A quick link to a recent Yahoo Finance and Aljazeera article citing myself on the issue of Anglo Irish tapes fallout.
http://en-maktoob.news.yahoo.com/leaks-expose-rotten-core-irish-banking-121539828.html
Thursday, July 18, 2013
18/7/2013: Anglo Irish Bank: Tapes Fallout
A quick link to a recent Yahoo Finance and Aljazeera article citing myself on the issue of Anglo Irish tapes fallout.
http://en-maktoob.news.yahoo.com/leaks-expose-rotten-core-irish-banking-121539828.html
Wednesday, July 17, 2013
17/7/2013: Wrong Austerity Compounds the Failures of the Monetary Union
Recent CEPR paper DP9541 (July 2013), titled "Debt Crises and Risk Sharing: The Role of Markets versus Sovereigns" by Sebnem Kalemli-Ozcan, Emiliano Luttini, and Bent E Sørensen (linked here: www.cepr.org/pubs/dps/DP9541.asp) used "a variance decomposition of shocks to GDP", in order to "quantify the role of international factor income, international transfers, and saving in achieving risk sharing during the recent European crisis."
Basic idea of the exercise was that a lack of saving in good times may reduce consumption smoothing in bad times, forcing households to cut back their spending and consumption more dramatically once recession hits.
Under perfect risk sharing, the consumption growth of individual countries should be completely independent from all other factors, conditional on world consumption growth.
The authors of the study "calculate how much of a shock to GDP is absorbed by various components of saving, in particular government saving, and other channels, such as net foreign factor income for the sub-periods 1990-2007, 2008-2009, and 2010." The key finding here is that "overall, risk sharing in the EU was significantly higher during 2008-2009 than it was during the earlier period, but total risk sharing more or less collapsed in 2010." Notably, 2010 is the year when European economies embarked on 'austerity' path, primarily and predominantly expressed (especially in the earlier stages) in tax increases. It is worth noting that there virtually no reductions in public spending during 2009 or 2010 across the EU and even in countries where spending was cut, such as Ireland, much of the reductions came from indirect taxation - e.g. transfers of health spending from public purse to private insurance.
Further, the authors "study how the crisis a affected risk sharing for "PIIGS" countries (Portugal, Ireland, Italy, Greece, and Spain), which were at the center of the sovereign debt crisis, compared to non-PIIGS countries (Austria, Belgium, Denmark, Finland, France, Germany, the Netherlands, Sweden, and the United Kingdom)."
Again, the findings are revealing: "For 1990-2009, risk sharing was mainly due to pro-cyclical government saving but the amount of risk sharing from government saving turned negative in 2010 for the PIIGS countries: government saving increased at the same time as GDP decreased." In other words - this is the exact effect of austerity as practised by the EU periphery.
"For [euro area peripheral] countries our measure of overall risk sharing turns negative because (conditional on world consumption growth) the decline in GDP in 2010 was accompanied by a more than proportional decline in consumption. This mirrors the behavior of emerging economies where government saving typically is counter-cyclical as shown by Kaminsky, Reinhart, and V egh (2005)."
Crucially, the study shows that there is basically no risk-sharing mechanism that operates on the entire euro area level. Even common currency zone - via lower interest rates - does not deliver risk sharing in 2010 and has potentially a very weak effect in 2008-2009 period. Worse, for the euro area peripheral states, euro has been a mechanism that seemed to have removed risk sharing opportunities both in and out of the crisis:
"…although non-PIIGS countries shared a non-negligible amount of risk during 2000{2007 while the PIIGS shared little risk in those years: in the good year 2005, consumption increased faster than GDP leading to "negative risk sharing." In 2008 and 2009 the major amount of GDP risk is shared for non-PIIGS with low consumption growth rates in spite of large drops in GDP, with the amount of risk shared in 2008 over 100 percent (positive consumption growth in spite of negative GDP growth). For the PIIGS, consumption declined very little in 2008 in spite of a large drop in GDP, while the drop in GDP in 2009 clearly led to declining consumption and, in 2010, consumption fell by almost as much as GDP, indicating little risk sharing."
Top line conclusion: once the authors "decompose risk sharing from saving into contributions from government and private saving", data reveals "that fiscal austerity programs played an important role in hindering risk sharing during the sovereign debt crisis."
17/7/2013: Sunday Times, July 14: The New Normal for Ireland
This is an unedited version of my Sunday Times article from July 14, 2013.
The release of the Irish quarterly national accounts for Q1 2013 two weeks ago should have been a watershed moment for Ireland. Aside from confirming the fact that Irish economy is back in a recession, the new figures reinforce the case for the New Normal – a longer-term slowdown in trend growth and continued volatility of economic performance along this trend. The former revelation warrants a change in the short-term policies direction. The latter requires a more structural policies shift.
Months ago, based on the preliminary data for the last quarter of 2012, it was painfully clear that Irish economy has entered another period of economic recession. This point was made on these very pages back in early March although it was, at the time, vigorously denied by the official Ireland.
Irish economy is currently in its fourth recession in GDP terms since 2007. Q1 2013 marked the third consecutive quarter in the latest recessionary episode. Since the onset of the crisis, Ireland had 17 quarters of negative growth in private and public domestic investment and expenditure, and counting.
For the Government that spent a good part of the last 2 years telling everyone willing to listen about our returning fortunes, things are looking pretty grim. Since settling into the office by the end of H1 2011, through the first quarter 2013, Coalition-steered economy has contracted by EUR1.52 billion or 3.75%.
