20/12/2013: Are the bondholders' bailouts off the table now?

From late 2008 on through today, myself (including on this blog) and a small number of other economists and analysts have maintained a very clear line that burning of Anglo and INBS bondholders would have been a preferred option for Ireland.

Not to speak for others, I still maintain that writing off the Government bonds held by the ECB is the only course of action open to us today and that it should be pursued.

The ex-IMF's official statements yesterday concerning the preference for burning senior unsecured bondholders in Anglo and INBS, and the claim that this option is no longer viable for Ireland,  are neither new, nor material. For three reasons:

1. Anglo and INBS bondholders should have been bailed-in in full regardless of their status. Those who held secured bonds should have been bailed-in via equity swaps after the full bailing-in of unsecured bondholders. The action would have saved Irish taxpayers tens of billions, not just billions as the ex-IMF-er claims.
2. Other banks: AIB and ptsb bondholders should have bailed-in as well.
3. ECB objections to such a course of action were exceptionally robust, but Ireland should have pursued more aggressive stance with respect to the ECB. Not quite a full exit, but possibly a combination of a threat, plus a concerted push alongside other 'peripheral' countries in the European structures to force ECB engagement.
4. It is never too late to do the right thing: the debts are still there, only in a different form. Anglo-INBS debts are now held by the Central Bank in the form of sovereign bonds, converted into the latter by the acts of the current Government. These bonds should not be repaid. There are many ways in which such non-repayment can be structured, including with cooperation of the ECB and European officials. One example would be converting the bonds into perpetual zero coupon bonds.

In other words, late admission by the ex-IMF employee of the wrongs, backed by the claim that 'nothing more can be done' are not good enough. We need real corrective action from the EU.

Report on actual statement is here: http://www.breakingnews.ie/ireland/imf-ireland-could-have-saved-billions-by-burning-anglo-bondholders-617688.html

Update: H/T to @aidanodr for the following:
http://www.independent.ie/irish-news/politics/eu-chief-barroso-no-backdated-bank-debt-deal-for-ireland-29854504.html

This pretty much sums up the EU Commission's stance on the 'seismic' banks deal 'negotiated' by the Irish Government in June 2012. It is also wrong, offensive and belligerent. Mr Barroso's comments are simply economically illiterate. Assume Ireland did cause the euro area crisis. Can anyone (Mr Barroso?) explain how the euro can be deemed sustainable if it can be destabilised by a crisis in one of the smallest nations members of the union? Alternatively, imagine the US Dollar being as vulnerable to a banking crisis in New Hampshire in a way that euro (per Mr Barroso's claims) was allegedly vulnerable to the Irish crisis?

19/12/2013: QNA Q3 2013: Expenditure Side and External Trade

QNA results came in strong at the headline levels for Q3 2013. These were covered here: http://trueeconomics.blogspot.ie/2013/12/19122013-good-gdp-gnp-growth-headlines.html

Now, let's take a look at the GDP decomposition by expenditure line. I am referencing throughout non-seasonally adjusted series for y/y comparatives. All in constant prices.

Year on year, personal expenditure on goods and services fell 0.98% in Q3 2013 and the series were up 0.79% on Q3 2011. This is not a good result, but it is an improvement on -1.52 y/y contraction recorded in Q2 2013.

Net Expenditure by Central & Local Govt. on Current Goods & Services rose 0.68% y/y in Q3 2013, after having posted a contraction of -1.73% in Q2 2013. Compared to Q3 2011, net expenditure by Government was down -3.25% in Q3 2013.

Gross domestic fixed capital formation jumped significantly in Q3 2013 up 8.30% y/y albeit from low levels. The series are now up 18.68% on Q3 2011. In Q2 2013, fixed capital formation rose 1.42% y/y, so Q3 2013 data shows some serious improvement.

Exports of Goods and Services (net of factor income flows) rose 0.58% y/y in Q3 2013 and are up only 0.94% on Q3 2011. This is poor given how much we have staked on an exports-led recovery. Worse news: in Q2 2013 exports grew 1.09% y/y, so we are seeing continued slowdown in the rates of growth.

