Economics: 15/05/09: Ned 'Homer' O'Keeffe & ESRI's latest trip

So we have Ned O'Keeffe as Irish Politics answer to Homer -
except the former's daftness is actually intended as political and economic view points... read here...

"What has Tesco offered us since they came over to Ireland?" said Deputy O'Keeffe. "I think we would be better off if Tesco were to leave Ireland altogether. Their absence from the Irish market would be taken up by other supermarkets who would fill the gap and hopefully it would lead to less exploitation of Irish food suppliers. We’ve already seem the damage that foreign banks have done to Ireland and how the Irish banks were forced to make up for their mistakes. Well the same could happen in the retailing sector with the foreign retailers such as Tesco ruining the Irish supermarket industry and putting thousands of people out of work around the country", Deputy O'Keeffe concluded.

This is either delusional or clinically mad. And it comes from a sitting TD. In fact, the statement is so historically, economically and socially illiterate, Mr O'Keeffe deserves no comment on this blog other than one word: FRIGHTENING!


And in case you are not scared enough by Ned 'The Belching Brain' O'Keeffe, look no further than the latest trip-to-the-light-fantastic from ESRI: Recovery scenario for Ireland in the medium term, calling for 6.5% GDP growth. Yes, you are reading it right - 6.5%!

How did they got so high? Well, they estimated that Irish potential GDP growth post-crisis will be 3.0% (down from their previous estimate of 3.6%). Then, they slapped on top of this an additional 3.5% to account for the severity of the downturn we are currently experiencing. So the logic is - the further you fall in a recession, the steeper will be the climb on the way up. Ah, if only the world evolved according to the ESRI model.

Per IMF earlier studies (including the one I covered in several previous posts and in my column in Business & Finance), current recession, globally and in specific countries, like the US, is likely to lead to a flat-line recovery in output. But don't trust my words - see in the excellent note from NCB's Brian Devine (here):
So ESRI is in effect assuming that Ireland will be unique in the world in experiencing stronger recovery post-crisis than other economies, including those that will drive Irish recovery - i.e. the US and UK.

Alternatively, you can read ESRI's 'forecast' as being driven by the rate of FDI inflows into Ireland outstripping in the rate of growth the US/UK domestic capital investment expansion post recession 2:1.

As Brian put it in his Friday note: "The ESRI have assumed that this catch-up process will cause Irish economic growth to average 6.5% over the period 2011-2015. We would be highly cautious of this growth rate because of: a) The difficulty in measuring potential output especially in light of the current shock to the domestic and global financial system. b) The uncertainty surrounding the pace of global growth, again because of the difficulty in assessing the potential output of our main trading partners arising from the damage to the global financial system. c) The uncertain effects on consumption of further tax hikes. We also believe that consumption will remain subdued because of the rise in the level of real indebtedness."

Well argued, although I would have put it in less polite terms.

Per NCB note, the summary of ESRI 'forecasts' and NCB latest forecast, alongside with my own estimates are shown in the following table:
The difference between NCB's forecast, my estimate and ESRI's absolutely acid-sharp predictions is in assumptions...

As NCB note explains: "The conventional view of economic growth is that business cycle fluctuations in GDP represent temporary deviations from trend. In other words the economy eventually returns to a path determined by the potential of the economy. It is not abundantly clear that the current deviation from trend is transitory in nature. In other words it is quite possible that the problems in the economy are more structural in nature i.e. there has been a permanent loss of output relative to previous potential. The ESRI have acknowledged this and lowered the potential growth rate from 3.6% to 3.0% over the period 2005-2020 (driven by a significant part of the capital stock being rendered obsolete, the increase in taxes, the risk premium on borrowing and the reduction in global output potential). As a result of the current recession the ESRI estimate that there will be a permanent loss of the level of output relative to previous potential of 10%."

Ok, but... is 3.0 a relevant figure for the future? What reasons can ESRI bring about to set our potential growth rate close to the US and well above our main Eurozone competitors? Superior education system? Super-human entrepreneurship drive? Low cost base? Low tax rates? Fit and efficient public sector? Effective and pro-market Government? Workers who are accustomed to giving that extra effort and not expecting to be paid for it on the double? Competitive domestic service providers ensuring low cost of doing business in Ireland? Not likely. Shamrocks planted on a White House garden patch from the last Taoiseach's visit for Paddy's Day? More like it.

But here is more from NCB note: "As the ESRI note “In considering how the Irish economy is likely to exit from the current recession the key lies with the timing and nature of a world recovery.” Most of the world’s economies are forecast to grow at rates close to potential over the period 2011-2015 in the ESRI forecast." So why, again, does the ESRI assume that Irish economy will grow at more than double its potential GDP?

NCB also highlights timing issues in ESRI forecast: "Despite the fact that the pace of the decline in global downturn is likely behind us ...things are only getting less worse not better and the outlook remains highly uncertain, with the possibility of policy error large. The ESRI do take this into account by running an alternative scenario in which global growth does not recover until 2012 – in this case GDP growth in Ireland averages 5.5% over the period 2011-2015." So feel free to wonder - the world will still be in a recession in 2012, but ESRI's Ireland will be looking at a growth of 5.5% pa over 2011-2015? Let's take it apart: suppose 2012 the world is still in a recession, with growth of -1% - for the sake of an assumption. In 2011, obviously, things wouldn't be much better either, so let's say GDP growth is at -1.5% then. Now, to post average growth rate of 5.5% over 2011-2015 as ESRI predicts, Ireland would have to grow at a cumulative compounded rate of 34% between 2013 and 2015, or at an average annual rate of 10.25%! The ESRI use this as their pessimistic scenario...

So why are these unrealistically high numbers? Why now? Why from the ESRI? We can only speculate.

NCB's note says: "We think the greatest domestic risk to economic recovery is that the fiscal consolidation which has begun is not seen through or that taxes bear even more of the adjustment than currently envisaged (ironically the ESRIs document could halt the process of adjustment as unions/ government point to the fact that the economy is forecast to average growth of 6.5% in the future). This would have a major knock effect on consumption, competitiveness and borrowing costs and as such GDP growth."

That is, as far as I can understand it, a hint at something that I completely agree with. ESRI is a quasi-Governmental organization with no real independence in sight. In fact, what passes for 'independent' thinking in the ESRI's usual policy work is a mix of Labour's leftism in social policy department and Garret Fitz FG's legacy in taxation thinking (i.e the inherent inability of the ESRI to actually think rationally about tax burden and the damage it does to our economy). Hence, ESRI saying today that 'look - things are going to be just fine in couple of years' can be interpreted as their masters' signal to the unions and the social partners that the discomfort they might feel to be will be rewarded out of the spoils of the growing economy once again tomorrow. The timing of this rosy forecast - close enough to the elections is also, at the very best, an unfortunate coincidence.

