13/7/2013: WLASze Part 1: Weekend Links on Arts, Sciences and Zero Economics

This is Part 1 of my regular WLASze: Weekend Links on Art, Sciences and zero economics. Enjoy!


"Nostalgia had been considered a disorder ever since the term was coined by a 17th-century Swiss physician who attributed soldiers’ mental and physical maladies to their longing to return home — nostos in Greek, and the accompanying pain, algos." Todays view: "Nostalgia does have its painful side — it’s a bittersweet emotion — but the net effect is to make life seem more meaningful and death less frightening." A fascinating article from NYT on research into the role nostalgia plays in our lives:

As Derek Walcott said:
"Art is History's nostalgia, it prefers a thatched
roof to a concrete factory, and the huge church
above a bleached village.  The gap between the driver  
and me increased when he said:
                          “The place changing, eh?”
where an old rumshop had gone, but not that river
with its clogged shadows. That would make me a stranger.  
“All to the good,” he said. I said, “All to the good,”
then, “whoever they are,” to myself. I caught his eyes  
in the mirror. We were climbing out of Micoud.  
Hadn’t I made their poverty my paradise?"

The whole poem is linked here. Keep an eye on that space/time/art/nostalgia continuum in links below.


I mentioned John Baldessari in last weekend's post and here's Baldessari in a conversation with Ed Ruscha dealing with works by another modern art's great: Richard Artschwager. Classic RArt: Destruction IV, 1972 — Acrylic on celotex 40x48in

Something less art-theoretic and more design-tied: a fascinating video from the relic of the past that keeps (nostalgia-helping)a firm footing in the present: it's Morgan carmakers' tour through their factor. I am not kidding you - this video is fascinating: they build things like this:

From design to science policy (though scientific precision does not exactly match Morgan's image and output, inspiration is similar). Aiming for the Big Thing, two US lawmakers decided to stake some territory on the Moon and called on the US Federalistas to "establish a US national park about 240,000 miles outside of America’s borders". Nothing outlandish there - the US planted a flag on the moon and can have territorial claim to some of it, presumably. I am sure Russians will support this, since their rovers covered more of the lunar surface and have laid a claim to bit of it too. Which begs a question: if the Federalists in Washington do create a 'park' on the moon, how soon will Gasprom be drilling for lunar gas in the vicinity of the American National Park?


For the time being, Lunar Park of the 'nostalgic future' (not to be confused with Luna Parks of the 'nostalgic past') is a matter of dreams for some over-enthusiastic congresswomen. Which means we can safely look into the past and imagineer from its artefacts the world of art we never knew (or cared to know). Archeology is a derivative of nostalgia (not uniquely of it, but nonetheless containing it): a fascinating find from China.

Mostly, we agree (for now) that true writing of language, beyond the system of counting things or simply marking things with a representative symbol, was invented independently from each other in at least two civilisations: Mesopotamia's Sumer ca 3400 BCE and Mesoamerica's Olmec or Zapotec around 600 BCE (put simply in colloquial Americana terms - very old Mexicans). Two other civilisations claim independent invention of writing: Egypt ca 3200 BCE and China ca 3600 BCE. Egyptian claim is a challenge to Sumer's claim. Meanwhile India is pushing for its own claim to fame on this, with Indus script from the Bronze Age ca 2200 BCE. The issue of dating the formation of languages arises because we generally have to distinguish symbolic scribbling - denoting some concepts, but not a full system of written language - from genuine fully symbolic and structured writing. This is the reason why there is a debate about whether earlier Mesopotamian symbolic records, dating to 5000 BCE are form of writing or not. And the same debate is going to apply to the Chinese finds described in the link above. Nonetheless, the latest find does support the idea of independent writing formation in China and at around the time when the first writing appeared or started forming in another part of the globe.


But enough of stuff old and physically proximate. Let's get out far away into Space. The five facts about the black holes can be scary, their size (so big that you can just fatalistically utter: 'who cares' should one be formed next to our solar system), their theoretical omnipresence (the Schwatzschild radius principle), their power (somehow, being ripped apart by a black hole seems more pleasant that being ripped apart by a Spanish bull), they trap and loop light (and fold space into a perfectly closed loop) at the photon sphere, and they can bend time. But… just think - all the energy they trap can provide infinite supply of non-fossil fuels powered electrical bulbs the Greens dream about… And thus, expect an Intergalactic Centre of Excellence in Offshore Black Holes Energy Harvesting to be formed in Drogheda, around 2113, just about in time for the Chinese to become official Irish language Number 3.


While out in space, but closer to our planet, picture of the week:

Iapetus is the third largest moon of Saturn discovered by Giovanni Cassini in 1671. You can see Cassini Spacecraft images in raw colours here.


