7/9/2014: Scotland's Financial Services and the UK

Here is an interesting tweet on the size and inter-links between Scottish Financial Services and the UK:

But here are some other facts:

• Financial Services contributed £8.8bn to the Scottish economy in 2010 or over 8% of Scottish onshore economic activity.
• Financial Services direct supported 85,000 employees and indirectly provided jobs for 100,000 more, accounting for around 7% of total employment.
• Banking, as a sub-sector of the Financial Services is the largest contributor to the Scottish economy adding over £4bn, or nearly half of the total financial services contributions.
• Adding to the financial services the associated professional services combined broader financial services sector employs a total of 148,600 people, or 6.1% of total Scottish employment, contributing over £14bn to the economy, 13.1% of Scottish GDP.
• More than 40% of Scottish postal services & almost 30% of Scottish accountancy services are sold to the Scottish financial sector. Almost 19.4% of all 'other business services' in Scotland are supplied to the financial services contractors, 18.7% of all advertising, 18.2% of computing services, 18.1% of real estate services, 17.6% of printing and publishing, 20% of research services, 16.3% of legal activities, 16% of telecommunications, and 13.4% of air transport services.
• The Scottish banking sector (a subset of Financial Services sector) is huge. The assets of the whole UK banking sector (including Scotland) are ca 490-500% of UK GDP. Scottish banks assets total around 1,254% of Scotland’s GDP, not counting any effects on the GDP from a vote for independence. In comparison, at the end of 2007, Icelandic banks had assets were around 800% of GDP, while Cypriot banks assets amounted to around 700% (450% for domestic banks). Irish banking system reached around 894% of GDP at the peak of pre-crisis boom.
• Scottish banking system is heavily concentrated (a factor that played significant role in the Cypriot banking crisis): the two largest banks – the Bank of Scotland and the Royal Bank of Scotland (RBS). As the UK Government report (see link below) of May 2013 notes, "There could be questions about an independent Scotland’s ability to stabilise its banking system in the event of a future financial crisis. In 2008, the UK Government spent £45 billion recapitalising the RBS in order to protect the deposits and savings of households and small business. In addition, the bank received £275 billion of guarantees through the UK Government’s Asset Protection Scheme. This combined support from the UK Government to RBS is equivalent to some 211 per cent of Scottish GDP in 2008." The later accounts for Scotland's geographical share of North Sea oil revenues.
• Quoting from the same report: "The Scottish financial services industry estimates that 90 per cent of its customers are located in the rest of the UK, and the market is highly integrated for most financial products. For example, 89 per cent of stocks and shares Individual Savings Accounts (ISAs) provided by Scottish firms are sold to customers based in the rest of the UK, and 33 per cent of the Individual Savings Accounts (ISAs) opened by Scottish consumers were with non-Scottish firms."
• Two main banks in Scotland control 70% share of the market for SMEs lending in 2011, Lloyds: 36% and RBS 34%.

On the opposite side of trade: 

• 70 per cent of all pension products bought by Scottish consumers are from firms based in the rest of the UK.
• 48 per cent of adults in Scotland currently have an ISA, which attract UK tax relief. Per UK Government report: "ISAs would cease to be available in the current form if Scotland separated from the rest of the UK."
• 24 per cent of employment in the UK life and pensions sector is based in Scotland, but 91% of pensions products originating in Scotland are for non-Scottish residents.
• Funds management is a big business in Scotland, with an estimated £750bn of assets under management and an estimated 3,600 people employed (directly and in related services). The Scottish share of the UK asset management sector was 6.4% in 2010. Two of the UK’s top 10 asset management firms: BlackRock International Ltd (the largest in the UK) and Standard Life Investments (the ninth largest) were based in Scotland.
• 90% of Scottish Financial Services customers reside in the rest of the UK. 84% of mortgages issued in Scottish institutions are to customers outside Scotland. 
• 58% of total exports and 71% of total imports in Scotland are with the rest of the UK.

More analysis and facts on the interlinks between the UK and the Financial Services in Scotland available here:
https://www.gov.uk/government/publications/scotland-analysis-financial-services-and-banking

7/9/2014: The Neighbourhood We Are In: Dublin as Global Financial Centre

Look who ranks as an offshore financial centre as opposed to regional or global or niche / specialist centre? Why... of course it is...

And what a neighbourhood we occupy... Lux, Guernsey, Caymans, Bermuda and Isle of Man... all, presumably, trading on their human capital, skills, world class education, innovation, R&D, state policies for development of entrepreneurship, rigorous world class quality regulations. etc, etc, and strictly transparent benign taxation regime...