The fabled exports-led recovery, first declared in Q1 2010, is not translating into real economic expansion. Neither do scores of strategic policies documents launched with promises of tens of thousands of new jobs.
With the national accounts officially in the red, the bubble of claimed policies successes is bursting. What is emerging from behind this bubble is the New Normal. Whether we like it or not, in years to come we will continue facing high risks to growth and a lower long-term growth trend. Traditional Keynesianism and Parish Pump Gombeenism - the two, largely complementary policy options normally promoted in Ireland - cannot sustain us in the future.
Prior to the crisis, Irish economy experienced three periods of economic growth, all driven by different internal and external forces, none of which are likely to materialize once again any time soon.
The first period of 1991-1997 witnessed rapid convergence in physical and financial capital, as well as in human capital utilization to the standards, observed in other small open economies of the EU.
From 1998 through 2003, Irish economy experienced a combination of rising share of economic activity generated in the domestic economy and rapid expansion of the financial services. This period is characterised by two short-lived, but significant booms and busts: the dot.com expansion and the subsequent dramatic acceleration in public spending.
From the late 1990s, Ireland also experienced accelerating property boom, which culminated in an unsustainable investment bubble. All three periods of economic expansion in recent past were underpinned by favourable external demand for MNCs exports out of Ireland, low or falling cost of capital and accommodative tax environments, in which tax competition was an accepted norm.
These drivers are now history.
Since the onset of the second stage of the domestic economy’s recession in H2 2010, Ireland has entered an entirely new period of development that will shape our long-term growth performance.
Externally, our capacity to extract rents and growth out of tax arbitrage is coming under severe pressures, best highlighted by the recent G8 decisions, the CCCTB proposals tabled in Europe and by accelerated tax policies gains in countries capable of serving big growth regions outside the EU. The financial repression that commonly follows credit busts is also denting our tax-driven growth engine by raising competition for tax revenues, and lowering our real cost competitiveness vis-à-vis Europe and North America.
Internally, since 2002, MNCs-led manufacturing in Ireland has suffered what appears to be an irreversible decline. Goods exports are down from EUR90.4bn in 2002 to EUR78.7bn in 2012 before we take account for inflation. Meanwhile, exports of services are up from EUR32.2bn to EUR93.3bn. Problem is: over the same time, services exports net contribution to the economy has expanded by only EUR18 billion. More worryingly, services exports growth is now falling precipitously.
Data from the Purchasing Managers Indices confirms the long-term nature of our economic slowdown. Average rates of growth in GDP are now closer to 1.5% per annum based on Services sectors contribution and closer to 1.0% for Manufacturing. Prior to the crisis these were 7.0% and 2.6%, respectively. In 1990-2007, all sectors included, Ireland experienced average annual growth of 6.6%. Now, we are looking at ca 1.5-1.7% average growth rates through 2020.
Lower growth rates for Ireland will be further reinforced by the lack of access to credit flows previously abundantly available from the global funding markets. This will impact our banks lending, direct debt issuance by companies, and securitised or asset-backed credit.
The retrenchment of the global financial flows away from the euro area, coupled with regulatory changes in European banking suggest that investment in the New Normal will become inseparably linked to the internal economy and significantly more expensive than the decade preceding the 2008 crisis. Much of this change will be driven by the same financial repression that will act to reduce our tax regime advantages.
This means that at the times of adverse shocks - such as, for example, a fall in revenues from exports or an increase in foreign companies extraction of profits from Ireland – our economy will be experiencing more severe credit and income contractions. This will put more pressure on investment and lower the velocity of money in the economy. Longer-term capital financing will become more difficult as domestic investors will face more uncertain returns and higher liquidity risk. A bust and severely restricted in competitiveness banking sector - legacy of the misguided post-2008 reforms - will not be helpful.
Thus, in the future, switch to services exports away from manufacturing and domestic investment, and reduced access to credit will mean higher volatility in growth, and lower predictability of our economic environment.
The New Normal requires more agile, more responsive and better-diversified economic systems, alongside a more conservative risk management in fiscal policies and less centralisation and harmonisation of policies at super-national level. It also calls for more aggressive incentivising of domestic investment and savings.
In terms of the fiscal policy stance, this means adopting a more cautious approach advocated, in part, by the ESRI this week. Irish Government should aim to continue reducing public spending, but do so in a structural way, not in a simplified framework of pursuing slash-and-burn targets. In addition, the Government needs to re-focus on identifying lines of expenditure that can be re-directed toward more productive use. In the short run, this can take the form of switching some of the current expenditure into capital investment programmes.
Reforms of social welfare, public education, health and state pensions systems will have to make these lines of spending more effective in helping people in real need, while slimmer in terms of total spend allocations. This can be achieved by direct means-testing and capping some of the benefits. But majority of these changes will have to wait until after the immediate unemployment and growth crises have passed.
In the longer run, going beyond the ESRI proposals, the Government should permanently reallocate some of the spending (such as, for example, overseas aid or poorly performing enterprise supports) to areas where it can increase value-added in public services (e.g. water supply or public transport) and create new exports platforms (e.g. e-health and higher quality internationally marketable education). Additionally, new revenues should be raised from severely undertaxed sectors and assets, such as agriculture and land, to be used to lower tax burden on both, ordinary and highly skilled workers.
