26/10/2013: Europe's Structural Deficits & Ireland's Headache...

As you know, I prefer not to blog extensively on economics matters over the weekend. However, due to work time constraints this week, I have accumulated lots of interesting material that requires some catch up blogging... so here are some new posts on economics matters...

First up: an interesting chart summarising neatly the problem of Irish fiscal consolidations to-date and the reasons why we are not out of the woods yet.

The above plots structural deficits in the EU (in other words the deficits that would have prevailed if the economy was not in a cyclical recession or downturn), as estimated by the EU Commission. Less questionable are those deficits derived using the IMF methodology:

According to IMF estimates, Ireland's structural deficits are the fourth largest in the EU and are second highest amongst the 'peripheral' states.

For comparative, consider also the primary deficits (removing the cost of interest on government debt):

Ireland is the worst performer in 2013 in the EU (this might improve to the second worst given reclassification of EUR700 million in licenses sales from 2012 into 2013). Notice that Greece is already running primary surplus, while Italy is close to doing so.

The above clearly shows that the Exchequer in Ireland is far from achieving sustainable deficits trajectory and that any claims that Ireland is close to completing fiscal adjustment required to restore its public finances to health should be subject to serious reservations.

25/10/2013: WLASze Part 1: Weekend Links on Arts, Sciences and zero economics

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

Enjoy!

Beautiful series of landscape photography from around the world:
http://www.theguardian.com/culture/gallery/2013/oct/21/awards-and-prizes-photography?CMP=twt_gu
From sublimely still:

To overpoweringly dynamic:

Best bit, the above link also offers links to 2010, 2011 and 2012 competitions.


From modern photography where every detail is given its prominence in light, motion and depth, to the first photograph ever that depicted people:
http://www.businessinsider.com/first-picture-of-people-2013-10
Irony is - the traces of people were all erased by the length of exposure… all but two...


I recently wrote about 3D and 4D printing (see here: http://trueeconomics.blogspot.ie/2013/10/4102013-wlasze-part-1-weekend-links-on.html). I even spoke about these two technologies as the signifies of the incoming change in global economic relations between core inputs of capital, labour and financial investment at a recent event… and now, art raced us all ahead of the reality:
http://www.dezeen.com/2013/10/20/mycelium-chair-by-eric-klarenbeek-is-3d-printed-with-living-fungus/

Living material interacting with 3D printed structure to reinforce it… the boundless capacity for tech innovation meets the boundless capacity for creative narration. And loses to it…

While on the topic: see this article about the emerging future of architecture in the age of 3D printing… http://www.dezeen.com/2013/09/25/3d-printed-buildings-to-become-reality-in-the-not-too-distant-future/ Will we print our homes of the future? Sure we will. Will they look like a spiders-infested cave of post-apocalyptic plastic universe that reverses Lego into a fly-like dimensionality of human existence?.. I hope not…

Spare me this 3-bed penthouse…

It might look cool in dramatic light (no - it does not) but semantically and aesthetically it is equivalent to Zaha Hadid's obsession with curvature sprawled over any space to bury any dimensional proportionality to the living space around it... sort of like the image below, only taken through the filters of design:

And think about the cleaning bills… or the cost of watches and jewellery lost in all these twigs and twists of the surfaces of the 3D-printed cob-web-building… Then there are family dinners, with kids… Yeeks!


Let's get back to the clean(er) world of science and thought… JPL imagery of Saturn: the colorized mosaic from NASA's Cassini mission shows an infrared view of the Saturn system, backlit by the sun, from July 19, 2013. http://www.redorbit.com/news/space/1112979062/new-backlit-infrared-saturn-images-101813/

And for less dynamic imagery that is dead-cool: Saturn's satellite, the 'Death Star'(Moon) Mimas

Awe-inspiring...

24/10/2013: Fiscal Policy: To Bail Directly or Via Project Finance?