Staying in space for the next story: "Astronomers used the ageing Hubble space telescope to determine the true colour of the distant world, the first time such a feat has been achieved for a planet that circles a star other than the sun." The beast is ugly behind its visual beauty: "Unlike the pale blue dot that harbours all known life in the cosmos, the "deep blue dot" is an inhospitable gas giant that lies 63 light years from Earth. On HD189733b, as the planet is named, the temperature soars to 1,000C and glassy hail whips through the air on hypersonic winds."

I am sure folks from The Guardian will blame lack of planning on hostility of the HD189733b environment, calling for more strict Space Development guidelines and better integration between Spacial designs, social inhabitability and environmental sustainability in future discoveries.


Of course, social concepts lend themselves to serious discussions. Here's a great example of the battle ranging in philosophy of science for ages: what implies causality and whether correlation is that. Very insightful and well written. Of course, in economics, we know - causality is whatever your heart desires...


Sometimes our hearts desire that which makes no sense in the world we inhabit. And in the modern age of ageing populations and immovable object-like human existence, this happens more often and with more violent outcomes. Seeing and experiencing nature requires technological contortions of immensely innovative kind in the society where we focus on minimising effort in attaining everything. Behold the latest exemplification of the absurd: a walk bridge 'out' into the Grand Canyon. The point the idea is missing is that Grand Canyon is not to be seen by human as a bird might see it. Instead, it is supposed to be experienced as human can experience it - through physical exhaustion of hiking down or climbing down its walls. Believe me - I've done it twice and it is arduous. But because is is arduous, it is awe-inspiring. And no amount of walking on a fancy platform, near-fainting from the illusion of vast space beneath you can ever replicate the feeling of standing - at the end of the day-long hike - waste-deep in the Colorado River and raising you head to look where you came from.


Not all human world is senseless and not all senselessness is ugly. Even the more poignant examples of ugliness contain elements of beauty. Stunning imagery from one of the best currently active photographers, Michael Wolf, proves the point. My favourite:

Stay tuned for more WLASze links Part 2 later today.

12/7/2013: IMF Report on Malta: A Warning for Ireland

IMF Report on Malta is out, with, as expected, much of attention given to the risks of erosion of the tax advantages that form one of the core drivers for Malta's growth. This, of course, is of interest to other European jurisdictions, including Ireland.

IMF opens the report with a statement that Malta (emphasis in italics is mine) "has maintained macroeconomic stability in the face of a major crisis in Europe. Low reliance on external finance by the government and domestic banks, solid fundamentals, and a sound banking system have contributed to this resilience. However, recent events in Europe have heightened financial stability risks. In the longer term, Malta’s attractiveness as a financial and business location could be adversely affected by regulatory and tax reforms at the European level. "

"The Maltese economy has greatly benefitted from a business-friendly tax regime… Although these gains are hard to quantify, the large increase experienced in financial services [parallels to our IFSC anyone?] and other niche activities [in Malta's case: online gambling. In Ireland's: all IP-linked tax arbitrage, e.g. Google et al] since 2004 are likely related to Malta’s accession to the EU [which means Ireland is hardly unique here], its macroeconomic stability [which Ireland spectacularly does not have], and relatively favorable tax regime [bingo!]. Over the last ten years, more than half of the growth in value added is explained by the growth in financial services, ancillary activities (legal, accounting, and consulting), remote gaming, and ICT [wait, wait… but Dublin?… replace remote gaming with pharma - worse]. These sectors alone account for a quarter of total value added and 12 percent of employment [err… even more in Ireland and growing, again - replace remote gaming with gaming and… worse in the case of Ireland]. It is possible that greater fiscal integration of EU member states and a potential harmonization of tax rates could erode some of these benefits, with consequences on employment, output and fiscal revenues."

The risk is medium in size, medium/low in probability of materialisation and medium term - per IMF:

And thus, the report states that "The authorities were also of the view that an EU-wide tax harmonization would not happen in the short or medium term." However, let me ask you a simple question - how often does the IMF directly and bluntly pointing actual risks to the euro area states? After they have fully materialised, only. Hence, IMF stating the politically-sensitive and structurally important risk is 'medium/low' in likelihood and 'medium' in expected impact is as stern of a warning as one might expect. At any rate, of 6 main risks faced by the Maltese economy, the risk of tax regime changes is ranked joint 3rd with the risk of Protracted period of slower European growth, Significant declines in real estate prices, and ahead of the risk of Global oil shock triggered by geopolitical events.


Why such downplaying of the risks?

"Malta has been an important international banking centre in the past 25 years. A special offshore regime for banks (and other non-bank institutions) was promoted since the late
1980s. Like in several other European jurisdictions (Cyprus, Ireland, Luxembourg, or Switzerland), the main incentives offered to foreign investors at that time included exemptions from various regulations imposed on onshore banks and a favorable fiscal treatment."