Beyond a short-term stimulus, rather than directing tax- and debt-funded new investment, public sector should help generate new opportunities for more intensive growth. Increasing value added in existent activities, not simply scaling these activities up in terms of quantity of services deployed or employment levels involved should become the priority for future public sector growth.
Adding further to the ESRI analysis, the objective of using fiscal policy to drive enterprise creation requires simultaneously freeing more resources in the private sector to invest in new technologies acquisition and adoption, and development of indigenous R&D. We need to increase, not shrink, disposable incomes of the middle- and upper-middle classes and improve incentives for these segments of the population to invest. IBEC's suggestion this week that the Government should abandon any future tax increases makes sense in this context. The key, however, is that direct and indirect income tax increases of recent years must be reversed.
We need to recognise, support and scale up clustering initiatives in the tech and R&D sectors that deliver partnerships between the existent MNCs and larger domestic enterprises and start ups. To do this, we should create direct links between the existent clusters, such as for example IT@Cork initiative and public procurement systems. To re-orient public procurement toward supporting younger enterprises, larger procurement tenders should explicitly target new opportunities for partnerships between MNCs and SMEs or start-ups.
To address structural decline in debt financing available in the economy, we should exempt from taxation capital gains accruing to any real investment in Irish enterprises, including the IPOs and new rights issues, where such investments are held for at least 5 years. To qualify for this scheme, an enterprise should have at least a quarter of its worldwide employees based in Ireland.
The New Normal of lower trend growth and higher uncertainty about the economic environment is here. Addressing the challenges it presents requires robust policy reforms. The least painful and the most productive way of implementing these would be to start as early as possible.
Box-out:
Recent report from CBRE on office market in Dublin for Q2 2013 provides an interesting insight into the commercial real estate markets dynamics in Ireland. Despite the cheerful headlines and some marginally encouraging news, the market remains in deep slump and so far, hard data shows no signs of a major revival. Good news: vacancy rate in Dublin office space has declined by 4% on Q1 2013, to 17.2% in Q2 2013. The vacancy rate was 19.32% in Q2 2012. Bad news: at this rate, it will take us good part of 10 years to catch up with the EU-average rates. More bad news: office investment spend fell from EUR79.6mln in Q2 2012 to EUR72.6mln in Q2 2013. Adding an insult to the injury, prime yields fell from 7.0% to 6.25% in the year through June 2013. The office market in Dublin is firmly reflective of what is happening in the economy. Only 37% of offices take ups in Q2 2013 were by Irish companies. Massive 65-66% of the city and suburban office space was taken up by the ICT and Financial services providers in a clear sign that outside these sectors, economic activity remains largely stagnant. Overall, on a quarterly basis, offices take up in Dublin has fallen for the second quarter in a row while there was the first annual decline since Q3 2012.
The release of the Irish quarterly national accounts for Q1 2013 two weeks ago should have been a watershed moment for Ireland. Aside from confirming the fact that Irish economy is back in a recession, the new figures reinforce the case for the New Normal – a longer-term slowdown in trend growth and continued volatility of economic performance along this trend. The former revelation warrants a change in the short-term policies direction. The latter requires a more structural policies shift.
Months ago, based on the preliminary data for the last quarter of 2012, it was painfully clear that Irish economy has entered another period of economic recession. This point was made on these very pages back in early March although it was, at the time, vigorously denied by the official Ireland.
Irish economy is currently in its fourth recession in GDP terms since 2007. Q1 2013 marked the third consecutive quarter in the latest recessionary episode. Since the onset of the crisis, Ireland had 17 quarters of negative growth in private and public domestic investment and expenditure, and counting.
For the Government that spent a good part of the last 2 years telling everyone willing to listen about our returning fortunes, things are looking pretty grim. Since settling into the office by the end of H1 2011, through the first quarter 2013, Coalition-steered economy has contracted by EUR1.52 billion or 3.75%.
The fabled exports-led recovery, first declared in Q1 2010, is not translating into real economic expansion. Neither do scores of strategic policies documents launched with promises of tens of thousands of new jobs.
With the national accounts officially in the red, the bubble of claimed policies successes is bursting. What is emerging from behind this bubble is the New Normal. Whether we like it or not, in years to come we will continue facing high risks to growth and a lower long-term growth trend. Traditional Keynesianism and Parish Pump Gombeenism - the two, largely complementary policy options normally promoted in Ireland - cannot sustain us in the future.
Prior to the crisis, Irish economy experienced three periods of economic growth, all driven by different internal and external forces, none of which are likely to materialize once again any time soon.
The first period of 1991-1997 witnessed rapid convergence in physical and financial capital, as well as in human capital utilization to the standards, observed in other small open economies of the EU.
From 1998 through 2003, Irish economy experienced a combination of rising share of economic activity generated in the domestic economy and rapid expansion of the financial services. This period is characterised by two short-lived, but significant booms and busts: the dot.com expansion and the subsequent dramatic acceleration in public spending.
From the late 1990s, Ireland also experienced accelerating property boom, which culminated in an unsustainable investment bubble. All three periods of economic expansion in recent past were underpinned by favourable external demand for MNCs exports out of Ireland, low or falling cost of capital and accommodative tax environments, in which tax competition was an accepted norm.
These drivers are now history.
Since the onset of the second stage of the domestic economy’s recession in H2 2010, Ireland has entered an entirely new period of development that will shape our long-term growth performance.