New paper "Macro Fiscal Policy in Economic Unions: States as Agents" by Gerald Carlino, and Robert P. Inman (NBER Working Paper No. 19559 published October 2013) argues that ARRA (the American Recovery and Reinvestment Act) was the US government’s fiscal policy (as opposed to monetary policy QEs programmes) response to the Great Recession. "An important component of ARRA’s $796 billion proposed budget was $318 billion in fiscal assistance to state and local governments."

The study "reaches three conclusions.

1. "First, aggregate federal transfers to state and local governments are less stimulative than are transfers to households and firms. It is important to evaluate the two policies separately." Note: I have argued that in the current extreme case of debt overhang on household side, monetary policy can act directly to monetize debt (effectively cover household debt write downs) instead of attempting tod sliver support for deleveraging via traditional channels (banks --> firms & households, or government --> firms & households).
2. "Second, within intergovernmental transfers, matching (price) transfers for welfare spending are more effective for stimulating GDP growth than are unconstrained (income) transfers for project spending. Matching aid is fully spent on welfare services or middle-class tax relief; half of project aid is saved and only slowly spent in future years." Again, direct injections to households will work better than indirect stimulus via 'infrastructure projects' or neo-Keynesian 'digging of the trenches'… However, this effect for the US is obviously linked to the less open nature of the US economy than say in the case of smaller economies of Europe.
3. "Third, simulations using the SVAR specification suggest ARRA assistance would have been 30 percent more effective in stimulating GDP growth had the share spent on government purchases and project aid been fully allocated to private sector tax relief and to matching aid to states for lower-income support."

From the paper: Federal Aid, Federal Purchases, and Federal Net Revenue: 1947 - 2010*
(Per Capita, 2005 Dollars)

Now, look at the above and give a thought to the fact that Paul Krugman still thinks there was not enough stimulus...

24/10/2013: Irish Tax Regime Hits the News, Again...

News on the Corporate Tax Haven front for Ireland:

• On foot of Budget 2014 removing one of the more visible tax loopholes: http://gigaom.com/2013/10/16/ireland-will-shut-apples-tax-holy-grail-but-leave-loopholes-wide-open/
• A link to the paper arguing why Ireland is not a tax haven: http://www.esr.ie/article/view/78
• Official Department of Finance paper on Ireland's international tax strategy: http://budget.gov.ie/Budgets/2014/Documents/Department%20of%20Finance%20International%20Tax%20Strategy%20Statement.pdf which basically argues that everything is fine... except:
• In Budget 2014 the Government explicitly admits that at least one of the loopholes existed via which Irish-registered companies were free to avoid paying any taxes: http://finance.gov.ie/documents/speech2013/spmn234.pdf see page 5.
• So Ireland is not a tax haven because it has 12.5% tax, but companies were evading that tax by using the scheme that the Government is now shutting down (de facto admitting that Irish law permitted tax minimisation to zero liability), yet per above links this is going to make virtually no difference to the practice... hmm...
• Excellent piece from FT: http://www.ft.com/intl/cms/s/0/1a5d3a4e-3cb6-11e3-a8c4-00144feab7de.html#axzz2ieiDHKTX on Ireland's launch on the road to tax reforms, which according to the Government Ireland does not need because Ireland is not a tax haven.

You can follow the trend of links to various articles on Irish corporate tax status and scandals from here: http://trueeconomics.blogspot.ie/2013/10/4102013-tax-haven-ireland-is-trending.html

24/10/2013: SCSI/IPD Ireland Property Index Q3 2013

SCSI/IPD Ireland Q3 2013 report is out for commercial property markets and the data is returning some interesting news.

