lending into the economy' or 'have been repaired' and so much real support for the body of economic knowledge that says the deeper the debt overhang crisis, the longer and the deeper the required deleveraging crisis...

Now, something that shows that despite the consensus in Ireland and in the bonds markets, we are not quite due an upgrade as risks are still favouring continuation of the banking crisis (note, my view is that we are due an upgrade, but a single notch one, to reflect economic decoupling from the peripherals):

And the sovereign-banks links? Well, they are still there and still nasty for Ireland:

And here are few sobering words from the ECR:

"While some observers might still be convinced the worst of the banking crisis is over, the [Euromoney’s Country Risk] survey provides compelling evidence that bank stability risks are as concerning, if not worse now, for many European countries than at the beginning of last year, according to its contributing experts. More than five years on from the catastrophic events of 2007/08, the resolution of the region’s banking sector problems is still firmly at the top of policymakers’ to-do list, but with plans seemingly stalling, the implications of failing to act could prove critical."

Just in case you are in the 'green jersey' 'we've-turned-the-corner' camp, here's ECR quote putting Irish gains in the above scores into perspective:

"Across the eurozone, bank stability risks were unchanged last year in four countries – Austria, Belgium, Cyprus and Slovakia; with Cyprus the lowest of the group – and improved in four more: Malta, Italy, Ireland and Portugal. However, for the latter three, the rebounds were small and their scores remained at low levels of 5.5, 4.3 and 3.3 out of 10 respectively, illustrating heightened levels of risk."

So how bad are things in the euro periphery and in Ireland? Well:  "And the banks are just as problematic across the periphery. Taken as a whole, the seven riskiest eurozone countries (Greece, Portugal, Spain, Ireland, Italy, Cyprus and Slovenia) had an average bank stability score below that of most other regions, worse even than Mena or Latin America – see chart (below)." Keep in mind, that is for the average and Ireland is way worse than the average.

So next time you see Irish 'banks' adds claiming they are 'open for business' and 'doing our bit to help the economy' etc, just check these charts once again. They are, by all international comparatives, graveyard zombies, still holding this island at ransom.

14/03/2013: Irish Construction & Building Sector Activity 2012

Latest index for Irish Building and Construction Production volumes and value is out today, confirming what I wrote about on the foot of new planning permissions data (here), namely that Construction and Building sector continued to shrink in 2012 and there is little hope beyond some public spending projects uptick for the already devastated sector.

Top headline numbers for full year 2012 (these are imputed from Q1-Q4 2012 data):

• Value index for all production activity in Building and Construction sector declined from 25.9 in 2011 to 24.7 in 2012 (using base of 2005=100). This means all activity in value terms has hit another historical low for the series and is running at less than 1/2 of the level of activity in 2000 when the index was reading 53.5.
• 2012 was the sixth consecutive year of declines in the sector activity by value and volume. 
• Peak sector activity was registered in 2006 with index reading of 109.7, which implies a decline from peak through 2012 of 77.5% in value terms.
• Value sub-index for Building excluding Civil Engineering has dropped from 20.9 to 18.2 between 2011 and 2012 (decline of 12.8% y/y) and is down 83.2% on peak attained in 2006.
• Residential Building value sub-index is down to 8.6 in 2012 from 10.2 in 2011, marking a decline of 92% on peak (2006).
• Non-residential building sub-index for value is down to 55.2 from 61.7 in 2011 and is 53.9% below peak levels attained in 2008.
• Civil engineering value sub-index was up in 2012 to 66.0 from 58.6 in 2011 (+12.6% y/y) but is down 49.3% on peak attained back in 2007. 

Similar story is traceable across the volume of production indices.

Charts to illustrate (note, charts are referencing a different base - instead of 2005=100 these have been rebased to 2000=100 for more clear compounded effect illustration):

14/3/2013: Comment of the Appointment of the New Governor of the Bank of Russia

Surprise nomination of Elvira Nabiullina (economic policy adviser to President Putin) as the incoming Governor of the Bank Rossiyii (Bank of Russia) prompted some speculation as to what this all means for the CB interest rates policy. Ms Nabiullina will take her position in June, subject to the approval by Duma (Lower House of the Russian Parliament). Here are my comments to the Central Banker on the topic:

There is no doubt that Ms. Nabiullina is well suited for the job of the Governor of the Bank of Russia both in terms of her qualifications and her knowledge of the Russian economy, economic policy formation and, in particular, the fiscal aspects of the policies. Ms Nabiullina also brings to the table a longer-term reformist perspective on the Russian economy - a much welcomed development especially given the overall environment of moderating inflationary pressures, slower and more sustainable growth rates, lower reliance in growth on domestic consumption and credit, and relative successes in liberalising foreign exchange rates policies recently delivered by the Bank of Russia. 