Externally, our capacity to extract rents and growth out of tax arbitrage is coming under severe pressures, best highlighted by the recent G8 decisions, the CCCTB proposals tabled in Europe and by accelerated tax policies gains in countries capable of serving big growth regions outside the EU. The financial repression that commonly follows credit busts is also denting our tax-driven growth engine by raising competition for tax revenues, and lowering our real cost competitiveness vis-à-vis Europe and North America.
Internally, since 2002, MNCs-led manufacturing in Ireland has suffered what appears to be an irreversible decline. Goods exports are down from EUR90.4bn in 2002 to EUR78.7bn in 2012 before we take account for inflation. Meanwhile, exports of services are up from EUR32.2bn to EUR93.3bn. Problem is: over the same time, services exports net contribution to the economy has expanded by only EUR18 billion. More worryingly, services exports growth is now falling precipitously.
Data from the Purchasing Managers Indices confirms the long-term nature of our economic slowdown. Average rates of growth in GDP are now closer to 1.5% per annum based on Services sectors contribution and closer to 1.0% for Manufacturing. Prior to the crisis these were 7.0% and 2.6%, respectively. In 1990-2007, all sectors included, Ireland experienced average annual growth of 6.6%. Now, we are looking at ca 1.5-1.7% average growth rates through 2020.
Lower growth rates for Ireland will be further reinforced by the lack of access to credit flows previously abundantly available from the global funding markets. This will impact our banks lending, direct debt issuance by companies, and securitised or asset-backed credit.
The retrenchment of the global financial flows away from the euro area, coupled with regulatory changes in European banking suggest that investment in the New Normal will become inseparably linked to the internal economy and significantly more expensive than the decade preceding the 2008 crisis. Much of this change will be driven by the same financial repression that will act to reduce our tax regime advantages.
This means that at the times of adverse shocks - such as, for example, a fall in revenues from exports or an increase in foreign companies extraction of profits from Ireland – our economy will be experiencing more severe credit and income contractions. This will put more pressure on investment and lower the velocity of money in the economy. Longer-term capital financing will become more difficult as domestic investors will face more uncertain returns and higher liquidity risk. A bust and severely restricted in competitiveness banking sector - legacy of the misguided post-2008 reforms - will not be helpful.
Thus, in the future, switch to services exports away from manufacturing and domestic investment, and reduced access to credit will mean higher volatility in growth, and lower predictability of our economic environment.
The New Normal requires more agile, more responsive and better-diversified economic systems, alongside a more conservative risk management in fiscal policies and less centralisation and harmonisation of policies at super-national level. It also calls for more aggressive incentivising of domestic investment and savings.
In terms of the fiscal policy stance, this means adopting a more cautious approach advocated, in part, by the ESRI this week. Irish Government should aim to continue reducing public spending, but do so in a structural way, not in a simplified framework of pursuing slash-and-burn targets. In addition, the Government needs to re-focus on identifying lines of expenditure that can be re-directed toward more productive use. In the short run, this can take the form of switching some of the current expenditure into capital investment programmes.
Reforms of social welfare, public education, health and state pensions systems will have to make these lines of spending more effective in helping people in real need, while slimmer in terms of total spend allocations. This can be achieved by direct means-testing and capping some of the benefits. But majority of these changes will have to wait until after the immediate unemployment and growth crises have passed.
In the longer run, going beyond the ESRI proposals, the Government should permanently reallocate some of the spending (such as, for example, overseas aid or poorly performing enterprise supports) to areas where it can increase value-added in public services (e.g. water supply or public transport) and create new exports platforms (e.g. e-health and higher quality internationally marketable education). Additionally, new revenues should be raised from severely undertaxed sectors and assets, such as agriculture and land, to be used to lower tax burden on both, ordinary and highly skilled workers.
Beyond a short-term stimulus, rather than directing tax- and debt-funded new investment, public sector should help generate new opportunities for more intensive growth. Increasing value added in existent activities, not simply scaling these activities up in terms of quantity of services deployed or employment levels involved should become the priority for future public sector growth.
Adding further to the ESRI analysis, the objective of using fiscal policy to drive enterprise creation requires simultaneously freeing more resources in the private sector to invest in new technologies acquisition and adoption, and development of indigenous R&D. We need to increase, not shrink, disposable incomes of the middle- and upper-middle classes and improve incentives for these segments of the population to invest. IBEC's suggestion this week that the Government should abandon any future tax increases makes sense in this context. The key, however, is that direct and indirect income tax increases of recent years must be reversed.
We need to recognise, support and scale up clustering initiatives in the tech and R&D sectors that deliver partnerships between the existent MNCs and larger domestic enterprises and start ups. To do this, we should create direct links between the existent clusters, such as for example IT@Cork initiative and public procurement systems. To re-orient public procurement toward supporting younger enterprises, larger procurement tenders should explicitly target new opportunities for partnerships between MNCs and SMEs or start-ups.
To address structural decline in debt financing available in the economy, we should exempt from taxation capital gains accruing to any real investment in Irish enterprises, including the IPOs and new rights issues, where such investments are held for at least 5 years. To qualify for this scheme, an enterprise should have at least a quarter of its worldwide employees based in Ireland.
The New Normal of lower trend growth and higher uncertainty about the economic environment is here. Addressing the challenges it presents requires robust policy reforms. The least painful and the most productive way of implementing these would be to start as early as possible.