Which brings us back to NAMA - why isn't the Government pre-committing itself to disbursing NAMA proceeds (if any gains occur) in the future to the taxpayers? Why isn't it ringfencing these proceeds? Perhaps, the NAMA upside is being held back to pay off the unions in the future through a compensatory wages increases after the crisis to the public sector workers for the income reductions they have suffered? or perhaps such a commitment has already been made? After all, the Bearded Men of the unions are not exactly fighting against NAMA, are they?..

Economics 14/05/09: Economy bottoming out?

Per Davy note today: "pace of decline of activity has slowed: January-February was the worst point of the recession. All available indicators suggest that the Irish recession is past the most acute point. It is becoming clear that January-February was the most intense phase."

This statement is conditional on two assumptions - not explicitly identified -

1. Irish fiscal position remains sustainable underpinned by relatively easy borrowing, despite the demand for new and massive volume of funding under NAMA; and
2. Global economic stabilization is going to spill-over into Irish growth.
   

"Consumer confidence bottomed last summer," says Davy. I would not be impressed by this statement too much. Consumer confidence can be volatile. Underlying fundamentals are still weak and even assuming consumer confidence is on an upward trend (I am yet to see this happening), consumer spending might not resume, as jobs losses fear and taxation increases expectations are still there. It will take a NAMA-induced budgetary hit on households after-tax income to send confidence tumbling down to historic lows, but this is on the books for H2 2009 anyway.

"Core" retail sales are rising says Davy note. Hmmm, rising? Latest data for retail sales ex motor (core) we have shows that in February 2009 core sales rose 1.3% after contracting 1.1% in January and rising 1.1% in December after falling 2.3% in November... A saw-like pattern at the very best. If Davy want to stake their claim on February numbers, why not call for the 'bottoming out' in December?

"Survey indicators for services, manufacturing and construction have improved". Now, don't tell that to PMI survey administrators at Markit and NCB...

"Unemployment claimants are increasing more slowly". I am stunned to see Davy economics team actually looking at month-to-month dynamics for something so rich in lags and various degrees of severity by unemployment type as unemployment figures. Presuming they are referring to the Live Register data, what we do know is the following:

• the pace of overall increases in Live Register data have slowed down from a destructively high level in January-February 2009;
• this does not tell us anything about a trend, but can either signal a temporary bounce or indeed a reversal in trend;
• I prefer the former explanation to the latter because I can clearly see a new wave of layoffs rising - construction sector jobs destruction is by now complete. But financial services and business services jobs and retail sector workers are probably going to see rising rate of layoffs. If I were working for Davy, I would explained to the 'masters ordering the music' for this note that laying off a financial services worker is 6-8 times more expensive for the economy than laying off a low-skilled construction worker. I would also explain that the probability of a laid off construction worker leaving this country is probably 10-15 times greater than the probability of a laid off Financial or Business Services worker going elsewhere. I would further add that our banks have issued much larger and more stretched mortgages to the latter, not the former and thus their impairments on mortgages side is, guess what, much more adversely impacted by the next wave of layoffs than by the former one.
  

"Meanwhile, the fact that Irish exports outperformed during the collapse in global trade late last year and in early 2009 received little attention". I agree with this statement. The problem is can we hold on to this performance and also, how much of the good news is driven by the resilient and competent MNCs and how much is driven by the lower value-added domestic exporters? One only needs to look at the combination of sectors with rising imports (inputs) and exports (outputs) to see where the answer to this question lies.

Having told us the half-baked story of the 'green shoots' Davy forecast the economy will bottom in Q1-Q2 2010. Now, this is puzzling. If we are seeing reductions in the rates of decline in some series today, while other are, according to Davy recording an outright improvement, what will be happening to the economy between Q3 2009 and Q2 2010? Bouncing at the bottom? No - Davy say that it will bottom out in Q1-Q2 2010. So things will be deteriorating then through Q4 2009. But hold on a second. The same Davy note also says - in its title - that "Ireland is probably past the worst of the recession"...

Anyone to spot a blatant contradiction here?

Well, Davy didn't:

"Consumer spending may trough in six to nine months due to the savings ratio peak and slower income declines" - so we are not past the worst yet in terms of consumer spending?

"The risks to our forecasts are evenly balanced: the economy may hit the floor sooner if we are too pessimistic about the fragile recovery in the global economy, but a double-dip recession is possible if the reaction of households to the recent Budget is negative". So again, under both scenarios, we are not past the worst point yet.

And as a side bar - how far detached from the reality do you have to be to presume that the household reaction to the recent Budget can be anything but negative?

I am simply amazed at the lack of consistency or basic logic in the Davy's arguments! But enough on this - there is an article of mine coming out on Sunday on the issue of 'green shoots'... so until then the topic shall rest.

But here is a good analysis of 'green shoots' theory for the global economy that folks in Davy might want to read.

A fresh candidate for City Council

Those of you who know me are aware that I extremely rarely support political candidates. Not because I do not share their views - although most of the time, I do not. And not because I do not find some of them to be honest and well-meaning enough to deserve a public office - although often that is the case. I simply never find their passion for independent thinking and existence to be sufficient enough to warrant my honest support. I treasure independence of my own thinking and my own passion for living enough to do something halfheartedly.

There were and are exceptions to the rule:

• David Norris commands my admiration. Not because I agree with him on most issues, but because he is a person I truly respect for being original and true to himself.
• Michael McDowell has won my support as a politician who tried to do what he promised to the best of his ability - and I am happy to hear that he is going to run again for the Dail in the next contest.

That was pretty much it, until today, when by a sheer accident I have learned that Mannix Flynn is running as a New Independent for Dublin City Council. Again, as with Senator Norris, I find myself in disagreement with some things Mannix advocates. But I think I know this man to be a truly independent thinker and a person with great real passion for what he feels to be right.

Check out his website www.votemannixflynn.ie. Don't come telling me that his ideas are wrong. They might be. It's your own call. But in our depreciated age when virtually every politico (add the same for academics, journalists and so on) is a carbon copy of the other, Mannix offers something different from the tired parade of the councilors who, come elections, fake passion better than the Eurovision contestants and then spend years in the City Council dividing the spoils.

Economics 12/05/2009: housekeeping & AIB

For those impatient to see analysis of the AIB Interim Results H1 2009 - scroll down to the last entry.


We are launching Ireland Russia Business Association tomorrow - the official D-day. Invitation is here. The website is next and we are currently getting this built, alongside a separate blog for IRBA. Of course, from next week on I will be in Moscow (with our trade mission) and later in St Petersburg in June for St Petersburg Economic Forum. I will be blogging from there - occasionally - so stay tuned...

And upon my return back to Dublin, I will be hosting a round table discussion on Sustainable Finance: Academic-Practitioner Interface at the Infinity Conference in TCD, June 8. The round table will be dealing with issues of facilitating a research interface between industry and academia in the area of sustainable (IIIrd generation sustainability concept) finance.


Here is an excellent article on how Schengen Visa Regime is turning Eastern European border into a new 'Velvet' Curtain. Of course, one can also add that in Ireland's case, lack of Schengen harmonization is resulting a ridiculous situation whereby people from non-EU states working in this country cannot travel on business to the rest of EU or the UK without having to spend days applying and queuing for visas and paying for these. Hours and days of work are being lost, businesses are paying for this and workers are wasting health and time doing needless pages upon pages of applications and documents collecting...