Exports of Goods fell 2.37% y/y in Q3 2013 on foot of a decline of 1.61% in Q2 2013. Exports of goods are now down 7.64% on Q3 2011.

Exports of Services meanwhile picked the slack from Exports of Goods contraction. Exports of Services grew 3.32% y/y in Q3 2013 having previously posted growth of 3.63% y/y in Q2 2013. In other words, strong growth in Q3, but slower than in Q2. Compared to Q3 2011, exports of services are now up cumulative 9.89%.

Imports of Goods and Services fell 1.28% y/y in Q3 2013 and are now up only 0.73% on Q3 2011. The decline was primarily driven by a 3.4% drop in imports of goods and moderated by a decline of 0.11% in terms of imports of services.

Trade Balance grew on foot of stronger trade surplus in services (+EUR747 million in Q3 2013 compared to Q3 2012) and moderated by small decline in trade deficit in goods (-EUR93 million in Q3 2013). Trade balance overall grew by EUR654 million in Q3 2013 compared to Q3 2012, up 6.56% y/y.

Thus, on the expenditure side of the National Accounts, Q3 2013 gains in GDP were supported by 

• Growth in the Net Government Expenditure on Current Goods and Services, Gross Domestic Fixed Capital Formation, and Exports of Services
• Contraction in Imports of Goods and Imports of Services

The GDP dynamics were adversely impacted by declines in:

• Personal expenditure on goods and services,
• Decline in Exports of goods.

Volatility remains a dominant theme in quarterly data analysis, so it is worth looking at the figures for the first 3 quarters of the year. This will be done is the next post.

19/12/2013: Good GDP & GNP Growth Headlines for Q3 2013

Quarterly National Accounts for Ireland were relaxed today by the CSO. The headline numbers are good:

For seasonally-adjusted (allowing for q/q comparatives), constant prices data:
1) GDP at constant market prices rose 1.50% in Q3 2013 compared to Q2 2013, having posted 1.02% growth in Q2 2013 compared to Q1 2013.
2) GNP grew by 1.58% in Q3 2013 compared to Q2 2013, having broken the previous period q/q contraction of 0.13% in Q2 2013 compared to Q1 2013.

For not seasonally-adjusted series (allowing for y/y comparatives), constant prices data:
1) GDP expanded 1.74% y/y in Q3 2013, posting significant improvement on -1.64% y/y contraction recorded in Q2 2013.
2) GNP also posted solid rise, beating increases in GDP. GNP was up 3.87% y/y in Q3 2013 and this is a massive jump on -0.69% contraction recorded in Q2 2013.
3) Q3 2013 marks the first quarter when growth in GDP (q/q terms, seasonally adjusted, constant prices) posted second consecutive quarter growth since Q1-Q2 2011. This is welcome, as the GDP series have been exceptionally unstable in recent years: since Q1 2010 through Q3 2013, there were only two episodes of GDP quarterly growth being consecutively above zero for two quarters period.

In y/y terms, GDP finally broke a string of contractions that lasted 4 consecutive quarters between Q3 2012 and Q2 2013.

CHART 3 to illustrate:

It is also worth noting that GNP expansion was fuelled by decline in MNCs transfers of profits abroad. This is most likely due to a decline in pharma sector profits on foot of patent cliff and, possibly, due to some 'parking' of profits on the side of other MNCs. Retained earnings reflected in the Financial Account of the Balance of Payments rose EUR6.27 billion in Q3 2013.

Two core points, however, so far continued as a trend in the data is that we are still witnessing erratic pattern in growth. The recovery is not convincing, yet, when it comes to trend, but there are some positive signs emerging. These are to be explored in the subsequent posts when I deal with composition of growth sources.

On the net, rebound is encouraging and coupled with expectation for growth in Q4 2013, we might be able to pull off a positive expansion for the year.

