22/11/2013: 'Clean exit': spin vs non-spin

Yesterday, I tweeted in response to the quote by An Taoiseach Enda Kenny concerning Ireland's 'exit' from the bailout as follows:

'Clean'? 'Break'? 'Right'? 'Course'? Is he randomising words off refrigerator magnets? RT @harrymcgee: Making ‘clean break’ from Troika was right course, Kenny http://t.co/C6rwa1G3lz | Cause, you know - it is neither a break (2-pack) nor 'clean' (debt still there), nor 'right' (retro debt relief not in place), nor a 'course' (cause we didn't have a choice - the money run out & the pot is empty).

The quote contained in this Irish Times article: http://www.irishtimes.com/news/politics/making-clean-break-from-troika-was-right-course-kenny-says-1.1604418 was as follows:
"Taoiseach Enda Kenny has asserted that the Government took the right course of action in making a ‘clean break’ from the Troika despite its own independent economic advisers recommending the State should have accepted a precautionary line of credit."

Let me explain why I have take the statement to task.

Word 'clean' implies that we have severed whatever attachments to the bailout we had in exiting the bailout. Alas, there were two such attachments to severe:

1. Troika oversight. This still remains, albeit in slightly altered form: http://trueeconomics.blogspot.ie/2013/11/17112013-ireland-to-remain-subject-to.html Note that, per my analysis here: http://trueeconomics.blogspot.ie/2013/11/15112013-exiting-bailout-alone-goods.html, our exit from oversight can be interpreted as ejecting the more positive side of the Troika and retaining the oversight by the less positive (from our interest perspective) members. Further note, Minister for Finance explicitly admitted that there was no exit from the oversight.
2. Financial ties to the bailout. These ties were not even reduced, let alone cut, since the entire debt we owe the Troika is still outstanding to the Troika.

Word 'break' implies an act of breaking free from something - the act of the doer. Ireland did not 'break' away from the bailout, but rather we have run out of the bailout terms. We completed drawing down the loans available per bailout. We completed the process on time (without overruns) and without requesting another bailout. But we did not 'break' from the bailout.

Thus, one cannot claim that we made a 'clean break' from the bailout, but rather that we have moved to the second stage of the bailout: paying down the loans.

Was the 'exit' a right choice? Time will tell. Fiscal Council thinks (as I do) that on balance of things, we should have secured a precautionary line of credit. Moreover, we can now clearly kiss goodbye any chance of a retrospective debt deal on legacy banks debts. Not being within a bailout disallows us to extend an argument of hardship arising from these debts, and by removing the IMF from the oversight process, we have now removed the strongest advocate of such a deal we had, after the Ballyhea-Charleville group of protesters and other similar groups. Note: Irish Government ranks, in my view, as a distant third force in asking for such a deal.

Thus one cannot argue that the 'exit' was a 'right choice' as it clearly fails to achieve the objectives that would have made it 'right'.

Lastly, the issue of the word 'course'. Course implies an option of direction undertaken. Ireland had no such option. We have completed the first stage of the bailout - conditional loans disbursement. Full stop. Altering this 'course' of completing the first stage would have required us negotiating a new bailout - something that was clearly not feasible, given the problems Germany and rest of the EU have encountered in Greece and given the fact that the IMF is desperate to stop lending in the Euro area. The entire process of Euro area bailouts has cost IMF hugely in terms of reputational costs and risks. The Fund came to severe blows with the EU and ECB over the policies and structures of the bailouts and it has run out of the road in extending more funding to the Euro area states beyond the funds agreed. In short, neither Germans, nor the IMF were looking forward to lending us any more cash should we request another bailout. Which means there was no 'course' nor a choice of action to take.

The good news, we do not need another bailout. The Irish people and the Government deserve a credit on this. The bad news, we neither exited the bailout, nor achieved a clean separation from the Troika, nor pursued a correct path of action on structuring our completion of stage 1 of the bailout. The Irish people certainly are not to be blamed for these. Which leaves only one question open: is our Government to be blamed?

