7/10/2013: IMF on Unconventional Monetary Policies Effectiveness

IMF released Policy Paper on Global Impact and Challenges of Unconventional Monetary Policies (UMPs). The paper covers all major monetary policy interventions across advanced economies and assesses their impact on emerging markets and advanced economies.

Here are some of the highlights of my analysis of the paper results:

When it comes to impact on bonds markets:

1) UMPs overall had zero statistical impact on bond yields in Ireland and Portugal, zero impact on Greece, except via a potential feed-through in commodities prices, moderate impact (reducing yields) for Italian Government bonds, and weak impact on Spanish yields.

2) There was significant statistically, but small overall adverse impact (increasing yields) for Germany and the Netherlands

Note: key to all tables:

3) Overall bond fund flows had zero impact on Irish and Portuguese bonds yields, adverse but small impact on Greek yields, small but positive impact on Spanish bonds yields and moderate positive impact on Italian bond yields.

4) UMPs overall had the impact of increasing bond flows for Ireland by 61.77% of GDP during the crisis, by 16.18% of GDP for Greece, by 8.32% for Italy, by 6.20% for Portugal and 10.68% for Spain.

5) In the case of Ireland, ALL of the increases in bond flows were associated with the US Fed and Bank of England interventions, and NONE with the ECB interventions. In other words, ECB policies seemed to have been absolutely irrelevant to Irish bonds flows.

6) In the case of Ireland, ECB interventions resulted in outflows (negative impact) on Irish equity funds, while Fed and BofE policies resulted in net inflows.

7) All UMPs combined had a net positive impact on equity funds flows in the case of Ireland of 24.48% of GDP, for Greece of 2.15% of GDP, for Italy of 0.77% of GDP and for Spain of 2.33% of GDP. For Portugal there was net negative effect of -1.17% of GDP - one of two countries in the euro area (with Austria) where net equity funds flows were negative as the result of UMPs interventions.

It appears that the ECB policies interventions were not supportive of the euro area periphery…

7/10/2013: Taking an Easy Road Out of Budget 2014? Sunday Times, September 22

This is an unedited version of my Sunday Times column from September 22, 2013.


The upcoming Budget 2014 will be one of the toughest since the beginning of the crisis in terms of the overall levels of cuts and tax increases. It also promises to cut across the psychological barrier of austerity fatigue. The latter aspect of Budget 2014 is more pernicious. Two other factors will add to the national distress, comes October 15th. Reinforcing our national sense of exhaustion with endless austerity, this week, the IMF published a staff research paper on fiscal adjustments undertaken during the current Great Recession. According to some, the IMF study reinforces the argument that Ireland should have been allowed to spread the austerity over a longer period time. In addition to this, Ireland’s planned 2014 cuts are set to be well in excess of the deficit reduction targets for any other euro area country.

The superficial reading of the IMF statement, the nascent sense of social distress brewing underneath the surface of public calm, and the tangible and very real pain felt by many in the society suggest that the Government should take it easier in 2014-2015. The policy option, consistent with such a choice would be to cut less than committed to under the multi-annual fiscal plans agreed with the Troika. This is being proposed by a number of senior Ministers and TDs, the Opposition and the Unions.

Alas, Ministers Noonan and Howlin have little choice when it comes to the actual volumes of fiscal adjustments they will have to implement next year. Like it or not, we will need to stick very close to the EUR3.1 billion deficit reduction targets irrespective of the IMF working papers conclusions, or the volume of outcries coming from the Government backbenchers and the opposition ranks.

Here's how the brutal logic of our budgetary position stacks up against an idea of easing on deficit reductions.

If everything goes according to the plan, Ireland will end 2013 with a second or a third highest deficit in the EU, depending on how we account for the one-off spending measures across the peripheral states. We will also have the second highest primary deficit (that is deficit excluding cost of interest payments on Government debt) in the euro area. In 2014 this abysmal performance will replay once again, assuming we meet the targets. Greece and Italy are set to finish 2013 with a primary surplus. Portugal is expected to post a primary deficit of less than one half that of Ireland's. Should Ireland deliver on the targets for 2014, our gap between the Government revenues and spending will still stand at around 4.3-4.6 percent of GDP at the end of December 2014. Not a great position to be in, especially for a country that claims to be different from the rest of the euro periphery.

In this environment, talking about any change in the course on austerity or attempting to enact a fiscal stimulus will be equivalent to accelerating into a blind corner on a one-lane road.

In order to stabilise government debt, Ireland will require cumulative deficits cuts of 11.6% of GDP between January 2013 and December 2018 with quarter of these cuts scheduled for 2014-2015. This is the largest volume of cuts for any economy in the euro area - more than 20 percent greater than the one to be undertaken by Greece and more than 50 percent in excess of Spain’s requirement.

Any delay in cuts today will only multiply pain tomorrow with higher debt to deflate in 2016-2018. As things stand under the agreed plans, Ireland will be spending 4.9 percent of its GDP annually on funding debt interest payments from through 2018. This is more than one and a half times greater than what we will be allocating to gross public investment. The interest bill, over the next five years, will be at least EUR46 billion. Lowering 2014 adjustment target by EUR1 billion can result in the above cost rising to over EUR50 billion, based on my estimates using the IMF forecast models.

The reason for this is that any departure from the committed fiscal adjustment path is likely to have consequences.