7/9/2014: What do PMIs Signal on Global Growth?..

Here's an interesting point raised recently by @phil_waechter: the global growth that is supposed to accelerate in H2 2014 is really not happening and worse, compositionally, the prospect of such growth is heavily reliant on one country's fortunes: the U.S.

Things are not pretty, but they are not as ugly as the above chart shows, at least in the short run of the last 2 months. Here are the summaries for global growth by index:

In Services, there is weakening growth, but still levels are relatively robust, with New Business accelerating, marginally, while Future Activity expectations moderating.

And in Manufacturing, there is marginally stronger growth, with new orders slipping by just 0.1 points.

Composite indicator shows some pressures to the upside in growth forward: backlogs indicator showing a rise, new orders similarly showing some very modest support up.

Emerging markets are generally improving in August, with exception of Brazil. Russia breaking downward trend, but this remains to be confirmed in September-October before any serious turnaround can be called. South Africa is weak, Brazil weak, although net is still more positive than in May-July:

So the longer term trends are weak, when it comes to the likes of the euro area, but are reasonably ok. The real weakness is in the euro area. Here is the summary of just how much the euro area performance across all PMIs is weighing down on the global growth:

Just another reminder, this is supposedly the European Century...

7/92014: WLASze: Weekend Links of Arts, Sciences & zero economics

This is WLASze: Weekend Links of Arts, Sciences & zero economics… Enjoy… a random selection not exactly unified by any singular theory...

A fantastic selection of cityscapes from Instagram collections: http://nymag.com/daily/intelligencer/2014/08/outlaw-instragrammers-of-new-york-city.html

Some are intimately epic

Some are epically intimate

Yet many are amazingly absolutely stunningly compositional. See more here: http://instagram.com/humzadeas?utm_source=partner&utm_medium=embed&utm_campaign=photo


Looking at the Big with an eye for the Small - as Humza Deas does above - goes well beyond just art. Here's a - perhaps surprising in comparative terms, yet fundamentally similar - example of applying statistical (simple Bayesian to boot) tools to searching for a needle in a massive haystack:
http://www.technologyreview.com/view/527506/how-statisticians-found-air-france-flight-447-two-years-after-it-crashed-into-atlantic/#.U_l7qFL1u_I.delicious

But needle in the haystack is nothing compared to a microbe on a continent… problems get bigger, but the intimate dimension always remains. Take for example the search for extraterrestrial civilisations. Feeling lonely ain't good thing for humanity, but applying our self-image to the search for others might have a set of values of its own, an intrinsic utility, including that of understanding the bounds to our own world. Here's a good example: http://www.technologyreview.com/view/530211/the-search-for-extraterrestrial-civilizations-waste-energy/ Do note the point (logical transition) of moving from own galaxy search to other galaxies search as linked to energy.

Sometimes, of course, by their very property, needles do stand out in space… here's one: http://www.cbc.ca/news/technology/meteorite-creates-brightest-flash-on-moon-ever-recorded-1.2549588
Or in more scientific display: http://www.space.com/24789-moon-meteorite-impact-brightest-lunar-explosion.html

Aside from searching for small in large, what about the large itself? Finding the haystack and unwiring, uncoupling, sorting through the strands of hay… ArsTechnica's "The never-ending conundrums of classical physics"  http://arstechnica.com/science/2014/08/the-never-ending-conundrums-of-classical-physics/ doesn't quite accomplish the full task of cataloguing the  haystack of classical physics, but it does provide a glimpse of how rich the field of inquiry really is. To those, I must confess myself including, who were bored to death by endless 'classical' problems of "An object traveling at speed X, hits a mass Y under the angle Z positioned on the slope with an angle A…" variety in high school, this is quite enlightening… As soon as MiniG is couple of years older, we shall revisit this all…

For many search for extraterrestrial can always start in the tangible world of the abstract art. If you are one of them, you should be in the Tate. Previously I profiled Tate's exhibition of the works of Kazimir Malevich a Polish by ethnicity Russian painter born in Kiev region. Here are two more articles on the subject:

First, we have Atul Dodiya (a Mumbai based artist) on the relationship between his own work and that of Malevich: http://www.tate.org.uk/context-comment/articles/atul-dodiya-on-malevich. Dodiya's page at Saatchi is here: http://www.saatchigallery.com/artists/atul_dodiya.htm. His Portrait of Niko Pirosmani (another painter, Georgian this time around, from the period, Niko Porosmanishvili) actually draws on some Malevich's techniques - a combination of iconic representations and distilled chromatic and geometric interplays.