I neither desire to answer the last question, nor to deal with what the potential answer might be.

22/11/2013: Euro area banks: leveraged through the nose... still

All you need to know about European banks sickness (it is still raging), the state of European regulations and quality oversight over the banks (it is still crap) and just how far we have travelled from the causes of the crisis (not far at all) in one chart:

European bounds set for the banks are a joke. A bizarre joke. And yet, Europeans call this a 'reform'. And regulators in the countries with completely dysfunctional banks (e.g Ireland) harp on about their banks 'compliance' with or 'meeting' the 'European standards'...

Notice, under the US proposed standards, leverage ratio requirement will be raised to 6% for FDIC-insured banks... meanwhile in Europe, 3% is 'rigorous' and 'robust' and 'safe' and 'never again' level...

Time to smell the roses. Going at the current rate of 'reforms', it will be decades before this European mess is sorted and by then, Europe won't matter to the rest of the world... will not matter at all... backwater with a few nice museums and some statues of the Great Leader Hermit von Frompy strewn across the lovely fields of wheat...

Oh, and if you still think that Newbridge Credit Union is a Big Story - my suggestion is: time for a visit to your friendly head doctor?..

22/11/2013: Freedom of Press in Ireland: 2013

I recently tweeted on the subject of press freedom assessment of Ireland, but have not blogged the numbers. So correcting for this shortcoming, here's the latest assessment of Ireland by the Reporters Without Borders under the Press Freedom Index:

• From 2011 through 2013 we are ranked 15th in the world in terms of freedom of press;
• In 2013, we were ranked 14th in Europe (not EU or EA) in freedom of press;
• Our worst ranking on the record was 17th achieved in 2003;
• We were ranked 1st in the world in 2004-2005 and again in 2009;
• We ranked in top 10 in the world in 2002, 2004-2010

Here is our 'neighbourhood' in terms of top 20 ranked countries in 2013, compared to 2010-2012 average:

I will be speaking and participating in a panel discussion at NUJ event tomorrow, focusing on the Future of Journalism: http://www.nuj.org.uk/events/the-future-of-investigative-journalism-in-ireland/

PS: For those who might ask why I was invited: I used to work as the Group Editor of Business & Finance magazine and its sister publications for a number of years and subsequently was non-executive director of the publishing house.

22/11/2013: German GDP - no surprise to the downside

German GDP figures out: Q2 2013 confirmed at +0.7% q/q, Q3 2013 final at 0.3% q/q. Year-on-Year Q3 2013 at +1.1%, exports up only +0.1% q/q, imports up +0.8% q/q.

A chart (via @moved_average):

And the chart lesson? Recovery period: 2010-to-date: Trend growth down-sloping, volatility consistent with 2002-2007 period. The latest recovery sub-period - unconvincing.

More on euro area growth: http://trueeconomics.blogspot.ie/2013/11/20112013-euro-area-zaporozhetz-of-growth.html

21/11/2013: Art = Rubbish Investment Despite 6%+ Average Annual Returns?..

Two interesting recent studies on economics of investment in art markets worth reading.

The first study, titled "Does it Pay to Invest in Art? A Selection-Corrected Returns Perspective" by Arthur G. Korteweg, Roman Kräussl and Patrick Verwijmeren (October 15, 2013) "shows the importance of correcting for sample selection when investing in illiquid assets with endogenous trading. Using a large sample of 20,538 paintings that were sold repeatedly at auction between 1972 and 2010, we find that paintings with higher price appreciation are more likely to trade. This strongly biases estimates of returns. The selection-corrected average annual index return is 6.5 percent, down from 10 percent for traditional uncorrected repeat sales regressions, and Sharpe Ratios drop from 0.24 to 0.04. From a pure financial perspective, passive index investing in paintings is not a viable investment strategy once selection bias is accounted for. Our results have important implications for other illiquid asset classes that trade endogenously."