Firstly, with the ongoing sell-offs of bonds in the global investment markets, it is highly likely that the cost of funding Government debt for Ireland will rise over the medium term even absent any delays in fiscal adjustments. The long-term interest rates are already showing sharper rising of yields on longer maturity bonds compared to short-dated bonds. Year to date, German 10-year yields are up 64 basis points, UK are up 105 bps and the US ones are up 111 bps. The effects of these changes on Irish debt and deficit dynamics are not yet fully priced in the latest IMF forecasts. A mild steepening of the maturity curve for Ireland can significantly increase our interest bill. This risk becomes even more pronounced if we are to delay the Troika programme.

Secondly, failure to fulfill our commitments is unlikely to help us in our transition from Troika funding. Ireland will require a precautionary standby arrangement of at least EUR10 billion in cheaply priced funds. The European Stability Mechanism (ESM) funds to cover this come on foot of good will of our EU 'partners'. These partners, in turn, are seeking to redraft EU tax policies, as well as banking, financial and ICT services regulations. In virtually all of these proposals, Ireland is at odds with the European consensus. Good will of Paris and Berlin is a hard commodity, requiring hard currency of appeasement. Whether we like it or not, by stepping into the euro system, we committed ourselves to this position.

The long run financial arithmetic also presents a major problem for those who misread the latest IMF research on austerity as a sign that the Fund is advocating easing of the 2014-2015 adjustments for Ireland. The IMF clearly shows that Ireland has already delayed required fiscal cuts more than any other euro area economy. In all euro area peripheral economies, other than Ireland, fiscal adjustments for 2014-2015 are set at less than one fifth of the total adjustment required for 2010-2015 period. In Ireland they are set at one third. Which means that, having taken more medicine upfront, Italy, Greece, Portugal and Iceland can now afford to ease on cutting future primary imbalances.


With this in mind, there is not a snowballs chance in hell that we can substantively deviate from the plan to cut EUR3.1 billion, gross, from 2014 deficit without facing steep bill for doing so. Which leaves us with the only pertinent question to be asked: how such an adjustment should be spread across three areas of fiscal policy: Government revenues, current expenditure and capital expenditure.

This year, through August, Government finances have been running ahead of both 2012 levels and we are perfuming well relative to what was planned in the budget 2013 profile. However, the headline numbers conceal some worrying sub-currents.

This year's current primary expenditure in 8 months through August stood at over EUR36.6 billion, more than targeted in the 2013 profile and ahead on the same period last year. This deterioration was caused by the one off payment made on winding down the IBRC, plus the increase in contributions to the EU budget. Nonetheless, while tax and Government revenues increases in the 8 moths of 2013 were running at almost EUR3.4 billion compared to the same period of 2012, spending reductions are down only EUR823 million.

To-date, only 17 percent of the entire annual adjustment came via current voted spending cuts and over 57 percent came from increases in Government revenues. The balance of savings was achieved by slashing further already decimated capital investment programmes.  Given the overall capital investment profile from 1994 through forecast 2013 levels, as provided by the Department of Public Expenditure and Reform, this year's net capital spending is likely to come below the amount required to cover amortisation and depreciation of the current stock of Government capital. Put simply, we are just about keeping the windows on our public buildings and doors on our public schools in working order.

In this environment, Labour Party and opposition calls for undoing 'the savage cuts to our frontline services' - or current spending side of the Government balance sheet - are about as good as Doctor Nick Rivera's cheerfully internecine surgical exploits in the Simpsons.

The adjustments to be taken over the next two years will have to fall heavily on current spending side. This is a very painful task. To-date, much of the savings achieved on the expenditure side involved either transforming public spending into private sector fees, which can be called a hidden form of taxation, or by achieving short term temporary savings.

The former is best exemplified by continued hikes of hospitals' charges which have all but decimated the markets for health insurance. The result is a simultaneous reduction in health insurance coverage, an increase in demand for public health services and costly emergency treatments. The 'savings' achieved are most likely costing us more than they bring in.

The latter is exemplified by temporary pay moderation agreements and staff reductions in the public sector. This presents a problem to be faced comes 2015-2016: with growth picking up, many savings delivered by staff reductions and pay moderation measures will be the first to be reversed under the pressure from the unions.

In short, the Government has no choice, but to largely follow the prescribed course of action. Like it or not, it also has no choice but to cut deeper into current spending. This is going to be an ugly budget by all measures possible, but the real cause of the pain it will inflict rests not with the Troika insistence on austerity. Instead, the real drivers for Ireland’s deep cuts in public spending are the internal imbalances in our public expenditure and the lack of deeper reforms in the earlier years of the crisis.

Via @IMF

Box-out: 

Recent data from the CSO on Irish goods exports painted a picture of significant gains in one indigenous economy sector: agri-food exports. The exports of Food and live animals increased by EUR101 million or 15 percent in July 2013, compared to July 2012. In seven months from January 2013, agri-food exports rose to EUR4,911 million, up 8.8 percent. Most of the increases related to exports of animals-related products, live animals, eggs and milk. The new data caused a small avalanche of press releases from various representative bodies extolling the virtues of agri-food sector in Ireland and posting claims that the sector is poised to drive Ireland out of the recession. Alas, the data on agricultural prices, also covering the period through July 2013, released just three days after the publication of exports statistics, poured some cold water over the hot coals of agri-food sector egos. From January through July 2013, the main driver for improved exports performance of our agriculture and food sectors was not some indigenous productivity growth or innovation, but the price inflation in the globally-set agricultural output prices. On an annual basis, the agricultural output prices rose 10.7 percent in July 2013. Over the same period of time, the agricultural input price index was up 5.2 percent in July 2013. This means that Irish exports uptick in 2013 to-date was built on the pain of consumers elsewhere. So good news is that our agri-food exports were up. Bad news is that we have preciously little, if anything, to do with causing this rise.