Perhaps the only three potential critical points in which Ms Nabiullina's appointment can be considered at this time relate to her close connections to the current Administration and her lack of experience in monetary policy and economics, as well as her predominantly applied and policy-focused knowledge of economics. 

The first criticism, while warranting some caution, in my opinion is over-played at this time. Following the sharp correction in economy in 2009, Russian economic environment has improved significantly along structural trend. This suggests that previously present tensions between fiscal and monetary policies have dissipated, as evidenced by the overall successful (albeit still incomplete) execution of longer-term monetary policies objectives by the Bank of Russia in 2011-2012. I do not expect significant fiscal/monetary policy tensions to arise in 2013, allowing Ms Nabiullina sufficient time to establish her relative independence from the Executive branch of the Russian Government. One critical area of the policies overlap is in the area of increasing foreign investment inflows and here too, the Bank of Russia and the Executive branch are on the same page.

It is also worth noting that Bank of Russia core policy targets: reduced inflation and free float for the ruble are supported by virtually all political parties in the Duma and by the Executive branch of the Government. Lastly, completion of structural correction period in Russian banking sector is also politically popular and is unlikely to cause much of a rift with Ms Nabiullina's Governorship.

The second and third areas of criticisms are more important in my opinion. 

Bank of Russia is engaged in continued process of freeing ruble exchange rate regime while simultaneously pursuing the objective of reducing inflationary pressures in the economy extremely exposed to price volatility in oil and gas markets. It is worth noting that recent inflationary pressures in the economy were driven primarily by tariffs and strong ruble weighing on imports bills, including via household consumption. In the near term, I expect capex uplift to add to these pressures, offsetting moderation in consumption growth. Overall, however, longer-term inflation is abating and the wage inflation is likely to become the core driver of the monetary policy in H2 2013 and thereafter. This means that the job of the Governor in months to come will be technical in nature, rather than broad policy-based. Here, technical monetary skills are required.

Critical issue that Ms Nabiullina is likely to face once she takes over the reigns at the Bank of Russia is the overall tighter monetary policy space. With wage inflation and trade policy (trade balance) driven inflation, Bank of Russia simply lacks tools to reduce significantly inflationary pressures. Despite this, Bank of Russia, in my view, has managed to establish (over 2012) its rates policy as a credible tool for combatting core inflation. As the result, I expect Russian headline inflation to moderate from 6.9-7.1% in H1 2013 to 5.4-5.7% in H2 2013. If this trend is established in the next two-three months, we are likely to see Bank of Russia moving to ease the headline rate, starting with a relatively conservative move in Q2 2013 and possibly accelerating cuts toward the end of the year.

13/3/2013: IMHO press release on CBofI Mortgages Plan

Here is the IMHO press release on today's Central Bank announcement relating to mortgages arrears resolution. This sums up my views and views I agree with.

Press release

March 13th, 2013

Government and Central Bank mortgage plan throws borrowers to the wolves, says Irish Mortgage Holders Organisation

Today’s announcement that the Central Bank of Ireland will set targets for six major banks in relation to restructuring of mortgages in arrears is a sad extension of the failed policies of the past that have allowed Irish mortgages crisis to spin out of control and have resulted in total mortgages arrears of unprecedented proportions.

The latest plan lacks any prescriptive solutions and allows banks to determine the nature, the extent and the application of all solutions while setting the terms and conditions with out any supervision. The plan delivers no improvement in transparency of solutions to be offered to borrowers by the lenders and provides no protection for borrowers against potential abuses by the lenders of their powers.

While the review of the code of conduct is to be welcomed the review fails to deliver a meaningful improvement to the previous practices and does not allow for an effective protections for borrowers.

Mr Elderfield's statement claiming that the regulator intends to remove the current cap on number of times a bank is allowed to contact or call or visit a borrower ahead of the review of the code of conduct is very concerning. In our view, the central bank is underestimating the extent to which the banks are willing to go to pressure borrowers. It also pre-empts the actual review of the code of conduct for mortgage arrears..

