A recent working paper from the European Central Bank, titled "Modelling Loans to Non-Financial Corporations in the Euro Area" (ECB WP No 989/January 2009) provided a benchmark model for assessing the impact of twin shocks of increase in the policy rate (ECB main interest rate) and increase in the banking system risk premium on the supply of credit to non-financial corporations across the Eurozone. The authors, Christoffer Kok Sørensen, David Marqués Ibáñez and Carlotta Rossi showed that a 25bps increase in the headline interest rate "causes a reduction in bank lending of about 1.4%, 5.4% and 6.4% after 2, 5 and 10 years, respectively. A 20bp increase in the risk premium on bank lending rate reduces bank lending to non-financial corporations by about 0.6%, 4.0% and 5.1% after 2, 5 and 10 years, respectively."
Of course, the first experiment coincides fully with the ECB's reckless 25bps hike in rates between June 2007 and October 2008. The second, however, is even more dramatically important from the point of view of private credit availability. Between August 2007 and today, Irish bank's risk premia on lending to the banks has risen by some 300%, implying, under the ECB model, an expected drop in the credit supply to Irish non-financial corporations of ca 9-11% in 2009-2010, rising to a whooping 75-99% between 2009-2018.
Alternatively, between December 2008 and today, the average weekly CDS spreads on Irish Government bonds have risen some 160bps. Given our state's exposure to banks debts, this is a comparatively reasonable measure of the overall increase in the risk premium on banks lending. Thus, within the span of only 3.5 months, our expected credit supply to non-financial corporations has fallen by the estimated 5-6% for the period 2009-2010, 30-35% for the period of 2009-2013 and by 40-47% for the period of 2009-2018.
As I always said, Mr Lenihan should stop blaming the Americans for this crisis. And he should stop saying that there is no cost to the broader economy from his rushed general debt guarantee to the banks. Instead he should look at his Government's fiscal imbalances, wobbling decisions on financial sector rescue, blanket and unsustainable guarantees to the banks, appeasement of trade unions at the expense of the taxpayers, destruction of the private sector via higher taxation and charges, etc - in other words all the policies that undermine international markets' confidence in Ireland Inc. His policies, responsible directly for the rising risk premium on Irish Government debt are also destroying the private credit markets here. Not only today, but well into the future.
Monday, March 23, 2009
Saturday, March 21, 2009
Boardrooms in denial: McKinsey study & Ireland Inc
McKinsey has done some homework and published impressive findings on the issue of corporate leadership in the current downturn. You can get the article here, if you have access to the Quarterly, but below are some main findings.
"While half of board members describe their boards as effective in managing the crisis, just over a third say their boards have not been effective; 14 percent aren’t sure how to rate their boards’ effectiveness. At the personal level, roughly half of corporate directors say their boards’ chairs haven’t met the demands of the crisis, and a nearly equal percentage of board chairs believe the same about their board members. Though most boards have implemented various changes to their procedures in response to the crisis, 62 percent say their boards need to change even more." Chart below (courtesy of McKinsey) illustrates.
Now, we all by now can be counted as the slaves of 'innovation' fad - the trend in modern management and policy to label every strategy change an 'innovation', but what McKinsey data shows, strategy is still the king when it comes to responding to changing environments.
"Innovative strategies are the key when corporate directors evaluate their boards’ responses. Among the group who say their boards have been effective in responding to the crisis, 60 percent credit the development of new strategies to manage risk and take advantage of new opportunities (chart below). That same area of management is most frequently cited as lacking among respondents at companies with ineffective boards. (This finding is consistent with the results of another recent survey, in which executives said support for innovation should be the overall focus of governments’ actions in response to the crisis.) Other areas that have been addressed by many effective boards are financing and operational needs; at unsuccessful companies, respondents say their boards have been particularly ineffective at tackling talent management and restructuring."
So let me ask you this question. Since November 2008 I spent inordinate amount of time and effort trying to convince some of our top organizations and companies - amongst hardest hit by the current uncertainty in the markets - to set up some formal research function to evaluate various strategic responses to the crisis that they can adopt. The structures I have been proposing are pretty much in line with those summarized by the McKinsey below:
Not a single Irish corporate took up my challenge. Majority of our corporate leaders are sitting on their hands, in words of Leonard Cohen 'Waiting for the miracle to come". But don't take my word for it - here is hard data on the issue.
Here is the truth - 'miracle' ain't coming, folks. Wake up and smell the roses - if you your board/CEO assessments of counterparty contributions is anywhere close to what McKinsey reports, you are screwed. Your corporate structure is rotten from the head down and you need to do an independent appraisal of it from the head down. Waiting around for 'miracles' is not going to do it.
"While half of board members describe their boards as effective in managing the crisis, just over a third say their boards have not been effective; 14 percent aren’t sure how to rate their boards’ effectiveness. At the personal level, roughly half of corporate directors say their boards’ chairs haven’t met the demands of the crisis, and a nearly equal percentage of board chairs believe the same about their board members. Though most boards have implemented various changes to their procedures in response to the crisis, 62 percent say their boards need to change even more." Chart below (courtesy of McKinsey) illustrates.
Now, we all by now can be counted as the slaves of 'innovation' fad - the trend in modern management and policy to label every strategy change an 'innovation', but what McKinsey data shows, strategy is still the king when it comes to responding to changing environments."Innovative strategies are the key when corporate directors evaluate their boards’ responses. Among the group who say their boards have been effective in responding to the crisis, 60 percent credit the development of new strategies to manage risk and take advantage of new opportunities (chart below). That same area of management is most frequently cited as lacking among respondents at companies with ineffective boards. (This finding is consistent with the results of another recent survey, in which executives said support for innovation should be the overall focus of governments’ actions in response to the crisis.) Other areas that have been addressed by many effective boards are financing and operational needs; at unsuccessful companies, respondents say their boards have been particularly ineffective at tackling talent management and restructuring."
So let me ask you this question. Since November 2008 I spent inordinate amount of time and effort trying to convince some of our top organizations and companies - amongst hardest hit by the current uncertainty in the markets - to set up some formal research function to evaluate various strategic responses to the crisis that they can adopt. The structures I have been proposing are pretty much in line with those summarized by the McKinsey below:
Not a single Irish corporate took up my challenge. Majority of our corporate leaders are sitting on their hands, in words of Leonard Cohen 'Waiting for the miracle to come". But don't take my word for it - here is hard data on the issue.Here is the truth - 'miracle' ain't coming, folks. Wake up and smell the roses - if you your board/CEO assessments of counterparty contributions is anywhere close to what McKinsey reports, you are screwed. Your corporate structure is rotten from the head down and you need to do an independent appraisal of it from the head down. Waiting around for 'miracles' is not going to do it.
Friday, March 20, 2009
Daily Economics Update 21/03/2009
Weekly analysis: Irish shares
The volume of shares traded on the New York Stock Exchange has topped the 50-day moving average on six of the seven days that the stock market has been up since March 6 (the day on which the S&P 500 touched its most recent low). The broad benchmark index has gained 15% since that low, sparking hopes of a recovery. The significant issue here is in the volume figure, not in the actual rise in the index, as stronger volumes on a rising trend tend to support more risk-taking and signal investors' support for the trend.
Interestingly, the same, but less pronounced, process has been starting on Friday in the Irish markets.
Chart above shows last week's movements in ISE Total Price Index (IETP), Irish Financials Index (IFIN), AIB, BofI and IL&P shares. Strong upward trajectories here, with significant volatility. But all underpinned by good (well above the average) volumes, as per chart below.
This is less pronounced when we normalize daily volumes by historical average, as done in the chart below.
Less extraordinary change is underway above, because we are using moving averages as normalizing variable, implying that we actually capture the inherently rising volatility in volumes traded here. So the above chart actually suggests that while Friday up-tick in share prices (and pretty much the last three day's rally) was reasonably well underpinned, it will take some time to see if market establishes a solid floor under the share prices.
Monthly results so far remain weak. Only BofI was able, so far, to recover all monthly losses and post some gains. AIB is just hitting the point of return to late February valuations. Given that at the point of sale - at the end of February, beginning of March - the volumes traded were 5-7 times those of the current week's peak, it is hard to see the present recovery as being driven by pure psychology and the spillover from the broader global markets (US' momentary lapse of optimism).
Two more charts: recall that in mid February I argued that downgrades in all three financials will come to an end by February's expiration and all three will settle into a nice slow bear rally, running at virtually parallel rates of growth. Chart below shows that this is happening, indeed.
Once we normalize prices and account for volumes traded, there is nothing surprising in the share prices movements since the beginning of March. And this is exactly where, as I argued before, the markets should be: awaiting news catalysts...
The volume of shares traded on the New York Stock Exchange has topped the 50-day moving average on six of the seven days that the stock market has been up since March 6 (the day on which the S&P 500 touched its most recent low). The broad benchmark index has gained 15% since that low, sparking hopes of a recovery. The significant issue here is in the volume figure, not in the actual rise in the index, as stronger volumes on a rising trend tend to support more risk-taking and signal investors' support for the trend.
Interestingly, the same, but less pronounced, process has been starting on Friday in the Irish markets.
Chart above shows last week's movements in ISE Total Price Index (IETP), Irish Financials Index (IFIN), AIB, BofI and IL&P shares. Strong upward trajectories here, with significant volatility. But all underpinned by good (well above the average) volumes, as per chart below.
This is less pronounced when we normalize daily volumes by historical average, as done in the chart below.
Less extraordinary change is underway above, because we are using moving averages as normalizing variable, implying that we actually capture the inherently rising volatility in volumes traded here. So the above chart actually suggests that while Friday up-tick in share prices (and pretty much the last three day's rally) was reasonably well underpinned, it will take some time to see if market establishes a solid floor under the share prices.Monthly results so far remain weak. Only BofI was able, so far, to recover all monthly losses and post some gains. AIB is just hitting the point of return to late February valuations. Given that at the point of sale - at the end of February, beginning of March - the volumes traded were 5-7 times those of the current week's peak, it is hard to see the present recovery as being driven by pure psychology and the spillover from the broader global markets (US' momentary lapse of optimism).
Two more charts: recall that in mid February I argued that downgrades in all three financials will come to an end by February's expiration and all three will settle into a nice slow bear rally, running at virtually parallel rates of growth. Chart below shows that this is happening, indeed.
Once we normalize prices and account for volumes traded, there is nothing surprising in the share prices movements since the beginning of March. And this is exactly where, as I argued before, the markets should be: awaiting news catalysts...