And here is another interesting thingy - for the upcoming European elections, you can actually see the records and votes, and attendance, and days worked, and more... for all our MEPs - here: http://www.votewatch.eu/.

I am not going to do detailed analysis, but Proinsias De Rossa ranks second in the entire Parliament in terms of Parliamentary Questions tabled and 43rd in terms of speeches delivered. I might not agree with most of what the man has to say, but at least he deserves a credit for asking questions.

Eoin Ryan ranked 35th in terms of Motions for Resolutions. Ryan was ranked 456th in terms of Reports Amended by him, above De Rossa - ranked 492nd. In terms of reports drafted, De Rossa ranked 101st, Ryan 170th. In terms of opinions issued, De Rossa ranked 208th, but Ryan ranked 25th. Attendance to plenary meetings: De Rossa scored 499th (97.85% loyalty to political group in voting, 73.21% loyalty to the member state, 85.23% attendance record); Ryan's stats were slightly poorer (82.26% - making him more independent than De Rossa, 87.95% - making him more focused on Ireland's votes, with attendance of 83.22%) giving him a ranking of 553. Mary Lou MacDonald failed to register on the radar at all, although her specific record is there as well: here.


AIB Interim Management Statement (available in full: here) my analysis in blue, IMS original text in black.

Operating Profit: Profit before bad debt provisions has been good in the year to date and up on the corresponding period in 2008. However, this outcome benefited from base period effects, most notably higher costs in the early part of 2008.

Read: the cost base has been trimmed and there isn’t much else we can do from here on. Of course, AIB won’t admit it, but it basically has the same number of employees on its books as at the peak of the growth cycle. In exchange for taxpayers’ money, the three banks have not laid any staff, so it is the taxpayer who is paying wages for over-bloated staff ranks in the Big 3 Irish banks.

The outcome reflects the very strong performance of Capital Markets and Global Treasury in particular, driven by interest rate management activities. Performance in our other operating divisions is in line with our expectations ...down relative to the same period last year.

It does appear that AIB is lending out to other banks and is borrowing from ECB – this is the rates wedge that can be exploited by the Treasury via ‘interest rate management activities’.

Costs are being very actively managed and are down by a higher percentage rate than income at this point. Downward pressure on income is expected as the year progresses due to a continuation of poor economic conditions and dislocated funding markets.

One would presume this is due to management efforts to extract value out of operations?.. Ah, nope, it is more likely due to the positive impact of the following factors:

• Lower ECB rates spilling over into lower financing costs;
• Declining spreads due to taxpayers’ guarantee and capital injection;
• Lower financing rates on property and other operating credit lines;
• Lower cost of physical capital and capacity;
• Lower bonuses.
  

All of this has very little to do with banking.

Loan and deposit volumes: ...loan balances remain broadly in line with the end of last year in each division [so no pay down of loans?]. In our Republic of Ireland business there has been a recent pick up in home mortgage applications but no material increase as yet in drawdowns. This increased activity reflects an attractive customer offering and very weak competitor presence in the market. [So why no drawdowns then, if AIB’s offer is so strong? may be because AIB is not originating any mortgages, despite giving pre-approvals? See their statement on the direction of loan to deposit ratio below...]

Customer deposits have stabilised in recent weeks following some outflows earlier in the year [How much in outflow?]. In the current recessionary conditions balances in current (money transmission) accounts have reduced. Customer resources, which include deposit and current accounts, are down by around 10% in the first four months of this year. This mainly reflects seasonal factors and outflows from our foreign institutional deposit base earlier in the year and a reduction from what was a very strong position at the end of 2008. Customer resources were up c. 9% year on year at the end of the first quarter.

I wonder if any of this is Irish wealth fleeing the Land of Brian (see here). I like, in particular the reference to a 'very strong position at the end of 2008'. Per 9% increase in y-o-y terms in customer resources in Q4 2008, how much of this is due to redundancy payments lodgements? How much is due to precautionary savings? and How much of it is due to a flight from other - weaker - Irish institutions, e.g Nation-vile and Anglo?

Margins: In highly competitive markets and a low interest rate environment, customer deposit margins continue to contract. The elevated price of wholesale market funding is also having an adverse effect on the net interest margin. Though negative effects are being partly offset by better margins on our lending, overall the net interest margin is expected to reduce this year.

Margins contraction is not surprising, given they are forced to pay higher rates to customers to retain deposits. What is surprising, however, is that lending margins are up. This could mean three things:

1. Elevated charges on new loans - AIB doing their 'patriotic duty to lend' bit for the economy;
   
2. Increased roll-over of debt at higher rates; and
3. They are lending out cash to other banks - see the Treasury operations results above - and loving it.

Asset Quality: At our 2008 results announcement on 2nd March we outlined a base case and a stress scenario. The bad debt charge in the first quarter of 2009 of close to n800m was a little ahead of the upper end of that base case. Conditions across our markets have worsened and there will be further pressure on the bad debt provision charge for full year 2009.

Read this as: S***t is hitting the fan and we are in a 'stress' scenario now. For a bank whose chief executive just 9 months ago was raising dividends, this is really an admission that takes courage.

...our key macro assumptions for Ireland are now more negative than in the stress scenario presented at our results announcement. The pace of change is increasing loan impairment and bad debt charges. This continuing factor means that the previous stress scenario charge is likely to be exceeded and we now expect our bad debt charge for 2009 to be around n4.3 bn, c. 325 basis points of average loans.

This is still a denial case scenario. AIB's book is heavily geared toward property-related loans and its business lending is also heavily tied into Irish economy. With companies going bust at a rate rising some 400% since 2007 and accelerating, with house prices hurling toward -50% contraction on 2007 levels, land values heading for -70% and commercial propety values falling toward -50% mark, and with unemployment threatening to reach more than 3 times 2007 level, does anyone believe an impairment charge of 3.25%? In my view, they will face impairments of at least 6% across the entire book, or 3.5% on post-NAMA book.

Group criticised loans (watch, vulnerable and impaired) have increased in the first quarter to c. n24.3 bn, an increase of close to n9 bn [or a whooping 37%]. Republic of Ireland division represents over 70% of the increase and c. 75% of the group bad debt charge. Increases continue to be heavily influenced by downgrades in the property, building and construction sector [so, looking ahead, expect construction sector to flatten out in late 2009, but other sectors pick up the slack in exerting downward force on loans performance: households, personal & motor loans, business investment loans etc].

Informed by the deteriorating environment and evidenced by the increase in criticised loans, we are aggressively recognising impairment as it arises.