Box-out:
Recent report from CBRE on office market in Dublin for Q2 2013 provides an interesting insight into the commercial real estate markets dynamics in Ireland. Despite the cheerful headlines and some marginally encouraging news, the market remains in deep slump and so far, hard data shows no signs of a major revival. Good news: vacancy rate in Dublin office space has declined by 4% on Q1 2013, to 17.2% in Q2 2013. The vacancy rate was 19.32% in Q2 2012. Bad news: at this rate, it will take us good part of 10 years to catch up with the EU-average rates. More bad news: office investment spend fell from EUR79.6mln in Q2 2012 to EUR72.6mln in Q2 2013. Adding an insult to the injury, prime yields fell from 7.0% to 6.25% in the year through June 2013. The office market in Dublin is firmly reflective of what is happening in the economy. Only 37% of offices take ups in Q2 2013 were by Irish companies. Massive 65-66% of the city and suburban office space was taken up by the ICT and Financial services providers in a clear sign that outside these sectors, economic activity remains largely stagnant. Overall, on a quarterly basis, offices take up in Dublin has fallen for the second quarter in a row while there was the first annual decline since Q3 2012.
17/7/2013: IMHO statement on Land & Conveyancing Bill
Irish Mortgage Holders Organisation response to the passing of the Land anf Conveyancing Reform Bill, 2013:
https://www.mortgageholders.ie/land-and-conveyancing-reform-bill-2013/
do keep in mind, while reading, that our view recognises fully that in many cases, in dealing with mortgages debt there will be no option other than foreclosure sale (voluntary or enforced).
The key to any economically and socially sustainable system for resolving this crisis is to create a symmetric balance of power and incentives between the banks and the borrowers to achieve a long-term sustainable solution to the debt overhang. This the current system does not allow for.
https://www.mortgageholders.ie/land-and-conveyancing-reform-bill-2013/
do keep in mind, while reading, that our view recognises fully that in many cases, in dealing with mortgages debt there will be no option other than foreclosure sale (voluntary or enforced).
The key to any economically and socially sustainable system for resolving this crisis is to create a symmetric balance of power and incentives between the banks and the borrowers to achieve a long-term sustainable solution to the debt overhang. This the current system does not allow for.
Tuesday, July 16, 2013
16/7/2013: Doing Good By Altering Trade Flows & Incentives? Not so fast...
An interesting paper on commodities prices and policy responses to these based on actual experience with food prices inflation in 2008.
CEPR DP9555, titled "Food Price Spikes, Price Insulation, and Poverty" by Kym Anderson, Maros Ivanic, and Will Martin, published this month "considers the impact on world food prices of the changes in restrictions on trade in staple foods during the 2008 world food price crisis".
Those changes ranged from reductions in import protection (allowing for more imports to flow into the countries heavily dependent on imports of food) to increases in export restraints (aimed at reducing exports of food from the countries experiencing rising domestic prices).
The changes "were meant to partially insulate domestic markets from the spike in international prices. We find that this insulation added substantially to the spike in international prices for rice, wheat, maize and oilseeds". In other words, domestic measures to ease prices by distorting international trade flows resulted in higher international prices for these foodstuffs.
"As a result, while domestic prices rose less than they would have without insulation in some developing countries, in many other countries they rose more than in the absence of such insulation." Thus, domestic measures to combat food inflation have been beggar-thy-neighbour in their effect on other markets.
The study also estimates "the combined impact of such insulating behavior on poverty in various developing countries and globally." The study found "that the actual poverty-reducing impact of insulation is much less than its apparent impact, and that its net effect was to increase global poverty in 2008 by8 million, although this increase was not significantly different from zero." Doing good, it turns out, can cause harm. Or alternatively, you might think global trade regime in food is evil, but try telling that to 8 million people impoverished by altering that regime to superficially re-direct flows of food away from established trade patterns in just one (single and short-lived) episode.
Authors point of view on policies? "Since there are domestic policy instruments such as conditional cash transfers that could now provide social protection for the poor far more efficiently and equitably than variations in border restrictions, we suggest it is time to seek a multilateral agreement to desist from changing restrictions on trade when international food prices spike." No knee-jerk reactions, please...
CEPR DP9555, titled "Food Price Spikes, Price Insulation, and Poverty" by Kym Anderson, Maros Ivanic, and Will Martin, published this month "considers the impact on world food prices of the changes in restrictions on trade in staple foods during the 2008 world food price crisis".
Those changes ranged from reductions in import protection (allowing for more imports to flow into the countries heavily dependent on imports of food) to increases in export restraints (aimed at reducing exports of food from the countries experiencing rising domestic prices).
The changes "were meant to partially insulate domestic markets from the spike in international prices. We find that this insulation added substantially to the spike in international prices for rice, wheat, maize and oilseeds". In other words, domestic measures to ease prices by distorting international trade flows resulted in higher international prices for these foodstuffs.
"As a result, while domestic prices rose less than they would have without insulation in some developing countries, in many other countries they rose more than in the absence of such insulation." Thus, domestic measures to combat food inflation have been beggar-thy-neighbour in their effect on other markets.
The study also estimates "the combined impact of such insulating behavior on poverty in various developing countries and globally." The study found "that the actual poverty-reducing impact of insulation is much less than its apparent impact, and that its net effect was to increase global poverty in 2008 by8 million, although this increase was not significantly different from zero." Doing good, it turns out, can cause harm. Or alternatively, you might think global trade regime in food is evil, but try telling that to 8 million people impoverished by altering that regime to superficially re-direct flows of food away from established trade patterns in just one (single and short-lived) episode.
