15/5/2014: Jobs & Employment: Lot Done, More to Do, Still

The is an unedited version of my Sunday Times article from April 27.



As cooperative organisations go, Paris-based OECD is one of the more effective ones. Its regular assessments of member states economic policies and performance drill into various sectors and often flash light into the darker corners of policy formation and implementation that are often untouched by the likes of the IMF, the central banks and the EU Commission.

Good example is the OECD’s third annual review of Ireland's Action Plan for Jobs, published this week.

The review starts by highlighting the positive achievements to-date set against the Action Plan targets and the realities of the unemployment crisis we face.

After hitting the bottom of the Great Recession, Irish labour markets have recorded a rebound in 2013. As the result of the robust jobs creation in the economy, Irish employment levels rose by around 60,000 in 12 months through Q4 2013. New jobs additions were broadly based across various sectors and predominantly concentrated in full-time employment segment. All of which is the good news.

Being a diplomatic, politically correct body, the OECD does not question the aggregate numbers of new jobs recorded. As this column noted on numerous occasions before, the 60,000 figure includes a large number of jobs in agriculture – a number that generates more questions than answers. But from the point of view of the OECD and indeed the Irish Governments 2012 Action Plan for Jobs, quality is a distant goal, while quantity is the primary objective. By this metric, as OECD notes, Ireland is now well on track to deliver on the interim target of 100,000 new jobs by 2016.

Still, accolades aside, Irish non-agricultural employment is lingering at 39 percent of total population – implying a dependency ratio that is comparable with that seen in the late 1990s. Official unemployment counts are around 253,000 and factoring in those in State training programmes the number rises to over 330,000. 16 percent of our total Potential Labour Force is currently not in employment. A things get even scarier when we add all people searching for jobs, underemployed, unemployed that have been discouraged from looking for work, those in State training programmes and the net emigration of working age adults. By this metric, the broadest joblessness rate in the country stands at around 32 percent.

Unlike the Government, faced with the above numbers, the OECD recognises that the Action Plan target of 100,000 new jobs by 2016 is a reflection of our public culture of low aspirations. "While Irish policymakers can take some satisfaction in the economy’s return to growth and recent robust job growth, significant challenges lie ahead if the country is to rapidly bring down the unemployment rate," said report authors. Anodyne a statement for you and me this screams a serious warning to the Government in OECD’s language.

There are legitimate concerns and uncertainties about the pace of the labour market recovery. At peak of employment in Q3 2007, there were 2.17 million people working in our economy. At the bottom of the Great Recession, in Q1 2012 that number fell to 1.825 million. In Q4 2013 the number employed was 1.91 million or 76,000 above the trough, but almost 260,000 below the peak. Meanwhile, Irish working age population has grown by some 93,700 despite large net outflows due to emigration. In other words, jobs creation to date has not been enough to fully compensate for demographic changes in working age population.

Beyond headline unemployment numbers, Ireland is facing a huge crisis of long-term joblessness, the crisis that was recently covered in depth by this column. With it, there is a significant risk that improved jobs creation in the future is not going to provide employment for those out of work for more than a year.

While reversing emigration and accommodating for growing population will require much higher rate of new employment growth than we currently deliver, the Government’s Medium Term Economic Strategy published this year is aiming to bring employment levels to 2.1 million in by 2020. This means thirteen years after the on-set of the crisis our employment is expected to still fall short of the pre-crisis peak.


Which begs a question: who will be the unemployed of tomorrow?

OECD is rather serious on this subject. "Tackling unemployment and ensuring that high cyclical unemployment does not become structural and persistent are important challenges. A relentless focus on activating those most vulnerable to alienation from the labour market will be even more important than aggregate job creation targets in this regard."

In other words, according to the OECD, long-term unemployed, youth out of jobs and out of education, as well as those with low skills and of advanced working age are at a risk of becoming structurally (re: permanently) unemployed, even if the Government targets under all existent strategies are met.

Much of this stems from the sectoral breakdown of jobs being created and types of jobs that are growing in demand in modern workplace.

For example, the OECD praises the Government for focusing Action Plan "on private sector-led, export-oriented job creation by getting framework conditions right and continually upgrading the business environment". But export-led growth is not going to do much for our high levels of long-term unemployment. Jobs creation in exporting sectors is directly linked to modern skills sets and high quality of human capital. Long-term unemployment is linked to lower skills and/or past skills in specific sectors, such as construction. To make a dent in an army of long-term jobless we need domestic growth. To make this growth sustainable, we need productivity enhancements in domestic sectors and SMEs that require employment of higher skills in these sectors. There is a basic contradiction inherent in these two drivers of recovery: skills in supply within the pool of long-term unemployed are not matched to skills in demand within the modernising economy.

Something has to be done to address this dichotomy.

Under various policy reforms enacted during the crisis, Ireland witnessed introduction of significant changes to the benefits system, employment programmes, as well as reduced levels and duration of unemployment insurance cover. In addition, the Government used restructuring of training programmes to introduce a new concept of one-stop support centres, Intreo, which are being rolled out across the country. All of this is in line with previous OECD and Troika recommendations and much of it is needed.

But, as OECD notes, six years into the crisis, more remains to be done.

The OECD identifies Government's flagship activation programme, JobBridge as "large and expensive" and insufficiently targeted to help the most disadvantaged groups. In other words, JobBridge has became a synonym for unpaid apprenticeship for recent graduates instead of being a stepping stone from unemployment to a job requiring moderate re-skilling. OECD also highlights the risk of State training programmes effectively delaying job searches by the unemployed or reducing their job search efforts.