Rates of decline, degrees of (construction sector) misery
Earlier today (here), I gave some figures from the CSO data release on planning permissions. Here is what I wrote:
"Also per CSO release, the number of dwelling units approved was down 22.4% in year to the end of Q4 2008. In Q4 2008, planning permissions were granted for 10,375 houses as opposed to 13,135 in the Q4 2007, a decrease of 21%. Only 3,392 planning permissions were granted for apartment units, compared with 4,598 in Q4 2007, a decrease of 26.2%. The total number of planning permissions granted for all developments was 8,977, as compared to 12,330 in Q4 2007, a decrease of 27.2%. Dire stuff once again. I will do the detailed analysis of the sectoral decline dynamics in a follow up to this post."
So, as promised here are some graphs illustrating the dire state of affairs in construction industry.
First chart below shows two things:
Now, the next chart shows total number of permissions granted per quarter. Here, the most dramatic trend is also found in 2008, most specifically in Q3 and Q4 2008, when quarterly rates of decline in total number of permissions granted were the steepest for any quarter since Q3 2000. And the rates of decline are accelerating, relative to Q1-Q2 2008.
Lastly, more detailed quarterly date below, by each broader category of permits. I also included trend lines for the period of peak-to-present contractions, showing that Q4 2008 dynamics were consistent with generally accelerating deterioration in all categories of permits, save for 'Other'. This means that we can expect this category to actually fall further and faster in months to come.
So here you have it, for construction industry - there is no bottom in sight, yet...
"Also per CSO release, the number of dwelling units approved was down 22.4% in year to the end of Q4 2008. In Q4 2008, planning permissions were granted for 10,375 houses as opposed to 13,135 in the Q4 2007, a decrease of 21%. Only 3,392 planning permissions were granted for apartment units, compared with 4,598 in Q4 2007, a decrease of 26.2%. The total number of planning permissions granted for all developments was 8,977, as compared to 12,330 in Q4 2007, a decrease of 27.2%. Dire stuff once again. I will do the detailed analysis of the sectoral decline dynamics in a follow up to this post."
So, as promised here are some graphs illustrating the dire state of affairs in construction industry.
First chart below shows two things:
- Numbers of permissions granted (annual totals) for main categories of dwellings and in total - these are now clearly falling at the fastest annual rate;
- Total area of all construction projects applied for is also falling at the fastest rate of decline.
Now, the next chart shows total number of permissions granted per quarter. Here, the most dramatic trend is also found in 2008, most specifically in Q3 and Q4 2008, when quarterly rates of decline in total number of permissions granted were the steepest for any quarter since Q3 2000. And the rates of decline are accelerating, relative to Q1-Q2 2008.
Lastly, more detailed quarterly date below, by each broader category of permits. I also included trend lines for the period of peak-to-present contractions, showing that Q4 2008 dynamics were consistent with generally accelerating deterioration in all categories of permits, save for 'Other'. This means that we can expect this category to actually fall further and faster in months to come.
So here you have it, for construction industry - there is no bottom in sight, yet...
Daily Economics Update 20/03/2009 - II
Ireland
Retail Sales volume decreases by 20.4% in January 2009 relative to a year ago, per CSO report out today. In monthly terms, index fell 9.4%. Mad numbers. And the things are going only to get worse, given the inept, virtually economically illiterate policies this Government has been putting out to date. Motor trades collapsed by 42.2% in January 2009 - in part due to tax hikes in October, in part due to VRT and road tax changes by the Greens, and to a large extent due to income uncertainty being hammered by the additional uncertainty as to the tax hikes the Government is planning to inflict on this already devastated economy. Ex-motor trade the volume of retail sales decreased by 8.1% in January 2009 compared to January 2008 and the monthly change was -0.1%. The value of retail sales decreased by 19.9% in January 2009 compared to January 2008 and decreased by 10.0% in the month. These are the largest annual decreases on record (1974 for volume record, 1962 for value).
Food, beverages & tobacco were down -11.6% in volume and -8.2% in value annually. These are inelastic demand articles, showing the full extent of consumers taking their business out of the Brian^2+Mary-devastated Ireland to the North and the Continent. Virtually every category of durable goods - goods that can be purchased up North and brought back to Ireland - is showing decreases in the 20-30% range. This is the real cost of Government's incompetence and the real indication that for all the wishful thinking our pro-tax-and-spend economists (in academe and SIPTU/ICTU) might deploy arguing that higher VAT will produce higher revenue, the reality of raising VAT (or income tax, for that matter) in terms of Exchequer revenue is going to be brutally contrarian.
Check other commentators' view - here Gerard O'Neill's blog on the topic, comparing the situation to "economic bungee jumping without the bungee". Well put! And here is another good comment worth reading.
Myles' post links to a report produced by the Office of the Revenue Commissioners and the CSO in February 2009, desperately trying to explain away the price differentials between the Republic and NI by all possible means other than those that put blame at the feet of the Government. Myles cuts past the bull&castle stuff in the report and, I think, correctly places most of the blame on the Government policies of squeezing consumers out of their earnings. But the linked report is fun. Fun, because it had to rely on, wait, other Government reports (e.g. June 2008 report by that illustrious data collection and analysis organization - the National Consumer Agency - that wouldn't know a data point if it jumped out of the hedge and bit it, and December 2008 Forfas report that was so poorly prepared and sampled that it was rubbished by several subsequent responses to it, including some from the objective/disinterested organizations and individuals). So I do encourage you to read through the report that Myles links in his blog - it is a good example of self-referential work being done by Government agencies.
Also per CSO release, the number of dwelling units approved was down 22.4% in year to the end of Q4 2008. In Q4 2008, planning permissions were granted for 10,375 houses as opposed to 13,135 in the Q4 2007, a decrease of 21%. Only 3,392 planning permissions were granted for apartment units, compared with 4,598 in Q4 2007, a decrease of 26.2%. The total number of planning permissions granted for all developments was 8,977, as compared to 12,330 in Q4 2007, a decrease of 27.2%. Dire stuff once again. I will do the detailed analysis of the sectoral decline dynamics in a follow up to this post.
Oh, and here is a pearl: Industrial wars are heating up... This is from IFUT - "a professional association and union representing over 1400 staff in third-level institutions" (hat tip to an Anonymous)
"Subject: BALLOT FOR INDUSTRIAL ACTION
I wish to advise you that the Ballot for Industrial Action was counted today and the following is the result:
US
According to the latest data from the US Treasury Department (here) the US public debt just passed $11 trillion. Chart below (courtesy Seeking Alpha - here) illustrates.
If you think Obamanomics will be the New Bill Clinton era, think again - more than $2trillion worth of new US bonds to be issued this year alone is going to see this chart shooting for $13trillion mark by the end of 2009. Thereafter? The sky is the limit.
Although dollar is currently trading on the upside (0.41%) to the euro, given the US public debt trajectory and factoring in the aggressive quantitative easing by the Fed, it is hard to see how the green buck can stay below $1.45-1.47/1euro range...
To update you on General Electric figures concerning GE Capital's (alleged) rude health, here is a link to investor presentation.
An interesting (and pioneering) case is developing in the US: the battle-ravaged AIG filed a lawsuit against Countrywide Financial Corp - one of the largest issuers of MBS. The lawsuit alleges the mortgage lender misrepresented the underwriting standard of loans that the AIG unit insured. The claim is that mortgages packages insured by AIG either violated Countrywide’s own guidelines or contained defects. Surely this paves the road to European insurers to sue mortgage providers and MBS-issuers. The big question for Irish financials is now - how soon can this wave of liabilities reach our own shores?
A Georgia-based FirstCity Bank was closed by the US regulators today, marking the 18th bank failure of 2009. Regulators also shut down some US credit unions with assets of up to $57bn.
Retail Sales volume decreases by 20.4% in January 2009 relative to a year ago, per CSO report out today. In monthly terms, index fell 9.4%. Mad numbers. And the things are going only to get worse, given the inept, virtually economically illiterate policies this Government has been putting out to date. Motor trades collapsed by 42.2% in January 2009 - in part due to tax hikes in October, in part due to VRT and road tax changes by the Greens, and to a large extent due to income uncertainty being hammered by the additional uncertainty as to the tax hikes the Government is planning to inflict on this already devastated economy. Ex-motor trade the volume of retail sales decreased by 8.1% in January 2009 compared to January 2008 and the monthly change was -0.1%. The value of retail sales decreased by 19.9% in January 2009 compared to January 2008 and decreased by 10.0% in the month. These are the largest annual decreases on record (1974 for volume record, 1962 for value).
Food, beverages & tobacco were down -11.6% in volume and -8.2% in value annually. These are inelastic demand articles, showing the full extent of consumers taking their business out of the Brian^2+Mary-devastated Ireland to the North and the Continent. Virtually every category of durable goods - goods that can be purchased up North and brought back to Ireland - is showing decreases in the 20-30% range. This is the real cost of Government's incompetence and the real indication that for all the wishful thinking our pro-tax-and-spend economists (in academe and SIPTU/ICTU) might deploy arguing that higher VAT will produce higher revenue, the reality of raising VAT (or income tax, for that matter) in terms of Exchequer revenue is going to be brutally contrarian.
Check other commentators' view - here Gerard O'Neill's blog on the topic, comparing the situation to "economic bungee jumping without the bungee". Well put! And here is another good comment worth reading.
Myles' post links to a report produced by the Office of the Revenue Commissioners and the CSO in February 2009, desperately trying to explain away the price differentials between the Republic and NI by all possible means other than those that put blame at the feet of the Government. Myles cuts past the bull&castle stuff in the report and, I think, correctly places most of the blame on the Government policies of squeezing consumers out of their earnings. But the linked report is fun. Fun, because it had to rely on, wait, other Government reports (e.g. June 2008 report by that illustrious data collection and analysis organization - the National Consumer Agency - that wouldn't know a data point if it jumped out of the hedge and bit it, and December 2008 Forfas report that was so poorly prepared and sampled that it was rubbished by several subsequent responses to it, including some from the objective/disinterested organizations and individuals). So I do encourage you to read through the report that Myles links in his blog - it is a good example of self-referential work being done by Government agencies.
Also per CSO release, the number of dwelling units approved was down 22.4% in year to the end of Q4 2008. In Q4 2008, planning permissions were granted for 10,375 houses as opposed to 13,135 in the Q4 2007, a decrease of 21%. Only 3,392 planning permissions were granted for apartment units, compared with 4,598 in Q4 2007, a decrease of 26.2%. The total number of planning permissions granted for all developments was 8,977, as compared to 12,330 in Q4 2007, a decrease of 27.2%. Dire stuff once again. I will do the detailed analysis of the sectoral decline dynamics in a follow up to this post.
