2/5/2013: News from the Irish Tax Haven Central... Barrow St, D2

Given our Manufacturing PMI released today, things have to be looking sour when it comes to Irish GDP and GNP for Q1-Q2 2013. But, as always, never mind. In reality, Irish manufacturing is no longer the core driver of the economy. Instead, making stuff in Ireland (even if it was done for tax purposes with la-la-land accounting for value added) is now surpassed by billing revenues into Ireland by the services exporters, like Google.

Of course, the latter activity is also driven by tax arbitrage. And it is booming. So much so, that we now have a weekly international media instalment labeling Ireland a tax haven for services exporting MNCs.

Here's the latest one http://mobilebeta.reuters.com/special-report-how-google-uk-clouds-its-tax

And should you want to trace more stories on the same subject of Ireland as tax haven, here is the link to start with (keep tracing posted links): http://trueeconomics.blogspot.ie/2013/04/2742013-news-from-irish-corporate-tax.html

2/5/2013: Microfinance: not really working all too well?

In recent years, there has been some new evidence emerging on the negative aspects of microfinance - the darling of many development quangos. Here's an interesting study showing that, basically, the entire concept might not be working all too well.

"The Miracle of Microfinance? Evidence from a Randomized Evaluation" by Abhijit V. Banerjee, Esther Duflo, Rachel Glennerster and Cynthia Kinnan (April 10, 2013, MIT Department of Economics Working Paper No. 13-09, available http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2250500) carried out "the first randomized evaluation of the impact of introducing the standard microcredit group-based lending product in a new market. In 2005, half of 104 slums in Hyderabad, India were randomly selected for opening of a branch of a particular microfinance institution (Spandana) while the remainder were not, although other MFIs were free to enter those slums."

Core findings from the experiment?

"Fifteen to 18 months after Spandana began lending in treated areas, households were 8.8 percentage points more likely to have a microcredit loan."

However, despite having more credit, households in treated areas "were no more likely to start any new business, although they were more likely to start several at once, and they invested more in their existing businesses."

Did consumption improve due to availability of microfinance? "There was no effect on average monthly expenditure per capita. Expenditure on durable goods increased in treated areas, while expenditures on “temptation goods” declined."

What about longer-term effects? "Three to four years after the initial expansion (after many of the control slums had started getting credit from Spandana and other MFIs ), the probability of borrowing from an MFI in treatment and comparison slums was the same, but on average households in treatment slums had been borrowing for longer and in larger amounts." In other words, availability of credit did not improve due to presence of microfinance lenders in terms of access to credit, but credit did increase for those who have borrowed.

Again, consumption did not improve and neither did the quality of enterprises started in the microfinance covered areas. "Consumption was still no different in treatment areas, and the average business was still no more profitable, although we find an increase in profits at the top end."

Top of the line conclusion? "We found no changes in any of the development outcomes that are often believed to be affected by microfinance, including health, education, and women’s empowerment. The results of this study are largely consistent with those of four other evaluations of similar programs in different contexts."

Much hype has been expanded on microfinance over the years, including a Nobel Prize award and UN and other multinational organisations cheerleading. Subsidies have been lavished on some lenders, while other lenders have gotten off to stock exchange listings on foot of 'doing good' by microlending. Yet, newer evidence continues to emerge that not all is happy in the microfinance world.

1/5/2013: Not pretty and getting uglier: Irish Manufacturing PMI April 2013

Another unpleasant print of NCB Manufacturing PMI for Ireland was out today, marking broad-based, deepening contraction for the second month in a row and for the third month in last four.

Here are top figures:

Overall Manufacturing PMI declined to 48.0 in April 2013 from 48.6 in March, marking second consecutive monthly fall and reaching the lowest level since September 2011. It is worth noting that the current reading is statistically significantly below 50.0, but that the last two months of decline came on foot of 12 months of consecutive expansions through February 2013. Nonetheless, 3mo average through April 2013 is now down to 49.4 against 3mo average through January 2013 at 51.4, and current 3 mo period marks the lowest average reading compared to same period 2010-2012.

