Sunday, July 14, 2013

14/7/2013: French downgrade: it really is very simple...


Here's why France been downgraded last week and why it's outlook is stable:


The chart shows pretty clearly that over the last three years, outlook for the French economy has deteriorated and deteriorated just a notch faster than that for the Euro area. In other words, France - expected to outperform Euro area by 150 bps on real growth in April 2010 is now expected to outperform euro area by 45 bps. Meanwhile, relative to the world growth forecasts, if France was expected to grow at a rate that was around 45% of the world growth rate forecast back in April 2010, today it is expected to grow - on a cumulated basis between 2012 and 2015 - at the rate that is just 13% of the world rate.

It really all is that simple: France is basically priced as Euro area and Euro area is not warranting a AAA risk rating.

14/7/2013: Banking Reforms : recent links

Some recent articles on Banks Reforms in the global and EU context:

"A viable alternative to Basel III prudential rules" by Stefano Micossi (9 June 2013) argues that Basel III "…proposed reforms will fail to correct flaws in the old system. The new rules are even more complicated, opaque and open to manipulation. What is needed is a radical shift to prudential rule based on a straight capital ratio."
Link: http://www.voxeu.org/article/viable-alternative-basel-iii-prudential-rules


And in a typically Bruegelesque fashion, "Basel III: Europe’s interest is to comply" by Nicolas Véron (5 March 2013) argues that since "the EU was once a champion of global financial regulatory convergence", then "the EU should drop its lacklustre inertia and pursue Basel III because, in the end, it’s in its interests to comply. EU policymakers ought to aim at enabling the adoption of a Capital Requirements Regulation that would be fully compliant with Basel III."
Link: http://www.voxeu.org/article/basel-iii-europe-s-interest-comply

His colleague, Daniel Gros is of a view that diversification is a good thing, but diversification not i regulatory space. In his "EZ banking union with a sovereign virus" (14 June 2013) he argues that: "The doom-loop between banks and the national governments played a dominant role in the Eurozone crisis for Ireland and Cyprus. A Eurozone banking union is usually viewed as the solution. This column argues that the doom-loop cannot be undone as long as banks hold oversized amounts of their government’s debt. A simple solution would be to apply the general rule that banks are prohibited from holding more than a quarter of their capital in government bonds of any single sovereign." Here's the problem, however, in both Cyprus and Ireland sovereign bonds holdings of own governments were not a problem. In Cyprus the problem was holding of Greek Government bonds, and in Ireland, the contagion mechanism was from inter-bank lending and banks' own bonds issuance to the sovereign via a blanket 2008 Guarantee.
Link: http://www.voxeu.org/article/ez-banking-union-sovereign-virus


"Implementation of Basel III in the US will bring back the regulatory arbitrage problems under Basel I" by Takeo Hoshi (23 December 2012) says that "rejigging financial regulation is in vogue. But, in the world of international finance, how well do different regulatory systems join up?" In the US context, the author "argues that the US Dodd Frank Act and Basel III are, in part, incompatible and that harmonising them may lead to unintended consequences. The US ought to tread carefully here but should also try hard to maintain the spirit of better financial regulation."
Link: http://www.voxeu.org/article/implementation-basel-iii-us-will-bring-back-regulatory-arbitrage-problems-under-basel-i


There's a huge amount of opinion published on Voxeu.org on bank regulation: http://www.voxeu.org/debates/banking-reform-do-we-know-what-has-be-done


ZeroHedge classic: http://www.zerohedge.com/node/475643 "The Secret Sauce Of Iceland's Success Story: Debt Liquidation?" argues that "That Iceland is so far the only success story in the continent of Europe, which continues sliding into an ever deeper depressionary black hole, as a result of the complete destruction of its financial sector and its subsequent rise from the ashes, is by known to most. …As it turns out, perhaps the biggest jolt to Icelandic economic growth is what we said was the correct prescription for resolving not only the US but global growth malaise that struck in 2008: debt liquidation."


Irish Times covers the outright bizarre and sublimely ironic day-dreaming that is going on in Ireland's highest policy circles. The latests instalment is transformation of the IFSC into a sort of "We've screwed up so comprehensively, we can sell this as competence" story: http://www.irishtimes.com/business/sectors/financial-services/ifsc-faces-radical-rethink-as-effects-of-crash-become-clear-1.1460832?page=2

Pearls of wisdom: "Ryan’s paper makes eight proposals, including “relaunching the IFSC brand” along product lines – global asset finance, a global servicing platform and a global listing platform." All of which have been already in place for years to various success. "The document recommends the creation of a JobsHub to allow firms seeking staff to “find people quickly and cost effectively”." Other things: setting up IFSC as a centre for 'bad banks' on foot of 'experience already present in NAMA'. This is the logic of converting Dublin Bay into a global toxic refuse dump for the UK and European waste disposal, because we 'already have considerable expertise' at the Poolbeg waste facilities. And last, but not least: converting IFSC into "global centre of excellence for property"… Even the Irish Times could not have escaped the obvious irony present in this idea.