Oh, and here is a pearl: Industrial wars are heating up... This is from IFUT - "a professional association and union representing over 1400 staff in third-level institutions" (hat tip to an Anonymous)
"Subject: BALLOT FOR INDUSTRIAL ACTION
I wish to advise you that the Ballot for Industrial Action was counted today and the following is the result:
Total Ballots Cast:
Those in Favour:
Those Against:
Spoiled Votes:
Therefore, the majority in favour being above the minimum set out in Rule 16 (b) (ii) we are authorised to participate in the ICTU National One-Day Stoppage scheduled for 30 March 2009..." blah-blah-blah, signed by the General Secretary of IFUT.
Note that per IFUT own website, there are over 1,400 members in this organization. Assuming the vote count reported is correct and that IFUT's rounding rules are the same as those holding for the rest of humanity, the ballot was passed with just 35-36% of the total number of eligible voters on a turnout of just above 50%. Hmmm... without a doubt - a mass-movement, supported by popular outrage against the Government.
US
According to the latest data from the US Treasury Department (here) the US public debt just passed $11 trillion. Chart below (courtesy Seeking Alpha - here) illustrates.
If you think Obamanomics will be the New Bill Clinton era, think again - more than $2trillion worth of new US bonds to be issued this year alone is going to see this chart shooting for $13trillion mark by the end of 2009. Thereafter? The sky is the limit.Although dollar is currently trading on the upside (0.41%) to the euro, given the US public debt trajectory and factoring in the aggressive quantitative easing by the Fed, it is hard to see how the green buck can stay below $1.45-1.47/1euro range...
To update you on General Electric figures concerning GE Capital's (alleged) rude health, here is a link to investor presentation.
An interesting (and pioneering) case is developing in the US: the battle-ravaged AIG filed a lawsuit against Countrywide Financial Corp - one of the largest issuers of MBS. The lawsuit alleges the mortgage lender misrepresented the underwriting standard of loans that the AIG unit insured. The claim is that mortgages packages insured by AIG either violated Countrywide’s own guidelines or contained defects. Surely this paves the road to European insurers to sue mortgage providers and MBS-issuers. The big question for Irish financials is now - how soon can this wave of liabilities reach our own shores?
A Georgia-based FirstCity Bank was closed by the US regulators today, marking the 18th bank failure of 2009. Regulators also shut down some US credit unions with assets of up to $57bn.
Thursday, March 19, 2009
Daily economics update 19/03/2009
Excellent piece on Irish Nationwide excesses here - I would certainly encourage everyone to read through it.
On the news front -
Ireland:
Per CSO (here): the number of overseas trips by Irish residents fell by 8.4% to 502,100 in January 2009 compared to the 548,400 a year ago. Brian^2+Mary's tax on travel and recession biting. And euro's steady rise has taken a bite out of travel to Ireland too: there were 424,200 overseas trips to Ireland in January 2009 - down ca3% on 2008. "Visits by residents of Great Britain accounted for virtually all of this decrease, falling by almost 16,000 (7%) to 208,300." Needless to say - this is costing this country. Visits by residents of Other Europe and North America recorded slight increases to 149,500 and 45,200 respectively. No breakdown on vitally important length of stay and locations visited by foreign tourists here was made available. The crucial point missing here is just how bad is it going to get for Irish hotels, located outside Dublin. In recent months, these palaces of rural kitsch built on the back of senile tax breaks to developers, courtesy (in part) of Brian Cowen in his tenure as Minister for Finance, have been popping out of business like flies in late autumn.
Also courtesy of CSO:
Monthly factory gate prices increased by 0.9% in February 2009, as compared with an 0.2% rise recorded a year ago, the annual increase of 3.9% in February 2009, compared with and annual rate of growth of 3.2% in January 2009. Inflation cometh? Well, possibly. In the year the price index for export sales was up 4.3% while the price index for home sales was up 1.7%.
Wholesale price changes by sector of use shows that: Building and Construction All material prices decreased by 1.2% in the year since February 2008 (surprisingly, very small deflation in the face of all but collapsed construction), and there were increases in Cement (+8.0%), and Stone, sand and gravel (+4.8%). At least Sean Quinn can always go back to mining boulders. Year on year, the price of Capital Goods decreased by 0.1%, and the rate is accelerating to -0.4% last month. The price of Energy products increased by 5.2% in the year since February
2008, while Petroleum fuels decreased by 17.9%. So ESB and Board Gais are still ripping us off, while teh Government is fast asleep. In February 2009, there was a monthly increase in Energy products of 0.4%, while Petroleum fuels increased by 1.6%.
But hey, the good news is that we are now in a 'breeding boom'. According to the CSO, there were 19,027 births registered in Q2 2008, an increase of 1,900 on 2007. Q2 2008 total is 40% higher than in 1999. "This represents an annual birth rate of 17.2 per 1,000 of the population, 1.4 above quarter 2 of 2007. This rate is 2.7 per 1,000 population higher than in
1999."
Incidentally, the latest US data shows that the country population is also booming. The preliminary estimate of births in 2007 rose 1% to 4,317,119, the highest number of births ever registered for the US. The general fertility rate increased also by 1% in 2007, to 69.5 births per 1,000 women aged 15–44 years, the highest level since 1990.
Clearly a good sign for Brian^2+Mary, who can now rest asured that Irish families are producing more future taxpayers for the Government to continue ripping off ordinary families. The bright future is at hand at last for public sector wages and pensions.
US:
There are some signs of longer-term lead indicators revival in the US. Much has been said about housing starts bottoming out and the fact that these are only long-term lead indicators for house prices (see here).
Unemployment - new claims have fallen by 12,000 to 646,000 in t he week ending March 14, while the numbers collecting unemployment benefits rose by 185,000 to a record seasonally adjusted 5.47 million by March 7th. The four-week average of new claims also rose by 3,750 to 654,750, the highest level in 26 years. Still, at least some things are starting to move in the right direction.
In the mean time, General Electric said it now expects GE Capital Finance unit to be profitable in Q1 and for the full year 2009. This follows a recent $9.5bn injection of capital by the parent. This, if holds through the year, is good news, as GEFC has been at the forefront of writing dodgy loans and mortgages to distressed consumers in 2005-2007.
Of course, Wednesday data was also showing some signs of the bottoming in the US recessionary dynamics. US consumer prices increased a seasonally adjusted 0.4% in February, primarily on the back of a 3.3% rise in energy costs (8.3% rise in gasoline prices). Food prices fell 0.1% in the first decline since mid 2007. Core CPI (ex Food and Energy) was up 0.2% - a nice range signaling possible end of deflation.
This is not to say that the current rallies are sustainable. So far, we are starting to see some early stage recovery indicators attempting to find the floor. It will take couple of months for them to start turning. But the markets will remain bearish until the second stage indicators start flashing upward turn-around. These are existent unemployment claims, construction indices, pick up in resale markets activity, PMIs etc. Until then, you'll have to be brave to wade out of the cash safety into individual equities.
And the latest news on the second stage indicators is poor. The index of leading economic indicators - designed to forecast economic activity 6-9 months ahead - fell 0.4% in February, following a gain of 0.1% in January 2009. Overall, 6 out of 10 indicators were up in February and 4 were down. According to Ian Shepherdson, chief economist with High Frequency Economics, "The trend remains clearly downwards, consistent with continued outright contraction in the economy."
On the news front -
Ireland:
Per CSO (here): the number of overseas trips by Irish residents fell by 8.4% to 502,100 in January 2009 compared to the 548,400 a year ago. Brian^2+Mary's tax on travel and recession biting. And euro's steady rise has taken a bite out of travel to Ireland too: there were 424,200 overseas trips to Ireland in January 2009 - down ca3% on 2008. "Visits by residents of Great Britain accounted for virtually all of this decrease, falling by almost 16,000 (7%) to 208,300." Needless to say - this is costing this country. Visits by residents of Other Europe and North America recorded slight increases to 149,500 and 45,200 respectively. No breakdown on vitally important length of stay and locations visited by foreign tourists here was made available. The crucial point missing here is just how bad is it going to get for Irish hotels, located outside Dublin. In recent months, these palaces of rural kitsch built on the back of senile tax breaks to developers, courtesy (in part) of Brian Cowen in his tenure as Minister for Finance, have been popping out of business like flies in late autumn.
Also courtesy of CSO:
Monthly factory gate prices increased by 0.9% in February 2009, as compared with an 0.2% rise recorded a year ago, the annual increase of 3.9% in February 2009, compared with and annual rate of growth of 3.2% in January 2009. Inflation cometh? Well, possibly. In the year the price index for export sales was up 4.3% while the price index for home sales was up 1.7%.Wholesale price changes by sector of use shows that: Building and Construction All material prices decreased by 1.2% in the year since February 2008 (surprisingly, very small deflation in the face of all but collapsed construction), and there were increases in Cement (+8.0%), and Stone, sand and gravel (+4.8%). At least Sean Quinn can always go back to mining boulders. Year on year, the price of Capital Goods decreased by 0.1%, and the rate is accelerating to -0.4% last month. The price of Energy products increased by 5.2% in the year since February
2008, while Petroleum fuels decreased by 17.9%. So ESB and Board Gais are still ripping us off, while teh Government is fast asleep. In February 2009, there was a monthly increase in Energy products of 0.4%, while Petroleum fuels increased by 1.6%.
But hey, the good news is that we are now in a 'breeding boom'. According to the CSO, there were 19,027 births registered in Q2 2008, an increase of 1,900 on 2007. Q2 2008 total is 40% higher than in 1999. "This represents an annual birth rate of 17.2 per 1,000 of the population, 1.4 above quarter 2 of 2007. This rate is 2.7 per 1,000 population higher than in
1999."
Incidentally, the latest US data shows that the country population is also booming. The preliminary estimate of births in 2007 rose 1% to 4,317,119, the highest number of births ever registered for the US. The general fertility rate increased also by 1% in 2007, to 69.5 births per 1,000 women aged 15–44 years, the highest level since 1990.
Clearly a good sign for Brian^2+Mary, who can now rest asured that Irish families are producing more future taxpayers for the Government to continue ripping off ordinary families. The bright future is at hand at last for public sector wages and pensions.
US:
There are some signs of longer-term lead indicators revival in the US. Much has been said about housing starts bottoming out and the fact that these are only long-term lead indicators for house prices (see here).
Unemployment - new claims have fallen by 12,000 to 646,000 in t he week ending March 14, while the numbers collecting unemployment benefits rose by 185,000 to a record seasonally adjusted 5.47 million by March 7th. The four-week average of new claims also rose by 3,750 to 654,750, the highest level in 26 years. Still, at least some things are starting to move in the right direction.