How bad?

"The separate offshore supervisory framework was eliminated in 2002. As part of the planned accession into the EU, Malta was required to amend its financial policies to treat local businesses the same as international companies. In the mid-1990s, Malta started abolishing its offshore banking. In 2002, the legal amendments to the Banking Law removed an offshore banking option. Since then, all banks operate under the same regulatory and fiscal frameworks."

Spotting a picture of Dublin's IFSC, yet?..

"However, Malta maintained a substantial tax incentive for attracting foreign investors
in its banking and other businesses. This was achieved through tax refunds based on the
dividends that a local bank distributes to its shareholders. While the headline corporate income tax rate in Malta is 35 percent, the application of a tax refund system positions Malta as the country with one of the lowest effective tax in the EU, which ranges between 0 and 12 percent. The quantum of the tax refund depends on the nature of income and is generally equal to 6/7th of the underlying tax (35 percent), resulting in a 30 percent tax refund of the taxable profits."

Of course, Ireland does not provide such refunds - instead we have a Mega 'Refund' System called Double-Irish.

"In addition, the EU accession in 2004 and the euro adoption in 2008 boosted international banking and non-bank financial sector activities in Malta. Several large banking groups from various countries around the world (Australia, Germany, Saudi Arabia, etc) established their presence in Malta since the mid-2000s. The EU and euro area memberships inspired confidence; the former also allowed non-EU investors an easy access to European markets, while the latter facilitated transactions for EU-based investors. The availability of skilled people and the use of English as the official language also contributed to making Malta an attractive place for doing business by the multinational banks."

You have to laugh reading the above, as you can just replace Malta with Ireland there and nail the regular IDA presentations…

"As a result, the internationally-active banks have become large compared to the size
of the Maltese economy. As of October 2012, there were 13 non-core domestic banks and
8 international banks, with assets of respectively €5.3 billion (80 percent of GDP) and €33.1 billion (500 percent of GDP). The majority of these banks are subsidiaries of EU banks offering a range of services to non-residents that include trade finance, investment banking, and group funding operations."

"Unlike some other EU countries with a big international financial centre (for example,
Cyprus or Ireland), Malta has not experienced any deleveraging pressures in recent years. As a result, measured by the total bank assets to GDP ratio, Malta now ranks higher than Cyprus or Ireland, and is second only to Luxembourg among all EU countries."

Problem, Roger, is that the above statement is pretty much bonkers. Ireland has deleveraged not tax-sensitive international banking sector, but tax incentives-insensitive domestic sector. Cyprus 'deleveraged' deposits. So from the truth-in-analysis point of view, one should look at the compatible assets and liabilities at risk of tax regime changes. And that is much harder, as a large part of Irish internal assets and liabilities is really IFSC, while part of Malta's external assets and liabilities is domestic economy.

All in - the risk is real. This is why IMF (having downplayed it to medium) still posits it as the fifth most significant in overall terms.

Ireland should be seriously concerned.

Note: I wrote about the threats to Ireland from tax policy harmonisation most recently here: http://trueeconomics.blogspot.ie/2013/07/272013-sunday-times-june-23-2013-g8-and.html
And I wrote about Malta's tax dilemma and IMF analysis of it before, here: http://trueeconomics.blogspot.ie/2013/05/1552013-what-imf-assessment-of-malta.html

12/7/2013: Irish Domestic Travel Stats Aren't Exactly Unexpected

CSO released new data on domestic travel by Irish residents for Q1 2013. Overall, there has been a marked decline in the total number of trips as well as outbound trips (details here: http://cso.ie/en/media/csoie/releasespublications/documents/tourismtravel/2013/hotra_q12013.pdf).

However, even more revealing are the sub-series for Holiday Trips:

Note: 2013 (e) estimates are based on Q1 2013 data adjusted for effects of normal seasonal variation. Since we have very little data to go by, these are very much indicative of the direction in the series, rather than of actual numbers in terms of absolute declines expected.

Data shows sustained declines in domestic trips undertaken for holiday purposes by Irish residents. Weather effects are of course a factor, but it is worth noting that holiday travel abroad by irish residents also contracted y/y in Q1 2013. In other words, it looks like even disregarding weather conditions, things are grim.

Now, keep in mind that the Government has spent two years now 'actively stimulating' travel sector here. And there have been plenty of noises coming from the tourism sector and Irish officials about alleged boom in Irish families substituting away from vacationing abroad in favor of domestic travel. This substitution is yet to show up. Instead we are facing faster contracting demand for domestic holidays travel, slower declines in outbound travel and an overall decline in all holidays travel...