The study is solid on econometrics and shows very clearly how the selection bias mechanism drives abnormally high reported returns for art. This, in my view, sets a new standard of analysis for the sector. The study is available here: http://ssrn.com/abstract=2280099.

Another paper, titled "The Investment Performance of Art and Other Collectibles" by Elroy Dimson and Christophe Spaenjers (September 2, 2013) was authored by finance specialists who should have known better to test for selection biases. They did not. Which means that some of the econometrics reported should be suspect. Still, the study is interesting if only because it covers not only fine art, but also philately and musical instruments.

Per abstract: "We assess the long-term financial returns from high-quality collectible real assets, and review the unique risks that are associated with such investments. Over the period 1900-2012, art, stamps, and musical instruments (violins) have appreciated at an average annual rate of 6.4%-6.9% in nominal terms, or 2.4%-2.8% in real terms. Despite the similarity in long-term returns, short-term trends can vary substantially across these different types of emotional assets. Collectibles have enjoyed higher average returns than government bonds, bills, and gold. However, it is important to recognize the quantitative importance of transaction costs in collectibles markets. In addition, price volatility is larger than is suggested by conventional measures of risk, and these assets are also exposed to fluctuating tastes and potential frauds. Yet, despite the large costs and many pitfalls, investment in emotional assets can pay off, because of the non-financial yield they provide."

The study is available here: http://ssrn.com/abstract=2319338

20/11/2013: Euro Area: the Zaporozhetz of Growth?..

"Ello... Ello... Stagnation calling... Is this Europe?"

Two snapshots from the recent ECB staff forecasts for the euro area performance: 2012-2014... Real GDP in the range of cumulative 3-years growth of... -0.0076%... 2014 rapid expansion of the forecast range of 0.9-1.2%... If this is the engine of growth, then this is the engine of mobility:

Update: The Zaporozhets of Growth is now spilling coolant (oil has drained already):

Via BBVA Research.

20/11/2013: Irish pensions: a crisis of policy, institutions and savings - Sunday Times November 17

This is an unedited version of my Sunday Times article from November 17, 2013.


Back in the early 2011, with the new Government coming into the office, fresh ideas were filling the airy halls of the Department of Finance. Armed with the knowledge that Irish pensions industry was the last vault in the country that still had money in it, Minister Noonan focused his sights. Hitting private pensions was a preferred alternative to raiding banks deposits or imposing cuts to public sector pensions. It suited the pseudo-fairness agenda of the Labor. Better yet, setting a levy on private pensions funds would, in PR-speak, allowed Fine Gael to avoid 'increasing taxes'. The fat cats (private pensions investors) were to share the burden of the fiscal adjustment while the Government was riding a high horse of delivering a rhetorical victory for the little man. The real logic of the move was exactly in line with the reasoning used in continuously raiding health insurance policies: go after the money.

Economics of the measure swept aside, the Government got busy expropriating private property and weakening the system of future pensions provisions. A temporary pensions levy was born out of this. With it, the country was firmly put on the road to a comprehensive dismantling of the already dysfunctional system.

Set at 0.6 percent per annum for 2011-2014 the original levy was dressed up in 2011 as a measure to free unproductive savings to fund jobs creation in the economy. Budgets 2012 and 2013 followed up with a raft of other measures, all designed to take more cash out of savings. Budget 2014 not only failed to curtail this onslaught but created a new levy of 0.15 percent that will run over 2014-2015 period and, according to a large number of analysts, is expected to continue beyond the 2015.

Yet, as the documents recently released by the Department of Finance show, back in 2011, the Department briefed the Minister as to the fallacy of his thinking. At the time, the pensions deficits accumulated in the Irish system totaled EUR10-15 billion. These deficits, according to the briefing, were in excess of what the nation's employers and employees could shoulder even before the Government moved on the funds. Between 75 and 80 percent of all Defined Benefit funds in the country were technically insolvent, accounting for two thirds of all pensions.