18/12/2013: TrueEconomics' 5th Anniversary

For the day this was: True Economics blog marked its 5th anniversary today, so many thanks to all of the readers and all who contributed their comments to this blog. Thanks to hundreds of journalists who quoted from the blog and cited it, and even to some academic and policy researchers who did the same. Thanks to all students who found some of the ideas discussed here worthy of learning about. Thanks to a small number of contributors and friends who on some occasions posted on the blog.

And special thanks to the person who talked me into starting this blog.

Here's to many more years and many more readers!

18/12/2013: Ireland's risk ratings improve: ECR

Euromoney Country Risk score for Ireland posted one of the largest increase of all countries surveyed in recent weeks. Here are the details:

Details of Ireland score upgrade:

 Note: ignore the glitch in data prior to June 2013.

Sub-factors of the Economic Assessment, Political Assessment and Structural Assessment scores:

18/12/2013: On Big Advisory Firms Role in the Crisis

EUObserver has a very interesting expose of the role played by a handful of large financial consultancies in shaping Europe's responses to the banking crisis: http://euobserver.com/economic/122415

The article quotes from a number of sources, including myself.

Here is a more in-depth version of my position on the issue:

There are two basic reasons for the Central Banks reliance on external assessment and validation of estimated banks losses. The first one is operational and the second one is reputational. 

Operational reason arises from the fact that during the per-crisis boom in credit creation, National Central Banks of countries with rapid credit expansion lost core personnel competencies and skills to staff migration to the private sector financial services providers. As the result, senior staff with skills at professional certification levels (e.g. CFA) and hands-on experience became virtually extinct in the Central Banks and regulatory authorities. The remaining staff largely performed mechanical tasks of collating and repackaging information supplied to the Central Banks by the financial institutions. Forensic analysis and modelling skills were lost. External analysts can supply these skills and provide more up-to-date specialist knowledge, rarely available in the tenured jobs-for-life setting of the Central Banks that was made even more scarce by the staff migrations to private sector. An added operational constraint faced by the Central Banks in crisis-hit countries was the demand for staff time to cover regulatory and policy changes during the crisis and deploying emergency measures. In simple terms, this meant that the Central Banks were short of staff.

Reputational reasons are more complex, spanning a number of areas where Central Banks faced and often continue to face significant deficits. Firstly, reputation ally, Central Banks are not known for possessing specialist forensic analysis skills required to bring together balance sheet analytics and forward business modelling. As such they lack credibility as markets analysts. Secondly, stress testing had two functions: identifying approximate potential losses on banks balance sheets and signalling these losses to the markets. In the case of countries severely hit by the crisis, the latter objective had to be served by supplying a credible signal to the markets. This signal could not rely on the internal assessments by the Central Banks which were at the time seen by the markets as being captive to the incumbent banking institutions. This too required bringing in external validation. Thirdly, as in the case of Greece, there was always concern that more realistic assessment of the banking situation will expose Central Banking authorities to renewed public anger and trigger public retaliations. As the result, a third party often had to step in to provide a public buffer between the losses estimates, the banks and the Central Bank. Fourthly, counterposing potential public backlash, the banks themselves were significantly incentivised (in the context of loss assessment exercises) to attempt influencing the Central Banking authorities to alter the results of the exercise. Perceived objectivity of the estimates, therefore, required more external validation.

18/12/2013: Portugal's Expresso on Irish Strategy for Growth 2014-2020

Portugal's Expresso is featuring Ireland's Strategy for Growth 2014-2020: "Irlanda quer ser o melhor pequeno país para as empresas" with comments from myself & @seamuscoffey :
http://expresso.sapo.pt/irlanda-quer-ser-o-melhor-pequeno-pais-para-as-empresas=f846740

16/12/2013: Russian economy & Ireland-Russia Trade updates

My most recent note on Russian economy is available here: http://irba.ie/2013/12/03/russian-economy-a-slowdown-before-policy-driven-re-acceleration/#more-1245

On Russian inflation: as noted in the above, inflation accelerated in October. This is the first month of re-acceleration since May 2013 when inflation peaked at 7.4% y/y. The cycle low inflation was recorded in September at 6.1% y/y.