It will be important to see how aggressively they do this. Remember - the more they write down today, the heavier will be the total discount that they will face post-NAMA. How? Suppose you have a loan valued on your books at €100 today. Scenario 1: write down the loan value on the books by, say 10% - remaining face value is €90. Here comes NAMAsaurus - with an offer at 25% discount - you get €67.5 on the loan that originally stood at €100. Scenario 2: pretend nothing is wrong with the loan. NAMAsaurus takes a bite at the same discount (they'll have to, simply because they are short talent or staff numbers or both to examine every loan) - you have €75 on your hands. So tell me if you can spot a rational reason for AIB to take 'aggressively' to 'recognizing impairment'?

Increases in the levels of criticised loans in other sectors are now more evident in the Republic of Ireland. Mortgage arrears stand at c. 2.0% of total mortgages at the end of March up from c. 1.5% in December 2008 and impaired loans have increased to n234m [that is a 33% increase in mortgage arrears and this is just the beginning as it takes time for these to build up due to redundancy payments cushion and savings cushion - both of which have to be exhausted before mortgage payments stop. Now, average tenure on the job in Ireland is ca 5 years. This means average statutory redundancy is 10 weeks pay. Add to this consolation 'bonuses' some lucky souls are getting - say we are at 12 weeks pay. Take tax out and spread over existent balances - you are getting closer to that 9% increase in y-o-y terms in Q4 2008 customer resources mentioned above. So we have: potentially, redundancy payments have been inflowing into customers accounts. These are sufficient to cover mortgages with a cushion of, say, x1.5 times the pay length covered - i.e. 18 weeks or 4 months, roughly. That spike in unemployment in January-February 2009 will be felt in mortgage default terms only around May-June! So expect the numbers to nose dive rapidly in months to come. Even more revealing in the light of this is the subsequent fall of 10% in January-April 2009 in customer deposits - this, given inflow of redundancy payments can mean that some (those who can?) are shifting money out of AIB... and they might be doing this by B&B-ing cash abroad... away from Genghis Brian Khan...]

Capital: Our capital remains well in excess of regulatory requirements. Our core tier one capital ratio was c. 5.5% at the end of March and will be strengthened in the event that the n3.5 bn Government recapitalisation proposal is approved at the Extraordinary General Meeting on 13th May. We have previously announced our aim to further increase our core tier one capital by n1.5 bn and will advise progress on this initiative as it takes place. [With recapitalization in place AIB should have just around 10% T1 - 2-4 percentage points shy of the international industry standard. And this is before fresh writedowns... In absence of that €1.5bn capital injection, I fear AIB will not be able to retain 8% core ratio post Y2009 writedowns - let alone post-NAMA. Although this is my suspicion at this time as we await for more detailed statement at EGM].

Funding: ...Market conditions improved during April and we successfully increased our existing Government guaranteed issue maturing in September 2010 by n1 bn to n3 bn. There was good demand for the issue and overseas investors subscribed for 78% of the additional amount. We have also recently seen very good demand for private placements. [I wonder how much of this latest issue is contingent on the markets expectation that the Government guarantees will have to be extended beyond 2010. In fact, AIB, by piling on the debt that it will have to roll over comes September 2010 - for it won't have funds to simply repay it -is, willingly or not, you judge, creating the emergency conditions for the Government to extend the guarantee scheme... Oh, and by the way - do they mean the ECB discount window when they are talking about 'private placements'?]

Over time, we continue to target a reducing loan to deposit ratio although the already referred to reduction in customer resources since the end of 2008 has subsequently increased that ratio.

So, as deposits are down, loans/deposit ratio can fall only if... loans fall even more than deposits. How can this be achieved with a AIB offering "attractive customer offering and very weak competitor presence in the market" for mortgages? Ah, you say - by aggressively attracting new deposits. Indeed, that would be the case, except then, of course, you are offering higher rates than your competitors, e.g the Anglo, which in turn shrinks your margins... which you have just promised to protect (above)...

And the conclusion to all of this is - AIB's statement to the economy: "We love you, man, but we've got numero uno problem of getting these pesky loans to deposits ratios down... so bugger off, you would-be-borrower!"

The unravelling of the core?

The latest report (here) from Switzerland is claiming that the Swiss are considering imposition of limits on the admission of the migrants from the EU15 + Malta & Cyprus. First, background, then conclusion:

Per EUObserver report, "under bilateral accords signed with the EU, the Swiss government is entitled to limit the number of workers entering the country" from the original EU15 states, plus Cyprus and Malta, whenever Swiss unemployment rises above a certain threshold.The threshold is not an absolute level of unemployment, but a rate of increase in jobless of more than 10% in a year "compared to the average rate in the previous three years". The latest data shows that Swiss unemployment reached a new three-year high of 3.5% in April - a 35.5% increase y-o-y. EU27 is now forecast to reach 9.7% unemployment in 2009 and 10.9% in 2010.

Currently there are no restrictions on the number of EU15+2 workers that can take jobs in Switzerland. "If the clause is activated", says EUObserver, "immigration from the EU15, plus Cyprus and Malta, will be limited to the average migration rate of the previous year plus five per cent for a maximum of two years.

So what is my analysis of this development? Access to the Swiss market - within a broader EEA community - is a legitimising point for EU in so far as it shows that European Union has attraction as a trading, capital and migration partner for countries which, unlike Eastern Europe, cannot be either bought or bullied into submission. Norway, Iceland, Lichtenstein (EEA members) and Switzerland are, at this point in time, the only countries that can claim such a status, although in the past the EU tried to 'compel' all of these states in relation to various aspects of their internal regulations.

Should Switzerland put in place even symbolic restrictions on the EU citizens' ability to gain work there, one of the three legs of this pillar will be gone. The questions to be asked in this context are:

1. Should Swiss authorities limit inward migration from the EU15+2, will this trigger a push within the EU15 to further restrict access to their own labour markets for the EU12 Accession states?
2. Should the Swiss elect to enact the restrictions clause, what signal on the integrity of EEA+ does this send out in the context of the future EU enlargement? Are we risking losing Switzerland as an investment and jobs market partner in order to gain Turkey? Albania? and so on?
3. Will Swiss-imposed restrictions signal an alternative 'Third' way for countries currently finding themselves in a difficulty within the harmonized EU monetary and FX policies - e.g. Austria - for distancing themselves from the full EU membership into an Association-style treaty Swiss-style?

In an opposite, but widely anticipated move, Iceland is now swinging in favour of full EU membership - a dubious win for Brussels, considering the state of general economic collapse in that country.

A disclaimer: applicable to anything I write on the EU - I do not advocate any of the above measures. This post is simply about presenting an argument as to what might be possible.

Economics 10/05/2009: Next Budget and other business

Given the latest Exchequer results - i.e lack of any improvement in performance - and a combination of (anecdotally evident) acceleration of lay-offs in the financial, legal and accountancy services, recently on NewsTalk 106FM I predicted that we are going to see a July mini-Budget.

My logic was based on the following confluences of 'stars':

1. Local elections will be over;
2. H1 Exchequer returns will be in;
3. Tax and Spend an boards will have some papers on the table by then, so a host of new taxes will be ready to roll out, while a host of new measures to evade cutting public spending (i.e various buy-outs and hand-outs and 'fairness' proposals) will also be at hand.