Beyond the above, the OECD points to the risk that the longer-term and lower-skilled unemployed may fall outside the resources and remit cover of the new agencies - the SOLAS and the Intreo.

With all reforms to-date, the OECD highlights the lack of willingness on behalf of the Government to rationalise some of the labour market programmes, even where there is clear and available evidence of their low effectiveness.

One example is the long-established Community Employment Programme (CEP), which accounts for a full one third of all spending on activation programmes. Data available to the Government strongly shows that CEP is not cost-effective and has a spotted track record in terms of securing the participants return to regular employment. Instead of the CEP, the Irish state should focus resources on developing a modern apprenticeship programme that can replace existent ineffective schemes. This focus on market skills-based training available under the apprenticeship system, supported by the OECD report, is in line with policy suggestions presented in this column in the recent past and with the Entrepreneurship Forum report published last year.


The OECD report also provides a detailed analysis of the institutional reforms that are needed to deliver sustainable jobs creation in Ireland in line with the Government agenda. There is a need to mobilise employers to engage with the Government programmes to develop employment and skills systems that can address future demands in the real economy. Instead of craft-focused and manual professions-oriented training, Ireland needs more MNCs and SMEs-driven skills acquisition and upgrading programmes.

The OECD also stresses the need for stimulating productivity growth by developing more skills-intensive domestic sectors. Unlike the Irish authorities, the OECD is painfully aware that aggregate productivity growth, jobs creation and skills development must be anchored to indigenous sectors and enterprise, including the SMEs, and not be relegated to the domain of the SMEs and exports-oriented producers alone.


In all of this, the report highlights a major bottleneck in the Irish human capital development systems – dire lack of training and up-skilling programmes available to SMEs and early stage companies that are capable of supplying skills that are in actual demand in the markets and that can simultaneously drive forward productivity growth and innovation in Irish enterprises.

Slightly paraphrasing Fianna Fail’s GE2002 posters: in the case of Government delivery on jobs and unemployment, “A lot done. Even more to do.”

Note: PLS1 indicator is unemployed persons plus discouraged workers as a percentage of the Labour Force plus discouraged workers.  

PLS3 indicator is unemployed persons plus Potential Additional Labour Force plus others who want a job, who are not available and not seeking for reasons other than being in education or training 



Box-out:

Since the early days of the EU, one of the most compelling arguments in support of the common European currency was the alleged need for eliminating the volatility in the exchange rates. It remains the same today. High uncertainty in the currency markets, the argument goes, acts to depress international trade and distorts incentives to transact across borders. Alas, theory aside, the modern history puts into doubt the validity of this argument. During the 1990s, prior to the creation of the euro, Irish current account surpluses averaged 1.9 percent of GDP just as the economy was going through a period of rapid accumulation of capital - a process that tends to put pressure on current account balance. Still, in the decade before the euro introduction, Ireland's external balance ranked fifth in the European Economic Area. During the first decade of the euro, owing to the massive credit bubble, Irish current account balance collapsed to an annual average of -2.3 percent of GDP. Since hitting the bottom of the crisis, our performance rebound saw current account swinging to an average annual surplus of 7 percent. Alas, this reversal of fortunes ranks us only 7th in the EEA. In fact, since 2000 through today, non-euro area economies of Denmark, Sweden, Switzerland have consistently outperformed Ireland in terms of current account surpluses. Cumulatively Swiss economy generated external balances of 135 percent of GDP between 2001 and 2013, Swedish economy 88 percent and Danish economy 51 percent of GDP. Irish cumulated current account balance over that period is a deficit of 9 percent of GDP. Let's put the matters into perspective: between 1990 and 1999 Irish economy generated a total surplus of USD12.5 billion. Since the introduction of the euro, our cumulated current account deficit stands at USD23.5 billion. At current blistering rates of current account surpluses, it will take us another five years to achieve a current account balance across the entire period of 30 years. Meanwhile, deprived of the alleged benefits of currency stabilisation, Denmark accumulated curret account surpluses of USD149 billion between 2001 and the end of 2013, Sweden USD378 billion and Switzerland USD645 billion. The euro might be a good idea for a political union or for PR and advertising agencies spinning its alleged benefits to European voters, but it has not been all too kind to our own trade balances.






15/5/2014: Bad Habits Die Hard

A neat summary of the euro area revisions to targeted deficits for 2014-2016 period:

Per BBVA Research: "The relaxation in fiscal targets approved by ECOFIN in the first half of 2013 was an important factor in the European economy’s recovery in the second half of the year, as we pointed out in previous editions of this report. The panorama has not changed. Fiscal policy continues to be contractive, but less so than forecast at the time, thanks to the postponement of the 3% deficit target for several countries, including France, Italy and Spain. Deviations from the deficit targets in 2013 have been small, except in France (0.4pp off the May 2013 stability plan’s target) and plans presented to the Commission in April this year retain the targets forecast or modify them towards a somewhat slower consolidation path."

Here's a question: we have growth in underlying GDP (anaemic, but still growth). We have widening deficits compared to targets, and deficits reductions over time are penciled in at slower rates for 2014-2015. Oh, and we are still running deficits… so explain to me where is that amazing 'austerity' excluding the bizarre stretch of the imagination by which lowering deficits (not turning surpluses) is 'austerity'… [presumably in the same way as spending money we don't have is a stimulus, may be]…

Just a few pages down, BBVA gloriously declare: "Fiscal policy will continue to be restrictive in the forecast horizon, although fiscal efforts will be less rigorous than those of 2012 and 2013, since the rest of the adjustment has been postponed, in order to meet the target of structural balance in the public accounts beyond 2015. With all this, public consumption may go up by around 0.3% in 2014 and 0.7% in 2015."