5/10/2013: Euromoney Country Risk: Italy v Spain

Euromoney Country Risk scores changes:

Notice-worthy:

• Improved score for Hungary driven by gains in Economic Assessment, Political Assessment and Structural Assessment
• Cyprus scores continue to deteriorate despite the claims from the Troika that the economy is close to 'stabilising'. Cyprus risk metrics are tanking at a rapid rate from 58.0 in March post-default rating to 52.1 only 6 months later.
• Spain is rated below Italy, but the two counter-moved in recent ratings, with scores differntials driven by the following:

The political cycle clearly disfavours Italy, but economic performance is on Italy's side.

Here's ECR's analysis on Italy v Spain, with comment from myself (you can click on slides to enlarge):

5/10/2014: Why the News of Budget 2014 'Easing' Is a Daft Idea

The reports are out about the IMF 'agreeing' to Government taking shallower adjustment in Budget 2014 are so far not based on IMF statements of record. In its latest review, published yesterday and amended to reflect the latest data, IMF clearly states that we still need a full EUR5.1bn adjustment to be taken over 2014-2015.

Irish Times reports undisclosed sources claiming that the IMF is now not opposing a shallower adjustment in 2014 in exchange for steeper adjustment in 2015. http://www.irishtimes.com/business/sectors/financial-services/imf-agrees-to-easing-of-3-1bn-target-1.1550925 This might be so. But there are several things you should consider before taking this as some unambiguous positive for Budget 2014.

Firstly, if true, this means that Ireland 'easing on austerity' in Budget 2014 to accelerate into 2015 adjustment will be equivalent to a household taking a 1 year mortgage relief in the form of reduced principal repayment relief (sort of a 'interest plus partial principal payment') that has to be recovered in full comes the following year. Even Irish Central Bank would not suggest this would be a meaningful relief to the borrower. In a sense, Irish Government will be taking a gamble if it reduces the EUR3.1 billion adjustment target - if growth undershoots the Budget 2014 projects or revenues slack or unexpected expenditure increases take place or any other possible risks arise, we will face more austerity in 2015 and possibly into 2016. All for a short-term small 'relief'?

Secondly, there are more reasons for being sceptical about the latest Government 'breakthrough':

1. Relief to be gained from such a transaction is not worth much - at most EUR300-400 million 'savings' to be immediately swallowed up by the 'black hole' of Government 'investment' - I wrote about this in my Sunday Times column on September 22nd. 
2. Much of this is unlikely to impact directly in 2014 due to time lags.
3. Much of the 'investment' will go to funding building activities in politicised constituencies. Remember primary care centres locations selection fiasco? The modus operandi that produced them is still here with us. 
4. The 'savings' will be terminated in 2015 as EUR5.1bn required total adjustment will have to erase fully the 'savings' generated in reduced adjustment for 2014. In short - we will get more waste, more future pain; and
5. Relief comes at a price of increased uncertainty into the Budget 2015 just at the time when we are heading into even more uncertainty of having to fund ourselves in the markets (keep in mind - our 2014 borrowing requirements are largely already covered by NTMA pre-borrowing, so real uncertainty over funding will coincide with the need for larger fiscal adjustment in 2015). This uncertainty is likely to result in Troika monitoring extending into 2016 and beyond, instead of Ireland gaining any meaningful clearance from Troika cover with 2015 fiscal adjustment. I covered this in the said Sunday Times article as well.

Oh, and one more little point: there is absolutely nothing new in the IMF taking such a position on Irish budget. IMF operates on the basis of longer-term targets and greater flexibility in adjustment than our EU 'partners'. IMF has signalled on a number of other occasions the same. 

So what exactly does the IMF 'support' for Budget 2014? Not much at all so far. And the risks from it, as noted above, are almost codified.

"The review had preliminary discussions on fiscal consolidation in Budget 2014. The Irish authorities are firmly committed to meeting the 5.1 percent of GDP ceiling on the deficit in 2014. They note some room to meet this ceiling with a smaller consolidation effort than the €3.1 billion (1.8 percent of GDP) set out previously, but have deferred a decision on the amount of adjustment in 2014 until closer to Budget 2014. [IMF] ...staff stressed the importance of delivering the planned cumulative consolidation in 2014–15 of €5.1 billion (2.9 percent of GDP). Under the revised macroeconomic projections, this amount of cumulative consolidation is also consistent with reaching a deficit within the EDP target of less than 3 percent of GDP by 2015." 

Note any statement about a 'relief'? I don't see one... But: "In this context, it was agreed that the authorities will publish Budget 2014 on October 15 with fiscal targets until 2016 fully in line with the 2010 Council Recommendation under the EDP, including the required fiscal consolidation effort until 2015, and national fiscal rules (proposed structural benchmark, MEFP)." Meanwhile, "the specific consolidation effort for 2014 will be discussed with the EC, ECB and IMF staff taking into account budgetary outturns in the first three quarters of 2013 and further information on growth developments and prospects." 