Second, an article on Malevich's Black Square: http://www.tate.org.uk/context-comment/articles/five-ways-look-Malevich-Black-Square taking the reader through the quick tour of suprematism and the political/philosophical context of the movement. But perhaps the best value in the article is the ending: "When it was exhibited people found it a strange thing and people still find it a strange object today. There’s no wrong or right way to look at it; you could say it looks like a window into the night, or you could say it is just a black shape on a white canvas, (which is more of what Malevich was intending…) but it’s like a very simple gesture. Malevich set out to forever change the idea of painting to represent reality, and its intriguing to think how doing something simple or even seemingly dull, can sometimes be revolutionary; that’s what makes the Black Square a radical thing, however you look at it."

A simple gesture…

As simple as a needle in a haystack or a haystack decomposed into an order... figurative, like classical physics, and equally deep too... Enjoy!

Шотландский Выход: Финансовый Риск для Великобритании

Here is a handful of edited notes relating to my interview this week on BBC Russian Service. In Russian.

These cover the topic of financial costs and risks to the UK from potential Scottish Independence vote.

Возможность выхода Шотландии из валютной системы Великобритании и создания собственной валюты несомненно представляет серьезные проблемы не только для Шотландской экономики, но и для Великобритании. 

В первую очередь, проблема для Великобритании будет заключаться в том каким образом долгосрочные финансовые контракты - страховые, пенсионные и инвестиционные контракты - будут расчитываться в новой валюте. Просто перевести их по начальному обменному курсу в Шотландский фунт будет слишком рисковано. Если в будущем Шотландия проведет девальвацию валюты, эти контракты понесут реальные потери. Каким образом риск таких потерь может быть покрыт на балансовых счетах банков и инвестиционных и пенсионных фондов в Сити - это не понятно. При этом, Английским банкам и банкам других стран придеться покрыть такие риски с момента изменения валюты. Это потребует серьезных средств и поглотит большой обьем капитала банков. Что может привести к новому финансовому кризису.

Один вариант - это создать еффективно две валюты: одну валюту непосредственно привязанную к фунту стерлингу, другую - независимую от фунта стерлинга. Первая валюта покроет существующие контракты, вторая будет работать в экономике. В этом случае, Шотландия примет весь риск перехода на новую валюту на себя. Однако, банкам за пределами Шотландии да и международным банкам работающим в Шотландии все равно придется искать новый капитал что бы покрыть уменьшенный риск девальвации и более высокий риск дефолта. 

Ну и, конечно, Шотландия окажется на финансовом тонком льду - Ллойдс и РБС имеют настолько гигантские активы, что Шотландия, как независимое государство, мгновенно превратиться в Новую Исландию. С рыбой и какой-то нефтью, но без вулканов и дешевой энергетики. Иначе говоря - потенциальным банкротом. А это означает еще более высокий риск дефолта и серьезные вопросы сможет ли Шотландская валюта перенести финансовый кризис и поддержать Шотландскую банковскую систему.

Опять же, вопрос не теоретический с точки зрения Сити и всей остальной Великобритании: риск дефолта в Шотландии - это риск дефолта на облигации и активы и депозитивы Шотландских банков. Цепочка финансовых контрактов и их подписчиков тянется далеко за пределы Эдинбурга.

Один пример: во время последнего финансового кризиса, Ллойдс поглотил 20.5 миллиардов капитала, предоставленного Банком Англии. Банковская группа РБС поглотила 46 миллиардов фунтов. Где Шотландия сможет найти такие деньги если будет новый кризис? Сможет ли страна с 130 миллиардами валового дохода буквально напечатать 67 миллиардов фунтов новой валюты только для того что бы покрыть риск двух банков?

Конечно нет! А значит все контракты переводимые в новую валюту будут оцениваться значительно ниже чем их оригинальная, начальная оценка в фунтах стерлинга.

Практически, переход на новую валюту это проблема новых рисков и старых долгов. Вспомните хорошо известное выражение: если вы должны банку 10,000 это твоя проблема. Если вы должны банку 10 миллионов, это уже проблема банка. Шотландская банковская система имеет активы в 12.5 раз превышающие валовой продукт страны. А Лондон практически банкир Шотландской банковской системы... Разве приходиться удивляться тому что Сити сегодня очень обеспокоен возможностью того что Шотландия выйдет из системы стерлинга?

5/9/2014: Investment and Foreign Exchange Reserves: Latest Data from Russia

Some recent news from the Russian economy's front.