Ah, European 'austerity' - where reducing the rate of spending growth represents unbearable economic pain and is yet consistent with a possible increase in the Government consumption...

It clearly looks like we are back to the good old 'bad' habits' on the side of the euro area periphery's largest sovereigns...

14/5/2014: Puff... and in a second few mortgages arrears were gone...

Irish Times covered Fitch report today that shows that for mortgages tracked by the agency as a part of 12 residential MBS (RMBS) packages posted another rise in arrears. In 2013 the 90-days in arrears mortgages accounted for 16.7% of total tracked by Fitch. In Q1 2014 this rose to 18.4%.

Irish Times article is available here: http://www.irishtimes.com/business/economy/irish-mortgage-arrears-continuing-to-accelerate-says-fitch-1.1795586

The article notes that Central Bank data showed decline in mortgages in arrears in the most recent 3 months period covered by Central Bank data. Alas, there is a caveat: in Q4 2013 data - the most current reported by the Central Bank, the authorities have omitted mortgages sold by the IBRC to private funds. Adding these mortgages back into the equation and applying the latest known arrears data on the IBRC brings the proportion of all mortgages in arrears 90 days and over for Q4 2013 closer to 13.04% which is above Q3 2013 reading of 12.9%.

Mystery of the declining arrears might just be the successful shifting of mortgages from the books of the entities regulated by the Central Bank to the vultures. In other words...

"The greatest trick the Devil ever pulled was convincing the world he didn't exist"

14/5/2014: Back to Bondholders & Golf Courses Owners...

Remember this little-ol-mom-n-pop investor in Bank of Ireland subordinated bonds?

 https://www.youtube.com/watch?v=ax5SK9ckC_Q

Remember how a crowd worth of Irish politicos and 'analysts' were whinging about the Irish Banks investors being the 'little old grannies' with a 'wee-bit of savings in dem'?

David Tepper made USD2.2 billion in 2012. Personally. He made USD3.5 billion more last year:

David is a cool dude. And Ireland, having made whole on his speculative 'investments' has moved on to help other elderly savers:

But never mind, Michael Noonan is buddies with Donald, who is JobBridging 'jobs' into Doonbeg.

Mr. Tepper got off cheaply, one must say - he did not get Ministerial prostrations and a 3-piece corny kitsch treatment on a shortened red carpet. But Mr. Tepper got paid full euro on 40-50 cents. Mr. Trump, alas, might have to be satisfied with slavish receptions and few very cheap interns.

13/5/2014: Q1 2014 Mortgages Approvals Data: There Is a Rise, But...

Undoubtedly, you heard much about the latest IBF data on mortgages approvals showing huge increases in lending in March 2014 compared to March 2013. But are these increases as dramatic as the IBF claims?

Well, let's take a look at the data:

• In Q1 2014, total number of mortgages approved for house purchase as opposed to remortgaging was 4,357 which represents a large increase of 55% y/y. Remortgages approved rose to 334, up 18% y/y. And total number of mortgages approved is up 51% to 4,691. Sounds impressive, until your remember that November 2012-April 2013 was the period of huge volatility due to changes in tax breaks on house purchases. But more on this point below.
• By value, total mortgages approved in Q1 2014 rose to EUR782 million, or 56% up on Q1 2013. House purchases mortgages value was at EUR750 million, up 58% y/y and remortgaging was up at EUR32 million or +19% y/y.
• Average mortgage issued for house purchase purpose stood at EUR172,027 which is up 3% y/y, average re-mortgaging loan was EUR93,954 or down 1% y/y. So average mortgage issued for both purposes was EUR136,854 which is up 3% y/y.

Two charts to illustrate above numbers:

Note two things from above chart:

1. With such a large jump in March, number of mortgages approved is still barely above the trend line. Which might be a sign of solid technical support for further upside.
2. Average mortgage value, having risen slightly above the trend line is still consistent with downward pressure on mortgages issued. Things are still solidly trending downside here.

Note to the above chart: we are bang-on the trend line in March, so nothing surprising in the rise - it is in line with longer term trend. The series continue to show support to the upside, which is a good news.

But here is the kicker. Coming back to that problem period of November 2012 - April 2013, we have a pesky little problem: how do we compensate for the one-off change in mortgages issuance that took place due to changes in taxation. One way (pretty much the only way) is to compute trend and use it to replace the actual outruns in these 'troublesome' months. I've done this before, so you will be familiar with the chart below:

Here's the thing: in IBF data we have a 53% rise in house purchase mortgages approved in March 2014 y/y. Adjusting for the one-off tax changes yields a much shallower rise - of 8.2%. Ditto for value data: IBF data shows 50.3% rise, but adjusting for volatility induced by tax changes, we have a 5.4% rise.

Still, nice bit - there is a rise...

13/5/2014: Q1 2014 Cars Licensed in Ireland

Note: correction - previously this post reported data for vehicles first licensed in the state but labeled these are registrations (as apparent from the contradictions between text and graphs). This is now corrected.

Per CSO, licensing data potentially represents better data for capturing car sales than registrations (see background notes here: http://www.cso.ie/en/releasesandpublications/er/vlftm/vehicleslicensedforthefirsttimeapril2014/#.U3EvbK1dWEK)

First quarter numbers for cars licensed in Ireland are available now, with some delay on my side, so let's chug through the data and what it might signal.

Lot of good headlines from the front of car sales.