Authors point of view on policies? "Since there are domestic policy instruments such as conditional cash transfers that could now provide social protection for the poor far more efficiently and equitably than variations in border restrictions, we suggest it is time to seek a multilateral agreement to desist from changing restrictions on trade when international food prices spike." No knee-jerk reactions, please...
16/7/2013: Italian Government Debt: All Is Going According to 'Plan'
Today's news:
ITALY'S GENERAL GOVERNMENT DEBT: €2.074 trillion (setting a new all-time record) and up on €2.0413 trillion prior… in other words, all is going according to the EU 'sustainability' plan.
A gentle reminder, back in April 2013, IMF forecast for Italy's 2013 GGD was EUR2.0405T, so that fiscal consolidation, then, is outperforming the targets, clearly… In fact, IMF forecast for 2014 GGD was EUR2.08055, so Italy is well into getting to 2014 target by the end of 2013. Keep digging, folks. Perhaps a French solution of raising taxes? Just for 'fairness' sake.
A chart via Ioan Smith @moved_average :
To update: via @lemasabachthani two charts:
Notice in the above chart the evolution of debt over years. And recall that Italy is cutting and cutting deficits. Clearly, something is amiss: there is austerity and there are continued increases in debt in levels terms, as well as in GDP-referenced terms. In other words, forget growth effects of austerity - Italian-styled policies are not cutting Government spending.
Also, notice the effect of the absurd Euro area 'solution' system whereby already over-indebted country like Italy is forced to take on more debt to fund 'adjustment' programmes for the peripheral states.
But even disregarding the above absurdity, there is a new spiking in funding requirements for the Italian Treasury.
16/7/2013: Irish ICT Services & Data Protection Harmonisation in Europe
An FT article today covers the issue of data protection regulation in Ireland and the divergence between Irish regime and the emerging European trend toward greater protection: http://www.ft.com/intl/cms/s/0/50fb3088-ed65-11e2-ad6e-00144feabdc0.html#axzz2ZBPI5mJ2
Removing all the usual bluster about 'one-stop-shop' and 'no light touch regulation here' that we hear from our authorities on a daily basis these days, the issue is of core importance to Ireland. Here's why:
ICT services are by now the sole most important contributor to the external balance of the country of all sectors, accounting for 14.93% of the entire credit side of the current account in Ireland and for 39.5% of Ireland's total services contribution to the credit side of the external balance.
And for a scary quote: ""We have great data protection laws in Germany but if Facebook is based in Ireland, then Irish law applies,” said Ms Merkel. “We wish that companies make clear to us in Europe to whom they give their data. This will have to be part of a [European] data protection directive.""
So, per usual, another comparative advantage to Ireland is being threatened? You bet!
H/T on the FT story: Philippe Legrain @plegrain
16/7/2013: Sovereign --> Private Risk Transmission
Is ECB policy too tight, about right or too loose? Well, the answer depends on many factors and metrics of choice. One metric is the cost of credit to the private sector - influenced in part by the ECB benchmark rates and in part by lending conditions and environments. The two forces are not independent of each other, however. More specifically, markets conditions (e.g. raging sovereign debt crisis in the euro area in the 2010-2011) can have impact on how monetary policy is transmitted. Put differently, in addition to banks --> sovereign transmission of risks, there is also sovereign --> private sector credit transmission mechanism.
"The Impact of the Sovereign Debt Crisis on Bank Lending Rates in the Euro Area" by Stefano Neri, June 20, 2013, Bank of Italy Occasional Paper No. 170 argues that "since the early part of 2010 tensions in the sovereign debt markets of some euro-area countries have progressively distorted monetary and credit conditions". This resulted in constriction of "the ECB monetary policy transmission mechanism and raising the cost of loans to non-financial corporations and households." The study looks at the role that the sovereign markets tensions played in determining bank lending rates in the main euro-area countries. The author finds that sovereign debt markets tensions "have had a significant impact on the cost of [private sector] credit in the peripheral countries". More specifically, "if the spreads had remained constant at the average levels recorded in April 2010, the interest rates on new loans to non-financial corporations and on residential mortgage loans to households in the peripheral countries would have been, on average, lower by 130 and 60 basis points, respectively, at the end of 2011."
Link: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2284804
Few charts, showing simulated interest rates against actual rates. Note: red lines: actual data; blue dotted lines: simulated data starting from May 2010; blue dashed lines: simulated data starting from July 2011. Percentage points.
"The Impact of the Sovereign Debt Crisis on Bank Lending Rates in the Euro Area" by Stefano Neri, June 20, 2013, Bank of Italy Occasional Paper No. 170 argues that "since the early part of 2010 tensions in the sovereign debt markets of some euro-area countries have progressively distorted monetary and credit conditions". This resulted in constriction of "the ECB monetary policy transmission mechanism and raising the cost of loans to non-financial corporations and households." The study looks at the role that the sovereign markets tensions played in determining bank lending rates in the main euro-area countries. The author finds that sovereign debt markets tensions "have had a significant impact on the cost of [private sector] credit in the peripheral countries". More specifically, "if the spreads had remained constant at the average levels recorded in April 2010, the interest rates on new loans to non-financial corporations and on residential mortgage loans to households in the peripheral countries would have been, on average, lower by 130 and 60 basis points, respectively, at the end of 2011."
Link: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2284804
Few charts, showing simulated interest rates against actual rates. Note: red lines: actual data; blue dotted lines: simulated data starting from May 2010; blue dashed lines: simulated data starting from July 2011. Percentage points.
