Economics 03/05/2010: World Debt Wish 4

This is the fourth post in the series covering world debt issues. In the previous post I provided analysis of the aggregate debt levels for 36 largest debtor nations (here) and for the Government debt (here) and the banks debt (here). The current post looks at the country-level data.
Chart above plots the evolution of the Gross External Debt for top 10 debtor nations. The US, predictably leads the way. Remember - these are absolute debt volumes, not relative to GDP. UK comes in second. While the UK Gross External Debt has actually declined in the duration of the crisis, that of the US remained on the rising path, with current GED levels in the US above the 2007 bubble peak. The same is true of the third (France) and fourth (Germany) countries.

Ireland is a remarkable member of this list, coming in ranked 8th largest debtor nation overall in the world in Q4 2009 - up from the 10th in Q4 2003. This clearly shows that in the Irish case, the debt bubble has been forming in the economy well before 2003. My previous research suggests that Irish debt bubble has started forming back in 1998-1999, the last year when our current account registered positive balance, as chart below illustrates:
What's even more interesting is that in 2009 Ireland held 4.1% of the total debt of the 36 most indebted countries, while producing less that 0.37% of the same group of countries' combined GDP. This implies that our economy's dependence on debt is 11 times greater than that of the group of 36 most indebted nations. Put into household finances perspective, we have managed to borrow ourselves into a complete corner, whereby our indebtedness is systemically important to the world, while our economic existence is not. If not for the euro, folks, we would have bailiffs from the IMF calling in.

Having borrowed more than Japan and Belgium, we are also leagues ahead of other, much larger economies in terms of GED:
Think of it: Irish debt is

• x2 times greater than Australia,
  
• x2.5 than Canada,
  
• x3 Hong Kong & Denmark,
  
• x5 Greece
  
• x2 the combined debt of Brazil, India & Russia which have combined 2009 GDP more than x44 times that of Ireland!

And we are the 'rich country' that is contributing to international aid and relief for the HIPCs (Highly Indebted Poor Countries) and whose Presidents (current and former) are jet-setting around the world dispersing piles of taxpayers' cash in aid and preaching economic reforms. Comical or farcical, folks?

Couple of scatter plots showing Q4 2003 position against Q4 2009 one:
Predictably, the US and UK are outliers, so let's zoom on the data ex-US & UK:
Majority of the 36 countries which are world's largest debtors locate above the 1-1 line, implying that between 2003 and 2009 total debt levels have risen in these countries. Countries that are above the regression line have above-average propensity to increase indebtedness between 2003 and 2009. Ireland sticks out like a sore thumb - sporting the largest Gross External Debt increase of all comparators, relative to the starting position in Q4 2003. The overall relationship between the starting debt levels and the current ones is extremely strong - something to the tune of 98% of variation in current debt positions is explained by the starting ones, which simply means that all 36 countries are habitual addicts to debt. Again, Ireland is the leading addict in the club.

A caveat, of course is due here - the figures for Ireland do include IFSC, but hey, why shouldn't they - IFSC is our economic miracle, isn't it? It provides jobs in Ireland. It pays taxes in Ireland. It pays rents to Irish developers...

Of course, do recall that GED includes 3 sectors in it - Banks, Government and the rest of the economy. Banks and Government, as I've shown in the previous post, are linked:
But the link is not particularly strong: correlation between GGD & Banks Debt was +0.49 in 2003 - positive, but not exceptional. It rose to +0.55 in 2009, reflecting the crisis measures transferring taxpayers wealth to the banks. But this too is not dramatic. A relatively modest increase in correlation between 2003 and 2009, plus the fact that we already had a positive correlation back in 2003 highlight pro-cyclicality of fiscal policies worldwide.

Now, let's put the GEDs together, for comparatives:
Ireland is the member of USD1 trillion debt club, despite having a substantially smaller income than any of the countries around it. Even removing IFSC out of this equation still leaves us in the club, pushing our total debt to the 12th position worldwide.

In the next post, I will look at the debt levels relative to countries' GDP, so stay tuned.