Ireland's bilateral trade (goods only) with Russia is covered here: http://irba.ie/2013/12/03/trade-with-russia/

16/12/2013: Troika Consultancies... via EUObserver

A very interesting article on the EUObserver.com today (disclosure: I contributed a comment) on the issue of professional advisory services relating to the banks and fiscal crises: "Troika consultancies: A multi-million euro business beyond scrutiny"

15/12/2013: First-to-Seventh Rate People?... via Schengen

Romania and Bulgaria have once again been rejected from membership in Schengen. Details here: http://www.ceeinsight.net/2013/12/11/romania-bulgaria-rejected-schengen-entry/?utm_source=feedburner&utm_medium=twitter&utm_campaign=Feed%3A+ceeinsight+%28CEE+Insight%29

So as a reminder, we still have a Europe of multiple layers of equality between its members' citizens, residents and foreigners:

1. The "Club Schengen"
2. The Club "Better Than Other Foreigners", includes non-EU states that have Schengen access: Switzerland, Norway, Iceland and Lichtenstein who are full Schengen, plus San Marino, Monaco and Vatican (which are de facto Schengen)
3. The Club "Not Good Enough For Much": including Greenland, and Faroe Islands, French ex-European territories, Aruba, Curacao, St Maarten, the Caribbean Netherlands, Norway's Svalbard which all are parts of Schengen states, yet have no Schengen rights
4. The Club "First Rate Foreigners": non-EU nationals resident in Schengen States who are granted Schengen rights
5. The Club "Second Rate Easterners": EU member states with no Schengen access: Romania, Bulgaria, Cyprus and Croatia but are allowed visa-less travel
6. The Club "Second Rate Westerners": EU member states residents who reside in non-Schengen countries such as UK and Ireland, who are married to a Schengen State national
7. The Club "Third Rate Westerners": EU member states residents who reside in non-Schengen countries such as UK and Ireland, who have no rights to free travel whatsoever and require full visas, unless married to a Schengen State national
8. The Club "Third Rate Easterners": EU member states residents with no citizenship (aka some national minorities in some Baltic States)

I'd say we have a pretty extreme case of the Abridged Seven Commandments of the Animal Farm where "All animals are equal, but some animals are more equal than others"... one might wonder if even Napoleon would find it hard to deal with eight tiers of 'equality'.

14/12/2013: WLASze: Weekend Links on Arts, Sciences & zero economics

This is WLASze: Weekend Links on Arts, Sciences and zero economics


Amazing work of experimental architect and artist Lebbeus Woods drawing on his work from the 1980s: http://www.dezeen.com/2012/11/08/lebbeus-woods-early-drawings/. Lebbeus traces back to the Chicago 'Bauhaus' and worked under Eero Saarinen. He later co-founded and led http://www.riea.ch/ which seeming became largely inactive back around 2009-2010, but left a marked legacy of daring innovation. Woods' site is here: http://lebbeuswoods.net/. His work is going to be profiled in November-March 2014 exhibition at the Michigan State University: http://www.archdaily.com/444068/exhibition-lebbeus-woods-architect/

Another wonderful feature from dezeen, with nice home connection: Dublin-based designers Notion have set up own brand NTN. The inaugural collection is brilliant, although short: http://www.dezeen.com/2013/12/08/first-collection-from-new-dublin-design-brand-includes-a-table-with-a-hammock-underneath/
Occasionally whimsical, often challenging, and frequently truly non-derivative in originality, this is an excellent start for what is promising to be a bright, light, creative design shop. And it is a much needed boost to Dublin design community which generally lacks brands that can stand on their own internationally, but has so much real potential. Let's hope Enterprise Ireland is paying attention!
My favourite of the lot:

The brand design base is here: http://www.designbynotion.com/
And NTN brand collection is here: www.ntn.ie



Unlike design in Dublin, which moving toward real sustainable life, life on Mars has taken a turn for the worse in recent years (rather billions of years). Nonetheless, fascinating bit of news from NASA's Curiosity rover is that "a crater found on Mars is actually an ancient lake bed that could have contained the proper conditions to have supported life on the Red Planet."