• Q1 2014 new licensed cars are up 30.0% y/y and up 10.9% on 2011 and 18.1% on 2012. This is a significant increase, albeit from very low numbers and an increase sustained outside the 2013 license plate superstitions.
• New vehicles licensed are up 29.2% y/y. However, rate of increase is shallower compared to 2011 and 2012 - up 10.7% on 2012 and 3.3% on 2011. This means used cars licensing is a larger driver of growth. 
• New private cars licenses are up 27% y/y in Q1 2014, and up 9.1% on 2012, but are still down 0.3% on 2011. Not so good, after all, when you consider Q1 2012 to have been recessionary in outlook and Q1 2014 supposedly all full of boisterous expectations of robust growth.
• New goods vehicles - decent indicator of future expectations on sole-traders and SMEs side - are up 50.9% y/y and up 24.7% on 2012 and 31.6% on 2011. This is a good sign on activity expectations side, but also a reflection of depreciation in the stock of goods vehicles over the years of the crisis.

Two charts to illustrate:

For the fun side of things, I used to look at Angela Merkel's Happiness with Ireland Index (or in simple terms: new premium brands German make car licensing - BMW, Merc, Audi and Porsche) - see the chart below for why Angela should be somewhat better pleased…

13/5/2014: BIS on Unwinding Global QE: There Will Be Pain...

BIS Working Papers No 448 "The exit from non-conventional monetary policy: what challenges?" by Philip Turner published last week offers some interesting analysis of the risks we can expect in the process of the unwinding of the QE measures and other non-orthodox supports extended by the Central Banks following the GFC. The topic of huge importance for anyone interested in the forward analysis of the advanced economies and the one I have covered over the recent years under my thesis of the impossible monetary policy dilemma both on this blog and in my Sunday Times articles.

Note: link to the paper http://www.bis.org/publ/work448.pdf.


"One legacy of the monetary policies pursued since the financial crisis is that central banks in most advanced economies now have exceptionally large balance sheets. And commercial bank reserves (“money”) have risen by several multiples. These policies have made the exit challenge faced by central banks more complex. But there is no consensus on the New Normal for the balance sheet of central banks.

This paper argues that the crisis has forced a critical examination of some widely-held beliefs about the division of labour between different agencies of government in implementing macroeconomic policies. The central bank has become more dependent on what the government decides – on fiscal policy, on government financing choices and on regulations requiring banks and other financial firms to hold government bonds. The exit will succeed only if central banks remain free of fiscal dominance and financial dominance."

But what does this really mean?

The paper starts by positing three orthodoxies or dogmas that dominated the past thinking on monetary-fiscal policies interlinks and that have been proven to be wrong by the current crisis:

"In recent years, The New Keynesian perspective incorporating rational expectations and perfect asset substitutability also had a number of convenient implications for policymakers. It shaped what has been called the pre-crisis “doctrine” of monetary policy, and
therefore was partly responsible for the severity of the recent crisis… [the] three “dogmas” that are of interest for the purpose of this paper:
a) Open market operations in government bond markets (or in foreign exchange markets) do not change relative prices. … [in other words] any purchase or sale of particular assets would lead only to offsetting changes in private demands, with no impact on prices. One corollary of this is that government debt management (that is, the relative supply of short-dated and long-dated bonds by the Treasury) can be separated from monetary policy.
b) The central bank short-term policy rate is the unique instrument of monetary policy aimed at macroeconomic objectives. The impact of policies on other core financial market prices – such as the term premium in the long-term interest rate – was neglected…
c) The “liquidity” of the balance sheets of commercial banks is irrelevant. If adequate capital standards are in place to ensure the viability of a bank, there was no additional need for bank regulators to worry about the liquidity of banks because a sound bank could borrow readily in interbank markets to meet any “temporary” liquidity squeeze. Hence the failure of international regulators in the 1980s to develop common measures of the overall liquidity of a bank (and the decline in liquid asset ratios) seemed unimportant."


As Turner notes: "…all three “dogmas” have been shown by recent events to be false."

In particular, "Central bank balance sheets matter. Large-scale central bank purchases of bonds (and other assets) have lowered long-term interest rates, leading economists to re-examine the portfolio rebalancing affects that the New Classical school had dismissed. The neat separation between central bank open market operations and government debt management has been blurred. And banks now pay much closer attention to the liquidity of their balance sheets (with bank regulation in this area having been strongly reinforced since the crisis). Equally, the scale of balance sheet measures taken by central banks actually reinforces the fundamental logic behind the New Classical theories. An intertemporal perspective – a key insight of rational expectations – has become even more necessary. Because of the substantial lengthening in the maturity of central bank assets, the decisions taken during this crisis will have more long-lasting (and therefore more uncertain) effects than if policy action had been limited to short-term interest rates or short-dated paper."

How big is that 'long-lasting effects' bit?

And more crucially, as we know the size of the problem, how difficult or painful will it be to undo this QE legacy?


Consider one aspect of the legacy: the link between asset prices (financial markets valuations) and the interest rate risk (the cost of undoing the QE). Per Turner: "Getting long-term rates down has contributed to bringing financial asset prices in the core economies back to pre-crisis levels, even higher. And, ...Gambacorta et al (2012) show that the expansion of central bank balance sheets did
increase real GDP. In this sense, QE policies have worked."

But just because it worked in the past, does this mean unwinding it will be cost-less even if 'handled right'?

As Turner points, "there is a reassuring answer. The massive purchases of central banks have had wealth effects that should, in time, stimulate global demand. In addition, stronger asset prices should raise the value of potential collateral for new loans and therefore ease the borrowing constraints facing firms and households. Once stronger aggregate demand is assured, the central bank
could readily unload the assets acquired during the crisis."

In other words, the idea of the 'well-managed exit' is that it will come at the time of demand boom and this demand boom should reduce adverse costs of the exits. In theory.