Economics 02/05/2010: World Debt Wish 3

Having covered the aggregate debt levels (here) and Government debt (here), now its time to move on to Banks. And some surprising stuff the numbers are throwing:
The UK is clearly an outlier in the entire global series. This is, of course, due to two factors - firstly, the international hub position of London, and secondly - the over-reliance of European and other non-US economies on banks lending (as opposed to the much more significant role played by equities and bonds in the US). Irish reliance on banking sector is also formidable. Also notice that

1. Irish banking deleveraging began in 2008, similar to other countries;
2. Recall from the previous post that Governments ramp up of liabilities in most countries, unlike Ireland, has began with a lag to banks deleveraging.
   

These two facts indicate that Irish banks unable to deleverage outside the state aid support, which, of course simply means that instead of writing down their debts, they re-loaded them onto us, the taxpayers.

Taking out the UK, as an influential outlier:
The remarkable part of the above picture is that virtually no banking sector amongst the top 10 debtor nations has managed to deleverage to anywhere near pre 2006 levels. The crisis, folks, has not gone away - it has been covered up with a thick layer of state-issued liquidity. In other words, printing presses, not structural reforms, what has been working over time to 'resolve' the crisis. And this can only mean two possible outcomes: high inflation or renewed crisis. Since the former relies at least on some recovery in consumer ability to take on new debt, the only way we can avoid a double-dip crisis scenario is if consumers have deleveraged more than the banks did during the last two years. I will be moving on to the real economy sector in my later posts, but for now let me give you an idea of the findings - there was virtually no deleveraging of consumers. Instead, the real economy is now deeply in debt itself.

Back to the banks for now. Chart above shows that the story of banks deleveraging is even worse in the second tier of debtor nations. In fact, with exception of Belgium, no banking system amongst the 11th-20th ranked debtor nations has managed to reduce the levels of debt incurred during the bubble formation.

Chart below once again highlights the nature of the UK banking system
Zooming onto the main group of countries (ex-UK):
All of the banking sectors in top 36 debtor countries are carrying more debt today than they did in Q4 2003. And Ireland once again stands out as the most debt-dependent country in the group when it comes to the rate of growth in banking liabilities since 2003.

So let us summarize the findings so far:

1. Irish Government debt position is by far not the strongest today - in absolute terms, our General Government Debt levels rank 13th highest in the world, up from 19th back in 2003 Q4.
2. Irish Government debt has been rising faster than that of the other 36 most-indebted countries between 2003 and the end of 2009.
   
3. Irish banking sector debt position is 8th highest in the world, up from 10th highest in Q4 2003 - in absolute dollar terms.
4. Irish banks deleveraging has in effect resulted in a swap of private liabilities for public liabilities, with no net reduction in overall economy's debt levels.
   

From the world economy point of view:

1. Global debt levels remain at extremely high levels and deleveraging has not taken place to the extent needed to resolve the crisis.
2. Private (ex-Banks and ex-Government) sectors debt remains at virtually peak level consistent with the bubble.
3. Banks deleveraging also has fallen short of what would be required to bring the debt levels down to more realistic levels.

Next, I will be looking at the data on total debt across 36 economies. Stay tuned.

Economics 02/05/2010: World Debt Wish 2

Continuing with a tour through the world debt numbers, let's take a look at General Government Debt levels:
Chart above shows the dynamics of GGD over the last 7 years. In majority of cases, except for the US, there has been virtually no break in the debt dynamics over the last two years, compared with the past. What does this mean?

1. Firstly, this means that the entire talk about 'massive' Keynesian stimuli around the world is bogus - the governments might have re-directed their spending to new activities in response to the crisis, but the path they chose to expand their spending in the last two years is largely the same they were operating on during the boom.
2. Secondly, this clearly shows that in 9 out of top 10 debtor nations, Governments were operating pro-cyclical fiscal policies during the boom - in other words, to maintain their role in the society, governments required increasingly greater and greater spending - a classic definition of an addiction.
3. Thirdly, the US Republicans were about as eager to burn taxpayers cash as the US Democrats.

The same patterns are not fully present amongst smaller debtors:
In the chart above:

1. With exception of Norway and Turkey, all governments engaged in a much more aggressive ramp up of expenditures during the last two years than before the crisis.
   
2. All governments, with exception of Ireland, that did engage in extensive GGD increases during the crisis did so only starting in 2009.
   
3. Ireland deployed massive increases in GGD back in 2008 - before any other country.
4. Stimulus - in so far as our GGD increases go - in Ireland has been the most dramatic of all other comparator economies.
5. Within a span of 7 years, Irish Government has pushed the country from 19th most indebted in the world in absolute terms to 13th. This is despite the fact that our economy is a minnow compared to the rest of the top 20 debtor nations club.