• Irish commercial property (down 65% since the pre-crisis peak) rose 0.3% in Q3 2013 - the first time capital values were up in 23 quarters.
• Per SCSI/IPD, the drivers were: improving sentiment relating to the value of discounted properties (bottom fishing is on) and "gradually increasing occupier demand". 
• Total quarterly return on commercial real estate were at 2.6% - highest since the end of Q3 2007.
• Per release: "Demand for offices in central Dublin, from both investors and tenants, are driving returns, while recovery across the retail and industrial sectors is slower." So things are very much compressed into few sub-zones of Dublin and the 'bottom-fishing' ain't that good in the rest of the nation. 
• Office capital values rose 0.9%, while capital returns to industrial and retail property were still down at -0.5% and -0.3% respectively.
• All property annual income returns were 9.7% in September 2013, the highest measured globally by IPD and much higher than 6% in the UK.
• Annual income returns were 10.2% for offices, 12.2% for industrial properties and 8.5% for retail.
• Alas, rental values fell 0.4% overall on weak retail demand (down 1.9%), offices rents were up 0.5% nationwide and 1.0% in central Dublin. Industrial rents are up 0.3%.

Summary:

22/10/2013: Keiser Report this week

Latest Keiser Report (E513) show with Stacy Herbert: Irish Bailout 'Exit', Greek Bailout 3.0, UK's China Model and the End of Pax Americana... with my contributions... http://www.youtube.com/watch?v=E20ycoQMEpY&feature=youtu.be

21/10/2013: Sovereign Debt & Banking Crises: Emerging Markets Evidence

Recent (March 2013) CEPR Discussion Paper No. 9369 by Sylvester C. W. Eijffinger and Bilge Karataş, titled "Three Sisters: The Interlinkage between Sovereign Debt, Currency and Banking Crises" argues that "the sovereign debt default and the linkages from banking and currency crisis have been rarely explored in the crisis literature." The study attempted "to dive into this unexplored area by applying panel data binary choice model on a sample with 20 emerging countries having monthly observations for the years between 1985 and 2007. The non-linear linkages from currency and banking crises to sovereign defaults are explored by using the interactions of these crises with international illiquidity, appreciated real exchange rates and real international monetary policy rates."

The sample is clearly not applicable directly to the advanced economies, such as the euro area, but the findings still remain interesting.

"It is discovered that currency, banking and debt crises tend to occur simultaneously [an increase in the indebtedness of the public sector, overvalued exchange rates and financial as well as political riskiness of a country plays a role in predicting sovereign default].

"Prior occurrence of a currency crisis increases the sovereign default probability through appreciated real exchange rates, and in countries with high short-term indebtedness the occurrence of banking crisis raises the probability of a debt crisis."


Source: www.cepr.org/pubs/dps/DP9369.asp

21/10/2013: Household Debt Crisis: Social Drivers

Recent CEPR Discussion Paper No. 9238 (December 2012) titled "Household Debt and Social Interactions" by Dimitris Georgarakos, Michael Haliassos and Giacomo Pasini looked at social determinants and drivers for debt accumulation amongst households.


According to the authors, "Debt-induced crises, including the subprime crisis, are usually attributed exclusively to supply-side factors. We examine the role of social influences on debt culture, emanating from perceived average income of peers. Utilizing unique information from a household survey, representative of the Dutch population, that circumvents the issue of defining the social circle, we consider collateralized, consumer, and informal loans. We find robust social effects on borrowing - especially among those who consider themselves poorer than their peers - and on indebtedness, suggesting a link to financial distress. We employ a number of approaches to rule out spurious associations and to handle correlated effects."

More specifically, the authors find that "the higher the perceived income of the social circle is, the greater is the tendency of respondents to take up loans and borrow sizeable amounts. This is true both for uncollateralized (consumer) loans and for collateralized loans…"

The above effect is "stronger for those who perceive themselves as having lower income than their social circle." In effect, this is keeping up with the Joneses effect, magnified by within-reference group peer effects.

"The tendency of households to take up uncollateralized and collateralized loans, controlling for the perceived average income of the social circle, is partly related to perceived spending ability or (computed) housing assets of members of the social circle."