In recent months we have witnessed some significant slowdown in both investment in Russia and economic growth (see here for the latest signals http://trueeconomics.blogspot.ie/2014/09/392014-russian-services-composite-pmis.html and here for the longer range data: http://trueeconomics.blogspot.ie/2014/08/2882014-state-of-russian-economy.html). But we now have some interesting data on the compositional changes in investment and the numbers are puzzling. As reported by BOFIT, aggregate decline in domestic investment in H1 2014 in Russia was driven by the smaller firms and the 'grey' economy.

This was offset, to a large extent but not fully, by a rise in investment by large and mid-size firms, households and the government which (combined) increased investment by 3%. As BOFIT noted, "the situation differs from 2012 and 2013, when investments of large firms stumbled". On private sector side, large and mid-sized companies investments rose in energy sector, industry, manufacturing, transport and food processing.

Construction and real estate investments rose on foot of new building activity with new apartments completions in H1 2014 up over 30% y/y in terms of numbers and floor area. This is puzzling, as household credit (ex-housing) fell, while housing loans demand remained strong. This suggests a rush to completions associated with the bust dynamics and I would be surprised if this activity carries over into H2 2014-H1 2015 without a major slowdown.

On an outright negative side, investment in machinery and equipment continued to shrink, following the beginning of the strong downward trend that started back in 2013.

Meanwhile, also this week, Russia and China launched the construction of the first section of the Power of Siberia pipeline which is set to deliver 4 trillion cubic meters of gas from Russia to China over the 30 years period, starting in 2019. The pipe was launched from Yakutian Chayanda gas field (which will start production in 2015 and has estimated reserves of 1.2 trillion cubic meters of gas and 93 million tons of liquid hydrocarbons with planned daily production of 25 bcm of gas and 1.5 million tons of oil) and will run 3,968 km and is expected to cost, in the end, some USD20 billion (including USD7.5 billion of associated investments relating to the pipeline to be allocated across the Siberia). But the pipeline will also enable access to other Yakut and Krasnoyarks fields.

Comparative market figures are massive. Europe purchases from Russia some 160 billion cubic meters (bcm) of gas in 2013. China's annual consumption is 170 bcm and this is expected to rise to 420 bcm by 2020.

While China and Russia both build and co-finance the project, steel pipe for the project will be supplied by the Russian company TMK.

Here is map - via @RT - of the new pipelines systems in works for Russian South-East:

Note: I covered in depth the geopolitical changes in Russian oil and gas development in the earlier note here: http://trueeconomics.blogspot.ie/2014/07/1772014-geopolitics-of-russian-gas-oil.html

Finally, time to update the data for International Reserves position for Russia based on data through the end of August, published today.

Total Foreign Reserves of the Russian Federation at the end of August 2014 stood at USD465.228 billion, down EUR44.446 billion year on year (-8.7%). Relative to the pre-sanctions period (March 2014), reserves are down USD28.1 billion (-5.7%).

Excluding IMF SDRs and other IMF-held reserves, actual foreign exchange and gold reserves stood at USD452.24 billion, down USD44.28 billion on the same period 2013 (-8.9%). Virtually all of this reduction came since January 2014 (USD44.04 billion), but from March 1, 2014 levels, the reduction has been USD27.76 billion (-5.8%).

Gold holdings alone rose in value by USD518 million in 12 months through August 2014 (up 1.1%) and are now up USD1.4 billion since March 1, 2014 (+3.1%).

Two charts to illustrate:

The above is consistent with virtual non-engagement by the Bank of Russia in FOREX markets, as outlined in this note: http://trueeconomics.blogspot.ie/2014/08/2882014-state-of-russian-economy.html.

6/9/2014: Euro Area Current Account and Growth Dynamics

Eurostat released Current Account statistics for the euro area for Q2 2014 and the numbers are not exactly pretty. Based on seasonally-adjusted data, Q2 2014 current account surplus was EUR54.5 billion, which is down on EUR55.6 billion in Q1 2014 and down on EUR61.8 billion in Q2 2013. Of the mani components:

• Trade in goods balance slipped from EUR46.9 billion to EUR40.3 billion in Q1-Q2 2014 and is lower than EUR45.5 billion surplus delivered in Q2 2013.
• Balance of trade in services improved significantly, rising to a surplus of EUR31.6 billion in Q2 2014 from EUR25.9 billion in Q1 2014 and compared to EUR27.1 billion in Q2 2014.
• There was a significant drop in the balance of income from abroad, year-on-year down EUR7.9 billion, somewhat moderated by the reduction in the current transfers deficit

Table below summarises:

It is worth noting that the above trade in good statistics are coming in at a balance of EUR87.2 billion for H1 2014, while the estimates just a half a month ago (http://epp.eurostat.ec.europa.eu/cache/ITY_PUBLIC/6-18082014-AP/EN/6-18082014-AP-EN.PDF) came in with a balance of EUR79 billion balance on goods trade side for extra-EU trade. That is a massive swing that is hard to explain by ordinary revisions.