Ireland's GDP ranked 53rd in the world by the IMF in 2009, 51st by the World Bank and 54th by CIA. Our Government debt ranked 13th... Getting concerned? Or still calling for the Government to borrow more and spend more?
Obviously, it is worth taking a look at the relationship between the starting debt positions and the current levels of government debt. Scatter plot above maps all 36 countries that are the top debtor nations around the world. The US is a significant outlier, so let us zoom closer:
What the chart above illustrates is that Ireland is in the league of its own when it comes to the government reliance on debt financing:

1. Between 2003 and 2009 Irish Government has engaged in the most extreme (relative to peers) debt expansion of all highly indebted nations (compare distance to regression line relative to levels of debt in 2003).
2. While majority of the 36 top debtor nations did run increases in debt levels between 2003 and 2009, Ireland's position is extreme in absolute terms (compare distance to the 1-1 line relative to 2003 debt)
   

In the next post, I will be taking a closer look at the Banks debts, followed by the post analysing total debt levels. The final post of the series will put together debt figures relative to GDP. Stay tuned.

Economics 01/05/2010: World Debt Wish 1

The last two weeks have thrown into the spotlight the reality of the troubled global economy we will be facing for years to come. This reality comes not the courtesy of the reckless banks and excessively greedy speculators. Instead, the 'new normal' is being powered by the same agency that many have come to see as the agent of salvation to the excesses of the private markets - the state.

By all numbers, world's largest governments are now broke. Insolvent and unable, due to political paralysis, to deal with the problem they face. This problem is compounded by the fact that in addition to the governments, the real economies are also broke. Unable to bear the weight of massive debt accumulated during 2003-2007 period, plus the expected burden of the government debts. The banks might have started the process over the period of 2006-2007, but before they did so, world governments were firmly on the path of unsustainable financing. The follies promoted and financed by the public purses in the developed world, which consumed hundreds of billions of taxpayers money, included a wide range of activities - from expansions of the public sector, to vast subsidies on environmental measures (most going to the least verifiable activities aimed at combating climate change instead of basic research, new technology development and investments in quality of life improvements), to pie-in-the-sky global economic development agendas and third world debt workouts. Geopolitical grandstanding, from aspirational 'democratization' to fictional 'unifications' also contributed significantly to the problem.

Now, the very economies that jostled for the positions of global power are suffering from debt overhang. And yet, rhetoric has not changed. Like a shopaholic unable to stop pulling out his credit card at every till in a shopping mall, world's leading economies cannot resist the temptation of vastly expanding public expenditure. In short, the governments around the world are now clearly exhibiting the same pattern of addictive behavior toward debt as a heroin junkie. The world has a debt wish!

Symptoms first. I took 36 countries data from the joint IMF/BIS/World Bank database on external debt positions - these countries represent world's largest debtor nations. Here are the charts (note, I will be publishing these charts over a number of posts in the next couple of days, so do come back for more).
The first chart above shows the overall composition of the total debts held by the world's largest 36 debtor nations. There are several apparent trends shown in this data:

1. Government borrowing did not accelerate dramatically during the current crisis. Instead, the entire government debt was showing clear pro-cyclical pattern during the boom years 2003-2007. In other words, the junkie was out for a fix well before the crisis hit.
2. Only in 2006-2007 did the banks managed to expand significantly their borrowing.
3. Globally, this cumulated banks debt mountain remains largely unaddressed despite a very significant contraction in banks-held debt from the peak. In other words, for all its destructive power, the crisis failed to bring banks debt balances back in line with pre-bubble levels of, say 2003-2004.
4. Global debt now stands dangerously close to the bubble peak.

A closer look at banks and governments
The following facts arise from the above chart:

1. Private sector debt globally falls below banks sector debt (see below for the case of Ireland).
2. Private sector debt deleveraging basically did not take place during the current crisis with non-banks and non-sovereign levels of debt remaining static close to the peak of Q4 2007.
   

Thus, world's largest debtors (and incidentally largest economies) remain exceptionally weak when it comes to their real economic activity reliance on debt financing.