"The problem with this reassuring answer is that the recent recession – now more than five years long – has lasted so long. Financial asset prices did get a considerable boost. Yet the hoped-for growth in real GDP that would have allowed central banks to scale back crisis-related asset purchases did not materialise."

The good times arrived, but not for the real economy. 'Well-managed' exits are not really on the books, since "this disconnect between the rapid rise in asset prices and the persistent weakness of demand is worrying. Is this a bubble that could suddenly deflate? Or do forecasters underestimate the strength of real demand over the next couple of years?"

And there is more: "Another worry is that global net interest rate exposures must have risen substantially since the crisis. At the core of this is US Treasury debt outstanding held outside the Federal Reserve. This rose from $3 trillion in early 2007 (yielding an
average of 5%) to $8 trillion (with an average yield of 1%) by mid-2013. The rise of government debt in other advanced economies – financed at yields that track US Treasuries – is well-known. Much of this risk is in the banking system: sovereign exposures accounted for 19% of total banking book exposures of large international banks in mid-2012, compared with 11% at end-2008. Lower-rated corporations have also benefited from the negative or zero term premium in government debt markets, so credit risks have probably risen too." Turner does not mention households, but they too were allowed breathing room on funding their debts - as policy rates scaled back, cost of funding mortgages and other debts fell. But debt levels did not fall significantly enough, with exception of bankruptcies and foreclosures cases.

"Furthermore, the link between US yields and yields on EM bonds has increased substantially over the past decade, and EM bond issuance has risen."

In plain English: we are all (governments/taxpayers, corporates, households and even emerging markets) are sitting on a ticking time bomb: once rates start rising, we start feeling the pain of higher debt funding costs. What miracle of 'well-managed exit' strategy can deliver us from this predicament?

The latter is the rhetorical question. "The scale of market turbulence in global bond markets from May to September 2013 demonstrates the importance, in any correction, of the outstanding stocks of assets. Quantities matter. The vastly increased volume of bonds outstanding, some held in leveraged portfolios, means that volatility will rise much more when market sentiment changes than it did in the past when outstanding stocks of bonds were much lower." What's that I hear? More volatility than in previous crises? Surely this cannot be good.

"The turbulence also illustrates the dominance of US Treasuries. A substantial rise in US long-term rates took place without any change in the policy rate in the United States." In other words, the Fed did not pause priming the pump, but rates went up… oops… "Such a strong and global market reaction suggests some sudden unwinding of leveraged positions and powerful contagion across markets."

Bingo! In the markets bubbly high on cheap liquidity, there is no 'well-managed exit' feasible.

Turner is, of course, all BIS on this point. "It is difficult to know what lies ahead."

Except this: rates will go up. "Central banks in the advanced economies are not comfortable with the size and structure of their balance sheets. From September 2009, governors of the major central banks (including Messrs Bernanke and Trichet) expressed the hope that they would soon be able to begin their “exit” from unconventional policies. But such hopes were dashed by the deepening euro crisis from mid-2010. Not only have central bank balance sheets further expanded but – equally important – the maturity of their assets has become much longer."

And with this 'staying in QE', Central Banks are gaining a new risk / problem: "Since their liabilities have remained of very short maturity (typically bank reserves), central banks have a growing maturity mismatch. A sizable term spread gives the central bank a positive running yield: this has boosted its profits typically remitted to the Treasury, often creating a favourable impression with parliaments." (Do recall my recent article on Irish Central Bank annual report published in Sunday Times… Bingo!)

"But higher short-term rates could at some point lead to central bank losses. This has no fundamental significance because the central bank does not face the financing constraint in its own currency that a private agent faces: it can print money." Oops… not Irish Central Bank can't… and ECB does not like to…

"Likewise, the government can raise taxes." Oops again, Irish Government can barely run a deficit at less than double European SGP limits on already sky-high taxes. Raising taxes further would be committing political seppuku.

So the conclusion is that "There will be many years ahead when central banks will have government and other bonds on their balance sheets. The accumulation of such substantial holdings was warranted only by the crisis situation that confronted central banks. It is difficult to know at present what the new “normal” size of such holdings will be. How quickly central banks reduce their bond portfolio will depend on (unknown) macroeconomic or financial developments over the next several years."

That's it, folks, the drunk will have to be primed with whisky for years ahed, lest he wakes up with a horrific hangover. That's the 'solution' to the 'exit' dilemma.

And this might not even solve the problem either. Here is why. Per Turner: "Could central bank sales or purchases of government bonds become viewed as a second policy instrument once monetary policy begins be tightened? Policies of Quantitative Tightening could well moderate any increase in the policy rate." In other words, can Central Banks hold off sales of government paper to allow higher liquidity in the system to offset interest rates increases?

Not so fast: "…one practical difficulty is that it is impossible to quantify how bond markets would react to central bank sales. Using estimates based on past experience of the policies that change the volume and maturity of government debt to be sold (such as those mentioned above) fail to take account of signalling effects. News of central bank selling even on a modest scale could send markets a signal that is more powerful than the actual sales (“They are testing the water for further, larger sales”). …The hyper-sensitivity of markets to guesses about future central bank sales was very well illustrated over the summer of 2013. The mention by Chairman Bernanke of what should have been obvious – that at some point the Fed would reduce the pace of its purchases – wreaked havoc in global bond markets … even with the very clear commitment of the Fed to keep short-term rates close to zero for a considerable time. The size and spread of this market adjustment suggest that many investors had highly leveraged positions."