The Minister also had to be aware that a tax on capitalised value of the funds amounted to expropriation of private property. And that it cuts across the serious warnings concerning our pensions sustainability coming from the Troika and the OECD.

The problems with this approach to pensions systems are manifold and are setting us up for a long-term crisis. They include: exacerbating catastrophic pensions shortfalls, reducing future credibility of the system and undermining public confidence in the security of our financial system. Increasing future pressures on the Exchequer finances stemming from demographic changes and the legacy of the current crisis is the direct corollary of the short-termist position adopted by the Government.


Irish pensions system is fundamentally insolvent today and this insolvency is only made worse by our policies.

Top figures speak for themselves: at the end of 2012, there were 232,939 Defined Contribution schemes members, 527,681 Defined Benefit schemes signees and 206,936 PRSAs. Inclusive of PRSAs, total capitalisation of the system was around EUR78-79 billion. Defined Benefit schemes made virtually no contributions to the capital pool backing pensions system in the country. Excluding PRSAs, almost 7 out of 10 Irish pensions were funded by the IOUs on future taxpayers and company employees. The cumulated potential obligations in the pensions provisions of the Defined Benefits schemes amounted to some EUR 165 billion or around 100 percent of Ireland's GDP. These are growing, fuelled by early retirement schemes in the public sector and exits of private sector Defined Contributions savers.

Private pensions in Ireland remain not only underfunded, but also insufficient in cover. Currently, Ireland ranks the lowest in the OECD in terms of net pensions wealth held for those earning at or above average wages. Things are somewhat better for those on lower incomes. Still, we rank below OECD mean in terms of pensions cover for workers earning less than the average wage. An Irish family with two earners and combined annual earnings of around EUR90,000 can expect a pension cover of 40% of the pre-retirement earnings for 10.5 years. Budget 2014 has reduced this number by at least 0.5 years. OECD average for such coverage is closer to 28 years. OECD estimates show that at the end of 2009 only 41.3 percent of our public and private sectors’ workers were enrolled in a funded pension plan.

Since the beginning of the century, the systematic policy approach adopted by the Irish Governments to dealing with the pensions crisis has been to rely on Defined Contribution schemes to plug the vast deficit in the Defined Benefit schemes. The former are dominant in the private sector, the latter are the cornerstone of the public sector. Since the onset of the crisis, Irish state has acted to level huge burden of fiscal adjustment on future retirees, with levies and tax adjustments reaching into billions of euros and rising rapidly. The measures hit hard not only the savers at the top of the income distribution, but ordinary middle class investors. For example, according to a recent report on Budget 2014 measures, a young worker setting aside annually some EUR2,500 as a starting pension in 2011 will see a life-time cost of the pensions levies reach EUR32,500. He or she will face a reduction of EUR1,625 per annum in annual retirement benefits thanks solely to levies alone.

All of this is gradually eroding the public credibility in the system and acts to lower future solvency of the private and public schemes. According to the Pensions Board and OECD data, Ireland pensions coverage is declining over time. The numbers of workers covered by both, Defined Benefit and Defined Contribution schemes have fallen steadily since 2006 for the former and 2008 for the latter.

This trend is compounded by the nature of the crisis that hit Ireland since the end of the Celtic Tiger era. Unprecedented collapse in property markets triggered massive destruction of household wealth and catastrophic inflation of the debt crisis for households that are nearing the age when they normally accelerate their pensions savings.

Despite this, the Government continues to reduce tax deferrals available for those retirement savings. Examples of such policies include changes to lump sum payments tax treatments, changes to the Standard Fund Threshold, elimination of the PRSI and health levy/USC relief and so on. In effect, pensions funds became a ground zero of the Irish Government-waged war of financial repression – a brutal and cynical policy aimed at protecting own interests at the expense of the future retirees.


The OECD report on Irish pensions system, presented to the Government earlier this year, before Budget 2014 contained the usual litany of complaints about the system.