Overall, recovery was short, shallow and predominantly trending down, with most significant sub-indicators now below 50. As chart above shows:

• Output index contracted sharply from already statistically significant contraction of 48.1 in March 2013 to 46.5 in April. 3mo average through April is at 48.6, with April reading being the lowest recorded since August 2009 and previous 3mo periods average through January 2013 at 52.2, a 3mo average swing of massive 5.7 points. Current 3mo average is the lowest (and the only one below 50) for any same-period reading from 2010 through 2013.
• New Orders sub-index fell to 48.4 from 49.1 in March, with 3mo average through April at 49.4, below 3mo average through January 2013 at 50.8. New Orders are currently running at the fastest rate of contraction since January 2012.
• New Export Orders index posted slower rate of contraction at 49.2 in April, compared to brisk decline of 47.6 recorded in March 2013. 3mo average through April 2013 is at 49.0 against 3mo average through January 2013 at 52.2. In Q1 2013, New Export Orders index was running on average at 49.53, so the current index reading signals continued slowdown on the Q1 already poor showing, same as with New Orders sub-index.

Structurally over time, both New Orders and New Export Orders are on downward momentum sub-50 and are seeking confirmation to the downside:

Input prices and output prices are trending down, but inputs are still inflating, while outputs are still deflating, which means profit margins continue to shrink, albeit at moderating pace, compared to March 2013:

Of course, profit margins here are relative, since much of our Manufacturing PMI is skewed to reflect MNCs activities. These activities - as I wrote before - are predominantly on transfer pricing side, so booking higher inputs costs against lower output costs improves tax arbitrage.

In the chart above, Employment sub-index posted a worrying two-months consecutive slip:

• Employment sub-index fell to 46.9 in April from already steeply contractionary 47.2 in March. April marks the lowest sub-index reading since September 2011. 3mo average through April is at 48.9 against 3mo average through January at 52.1 and Q1 average of 49.8. Reminder: Q3 and Q4 2012 saw employment sub-index averaging 52.8 and 52.9 respectively, which implies a swing of 5.9 points to April 2013 from the end of 2012.

Lastly, my own Composite Current and Forward indices, re-weighting exports contributions and profitability conditions into overall PMI:

• Composite Current conditions indicator fell to 47.2 in April from 48.3 in March, with April reading statistically significantly below 50.0. The deterioration is broad on 3mo average basis and quarterly averages basis. The index is now at the lowest reading since August 2009!
• Composite Forward conditions indicator posted another (second consecutive) monthly contraction at 48.8 in April, which is marginally shallower than 48.4 contraction in March 2013. The reason for this is that the index is clearly tracking some of the forward activity, suggesting that conditions will ease slightly in months to come, but will remain in the 'negative headwinds'.

With both Current and Forward Composite Indices tracing close to (and even breaking) the lower bound of statistical significance, Irish Manufacturing activity seems to be heading for some rougher seas in months ahead. Granted, volatility can easily return things back above 50, but the dynamics overall are not pretty.

30/4/2013: The latest from the island nuked by the Troika 'rescuers'

Cypriot Parliament has narrowly (29:27 votes) approved the EU 'rescue' package agreement that covers EUR 17 billion in funds, according to the majority of the media analysts. Alas, the devil of the package is in the details.

Cyprus is not (repeat - not) getting EUR 17 billion in funds. Instead the package lists the following sources of funding:
- EUR 1.2 billion to be raised via losses on junior bonds in Popular and BoC
- The “bailin” of uninsured depositors (deposits in excess of EUR 100K) and senior bondholders is set to yield €8.3 billion
- EUR 10 billion loan from the euro zone and the IMF of which the IMF will provide EUR 1 billion (http://www.imf.org/external/np/sec/pr/2013/pr13103.htm)
- EUR 1 billion from rolling over domestically-held government bonds, plus EUR 100 million from extending Russian bilateral loan
- EUR 0.4 billion from gold sales by the Cypriot central bank and EUR 0.5 billion from privatizations

Grand total is, therefore, EUR 1.2 + 8.3 + 10 + 1.1 + 0.9 = EUR 21.5 billion.

Per preliminary MOU, Cyprus 'programme' has three core pillars:

"The first pillar aims to restore the health of the financial system and minimize the contingent liabilities from the banks to the state." This includes haircuts on depositors and bondholders in the first stage - as confirmed in the today's approval vote. In later stages, this involves "a substantial reduction in the size of the banking system in relation to the economy as well as in restructuring and recapitalization of one of the banks."

“The second pillar entails an ambitious and well-paced fiscal adjustment that balances short-run cyclical concerns and long-run sustainability objectives, while protecting vulnerable groups. In addition to the fiscal consolidation already underway—estimated at about 5 percent of GDP— an additional 2 percent of GDP in measures will be implemented during the program period, including by raising the corporate income tax rate from 10 to 12 ½ percent and the tax rate on interest income from 15 to 30 percent. An additional 4½ percent of GDP in measures will be needed over the medium term to achieve a 4 percent of GDP primary surplus by 2018, which is required to put debt on a firmly downward path. There will be protection for the most vulnerable groups. The social welfare system will be reviewed to streamline administration costs, minimize the overlap of existing programs, and improve their targeting to ensure that public resources reach those in need."