What about the option of just allowing bonds to mature, thus preventing the need for sales? As Turner points out, this still will not be a neutral policy choice. "It would mean central bank balance sheets remaining large beyond 2020. And it would also mean that the timing of shrinking – which would have effects on financial markets and the macroeconomy – would depend only on the pattern of past purchases and be quite independent of future economic conditions. It could even continue into the next recession." Ah, the dreaded bit no one mentions at all, but the BIS grim reaper… the next recession. You know, while all Governments and Central Banks keep droning on about the next expansion, one has to remember the simply fact of nature: there will be another recession. And given the duration of the current anaemic recovery, it might arrive well before the economies have fully recovered from the previous shock.


Where's me parachute?.. cause this saucer is increasing looking likely to crash.

13/5/2014: No, Johnny the Foreigner didn't do it... our own Government did...

Ah and so it rolls, Irish national media obsession with who (from abroad) pushed (presumably unwilling) Irish Government (so deeply concerned with national wellbeing) to guarantee bondholders (presumably the elderly investors from pension funds and teachers, nurses and fire(wo)men) back in September 2008 (because, you know, the Government did not beat the 'Great Irish banks Inviolable drum for the good part of 2008).

The latests instalment is on the role of Timothy Geihtner (based on his book) and it is available here: http://www.irishtimes.com/business/economy/timothy-geithner-keeps-it-short-when-it-comes-to-haircuts-1.1792498.

So we know the drill:

1. IMF called for haircuts. Well, I am not so sure. IMF does include haircuts in some of its 'rescues' and it is a part of the tool kit. But IMF never played an active part in Ireland or for that matter in the euro area. Just compare and contrast the Fund manhandling of Hungary against its waffling on in Greece. My internal IMF sources told me that staff was surprised Ireland did not burn the bondholders the way Iceland did. But then again, one's dismay is not Fund's advice, and Fund's advice is not Fund's order (oh, and IMF does issue 'orders').
2. ECB barked at the idea of haircuts. Again I am not so sure. We do know ECB opposed them, but that is not a reason not to try them, is it? The argument goes that if Ireland were to go against ECB's will, the skye would fall onto us and the moon will no longer exert its tidal push and pull force on the Irish sea, making the entire island uninhabitable. Truth is, we have no idea what ECB would/could have done. Stop funding of Irish banks? Lots of good that funding did to us, I'd say - apparently even with ECB lending we had to bankrupt the nation to mummify the zombies (you wouldn't call this a rescue operation, since our banks are still zombies five and a half years into the mess).
3. EU balked at the idea. Which means what? Olli Rehn had hiccups for breakfast? Both EU and ECB were, allegedly, powerless midgets incapable of stopping the spread of contagion from the inter-galactically important Irish banks (if they were just simple banks, why all the huff about their systemic importance) and thus needed Irish people to bite the missile (you would hardly call a guarantee the size of 2.5 times the nation's GDP a bullet) for them. So who exactly held the trump cards? 
4. US and UK went apoplectic (although as we now know, Geithner did not oppose haircuts in principle, though he was against their timing). I must confess, I noticed no such reaction from Treasury and BofE officials I encountered in briefings around the time of the Guarantee and there after.
5. Irish Government reluctantly, tragically, with tears in their eyes, was forced to introduce a guarantee of all liabilities. 

Now, just for nanosecond give this a thought: the Irish Government, that spent a good part of 9 months prior to the Guarantee staunchly defending the banks and since around July of 2008 - covering up their repeated violations of regulatory requirements (liquidity ratios etc), the same Government that apparently had no desire to know what was going on in the banks shares support schemes and didn't give a damn about abuse of derivative instruments to prop up the banks valuations, the said Government that had lost no sleep over the silencing of whistleblowers pointing to systemic problems in the banks… that Government today is being painted as having been 'bounced' into the Guarantee and subsequently the Troika bailout?..

Are we serious? Let's take a hard look into the mirror. The Guarantee was an act of the Irish Government to protect and secure Irish banks connected to the Irish elite's interests. Full stop. That it rescued a bunch of unsavoury bond holders and investment funds was a cherry on the proverbial cake, not the main spoiler of the 'benevolent Government' intentions.

That we did not exercise a sovereign right to, in a national emergency, impose losses on whoever we wish to impose them is not a corollary - it is a direct evidence of intent to rescue the banks at any cost to the nation. This is further collaborated by the fact that following the guarantee, the Irish Government (not the ECB or US Treasury or the EU Commission) sat back and did absolutely nothing to impose any terms and conditions onto the banks. It is evidence by the fact when our Government at the time was forced to start doing something about reforming the banks, it went about it in the following order:

• First, losses were imposed on borrowers. Borrowers who are still (after numerous 'powder over the gaping wound' reforms of insolvency and bankruptcy codes) being milked by the banks to the loud approval from the Central Bank for every penny they might have or will have in the future.
• Second, banks were given token targets on governance reforms (changes of boards, senior executive ranks, salaries caps etc). The banks blew past these like a boy racer blows past the '30 km/h' speed sign.
• Third, the State created Nama which underpaid for the banks assets in order to secure brighter future for itself and its consultants and vulture funds (the latter now expect returns of 20% per annum and more on the assets they are buying from Nama, which Nama claims to be selling at a profit).
• Fourth, more cash was injected into the banks to cover the hole blown in them by Nama. Cash was taken off the same taxpayers, many of who are the said borrowers being pursued by the banks with the blessing of the State.
• Fifth, the banks were subsidised and protected from any competition - and still remain such: we have a massive penned up demand for credit (allegedly from top-quality SMEs and corporates and households with healthy balancesheets that everyone - from IBEC to myhome.ie claims exist all over Ireland) and we have rising lending margins, and yet we have not a single foreign bank coming into the country or expanding its operations (beyond PR releases) here. Why?