Last, but not least, Bloomberg report on Michel Barnier balmy ideas on 'Bank-Crisis' plans for the EU: http://www.bloomberg.com/news/2013-07-09/eu-steels-for-battle-over-bank-resolution-plans-led-by-germany.html from July 9. "The European Union’s executive arm proposed procedures for handling failing banks with a 55 billion-euro ($70 billion) backstop, setting up a showdown with Germany over control of taxpayers’ cash." Good summery of current play on this.

Saturday, July 13, 2013

13/7/2013: Work Ethic? Just Don't Try the Dail

Outside my weekend links on Arts and Sciences - the WLASze posts (the current ones are here), I rarely write about things that are outside economics. One recent example was a post on the conscience of voting (here).

In the wake of this week's debacle in the Dail, here are some links summarising the very nature of the legislative practice we have - the nature which highlights why true change is so hard to either design of implement in Ireland.

http://www.thejournal.ie/dail-bar-drinking-tds-drunk-abortion-vote-989988-Jul2013/?utm_source=shortlink

Choice quotes:
"Barry himself has already admitted he was in the Dáil Private Members’ Bar but told the Irish Independent he “wasn’t drinking excessively”. Another government TD, who did not wish to be named, admitted he had “a couple of pints”."

Background for those not living in Ireland: it is illegal to drive a car after consuming 1-2 drinks (depending on person, obviously). It is, apparently, completely legal to legislate on the matters of importance to the entire country while being on a 'couple of pints'.

"Fianna Fáil TD Dara Calleary said he had “one or two” at around 11pm on Wednesday along with a number of party colleagues but said he “stuck to tea and coffee after that”. His party colleague, Barry Cowen, also said he had “one or two” drinks but said there was nothing “out of the ordinary”."

In other words, there is an accepted and completely 'ordinary' proposition that a TD can drink 'one or two' drinks before taking a vote.

"Most TDs contacted by TheJournal.ie this week played down the level of drinking on Wednesday night and early Thursday, pointing out that there were higher levels of intoxication on the night that IBRC was liquidated in February. “The IBRC night was f**king mayhem,” one TD, who declined to be named, said. Sinn Féin president Gerry Adams has previously told this website that there were at least two TDs in his vicinity who were intoxicated on the night the former Anglo Irish Bank was liquidated."

Aside from confirming that alcohol abuse is at least occasionally present and completely tolerated, there is an issue of the language deployed by some of the Irish parliamentarians in conversing with the media.


And about 'perceptions' - Ireland is perhaps the most self-conscious country I ever been to. Our leaders and civil service and public sector elites, our business elites go to extraordinary lengths to promote Ireland in the 'right light' internationally. Now: http://www.thejournal.ie/reaction-to-tom-barry-grabbing-aine-collins-989707-Jul2013/


Note: I have never once encountered a work colleague - Irish or foreign - in Ireland who was intoxicated at work. Then again, I never worked in a place where there is working, taxpayers-subsidised bar that stays open during all-night working sessions and where there is seemingly no work ethic present other than a mindless and ethics-light obedience to the whip.

13/7/2013: WLASze Part 2: Weekend Links on Arts, Sciences and Zero Economics

This is the second post from my WLASze: Weekend Links on Arts, Sciences and zero economics.

The first post is available here and is referenced in several links below.


The Missing Link is something (someone) many have claimed to have seen, and no one really needs to find. Another missing link - the one no one expected to exist, but which has tremendous significance to our future, as reported in Science Daily has been established by two researchers. A deep link between two seemingly unconnected areas of modern science has been discovered by researchers from the Universities of Bristol and Geneva. Basic story is that physicist Dr Nicolas Brunner and mathematician Professor Noah Linden uncovered "a deep and unexpected connection between their two fields of expertise: game theory and quantum physics".

Game theory "gives a mathematical framework for describing a situation of conflict or cooperation between... rational players". "Quantum mechanics, the theory describing the physics of small objects." Dr Brunner and Professor Linden showed that the game theory and quantum mechanics co-share same concepts, such as the concept of locality. By bringing quantum mechanics models into game theoretic setting, the games outcomes were transformed, opening up a possibility for co-sharing of quantum technologies in a game-theoretic setting, e.g in the case of auctions. I would not be surprised if this opens up some AI opportunities in the future too...