In the mean time, General Electric said it now expects GE Capital Finance unit to be profitable in Q1 and for the full year 2009. This follows a recent $9.5bn injection of capital by the parent. This, if holds through the year, is good news, as GEFC has been at the forefront of writing dodgy loans and mortgages to distressed consumers in 2005-2007.
Of course, Wednesday data was also showing some signs of the bottoming in the US recessionary dynamics. US consumer prices increased a seasonally adjusted 0.4% in February, primarily on the back of a 3.3% rise in energy costs (8.3% rise in gasoline prices). Food prices fell 0.1% in the first decline since mid 2007. Core CPI (ex Food and Energy) was up 0.2% - a nice range signaling possible end of deflation.
This is not to say that the current rallies are sustainable. So far, we are starting to see some early stage recovery indicators attempting to find the floor. It will take couple of months for them to start turning. But the markets will remain bearish until the second stage indicators start flashing upward turn-around. These are existent unemployment claims, construction indices, pick up in resale markets activity, PMIs etc. Until then, you'll have to be brave to wade out of the cash safety into individual equities.
And the latest news on the second stage indicators is poor. The index of leading economic indicators - designed to forecast economic activity 6-9 months ahead - fell 0.4% in February, following a gain of 0.1% in January 2009. Overall, 6 out of 10 indicators were up in February and 4 were down. According to Ian Shepherdson, chief economist with High Frequency Economics, "The trend remains clearly downwards, consistent with continued outright contraction in the economy."
Wednesday, March 18, 2009
Trichet's latest interview - much hype, little substance
Here is an exclusive interview, Jean-Claude Trichet (ECB) gave to Foundation Robert Schuman. And here is my quick and dirty walk through its main points:
"Since the introduction of the euro on 1 January 1999, European citizens have enjoyed a level of price stability which had been achieved in only a few countries. This price stability directly benefits all European citizens, as it protects income and savings and helps to reduce borrowing costs, thereby promoting investment, job creation and lasting prosperity. The euro has been a factor in the dynamism of the European economy. It has enhanced price transparency, it has increased trade, and it has promoted economic and financial integration, not only within the euro area, but also globally."
Not really. Price stability in the eurozone has been pretty average - not as good as in Germany and several other countries over the years before the euro, similar to that in the UK, US and pretty much the rest of the developed world in the 2000-2008 period. A picture is worth a thousand words: since the adoption of the euro through mid 2008 (before deflation), inflation in the euroarea exceeded that in the non-euro EU states...
But it is in growth, dynamism and employment where the 10 years of the euro have recorded a very poor performance. I have already posted on this topic (here, here, and here). EU's growth rates since the early 1990s on have been sluggish (lagging behind the US and UK and only notching above a recessionary Japan). Euro area's unemployment remained well above the US, UK and almost all of the rest of the OECD. Eurozone's employment growth has been better than Japan's, but worse than any other OECD economy. So while the euro did enhance price transparency marginally, it did have very little real benefit in improving the quality of life for an average European. Not surprisingly, the euro is not enjoying a strong ride in terms of its democratic legitimacy (here).
"In recent months we have seen another benefit of the euro: the financial crisis has already demonstrated that... Would Europe have been able to act as swiftly, decisively and coherently if we had not had the single currency uniting us? Would we have been able to protect many separate national currencies from the fallout of the financial crisis? European authorities, parliaments, governments and central banks have shown that Europe is capable of taking decisions, even in the most difficult circumstances."
Again, largely untrue - as of today, there is no coherent eurozone-wide response to the crisis. The EU joint response to date is to issue a €5bn in stimulus, and this is yet to be disbursed. While the euro did protect some countries from a run on their currencies, it also boxed majority of eurozone's exporters into a corner of over-valued medium of exchange. Perhaps most importantly, lack of agreement between the European governments - exemplified in a series of failed summits since Autumn 2008 through today - shows unequivocally that "European authorities, parliaments, governments and central banks" are not "capable of taking decisions, even in the most difficult circumstances". The EU itself. this week, put the total size of its recession busting plans at between 3.3 and 4% of GDP, including welfare spending and yet to be specified and agreed measures. This is still short of the US plan to devote 5.5% of GDP to recovery efforts (source: here).
I agree with Mr Trichet that much-talked-about price increases in the wake of euro adoption have been small across the eurozone, but he is plain wrong in claiming that:
"With the benefit of hindsight, it has become clear that the Governing Council of the ECB ...took the correct decisions in order to guarantee price stability in the euro area in line with our mandate and as required by the Treaty establishing the European Community."
This statement is bordering on being offensive and arrogant. Mr Trichet is fully aware that his action of raising interest rates at the very end of the bubble has done too little too late to cool the markets. Similarly, his reckless increases in the interest rates in July-October 2008, as well as keeping the rates high in the first half of 2008 have spelled a disaster for the eurozone economies and also led to an overvaluation of the euro. His failure to act in July-August 2007 to lower rates was an act of mad denial of the unfolding credit crisis. Between July 2007 and September 2008, Mr Trichet stubbornly insisted that the credit crisis was not a problem for the eurozone.
"According to the ECB staff macroeconomic projections published on 5 March 2009, annual real GDP growth in the euro area is projected to be between -3.2% and -2.2% in 2009, and between -0.7% and +0.7% in 2010."
This is a much more gloomy (and much more realistic) outlook than the EU Commission -1.9% forecast for GDP growth in 2009. But note 2010 figures -0.7 to +0.7 or a central point of 0%. An optimist at heart.
"Since the outbreak of the financial turbulence in August 2007, the Governing Council of the ECB has taken unprecedented action in a timely and decisive manner."
Chart below illustrates...
So nothing short of a failure above.
But what about rescuing troubled countries (APIIGS)? "...My response to questions of the type "What would happen if...?" is that I never comment on absurd hypotheses. I have confidence that the Member States will face up to their responsibilities, including with regard to fiscal policy." In other words, is the answer yes or is it no? Is this answer consistent with what Mr Lenihan told reporters about ECB's readiness to rescue Irish banking system (here)?
Overall, a pretty vacuous interview from a man who obviously has no way of re-assuring anyone that he can handle the current economic crisis in the eurozone. A bit more competent than our Brian^2+Mary partial-indifferential-equation, but a lot less competent than, say, the US Fed&Treasury gang.
"Since the introduction of the euro on 1 January 1999, European citizens have enjoyed a level of price stability which had been achieved in only a few countries. This price stability directly benefits all European citizens, as it protects income and savings and helps to reduce borrowing costs, thereby promoting investment, job creation and lasting prosperity. The euro has been a factor in the dynamism of the European economy. It has enhanced price transparency, it has increased trade, and it has promoted economic and financial integration, not only within the euro area, but also globally."
Not really. Price stability in the eurozone has been pretty average - not as good as in Germany and several other countries over the years before the euro, similar to that in the UK, US and pretty much the rest of the developed world in the 2000-2008 period. A picture is worth a thousand words: since the adoption of the euro through mid 2008 (before deflation), inflation in the euroarea exceeded that in the non-euro EU states...
But it is in growth, dynamism and employment where the 10 years of the euro have recorded a very poor performance. I have already posted on this topic (here, here, and here). EU's growth rates since the early 1990s on have been sluggish (lagging behind the US and UK and only notching above a recessionary Japan). Euro area's unemployment remained well above the US, UK and almost all of the rest of the OECD. Eurozone's employment growth has been better than Japan's, but worse than any other OECD economy. So while the euro did enhance price transparency marginally, it did have very little real benefit in improving the quality of life for an average European. Not surprisingly, the euro is not enjoying a strong ride in terms of its democratic legitimacy (here)."In recent months we have seen another benefit of the euro: the financial crisis has already demonstrated that... Would Europe have been able to act as swiftly, decisively and coherently if we had not had the single currency uniting us? Would we have been able to protect many separate national currencies from the fallout of the financial crisis? European authorities, parliaments, governments and central banks have shown that Europe is capable of taking decisions, even in the most difficult circumstances."
Again, largely untrue - as of today, there is no coherent eurozone-wide response to the crisis. The EU joint response to date is to issue a €5bn in stimulus, and this is yet to be disbursed. While the euro did protect some countries from a run on their currencies, it also boxed majority of eurozone's exporters into a corner of over-valued medium of exchange. Perhaps most importantly, lack of agreement between the European governments - exemplified in a series of failed summits since Autumn 2008 through today - shows unequivocally that "European authorities, parliaments, governments and central banks" are not "capable of taking decisions, even in the most difficult circumstances". The EU itself. this week, put the total size of its recession busting plans at between 3.3 and 4% of GDP, including welfare spending and yet to be specified and agreed measures. This is still short of the US plan to devote 5.5% of GDP to recovery efforts (source: here).
I agree with Mr Trichet that much-talked-about price increases in the wake of euro adoption have been small across the eurozone, but he is plain wrong in claiming that:
"With the benefit of hindsight, it has become clear that the Governing Council of the ECB ...took the correct decisions in order to guarantee price stability in the euro area in line with our mandate and as required by the Treaty establishing the European Community."
This statement is bordering on being offensive and arrogant. Mr Trichet is fully aware that his action of raising interest rates at the very end of the bubble has done too little too late to cool the markets. Similarly, his reckless increases in the interest rates in July-October 2008, as well as keeping the rates high in the first half of 2008 have spelled a disaster for the eurozone economies and also led to an overvaluation of the euro. His failure to act in July-August 2007 to lower rates was an act of mad denial of the unfolding credit crisis. Between July 2007 and September 2008, Mr Trichet stubbornly insisted that the credit crisis was not a problem for the eurozone.
"According to the ECB staff macroeconomic projections published on 5 March 2009, annual real GDP growth in the euro area is projected to be between -3.2% and -2.2% in 2009, and between -0.7% and +0.7% in 2010."
This is a much more gloomy (and much more realistic) outlook than the EU Commission -1.9% forecast for GDP growth in 2009. But note 2010 figures -0.7 to +0.7 or a central point of 0%. An optimist at heart.
"Since the outbreak of the financial turbulence in August 2007, the Governing Council of the ECB has taken unprecedented action in a timely and decisive manner."
Chart below illustrates...
So nothing short of a failure above.But what about rescuing troubled countries (APIIGS)? "...My response to questions of the type "What would happen if...?" is that I never comment on absurd hypotheses. I have confidence that the Member States will face up to their responsibilities, including with regard to fiscal policy." In other words, is the answer yes or is it no? Is this answer consistent with what Mr Lenihan told reporters about ECB's readiness to rescue Irish banking system (here)?