Something that can be expected in an economy in its fourth recessionary 'dip' since 2007 and with domestic demand down for 17 quarters out of last 25.

12/7/2013: Euromoney Country Risk: Q2 2013 update

Euromoney Country Risk Survey Q2 2013 update is out today, showing continued divergence in risk perceptions about Brics and Europe (rising risks) and North America and Latin America (falling risks):

Largest risk increases are:

One area of interest from my personal perspective: Russia:

"With one or two exceptions, the majority of former Soviet independent states, alongside Russia, have become riskier this year, continuing longer-term trends.

Diminishing economic growth is imparting a negative impact on the region, especially in light of the slowdown in Russia (Russia: Stagnant oil price dampens economic outlook).

However, the risks are also tied to worsening perceptions concerning other indicators, and for a variety of reasons, ranging from Russia’s institutional underpinnings and corruption record, and government stability in Azerbaijan, to currency and information access/transparency concerns in Ukraine and Georgia’s regulatory and policy environment.

The Kyrgyz Republic and Moldova – the latter especially – have seen their political risk profiles downgraded sharply, highlighting the region’s flaws, its failure to capitalize on the eurozone’s worse risk-return opportunities, and why Russia, ranking 62nd globally, is still the only country to score more than 50 out of 100."

I gave a comment on Russian scores changes:

My full view is as follows:

In my view, increased risks associated with the Russian economy relate to the lack of structural drivers for growth, lagging reforms and low returns on reforms already enacted, plus the overall downward revision of the emerging markets and commodities in the environment of highly uncertain and subdued global growth.

Russian Government drive toward modernisation of the economy has dramatically slowed down and is no longer appearing to be a long-term priority for policy development. At the same time, investment in the economy has fallen off the cliff due to a combination of exhaustion of construction investment, Cyprus crisis, continued low FDI and reduced overall economic growth, as well as the perception that tax increases are likely in the near future. Looming ruble devaluation is reducing both FDI and internal investment.

Institutional capital is lagging and remains largely un-effected by reforms rhetoric. If anything, last 24-30 months have seen sustained deterioration in reforms efforts. The comprehensive agenda for modernisation of the economy has been pretty much frozen, if not abandoned.

On the longer-term horizon, emergence of alternative energy supplies and shale gas reserves development worldwide is starting to feed through to the forecasts for future current account and earnings capacity of the Russian economy.

However, there is a negative bias built into markets analysts expectations and assessments of the Russian economy, compared to other BRICS. Brazil and India have largely unsustainable models of longer-term growth driven by internal investment dynamics, instead of institutional capital build up, China is a massive credit bubble ready to blow with current account surpluses acting as the only potential buffer, given already extensive expansion of credit and money supply undertaken, and South Africa is hardly a sustainable, or significant in global terms, economy by any measure. In my opinion, Russia's economic future is highly uncertain. But of all BRICS - Russia has the best potential for stable and sustainable growth based on intrinsic workforce and domestic investment and demand potentials. Whether it will realise these potentials is a different matter.

12/7/2013: Few links on European Federalism

Recently, I wrote about the emergence of federalist movement in Europe and the requirement for federalisation to proceed along the direction and depth consistent with looser, more locally-based and flexible path of Swiss Federalism. The original post is here: http://trueeconomics.blogspot.ie/2013/06/1962013-european-federalism-and-emu.html

In a Project Syndicate article, Hans Helmut Kotz makes a very similar point, including the strong positioning of weaker federalist model as risk management driver for future policies:
http://www.project-syndicate.org/commentary/germany-s-economic-groupthink-by-hans-helmut-kotz

Couple quotes (italics are mine):

"... if the eurozone is to be a sensible long-term proposition, mere survival is not enough. The main justification for a monetary union cannot be the possibly disastrous consequences of its falling apart. Even less convincing is the neo-mercantilist point that the eurozone would allow for indefinite current-account surpluses (it does not)."

"Originally, Europe’s monetary union was supposed to provide a stable framework for its deeply integrated economies to enhance living standards sustainably. It still can. But this requires acknowledging what the crisis has revealed: the eurozone’s institutional flaws. Remedying them calls for a minimum of federalism and commensurate democratic legitimacy – and thus for greater openness to institutional adaptation."


Update: Swiss Confederate system is once again coming up as a model for the EU Federalissation here: http://blogs.lse.ac.uk/europpblog/2013/06/20/the-eu-should-take-inspiration-from-switzerland-in-its-attempts-to-increase-democratic-legitimacy/

11/7/2013: Consumer Confidence Boost in June

ESRI/KBC Consumer Confidence indicator for Ireland posted a surprising jump in June compared to May, rising to 70.6 from 61.2. The index is now at the highest reading since October 2007. There are many caveats to this increase, as contained in the ESRI/KBC release, available here:
http://www.esri.ie/irish_economy/consumer_sentiment/latest_consumer_sentiment/PRJune_13.pdf

The chart below plots June reading for the indicator (vertical red line), as well as the latest (May 2013) pairings of Consumer Confidence against Volume and Value indices of retail sales (labeled as 'Current').