The borrower is exposed and has been afforded no protection in this plan. The lenders are incentivized to maximize the rate of extraction of savings and income from the already distressed borrowers prior to completion of any long-term forbearance or restructuring agreements, thus reducing the effective relief that can be accorded the borrower in the end.

The net effect of this plan will be additional stress on mortgage holders and more power to banks without an appropriate safety net or independent arbitration for mortgage holders.

The Irish mortgages crisis, now into its sixth year, is still raging beyond any control of the authorities. Per latest figures from the Central Bank of Ireland, 186,785 mortgages (including BTL) in Ireland are at risk (in arrears, restructured or in repossession), accounting for an unprecedented 25.3% of all mortgage accounts still outstanding. The balance of mortgages at risk,  relative to the total balance of all mortgages outstanding has reached a catastrophic figure of 31.9%. With some 650,000-750,000 estimated people residing in the households with the principal residence in mortgages difficulties, we are witnessing a wholesale destruction of savings, pensions and wealth of several generations of Irish people.

State response to this crisis to-date has been woefully inadequate and erring on the side of the financial institutions. Today’s announcement offers no hope for any meaningful change in the ways Irish authorities treat ordinary borrowers in distress.

For further information contact:

David Hall

or

Constantin Gurdgiev

IMHO

13/3/2013: Irish-Russian Trade & Investment - The Moscow News

Report in Moscow News on Irish-Russian bilateral trade, investment links and current state of growth in economic links between Russia and Ireland:

themoscownews.com/business/20130311/191325204/Russia-and-Ireland-forge-trade-ties-in-busts-wake.html

11/3/2013: Irish Services Activity: January 2013

In an earlier post I covered annual figures for Services Index for Ireland (link here). Today's release from CSO also provides data for January 2013 (monthly series) and here is the detailed analysis of shorter-term series.

• Wholesale Trade activity index rose in January 10 118.8 from December 2012 level of 115.2 (+3.13% m/m). The index is down 1.49% y/y. 3mo average is at 117.23 up on previous 3mo average of 115.93, but down on 3mo average through January 2012 which stood at 120.47. 6mo average is 116.6 against previous 6mo average of 120.9 and a year ago 6mo average of 119.9. Thus, at 3mo average activity through January 2013 is slower than through January 2012. Ditto for 6mo average.
• Wholesale & Retail Trade, Repair of Motor Vehicles and Motorcycles activity index increased to 108.9 in January 2013 - up 1.02% m/m, but down 1.27% y/y. 3mo average through January 2013 is static compared to 3mo average through October 2012 and is down on 3mo average through January 2012. 6mo average through January 2013 is down on 6mo average through July 2012 and down on 6mo average through January 2012. Slowdown in the broader category, therefore, is more pronounced and stretched over the last 12 months than in Wholesale Trade alone.
• Transport & Storage services activity index dipped from 112.1 in December 2012 to 111.5 in January 2013, a decline of 0.54% m/m. However, the index is up 10.29% y/y. 3mo average is statistically indifferent in 3mo through January 2013 (111.3), as in 3 mo through October 2012 (111.9), but is significantly ahead of 3mo through January 2012 (101.2). 6mo average through January 2013 (111.62) is ahead of 6mo average through July 2012 and ahead of 6mo average through January 2012.
• Accommodation & Food services index declined in January 2013 to 103.5, down 1.33% m/m and marked second consecutive monthly decline. The index is up 2.38% in y/y terms. 3mo average through January 2013 is at 104.6, which is lower than 3mo average though October 2012 (105.63) but above 3mo average through January 2012 (101.6). On 6mo average basis activity through January 2013 was ahead of activity through July 2012 which itself was ahead of activity in 6 months through January 2012.
• Information & Communication services activity declined in January 2013 from 121.7 in December 2012 to 119.8 (decline of 1.56% m/m) although activity was strongly up (+11.76%) on January 2012. 3mo average through January 2013 was at 118.7, well above 3mo average through October 2012 (112.23) and 3mo average through January 2012 (108.43). Similar increases are traceable to 6mo averages.
• Professional, Scientific & Technical activities index rose to 90.2 in January from 89.4 in December 2012 (+0.89% m/m) although the index is down 1.85% y/y. 3mo average through January 2013 is at 90.53, ahead of 3mo average through October 2012 (87.83), but behind 3mo average through January 2012 (98.13). Similar dynamics can be traced across 6mo averages.
• Administrative & Support services index rose strongly from 100.7 in December 2012 to 104.2 in January 2013 (+3.48% m/m). The index is up incredible 19.63% y/y and I am at a loss as to how this can be explained given the current economic environment and fiscal consolidation. on 6mo average basis index is up from 91.88 average for 6mo through January 2012 to 102.63 average for 6mo through January 2013.