Overall, a pretty vacuous interview from a man who obviously has no way of re-assuring anyone that he can handle the current economic crisis in the eurozone. A bit more competent than our Brian^2+Mary partial-indifferential-equation, but a lot less competent than, say, the US Fed&Treasury gang.
Irish credit III
NTMA is brewing up a plan again (here). This time around, reportedly for a 5-year bond to be launched next Tuesday at 4.5%. Which would be a wishful thinking - the current bid yield is 60bps above that - if not for the possible caveat.
Oh no, the caveat is not about launching the bonds into the outter space from Baikonur Launching Station in Kazakhstan (although potentially only Martians would willingly take Irish paper on these terms and only Borat-land would underwrite such a launch). The caveat - speculative at this junction - is that the 'launch' will aim to place the bond in Irish banks and some into the eurozone CBs. The banks will then go to the ECB and get, ugh, 85c on a euro. A helicopter drop of money with Mr Trichet in the driving seat.
Now, don't take me wrong - NTMA has done some seriously competent job to date and, in my view, represents pretty much the second half of the two functioning financial organizations in this state (the Revenue Commissioners being another). But they are facing an increasingly impossible task of feeding the Brian-Brian-Mary T-Rex of fiscal excesses.
Last time around (see here) only 21% of the bond issue has gone to the willing private buyers. That issue was priced to the market median. This time, 4.50% implies only a 75bps premium over German 10-year bund placed earlier this week. Today's YTM on 10 Plus Bond Index was at 5.90% and no outstanding bond with maturity beyond 2014 was priced at YTM below 5%. So where does it leave the newest issue? My guess - at the ECB via a primary orbit of the Irish banks.
So let's speculate together:
Take 4.5% at 15% ECB discount on, say 79% of bonds placed via banks (and with CBs), 2018 10-year bond and March 16th closing (clean) price of 91.35. You have YTM of 4.64-4.89% - darn close to 4.5% NTMA dangling about, except it is priced off the February issue (extending the maturity horizon).
Now, move forward to 2019-2020 and take the same 4.5% bond at 15% discount, 85% placement with ECB and get 5.6% YTM at today's opening price. What is the YTM consistent with 100% placement at ECB? 6.4%, which in March 16th market corresponds to 11.5 cents discount on a Euro. Also nicely close to today's 15 cents discount at ECB window.
It all adds up iff we are setting up a sale to ECB. At ECB's discounts on near-junk paper (here)...
Oh no, the caveat is not about launching the bonds into the outter space from Baikonur Launching Station in Kazakhstan (although potentially only Martians would willingly take Irish paper on these terms and only Borat-land would underwrite such a launch). The caveat - speculative at this junction - is that the 'launch' will aim to place the bond in Irish banks and some into the eurozone CBs. The banks will then go to the ECB and get, ugh, 85c on a euro. A helicopter drop of money with Mr Trichet in the driving seat.
Now, don't take me wrong - NTMA has done some seriously competent job to date and, in my view, represents pretty much the second half of the two functioning financial organizations in this state (the Revenue Commissioners being another). But they are facing an increasingly impossible task of feeding the Brian-Brian-Mary T-Rex of fiscal excesses.
Last time around (see here) only 21% of the bond issue has gone to the willing private buyers. That issue was priced to the market median. This time, 4.50% implies only a 75bps premium over German 10-year bund placed earlier this week. Today's YTM on 10 Plus Bond Index was at 5.90% and no outstanding bond with maturity beyond 2014 was priced at YTM below 5%. So where does it leave the newest issue? My guess - at the ECB via a primary orbit of the Irish banks.
So let's speculate together:
Take 4.5% at 15% ECB discount on, say 79% of bonds placed via banks (and with CBs), 2018 10-year bond and March 16th closing (clean) price of 91.35. You have YTM of 4.64-4.89% - darn close to 4.5% NTMA dangling about, except it is priced off the February issue (extending the maturity horizon).
Now, move forward to 2019-2020 and take the same 4.5% bond at 15% discount, 85% placement with ECB and get 5.6% YTM at today's opening price. What is the YTM consistent with 100% placement at ECB? 6.4%, which in March 16th market corresponds to 11.5 cents discount on a Euro. Also nicely close to today's 15 cents discount at ECB window.
It all adds up iff we are setting up a sale to ECB. At ECB's discounts on near-junk paper (here)...
A wish list: asking for the right policies
For those of you who missed it, here is my take on Mr Cowen's White House visit - an unedited version of the article in yesterday's Irish Daily Mail.
There is always much ado about the Taoiseach’s visit to the White House on St Patrick’s Day. And yet, for all the opportunities such occasions present, it is only in rare instances of major crises, either North or South of the Border, that any meaningful discussions take place. Well, it is the Annual Shamrock Presentation Ceremony today and we are in a crisis of monumental proportions. So, within the context of the long-running tradition of crisis requests, what exactly should Brian Cowen be asking of Barack Obama today?
First and foremost, a flight of fancy - he should ask for the US to allow Ireland to adopt the dollar as our currency. What a prospect that would be. Set at roughly $0.80-0.85 to 1 euro at conversion, the dollarization would lead to an instantaneous and adequate repricing of our labour, business and capital costs to ensure that these are reflective of our true productivity and real inefficiencies. It would also allow us to fall into the US interest rates regime which is much closer to our real economy’s need than the Germany-focused ECB rates can ever be.
As a side benefit, dollarization would bring our real per capita income in line with that of the median US State – a slightly optimistic valuation, given our lower standard of living. But a good starting point for bringing a sense of reality to our political elites who still believe that we are all fat kittens of the Celtic Tiger when it comes to taxing our incomes.
Too drastic? Indeed, I hear the protests already from the Department of Foreign Affairs. When I asked a senior Irish academic as to what his top priority for the White House visit would be, his reply was: 'Number one? A statehood for Ireland or something similar to the Puerto Rico model!' Now, that might be going a bit too far.
Humour aside, we can restore Irish competitiveness through an alternative, much longer and more painful process of deflating our real wages and cutting excessive fat in the public sector spending. Instead of dollarization-induced devaluation, we can opt for a, say, 30% cut in public sector wages, plus a 20% cut in public sector employment numbers, leading to a ca 40% cut in the Government’s current expenditure. Add to this some 20% cut in the private sector average earnings (by now we are almost half way there in real terms), and we will be on the road to a recovery.
Mr Cowen should also ask the US to fully open bilateral labour and capital markets with Ireland.
In practical terms, the former would imply Brian Cowen announcing today that any US citizen or legal resident can work and reside in Ireland without any restrictions. Following this unilateral opening,the Taoiseach should ask President Obama to reciprocate by opening up the US labour market to Irish citizens and residents.
As a side-benefit, we can also open our education systems to students from both countries, guaranteeing that American students coming to undertake their degree studies in Ireland will face EU resident tuition rates, while Irish students traveling to study in the US will have access to the same merit-based study grants and tuition as US students.
While a less dramatic broadening of the work visa regime is likely to be acceptable for Mr Obama, Ireland should stake a more ambitious goal of achieving a fully mobile labour flow between the two countries.
Extending this mobility to education will make it possible for Ireland to become a real player in international knowledge economics and give us a significant competitive advantage over our EU counterparts. In effect, the UK is already enjoying relatively free mobility of its students when it comes to top US universities, with the likes of University of Chicago even opening a campus there. For Ireland to be able to supply a better educated labour force than that of our closest neighbour, and to compete globally for best students, Brian Cowen needs to either bring about strong incentives for US universities to set up their European campuses here, or to gain access for our best students to US education system, or both.
In capital markets, we should aim to maximally align our regulatory standards while preserving Irish competitive advantage in the area of taxation. Of course, President Obama might have a question or two about our corporate tax regime, especially when it comes to the repatriation of FDI-generated profits. Brian Cowen should stand firm on the issue, asking the White House to exempt Ireland from any forthcoming legislation aiming to restrict US multinationals’ ability to book overseas profits.
During his election campaign, Mr Obama made some sweeping statements about the role played by the ‘temporary’ tax exemptions for corporate profits earned outside the US in fueling the drive for ‘outsourcing of American jobs’ to other countries, including Ireland. This is misguided from the US economy’s perspective, and extremely dangerous from the point of view of Ireland. Mr Cowen can do the US and Ireland a favour by reminding President Obama that higher value activities in the US operations (e.g R&D, managerial innovation, marketing and sales) depend crucially on companies ability to access restricted markets of Europe including via Irish operations.
In exchange, as a goodwill gesture and, coincidentally, to the benefit of our own traded services sector, Mr Cowen should promise President Obama to veto all and any EU proposals for unified international financial regulation. This is something that the US Administration opposes because of the threat such bureaucratization poses to the largest services sector in the world. Incidentally, this is also something Ireland should oppose if we were to retain and expand our competitive position in the sector.
Closely linked to this should be a request to extend US accountancy and governance rules to Irish plcs. Think of the benefits that Securities and Exchange Commission (SEC) oversight and law enforcement would have brought to the Anglo Irish Bank shenanigans or to the financial acrobatics at the Irish Nationwide and the IL&P? In the wake of the latest annual results publication, only SEC had the guts to question AIB’s bad debt provisions.
Think of the savings to the Exchequer and the gains to regulatory efficiency that this country would have achieved were our regulators acting under the US conditions. Of course, Mr Cowen might suggest that Ireland and the US also jointly do something about restricting careless lending practices by the banks in the future and limit the excessive risk-adjusted gearing in the countries’ financial systems.
Mr Cowen might also ask President Obama to extend his latest US Federal Government pay containment measures to Ireland. In fact, Mr Cowen can benchmark our public sector wages to those in the US – starting with a ca 60% cut of his own and Cabinet’s salaries. Our senior regulators and civil servants can also enjoy US-comparable earnings at a ca40-50% discount to their current wages.
Lastly, as a personal favour, I would like Mr Cowen to ask the US President to place a limit on the number of Irish public and local authorities officials flying to the US for St Patrick's Day celebrations and to impose a strict limit on FAS’ spending during its visits to NASA, Disneyland and Sea World in the future. As vital as these locations might be to generating future employment for numerous Irish astronauts, aquarium minders and fantasy castles managers, we are, after all, in a crisis. Time to slim down and get fitter. Presenting shamrocks and drawing pints will have to wait.