The IMF reiterates the same position of serious ambiguity on Budget 2014 and strict clarity on 2014-2015 adjustments targets throughout the entire Review. The Fund also clearly states where the thrust of 'savings' should be delivered: "An expenditure-led consolidation remains appropriate, including improved targeting of social supports and subsidies while protecting core public services and the most vulnerable."

4/10/2013: WLASze Part 1: Weekend Links on Arts, Sciences and zero economics

This is the first post of WLASze: Weekend Links on Arts, Sciences and zero economics for this weekend. enjoy!


A powerfully stylised and accomplished in technique, yet still young (in age, but even more importantly) in contextualising the meaning artist Andrew Salgado: via Saatchi Online:
http://www.saatchionline.com/andrewsalgado

Moving between the traditions of Euan Uglow (http://theartstack.com/search/Euan%20Uglow)

and
Valery Koshlyakov (http://theartstack.com/artists/valery-koshlyakov)

The maturity is still lacking, though, hence rather over-dramatised treatment of portraits, but overall - Salgado is a promising artist in great line of tradition…


From Tanzania to China: 18 absolutely fascinating landscapes on Earth:
.businessinsider.com/the-most-surreal-landscapes-on-earth-2013-7?op=1#ixzz2gn6ZDVYw
http://www.businessinsider.com/the-most-surreal-landscapes-on-earth-2013-7#

I covered number 13 before here: http://trueeconomics.blogspot.ie/2013/08/1182013-wlasze-part-2-weekend-links-on.html And I have seen numbers 6, 16, 17 myself… closeup and in person…
One of my favourite places, missing in the above is this:

That's right, the Death Valley. Unbelievably beautiful place.


The chain of innovation being triggered by 3D printers keeps expanding now to 4D printing incorporating materials memory:
http://climateerinvest.blogspot.ch/2013/10/ja-ja-you-have-your-little-3d-printer.html
So run this chain into the future:
Set A= {3D Printing + 4D Materials}
Set B= {"microfluidic" computer chips + DNA Memory}
Set C= {Wearable Tech}

Take sets A + B + C = merger of biotech and materials sciences into a seamless incorporation of all technology with our biological and neurological structures from chips auto-repairs of neurone connections to medicine hunting cancer cells to communications systems that replicate telepathy. Pretty soon - morning make up will not only shape our faces, but also carry our memory files, while our bodies act as "projection screens" for anyone we want to communicate with in, say, presenting business plan 'powerpoint' slides… keep going...

For set B see: http://trueeconomics.blogspot.ie/2013/09/2792013-wlasze-part-1-weekend-links-on.html


Amazing imagery from Tanzania shot by Nick Brandt
http://gizmodo.com/any-animal-that-touches-this-lethal-lake-turns-to-stone-1436606506?utm_campaign=socialflow_gizmodo_facebook&utm_source=gizmodo_facebook&utm_medium=socialflow

Brandt's work can be seen here: http://www.nickbrandt.com/index.cfm


Nice to see WordlessTech.com profiling the visualisations of mathematical constants by Martin Krzywinski - http://wordlesstech.com/2013/10/03/round-art-pi/. I featured his work twice:
http://trueeconomics.blogspot.ie/2013/08/3182013-wlasze-part-1-weekend-links-on.html
http://trueeconomics.blogspot.ie/2013/07/2072013-wlasze-part-2-weekend-links-on.html

Though, unlike WorldlessTech.com - I wouldn't call him an artist in a strict sense. rather he is a visualisation scientist - a category of science that is somewhere between art and science in a normal sense. Maybe - it is just a branch of mathematics?.. Here is a snapshot of his fascinatingly intricate and deep work on 'accidental similarity': http://mkweb.bcgsc.ca/accidental-similarity/

A fascinating show in London's David Zwirner Gallery by Philip-Lorca diCorcia http://www.davidzwirner.com/artists/philip-lorca-dicorcia/survey/

There is amazingly nostalgic, sensitivity-filled space to his compositions, Hockney'esque
More of his work: http://theartstack.com/artists/philip-lorca-dicorcia
One of my favourites:

Stay tuned for more…

4/10/2013: 'Tax Haven' Ireland Is Trending in the Media

So more news flow on the 'tax haven' front for Ireland:

Finfacts: Google booked 41% of global revenues in Ireland in 2012; A leprechaun's gold? http://www.finfacts.ie/irishfinancenews/article_1026612.shtml and http://www.tax-news.com/news/Googles_Irish_Tax_Payments_Revealed____62232.html

Give it a thought… mind boggling accounting - more from Finfacts: http://www.finfacts.ie/irishfinancenews/article_1026577.shtml US company profits per Irish employee at $970,000; Tax paid in Ireland at $25,000

And Adobe was dragged out of the shadows to face questions about its... Irish tax exposures: http://www.ft.com/intl/cms/s/0/6273646e-fb77-11e2-8650-00144feabdc0.html#axzz2gmUQNTzk

Irish Times covering 'confusion' over Irish effective tax rates: http://www.finfacts.ie/irishfinancenews/article_1026602.shtml
Ahem… really? Confusion?..