And now on to Ireland:
The country that, according to the Government, has done so many things right in 2009 has... well:

1. Managed to virtually completely avoid any deleveraging in the current crisis, with our debt levels remaining at the peak levels attained (remember - all of the world peaked in debt levels back in Q4 2007) in Q4 2008.
2. There has been a marked increase in the rate of accumulation of government debt in Ireland in 2008-2009, again in departure from the world experience.
3. Irish banks have experienced steady deleveraging since Q4 2007 although this process is still to weak to return them to the healthier levels of 2003-2004.
4. Irish households and the rest of the real economy in Ireland have actually accumulated a debt mountain greater than our banking sector - a position that is different from the rest of the world.
   
5. There has been no deleveraging in the real economy, which continues to increase overall indebtedness.

In short, Irish debt position is deeply sicker than that of the rest of the largest debtor nations.

At this junction, data calls for some comparative analysis of the various debtor nations. This will be the subject of my next post on the topic. Tune in...

Economics 30/04/2010: Minister Lenihan's statements in the Dail

Some interesting points on Nama, coming out of Minister Lenihan's answers to Dail questions this Wednesday, April 28 (emphasis is mine):

"The NAMA SPV structure has a subscribed capital of €100m. As explained to the Dail at the time of the legislation, and subsequently agreed with the EU, 49% of this capital was advanced by NAMA and 51% by private investors.

Three private investors, namely, Irish Life Investment Managers, New Ireland Assurance and a group of clients of Allied Irish Banks Investment Managers, have each invested €17m in the vehicle. It is important to note that in each case the beneficial owners of the investment are pension funds or other clients of these investment companies and not the parent credit institution. [It is equally important to note that in each case the full owner of each one of these entities is an institution directly involved either in Nama or in Banks Guarantee scheme, which, of course, under normal rules of engagement would imply potential conflict of interest]

The SPV has been established in accordance with Eurostat rules. The Board of the SPV is chaired by the CEO of NAMA and has three NAMA nominated directors with the private investors retaining the right to nominate a further three directors. Thus the SPV is structured in such a manner that NAMA representatives will maintain an effective veto over decisions of the SPV Board. [Thus the so-called 'veto' is a de facto, not de jure. Should one of the Nama representatives on the board fall ill, be delayed in travel or be absent on some state-sponsored junket, in absence of the said member, it is quite possible - even if only in theory - that the veto power can pass over to the 'private' owners of SPV.]

Further:

"In line with my statement to the House on 30 March on the banking situation, I subsequently issued Promissory Notes on 31 March to Anglo Irish Bank and Irish Nationwide Building Society. These Notes will ensure that both institutions continue to meet their regulatory capital requirements. The initial principal amount of the Note that issued to Anglo Irish Bank is €8.3bn and to INBS it is €2.6bn. As I indicated in my recent statement, it is likely that Anglo will need further capital in due course but the extent and timing of such further support remains to be determined.

The terms of the Promissory Notes that issued to both institutions on 31 March are substantively the same and, inter alia, provide that 10% of the principal amount will, if demanded by the institution, be paid each year and that the first such payment will fall due for payment from the Central Fund on 31 March 2011. An annual interest coupon, related to Government bond yields, is also payable on the Promissory Notes which the Minister has absolute discretion to pay on the due date or to add to the principal amount. [So, in contradiction to the deeply-informed Dara O'Brien TD, it is the state who will be paying interest to the banks. Not the other way around]

This ensures that the Note meets accounting requirements to be “fair valued” at the principal amount in the annual accounts of each institution, consistent with the regulatory capital requirements. [This sentence is an example of Minister's habitual abuse of financial terminology, in so far as it makes absolutely no rational sense to anyone even vaguely familiar with finance. 'Fair valued' must refer to a benchmark, being a comparative/relative term. 'Fair valued at the principal amount' is gobbledygook as principal amount - the face value of the bond/note can only be valued in relation to the price of the bond or yield on the bond, none of which are referenced in Minister's statement. Furthermore, fair value concept does not refer to the regulator capital requirements. It refers only - I repeat, only - to the market value of the bond/note.]

In the event of a winding-up of either institution, the aggregate of the outstanding principal amount and any unpaid interest that has accrued on the institution’s Note falls due for immediate payment. [So, at least in theory, the Exchequer might face an immediate call for billions of euros in cash... what provisions have been made to ensure we will have this covered? How will Minister Lenihan be able to raise such funding even if the economy is not in crisis? What will be the additional cost of having to raise such funding in a fire-issue of a new state bond? Has the Minister established adequate pricing scheme to charge the banks for the taxpayers assuming such a risk or has he 'gifted' this risk premium away, thereby potentially exposing taxpayers to added hundreds of millions in new costs of such emergency issuance?]