There is always much ado about the Taoiseach’s visit to the White House on St Patrick’s Day. And yet, for all the opportunities such occasions present, it is only in rare instances of major crises, either North or South of the Border, that any meaningful discussions take place. Well, it is the Annual Shamrock Presentation Ceremony today and we are in a crisis of monumental proportions. So, within the context of the long-running tradition of crisis requests, what exactly should Brian Cowen be asking of Barack Obama today?
First and foremost, a flight of fancy - he should ask for the US to allow Ireland to adopt the dollar as our currency. What a prospect that would be. Set at roughly $0.80-0.85 to 1 euro at conversion, the dollarization would lead to an instantaneous and adequate repricing of our labour, business and capital costs to ensure that these are reflective of our true productivity and real inefficiencies. It would also allow us to fall into the US interest rates regime which is much closer to our real economy’s need than the Germany-focused ECB rates can ever be.
As a side benefit, dollarization would bring our real per capita income in line with that of the median US State – a slightly optimistic valuation, given our lower standard of living. But a good starting point for bringing a sense of reality to our political elites who still believe that we are all fat kittens of the Celtic Tiger when it comes to taxing our incomes.
Too drastic? Indeed, I hear the protests already from the Department of Foreign Affairs. When I asked a senior Irish academic as to what his top priority for the White House visit would be, his reply was: 'Number one? A statehood for Ireland or something similar to the Puerto Rico model!' Now, that might be going a bit too far.
Humour aside, we can restore Irish competitiveness through an alternative, much longer and more painful process of deflating our real wages and cutting excessive fat in the public sector spending. Instead of dollarization-induced devaluation, we can opt for a, say, 30% cut in public sector wages, plus a 20% cut in public sector employment numbers, leading to a ca 40% cut in the Government’s current expenditure. Add to this some 20% cut in the private sector average earnings (by now we are almost half way there in real terms), and we will be on the road to a recovery.
Mr Cowen should also ask the US to fully open bilateral labour and capital markets with Ireland.
In practical terms, the former would imply Brian Cowen announcing today that any US citizen or legal resident can work and reside in Ireland without any restrictions. Following this unilateral opening,the Taoiseach should ask President Obama to reciprocate by opening up the US labour market to Irish citizens and residents.
As a side-benefit, we can also open our education systems to students from both countries, guaranteeing that American students coming to undertake their degree studies in Ireland will face EU resident tuition rates, while Irish students traveling to study in the US will have access to the same merit-based study grants and tuition as US students.
While a less dramatic broadening of the work visa regime is likely to be acceptable for Mr Obama, Ireland should stake a more ambitious goal of achieving a fully mobile labour flow between the two countries.
Extending this mobility to education will make it possible for Ireland to become a real player in international knowledge economics and give us a significant competitive advantage over our EU counterparts. In effect, the UK is already enjoying relatively free mobility of its students when it comes to top US universities, with the likes of University of Chicago even opening a campus there. For Ireland to be able to supply a better educated labour force than that of our closest neighbour, and to compete globally for best students, Brian Cowen needs to either bring about strong incentives for US universities to set up their European campuses here, or to gain access for our best students to US education system, or both.
In capital markets, we should aim to maximally align our regulatory standards while preserving Irish competitive advantage in the area of taxation. Of course, President Obama might have a question or two about our corporate tax regime, especially when it comes to the repatriation of FDI-generated profits. Brian Cowen should stand firm on the issue, asking the White House to exempt Ireland from any forthcoming legislation aiming to restrict US multinationals’ ability to book overseas profits.
During his election campaign, Mr Obama made some sweeping statements about the role played by the ‘temporary’ tax exemptions for corporate profits earned outside the US in fueling the drive for ‘outsourcing of American jobs’ to other countries, including Ireland. This is misguided from the US economy’s perspective, and extremely dangerous from the point of view of Ireland. Mr Cowen can do the US and Ireland a favour by reminding President Obama that higher value activities in the US operations (e.g R&D, managerial innovation, marketing and sales) depend crucially on companies ability to access restricted markets of Europe including via Irish operations.
In exchange, as a goodwill gesture and, coincidentally, to the benefit of our own traded services sector, Mr Cowen should promise President Obama to veto all and any EU proposals for unified international financial regulation. This is something that the US Administration opposes because of the threat such bureaucratization poses to the largest services sector in the world. Incidentally, this is also something Ireland should oppose if we were to retain and expand our competitive position in the sector.
Closely linked to this should be a request to extend US accountancy and governance rules to Irish plcs. Think of the benefits that Securities and Exchange Commission (SEC) oversight and law enforcement would have brought to the Anglo Irish Bank shenanigans or to the financial acrobatics at the Irish Nationwide and the IL&P? In the wake of the latest annual results publication, only SEC had the guts to question AIB’s bad debt provisions.
Think of the savings to the Exchequer and the gains to regulatory efficiency that this country would have achieved were our regulators acting under the US conditions. Of course, Mr Cowen might suggest that Ireland and the US also jointly do something about restricting careless lending practices by the banks in the future and limit the excessive risk-adjusted gearing in the countries’ financial systems.
Mr Cowen might also ask President Obama to extend his latest US Federal Government pay containment measures to Ireland. In fact, Mr Cowen can benchmark our public sector wages to those in the US – starting with a ca 60% cut of his own and Cabinet’s salaries. Our senior regulators and civil servants can also enjoy US-comparable earnings at a ca40-50% discount to their current wages.
Lastly, as a personal favour, I would like Mr Cowen to ask the US President to place a limit on the number of Irish public and local authorities officials flying to the US for St Patrick's Day celebrations and to impose a strict limit on FAS’ spending during its visits to NASA, Disneyland and Sea World in the future. As vital as these locations might be to generating future employment for numerous Irish astronauts, aquarium minders and fantasy castles managers, we are, after all, in a crisis. Time to slim down and get fitter. Presenting shamrocks and drawing pints will have to wait.
Tuesday, March 17, 2009
Housekeeping and S&P
You can see a quick snippet of my contribution to the Bloomberg report on Ireland today here.
But for now, the main piece of news of the week so far is the S&P downgrade of Irish Banks.
The downgrade is the second in just 4 months - took Ireland's Banking Industry Country Risk Assessment from Group 1 (prior to December), to Group 2 in December and now to Group 3. We are now in the sick puppies crate with Portugal, Austria and Japan. The first (December 2008) downgrade was based on S&P's negative assessment of banks loan books exposures to housing and construction. The latest downgrade is based on an all-but-silly argument that Anglo Irish Bank loans scandal has undermined reputation of Irish Banking, as if a litany of bad loans did nothing of the sort, or as if unethical manipulation of the banks books via cross deposits between IL&P and Anglo did nothing of the sorts.
More importantly, S&P has also threatened a further downgrade due shortly - this time on the back of "significantly weaker long-term prospects for the Irish economy". Such a downgrade will place us in a banking ICU with Greece, Israel, the Czech Republic, Slovakia and Slovenia in the neighboring beds.
But the real unspoken issue remain unaddressed.
Rome or Reykjavik?
In the mean time, economic silliness (I am avoiding here a much stronger word) continues to grip the Government, as the latest statements by Minister for Finance (see here), attest.
“A lot of political pundits say the choice next time for Ireland will be Rome or Reykjavik,” Lenihan said on Bloomberg TV today. “Most people will vote for Rome."
Yes, Minister, we get the historical pun. But do you actually mean what you are saying?
Ireland is already in the company of Rome in many senses. Being a part of the APIIGS countries we are in a club of the sickliest countries in Europe (and OECD) alongside Italy. We have surpassed Italian levels of unemployment and, should we adopt Minister Lenihan's suggestion and chose Rome, we will be settling into a trend (long-term) growth rate of 0.5% annually over the next 30 odd years. But then again, we have already surpassed Italy as a more corrupt society (according to the World Bank) and as our economy shrinks by 7+% this year and 16% between 2008-2010, we are well on track to be the Mezzogiorno of the North Atlantic (minus weather, food, wine and beaches of Sicily). And, of course we are heading for the glorious 100%+ public debt to GDP ratio should Brian Cowen, have his way with the economy. So, Mr Lenihan, is Irish Government really bent on getting Ireland to join Rome? Is this what you will be telling the international investors?
In reality, what this comment illustrates is that Mr Lenihan is much better fit to be a Minister for Justice than a Minister for Finance, for even his European references set is so limited to the legalities of European treaties that he forgets that the brief he has is in finance!
But there was more to Lenihan's comments than Rome v Reykjavik blunder. “The ECB stands behind the entire Irish banking system, just as the Bank of England will stand behind the banks in the U.K.,” said Lenihan. “So there’s no default issue in relation to the banking system.”
Irony has it, I predicted after the last issue of Government bonds in February that in effect Ireland is already being rescued by the ECB. Now, we have a confirmation. Mr Lenihan's reckless actions on Irish banks have been preconditioned upon his belief that the ECB is going to back him up!
Here are two follow up questions to this statement:
1) If this is true, when did you negotiate with the ECB actual arrangements for emergency financing for Irish banks?
2) Do Germans and French know about this ECB commitment to Ireland?
Lenihan said nothing on this, other than claim that Ireland will be "in a position to fund ourselves as a state this year and the European Central Bank stands behind our banking system... So we’re a solvent state and we’re well able to do our business.” This is eerily reminiscent of Eugene Sheehy's infamous battle cry that AIB will not take any public money last Autumn. We know how that one turned out in the end...
Setting aside the arguments as to whether or not Mr Lenihan can actually finance our Exchequer deficit this year, can we please see the actual contract that commits the ECB to underpinning the Irish Government guarantees to the Irish banks and provide capital to these banks?
But for now, the main piece of news of the week so far is the S&P downgrade of Irish Banks.
The downgrade is the second in just 4 months - took Ireland's Banking Industry Country Risk Assessment from Group 1 (prior to December), to Group 2 in December and now to Group 3. We are now in the sick puppies crate with Portugal, Austria and Japan. The first (December 2008) downgrade was based on S&P's negative assessment of banks loan books exposures to housing and construction. The latest downgrade is based on an all-but-silly argument that Anglo Irish Bank loans scandal has undermined reputation of Irish Banking, as if a litany of bad loans did nothing of the sort, or as if unethical manipulation of the banks books via cross deposits between IL&P and Anglo did nothing of the sorts.
More importantly, S&P has also threatened a further downgrade due shortly - this time on the back of "significantly weaker long-term prospects for the Irish economy". Such a downgrade will place us in a banking ICU with Greece, Israel, the Czech Republic, Slovakia and Slovenia in the neighboring beds.
But the real unspoken issue remain unaddressed.
- The Irish taxpayers have guaranteed the banking system's liabilities, nationalized one of the big 3 banks and committed to injecting capital into other.