Overall, Q2 figures show some serious weakness on the trade side. Overall trade balance (goods and services) at the end of Q2 2014 stood at EUR71.9 billion, which is down on EUR72.8 billion in Q1 2014 and on EUR72.6 in Q2 2013. This means that y/y net exports made a negative contribution to the GDP (gross of factor payments), although excluding factor payments, the latest breakdown of Q2 GDP shows (http://epp.eurostat.ec.europa.eu/cache/ITY_PUBLIC/2-05092014-AP/EN/2-05092014-AP-EN.PDF see Tables T1 and T2) that net exports contributed positively to y/y growth in GDP in Q2 2014. In other words, at least 0.1% of growth registered in Q2 2014 in the euro area economy seems to be attributable to factor payments swings (delays) which presents a potential problem forward for Q3 - Q4 2014 GDP growth. If lagged factor payments come due in Q3-Q4 2014, these will act to depress any potential uplift from rebuilding of inventories (much of the Q2 2014 drop to 0% is accounted for by depletion of inventories by the firms).

5/9/2014: ECB, Zero Rates, Negative Yields and Debt... The Glorious Debt...

As I noted yesterday on twitter, the ECB policy rate change might be accommodative of the upcoming September TLTROs (by lowering the gross cost of using TLTROs to raise funds), but in reality all it is doing is continuing to push more debt accommodation for the already heavily-accommodated sovereigns. I also noted yesterday that this accommodation of banks and sovereigns has done preciously little to improve lending conditions for the real economy (http://trueeconomics.blogspot.ie/2014/09/492014-ecb-little-done-loads-more-to-be.html).

So here is a neat summary table showing the extent and spread of negative rates on 3 year government bonds - the table is courtesy of @Schuldensuehner (click on the image to enlarge):

In simple terms, if you want to lend money to Austrian, German, Belgian, French, Finnish, Dutch and Slovak Governments, you now have to pay for the privilege. It is as if there is a panic dumping of cash going on out there, under some grave threat of eminent expropriation or a meltdown of the entire financial system.

You betcha the Euro needs a traditional QE at this stage, because Belgium borrowing at negative rates is just not good enough, more debt is needed to fund more debt needs so the governments can spend more to stimulate tax revenues to sustain higher demand for debt yet... This, in a nutshell, the modern monetary policy, then.

And meanwhile, having crossed into the negative territory, bond yields opened up a new horizon for price appreciation for Government paper: higher debt supply, must equal higher price, inverting everything - from fundamentals to bounds on price appreciation. If you ever needed a sight of a bubble wobbling in the sun from the internal perturbations of hot air, give it another look... before it pops one day...

4/9/2014: ECB: Little Done. Loads More to Be Done Still...

In its latest move in attempting to combat the risk of deflation in the euro area, the ECB pushed the policy interest rate down to 0.05% from 0.15%. Here are some historical dynamics of the rates and comparative analysis of the ECB policy relative to other Central Banks:

Let's start from the historical chart:

The chart is showing the historical evolution of the rates in six advanced economies. At this stage, we have a statistical convergence between the US, Japanese and Euro area rates at the lower margin feasible.

It is worth noting that from January 1999 through September 2008, pre-crisis average for the Euro rates is 3.10 which is now 3.05 percentage points above the current rate. In the case of the US, current rates are 3.37 percentage points below the pre-crisis average. In the UK, historical pre-crisis average is 4.83% which means we are at 4.33 percentage points below the historical average.

The dynamics of deviations in the ECB rates from their historical average are shown below:

Statistically, mean reversion in rates is now well-overdue and accounting for likely overshooting we are looking at the mean reversion taking the rates above 3.25-3.5%. Total duration of periods of deviation from the mean in the last episodes (for rates both above and below the mean) is 85 months over 9 years and 11 months. Current deviation is already 70 months long and counting. Excluding the 1999 period, which is consistent with the period of early establishment of the euro policy, total length of combined deviations from the historical average is 78 months, just 8 months short of the current period duration.

The higher the hill in the above chart gets, and the deeper the blue line goes, the greater pain will be required to revert the rates to their historical mean. This pain is coming, whether we like it or not and its timing and extent will have nothing to do with the legacy debts in Ireland or with our capacity to service them. It will come on foot of the Big 4 euro states data.