"Moreover, we find that expectations about (the minimum) next period’s income are statistically significant for collateralized loans, pointing to a ‘Tunnel Effect’, but do not render perceived income of the peers insignificant. This is consistent with the idea that borrowing behavior is influenced by peer income not only because it conveys some information regarding the respondent’s own future, but also because of some comparison or envy effect." Notice - this is about basic human psychology, as co-determined by external (not internal or own-control) factors. In other words, any corrective policy will have to address the issue of peer effects, not only 'own effects'.

"Finally, the role of such comparisons is not confined to the tendency to borrow and to the level of borrowing conditional on participation, but it seems to extend also to financial distress."

To reinforce the argument above that the drivers of borrowing crises are social, not just individual (and hence any responsibility, liability and policy actions on this front have to be co-shared): "Our study has uncovered a potential for social influences on borrowing. By observing that others have higher average incomes, the household not only tries to emulate their
spending, as earlier studies have found, but also decides to borrow more, only partly because of expectations of higher future own income. Such decisions may be encouraged by a massive and unprecedented housing boom associated with high collateral values and expectations of continuing house price trends. The policy implication of our finding that social comparisons matter for debt behavior, after controlling for fundamental characteristics
of the household and region-time trends, is not to interfere with the process of forming social circles or perceptions regarding them, but rather to decouple perceptions of income or spending differences with peers from any decisions to borrow without proper account of the associated risks."

My view: let's cut puritanism bull**&t and recognise that debt crises are not solely driven/caused by the reckless behaviour of individuals taken in an isolated setting, but are social / societal phenomena. This realisation should lead us to a recognition that dealing with prevention of future crises and with the fallouts from the current ones requires co-shared responsibility and liability.


Source: for earlier version (free to download) http://arno.uvt.nl/show.cgi?fid=127996

21/10/2013: Uneasy Links: Banks and Sovereign Bonds Exposures

IMF recently warned about growing own-sovereign exposures of European banks when it comes to government bonds holdings. FT echoed with an article: http://www.ft.com/intl/cms/s/0/9b6fb558-3270-11e3-b3a7-00144feab7de.html

Per FT:

• "...Government bonds accounted for more than a 10th of Italian banks’ total assets at the end of August, the last month for which data are available. That is up from 6.8 per cent at the beginning of 2012, according to data from the European Central Bank."
• "In Spain the proportion has risen to 9.5 per cent, up from 6.3 per cent over the same period…"
• "… in Portugal it has increased to 7.6 per cent from 4.6 per cent."

"By far the majority of the increases – which occurred steadily month-on-month – are in holdings of bonds issued by banks’ own governments." So overall, "Government bonds, as a percentage of total eurozone bank assets, have grown to 5.6 per cent from 4.3 per cent since the beginning of 2012."

Lest we forget, there is a strong momentum building up in Europe to do something about the problem of European banks over-reliance on sovereign bonds - a momentum driven by lower debt countries with significant exposures to Target 2 imbalances. At the end of September, ECB's Governing Council Member Jen Weidmeann said that "The time is ripe to address the regulatory treatment of sovereign exposures," Weidmann wrote in an opinion piece published on the website of the Financial Times. "Without it, I see no reliable way of breaking the sovereign-banking nexus." (see here: http://www.efxnews.com/story/20978/ecb-weidmann-time-end-preferential-treatment-gov-debt?utm_content=bufferffb97&utm_source=buffer&utm_medium=twitter&utm_campaign=Buffer)

Basically, removing automatic zero risk weighting on sovereign bonds, especially for the weaker peripheral sovereigns will be a major problem for the European banks and can precipitate a strong sell-off of the sovereign bonds. I suspect it will be unlikely to take place in the current environment. But gradual shift toward such an approach can easily take place.