Charts to illustrate:

• Total services activity inched up to 107.9 in January 2013 from 107.7 in December 2012. Year on year, the index clocked a rise of 4.35%. 3mo average through January 2013 was at 107.57 - ahead of 3mo average a year before (105.73).

Despite these above improvements, overall services activity remains below the long-term recovery trend, albeit, owing to the strength of Wholesale Trade and ICT sectors (see the annual data analysis for these) and to the surprise uptick in Admin & Support services, the sector is tracing a shallow U-shaped recovery path so far. From January 2009, it took the index 16 months to hit the bottom, and we are 32 months into the recovery now, with still 1.55% to go (1.86% on 3mo average basis) before regaining January 2009 levels of activity. We will, barring unexpected events, close this gap in the next 2-3 months, but do keep in mind that January 2009 was already 1 year into contracting services activity in the first place.

11/3/2013: Property tax and the markets for property investment

The Irish Government is about to bring in a property tax covering only residential property and excluding land holdings. This is the market for real estate investment that the Government is about to hammer even more:

All permissions for new residential construction are down 87.6% in 2012 (based on estimated full year figure using actual data through Q3 2012) relative to peak. The levels are so low, we are at a historical low now and 2012 was down on 2011. Declines in permissions were recorded every year since 2008. For dwellings - full houses - planning permissions are down whooping 91.8% in 2012 compared to peak attained back in 2005!

Overall planning permissions are down 77.5% on peak. Again, historical series low in 2012 (based on estimate):

This is the same Government that has attempted to 'revive' the property markets via various tax breaks in 2011-2012. Talking about 'policy consistency' then...

11/3/2013: Irish Services Sectors Activity in 2012

Data for 2012 end of the year index of activity in Irish Services sectors is out and before I cover monthly data for January 2013, here are some annual results:

• Wholesale trade services activity expanded 4.03% in 2011-2012, after growing 14.2% in 2010-2011. In 2012 the sub-sector activity was up 31.6% on 2009 and up 18.8 on 2010 making this the fastest growing sub-sector in all Irish services since 2009.
• Wholesale and retail trade, repairs of motor vehicles and motorcycles sub-sector activity grew 2.24% in 2012 compared to 2011 after having expanded 7.2% in 2010-2011. Over 2009-2012 the sub-sector activity grew incredible 14.6% all of which was driven solely by growth in wholesale trade, offset by shrinkages in retail and other sub-sector activities.
• Transportation and storage sub-sector activity expanded 5.39% in 2011-2012 period, having grown at 3.8% in 2010-2011 period. Since 2009 through 2012 sub-sector activity shrunk by 1.88%.
• Accommodation and food services activities expanded at 2.27% in 2011-2012, following growth of 1.4% in 2010-2011 period. Between 2009 and the end of 2012, sub-sector activity was down 6.74%. Accommodation sub-sector alone grew 2.18% in 2011-2012 after posting growth of 5.4% in 2010-2011 and the index is on the aggregate still down 3.67% on 2009. Bizarrely, Food services activities grew since 2009 through 2012 at 1.76%, and this sub-sector posted expansion of 6.80% in 2011-2012 that followed growth of 2.9% in 2010-2011 period.
• Information and Communication sub-sector activity was the star of the show in 2011-2012, rising 8.40% on foot of 3.6% growth in 2010-2011. The sub-sector is now up 20.11% on 2009 making this the second fastest growing sub-sector in Irish services after Wholesale trade.
• Professional, scientific & technical activities sub-sector activity was the worst performing sub-sector in 2011-2012, shrinking 10.39%. This followed growth of 1.1% in 2010-2011. The sub-sector activity is now down 23.80% on 2009 making it overall the worst performing sub-sector, even worse than the Services (68, 92 to 96) sub-sector described below.
• Administrative and support services activity sub-sector clearly doesn't have much in common with the sub-sectors that usually require significant admin & support (e.g. professional, scientific and technical areas of activities) as it posted an robust growth rate of 7.54% in 2011-2012, albeit on foot of strong contraction of 7.2% in 2010-2011 period.The sub-sector activity is cumulatively up 2.67% on 2009. Either Irish exports are becoming more bureaucratised to warrant increases in Admin & supports, or there's some sort of substitution from shrinking public sector employment to temps and outsourced services. Otherwise, why on earth would an economy in a deep slowdown post growth in this category on 2009 figures?
• Services (68, 92 to 96) encompassing Real Estate activities, Gambling and betting activities and Other personal service activities were down 3.48% in 2011-2012, following virtually zero (+0.7%) expansion in 2010-2011. The grouping is down 19.67% on 2009 levels of activity.