Meanwhile, this will do preciously nothing for the euro area economy. Why? Because the problem in the euro area economy is not the rates on loans to banks or between banks, as illustrated by the chart below. The problem is that policy rates are not feeding through to the retail rates charged on real loans for real companies and households in the real economy:

As the above chart clearly shows, the banking rates track reasonably well the policy rate (blue line, showing 12 months euribor rate deviation from the ECB repo rate), but the real rates (retail rates charged on loans in excess of EUR1 million with 1-5 years maturity for euro area non-financial companies) are getting increasingly more expensive compared to the ECB repo rates (red line).

The latest cut in rates is not going to do anything to the above story. And the ECB, so far, has found no means for breaking the financial markets blockage that prevents the policy rate to feed through to the retail rates. Nor, incidentally, has the ECB discovered any means so far to break the cycle of fragmentation in the credit system - the situation where by credit rates for non-financial companies and households diverge between different countries of the euro area.

Two real and actual problems: not cured. One imaginary problem - of official policy not being absurdly accommodative enough - is now addressed. Little done. Loads to be done still... and the future interest rates hikes super gun is loaded, primed and the fuse lit already...

4/9/2014: The Bizarre World of World Economic Forum Rankings

Recent, the WEF released its new Global Competitiveness Indicators, showing some pretty bizarre changes in Ireland's performance across a number of metrics.

Here are the historical trends and the latest figures.

Overall, 2014-2015 GCI rank for Ireland shows and improvement from 28th place in 2013-2014 rankings to 25th place in this year's assessment. Expect to see this figure paraded in the official Ireland Inc's power point slides issued by numerous state agencies and departments in months to come. 

The problem is that 25th place is based on a diminished sample of 144 countries and 2013-2014 rank of 28th place is based on a larger sample of 148 economies. If the two samples are reconciled, Ireland's performance did not improve at all. As WEF points out, if the two samples contain economies present in both 2013-2014 and 2014-2015 surveys, Ireland's rank in 2013-2014 survey is 25th, dead on same as in 2014-2015. All the reforms, changes, improvements, turnarounds in competitiveness over the last twelve months amount to standing still in global indicators.

Take a look at the 'Ireland's neighbourhood' in rankings:

Save for Italy (49th rank), Portugal (36th rank) and Spain (35th rank) we are at the bottom of the euro area advanced economies rankings. And we face stiff competition from the likes of the usual suspects and unusual ones, like UAE, Taiwan, Qatar, Malaysia, Saudi Arabia - ahead of us, and China, Thailand, Puerto Rico, Indonesia - within 10 place of us. You might think 10 places is a safe distance, but UAE moved massive 7 places up in rankings within just 1 year. even France, hardly a poster-child for competitiveness (a mistaken, but commonly-held view) is ahead of Ireland.

Never mind competition, here are some of our performance pearls:

Chart above summarises changes in our rankings in 2014-2015 compared to 2007-2008 rankings in categories where we have direct control over our destiny. Take a walk through these with care and consideration.

Take for example Infrastructure. Here we have it: rank of 49th place in 2007-2008 is vastly improved to a rank of 27th place in 2014-2015. Scratch your heads: between 2007-2008 and 2014-2015 our capital investment collapsed, infrastructure investment collapsed, we built virtually no major infrastructure projects… and yet… our performance greatly improved. Applying this logic, tearing down few railway lines in 2015 might get us to rank even better in 2016.

In Health and Primary Education - the area of largest cuts, costs-reallocations and other 'austerity reforms' in recent years, our performance is getting better and better: from 16th place in 2007-2008 to 8th place in 2014-2015. How? I have no clue. Scandals at HSE are running at a steady level of historical highs, funding for new facilities and technologies and treatments is nowhere to be seen, doctors are being replaced at an increasing rate down to emigration, education system had virtually no significant improvements or new funding in ages. Still, rankings improve.

Higher Education and Training: improved from 21st rank in 2007-2008 to 17th in 2014-2015. Meanwhile, our best universities rankings have slipped and our other universities rankings have not shown any visible improvements.

Labour Market Efficiency, however, is basically unchanged on 2007-2008. And that is despite huge efforts expended by the Government to improve our labour markets competitiveness. All the Troika reforms and all the gains in unit labour costs... to stay in the same place...

Innovation factors are also basically flat on the past. Again, despite billions in investment between 2007 and 2014 on innovation and R&D, myriad of funding programmes, agencies reforms, etc, etc.

Chart above shows evolution of our overall rankings in history of the WEF report. Thing to note here is that just as with all other rankings, our performance has deteriorated from the pre-crisis period. But this deterioration is now being erased, rapidly, on foot of the above mentioned (and some other) 'improvements'. 