The Deputy may also wish to note that, as indicated in my banking statement of 30 March, the use of Promissory Notes means that the institution’s capital requirements are met in a way which spreads the cash payments over a number of years and thereby reduces the funding burden on the Exchequer that would otherwise arise in the current year. [This statement clearly shows that Minister Lenihan does not understand the basics of interest rate/yield curve relationships. He implicitly assumes that in the future, the state borrowing costs will be lower than they are today. There is absolutely no reason for such an assumption.]

Economics 30/04/2010: Anglo Irish Bank shutdown costs

We are once again swamped with the 'new numbers' from the DofF and Minister Lenihan. This time the latest 'facts' relate to the potential cost of shutting down Anglo. Yesterday, Mary Coughlan stated in the Dail that the cost of an immediate liquidation of the bank had been prohibitive (per Irish times - here). Today, the unquestioning media squad is reporting that the cost of shutting down Anglo will be "more than €100 billion" (The Irish Independent, page 17). This figure has been floated out by the Anglo's paid-public-'experts'-turn-paid-executives, like Mr Dukes, and by the DofF talk-heads.

In reality this number is simply plain wrong, representing, simultaneously, a combination of

• bad arithmetic, and
• poor understanding of finance

Here is why. Take Anglo's balancesheet:

Assets of €72 billion:

• Loans to customers of €65 billion (with €35 billion earmarked for Nama)
• Loans in the interbank markets (loans to other banks) of €7 billion
• Risk-adjusting loans to customers to reflect an impairment charge of 60% implies recoverable loans of €26 billion (without a need to call in Nama at all).

Total recoverable assets of €34 billion.

Liabilities to customers and the ECB of €60 billion

• Customers' deposits of €27 billion
• Banks and ECB deposits of €33 billion

Thus, the real taxpayers' liability is €60bn-€34bn=€26 billion. Not €70 billion, nor €100 billion claimed by the various parties.

You might ask me 2 questions at this junction:

1. "What about bond holders?" Ok, there are €15 billion worth of senior bond holders and €2.3 billion of subordinated bond holders. These bondholders - all institutional - have been begging the State for years to keep banking sector lightly regulated. And I agree with them on this, in principle (omitting details here). As a part of their pleas, we've been repeatedly told that markets are able to price risks better than any regulator can. And I agree with them on this as well. So, as a consequence of their own stated desires and claimed powers, the bond holders should be made to bear the responsibility for their own errors in pricing risks. In other words, the Government should tell them to count their losses. This is what the market is all about and this, not the rescue by taxpayers, is what the real market participants expect from Ireland Inc. Lastly, on this point, there is not a single financial instrument or contract that legally requires the Irish taxpayers to foot the bill for non-sovereign investment undertaking. Full stop. Cut the guarantee on all Anglo bondholders and send them packing. Note: even if we are to cover bondholders in full, Anglo wind down will cost no more than €39 billion. Not €70 billion, nor €100 billion.
   
2. "How can the winding down take place?" Simple - we proceed to gradually, over the next 5 years, to sell assets. Depositors remain guaranteed, so we can rest assured they will not call in their deposits all at the same time. As we realize the value of the assets, we gradually close off the liabilities. To do this, bank staff can be reduced by over 50% and their wages (currently averaging €110,515 per annum per employee) can be cut by the same proportion. This is it, folks - simple.

Now, let me ask you two questions in return:

1. Why are Messrs Dukes, Lenihan etc are claiming that the winding down Anglo will cost €70-100 billion? Is it because (a) they have no idea and are 'inventing' numbers as they go? or (b) they have an ulterior motive to claim improbably high figures to continue dragging out this Anglo saga over 20 years?
2. Why have the Irish taxpayers paid hundreds of thousands of euros to 'consultants' who cannot come up with a simple, straight forward plan for dealing with Anglo to date, despite the fact that people like Peter Mathews (to whom I am obliged for much of the figures quoted above), Brian Lucey, Karl Whelan and myself have provided viable alternatives for dealing with the 'bank' free of charge?

Economics 29/04/2010: House prices peak to peak cycle

Back in October last year I did an estimate, based on the IMF model, of the peak-to-peak duration of the current housing slump. Now's time to do some updating on this matter.