Paywall-free link to paper is here: http://arxiv.org/pdf/1210.1173v1.pdf


Quantum Physics might be our only hope in resolving the game played by Covanta and Dublin City Managers against the residents of the Dublin Bay-adjoining communities - the game of turning Poolbeg peninsula into a complete toxic dump. But should some magic get us rid of the Covanta crowd and their Grand Incinerator, there are some ideas we can deploy around Poolbeg. One example - get rid of the industrial wasteland by converting the space into habitable and social space.


While on the theme of liveable architecture, here's a lovely conceptual modern low-density house, from Argentinian practice.


More on architecture. From small scale to large. And where else do they do large as Large? Of course, in China.

There is some strange fascination in China with lattice architecture form. Perhaps it is purity of mathematical abstraction - the non-threatening semiotics of pure maths? Social escapism in the seemingly structured and orderly? Or is it the historical nostalgia to lattice as a form of space capture or, for some, people capture? I am not sure. But it does look like much of contemporary 'visionary' architecture in China is about lattice constructs…


Enough of buildings, let's switch to art.

One of my all-time favourite painters [I share this with Jean-Luc Godard, who is not my favourite film maker at all], under-appreciated and under-rated Nicolas de Staël. I sadly missed his exhibition in NYC. Here's his Méditerranée, Le Lavandou, 1952, Oil on canvas, 65 by 81 cm.


De Stael is about bold shape, brushstroke and even bolder use of shadow and light, and colour. He is subtly unbalanced in composition and boldly unbalanced in geometry - two juxtapositions that were similar to Morandi and some other contemporaries. But De Stael also knows depth - brilliantly so. He is a master of abstract landscape or rather space-scape as he transformed the use of landscape perspective to other compositional works, including still-life.


Into an entirely different world next: Brilliant work by the Iraqi artist Adel Abidin, who resides in Helsinki:  Symphony [Symphony of Death], 2012, one channel video installation, 3’15’’, video still


And a good interview with him here: http://www.guernicamag.com/art/bird-and-stone/


Next to sculpture: Bruno Walpoth Wood Carved Sculptures by one of the brilliant Italian sculptors of today:


Joseph Brodsky: "Now the purpose of evolution is the survival neither of the fittest nor of the defeatist. Were it the former, we would have to settle for Arnold Schwarzenegger; were it the latter, which ethically is a more sound proposition, we'd have to make do with Woody Allen. The purpose of evolution, believe it or not, is beauty, which survives it all and generates truth simply by being a fusion of the mental and the sensual." He'd disagree in absolute beauty being embodied in anything but a word. But do take the above images in consideration, will you?.. They are an unspoken word, a Nostalgic word of sorts. They convey thought…


Having tied Nostlagia - a major theme in my first part of this weekend's WLASze (Part 1 linked above) - to Walpoth's work, now to the poetic Nostalgia of abandoned spaces and beyond photography - in painting - Matt Bahen 


Good write up about the painter: http://www.akrylic.com/2012/05/just-before-the-dawn-the-work-of-matt-bahen/ . Recall Richard Artschwager in Part 1 of this week's WLASze, and remember Richard Diebenkorn here: http://trueeconomics.blogspot.ie/2013/06/2862013-wlasze-part-1-weekend-links-on.html - it's a cross of themes.


Having posted a link on the debate between causality and correlation (in the Part 1 of WLSAze linked above), let's dig slightly deeper into the nature of inquiry. Here's a slightly windy post on the topic of scientific vs religious systems of thought by E.M. Johnson for Scientific American. You have to read a bit before hitting the main point: "Science is not concerned with truth, it is concerned with doubt. As I’ve discussed before, it is this that makes science and religious faith fundamentally different."

Much of the rest of the post is also interesting. It focuses, in my view, on why science as a system (and religion too) abhors doubt. The author does not say so outright, but I can tell you - doubt is not a publishable concept in science. Majority of peer reviewed publications are on topics of affirmation of empirical or theoretical conjectures. Try writing a critique, doubting something without offering an affirmative counter-proposition. Likelihood is - you will get an outright rejection letter.


Enjoy! And do come back to this blog...

13/7/2013: Reuters on Anglo Tapes & Social Awakening in Ireland


Reuters programme on Ireland awakening to the banking and economic mess. Warning: shameless self-promotion (my contributions included).

http://uk.reuters.com/article/video/idUKBRE96B0X620130712?videoId=244195065

13/7/2013: The Moral failure of Irish policy exposed

This post by @happybeingme70
http://alexslye.wordpress.com/2013/07/12/my-response-to-minister-reilly/
is simply superb.
It is poignant, powerful, full of dignity and on-target. Read it, spread the word about it.

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.

Friday, July 12, 2013

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/

Thursday, July 11, 2013

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.