Another recent article highlighted the shift away from foreign lending by European banks on foot of the growing sovereign debt exposures: http://www.voxeu.org/article/impact-sovereign-debt-exposure-bank-lending-evidence-european-debt-crisis

Based on Forbes data,

• BNP Paribas has total assets of USD2,668 billion, with USD43.1 billion in peripheral 'light' (ex-Cyprus) Government bonds (1.62% of total assets);
• Deutsche Bank has total assets of USD2,545 billion, with USD16.2 billion in peripheral (ex-Cyprus) Government bonds (0.64% of total assets);
• HSBC has total assets of USD2,468 billion, with USD6.7 billion in peripheral (ex-Cyprus) Government bonds (0.27% of total assets);
• Barclays has total assets of USD2,328 billion, with USD29.2 billion in peripheral 'light' (ex-Cyprus) Government bonds (1.26% of total assets);
• RBS has total assets of USD2,266 billion, with USD3.5 billion in peripheral (ex-Cyprus) Government bonds (0.15% of total assets);
• Credit Agricole has total assets of USD2,131 billion, with USD19.1 billion in peripheral (ex-Cyprus) Government bonds (0.89% of total assets);
• Banco Santander has total assets of USD1,610 billion, with USD69.6 billion in peripheral (ex-Cyprus) Government bonds (4.32% of total assets);
• Lloyds has total assets of USD1,546 billion, with USD0.1 billion in peripheral (ex-Cyprus) Government bonds (0.01% of total assets);
• Societe Generale has total assets of USD1,512 billion, with USD9.7 billion in peripheral (ex-Cyprus) Government bonds (0.64% of total assets);
• Unicredit has total assets of USD1,232 billion, with USD54.3 billion in peripheral (ex-Cyprus) Government bonds (4.41% of total assets)

Two charts highlighting the plight of Spanish and Italian banks in terms of their sovereign bonds exposures (first) and the levels of LTROs exposures:

21/10/2013: IMHO Submission on Minimum Competency Requirements 2013

Irish Mortgage Holders Organisation submission to the Central Bank on consultation paper on Authorisation Requirements and Standards for Debt Management Firms and the Amendment of the Minimum Competency Code is now available on the Central Bank page here: http://www.centralbank.ie/regulation/poldocs/consultation-papers/Documents/CP70/IMHO%20submission.pdf

20/10/2013: Oscillator: Long and Short-run Cycles

Some months ago I gave a presentation at the Science Gallery on the topic of cyclicality in social and economic data. I focused on more philosophical issues and longer cycles. Someone just sent me the link to the video... http://www.youtube.com/watch?v=ChiVez1IlMc

FISCAL CYCLE: FROM NANOSECOND TRADING TO GENERATIONAL OSCILLATIONS

19/10/2013: Debt Bias and Wealth Taxes: Pesky IMF Ideas...

Nasty little bit from the IMF Fiscal Monitor - a box-out on page 49 of the report...

So the IMF basically reminds us that once things get desperate, wealth taxes (err... Irish pensions levy anyone?) or put differently - expropriation of private wealth - can be contemplated...

Reinhart and Rogoff have warned us all about the Financial Repression coming, so no surprise here. What is, however, surprising is the IMF estimate at the end of the box-out. "The tax rates needed to bring public debt to precrisis levels... are sizeable: reducing debt ratios to end-2007 levels would require (for a sample of 15 euro area countries) a tax rate of about 10 percent of households with positive net wealth".

Give it a thought - 10 percent on average for the euro area... for Ireland? 20%? 30%?.. And, of course, what will that do to households' debt?.. oh, wait, that does not matter in Europe...


Oh, and while on the topic of debt. I wrote recently (here) about the issue of 'debt bias' (incentives to hold debt over equity) in tax systems... Here's a chart from the same report (page 45) showing the impact of eliminating 'debt bias' in tax system on systemic stability of the country financial system:

Of course, Irish policymakers are keen to eliminate the bias - not because it can help repair the systemic instability of our financial system, but because eliminating the bias will increase state yields from debt-funded property loans (via closing of the mortgages interest relief).

Once again, the problem is that of legacy - what do such closures of 'debt bias' do to sustainability of mortgages debt already carried in the system? Once again, no one pays any attention to the issue...