Assumptions:

• Peak to trough correction in real prices of -40-43%;
• Growth rates - resuming in 2011: 2011-2013 +3.6% - in excess of the long-term growth rate estimate for Ireland in the current GFSR (2.6%), slowing to 3% in 2014-2016, then to 2.7% in 2017-2019 and 2.6% thereafter.

Using peak of Q2 2007 to assumed trough in Q3 2010, we have the full cycle duration of between 95 and 87 quarters, taking us back to 2007 peak by either 2029 or 2031.

If bottom hits at -48%, we get return to 2007 peak by 2034, with 107 quarters from peak to peak cycle.

Now, think Nama will run out in 2015? or 2020?

If Nama sets shut-off date in 2015, it is likely to get between 61 and 70 cents on the euro for each value underlying the loan. Assuming loans LTV of 70% and default rate of 30% on loans transferred to Nama (extremely conservative assumptions, but these allow a cushion on some interest collected), the value of Nama realized book will be 26 cents on the euro and 30 cents on the euro, or less than 50% of the post-discounted price paid!

If Nama shuts down in 2020, the above two figures will be 30 cents and 34 cents on the euro paid or just around 50% of the post-discounted price paid!

Now, that's what I would call overpaying for the loans.

Economics 29/04/2010: Debt crisis is spreading

Another credit downgrade from S&P, this time for Spain, from AA+ to AA with negative outlook, based on the outlook for years of private sector deleveraging and low growth. Spain, as you can see, is severely in red in terms of debt, ranking 14th in the world. Spain's external liabilities stand at 186.1% or $2.55 trillion (as of 2009 Q3) against estimated 2009 GDP of $1.37 trillion.

The country is actually worse off in terms of debt than Greece which has ranks 16th at debt at 170.5% of GDP or $581.68 billion, with 2009 GDP of $341 billion.

Of course, Ireland is world's number 1 debtor nation with external debt of 1,312% of GDP (IFSC-inclusive) of $2.32 trillion in Q3 2009 against the GDP of $176.9 billion. Of course, part of this debt is IFSC, but then, again, we really do not have a claim on our GDP either, with GNP being a more real measure of our income. So on the net, our debts - the actual Irish economy's debts - are somewhere in the neighborhood of 740%. This is still leagues above the UK - the second most indebted nation in the world - which has the debt to GDP ratio of 'only' 426%!

The S&P also provided estimate for expected recovery rate on Greek bonds, which the agency put at 30-50%. In other words, S&P expects investors in Greek bonds to be paid no more than 30-50 cents on the euro. Yesterday on twitter I suggested that "Greek debt should be renegotiated @ 50cents on the euro - severe default. Portugal's @ 80 cents - mild default, Irish @ 70-75 cents". Looks like someone (S&P) agrees. Before it is too late, before German and other European taxpayers have poured hundreds of billions of euro into the PIIGS black hole of delinquent public finances, Europe should cut losses and force Greece and Portugal to renegotiate their liabilities. If Ireland and Spain were to elect to follow, so be it. Of course, in Irish case, the debt re-negotiations should cover private debts, not public debt.

Just how many billions of euros are EU taxpayers in for for the folly of admitting Greece - a country that spent 90 years of the last 180 (since 1829) in defaults on its debts - into the common currency area? Well, Greek 2-year bonds were traded at yields of 26% yesterday at one point in time. This is pricing that's in excess of pretty much every developing country, save for basket cases which practically cannot issue bonds at all.

IMF's Dominique Strauss Kahn has told Bundestag yesterday that Greek package will be

• €100-120bn for three years;
• Which means German taxpayers are on the hook for €67 billion over 3 years, not €25 billion that Germany ‘s economics minister was signing for in the original deal;
• Ireland's contribution will also have to rise to €4 billion over 3 years, not €500 million we originally were told we will have to contribute;
• Greece will not be forced to restructure or reschedule debt
• The loans to Greece will be subordinated to existent bondholders, which means that if in the end Greece does pay 30-50 cents on the euro to the latter, European taxpayers will be lucky to get 10 cents on the euro.

The whole deal is now looking like a massive subsidy for Greece and entails absolutely no protection to European taxpayers.