The trend will continue on into the future: bogus data/analysis will be reinforced by more real gains, such as moderation in our obscene ranking (130th in the world) in terms of Macroeconomic Stability which is bizarrely lagging improvements in our Financial Markets Sophistication.

The latter point above is yet another 'scratch thy head' moment for WEF rankings. Macro stability ranking worst performance was 134th in 2013-2014 and this improved just 4 places to 130th in 2014-2015. In contrast worst Financial Markets performance ranking was 115th in 2011-2012 and this has improved by a massive 54 points to 61st place in 2014-2015 rankings. Now, give it a thought:

1) Irish financial system performance was effectively underwritten by the state debt and ECB. 

2) Irish Exchequer performance improved significantly since 2011, but banking system remains clogged with bad debts and legacy issues. The Exchequer is beating the targets, the banks are still contracting credit and face flat/declining deposits.

3) Economy (macro side) returned to growth some time ago and with some hiccups it is performing vastly better than the banking system.

How on earth can (1) - (3) above add up to a more dramatic gain in Financial Markets assessment against Macroeconomic assessment?

All of the above puts some serious questions up against the WEF rankings. Not just for Ireland, but for the rest of the world too... Then again, it was in January 2007 in a publication accompanying WEF research that Oliver Wyman claimed that the Anglo was the best-performing bank in the world over the previous 5 years. We know the accuracy of that insight.

4/9/2014: Repaying Ahead of Schedule: Ireland & IMF Loans

Last week Portugal's Expresso published a big article on Irish plans to repay earlier the IMF loans. The link is here: http://fesete.pt/portal/docs/pdf/Revista_Imprensa_30_e_31_Agosto_2014.pdf (pages 37-38)

My view on the subject in full:

1-      The Irish hurry is politically engineered or they understand that the present low sovereign bond yields mood can be a short-term window of opportunity in the Euro area?

In my view, Irish Government interest in refinancing IMF loan is driven by both political and economic considerations. On political front, following heavy defeats in the European and Local elections, the ruling coalition needs to deliver new savings in Exchequer spending to allow for a reduction in austerity pressures in Budget 2015 and more crucially support increased giveaways in the Budgets in 2016 and 2017. Savings of few hundred millions of euros will help. And an ability to claim that the IMF loans have been repaid, even if only by borrowing elsewhere to fund these repayments can go well with the media and the voters tired of the Troika. On economic incentives side, the Government clearly is forwarding borrowing and re-profiling its bonds/debt maturity timings to minimise short-term pain of forthcoming repayments and to safeguard against the potential future increases in the rates and yields. In addition, there is a very apparent need to refinance the IMF loans as the interest charges on these is out of line with the current funding costs for the Government. It is worth noting here that the Irish Government is far from being homogeneous on the incentives side. For example, from Minister for Finance, Michael Noonan's statements, it is pretty clear that the incentives to refinance the IMF loans are predominantly economic and financial. On the other hand, for majority of the Labour Party ministers and a small number of the Fine Gael Cabinet Ministers, the incentives are more political.


2-      The move is also a way of reducing the “official sector” debt in the overall sovereign debt composition (higher than 50 per cent)?

The issue of the 'official sector' debt as opposed to the total public debt is less pressing for the Irish state. Larger share of the official sector debt in total debt composition provides short-term support for bonds prices, as higher official sector debt holdings imply lower private sector debt holdings in the present. However, in the future, the expectation in the markets is that the official sector debt will be refinanced via private markets, thus higher share of official sector debt today is a net negative for the future debt exposures. The result is that higher official share of debt is supporting lower current yields, but rises future yields, making the maturity curve steeper, ceteris paribus. In the current environment, Irish government is not significantly exposed to shorter-term debt markets, but it is exposed to longer termed debt roll-over demands that are consistent with political cycle. Reducing official exposures, therefore, can be supportive of the longer-term view of the debt issuance by the state. However, the issue is marginal to Irish policymakers and certainly secondary to the political and economic benefits the early repayment of the IMF loans brings.


3-      This initiative is useful to upgrade the sovereign debt sustainability?