These include the fact that Ireland does not have a mandatory earnings-related pensions system to complement the State pension at basic level. According to the OECD, as a result, Ireland "faces the challenge of filling the retirement savings gap to reach adequate levels of pension replacement rates to ward off pensioner poverty." Furthermore, private pension coverage, both in occupational and personal pensions, is uneven and needs to be increased urgently. The latest changes introduced in Budget 2014 clearly exacerbate this, and the Government cannot claim that it was not aware of this problem. The existing tax deferral structure in Ireland, based on marginal tax rates, provides higher incentives to invest in pensions for higher earners, resulting in severe pensions under provision for middle classes. The OECD identified "unequal treatment of public and private sector workers due to the prevalence of defined benefit plans in the public sector and defined contribution plans in the private sector."  The reforms aiming to address this gap by introducing new pensions scheme for public servants are "being phased in only very slowly and [are] unlikely to affect a majority of public sector workers for a long time".

The OECD produced a long list of recommendations for the Government aimed at improving the system design and addressing some of the above bottlenecks. Virtually none of these saw any significant action.

The two options for a structural reform of the State pension scheme recommended by the OECD: a universal basic pension or a means-tested basic pension remain off the drawing board. Explicitly, OECD stated that “to increase adequacy of pensions in Ireland, there is a need to increase coverage in funded pensions. Increasing coverage can be achieved through 1) compulsion, 2) soft-compulsion, automatic enrolment, and/or 3) improving the existing financial incentives.” Instead, the Government continues to treat private pensions savings as funds it can raid to raise quick revenues. This makes it impossible for broad and structural reforms to gain support of the public, undermining in advance any future effort to address the crisis we face.

Note: this information was just released today: http://www.independent.ie/business/personal-finance/pensions/thousands-of-oaps-facing-the-shock-of-cuts-in-their-pensions-29768766.html

Box-out:

In economics terms, it is often impossible to put a hard number on the value of less tangible institutional capital of the nation. Yet, systems and institutions of governance and democratic participation do matter in determining nation’s economic capacity and competitiveness. Sadly, it appears that the Irish Government is giving the idea that open and transparent state systems are a necessary condition for building a sustainable and prosperous economy and society little credit. Instead, the Irish authorities are about to significantly restrict effective access to state information. To do so, the Government is planning to introduce a new, more complex and expensive system of fees that apply to the requests filed under the Freedom of Information Act. Some observers have been arguing that the true objective is to reduce the public disclosure of information. Others have suggested more benign reasons for the proposals. Irrespective of the motives, over time, these changes are likely to lead to greater opacity and lower accountability across the State and private sectors. Such trends usually go hand-in-hand with increases in corruption, mismanagement, poor design of public policies, and increased political and civic apathy. In the long run, the proposed reforms can, among other things, spill over into generating greater economic inefficiencies, less meritocratic distribution of resources, and distort returns to investment. They can also reduce our attractiveness as a destination for domestic and foreign investors, entrepreneurs and workers. The victims of poor governance that can arise on foot of any effort to reduce effective access to information will be both the Irish society and our economy.

19/11/2013: Financial Services Innovation Briefing November 2013

I will be speaking at Financial Services Leaders' Briefing: Turning Innovation into Assets next week:

http://www.bearingpoint.com:80/en-ie/7-8551/financial-services-leaders-briefing-turning-innovation-into-assets/?cpssessionid=SID-BB53B045-C8C7337D 

18/11/2013: Some cautiously decent news for Pharma sector?..

An interesting article from McKinsey on the drivers for rapid increase in the new drugs approvals by FDA: http://www.mckinsey.com/Insights/Public_Sector/Whats_driving_the_surge_in_new_drug_approvals?cid=other-eml-alt-mip-mck-oth-1311 with 39 new drugs approved in 2012 alone - the decade high. 2011-2012 approvals were 24% ahead of long-term average.