But internationally, EU news are getting darker and darker by the minute. Last night Bloomberg reported that EU countries are in for estimated €600 billion bill for the fiscal crises that have spread across the block. That's the cost, in the end, of all the tacky policy follies that Brussels endorsed and pushed through over the last 10 years -

• from the Lisbon Agenda, which was supposed to deliver EU to the position of economic superiority over the US by 2010,
  
• to the Social Economy, which was supposed to deliver... well, who knows what...
  
• to the Knowledge Economy, which was aiming to turn us all into brains in a Petri Dish
• to the absolutely outlandish HIPCI and HIPCII agendas wholeheartedly embraced by the EU, which were supposed to deliver debt relief to the world's real basket cases (before Greece and other PIIGS took the spotlight away from them), and the rest of the international white elephants.

The problem, of course, is that €600 billion price tag for fiscal excesses has generated preciously little in returns (despite what folks at Tasc keep telling us about the fiscal stimulus) which means we will have to pay for it out of our long term wealth. The same wealth that has been demolished by the recession and the financial markets collapse!

Economics 28/04/2010: 'Duin de rite ting'

A brilliant chart from one of the readers (hat tip to Jonathan):
May Toyota forgive me a pun, but is this a stuck (downward) accelerator problem?.. After all the 'right things' done to our economy, why are we still leagues away from even our fellow PIIGS travelers?

Economics 28/04/2010: More on Greece contagion

Contagion from Greece is clearly a problem for the EU at this stage. Looking back into some older data, February 2010 note from Credit Suisse (linked here)
Spot Ireland at position number 7? That was then. The figures refer to 2009, which means that since then, pressures on Iceland, Hungary and Latvia have receded. In addition:

• Our 2009 deficit has been revised to 14.3%
• Our CA deficit has worsened (as imports are falling at a lower rate and exports are now performing less robustly)

So re-weighting the score in the right hand column of the table, Ireland gets closer to 38.1-38.3, Portugal moves to 39.4-39.5, Greece to 45. We are number 3 on the list...


PS: If you want to see an example of absolutely and even alarmingly distorted logic - read this. One of the best examples of bizarre ramblings that pass for 'analysis' in Ireland. I mean what else can you call a note that:

• Admits that Ireland has record deficits of all EU countries;
• Admits that debt levels are very high;
• Admits that we are close to Greece;
• Admits that Greece is deep trouble, and then
• States that "The Greek recesion [sic] had been milder than the EU average, and recovering, before austerity measures were adopted" and thus
  
• Makes an implicit claim that the spectacular collapse of Greek economy witnessed by the entire world and threatening contagion to all of the EU has been caused by Greece not running enough deficits!
• And concludes that: "By contrast, other EU countries adopted fiscal stimulus measures [without identifying which states did so, what were the implications of these, etc]. Their debt has stabilised along with economic activity [a mad claim, given that stimulus measures were financed out of debt increases] and they have been rewarded with much lower bond yields than Ireland [absolute groundless claim, as none of the countries that adopted stimulus had the same fundamentals as Ireland going into the recession or during the recession and furthermore, none of the countries, other than PIIGS experienced similar bond yields dynamics to Ireland]"

I mean this stuff is actually factually incorrect and logically inconsistent!

Economics 28/04/2010: Our week so far

So will Germany open a 'needle exchange' for Europe's debt junkies (para-phrasing Laughinbear comment)? Check CNBC's rankings of debt by nation (here - all rankings slide show)... Greece is No 16, Ireland is No1! Link here.

Ireland 10-year yields are at 5.6% and moving in tandem with Portugal and Greece. Here is a revealing weekly step-function for our 10-year notes (hat tip to Brian Lucey):

Economics 27/04/2010: Greece - the end is tragic!

2-year yields close of today:
EU = 0.7%
Ireland = 3.6%
Portugal=4.8%
Greece = 16.4%
This is it, folks. No where else to run. Greek interest on public debt would swallow over 19 percent of their GDP annually!

Clearly, Ireland should do what Greece did, according to the folks at Tasc, the Irish Times and in the Siptu building. Ramp up borrowing to stimulate economy...