The chart below puts the time series for retail sales (through May) and Consumer Confidence (thorugh June):

The core points to add to the release (linked above) is that

1. Consumer Confidence has little direct connection to core (ex-motors) retail sales indices, with low R-squares for both relationships.
2. Consumer Confidence shows more volatility than the volume of retail sales across all time periods. Pre-January 2008, STDEV for Value of Retail Sales is at 7.0 and for Volume at 6.6, with Consumer Confidence at 14.8. Since January 2008, Consumer Confidence STDEV is at 7.9, against 4.5 for Volume and 7.4 for Value of core retail sales. Since January 2010, STDEV to Consumer Confidence is at 6.3, against that for Value of retail sales at 1.3 and Volume of 1.8.
3. Last chart above clearly shows divergent trends in retail sales and confidence series from July 2008 through June 2010 and from March 2011 through today.

This is not to criticise the Consumer Confidence Indicator quality, but to caution against any short-term calls to be based on indicator alone. To see serious change in the underlying consumer propensity to spend and to see any serious change in the underlying inputs into the national accounts, we have to wait for a confirmation over time of the stronger trend in all three series.

11/7/2013: Sunday Times 7/7/2013: Defining Mortgages Sustainability

This is an unedited version of my Sunday Times article from July 7, 2013.

In coming weeks, the Irish authorities are planning to complete the general policy reforms comprising the Personal Insolvency Act 2012, the Mortgage Arrears Resolution Targets (MART), Guidelines on a Reasonable Standard of Living and Expenses, the Review of Code of Conduct on Mortgage Arrears, and the Land and Conveyancing Law Reform Bill.

All of the above documents define the core objective of the reforms as delivering long-term sustainable solutions to mortgages crisis. None, save for the Central Bank’s MART, bother to explicitly define what constitutes such sustainability. Sadly, the Central Bank existent definition is both vague and, arguably, counterproductive in terms of its potential impact on the economy and society at large. As such, it is in need of urgent clarification and amendments.

MART states that " the Central Bank will assess the success of the institution’s progress by sampling cases and gauging the plausibility of their sustainability, including through the use of quantitative tools".

The Central Bank is currently in the process of defining what these sustainability assessment tools will be and what methodology will underpin these.  The public is unlikely to see these in full detail. This week, Seanad reading of the Central Bank Supervision and Enforcement Bill 2011 showed clearly that the Irish authorities are also unwilling to grant the Central Bank sufficient powers to robustly curb potentially anticompetitive and consumer-damaging actions of the banks.

All of this does not bode well for the prospect of effectively resolving the longer-term social and economic crises related to the household debt overhang.


MART sets out three fundamental principles that must be respected with regard to sustainability. These include consideration of both current and prospective debt servicing capacity of the borrower; the "need to use an appropriate interest rate when discounting future income flows, which should take account of the lender’s cost of funds”, and the requirement for the lenders to apply "a realistic valuation of the borrower's assets" and costs of foreclosure on the loan.

As such, the existent concept of sustainability substantively contradicts the economic and social considerations of long-term household debt sustainability.

The Guidelines on a Reasonable Standard of Living and Expenses form the cornerstone of the test for what can be recovered by the banks from defaulting households. Yet, the Guidelines do not allow for households accumulation of pension savings and savings that can be used to cushion against any potential future adverse shocks to household employment, earnings, health or other unforeseen risks, such as an old-age parent dependency. As the result of this, a sustainable mortgage arrangement can easily become unsustainable overnight at any point in time following the original restructuring.

Worse than that, the risks to future sustainability are actually higher the greater is the extent of the original distress. This so, because current mortgages problems are linked to future risks of unemployment, poorer health and lower pensions provisions. The draconian insolvency and debt restructuring regimes promoted by the Government further compound these risks.

Economists know that a household experiencing unemployment are more vulnerable to higher risk of unemployment in the future. The duration of the original unemployment spell is also a contributing factor.

Households that experience mortgages distress are also more vulnerable to adverse long-term health effects. The long-term health risks arise from the current stress, as well as from the lower lifetime disposable income available to the distressed mortgagees. These two risk factors, in turn, are reinforced by the fact that in Ireland, preventative health is an out-of-pocket expense. This means that economically distressed households tend to cut back on preventative health expenditures early on in the crisis.  Having entered into the Guidelines-determined payments arrangements with the banks, these households will have no future funding for either preventative health or insurance cover that facilitate prevention, early detection and treatment of chronic and disability-related illnesses.