Interest rates on new loans to non-financial corporations: counterfactual simulations - peripheral countries:
Monday, July 15, 2013
15/7/2013: Irish Travel & Tourism Sector Impact on External Balance
Some interesting figures on Tourism and Travel contributions to the Current Account in Ireland over 1998-2012 period show that, at least year-and-a-half into State subsidisation of the sector under the current Government, there was little change on the sector exporting activity to show for the subsidies.
The numbers below clearly highlight the low impact of the core indigenous sector and subsidies allocated to it on the external balance in the Irish economy. Please keep in mind - I am only considering impact of the sector on external balance here, not on other economic performance parameters.
Let's crunch through some numbers:
The numbers below clearly highlight the low impact of the core indigenous sector and subsidies allocated to it on the external balance in the Irish economy. Please keep in mind - I am only considering impact of the sector on external balance here, not on other economic performance parameters.
Let's crunch through some numbers:
- In 2012, Tourism & Travel (T&T) sector contributed EUR3,022 million to the credit side of the Current Account in Ireland - an improvement of just EUR12 million over 2011 and still EUR84 million below 2010 level. Excluding the absolute low (so far) of 2011, 2012 was the lowest reading since 2000 (remember - these are nominal figures). In real terms, this was lower than 2011 reading and the lowest year on record (since 1998).
- Because debit side of the sector (imports of T&T services and inputs) dropped over 2011-2012 from EUR4,817 million to EUR4,609 million, overall negative balance in the sector has shrunk from EUR1,807 million in 2011 to EUR1,587 million in 2012.
- But don't credit Government subsidies for the above. Increases on credit side were most likely driven by the net outward emigration and return visits by new emigrants. That is, given how low overall increase on the credit side was.
- Incidentally, the last time Irish T&T sector yielded a surplus on the balance side of the Current Account was back in 2000 and even then the surplus was puny at EUR100 million. Now, et's recall - in 2012, surplus on Transport sector side was EUR2,934 million, on Insurance side EUR2,650 million, on Financial Services side EUR2,465 million, on ICT services side EUR35,332 million and there were deficits of EUR28,867 on Royalties and Licenses side and EUR462 million on Communications side. All of which makes T&T sector, sort of not exactly a massively significant contributor to the current account. Which is not to say anything about it's contributions to other parts of the economy, of course.
- But in terms of credit side of the Current Account alone (the target of Irish Government's subsidies/supports in T&T sector case), we have: T&T contribution in 2012 at EUR3,022 million, against EUR4,609 million contribution by Transport sector, EUR8,910 million contribution by Insurance sector, EUR7,073 million contribution by Financial Services sector, EUR35,681 million contribution for ICT services, and EUR3,888 million contribution from the Royalties and Licenses line of credit. Only Communications sector - with credit contribution of EUR627 million was below the Tourism and Travel when it comes to gross credit to the Current Account.
Two charts:
15/7/2013: Two notes on HFT effects on the markets
Two interesting notes on the financial markets general operational issues in relation to High Frequency Trading (HFT).
A quick post from the Aziz Economics: http://azizonomics.com/2013/06/15/have-financial-markets-gone-post-human/ on the topic of HFT and data disclosure. Do read the Nanex post cited: http://www.nanex.net/aqck2/4302.html
Basic idea is that speed of light separates trades in the current market. With some data being released in different formats and to different audiences at different times, this difference drives a massive wedge between HFT trades and ordinary order flows.
And a couple of quotes:
"... is having a two second jump on the market “insider trading”? Well, yes — but it’s legal insider trading with consent, out in the open."
Yep, you can pay more to get information ahead of everyone and then pay a bit more to execute trades ahead of the mere mortals. You can then collect the upside (you'd have to be pretty dim-witted to collect a downside on such a trade).
And that means that the old-fashioned elbow-grease and hard labour analysing stuff, forecasting it, setting a strategy, hedging etc… all become subservient to the speed of access + speed of execution.
Human is gone. Algo is in...
"… perhaps the beginning of the end for human traders is just the end of the beginning for global financial markets. Perhaps that is less of a death sentence, and more of a liberation, allowing talented human labour that in recent years has been channelled into unproductive and obscure projects in big finance to move into more productive domains."
I don't know. But I'd like to think a person is still somewhere under the sun in the markets. Otherwise, how can be make any connection between the financial markets, instruments traded and real side of the economy, aside from the sides glimpsed through high-frequency-advanced-release mechanism?..
And a paper on HFT effects on market index here: http://www.nature.com/srep/2013/130702/srep02110/full/srep02110.html
The paper shows that in short time scales stocks have a stronger influence on the index, rather than index has on stocks that are constituents of the index. This is encouraging, as it suggests that within shorter time horizons, extreme HFT-linked instrumentation of index is far less of a driver than HFT-linked instrumentation of individual stocks. In other words, whatever relevant information is contained in the stock gets indeed transmitted into index at high frequency and this information dominates index-own changes.
15/7/2013: 12 Months Ahead, Things are Getting Darker...
Two charts on business expectations for 12 months forward, via Markit (full release here: http://www.markit.com/assets/en/docs/commentary/markit-economics/2013/jul/GLOBAL_Outlook_ENG_1307_PR.pdf)
First, global (lower levels represent lower percentage of businesses expecting growth in the next 12 months net of the percentage expecting contraction):
and now, regional
Ouch!.. For euro area, things are clearly bad enough and they get worse when we compare June 2013 results to February 2013. For Japan, same and even sharper. US is in the pain zone too. UK throws strange outlier.