Do tell me that anything in the above suggests that the past Government shed a single non-crocodile tear in guaranteeing the banks? I simply can't believe that. It does not correspond to the facts at hand.

So to tidy things up: let's continue digging for the evidence that some Johnny the Foreigner 'bounced' Ireland into the Guarantee and the bailout and the rest of the mess we are in. Let's even keep digging for the evidence that the Martians are responsible for the original mishap of two Luas lines not being connected to each other.

But let's also remember - as a sovereign State, Irish State had choices. It made them. It made them to suit all of the objectives of supporting the banks that were consistently and persistently pursued by the State prior to the Guarantee. Subsequent to the Guarantee, Irish Government officially and repeatedly stated that it will provide all and any support needed by the banks, unconditionally, unreservedly and unceremoniously. Whatever Johnny the Foreigner did or did not do in such circumstances is secondary - interesting, important, intriguing, but still secondary. Primary is the fact that we were flushed down the proverbial banks sewer by our own.

12/5/2014: Norway: Heading for Some Rough Economic Waters?

AN interesting article on Norway's petrodollars 'curse of oil' economy's future from Reuters, headlined "End of oil boom threatens Norway's welfare model" (see: http://www.reuters.com/article/2014/05/08/us-norway-economy-insight-idUSBREA4703Z20140508)

This begs a question - are things really going South for Norway?

Sure, the country has basically nothing to show for its oil bonanza in terms of indigenous industries development or investment. Sure, it is giving cash left-right-and-centre to various social entrepreneurs, native enterprises, cultural ventures etc which produce virtually nothing of any demand outside Norway and questionably fulfil real demand inside Norway.

But, really, are things getting visibly bad on the horizon? And are they getting worse than in other Nordic countries?

Here are some charts summarising economic and fiscal performance of Norway compared to the rest of Nordics and Sweden.

Starting with General Government Revenue as % of GDP:

The above shows couple of things:

• Norway's revenues are comfortably above those for Sweden and for Nordics. Which is the same as to say that Norway's economy is more heavily dependent on Government sector. This, of course, includes gas and oil revenues. 
• But the share is has been rising between 1994 and 2008 not only because revenues from North Sea are rising, but also because rest of economy activity was getting trapped in state-dependency.
• Crucially, the revenues have been on downward trajectory since 2009 and this is forecast to continue into 2019. Pressure is mounting.
• The opposite to Norway's trajectory is happening in the rest of the Nordics and Sweden. In particular, following massive Swedish and Finnish crises on the early 1990s, share of Government in the economies of the Nordics ex-Norway has fallen steadily from 1988-1991 peak toward the trough around 2010 in the Nordics and still heading down for Sweden.

All in, Norway is showing signs of serious strain on revenue side, but it is not in a crisis… not yet.


What about the Government Expenditure?

The above shows the following:

• Basic expenditure side of the fiscal equation is still better in Norway than in the Nordics and Sweden. 
• However, out on 2019 range forecasts, Norway is starting to actively catching up with Sweden and converging toward the Nordics.

Again, not a crisis yet… but dynamics are not encouraging.


On Government Debt front, Norway is doing well, especially compared to the Nordics:

And it still outperforms the Nordics on Current Account side:

• One caveat here is that Norway's current account surpluses are solely down to oil and gas revenues. The country does not deliver value for money in any other sector, including, increasingly in its aqua-farming sector. Meanwhile, Sweden generates current account surplus ex-energy and raw materials.

On balance, there is a serious problem emerging for Norway: current account surpluses are on downward trajectory since 2006, and decline is forecast to accelerate. Good news for Norway: there is no deficit in sight. Bad news: in order to achieve quick transition of its economy away from oil & gas dependency, it will need massive investments and capital imports - which can force the current account balance into deficit very quickly.

The problem of fast rising public spending against revenues and declining public surpluses is often best can be seen in level terms, in current spending, instead of as a share of GDP. Here is the summary chart:

As noted earlier, this shows:

• Rapidly rising state spending, for not rather well matched by revenues.
• Rate of revenues increases declining from 2012 on and being outstripped by projections for expenditure increases for 2013-2019 period. These are mostly down to forecasts, so not materialised yet… but still - a warning shot.
• Exchequer surpluses declining from local peak in 2012.
• On positive side, surpluses are still present in forecast out to 2019, which is a strong position to have.

Here is a net summary on various growth rates over decades averages:

and a chart showing the gap between Sweden's GDP growth rate and public spending rate, and that for Norway:

Key takeaways: Norway is not yet flashing red, but its growth in public spending is not sustainable in the environment of falling net revenues from energy sector. Structural weakness in the Norwegian economy is basic lack of real economic growth outside the energy sector, compensated for by the over-reliance on public spending and investment.

11/5/2014: Super Mario: Whatever It Takes Will Now Happen in June… Likely, Like…

This week, the ECB has sent a barrage of signals. Blanket-bombing the Forex markets, Super Mario laid it thick with the promises. Behind this there is less of the classical monetary policy and more of the classical exchange rates expectations balancing. Inflation is low, for sure. Euro is stubbornly stuck in the highs, for sure. The former is just fine for retirement-bound Germany. The latter is not fine for growth centres-bound BMWs and Mercs. So the majority of the Governing Council decided to move… but only in the future… and only once new forecasts are made available.

Basically, Draghi pre-committed to acting in June to ease policy. This is not the same as a promise of QE, neither in the form of actual printing or unconventional measures of any serious significance. Instead, my expectation is the ECB will pass through another refinancing rate cut or do some re-arranging on liquidity support measures side (maturity or volume or both). The Governing Council can then sit back and watch if the marginal move induces downward pressure on the euro. This being June, real economy in Europe will be heading into Summer, buying ECB some time for navel gazing.