Some internal sources (hat tip to B) are now indicating that this indeed is being considered - or 'lightly penciled in' as I was told. In other words, we are in the stage of contingency planning for another raid by Genghis Brian Khan. The problem is that all the indication I am getting is that our an board chainsaw/snip is coming back with a whimper: to the question "Can we save some dosh?" the snappers will answer Bob-the-Builder-like "Yes we can", but to the question "How much?" they will have a goldfish-like response "O*o*p*o*gh*ph" and a bubble of air emanating out of the fat lips. The reason for this is that An Board Snip-identified 'savings' are now rumored to amount to nothing more than cutting temp contracts, which have to be honoured until maturity. In other words, not much of saving is possible in 2009...

Of course, to save big one needs: political will to break the unions and a reform plan to break the hysteresis in spending. But who has that? Brian? The other Brian? of Mary? In the mean time, there will be plenty of small scratches - €1-5mln here and there, but with a hole of some €30bn to be plugged this year alone, you have to do something BIG.

Now comes another new rumor - that a birdie chirped at my windowsill: the Revenue are now starting to worry that smelling the (rotten) rat from the Upper Merrion Street, our wealthy (what's left of them) are moving assets off-shore faster than Brian can shout 'Tax!" There is a rumor now, allegedly at the Dublin Castle gates, that CGT might come in at or near zero in the nominal terms in H2 2009 and this might even imply - considering bookings on CGT losses for 2008 - a negative CGT return! Now, that would be a nice lesson for the Government and for the likes of Fintain O'Toole and Vincent Browne - tax liquid wealth and see it evaporate.

Here's how it might turn out to be: charts below show my projections for CGT and CAT heads under 3 scenarios.

Scenario 1 assumes that the rest of 2009 will see replay of the same changes as happened between 2007 and 2008. This is a clearly optimistic scenario for H1 2009 projections (remember, H1 2008 fall-off relative to H1 2007 was much smaller than what we are already seeing in Jan-April 2009 relative to Jan-April 2008), but it is probably pessimistic for the last 2 months of 2009. So it might be a wash then across the year.

Scenario 2 assumes that the 2007/2008 dynamics apply to the trend that was established in 2009 to date. This is more pessimistic for CAT, and the intermediate scenario on CGT.

Scenario 3 assumes the same as Scenario 1 except I also consider the possibility of zero monthly returns on CGT in October-December 2009. How can I justify this assumption? Well, in 2008 for the same period, the Revenue collected €626.4mln in CGT. Suppose that this year, by October 2008 some €3.13/2=€1.55bn of Irish capital were to be 'B&B'ed abroad, with owners declaring a loss on these, writing off some €311mln. This will drive the CGT revenue to zero, even if the last year's performance were to be repeated.

Now the two charts for the picture is worth a 1,000 words...
Of course, the problem could have been avoided should we chose to tax illiquid/immobile asset base - i.e land... in the long run, or should we have cut the idiocy of raising taxes in a recession... in the short run.

An interesting chart: destruction of wealth

Here is an interesting set of charts I came across in doing some work recently. All are for the US and all showing some very disturbing long run trends:

First chart: US CPITwo things are worth noticing here:

1. The absolutely scary rate of inflation since the end of WWII through today, and
2. The absolutely scary length of deflationary periods.

It is worth focusing in a bit more depth on the second point (the first one being obvious to all).

In general, there were 3 periods of persistent deflation since 1774. These are plotted in the chart below.
Guess what - all three lasted more than 14 years before bottoming out and two managed to last 29 and 32 years. Scary stuff, if you believe deflation is bad.
Now, consider the real cost of unskilled labour over time. Chart below plots the time series since 1774, showing that starting with the late stages of the Great Depression on through roughly early 1970s the real (CPI-deflated) cost of unskilled labour was rising at an unprecedented rate. This cost peaked in the early 1980s and fell into the early 1990s. Ironically, as President Clinton battled the harbinger of the 'Giant Sucking Sound from the South' - Ross Perot - in US Presidential elections, the unskilled labourers of America were about to get a boost in their wages. The cost of unskilled labour has risen since 1994 through 2003 - just as the US economy was evolving skills-intensive sectors (IT and finance) and expanding trade with Mexico. Irony has it - the period of active low-skilled jobs creation of 2003-2007 (construction boom) saw real wages of the same fall!

Looking at the raw (nominal) cost of unskilled labour, there is a clear pattern of correlation between the wages of the lowest earners and the CPI. Chart below illustrates. Again, really dramatic stuff is the rate of rise in the nominal cost of labour that takes place from the late 1960s through today.
Scatter plot below shows the same in more detail. There are 2 clear periods in the US history in the relationship between inflation and unskilled labourers real wages. The first period - 1774 through roughly 1969/1970 is the period of a positive relationship, with real wages rising at a faster rate than CPI. Of course, this is the age of industrial might of the US. Post 1970, the relationship is that of a gently declining real unskilled wages relative to CPI.
What about other measures of purchasing power? Taking the value of the standardized consumer bundle of goods, chart below plots the dollar cost of purchasing such a basket alongside the CPI. There is a close relationship between the two series, but in general, the value of consumer bundle underlies the CPI. Convergence of the two series is achieved in 1967-1972, to be broken down following the oil shocks of the 1970s, and then again since 2004.

The following chart highlights long-term trends in the co-movements between the cost of unskilled labour and the cost of the consumption bundle. As with real unskilled labour wages vs CPI, there are broadly speaking two distinct periods in the relationship between the wages and consumption costs. In the period prior to 1970 increases in wages outpaced the rise in the cost of consumer basket. Since 1970, however, the relationship reversed, with wages rising, while the cost of consumer basket falling.Hence, overall, although real wages have declined in the recent years, the average consumption basket cost has declined faster than the unskilled labour costs. This implies that while wage disparity between the skilled and unskilled labourers (the driver of the CPI) might have risen, the unskilled labourers are still better off today than ever before, thanks to the WalMart effect of driving down the cost of the average consumption bundle.

The chart below plots the awesome power of value destruction in the US dollar purchasing power.

These charts present an interesting evolution of the US economy, from my point of view. They also suggest that:

1. The current deflationary period might last much longer than many of us, including myself, anticipate, although there is an added component to the above equation - the role of the exchange rates. Should dollar appreciate from its currently relatively low levels, the international dimension of the US deflation will be erased.
2. The inflationary trend - measured either as a function of CPI, or a function of PPP, is unlikely to reverse from its long-run upward trend.
   

Finance Bill 2009: Economically-illiterate and jobs-destroying

Finance Bill 2009 published yesterday confirms a simple fact Lenihan and Cowen are hell-bent on pillaging this economy and destroying private growth and wealth.

I will focus on far less-discussed Explanatory Memorandum:

• confirms that "the income levy rates in force in the first four months of the year will apply to redundancy payments made up to 30 April 2009" - so DofF has venally gone after people who lost their jobs and was forced to step back. No worries, they'll get you in some other ways. But this means that the DofF projections for €754mln in 2009 due to be raised out of income levies is now looking more like my predicted (here) €714mln.