If there is 'confusion' then why is it that we insist on 'no apology' for running beggar-thy-neighbour tax arbitrage? http://www.finfacts.ie/irishfinancenews/article_1026639.shtml

More from Finfacts: http://www.finfacts.ie/irishfinancenews/article_1026038.shtml - you have to love the picture… homo intellectualis gathered in thought…

But apparently, there is no Irish-styled 'confusion' in another corporate tax haven camp: http://www.ft.com/intl/cms/s/0/1560d626-16bf-11e3-bced-00144feabdc0.html?siteedition=intl&siteedition=intl#axzz2eN4xmAsd

Of course, our 'confusion' is single-sided: Minister Noonan is pretty certain that our gains in services exports in 2012, reported recently by CSO are all organic growth: http://www.finance.gov.ie/viewdoc.asp?DocID=7567 So convinced is our Minister of being right on that point, he is unwilling to follow the Dutch in even considering a review of what has been going on: http://www.tax-news.com/news/No_Minimum_Effective_Corporate_Tax_Rate_For_Ireland____62205.html. Now, I actually would agree that setting such a rate might be silly or not enforceable or not even desirable for Ireland, but that does not mean we should be arrogant about the issue of corporate taxation practices.

Brilliant stuff.

To remind you, my view on tax arbitrage (I equate it with being a 'tax haven' in spirit as it is a purposeful attempt to game the system of international taxation to one's advantage) is that not only it undermines our ethical position vis-a-vis our competitors and partners in business, investment and development, but it corrupts our internal economy by showing that gaming the system pays much more than actually attempting to produce something of real market value. It also crowds out resources from productive entrepreneurship and firms.

Let me quote from Finfacts post (http://www.finfacts.ie/irishfinancenews/article_1026577.shtml): "Prof Frank Barry of Trinity College in a recent paper, says that as far back as 1987, T.K. Whitaker said that he would like to see “a restoration of the old (civil service) principle that you were independent of ministers. You gave your views on any new proposals fearlessly, critically, honestly. You did not care whether your views were likely to commend themselves to the minister, whether for their own sake or politically. Once a decision was taken by minister or government, however, you carried it out as loyally and efficiently as you could. That was my understanding of the function of senior civil servants but I’m afraid it has been undermined."

When was the last time that a public enterprise chief said anything of consequence in public that was a departure from the official spin line?"

Indeed I can agree with much of what Professor Barry said recently in arguing that Ireland is not a tax haven (http://www.taxationinfonews.com/2013/09/ireland-is-not-a-tax-haven/). However, our reliance on tax arbitrage is undeniable and it fuels the green jersying agenda of opposing any expression of real (as opposed to token) criticism is seen as an undesirable activity. The result? Look around yourselves - we no longer can live the truth as our GDP, GNP, Exports, Imports, Current Account, PMIs, etc statistics become increasingly invalidated by the tax arbitrage activities of the growing number of global MNCs.

In a typically anodyne fashion, Irish Times posted a debate on the topic: http://www.irishtimes.com/business/economy/can-we-change-our-corporate-tax-rate-1.1542608

Culmination of this circus is: we have Bono - tax resident outside Ireland - claiming that there is nothing wrong with Irish corporate tax policies: http://www.irishtimes.com/business/economy/bono-defends-ireland-s-corporation-tax-1.1538793

But good news for Apple - it was cleared by SEC on technical concerns about its disclosures in relation to foreign tax regime risks: http://www.latimes.com/business/technology/la-fi-tn-apple-reveals-sec-review-of-irish-tax-disclosures-20131003,0,7138891.story

Note: you can track my other posts on the topic from here: http://trueeconomics.blogspot.ie/2013/10/2102013-low-tax-free-market-economy.html

4/10/2013: Eurocoin: Cautious Return of Growth? September 2013

I have not updated my charts for Eurocoin in some time now, so might as well bring them up to September cover:

Eurocoin - the Banca d'Italia and CEPR joint leading indicator for growth in the euro area rose above zero, for the first time since September 2011, reaching +0.12 in September 2013. The rise was not statistically significant, but is nonetheless welcome. Growth forecast consistent with this level is 0.1% which is below Q2 2013 at 0.3 but that ignores the point that in Q2 2013 eurocoin run at an average of -0.143.

And updating monetary policy charts: growth is still being accommodated by historical standards, but caution on behalf of ECB is still excessive. Cutting rates to 0.25 or lower will be fine, even by inflation consideration (chart below):

And y/y change in inflation/growth relationship:

Inflation dampening while growth accelerating... hardly a scenario for sustained recovery, but we have seen periods with even more pronounced disconnect. 

4/10/2013: IMF 11th review of Ireland: Banks & Exchequer

IMF released its 11th review of Irish economy under the Extended Arrangement for funding. I covered growth-related issues arising from the IMF release here: http://trueeconomics.blogspot.ie/2013/10/4102013-imf-11th-review-of-ireland.html

Now, some other topics, namely banks and the Exchequer.

Per IMF: "Ireland is expected to return to reliance on market financing in 2014, yet further European support could make Ireland’s recovery and debt sustainability more robust. Irish banks face weak profitability that hinders their capacity to revive lending. European support to lower banks’ market funding costs could help sustain domestic demand recovery in the medium term, protecting debt sustainability and financial market confidence."

What's that about? Here are two charts:

IMF: "The recent retracement of Irish sovereign bond yields has been broadly consistent with the experience of other countries in the euro area periphery." [But wait, what about Ireland's unparalleled success in fiscal adjustments and 'best-in-class' status? Are the IMF saying that Enda did not singlehandedly deliver huge improvements in Irish bonds yields? How can this be the case, unless the Irish Government uses 'we' as denoting 'Peripheral Countries' collective in claims that the Govenment has delivered stabilisation of Government funding costs.]