Households at higher risk of unemployment also face exponentially higher risk of completing their work-lives without adequately providing for pensions, even in the absence of mortgages debt problems. Those that are forced to go through a debt restructuring processes are more likely to enter their retirement in poorer financial health. Which, in turn, implies that their pensions expenditures funding shortfall will be higher in the future than the gap which will befall their age cohort counterparts.

The endgame for the households experiencing financial difficulties today and facing a ‘sustainable’ mortgages restructuring can be high risk of old age poverty and low quality of old-age health.


The second point about the MART definition of sustainability is that it ignores the margins between the cost of borrowing for the households and the cost of funding these loans for the banks. This difference is non-trivial. The Central Bank criteria for sustainability require that a restructured mortgage should be at least self-funding for the bank. Currently, average new adjustable rate mortgage is priced at around 3.45 percent or ca 0.7 percent above the lowest cost of funding currently available via a bond placement. As the Pillar banks are moving toward the Government-set 2014 deadline for switching to independent funding, both margins and the funding costs for the banks are likely to rise.

Over 2003-present, average new business retail interest rates on adjustable rate mortgages peaked at 5.62%. Yet, during the period when the new business rates were at their highest, banks margins were actually relatively low. If the margins increase, as envisioned by the Central Bank-own policies on reforming the Irish banking sector, convergence of wholesale funding costs to historical averages will imply that the retail rates faced by the households can jump above 7 percent. MART definition of sustainability will account for only about 60 percent of this increase, with 40 percent left outside the official long-term sustainability consideration.

The third core component of sustainability definition under MART also requires significant re-thinking. The banks have no incentives, under the reformed personal insolvency regime to consider longer-term implications of household asset valuations and costs of foreclosure.

Taking all mortgages that are either in arrears, restructured and in banks possession, 238,254 mortgages accounts amounting to the total of EUR46.21 billion were at risk of default or defaulting in Q1 2013. While the number of accounts in distress was down 0.17 percent quarter-on-quarter in Q1 2013, the volume of lending these accounts represent rose 2.27 percent. The rate of increase in Q1 2013 was three times faster than in Q4 2012.

Some percentage of the non-performing mortgages is undoubtedly represented by the accounts that are in strategic arrears - the case brought to the forefront of the news-flow this week by the Ulster Bank statement on the matter. However, what is not in doubt is that overall, the quality of the outstanding mortgages pool in Ireland is deteriorating. This is happening at the time when the property prices are continuing to fall, especially in the areas and regions where mortgages distress and quality of mortgages loans are most likely the lowest – outside the core urban locations. With this, the costs associated with future foreclosures are rising as well.

Some anecdotal evidence and reports by the insolvency support organisations indicate that the banks are currently attempting to accelerate foreclosures on properties with some positive equity, where households have fallen behind their mortgages repayments. If true, this will put added pressure on the market prices and increases, not reduces the costs of foreclosure for the mortgages that are truly unsustainable in the long run. Perversely, the current system for mortgages arrears resolution is incentivizing the bank to pursue short-term maximization of funds recovery at the expense of genuine long-term sustainability.


Given the extent of the Irish mortgages crisis, we have no easy and painless solutions to the problem of household debt overhang. The more efficient and sustainable long-term options require direct writedowns of household debts to reflect, at least in part, collapsed asset markets valuations of Irish property. Arguably, with the Irish Governments committing all resources aimed at restructuring the banking sector to writing down development and investment loans underlying the commercial real estate bust, we no longer have this option available to us.

In its absence, we need to prepare for a wave of bankruptcies that will have to take place to absorb the losses accumulated within the banking system. Doing so will require taking a longer-term view of the Mortgage Arrears Resolution Targets, and relaxing significantly the Guidelines on a Reasonable Standard of Living and Expenses to allow for accumulation of savings and provision of health cover as discussed above.

We also need to cut the insolvency period duration from the current 6+1-years formula that applies to mortgages down to 1+2-years formula similar to the one that is in place in the UK, but only for households in genuine financial distress. Strategic defaulters who subsequently enter bankruptcy proceedings should be subject to the tougher regime as currently outlined in the existent legislation.

To finance these measures, we need to secure long-term cheap funding for the banks that will allow them rebuild their balancesheets not in a matter of 12 months, as currently planned, but over the next 10-15 years. The latter should be the job for the Eurosystem and the Central Bank.