How? Well, we had some 384,400-268,600=115,800 people joining the Live Register since November 2008, this is probably ca 80% of those laid off in the period and so the numbers of those getting redundancies since January 1 (there is a lag in redundancy payments for quite a few workers due to cash flow problems in many businesses) are close to the above number. Statutory redundancy is 2 weeks pa, so say on average we have around 4 weeks of pay pa of service, for median salary of the laid off of, say €35,000 pa. Average tenure in the job is 5 years. Redundancy total paid since January is around €1.55bn mark. At 1% foregone levy, flat, that is €15.5mln. Annualized - €46.5mln. Ouch! Yet, it does not stop there - those 115,800 workers aren't going to get a job any time soon, so their income taxes (and levies) are now NIL. Foregone levies? Ouch, €41.5mln odd for the rest of 2009 income... And that is before we get to factor in the Laffer Curve effect of levies on the rest of us...

Yes, Brian, you should have sent Lenihan to Economics 101...

• "Section 5 amends section 97 of the Taxes Consolidation Act 1997 in relation to the extent to which interest on borrowed money used to purchase, improve or repair a rented premises can be deducted in computing the amount of taxable rental income. Where the borrowed money is used to purchase, improve or repair a residential premises, 75% of the interest on the borrowings can now be deducted instead of the normal 100%".

Now, I am not the biggest fan of buy-to-let investors, but... this is absolutely arbitrary. If I invest in a business - to increase that business' earning capacity, I can write it off against my earnings. Well, rental properties are business too. This measure is arbitrary in so far as it applies to a relative penalty to specific businesses. It is also idiotic, for it discourages improvements in properties, or in other words reduces efficiency of the existent housing stock in the country.

Yes, Brian, you should have sent Lenihan and DofF to Economics 101... preferably not taught by Alan Ahearne...

• "Section 6 amends section 644A of the Taxes Consolidation Act 1997 (which deals with the income tax treatment of income arising from dealing in residential development land) by providing for the abolition of the 20% incentive rate of income tax on such income, with effect from the 2009 tax year. From 2009 onwards such income will be taxed under normal income tax rules. The section also inserts a new section 644AA into the Taxes Consolidation Act 1997 [on] certain trading losses arising from a trade of dealing in residential development land where if profits had been earned the profits would have qualified for the 20% incentive rate of income tax. Under normal income tax rules, a loss sustained in a trade may be set ... against the person’s other income. In the case of losses sustained in a trade of dealing in residential development land, ...such losses (sustained in a trade in which if profits had been made would have been taxed at 20%) could be set against the person’s other income taxable at the higher 41% rate. The new section provides that such losses must first be converted into a tax credit, valued at 20% of the loss, and then allows the tax credit to be set sideways in the year the loss is sustained
  against tax payable on the person’s other income."
  

Brian-the-Genghis-Khan of Irish finances is now doing the following: you can earn income and pay a tax of 41%, plus levies, but if in the process you incur a loss, you can only write it off at 20% tax rate. This is patently business retarding. Application of this Zimbabwean-like measure to residential development land is not the point. The point is that the tax charge is more than twice the loss write-off charge. Of course, Zanu-FF will never pass this onto the entire economy - because our MNCs and large domestic vested interests will never allow this to occur, but... drop-by-drop he will start extending this in the next Budget to other parts of business.

But again, an added here is a bonus insight into Brian's economic illiteracy. The banks and corporates are overloaded with bad loans at this time. Much of it is collateralized on or lent on development land. If we were to force the banks to take serious writedowns and to see developers do so as well, why are we introducing a 50% penalty for them to do this? Brian is creating zombie land banks in return for a couple of hundred of euros he might claw back from a handful of forced sales of land. This is (a) going to haunt us for a long period of time, and (b) bodes poorly for the prospect of NAMA not generating the same...

• Finally, where a claim for terminal loss relief (i.e. on the permanent cessation of a trade) has not been made to and received by Revenue before 7 April 2009, the new section restricts the relief so that any part of the terminal loss that relates to a loss sustained, before 1 January 2009, in a trade of dealing in residential development
  land is ‘‘ring-fenced’’ and can only be set against income arising in that trade, or in that part of a trade, in prior years.
  

So no booking of losses after January 1, 2009 on development land. This is a penalty on those going bust in 2009 - a venal act, given that some developers tried their best to stay afloat before then and are now facing back taxes on business losses. Again, not being enamoured with land speculation myself, I just don't think this is a good way of reducing such activity in the future, but rather a way to kick in the sensitive area those who are already down. Well done, Brian.

In contrast, Section 8 allows for a close-off period for nursing homes incentives scheme phase-out. Why not for development land, Brian? After all, what's more toxic and needs to be written off faster and in a more orderly fashion?

In further contrast, here is a fair treatment:

• Section 11 abolishes the effective 20% rate applied to trading profits from dealing in residential development land with effect from 1 January 2009. An accounting period that straddles that date is treated for this purpose as two accounting periods. Profits or gains on dealing in residential development land will now be charged at the general rate of corporation tax that applies to dealing in land, which is 25%.

The only question to be asked here is why on earth did we have this exemption in the first place?

• Section 7 amends section 372AW of the Taxes Consolidation Act 1997 which relates to the Mid-Shannon Corridor Tourism Infrastructure Investment Scheme. One of the conditions of this tax incentive scheme is that the Mid-Shannon Tourism Infrastructure Board must grant approval in principle for investment projects in advance of expenditure being incurred. At present an application for such
  approval in principle must be made within one year of the commencement of the Scheme, i.e. by 31 May 2009. This amendment extends the period during which such applications can be made from one year to two years so that the latest date for the submission of applications is now 31 May 2010. Under the Scheme, the current period within which expenditure must be incurred for capital allowances purposes is the three-year period commencing on 1 June 2008 and ending on 31 May 2011. To cater for any projects that may avail of the new date for the submission of applications for approval in principle, this period is also being extended and will now end on 31 May 2013.
  

So all is fine in the land of wasted resources - Mid-Shannon development incentives scheme is being extended... Typical FF regional subsidies waste before the local elections.


Down to the part where Brian extorts the money out of the ordinary folks:

• Section 9 increases Deposit Interest Retention Tax by two percentage points with effect from 8 April 2009. Section 10 increases the rates of tax applying to life assurance policies and investment funds by two percentage points with effect from 8 April 2009. Section 14 gives effect to the proposal announced in the Budget statement to increase the rate of capital gains tax from 22% to 25% in respect of disposals made from midnight on 7 April 2009. Section 15 confirms the Budget increase in the rate of Mineral Oil Tax on auto-diesel which, when VAT is included, amounts to 5 cent on a litre. Section 16 confirms the Budget increases in the rates of Tobacco Products Tax which, when VAT is included, amount to 25 cent on a packet of 20 cigarettes with pro-rata increases on other tobacco products.
  