"After touching record lows in early May, the 10 year yield has risen 56 basis points, to 3.98 percent as of September 11. Market tensions dissipated in July after the settlement of the political crisis in Portugal and recent turbulence in emerging markets has had limited effect on Irish bond yields. No new bond has been issued by the Irish sovereign since the €5 billion ten-year issue in mid March." The latter, of course simply means that lower supply of new bonds (lack of it since mid-March) and now the new announcement by NTMA that it will not be tapping the markets any time before official exit from Troika supports, are keeping things steady in yields terms. Otherwise… well… logic suggests, at least speculatively, they can be higher.

And on banks: "From a trough in mid-May, yields on Bank of Ireland (BoI) and Allied Irish Banks (AIB) 3 year covered bonds have edged up some 40 basis points as of September 11. Since its May 30 issuance, the yield on BoI’s 3 year senior unsecured bond has been more volatile, but overall has risen by 62 basis points, to 3.37 percent."

Bah! Two things to say about the above:

1. Banks bonds still tracing sovereign risks and that holds even for covered bonds! Not a good sign for the banking sector. The explicit guarantee is gone, so now it is don to the implicit guarantee and the state simply cannot shake off the baggage of the original 2008 Guarantee. Irish banks are still too-big-to-fail and Irish state is still a too-small-to-bail-in banks lenders.
2. For an army of bonds sales-desks analysts out there pontification on Irish economy, I am yet to see their honest analysis on what is happening with banks funding costs and sovereign funding costs. They are a bit too keen talking about the economy and too little about debt markets. Which is sort of 'your dentist is football analyst' analogy...

"Deposit rates continued to inch downward, however, and ECB borrowing by domestic banks fell from €39.6 billion at end March to €33.4 billion at end August, reflecting a paucity of new lending, further noncore asset deleveraging, modest amounts of new market funding, and a broadly stable deposit base."

So cheap funding dissipating, deposits (stable funding) still anaemic or declining… Happy times, folks. Stabilisation bites. Come back and argue that when businesses and households are croaking under the weight of interest on their debts with the above 'improvements'.

Why wait, however, let's take a look at IMF-reported 2009-2013 data:
Banks non-performing loans (vs provisions) as % of total loans: 2009=9% (4%) or 44.4% cover, 2012 = 11.3% (5.4%) or 47.8% cover, 2013 = 11.5% (4.5%) or 39.1% cover. So cover is shrinking! Meanwhile, personal lending rates have gone up (as ECB repo rate went down) from 11.1% in 2009 to 11.6% in 2013, and SVR mortgages rates have gone up from 3.3% in 2009 to 4.4% in 2013. Government bond yields are down from 4.9% in 2009 to 4.2% in 2013. What's happening folks" The state credit costs are being dumped onto mortgagees. The 'rescue' of the banks and subsequently the rescue of the state has been loaded up onto the borrowers from the banks.


On the positive side, Exchequer performance was good. Not spectacular, but fine - in line with (and slightly better than) budgetary targets:

Do note the caveats listed below the charts - it would be nice were the Irish authorities actually provided a clear, consistent and well-defined map of all one-off payments and receipts… but then the picture of the fiscal adjustment would not have been as pretty as our politicians like to claim. Still, the picture is broadly fine.

Crucially, the above is not sufficient for us to rest on our laurels. For a number of reasons, but chiefly for the reason not even mentioned in the IMF note: has anyone looked at how sustainable, over the medium (2015-2020) term the fiscal savings delivered by the Government are? I mean: we know that pay moderation agreements with public sector unions are not sustainable and even subject to automatic reversals in 2015-on, right? We also know that much of health system 'savings' are not sustainable, since these come on foot of extracting more and more cash out of ever-dwindling supply of private insurance holders. Right? What else is not sustainable? How much? What is the risk down the line? Is corporate tax revenue uplift we have seen over the last 24 months or so sustainable? Much of it seems to have come from MNCs booking more transfer pricing profits into Ireland. Is that 'sustainable'?

IMF does some 'sustainability' tests in its analysis and here is a scary chart:

Basically, note the path of the gross financing needs for Ireland through 2018. This returns us, under baseline (no new shocks) scenario back to the situation in 2018 where financing needs of the Exchequer are slightly above the needs in 2013. This is assuming GDP is growing 2.5% annually in real terms 2015-2018. And this is incorporating the 'savings' achieved from the Promissory Notes. And this is after we impose agreed target cuts of 2014-2015. We are swimming faster and faster to be thrown back, not even to stay put.

Now, tweak few assumptions:

So in Constant PB Scenario, the change is with no 2014-2015 'austerity' factored in, which is boring stuff. But the exciting stuff is the 'Historical Scenario' where things slide back to 'normal' on growth and government deficits:

 The outcome of the above in two charts:
1) Public debt explodes

2) Financing needs of the Government explode too

Care to argue now we can afford a 'stimulus'? As Harry Callahan put it: "Go on, punk, make my day!"

4/10/2013: IMF 11th review of Ireland: Growth Warnings

So IMF released its 11th review of Irish economy under the Extended Arrangement for funding.

Key points:

"Real GDP declined in the first quarter, reflecting a fall in exports and weak domestic demand. Nonetheless, fiscal results remain on track and sovereign and bank bond yields have risen relatively modestly in response to declining global risk  appetite. A range of other economic indicators are more encouraging, suggesting lower but still positive growth in 2013, though uncertainty remains. Growth projections for 2014 are also lowered given weaker prospects for consumption recovery and for trading partner growth."