The third pillar, per usual IMF waffle, involves 'structural reforms'. “To complement the fiscal consolidation efforts, the program will undertake substantial structural reforms aimed to improve the effectiveness of the public sector. The state’s capacity to collect revenues will be strengthened with the implementation of a comprehensive reform agenda to modernize and harmonize procedures, improve internal coordination, and exploit economies of scale. Public financial management reforms will include the implementation of a medium-term budget framework and the adoption of a law on fiscal responsibility. In addition, to enhance the efficiency of the economy and reduce public debt, viable state-owned enterprises will be privatized. Finally, based on an assessment of needs, the program will supplement the recent reform of the pension system with additional measures to ensure its long-run sustainability.

In short, Cyprus gets the usual Troika 'Package +' of big-bang commitments delivery of which will be measured as common not by achieved sustainability or risk metrics, but by passed legislation and enacted legal changes (paper ahead of real impact). And the '+' bit refers to the total wrecking of the Cypriot economy under the reforms of the banking sector and international financial services sector, plus tax hikes which will assure that if there is any oil / gas off-shore, Cypriots will be out with shovels and snorkelling masks to dig every hydrocarbon molecule out to repay these debts.

30/4/2013: Irish chart that worries me most

The chart that bothers me most in Irish context is:

This shows the structural nature of the growth slowdown in Ireland in post-2007 period (based on IMF forecasts through 2018). The period of this slowdown is consistent with the growth rates recorded in the 1980s. And here's the summary of decade-average real GDP growth rates:

Now, keep in mind, in the 1980s and 1990s, Irish growth was driven by a combination of domestic drivers, plus external demand, primarily and predominantly in the goods exports areas. Which means that more of our GDP actually had real impact on the ground in Ireland. Since the onset of the crisis, most of our growth has been driven by the growth in exports of services, which have far less tangible impact on the ground.

Another point to make: current rates of growth for the 2010s are below those in the 1980s and, recall back, the rates of growth achieved in the 1980s were not enough to deflate the debt/GDP overhang we had. Of course, in addition to the Government debt overhang (similar to that in the 1980s) we also now have a household and corporate debt overhang.

If the IMF projections above turn out out be close to reality, we are in a structural decline economically and are unlikely to generate sufficient escape velocity to exit the debt crisis any time before 2025 at the earliest.

30/4/2013: Why not in Ireland?..

Bloomberg has an excellent report on MIT pairing up with Russia's Skolkovo on research, education and commercialisation:

Key stats of interest: "There were 83 international branch campuses of U.S. universities as of March, not including partnerships such as MIT and Skolkovo’s, according to GlobalHigherEd.org, a website run by researchers at the State University of New York at Albany. That number has climbed from 10 in 1990, says Jason Lane, a SUNY Albany professor."

Ok, how many are in Ireland - the country with self-professed 'best educated workforce' and focused on building 'knowledge economy' self-dubbed 'innovation island', where we are so solemnly focused on exports (yes, education is exportable and it is a very high value-adding export too)? Answer: none.

There's an MIT campus in Portugal (hardly a shining light in 'knowledge economics'), there are educational 'hubs' all over the world (http://www.globalhighered.org/edhubs.php) and campuses all around the globe (http://www.globalhighered.org/branchcampuses.php). We even have 5 Irish institutions' campuses outside Ireland (though I seem to think UCD and TCD have either plans or actual campuses too, though they are not on the list), but when it comes to the closed shop market inside Ireland, there are no top-league unis from the US trading from the Emerald Isle into Europe and beyond.

Check out this map with locations and spot Ireland... http://www.globalhighered.org/maps.php

Why?.. We have lavish facilities for some ITs built around the country with little reason or rationale for their existence. Why not convert one of them into a JV with, say, Stanford? Princeton? Hell, University of Arkansas would be an improvement... Ah, I hear the Unis dons say, competition is good when it is regulated (aka, stacked in incumbents' favour), but in the age of economic crisis, why not get universities to start really competing for exports by giving them a worthy competitor here, targeting markets outside Ireland?