• Section 22 provides for an increase in the current non-life insurance levy by 1 per cent to 3 per cent and for a new 1 per cent levy on life assurance policies. The increase in the non-life levy applies to premiums received on or after 1 June 2009 in respect of offers of insurance or notices of renewal of insurance issued by an insurer on or after 8 April 2009. The new levy on life assurance policies applies to premiums received on or after 1 August 2009 in respect of life assurance policies whenever entered into by an insurer.
  

As expected, the issue of legality of these measures didn't phase DofF. I certainly hope insurers are going to take this state to the ECJ and trash these measures as an arbitrary infringement by the state onto the conditions of the private contracts.

• Section 23 gives effect to the proposal announced in the Budget statement to reduce the current tax-free thresholds from \542,544 (Group A — broadly speaking, from parent to child), \54,254 (Group B — broadly speaking, between siblings, from children to parents, from grandparents to grandchildren, and from uncles and aunts to nephews and nieces) and \27,127 (Group C — all cases not covered by Group A and Group B) to \434,000, \43,400 and \21,700 respectively. The section also increases from 22% to 25% the rate of tax in respect of gifts or inheritances taken after midnight on 7 April 2009.

This is clear hand out to the trade unionists - you work all your life, you save and invest, you pass it over to your children and you get milked by the state on assets which were acquired from after-tax income. This is a signal that Brian Lenihan wants to send to us, wealth-creators, and to the rest of the world.

I certainly hope that during his ''road show' selling Ireland Inc, at least one prospective foreign investor stands up and asks him: "Minister, if you can raid your own peoples' wealth in an arbitrary and unilateral fashion such as this, what guarantees can you give us, foreigners, that you will not turn Ireland into a Zimbabwe, where property rights are adhered to only as long as it is convenient for your Government?"

And watch him avoid your gaze...

Economics 08/05/2009: ECB - a bark, but no bite..., Obama's Frying Pen for Ireland

ECB's latest rate cut has a bark, but little real bit...

As we all know by now - the ECB has cut the rate by 25bps to a 'historic' low of 1%. The word 'historic' is suppose to impress us, yet it does not - the US rates are at zero, UK at 0.5%, Japan at 0.1%, Canada at 0.25% and these countries have seen significant devaluations vis-a-vis the Euro and quantitative easing...

Some say - this is the seventh reduction in seven months. "Geez Louise!", as Woody Allen would say. It would have been better if they were to cut the rate once - seven months ago - to 1.25% and not pretend to be 'conservative'. More medicine quickly is what gets the sick back on their feet. Drip-feeding vitamins to a dying patient is not going to do much good. And hence, I am not impressed by today's cut.

More significant was the statement that the ECB delivered alongside the decision. This is worth to be discussed on several fronts:

1) It suggests (and Trichet hinted at the same) that the forthcoming growth data for Q1 2009 is going to be poor. Does ECB know something we don't? My forecast (see April 24 post) was for 1.1% decline - monthly. So quarterly decline of ca 3.3% or more than double on Q4 2008 (-1.6%). Can it be worse? Yes, it can - Germany is forecast to fall 5.6% in 2009, with most of the falling to be done in Q1-Q2 2009. My gut feeling is that no matter what the fall off in Q1 can be (and we will know today), we are now in a 3.5-4% decline territory for Q2 as well. Hold on to your seats, because if this is the case, ECB's posturing that we are at the end of the cuts cycle is a fantasy. Expect a cut to 0.75% in June-July. Why? Because if H1 contraction were to be in a 4-5% territory, we are going to post a similarly deep contraction for the whole year. And that would warrant serious intervention.

So on the net, I must revise my forecast - yet to be quantitatively confirmed (which I will do tomorrow once the Q1 figures are in) - downward, and my feeling is that the full year 2009 figure is now shaping to look like a 4-4.5% fall in the eurozone.

2)Trichet had to mention the 'tentative signs of stabilization' in the economy. Presuming he was not talking about the US, the phrase reflects lack of agreement within the council as to what is taking place in the real economy. This is good news for us, analysts, since we now are no longer alone in not knowing what is going on, but it is bad for the markets. Uncertainty is something that usually spurs the Fed to act, and ECB to stall. Hence, I suspect we will see a month-long pause before another 25bps cut is enacted. Remember, the patient - the euro area economy - is still in ICU...

3)Whether you call it quantitative easing or not, but the plan to purchase €60bn in covered bonds (CBs) is a joke. Brian Cowen alone would burn through that amount in a year (with NAMA - in a blink of an eye). And there are Austria, Italy, Greece, Portugal, Spain still waiting in line for a handout. CBs are debts backed by cash flows from underlying loans (e.g mortgages). It is the sort-of securitization product, with all the stuff - however toxic, as long as it is paying some sort of interest - bunched in. It does appear that Ireland and Spain are the two leading contenders for the first slot at the new 'ECB pawn brokers' window, as our banks have been shifting all sorts of pesky stuff across their books into the ECB already.

The only question to ask here - what will be the associated terms and conditions? We will know these only about a month from now when ECB actually sketches these. But I suspect Brian Lenihan will be phoning Trichet's people to find out the details starting from tomorrow. After all, survival of the Irish financials and the Exchequer is now hanging by the thread, and Mr Trichet has a pair of sharp scissors at his disposal. Significantly, of course, the ECB's newest plan is to come ahead of NAMA legislation, so here is a question: Is this new CBs-purchasing plan a tailor-made device for Ireland to be tested as a guinea pig in European financial rescue experimentation?

On a bit more positive note, the ECB stretched liquidity provision terms to 12 months. It also added the European Investment Bank to the eligible counterparties list, in effect creating an additional supply of credit - ca €40bn. Now, combined the ECB €60bn, plus the EIB's €40bn are just about covering the borrowing requirements for Biffonomics and Lenihanama.

Obamanomics might, just might, spell a real disaster for Ireland Inc...
It was 100-days in the Hot Seat for Barak Obama last week and, true to his promises to change America, the President has gone for his big pledge: to crack down on the use of offshore tax havens. This time around Ireland will have to do better than sending Mary Coughlan to Washington in order to keep the US taxman at bay.

A key initiative, announced Monday, would partially close a provision that allowed US companies to defer paying taxes on the profits they make on their overseas investments. Another proposed change is to close completely the loophole that allowed companies to treat foreign subsidiaries as non-resident in the US for tax purposes.

A report by the Congressional General Accounting Office found that 83 out of the US top 100 companies have set up subsidiaries in tax havens. Some $20bn in allegedly ‘lost’ annual revenue for Uncle Sam is at stake, as in 2004 – the latest year for which data is available – US MNCs paid just $16bn in Federal tax on foreign earnings of $700bn. That’s an effective rate of tax of ca 2.3%.

Now, an interesting twist in the proposals is to allow deferring tax payments only on R&D investments, so expect Ireland suddenly jump to the top of the league of nations in per capita R&D spending, should the White House plan go through Congress.