Three charts:

Box-out:


This week, the Central Bank of Ireland published the data on the holdings of Irish Government long-term bonds for May 2013. Since May 2012, the amount of outstanding long-term dated Irish Government bonds rose by some EUR6.4 billion, once we control for the new bonds arising from the conversion of the IBRC Promissiory Notes in February 2013. EUR3.41 billion of this increase in supply of bonds was absorbed by the non-resident investors and institutions, while Irish Central Bank and monetary and financial institutions (aka Irish banks) have increased their holdings of long-dated Government bonds by EUR6.37 billion. All other investors, including financial intermediaries other than banks, non-financial corporations and households have reduced their holdings of   long-dated Government bonds by EUR3.37 billion. The data clearly shows that the degree of the inter-connectedness between the banks and the state, as measured by the Irish Government exposure to banks demand for its debt, did not decline since January 2012 through May 2013. Instead and in contrast to all official statements on the subject of the Sovereign-banks contagion risks, such risks today are only stronger than they were seventeen months ago.

11/7/2013: Assessing 2 years of Irish economic performance since Q1 2011

Currently, the Dail is debating around the clock one of the most important pieces of legislation: The Protection of Life During Pregnancy Bill 2013 (see my post on the core ethical issue involved in the actual vote here: http://trueeconomics.blogspot.ie/2013/07/972013-voting-on-conscience-vs-voting.html). The Government is unhappy with the possibility that it might lose several very high profile TDs on the issue.

In the background, Irish economy is appearing to gather more and more supporters of the thesis that things are getting better under the stewardship of the Government. Are they? Let's take a look at the Q1 2013 data from the Quarterly National Accounts.

Quick guide: I take four metrics of economic health: GDP, GNP (which is GDP less net transfers of profits and earnings abroad), Final Demand (private and public investment and spending on goods and services) and Total Demand (Final Demand less changes in stocks of inventories). To be more precise: Final Demand = Personal Consumption of Goods and Services + Net Expenditure by Central & Local Government on Current Goods & Services + Gross Domestic Fixed Capital Formation).

Also, consider the above variables in terms of current prices (including inflation effects) and in constant prices (controlling for inflation), as well as seasonally-adjusted and not seasonally-adjusted.

Here are three summary tables. Red marks cases of decline (in percentage terms) in excess of 1%, Green marks cases of increase in excess of 1%.

Remember - these are 2 years cumulated changes.

First GDP and GNP not seasonally-adjusted:

Second GDP and GNP seasonally-adjusted:

 Last, Final and Total Demand:

In the first two tables, I also showed the changes in GNP that accrue to changes in MNCs decisions to either retain earnings or expatriate them (Factor Payments). Whenever GDP is down and GNP is up, this effect is solely due to decline in transfers by MNCs of profits abroad or higher returns from Irish investments abroad repatriated into Ireland or both.

Another quick explanation: I reference both Q1 2011 to Q1 2013 change, as the Government officially took over the economy at the end of Q1 2011. But since economic activity is 'sticky' (and does not immediately respond to changes in Government policies) and since any Government requires some transition to power, we can treat both Q1 and Q2 2011 as basically being determined by the previous Government. Hence I am also showing comparatives for Q1 2013 relative to Q1-Q2 2011 average.

Draw your own conclusions.

10/7/2013: Four charts that scream 'Wake Me Up, Scotty!'

A look into the future in four charts:

The charts above show the demographic divergence between the US, and other core G7 economies, as well as the differential in trend for France and the UK from Japan and Germany. 

Of course, labour mobility is much more open today than in the 1950s-1990s, but given that back in those days Europe usually sent its brightest to North America (more recently also to Australia and in the near future to the rest of the world, if we keep going at current rates of youth unemployment), and that with the above charts this is not likely to change. If anything, given the rends above, why would anyone young stay in declining Europe? To mind the decaying family estates and pay for the growing demand for geriatric supplies and services? So one has to wonder: is the Old World really going to have any growth?.. Of course, it might be the case that by, say 2050, Europe will harmonize and consolidate and coordinate and centralize and stabilise and OMT itself to such an extent that no one will have to work at all in the paradise fully funded by an unlimited ESM. 

Who knows... but for now, you can play with the UN Population data through 2100 here: http://esa.un.org/unpd/wpp/unpp/panel_population.htm

Updated: an interesting article on the crisis effects on European birth rates: http://hromedia.com/2013/07/10/eurozone-economic-crisis-hit-birth-rates/

10/7/2013: France credit score continues to slide

Per Euromoney Country Risk Survey, France score continued to decline in Q2 2013 falling to 71.9 from 72.3 in Q1 2013, despite tighter CDS. France now ranks as the second worst performer in the euro area after Slovenia.

France's score is well behind AAA-rated Germany and is 0.7 points behind the G8 average. The core drivers for recent downgrades are:

• Deteriorating Government finances;
• Poor employment outlook; and
• Increased transfer risk

9/7/2013: Voting on Conscience vs Voting with the Whip.