Overall, for all services covered in the CSO data, sector growth clocked at 2.52% in 2011-2012 period, down from 3.3% growth in 2010-2011. Not a good sign, but better than posting negative growth, I guess. Compared to 2009, sector activity is up miserly 3.52%. And that is despite increases in R&D spending, massive hikes in availability of state-financed VC and angel investment (via Enterprise Ireland), big-time focus on incentives (including tax incentives) in 'key' sectors etc. Not exactly an achievement to brag about, but, again, could have been worse.

Here's another interesting chart:

As I mentioned above, Professional, scientific & technical activities sub-sector activity was down 23.80% on 2009 making it overall the worst performing sub-sector in all services sectors covered. Which isn't going well with the claims we keep hearing about our 'knowledge economy' and 'smart economy' and the rest of the hoopla surrounding branding like 'Innovation Island'. Looks like stripping ICT, there is not much of 'knowledge'-intensive trading going on out there. And we take out IFSC, the whole landscape of 'knowledge-based economy' might just as well start resembling a veritable desert? Instead, the 'traditional' (aka not 'smart' according to our Government policies priorities) wholesale trade is driving the sector activity, plus the 'smart' ICT sector.

And one last point. Here's the Services PMI data for Ireland for the period covered above in the index (see latest data here: http://trueeconomics.blogspot.ie/2013/03/533013-irish-services-pmis-february-2013.html) ...

Strange that a lift-off in PMI from ca 35 average in 2009 to 52 average in 2012 should be translating into only 3.5% increase in actual services activity, no? Sort of suggests something bizarre going on in PMI data, right? Hello, Markit!.. Station Earth paging...

11/3/2013: Food Security & Social Protection

'Gas Flyer of the Week' award this Monday surely goes to the 'never-too-close-to-reality' crowd in the UN:

You see, in the real world, vast subsidies lavished on farming sectors in the advanced economies do two things:

1. Reduce resources available for social protection (and in scarce resources world that UN does not seem to inhabit this implies more severely binding budget constraint effects across the entire economy taxed to support what often amounts to landed gentry and large famers), plus
2. In emerging and middle income economies, subsidies paid out in advanced economies imply reduction in trade flows in agricultural goods from poorer states to richer ones (which in turn reduces economic activity in the former states, increases costs of food in the latter states and reduces resources available for social protection across the board).

So 'food security' hardly has anything positive to do with social inclusion, but a load of negatives...

Go figure, UN thinks differently. Then again, they thought few years back that Iran and Syria were human rights defending nations too...

9/3/2013: Slight improvement in Irish credit risk score

Small and in-line with other countries improvement in Irish Sovereign and Economic risk score from Euromoney Country Risk:

8/3/2013: Why Economists Failed to Predict the Twin Crises?

Wonderfully interesting recent CEPR (DP No. 9269) paper titled THE FAILURE TO PREDICT THE GREAT RECESSION. THE FAILURE OF ACADEMIC ECONOMICS? A VIEW FOCUSING ON THE ROLE OF CREDIT by Maria Dolores Gadea Rivas and Gabriel Perez Quiros (http://www.cepr.org/pubs/new-dps/dplist.asp?dpno=9269.asp) takes up a gargantuan task of trying to answer why (and indeed if) economists failed to predict the latest financial and real economic crises.

In addition, the real economic downturn "has also highlighted the lack of consensus in macroeconomic thinking about how far the financial system influences economic activity."

"Basic economic theory suggests that, in a frictionless world, the shocks originating in credit markets play only a minor role in explaining business cycles. However, the presence of financial imperfections can amplify their effect on the real economy and, thus, disturbances in credit markets can lead to larger cyclical fluctuations in the real economy. These frictions also provide micro-fundamentals for analyzing the channels of transmission." This is known as the financial accelerator mechanism.

However, prior to the crisis, "the most influential dynamic general equilibrium models developed just before the recession by Chistiano et al. (2005) and Smets and Wouter (2007) do not incorporate any financial accelerator mechanism. The debate at that time was about the effect of frictions, nominal and real, and the role of monetary policy to offset these effects on output and inflation."