- Yet, the ability of the Exchequer to cover these commitments has been deteriorating at a speed that would make Einstein's theory of relativity go bonkers.
- In the mean time, not-too-often remembered smaller banks, building societies and credit unions are getting their closets opened up by scandal-seeking media. And rich pickings these parish-pump financial institutions present under the inspecting lens of public attention.
- All along, housing markets are still falling, commercial property is heading South like a flock of geese sensing a winter chill and the economy is shrinking like ceran wrap on a fireplace mantle.
Rome or Reykjavik?
In the mean time, economic silliness (I am avoiding here a much stronger word) continues to grip the Government, as the latest statements by Minister for Finance (see here), attest.
“A lot of political pundits say the choice next time for Ireland will be Rome or Reykjavik,” Lenihan said on Bloomberg TV today. “Most people will vote for Rome."
Yes, Minister, we get the historical pun. But do you actually mean what you are saying?
Ireland is already in the company of Rome in many senses. Being a part of the APIIGS countries we are in a club of the sickliest countries in Europe (and OECD) alongside Italy. We have surpassed Italian levels of unemployment and, should we adopt Minister Lenihan's suggestion and chose Rome, we will be settling into a trend (long-term) growth rate of 0.5% annually over the next 30 odd years. But then again, we have already surpassed Italy as a more corrupt society (according to the World Bank) and as our economy shrinks by 7+% this year and 16% between 2008-2010, we are well on track to be the Mezzogiorno of the North Atlantic (minus weather, food, wine and beaches of Sicily). And, of course we are heading for the glorious 100%+ public debt to GDP ratio should Brian Cowen, have his way with the economy. So, Mr Lenihan, is Irish Government really bent on getting Ireland to join Rome? Is this what you will be telling the international investors?
In reality, what this comment illustrates is that Mr Lenihan is much better fit to be a Minister for Justice than a Minister for Finance, for even his European references set is so limited to the legalities of European treaties that he forgets that the brief he has is in finance!
But there was more to Lenihan's comments than Rome v Reykjavik blunder. “The ECB stands behind the entire Irish banking system, just as the Bank of England will stand behind the banks in the U.K.,” said Lenihan. “So there’s no default issue in relation to the banking system.”
Irony has it, I predicted after the last issue of Government bonds in February that in effect Ireland is already being rescued by the ECB. Now, we have a confirmation. Mr Lenihan's reckless actions on Irish banks have been preconditioned upon his belief that the ECB is going to back him up!
Here are two follow up questions to this statement:
1) If this is true, when did you negotiate with the ECB actual arrangements for emergency financing for Irish banks?
2) Do Germans and French know about this ECB commitment to Ireland?
Lenihan said nothing on this, other than claim that Ireland will be "in a position to fund ourselves as a state this year and the European Central Bank stands behind our banking system... So we’re a solvent state and we’re well able to do our business.” This is eerily reminiscent of Eugene Sheehy's infamous battle cry that AIB will not take any public money last Autumn. We know how that one turned out in the end...
Setting aside the arguments as to whether or not Mr Lenihan can actually finance our Exchequer deficit this year, can we please see the actual contract that commits the ECB to underpinning the Irish Government guarantees to the Irish banks and provide capital to these banks?
Eurozone: The High Cost of [Corporatist] Complacency
An interesting article from the Economists’ Voice (Éloi Laurent "Eurozone: The High Cost of Complacency", January 2009) argues that while the Euro is politically and economically attractive to a host of collapsing smaller economies, the Eurozone itself "is inert".
"How to make sense of this seeming contradiction?" asks Laurent. "It is tempting to blame America for Europe’s recession, but... Actually, if we view the last decade as a whole, we see that European passivity has cost it dearly and there lies the key to the Eurozone’s still unfulfilled promise."
Laurent's view of the Eurozone's failures reads like a description of what has happened in Ireland.
"...The ten years between 1999 and 2008 have been a golden era. There probably was not a better time in contemporary history to launch a monetary union and, learning by doing, to build efficient and resilient economic policy institutions to ensure its prosperity and sustainability. Yet, the decade was largely lost by Europeans in vain doctrinal debates and sterile blame game sessions. ...The reason [that technocratic debate] absorbs so much time and energy [of the European leadership] is that, absent a true democracy, economic doctrine has become over the years the justification of political power in Europe."
Laurent is only partially correct. Indeed, the technocratic economic doctrine debates have been a marker for European political landscape since 1999, but the debates became so central to the EU functioning because of the dogmatic pursuit of social consensus as the only benchmark for policy success. In other words, absent real democracy, the EU had to devise a deus ex machina replica of legitimizing democratic institutions. This is what social consensus - or corporatism, as it became known in Europe in the 1930s and 1940s - predicated upon.
The problem is that social consensus fails when ti comes to the need to formulate potentially unpopular and decisive policies. "With virtually the whole planet booming over the past decade, the Eurozone has, since its creation in 1999, displayed the worse performance in terms of growth and unemployment of the developed world, barely ahead of a depressed Japan."
What was the EU response to this crisis of insufficient growth? "One might conclude from [international comparisons] that the value added of the Euro is so far, at best, dubious and wonder why. But the European Commission did not, and recommended instead more of the same economic policies, stressing the importance of “budgetary surveillance” for the future and dismissing calls for improving economic cooperation and coordination among member states. [Thus] the ECB made in 2008 the exact same mistake as in 2001 by resisting a necessary cut in interest rates (actually, it increased interest rates in July 2008), waiting for the worst to be certain instead of trying to prevent it."
Laurent omits to mention the laughably naive EU Commission road maps and 'agendas' - the Lisbon I and Lisbon II frameworks for economic growth, the Barroso's Social Economy lunacy, and lastly the idea that geopolitical enlargement will resolve economic growth and political legitimacy deficits. For their claim that European Unification is predicated on a deeply historical rooting of European people, this Commission is failing a primary school lesson in history: the same strategies for legitimization have marked the Ottoman and Austro-Hungarian Empires, as well as a bag full of unsavory regimes in the early 20th century Europe.
But, getting back to the economy: few probably remember today the 1970s. Back then, it took European countries more than double the length of time it took the US to come out of the crises, despite the fact that Europe had at the time much lower dependency on imported oil than the US. Why? That European disease of not willing to take the necessary economic policy adjustments. The same sclerosis is present within the Eurozone today. "After the 2001 recession, [thanks to the Fed active intervention] it took a year for the US to go from negative to vigorous growth. In the Eurozone, it took five years to fully recover. As for fiscal policy, ...a true European stimulus is still nowhere in sight, even as the economic outcome worsens by the day."
Taking real policy decisions and implementing new policies is something that is clearly not en vogue in Brussels. "Facts speak for themselves in this regard: the financial and banking crisis started to receive an adequate response after an improvised meeting of head of states and governments of the Eurozone last October, a standing body that does not even exist in
European treaties. As [Jean-Paul] Fitoussi observed: “the structure of power is such in Europe that those institutions who have the instruments to react have not the legitimacy to do so while those which have the legitimacy no longer have the instruments. Hence the passivity of European policy reaction.”
This is a sweeping (and absolutely apt) description of the entire political illegitimacy of the current EU power structures. But it is also an apt description of the Irish governance disease.
Just as an unelected and unaccountable EU Commission (and its Directorates) has no capacity to legitimize its rule, except via an elitist consensus bought by providing a guarantee of access to the feeding troughs of Brussels, so the elected European Parliament has no capacity to exercise its democratic mandate. Just as an unelected and unaccountable Social Partnership in Ireland has no capacity to rule except by bribing its way through all and any changes in economic environment, the elected Dail has been reduced to a nearly irrelevant student debating society. In both cases, corporatism has won and society has lost.
In 1934, Eoin O'Duffy - an Irish corporatist - stated: "We must lead the people always; nationally, socially and economically. We must clear up the economic mess and right the glaring social injustices of to-day by the corporative organization of Irish life; but before everything we must give a national lead to our people... The first essential is national unity. We can only have that when the Corporative system is accepted."
Am I the only one who sees clear parallels between this historical statement and our Government's (and EU's) active suppression of any dissent and the pursuit of a social-consensus model of policy formulation?
"How to make sense of this seeming contradiction?" asks Laurent. "It is tempting to blame America for Europe’s recession, but... Actually, if we view the last decade as a whole, we see that European passivity has cost it dearly and there lies the key to the Eurozone’s still unfulfilled promise."
Laurent's view of the Eurozone's failures reads like a description of what has happened in Ireland.
"...The ten years between 1999 and 2008 have been a golden era. There probably was not a better time in contemporary history to launch a monetary union and, learning by doing, to build efficient and resilient economic policy institutions to ensure its prosperity and sustainability. Yet, the decade was largely lost by Europeans in vain doctrinal debates and sterile blame game sessions. ...The reason [that technocratic debate] absorbs so much time and energy [of the European leadership] is that, absent a true democracy, economic doctrine has become over the years the justification of political power in Europe."
Laurent is only partially correct. Indeed, the technocratic economic doctrine debates have been a marker for European political landscape since 1999, but the debates became so central to the EU functioning because of the dogmatic pursuit of social consensus as the only benchmark for policy success. In other words, absent real democracy, the EU had to devise a deus ex machina replica of legitimizing democratic institutions. This is what social consensus - or corporatism, as it became known in Europe in the 1930s and 1940s - predicated upon.
The problem is that social consensus fails when ti comes to the need to formulate potentially unpopular and decisive policies. "With virtually the whole planet booming over the past decade, the Eurozone has, since its creation in 1999, displayed the worse performance in terms of growth and unemployment of the developed world, barely ahead of a depressed Japan."
What was the EU response to this crisis of insufficient growth? "One might conclude from [international comparisons] that the value added of the Euro is so far, at best, dubious and wonder why. But the European Commission did not, and recommended instead more of the same economic policies, stressing the importance of “budgetary surveillance” for the future and dismissing calls for improving economic cooperation and coordination among member states. [Thus] the ECB made in 2008 the exact same mistake as in 2001 by resisting a necessary cut in interest rates (actually, it increased interest rates in July 2008), waiting for the worst to be certain instead of trying to prevent it."
Laurent omits to mention the laughably naive EU Commission road maps and 'agendas' - the Lisbon I and Lisbon II frameworks for economic growth, the Barroso's Social Economy lunacy, and lastly the idea that geopolitical enlargement will resolve economic growth and political legitimacy deficits. For their claim that European Unification is predicated on a deeply historical rooting of European people, this Commission is failing a primary school lesson in history: the same strategies for legitimization have marked the Ottoman and Austro-Hungarian Empires, as well as a bag full of unsavory regimes in the early 20th century Europe.