Would have been good to see actual percentages listed on the bars... but...
First, global (lower levels represent lower percentage of businesses expecting growth in the next 12 months net of the percentage expecting contraction):
and now, regional
Would have been good to see actual percentages listed on the bars... but...
15/7/2013: Current Account Q1 2013: Extreme Imbalances in the Irish Economy
CSO recently released Balance of Payments stats for Q1 2013 - you can read the main headlines and see underlying data here.
Current account data is of more interest from my point of view. And it shows some changes both at a trend and at shorter-term levels, as well as the extremes of skewness in Irish economic activity in favour of the MNCs-dominated Financial and ICT services.
Let's run through the credit side (exports from Ireland) of the CA first.
Aggregate levels of exports (goods and services):
Current account data is of more interest from my point of view. And it shows some changes both at a trend and at shorter-term levels, as well as the extremes of skewness in Irish economic activity in favour of the MNCs-dominated Financial and ICT services.
Let's run through the credit side (exports from Ireland) of the CA first.
Aggregate levels of exports (goods and services):
- Aggregate level (goods and services) exports run at EUR55.657bn in Q1 2013, down on EUR60.295bn in Q4 2012 and down on EUR58.034bn in Q1 2012. This marked the level of exports comparable to Q1 2011 (EUR55.570bn) before we adjust for inflation.
- Aggregate exports were dow 7.69% q/q in Q1 2013, having posted an increase of 1.22% q/q in Q4 2012. The rate of decline was 4.1% y/y compared to 2.19% rise in y/y figure for Q4 2012.
- Current level of quarterly exports is down 12.03% on peak.
- Cumulated exports of goods and services for last 6 months were down 3.87% on previous 6 months and down 0.93% y/y. Last 12 months cumulated exports (12 months through March 2013) were still up 2.21% y/y.
Chart above clearly shows the downward shift in the shorter-term trend from the peak of Q2 2012. The chart also shows that prior to the Q2 2012, from Q3 2009, rate of increase in overall exports was slower than in the period of Q1 2005-Q4 2007. This suggests that the 'exports-led recovery' of 2010-2011 was not rapid enough to compare with the previous periods of strong exports growth, such as Q1 1998-Q4 2000, and Q1 2005-Q4 2007. Instead, the rate of growth in exports was closer to that attained in Q1 2003 - Q4 2004 - the period coincident with growth post-collapse of the dot.com bubble.
Breakdown between goods and services exports:
- Credit on goods side (exports) shrunk 3.82% q/q in Q4 2012 and this was followed by the decline of 4.83% in Q1 2013. Y/y exports of goods were down 9.21% in Q1 2013, after posting a y/y increase of 0.52% in Q4 2012. Credit on goods side of the Current Account was down 18.16% on peak in Q1 2013.
- Longer term series for credit on goods side were down 7.12% in current 6 months cumulative basis compared to previous 6 months period and y/y last 6 months cumulated credit on goods side was down 4.47%. Over the last 12 months (through March 2013) cumulated credit on merchandise side was down 1.74%.
- On services side of credit in current account, q/q rise of 4.65% in Q4 2012 was followed by a decline of 8.66% q/q in Q1 2013. Y/y changes are more solid: +8.90% in Q4 2012, slower at +2.68% in Q1 2013. Current levels are 8.66% below peak.
- Longer term trend for Services shows current 6 months cumulated services credits down 0.74% on previous 6 months - bad news. Good news, current 6 months cumulated credit up 5.84% y/y. 12 months cumulated credit through March 2013 is still solidly up 8.75% y/y.
On trends side: chart above shows worrying shorter-term changes downward in merchandise credit, from a gently up-sloping trend established in and contraction in Q4 2009, and a sharp short-term decline on robustly upward trend in services.
Breakdown in the core MNCs-driven services credits is in the following chart:
Balance side:
- Merchandise balance has deteriorated at an accelerated rate in Q1 2013. Net balance in Q1 2013 stood at EUR7.458 billion surplus, down from EUR8.616 billion in Q4 2012 and EUR8.401 billion in Q1 2012. Overall, this is the lowest Q1 balance on merchandise side since the disastrous Q1 2008.
- On Services, side, balance rose to EUR754 million in Q1 2013 from EUR238 million in Q4 2012 and is up on EUR178 million recorded in Q1 2012. Q1 2013 balance marked the third highest balance in the series, but the balance is rather sluggish compared to previous two top performing quarters (Q2 and Q3 2012).
- Overall balance is at EUR1.197 billion in Q1 2013, down on EUR2.895 billion in Q4 2012 and up on deficit of EUR704 million in Q1 2012. Good news is: Q1 2013 marked the 7th strongest quarterly balance on current account side of all quarters since Q1 1998, and the strongest first quarter of any year since Q1 1998.
The chart above underpins the extremely skewed distribution of source of the current account balance. Taking three sources of the balance attributable to MNCs-driven trade in services: Financial Services, Computer Services, net of Royalties and licenses payments, the three sources of balance accounted for 21.5% of all credits recorded on the credit side of the Current Account, but 190% of the total balance. In other words, even when we factor out net outflows of funds to cover licenses and royalties, the resulting balance on two sub-sectors of ICT and financial services stood at EUR2.271 billion which is almost double the total current account surplus of EUR1.197billion recorded across the entire economy.
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