Since the onset of the crisis, a new strand of literature has taken prominence in economics, dealing more directly with the links between the economic and credit cycles. This literature is empirical, rather than theoretical in nature and focuses on historical data of financial crises. Much of the literature concludes "that there are strong similarities between recent and past crises and, consequently, the Great Recession is nothing new" and that credit growth acts as a powerful predictor of financial crises, with external imbalances useful ind erecting the turning points. Majority of studies conclude that "credit booms tend to be followed by deeper recessions and sluggish recoveries."

Per authors, "all these papers have much in common, both in the stylized facts derived from them and in their methodological foundations. They provide considerable evidence that financial markets, and credit in particular, play an important role in shaping the economic cycle, in the probability of financial crises, in the intensity of recessions and in the pace of recoveries. The argument is that the strong growth of domestic credit and leverage that fuelled the expansion phase became the trigger for a financial crisis and, therefore, for a recession4. A common finding is that downturns associated with financial crashes are deeper and their recoveries slower."

The clarity and the robustness of the new studies' results begs a question as to why "the financial accelerator mechanism did not appear earlier on the agenda of the theoretical business cycle models"? "It seems that the link between financial and real crises is so obvious that economists should have been blind when looking at data before the crisis to miss such an important feature of the data. Significantly, however, all the papers that find this clear empirical evidence date from after the financial crisis started."

The real question to ask, therefore, is "whether this ex post evidence, could be obtained ex-ante and if it is sufficiently robust to assist with economic policy decisions"?

In other words, ex-post crisis studies do not "take into account the fact that recession dating is uncertain in real time. Furthermore, when the macroeconomic variables have the property of accumulating during the expansions periods, a potential bias may arise because these variables usually present high levels just before the turning points. For example, from this literature, an analyst could extract the lesson. However, during long periods of expansions, credit to GDP growth is high and there is no recession. Also, credit as a proportion of GDP accumulates over time endogenously in different theoretical models, …and, therefore, it is endogenously high when expansions are long. Yet these high levels before turning points do not imply any power of the credit to GDP ratio in predicting the turning points. In medical terminology, the previous literature is more interested in the ”anatomy” of financial
crises, after they have occurred, than in ”clinical medicine”, that is, diagnosis from the symptoms. …For the lessons extracted from the data to be of value to policymakers in their day-to-day policy decisions, we have to understand the dynamics of these financial variables in real time without forgetting the uncertainty about turning points."

This is a brilliantly put introduction to the core thesis of the paper: "to consider the cyclical phases and, especially, recessions in an environment of uncertainty. Policymakers that see credit to GDP growing have to decide when the growth is dangerously high and could generate a turning point. If a long expansion keeps generating a high credit to GDP ratio endogenously, to cut credit dramatically could unnecessarily shorten the period of healthy growth."

Put differently, "the key question for a policymaker is to what extent the level of credit to GDP (or its variation) observed in period ”t” increases or not the probability of being in a recession in ”t +1”, or whether it changes the characteristics of future cyclical phases."

To answer these questions, the authors propose "a novel and robust technique for dating and characterizing business cycles and for analyzing the effect of financial and other types of variables. We combine temporal and spatial data and we show that this approach is legitimate, notably reduces the uncertainty associated with the estimation of recession phases and improves forecasting ability in real time."

The key results can be summarized as follows:
-- "Credit build-up exerts a significant and negative influence on economic growth, both in expansion and recession, increasing the probability of remaining in recession and reducing that of continuing in expansion."
-- "However, these effects, although significant, are almost negligible on the business cycle characteristics.
-- The authors show that "there is no significant gain in forecast performance as a consequence of introducing credit."
-- Thus, "in contrast to the previous literature, our findings indicate that the role of credit in the identification of the economic cycle and its characteristics is very limited."

Per original (and by now secondary) question asked the authors claim that their "results also explain why financial accelerator mechanisms have not played a central role in the models that describe business fluctuations. The financial accelerator was not a key point in explaining business fluctuations simply because, empirically, it did not have such a close relationship to the business cycle, either in a sample (prior to the crisis) or in an out of sample approach, once the uncertainty in dating recession periods is included in the model."

This is a really interesting paper with fundamental implications for macroeconomics and one of the earliest attempts to reconcile empirical predictability and theoretical clarity of core modern theory (namely that of the financial accelerator) relating to the financial crises and the links between the financial and real economic crises.