But, getting back to the economy: few probably remember today the 1970s. Back then, it took European countries more than double the length of time it took the US to come out of the crises, despite the fact that Europe had at the time much lower dependency on imported oil than the US. Why? That European disease of not willing to take the necessary economic policy adjustments. The same sclerosis is present within the Eurozone today. "After the 2001 recession, [thanks to the Fed active intervention] it took a year for the US to go from negative to vigorous growth. In the Eurozone, it took five years to fully recover. As for fiscal policy, ...a true European stimulus is still nowhere in sight, even as the economic outcome worsens by the day."
Taking real policy decisions and implementing new policies is something that is clearly not en vogue in Brussels. "Facts speak for themselves in this regard: the financial and banking crisis started to receive an adequate response after an improvised meeting of head of states and governments of the Eurozone last October, a standing body that does not even exist in
European treaties. As [Jean-Paul] Fitoussi observed: “the structure of power is such in Europe that those institutions who have the instruments to react have not the legitimacy to do so while those which have the legitimacy no longer have the instruments. Hence the passivity of European policy reaction.”
This is a sweeping (and absolutely apt) description of the entire political illegitimacy of the current EU power structures. But it is also an apt description of the Irish governance disease.
Just as an unelected and unaccountable EU Commission (and its Directorates) has no capacity to legitimize its rule, except via an elitist consensus bought by providing a guarantee of access to the feeding troughs of Brussels, so the elected European Parliament has no capacity to exercise its democratic mandate. Just as an unelected and unaccountable Social Partnership in Ireland has no capacity to rule except by bribing its way through all and any changes in economic environment, the elected Dail has been reduced to a nearly irrelevant student debating society. In both cases, corporatism has won and society has lost.
In 1934, Eoin O'Duffy - an Irish corporatist - stated: "We must lead the people always; nationally, socially and economically. We must clear up the economic mess and right the glaring social injustices of to-day by the corporative organization of Irish life; but before everything we must give a national lead to our people... The first essential is national unity. We can only have that when the Corporative system is accepted."
Am I the only one who sees clear parallels between this historical statement and our Government's (and EU's) active suppression of any dissent and the pursuit of a social-consensus model of policy formulation?
Sunday, March 15, 2009
What if interest rates rise?
Just to stake some forward looking ground - here is a quick thought.
While we are preoccupied with the current crises, one has to wonder what the future might hold. Consider the following scenario.
Mid-2010 and German economy recovers slightly ahead of the rest of the Eurozone. Why? Because Germany is more exposed to global growth and thus will respond to renewed global demand for investment and consumer goods; and because German consumption has been suppressed since the mid 1990s, creating a significant domestic demand overhang. The ECB's response will be to immediately raise interest rates.
Of course, prior to German recovery, Manufacturing Purchasing Indices and other leading indicators will be flashing red for some time, prompting an earlier rise in interest rates in early 2010. So, say, Eurozone enters 2010 with 0.5-0.75% rate, goes to 1.0-1.25% by June 2010 and jumps to 2.0-2.25% by the end of 2010.
What happens then? Ireland, will by now have much higher taxes (three-tier rates structure of 25%, 48% and 52%), much lower standard deductions and standard rate ceiling, with higher PRSI and pensions tax relief at a standard rate. This will mean that before ECB rates hikes, our mortgages burden will be on par with those that prevailed at the onset of the crisis, but against a backdrop of lower disposable income. Now, as interest rates revert to rising, the burden of debt will start climbing up against decimated household incomes. Homeowners, with savings exhausted during the 2009-2010 downturn will be feeling more heat than they do today. Foreclosures will rise and personal insolvencies will go sky high. Consumption will remain suppressed, but this time, there will be no boost in savings. Ireland Inc might suffer a complete fall-out of the growth re-start.
An example
Here are some numbers. Assume we take a family with Q1 2008 after-tax income of €100 and a mortgage burden of €35 (35% of the after-tax income). By Q1 2009, due to falling interest rates, this family's mortgage costs will have fallen 26% (roughly 10% per each 1% fall in ECB rates). At the same time, the family income has declined to €91 due to increased taxation (Budget 2009) and recession. In Q1 2009, family mortgage burden was €26 or 28.5% of the disposable income.
Now, assume we are in Q4 2009 and recession continues and Mr Lenihan has stuck to his promises and raided the family income to 25-48-52% tax rates outlined above). The family after-tax disposable income now stands at €82, while the ECB has lowered the rate to 0.75% from current 1.50%. The family is now paying €24 in mortgage which constitutes a mortgage burden of 29.25% of the family income.
We go to Q1 2010 next. Recession and Mr Lenihan keep on robbing the family of income, so its after-tax take home pay is now €79.5. But due to advance leading indicators flashing recovery for Germany, the ECB tightens the rates a notch to 1.0%. Family mortgage burden jumps to 31% as the twin blades of higher taxes and interest rates inflict two simultaneous cuts to household's spending power.
On to Q4 2010. Things are going swimmingly in Berlin, so the ECB races with rates increases. We have three scenarios:
Scenario 1: relative stagnation in Ireland - so our income remains at €79, while German expansion drives rates to 1.75%. Irish family's mortgage burden jumps to 33.4% of the disposable income.
Scenario 2: recession in Ireland continues, with income falling to €76, while more mild German expansion drives the ECB to raise rates to 1.5%. Irish family's mortgage burden jumps to 34%.
Scenario 3: recovery shines upon Ireland and our income rises to €80, while rapid growth in Germany drives rates up to 2.25%. Our family's mortgage repayment burden is now at 36% of the disposable after-tax income.
Conclusion
May be Alan Ahearne, in his new capacity, can tell Minister Lenihan this much? Or anyone from a myriad of our vociferous social-democratic economists, begging the Government today to raise taxes. Little hope. His (and their) policy advice to date has been pretty much in line with the Government's efforts to demolish private sector workers in order to save public sector jobs. Then again, neither Ahearne, no Lenihan will be losing much sleep over ordinary families who will be unable to stay afloat in this WunderWorld of richly rewarded public sector and impoverished private sector workers that they are creating.
Recession? Raise taxes. Public finance busting at the seams? Raise taxes. Unemployment? Raise taxes. Public sector inefficiencies? Raise taxes. Exports plunging? Raise taxes. Banks falling off the cliff? Raise taxes. And always blame the outside world for any trouble we might land ourselves into. Classic economic problems with uniquely Irish responses.
"Pints!"
While we are preoccupied with the current crises, one has to wonder what the future might hold. Consider the following scenario.
Mid-2010 and German economy recovers slightly ahead of the rest of the Eurozone. Why? Because Germany is more exposed to global growth and thus will respond to renewed global demand for investment and consumer goods; and because German consumption has been suppressed since the mid 1990s, creating a significant domestic demand overhang. The ECB's response will be to immediately raise interest rates.
Of course, prior to German recovery, Manufacturing Purchasing Indices and other leading indicators will be flashing red for some time, prompting an earlier rise in interest rates in early 2010. So, say, Eurozone enters 2010 with 0.5-0.75% rate, goes to 1.0-1.25% by June 2010 and jumps to 2.0-2.25% by the end of 2010.
What happens then? Ireland, will by now have much higher taxes (three-tier rates structure of 25%, 48% and 52%), much lower standard deductions and standard rate ceiling, with higher PRSI and pensions tax relief at a standard rate. This will mean that before ECB rates hikes, our mortgages burden will be on par with those that prevailed at the onset of the crisis, but against a backdrop of lower disposable income. Now, as interest rates revert to rising, the burden of debt will start climbing up against decimated household incomes. Homeowners, with savings exhausted during the 2009-2010 downturn will be feeling more heat than they do today. Foreclosures will rise and personal insolvencies will go sky high. Consumption will remain suppressed, but this time, there will be no boost in savings. Ireland Inc might suffer a complete fall-out of the growth re-start.
An example
Here are some numbers. Assume we take a family with Q1 2008 after-tax income of €100 and a mortgage burden of €35 (35% of the after-tax income). By Q1 2009, due to falling interest rates, this family's mortgage costs will have fallen 26% (roughly 10% per each 1% fall in ECB rates). At the same time, the family income has declined to €91 due to increased taxation (Budget 2009) and recession. In Q1 2009, family mortgage burden was €26 or 28.5% of the disposable income.
Now, assume we are in Q4 2009 and recession continues and Mr Lenihan has stuck to his promises and raided the family income to 25-48-52% tax rates outlined above). The family after-tax disposable income now stands at €82, while the ECB has lowered the rate to 0.75% from current 1.50%. The family is now paying €24 in mortgage which constitutes a mortgage burden of 29.25% of the family income.
We go to Q1 2010 next. Recession and Mr Lenihan keep on robbing the family of income, so its after-tax take home pay is now €79.5. But due to advance leading indicators flashing recovery for Germany, the ECB tightens the rates a notch to 1.0%. Family mortgage burden jumps to 31% as the twin blades of higher taxes and interest rates inflict two simultaneous cuts to household's spending power.
On to Q4 2010. Things are going swimmingly in Berlin, so the ECB races with rates increases. We have three scenarios:
Scenario 1: relative stagnation in Ireland - so our income remains at €79, while German expansion drives rates to 1.75%. Irish family's mortgage burden jumps to 33.4% of the disposable income.
Scenario 2: recession in Ireland continues, with income falling to €76, while more mild German expansion drives the ECB to raise rates to 1.5%. Irish family's mortgage burden jumps to 34%.
Scenario 3: recovery shines upon Ireland and our income rises to €80, while rapid growth in Germany drives rates up to 2.25%. Our family's mortgage repayment burden is now at 36% of the disposable after-tax income.
Conclusion
May be Alan Ahearne, in his new capacity, can tell Minister Lenihan this much? Or anyone from a myriad of our vociferous social-democratic economists, begging the Government today to raise taxes. Little hope. His (and their) policy advice to date has been pretty much in line with the Government's efforts to demolish private sector workers in order to save public sector jobs. Then again, neither Ahearne, no Lenihan will be losing much sleep over ordinary families who will be unable to stay afloat in this WunderWorld of richly rewarded public sector and impoverished private sector workers that they are creating.
Recession? Raise taxes. Public finance busting at the seams? Raise taxes. Unemployment? Raise taxes. Public sector inefficiencies? Raise taxes. Exports plunging? Raise taxes. Banks falling off the cliff? Raise taxes. And always blame the outside world for any trouble we might land ourselves into. Classic economic problems with uniquely Irish responses.
"Pints!"
Subscribe to:
Posts (Atom)