NASA scientists basically claim that they "have discovered the fossil remains of a lake inside Gale Crater. The scientists say that this lake would have existed for as long as tens of thousands of years, which is long enough for life to have evolved." And, allegedly, the lack "contained chemical and mineral conditions needed to support microbial life. The lake waters held low salinity at just the right acidity and all the chemicals needed to support living organisms." Read more on this here: http://www.redorbit.com/news/space/1113023177/life-bearing-ancient-lake-discovered-mars-120913/

Let's hope Irish Water will too contain the right acidity and all the chemicals needed to support living organisms… and deliver these to us at a price that won't turn Ireland into a Martian 'Gale Crater'…

Fabian Oefner show at the whimsically inimitable MB&F M.A.D. gallery, Geneva (through May 2014) is based on pain tacking deconstruction of classic sports cars and re-assembly of their deconstructed images into a static representation of dynamic motion called 'explosion'… See the brilliant video of the work here:
http://www.designboom.com/art/fabian-oefner-explodes-views-of-classic-sports-cars-11-29-2013/
And MB&F gallery link is here:
http://www.mbandf.com/mad-gallery/explore/disintegrating-by-fabian-oefner/

His other work is here: http://www.mbandf.com/mad-gallery/explore/hatch-by-fabian-oefner/
and his personal page is here: http://fabianoefner.com/
So now you know, when that Lambo no longer fits the driveway… go 'Boom' instead of 'e-Bay'… for some serious visual impact.



Of course, the concept of destruction as artistic expression is not novel. Perhaps surgical nature of Oefner's work makes it rather more technically advanced, but the idea traces back centuries, including historical alterations and defacements of the ancients. One good example from the past is this article on "The seeds of destruction" or "Art Under Attack: Histories of British Iconoclasm at Tate Britain" covering the recent exhibition of the Tate:
http://www.tate.org.uk/context-comment/articles/seeds-destruction
I love this work by Jake and Dinos Chapman:

And here's a feature about Capmans show in Kiev earlier this year: http://www.designboom.com/art/the-sum-of-all-evil-by-jake-and-dinos-chapman/

Not a cheerful note to end, but superb art…

Enjoy!

12/12/2013: Measuring the Mortgages Crisis in Ireland

As the readers of this blog would know, I rarely comment on articles in Irish press, and rarer yet on articles in the Irish Times. So here is a rare occasion, not because of the article itself, but because of what it suggests about our national treatment of statistics.

Let's start from the top. The New York Times published an article on Irish crisis today. Here's the link: http://www.nytimes.com/2013/12/12/business/international/as-bailout-chapter-closes-hardships-linger-for-irish.html?pagewanted=2&_r=1&rref=business&hpw&pagewanted=all

Irish Times - in some ways correctly took the New York Times article to task: http://www.irishtimes.com/news/ireland/irish-news/are-we-really-reduced-to-shooting-pigeons-for-food-1.1625588

Let me take up one point in the two articles. Original version of the NYT article cited - quoting from the IT response - that "most startling is the assertion that two-thirds of homeowners have not paid their mortgage “on time for the last two years”".

IT correctly points that this is not true, saying that "The bank’s most recent arrears figures suggest 18.5 per cent of mortgage holders are in arrears of some sort or other.
They also indicate that 22 per cent of those currently in arrears are behind in their payments for at least two years or more."

The NYT published correction to their original claim. Story ends there.

But from the point of view of reality, it does not. This is pivotal to our narrative about the crisis.

Mortgages arrears have many meanings in the economy. But in the social context and in relation to mapping out the extent of the crisis here's what matters: Mortgages arrears are a signifier of the extent of the crisis. In this, they are neither the only indictor, nor are they a relative indicator. Let me explain.