So weaker than forecast growth conditions… ok… How much weaker?

"Balancing the weak GDP results for the first quarter against a range of more positive indicators, the growth projection for 2013 has been pared back by a ½ percentage point to 0.6 percent y/y, but uncertainties remain." Boom! Ugly stuff, folks. And replace 'but' with 'and' and you will get a double Boom!


"Most importantly, export growth has been cut by 1½ percentage points as data indicate a larger impact from the patent cliff and tepid recoveries in important trading partners. Lower imports dampen the impact on growth." Wait, weren't we told that patent cliff doesn't matter much cause exports are offset by imports etc?

"Domestic demand is expected to be flat, with private consumption still contracting modestly owing to fiscal consolidation and household debt reduction, cushioned by employment growth and low inflation. Fixed investment is expected to expand by some 2 percent given improving business sentiment and the uptick in housing starts, but remains the most volatile GDP component. This projection will need to be further reviewed when Q2 national accounts data become available near end September." We have that Q2 data available now… see here: http://trueeconomics.blogspot.ie/2013/09/2092013-domestic-economy-continuing-its.html and it ain't pretty…

More details here: http://trueeconomics.blogspot.ie/2013/09/2092013-h1-2013-qna-domestic-economy-vs.html Net: Gross Fixed Capital Formation (basically investment in the economy) is down 9.40% in H1 2013 compared to H1 2012, down 14.09% compared to H1 2011 and down 67.73% compared to H1 2007. The reductions in capital investment jun H1 2013 compared to H1 2007 are ten-fold the size of reductions in current Government spending at EUR17,542 million. For another comparison, reductions in personal expenditure on goods and services by households over the same period is EUR4,757 million.

"Weaker consumption and export growth are expected to dampen the pace of recovery, with growth now penciled in at 1.8 percent in 2014. Export and consumption growth are expected to benefit from a projected rise in trading partner growth with employment growth contributing to incomes and confidence. Although consumption growth is still expected to become modestly positive in 2014, the pick up is weaker because a 1½ percentage point downward revision to household saving in 2012 suggests less room for lower savings given the priority households attach to debt reduction. Public consumption is also expected to be softer than previously anticipated as the full effects of the Haddington Road Agreement feed through in 2014. Export growth in 2014 is scaled back to reflect the possibility that recent weakness could persist."

Per IMF: "Growth firms to 2½ percent in 2015 as external growth rises further and fiscal consolidation eases, but durable recovery hinges on reversing the tide of NPLs." The miracle of 3%+ growth for ever, projected back in 2010-2011 to start in 2013-2014 is now replaced by the miracle of 2.5% growth projected to start in 2015… And the new projections out to 2018 no longer feature a single year of growth expected to rise above 2.5%… but all is still sustainable, just as it was in 2010 and 2011 and 2012 and… And the dream of 2.5% growth will, per IMF, be consistent with a positive output gap of ca 0.3%, which means that that is not the expected long-run real growth rate.

In effect, IMF admits now that Ireland cannot be expected to grow sustainably at the rates in excess of 3% per annum in real terms. Say goodbye to Ireland's 'growth miracle', say hello to Ireland's Belgium decades...


Another kicker: after 2015: "…the recovery continues to rely principally on net exports as domestic demand recovery is expected to be protracted as many households continue to deleverage in the medium term. Resolution of mortgages is not expected provide significant direct support to consumption recovery, as while some households may have a reduction in debt service due under a split mortgage restructuring, they may have previously been temporarily on interest-only terms, while other households may need to adjust consumption to serving their debt even if the debt service due is reduced. Rather it is expected that progress in reducing NPLs and enhancing bank profitability will gradually enhance the terms of banks’ access to market funding and their ability and willingness to lend to less indebted borrowers—which includes the younger cohort of households—unlocking housing market turnover and reducing household uncertainty."

Wow! So the IMF is warning us that things are going to remain tough even after the mortgages crisis 'resolutions'… Not like our Government is listening… And the IMF is telling us that the economy is going to get more polarised and paralysed... where did you hear that? Oh... http://trueeconomics.blogspot.ie/2013/08/782013-sunday-times-july-28-2013.html

Employment: long-term unemployment remains a problem (we know that)… and surprisingly: "Facilitating SME examinership could aid resolution of SMEs in arrears, supporting their potential to invest and create jobs." Now, here's the key point: in all this excitement about family homes and repossessions we forgot that roughly 50% of SMEs loans are in arrears… and of the remaining 50%, unknown quantum is at risk… Hm… I wonder how that 'facilitated examinership' going to work for the employment stats and for property markets and mortgages arrears, when examiners go into the SMEs books to uncover potential subsidies to proprietor's income or when examinerships lead to cuts in employment levels?..

So back in 2011, IMF predicted Irish economy to grow 2.4% (GDP) in 2013, 2.9% in 2014 and 3.3% in 2015. This time, IMF is projecting Irish economy to grow 0.6% in 2013, 1.8% in 2014 and 2.5% in 2015. Nominal GDP was supposed to reach EUR182.5 billion by end of 2015 back in 2011 projections and is now forecast to reach EUR178.4 billion… What's being down EUR4.1 billion (one year difference) between friends, or EUR6.5 billion over three years, eh? Especially when all of this is sustainable, right?..