In the short run, if successful, the initiative will provide improvement in the sovereign cash flows, but will cause the rebalancing of some private portfolios of Irish government debt. In the longer run, the direct effect of a successful refinancing of the IMF loans will most likely lead to little material change in the Government debt dynamics. The issue of the greater longer term concern is what the Irish Government is likely to do with any savings achieved through the debt restructuring. If the funds were to be used to fund earlier closing off of other official loans, there is likely to be a positive impact in terms of markets expectations on supply of Government bonds in the future and the direction of Irish fiscal reforms, both of which will support better risk assessments of the sovereign debt and Irish bonds. This is unlikely, however, due to the strong political momentum in favour of spending the new savings on reversing in part past savings achieved via public sector spending cuts and wages costs moderation. Such a move would likely be detrimental to Ireland's debt sustainability in the longer run. A third alternative is to deploy savings to reduce austerity pressures in the Budget 2015 across tax and spend areas. Tax reductions can be productive in stimulating sustainable growth and thus improving the fiscal position of the state in the longer run; spending cuts reductions will simply be consumed by remaining inefficiencies within the public sector.


4-      The Irish had some interesting political initiatives during the bail-out and post-bail-out period. First they change the annual promissory notes repayments into very long long debt (a kind of soft debt restructuring of 25 billion, 12 per cent of total public debt); then they decided for a “clean” exit opting out from the OMT constraints; and now they take the move to get out of IMF loans. In the framework of the Euro are peripheral countries this is an “innovation”?

The Irish government has taken a clearly distinct path from other euro area 'peripheral' states. However, this path is contingent on a number of relatively idiosyncratic features of the crisis in Ireland. Restructuring of the IBRC Promissory Notes was required due to political pressures of facing continued and clearly defined cost of the IBRC restructuring, but also by the significant pressures from the ECB to close off the ELA lines to IBRC, as well as Frankfurt's unhappiness with the structure of the Promissory Notes. In the end, this policy 'innovation' basically traded off short term savings for longer term costs and increased longer term uncertainty. It achieved substantial improvements in cash flow up front, but, depending on the schedule of bonds sales into the future, created little real savings over the life time of the loans. In the case of 'clean exit', Ireland benefited from the fact that a bulk of its deficits were incurred in extraordinary supports for the banks through 2011. In this sense, the Government had two years of relative stabilisation and decline in fiscal pressures before exiting the Troika programme. No other country in the euro 'periphery' had such deficit and debt dynamics. The move to refinance the IMF loans, however, is probably the first significant policy lead that Ireland deployed, as this move (if successful) will be paving the way for Spain, Portugal and Greece to follow in the future. Throughout the second stage of the euro area sovereign debt crisis (2012-present), the Irish Government deserves the credit for being recognised as being the one most actively seeking marginal improvements in the cash flow and rebalancing of debt costs and maturities within the euro area 'periphery'. But in part, this activism is also down to the fact that Ireland had a longer run in the debt crisis than any other 'peripheral' states and it deployed a plethora of various programmes, creating a policy map that is a patchwork of temporary and poorly structured programmes, like the IBRC Promissory Notes. Repairing these programmes offers Ireland a rather unique chance to get an uplift on some of its exposures.

3/9/2014: R.I.P. That Seismic Game-Changer...

Remember June 29, 2012? No? But you do remember this:

"Speaking as he left the European Council building, Mr Kenny described the new deal as a seismic shift in EU policy, and said it would allow Ireland to re-engineer its overall debt level, which would reduce the burden on Irish taxpayers. "What was deemed to be unachievable has now become a reality and that principle has been established, decided and agreed upon by the council and heads of government," he said."

Following in Mr Kenny's footsteps, then Tanaiste Eamon Gilmore : "described last night’s deal as a "major game changer" for Ireland that will ease its path back to financial markets. "When the details are worked out between July and the end of the year, it will have a real impact on our debt level and will greatly improve our ability to get back into the market and not to need a second bailout," he told RTE’s Morning Ireland."

And so the saga of the 'Deal' promised by the 'For Jobs, For Growth' EU 'Partners' to struggling Ireland is now no longer needed... http://mobile.bloomberg.com/news/2014-09-03/noonan-says-esm-deal-on-bank-debt-no-longer-as-attractive.html Some 796 days after the seismic game changer rolled into town, the idea is all but abandoned to focus instead on 'early repayment of the IMF loans' or in other words, another not-restructuring of government debts.

Yes, the latter will save us some significant dosh and should be pursued. No, abandoning the former means abandoning a hope of still saving more cash, as ESM valuations mechanism is neither determined nor precludes payment of current market consideration/valuation. And no, Minister Noonan still has no solution in sight to the problem of EUR24 billion worth of Government bonds sitting in the Central Bank that will continue burning an ever widening hole in our finances as we proceed to sell them.

The seismic game changers of Europe, the come and go and jobs and growth remain the objective of the economy thrown onto the rocks, in part, with the help of Brussels and Frankfurt...