Good news for Ireland's number one goods-exporting sector, but several caveats in place:

• FDA approvals are accelerating both due to pipeline of new formulas, and on acceleration in late stage trials approvals. The former is driven by biophrama - with much less prevalent activity presence in Ireland, although we are aggressively competing for the sub-sector. 
• Pharma sector is still driven into lower costs operations - something not exactly favouring Ireland.
• Irish market access to the EU is becoming problematic due to cost cutting efforts of the European health systems.
• Approvals seem to be in new submissions, so less likely to generate blockbusters we need to replace to stay put in terms of pharma sector exports.

Still, to quote McKinsey: "We are cautiously optimistic that this development signals a turnaround in pharmaceutical R&D productivity"

18/11/2013: European Health: Cancer Survival Rates

Spot where our HSE comes compared to NHS...

Source: http://www.thecommentator.com/article/4359/if_polly_toynbee_cared_about_britons_health_she_d_campaign_to_scrap_the_nhs

Now see some other metrics: http://trueeconomics.blogspot.ie/2013/10/8102013-jokers-burning-money-public.html

Most detailed and most recent study of cancer rates: incidence and survival across Europe: http://www.iarc.fr/en/media-centre/iarcnews/pdf/Ferlay%20J_EJC_2013.pdf

17/11/2013: Irish Government Score Card 2013: OECD

Well-summarised insights from the OECD on Irish Government performance based on 2011-2012 data: http://www.oecd.org/gov/GAAG2013_CFS_IRE.pdf

Latest Government at a Glance page for all countries: http://www.oecd.org/gov/government-at-a-glance-information-by-country.htm

Note, to adjust for GDP/GNP gap in the case of Ireland, use roughly 20% gap (longer-term average).

17/11/2013: Ireland to Remain Subject to EU/ECB Oversight post-Exit

On may occasions I have stated that Ireland will remain subject of the enhanced supervision by the EU and ECB of its fiscal policies following our exit from the 'Troika bailout'.

Minister Noonan this week confirmed as much: http://www.irishexaminer.com/ireland/troika-to-keep-eye-on-ireland-for-20-years-249851.html

Here's the relevant legislation governing our required compliance:

Regulation (EU) No 472/2013 of the European Parliament and of the Council
of 21 May 2013
http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=CELEX:32013R0472:EN:NOT
pdf link: http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=OJ:L:2013:140:0001:0010:EN:PDF

Emphasis in bold is mine:

Article 14: Post-programme surveillance

1. A Member State shall be under post-programme surveillance as long as a minimum of 75 % of the financial assistance received from one or several other Member States, the EFSM, the ESM or the EFSF has not been repaid. The Council, on a proposal from the Commission, may extend the duration of the post-programme surveillance in the event of a persistent risk to the financial stability or fiscal sustainability of the Member State concerned. The proposal from the Commission shall be deemed to be adopted by the Council unless the Council decides, by a qualified majority, to reject it within 10 days of the Commission's adoption thereof.

2. On a request from the Commission, a Member State under post-programme surveillance shall comply with the requirements under Article 3(3) of this Regulation and shall provide the information referred to in Article 10(3) of Regulation (EU) No 473/2013.

3. The Commission shall conduct, in liaison with the ECB, regular review missions in the Member State under post-programme surveillance to assess its economic, fiscal and financial situation. Every six months, it shall communicate its assessment to the competent committee of the European Parliament, to the EFC and to the parliament of the Member State concerned and shall assess, in particular, whether corrective measures are needed...

4. The Council, acting on a proposal from the Commission, may recommend to a Member State under post-programme surveillance to adopt corrective measures. The proposal from the Commission shall be deemed to be adopted by the Council unless the Council decides, by a qualified majority, to reject it within 10 days of the Commission's adoption thereof.

Note: you can track my analysis of the 'exit' announcements following the links posted here: http://trueeconomics.blogspot.ie/2013/11/15112013-beware-of-german-kfw-bearing.html