Still, gives us some perspective as to the whole circus going on: we are sticking to EUR3.1 billion fiscal target for 'adjustment' and washing off EUR4.1 billion in growth expectations underpinning 'sustainability' analysis… You'd think this is monkeys with abacus, but no - these are highly paid 'analysts', 'economists' on Government side, state side, sell-side at stockbrokerages and banks, ECB side, EU side, IMF side… And they all sing in unison: all is sustainable, just as they revise continuously their forecasts down and down and down. Which begs a question: at what stage will the sustainability malarky be replaced by the admission of the crisis? Presumably when GDP growth is revised to nil into perpetuity?

I will be updating charts on Irish economy forecasts from the IMF over the next few days, so stay tuned. Before that, I will be blogging more on key topics covered by the IMF review later today, also stay tuned…

3/10/2013: Irish PMIs - are they meaningful?

Having covered Services and Manufacturing PMIs (see links here: http://trueeconomics.blogspot.ie/2013/10/3102013-services-and-manufacturing-pmis.html) in terms of Q3 2013 averages, let's have a reminder as to the links to actual growth in Irish GDP and GNP these series have.

Two charts covering through Q2 2013:

Thus, overall:

• Changes q/q in Manufacturing PMIs have only a weak correlation with actual real (constant prices) GDP and GNP changes q/q: R-squares of just 35.6% and 29.4% respectively when we remove the constant factor (which is not significant by itself at any rate). This is weak to say the least.
• Changes q/q in Services PMIs have only a very weak correlation with actual real (constant prices) GDP and GNP changes q/q: R-squares of just 16.4% and 17.6% respectively when we remove the constant factor (which is significant). This is very poor.
• With positive intercepts of 0.0023 for GDP and 0.0024 for GNP, the Services PMI R-square rises to 23.7% for GDP and 22.7% for GNP. Once again, no change to the above conclusion.

The above suggests that a significant component of both PMIs come from transfer pricing and not real economic activity on the ground. Or put differently, the PMIs are not that exceptionally meaningful indicators of actual levels of activity in the economy and are only weakly-significant in indicating the direction of that activity. 

Note: this is quarterly averages data, not much more volatile data based on monthly series. Which puts to question monthly movements in PMIs even more...

3/10/2013: Services and Manufacturing PMIs for Ireland: September 2013

In the previous posts I covered separately both Service PMI for Ireland and Manufacturing PMI (released by Markit & Investec). As noted, both series show strong performance in September. Here is the combined analysis:

Both Services and Manufacturing PMIs are now above their historical crisis-period averages. Manufacturing PMI is slightly ahead (0.1 points) of its historical pre-crisis average since May 2000 when both series start running coincidently. Services PMI is now slightly below its historical pre-crisis average.

Services PMI have broken out of the flat trend and are now trending up for the last 12 months. However, Manufacturing PMI continues to move side-ways, although on average remaining positive.

Two major points: September 2013 reading puts both indices at statistically significant levels above 50.0, which is the first such occurrence since February 2011:

In addition, we are seeing stronger positive correlation between the two indices (the 12mo rolling correlation below is only indicative) established since February 2013 low:

In other words, both sides of the economy are now performing better, but we need this momentum to be sustained over 2-3 months to see serious feed-through into actual economic activity figures.

3/10/2013: Services PMI: September 2013

Markit and Investec released Services PMI survey press release for Ireland. As usual - the note is full of statements that can not be confirmed by information contained in the note itself.

On the side that can be reported/interpreted:

• PMI slipped from what appeared to be an unlikely jump to 61.6 in August to slightly lower, yet still strongly-expansionary 56.8. This is still a robust rate of growth. 
• I cannot tell if it was driven by a handful of MNCs or was broadly-based. Allegedly, the UK was the main source of strength for new exports orders, which are expanding, seemingly (reading the Markit release) at a more modest pace than headline PMI indicates. The UK receives huge volume of exports from Ireland on ICT services side (the likes of Google et al) and this is the major point of contention the UK Government has with Irish tax structures, so it might be that much of the services exports 'boost' comes from transfer pricing.

• Dynamics are good: there is new upward sub-trend established since September 2012 and this breaks the period of flat trend between September 2010 and September 2012. 
• Significantly, since around September 2012 the series have been - on average - in the statistically-significant zone of expansion (again, distinct from September 2010-September 2012 period when expansions on average were not statistically significant).

• On quarterly averages basis: Q1 2013 came in at 53.7, Q2 at 54.3 and Q3 came in at 58.7. Sounds impressive, however, if we account for the freakishly high reading in August (partially and imperfectly controlling for weather effects) the Q3 average sits within 55-56 range. Thus even with weather effects taken out, the overall Q3 result is strong.
• On annual basis, using quarterly averages: Q3 2010 stood at 52.5, Q3 2011 at 51.4, Q3 2012 at 51.6 and the current running average is well ahead of all of these, even if we take adjustment for unusually good weather.

Overall: good numbers. However, we have no tangible information as to the movements on profit margins, employment, export orders, new orders etc. You should read this note on some caution regarding interpreting PMI for Services for Ireland: http://trueeconomics.blogspot.ie/2013/09/592013-cautionary-note-on-irish.html. Combined analysis of Manufacturing and Services PMIs to follow shortly.

Note: To add to this, I have now been seemingly removed from the mailing list for the slightly more detailed version of release (or Investec stopped supplying one altogether).