Most likely outcome: as long as ECB does not drastically depart from the Fed and BofE, things will remain hard for the euro.

The ECB stance overlays the fundamentals that are consistent with medium-term low inflation and anaemic, albeit improving, growth (see http://trueeconomics.blogspot.ie/2014/05/752014-eurocoin-leading-indicator-april.html). Any easing the monetary policy from here on is therefore consistent with ECB responding to deflationary pressures and Forex pressures, and not to the issues relating to fragmented lending markets. Thus, any easing in June remains conditional on ECB forecasts. Draghi noted as much, stating that

• Going forward, the ECB is still mindful of low inflation and is concerned with the medium-term trajectory in inflation, so that both levels and dynamics seem to matter now (it was the former and not the latter that were of concern before)
• The ECB is also worrying about the high valuation of the euro, especially consistent with low inflation. The two factors reinforce each other in the longer run.
• The fact that geopolitical crisis in Ukraine is now spilling over into the euro area more than to any other region.

The ECB still appears to be undecided on specific tools that it is going to use. Much of this indecision is probably down to the difficulties with structuring some less conventional measures. Much is due to the uncertainty as to how much easing will be required. Intervention for Forex sake will have to be initially smaller than intervention aimed at unlocking fragmented lending markets. This is my expectation for any June action, if any were to take place: symbolic act to alter forward expectations and buy time before end of summer.

The tool kit for this includes potential

• Shallow cut to refinancing rate: -10 to -15 bps
• Extending to full allotment of fixed rate liquidity provision. As Bloomberg puts it: "The ECB could extend its policy of granting as much cash as banks need against eligible collateral. The measure was introduced in October 2008 after the collapse of Lehman Brothers Holdings Inc. sparked a global credit crunch and is scheduled to run until at least July 2015."
• New LTRO. Again, via Bloomberg: "The ECB’s emergency 3-year loans to banks are losing their effectiveness as they approach maturity at the start of 2015, prompting speculation that a new round may be offered. Another LTRO might look different from the previous ones, when banks used most of the liquidity to buy government bonds. “We will want to make sure that this is being used for the economy,” Draghi said in December."
• Non-sterilisation of SMP (I wrote about this earlier here: http://trueeconomics.blogspot.ie/2014/03/07032014-to-sterilise-or-not-to.html). This can ad up to EUR168 billion to liquidity supply.
• Reserve requirements can be lower or ECB can remove the reserve ratio of 1%. Both measures will increase liquidity supply.
• Negative Deposit rate from current zero rate to -0.05 to -0.1 percent (negative rates were used recently in Denmark: http://www.bloomberg.com/news/2014-04-24/danish-central-bank-exits-negative-rates-first-time-since-2012.html). 

I suspect ECB will not go for negative rates, or opt for the outright non-sterilsation of SMP, albeit it can slow down the rate of sterilisation. Negative rates is a nuclear option that will have more significant impact on reducing euro strength. And it might add credit supply in the euro area on the aggregate, though I doubt this will have much of an effect on breaking the vicious cycle of market fragmentation (I find it unlikely that negative rates can trigger restart of credit supply in euro area impaired economies).

In the longer term, I suspect ECB is going to take a wait-and-watch approach through summer. If economic growth continues to pick up and inflation starts to rise, we shall see ECB abandoning any further action beyond the token signalling in June. If things deteriorate over the summer, ECB will look into more QE-focused policies in September-October. Corporate bonds purchases might be on the books then.

Couple of charts to illustrate ECB's long term dilemma:

Policy rates are at historical lows and moving out of synch with Euribor (fragmentation)

Meanwhile, the euribor-ECB spread rose to the highest level since April 2012... The Draghi Put period average spread is at 0.054, pre-Put at 0.594 and current spread is at 0.354. The cost margin in inter-bank markets is now closer to the crisis peak averages than to the Draghi Put average, showing the effects of LTROs and ECB easing wearing out.

And duration and magnitude of deviation from historical averages are frightening:

All of which shows that ECB will have to seriously push the bounds on unconventional measures, if it really wants to make a dent in the pile of problems (forex rates, fragmentation, aggregate liquidity supply, inflation, growth...) the ECB is facing.

10/5/2014: Irish Unis: Excellence in Areas of State Neglect...

No comment needed. Headline says it all:

As @brianmlucey said:

Oh, and all top departments are in the Universities that are not designated as greenfield 'centres of excellence' during the Celtic Tiger and were not in receipt of massive specially-designated 'convergence' infrastructure funding from the National Development Plans.

9/5/2014: Irish Credit Conditions Worsened in Q1 2014

Latest data on interest rates (covered here: http://trueeconomics.blogspot.ie/2014/05/952014-cost-of-credit-in-ireland-kept.html) and credit outstanding in the Irish banking system shows continued deleveraging in the economy:

At the end of Q1 2014,
-  Total volume of loans outstanding declined 5.6% y/y,
-  Loans to Households were down 1.54% y/y and
-  Loans to NFCs were down 9.29%.
-  Loans for house purchases were down EUR1.46bn,
-  Households' overdrafts rose EUR1.39bn, while
-  Consumer credit loans were down EUR1.43bn.
-  NFCs overdrafts fell EUR2.81bn and
-  Non-overdraft NFCs credit fell EUR5.2bn.

So credit available to enterprises and households in Ireland is still falling. More significantly, households are accumulating overdraft liabilities. And the cost of these facilities is rising.

Not a good sign, suggesting households and corporates are being squeezed on both ends of the debt deflation pump.