It is worth remembering that our much-loved Bill Clinton prepared an even more ambitious plan for shutting down tax havens that would have seen US investment here dry-out like a salty pond in the middle of Sahara. Much-disliked George Bush shelved it, saving our US MNCs-led economy. Now, another Democrat - ah they are such 'friends of Ireland' those Democrats - is going to fry us up crispy...

How're those 4% growth forecasts from DofF looking now?

Adoption issue ...fizzles in gutless Seanad

In a follow up to my post on the issues of adoption between Ireland and Russia and Vietnam (here) - and a large number of responses I received to it - yesterday there was a debate on the issue at the Seanad, the transcript of which is available here.

Given that Seanad site provides collapsed entries for each statement on the issue and since the debate took place in the context of the debate on the order of business (so the adoption issue is mixed within other statements), here are the parts of the debate that relate to the topic. My quick analysis of what happened follows this copy of the Seanad record.

Emphasis is mine, throughout.

Senator John Hanafin: I raise the issue of adoptions from Russia and Vietnam. In particular, I am cognisant that the difficulty that has arisen could be ameliorated through serious bilateral negotiations, notwithstanding the fact that all organisations, including the Health Service Executive, have limitations. Whereas normal criteria are applied prior to adoption, I understand post-placement requests have become extremely vigorous. If a little understanding were shown, it could help the HSE and put the matter in context..

[Senator Hanafin subsequently votes against a proposal to bring in Minister Barry Andrews for questions on the issue that he so passionately supports in this statement]

Senator Ivana Bacik: It is important to debate the treatment of children today. It is extraordinary that this Government has time to legislate for an outdated and dangerous offence of blasphemous libel--- and yet no time, apparently, to ensure the impasse between the HSE and the Ombudsman for Children is resolved and ensure the bilateral agreements for adoptions in Vietnam and Russia are resolved.

[Senator Bacik subsequently votes in favour of a proposal to bring in Minister Barry Andrews for questions on the issue]

Senator Mary M. White: Like my colleagues, I call on the Leader to invite the Minister for Health and Children, Deputy Mary Harney, to come in and explain the difficulties faced by the Ombudsman for Children, Ms Emily Logan, which led to her suspending her investigation into the HSE’s handling of the child protection audit of Catholic Church dioceses. The HSE should be absolutely transparent as a public body and should be forced to co-operate fully with the Ombudsman’s investigation...

When the Minister of State at the Department of Health and Children, Deputy Barry Andrews, was here to discuss the Adoption Bill he was exemplary in his understanding and comprehension of the legislation. I remember my colleagues on the other side of the House praised him for his dedication and understanding. It is critical we get to grips with the situation regarding adoptions in Russia and Vietnam. When I spoke on the Bill I said we must have compassion for the parents who are waiting to adopt children and for the children who are aching to be brought into a loving family...

[Senator White subsequently votes against a proposal to bring in Minister Barry Andrews for questions on the issue that she so passionately supports in her statement]

Senator Fidelma Healy Eames: I am pleased there is support on both sides of the House for an urgent clarification by the Minister of State with responsibility for children, Deputy Barry Andrews, on the adoption crisis currently being experienced by families in this State. As an adoptive parent, I know what it is like to go through the process of adopting a child. As we speak, the applications of 24 Irish couples are delayed in Hanoi because the Minister of State has dropped the ball.

In the first week of March, we debated the provisions of the Adoption Bill 2009 in this House. Senator Fitzgerald and I told the Minister of State it was critical that the bilateral agreement should be in place by 1 May. His failure to act is hurting families, including the 250 couples who are ready to submit their applications to the Vietnamese authorities. The Minister of State has also dropped the ball in regard to Russia. Irish couples successfully adopted 484 babies from Vietnam and Russia last year, accounting for 84% of inter-country adoptions. I implore Members on the other side of the House to come together us on this issue. I ask that the Minister of State, Deputy Barry Andrews, be invited to the Chamber this afternoon to update us on the situation. I cannot answer all the e-mails I am receiving from people asking questions about it.

[Senator Eames subsequently votes in favour of calling in Minister Barry Andrews for questions on the issue]

Senator Ciaran Cannon: I refer to the matter of adoption. I have much respect, as does Senator Norris, for the Minister of State at the Department of Health and Children, Deputy Barry Andrews. He has brought fresh thinking and enthusiasm to that Ministry. However, the energy and effort invested in the attempt to get the agreement with Vietnam re-established took place far too late. It began in earnest in March and the Minister of State should have made it a priority. He should have gone to Vietnam to establish what the issues were and how they could be resolved.

[Senator Cannon subsequently votes for a proposal to bring in Minister Barry Andrews for questions on the issue]

Senator Nicky McFadden: I also support Senator Fitzgerald’s comments on the bilateral agreement. I agree with Senator Norris about the Minister of State, Deputy Andrews. He is a good, caring Minister of State but why in God’s name did he only start negotiations in earnest on 25 March? Why did he not go to Vietnam, as Senator Cannon said? We need to put ourselves in the position of the families who, after five years of negotiation, are going to get their packs, information and deposits back from Vietnam and such places. That will be heartbreaking and soul destroying for people, not to mention the effect it will have on the extended families. Given that 1,000 families are waiting in this situation, it is incumbent on us to sort it out as soon as possible.

[Senator McFadden subsequently votes for a proposal to bring in Minister Barry Andrews for questions on the issue]

An Cathaoirleach: Senator Fitzgerald has proposed an amendment to the Order of Business, “That a debate with the Minister for Health and Children on international adoptions, the suspension of the inquiry by the Ombudsman for Children and plans for child care places be taken today”. Is the amendment being pressed?

Tá: Bacik, Ivana. Bradford, Paul.Burke, Paddy.Buttimer, Jerry.Cannon, Ciaran.Coffey, Paudie. Coghlan, Paul. Cummins, Maurice. Fitzgerald, Frances. Hannigan, Dominic. Healy Eames, Fidelma. McFadden, Nicky. Mullen, Rónán. Norris, David. O’Toole, Joe. Prendergast, Phil. Quinn, Feargal. Regan, Eugene. Ross, Shane. Ryan, Brendan. Twomey, Liam.

Níl: Boyle, Dan. Brady, Martin. Butler, Larry. Callely, Ivor. Carty, John. Cassidy, Donie. Corrigan, Maria. Daly, Mark. Feeney, Geraldine. Glynn, Camillus. Hanafin, John. Keaveney, Cecilia. Leyden, Terry. MacSharry, Marc. McDonald, Lisa. Ó Domhnaill, Brian. Ó Murchú, Labhrás. O’Brien, Francis. O’Donovan, Denis. O’Malley, Fiona. O’Sullivan, Ned. Ormonde, Ann. Phelan, Kieran. Walsh, Jim. White, Mary M. Wilson, Diarmuid.

So motion was defeated... Why? Anyone?

I have no idea and I cannot define a single reason as to why would anyone oppose this, but what is clear to me is that there is some sort of a party-line closing of the ranks on the No side. Gutless and crass! And espacially so for those who spoke of their concern for children and adopting parents and then turned their backs on them in the vote!