As you know, I rarely post on matters outside economics (exception being my WLASze weekend links posts). The current, heated on both sides, debate about the Protection of Life During Pregnancy Bill is too often spilling into passion-driven mud slinging. This I find always disturbing in a civilised society.

I do not want to convey support for one side of the argument or the other. My personal opinion on this is probably irrelevant to anyone but myself, but given I am aware that it will be thrown my way once this post goes life, let me preclude any potential accusations and state that

1. I am a socially liberal Libertarian and I am also aware of the deeply rooted ethical dilemmas involved in the issues when there is actual or potential termination of life at stake.
2. That said, I tend to favour current legislation and this is my personal judgement not to be taken as any sort of endorsement.

With these caveats, as I pointed earlier on twitter: whether I agree with their position on the Bill or not, I believe that those TDs who vote on the basis of their conscience - be they in 'Yes' camp or 'No' camp - deserve to be respected. 

There are basically two types of issues, our legislators face: policy and ethical. 

• Policy issues votes should be aligned with the TDs understanding of the specific policy benefits and costs to their constituents and to the nation overall. This is basic representative democracy at work.
• Ethical issues are bigger. These involve fundamental values and can be associated with unresolvable dilemmas that cannot be called on the basis of plurality or majority. These must be determined on the basis of one's deeper convictions and the test of these convictions in a representative democracy comes with elections. 

I have said on numerous occasions that the Church and the State shall be always kept separate and this separation should be considered not only to sustain integrity of the State, but also to sustain integrity of the Church. 

However, we must recognise that people are free to hold a religious belief. When they do hold a belief - any belief - their acting on such a belief (e.g. voting on the basis of it) is not a reflection of the institution power over the State. It is a reflection of their belief. Separation of Church and State does not mean removal of religious beliefs from voters' choices. It means removal of the Institution of Church from directly determining outcomes of the State policies and legislative processes. 

The core test here, again, is whether a person (a TD) is voting with their conscience or with their institutional affiliation. Those TDs who vote with the whip are doing the opposite of what separation of State and Religion requires. They force Institutional consideration into Legislative outcome. Those TDs who vote with their conscience (again - regardless of whether they vote Yes or No) are doing exactly that which is consistent in principle with separation of Church and State - they put their conscience above the Institutional framework of the whip.

9/7/2013: Gold Price, Gold/Oil Price and What's the Fundamental Difference?

Here's a chart from @freegolds on oil-gold price co-movements:

The point is - as raised here: http://www.sciencedirect.com/science/article/pii/S1057521912001226

Main points of our research:

For the US data: "… our results discussed above indicate that the oil market does not in general act as a safe haven for stocks. However, we find that oil in fact acts as a safe haven during specific periods, such as around 1990, which is presumably related to the first Gulf War and recently, after the 2007-2009 financial crisis (the “credit crunch”). Moreover, the role of oil following the most recent crisis seems to be continuing. Similarly, oil acted as a safe haven for bonds after the 1987 stock market crash and also, after 2000, which is presumably related to the crash in technology and telecommunications stock on the NASDAQ. These results seem to create a pattern for the role of oil that has not been reported before."

"… we find specific periods in which gold market acts as a safe haven. In particular, for equities, we detect evidence for this after 1990, again presumably related to the war, and also, for the recent credit crunch. The role of gold as the anti-dollar is further confirmed in this analysis, also. Gold can be considered a safe haven for dollar in most of the last decade."

For the UK data: "Our main finding perhaps is that we continue to observe a significant role for the oil market as a safe haven when short time periods are targeted in our rolling regression analysis…  In particular, oil acts as a safe haven for the UK stocks around 2001-2002, which coincide with the technology stocks collapse, and as well as around 2007- 2008, which coincide with another crash in stock values during the “credit crunch”. Moreover, oil is a safe haven for the UK bonds also around 2001-2002 period."

"On the other hand, gold cannot be considered a safe haven for the UK stocks during these equity markets turmoil periods, which should be of interest to market participants."

"Gold, however, continues to play its role as a safe haven against paper currencies with regards to the Sterling, also. Hence, our findings indicate that the attributes of gold in this regards are not confined to the US dollar. We find that gold is a safe haven for Sterling around 1998, which was a period of turmoil in financial markets due to the collapse of the hedge fund LTMC; around, 2001, again a period of turmoil due to collapse in technology stocks as mentioned above; and further around 2007-2008, which is of course the recent global financial crisis."

The core issue the chart above raises is that simplified worldview of gold (or any other asset class) as a pure 'absolute return' play. Instead, every asset should be considered in the context of total portfolio of assets being held, including risk-adjusted returns the asset offers and hedging and safe haven properties it affords.