30/4/2013: Business Confidence... not exactly an unbiased metric of reality

Readers of this blog would know that I have always been skeptical about 'business confidence' and 'consumer confidence' surveys as indicators of true underlying activity or predictors of the future activity. In the past I have criticised the German Ifo data on business expectations (http://trueeconomics.blogspot.ie/2013/02/22022013-small-cloud-over-german.html) and Irish consumer confidence indicators (http://trueeconomics.blogspot.ie/2013/04/2642013-another-indicator-turns-south.html) as being somewhat systemically biased into the la-la land. I even lost Sunday Tribune column back in 2007 on foot of criticising one of Ireland's largest real estate brokers' research on similar methodological basis.

Now, behold research from NBER, titled "Firms’ Optimism and Pessimism"  
(NBER Working Paper No. w18989) by RUDI BACHMANN, STEFFEN ELSTNER and (http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2257179) which looks at whether in general, firms’ expectations can be systematically too optimistic or too pessimistic. The authors used "micro data from the West German manufacturing subset of the IFO Business Climate Survey to infer quarterly production changes at the firm level and combine them with production expectations over a quarterly horizon in the same survey to construct series of quantitative firm-specific expectation errors."

The authors found that "depending on the details of the empirical strategy at least 6 percent and at most 34 percent of firms systematically over- or underpredict their one-quarter-ahead upcoming production. In a simple neoclassical heterogeneous-firm model these expectational biases lead to factor misallocations that cause welfare losses which in the worst case are comparable to conventional estimates of the welfare costs of business cycles fluctuations. In more conservative calibrations the welfare losses are even smaller."

Ouch… the confidence fairy might not only be a lier, but biased lier on top of that…

30/4/2013: 2012 Was Not a Year of Brilliance for the Central Bank

From the Opening Statement by Governor Patrick Honohan at the publication of the Central Bank of Ireland Annual Report 2012, 30 April 2013


"Two major elements of the Bank’s work during 2012 came to decisive junctures early this year – the liquidation of IBRC and related replacement of the promissory notes with marketable government bonds; and the introduction of an enhanced mortgage arrears resolution framework, which was announced in recent weeks. All of these measures are ultimately concerned with creating the environment for sustainable economic growth and reduction in unemployment."

It is my opinion that 2012 marked the year when the Central Bank has done the least to deliver on any meaningful reforms and change that can create or sustain "the environment for sustainable economic growth and reduction in unemployment". The bases for my opinion are:

1. In 2013, the Central Bank attempted (key word here) to introduce an enhanced mortgage arrears resolution framework. The new framework is 'enhanced' only to the extent that the previous framework was proven to be a complete failure. However, looking forward and setting aside the failures of the very recent past, the new framework is not consistent with the goals for either reducing unemployment or enhancing prospects for economic growth. Some of my criticism of the new framework in the context of these two objectives can be found here: http://trueeconomics.blogspot.ie/2013/04/1842013-legalising-modern-version-of.html
2. In 2013, the Irish Government has undertaken a swap of one financial liability (promissory notes) with another (government bonds). This transaction has been deemed by myself, many others, including the IMF, to have near-zero impact on debt sustainability when it comes to the Irish Government debt. The transaction was net positive for cash flow, albeit moderately, and hugely positive for PR. while th CB of Ireland did benefit significantly from improved security underlying the ELA, this benefit came at a cost to the rest of the Irish economy in the form of the conversion of the quasi-sovereign debt (promo note) into long-dated sovereign bonds.
3. Beyond the above two points, there has been very little progress on any tangible reforms in the banking sector in Ireland. We are still pursuing a duopoly model of the domestic banking market,  and there is no effective discussion, let alone effective resolution of the problem of lack of new entrants and lack of restructuring of the existent lenders. We have no new models of banking and lending in the country emerging after six years of this crisis and, if anything, we are now consolidating the strategic space in our banking services to a singular model of low-quality, low-access services supplied at an excessive cost. Both AIB and Bank of Ireland are pursuing this model, leaving customers to pick up the tab for reduced access to services and increased charges on the remaining services. This hardly supports Governor Honohan's claim that the Central Bank is working on creating and sustaining environment for growth.
4. All banking sector performance parameters have been either not improving or deteriorating over 2012 within the directly state-influenced covered group of financial institutions.

Slapping ad hoc targets on the banks to reduce mortgages arrears and then introducing masers to give them power well in excess of that awarded to the borrowers is about as productive of a measure for dealing with mortgages crisis as giving hospitals management targets for reducing the number of trolleys in corridors while removing patients protection from malpractice.

The Central Bank-supplied 'framework' is thus simply not fit for purpose, neither by the criteria of dealing effectively and humanely with the debt crisis (by first removing the unsustainable debt in systemic, transparent and fairly-priced fashion, then by addressing future moral hazard), nor in terms of placing the burden of crisis resolution where the causes of the crisis rest (proportionally with both the banks and the borrowers), nor in respect of the Central Bank claimed objectives of delivering supports for economic recovery.