1. Assume we want to identify the extent of the crisis as it impacted the households holdings of property.
2. Assume we have official data to do so only.

From (1) and (2), identifying the crisis extent is simple and yet hard. 

Take an analogy of identifying the crisis in the macroeconomy. That would be GDP. Or rather, the size of the crisis = the gap between the GDP at pre-crisis peak to GDP at crisis-period trough. One thing that does not matter to this analysis is where the GDP is today (post-trough). Should in the future the GDP hit a new trough and should the drivers for this be consistent with the drivers for the original crisis, then that new trough becomes the crisis metric. Should GDP recover to pre-crisis highs (as it will one day), the magnitude of the crisis will not be zero, it will still be GDP pre-crisis less GDP at trough.

Variants on the above are possible by looking at various GDP metrics and/or pre-crisis and trough metrics (trend, potential etc). But the essence of analysis is the same: GDP pre-crisis - GDP at trough = Crisis Impact.

Now, back to the original issue: How shall be measure the impact of the crisis when it comes to mortgages?

The IT comments can suggest (and usually the media obliges to take this as given) that Arrears Current = Crisis Impact. But are they?

My view is that they are not. Let's compute the total impact:

1. Peak of arrears (we are yet to reach that) = part of impact
2. Restructured mortgages that are not in arrears = part of impact for two reasons: (a) they face high probability of going back into arrears (just under 50:50 chance currently and declining slowly); and (b) restructured mortgages are no longer the original pre-crisis mortgages, so the mere fact of restructuring them is a sign of the crisis impact
3. Repossessed homes = direct impact; and
4. Voluntary surrenders = direct impact.

What do we know from official sources: Total mortgages outstanding: 915,746 per CBofI (composed of 768,136 principal residences-linked mortgages and 147,610 BTLs), of these:

1. Total mortgages in arrears: 181,946 per CBofI (composed of 141,520 principle residences and 40,426 BTLs)
2. Restructured, not in arrears: 56,186 (composed of 43,034 principal residences and 13,152 BTLs)
3. Repossessed homes - we have no numbers for aggregates repossessed - neither the CBofI, nor Department of Finance report these on any regular basis. But in Q3 2013 we had 1,566 properties in repossession (1,050 residences and 516 BTLs). These are properties held in possession by the banks. We do not know how many they have sold since the beginning of the crisis.
4. Voluntary surrenders - we have no data on these from any official source, but the properties that are surrendered and are still in the possession of the banks are aggregated into (3) above.

So, with incomplete information on (3) and (4), to-date, the extent of the crisis is for all types of properties:

181,946 in arrears + 56,186 restructured, not in arrears + 1,566 repossessed and surrendered = 239,698 accounts or, ca 26% of all accounts outstanding.

And the number is growing...

This is not 2/3rds as claimed originally in the NYT, not even 1/3rd, and it is certainly not the percentage of mortgages in trouble over 2 years... and the above 26% include BTLs too... But the true extent of the crisis is that 26 out of 100 mortgages in the country have been directly impacted by it. And the crisis has not peaked, yet.

But here's what this tells us about our psychology when it comes to measuring the extent of the crisis: we commonly interpret arrears alone (and often only arrears in excess of 90 days) as the metric of the crisis. This is an error - an error based on the implicit anchoring of the idea of the crisis to the news and thus, to relative position in time. This is simply wrong. The crisis of WW2 is measured by the absolute level of destruction wrecked at the peak, cumulatively, not by where the losses were in 1955 or in 1948.


Actually, should you be interested, I track the evolution of the above metric (I call it mortgages in default, defaulted or at risk of default) in my regular posts on CBofI quarterly data. The latest was provided here: http://trueeconomics.blogspot.ie/2013/11/28112013-irish-mortgages-arrears-q3-2013.html.

And for the conclusion: I recall in 2007 CEO of AIB at the time stating in a meeting with analysts that "Irish people do not default on mortgages. They never do." I replied: "Never is a very precise term. Is there any uncertainty around this claim?" and he retorted: "None." Back to that 26% figure, then?..