Updated: Central Bank of Ireland has made a claim of 2012 'profit' of EUR 1.4 billion. But wait, a business makes profit by taking investors' / equity holders' / lenders' or own funds, purchasing inputs into production, producing something and then selling that something to willing customers who pay for these goods from their own funds. Central Bank of Ireland took claims imposed by the Government of Ireland on consumers and taxpayers, gambled these claims on the banks, who were basically compelled to take 'as offered' these Central Bank-supplied 'goods' and then collected from these captive banks pay (which the banks promptly ripped-off their customers - aka consumers and taxpayers). The Central Bank subsequently relabelled these rip-off charges 'profits' and remitted them back (EUR 1.1 billion) to the Exchequer. So can anyone explain to me what Central Bank produced that someone voluntarily was willing to buy with their own cash?

30/4/2013: German credit keeps flowing to firms... & still there's no growth

Per German Ifo institute: " Credit constraints for German trade and industry edged downwards by 0.1 percentage points compared to March. Around a fifth of the companies surveyed reported a restrictive credit policy on the part of banks. Despite recent developments in the euro crisis, there have been no significant changes in the favourable financial environment of German companies.

"After last month's decrease, credit constraints for large and small firms rose again, with the latter experiencing the sharpest increase of 1.3 percent. Medium-sized companies reported an easing of credit constraints."

So things are going swimmingly in terms of credit for German enterprises. Ease of getting credit is about as good as 2005-2007 average - the years when German banks were not just lending with abandon to domestic enterprises, but were also funding massive property booms in Spain and Ireland... yet, for all the credit access, German growth is... tanking.

So much for the Irish (and other governments') thesis that if only credit flows were improved, growth will return...

30/4/2013: The horrors of Euro-austerity: Part 1

The horrors of Euro-austerity are so vivid in this chart...

It is obvious (to anyone who is economically blind or illiterate in a basic Cartesian sense) that 'sustaining growth' would have required deficits of ugh... ogh... like... say 5% pa over 2009-2013 period? Or 6%? To cumulate these to over 25-30% of GDP in added debt? What could have possibly gone wrong?..

28/4/2013: That German Miracle...

Germany... the miracle economy of Europe:

Let's do some growth facts. recall that G7 includes such powerhouses of negative growth as Japan and Italy, and the flagship of anemia France.

1) Germany vs G7 in real GDP growth:

From data illustrated above:

• In the G7 group, Germany ranked 6th in growth terms over the 1980s, rising to 5th in the 1990s and 2000s, and, based on the IMF forecasts, can be expected to rank 4th in the period 2010-2018. In simple terms - Germany ranked below average in every decade since 1980 through 2009 and exact average in 2010-2018 period.
• On a cumulated basis, starting from 100=1980, by the end of this year, judging by latests IMF forecast for 2013, Germany would end up with second slowest growth in G7, second only to Italy. 
• On a cumulated basis, starting from 100=1990, by the end of this year, judging by latests IMF forecast for 2013, Germany would end up with fourth fastest growth in G7. Ditto for the basis starting from 100=2000.

2) Germany vs G7 in annual growth rates in GDP based on Purchasing-power-parity adjustment (PPP) per capita to account for exchange rates and prices differentials:

From data illustrated above:

• In the G7 group, Germany ranked 5th - or below average - in PPP-adjusted per capita growth terms over the 1980s and the 1990s, rising to 4th - group average - in the 2000s, and, based on the IMF forecasts, can be expected to rank 3rd - slightly above average - in the period 2010-2018. In simple terms - Germany ranked below or at the average in every decade since 1980 through 2009 and one place ahead of the average in 2010-2018 period.
• Note: Germany is the only G7 country with shrinking overall population, that peaked in 2003 and has been declining since, thus helping its GDP (PPP) per capita performance.

Here's the chart summarising Germany's rankings in G7 in terms of two growth criteria discussed:

Germany might have been performing well in 2006 and 2011 (when it ranked 1st in real GDP growth terms) and really well in 2007-2008 and 2010 when it ranked 2nd, but other than that, it has been a lousy example for any sort of a miracle.

28/4/2013: Nassim Taleb's Reading List

Following on my link to a TED talk (go figure... I am getting soft) here's another link, this time to Nassim Taleb's reading list:

http://www.farnamstreetblog.com/2012/02/book-recommendations-from-nassim-taleb/

Worth a 'trip' to the Amazon...