Economics 27/04/2010: Greece & Ireland - tied by the risk of contagion

As the Greek, Portuguese, Italian and Irish bonds are melting in the markets' gaze at the countries fundamentals, one quick reference number is worth repeating. Per Chapter 1 of the latest Global Financial Stability Report from the IMF (linked here), the overall risk of contagion from a systemic crisis in one Euro area country to another (as measured by the percentage point contribution to total distress probability) for Greece was:

Contagion from Greece to:
October 2008-March 2009

• Portugal = 9.8%
  
• Italy = 9.9%
  
• Ireland = 12.5% (highest of all Euro area countries)
  
• Spain = 9.0% (in line with the Euro area total)
  
• Euro area as a whole = 8.8%

October 2009-February 2010

• Portugal = 23.6% (in line with the Euro area total) - up 13.8 pps
  
• Italy = 24.2% - up 14.3pps
  
• Ireland = 31.3% (highest of all Euro area countries) - up 18.8 pps
  
• Spain = 23.9% (in line with the Euro area total) - up 14.9 pps
  
• Euro area as a whole = 21.4% - up 12.6 pps
  

So spot the odd one here. As the crisis evolved, despite our Government's talk about 'Ireland turning the corner' and 'doing the right thing', our economy became actually closer and closer linked to Greece. More so than any other member of the PIIGS club. Some achievement that is...

Now, spot the similarity in responses to the crisis in Greece (here) and Ireland (here) and tell me - are we really that much better off in terms of macro fundamentals than Greece, especially given that Greek policymakers are at the very least not held hostage to a Social Partnership in which the likes of Tasc-informed Unions have a direct say?

Economics 26/04/2010: Bank of Ireland Conversion Deal

Bank of Ireland deal: per latest report from the RTE, the State's shareholding in BofI will increase to 36% from 16% through a conversion of €1.7bn of funds given to the bank last year into ordinary shares. The bank will now attempt to raise the other €1.7bn in equity from private markets with a rumored discount on first-offer of 40%.

Minister for Finance Brian Lenihan said that 'This transaction is good news for our economy, good news for the taxpayer and good news for Bank of Ireland's shareholders and investors.'

This is another extraordinary statement made by the Minister. The Minister has just informed the nation that we are overpaying some 11%+ (see below) for the shares gained under this conversion, since 'the transaction has been agreed on market terms'.

Aside: the Minister does not appear to clearly understand the terms of conversion he agree to, as 'market terms' would mean that the state is converting at a current price (Friday close of €1.80) less cumulated dividends (2 years @8%), less the discount extended to the market (38-42%). 'Market terms' therefore would imply conversion at €0.88 per share, not €1 per share achieved.

Finally, the Minister failed to negotiate a discount that should be due any large-scale investor. All in, the estimated overpayment of 11% is really a likely underestimate. In exchange for our money, we, the taxpayers, got a pile of over-priced shares which are about to be diluted!

Looking closer at the details: BofI plans to raise €500mln from private placements with institutionals, priced at €1.53 or 15% discount on Friday close price. The main issue will be €1.2bn (net) with 38-42% discount. Preference shares held by the taxpayers will be converted at €1 per share (they were bought at €1.2 per share and paid no dividend), which actually means we de facto are paying €1.16 per share, while existing shareholders can get shares at as low as €1.04-1.06. Government-held warrants are priced at ca €491mln.

Economics 25/04/2010: Forfas' mathematical modeling powers

Name and shame, folks. The table below is reproduced from Forfas' "Profile of employment and unemployment" publication from February 2010. The research paper itself is not really worth covering in any depth, as it contains broadly speaking nothing new. But the table below is worth one's attention. Irony has, it is sourced as "CSO Quarterly National Household Survey, Forfás calculations". One can really see the quality of 'calculations' deployed from the sophisticated mathematical Scribbling Model developed by the 3-year olds in a Montessori University and adopted by Forfas research staff. Superb!
Oh, and just in case you might think there are real calculations used anywhere later in the paper in relation to this table, don't be fooled - the entire computational burden here is that of adding percentages! Too bad they never attached a detailed breakdown of their costs that went to cover this glossy production...

Economics 24/04/2010: Greece and Ireland

The unedited version of my op-ed in today's Irish Independent (link here)

“It’s been a brilliant day,” said a friend of mine who manages a large investment fund, as we sat down for a lunch in a leafy suburb of Dublin. “We’ve been exiting Greece’s credit default swaps all morning long.” Having spent a couple of months strategically buying default insurance on Greek bonds, known as CDS contracts, his fund booked extraordinary profits.

This wasn’t luck. Instead, he took an informed bet against Greece, and won. You see, in finance, as in life, that which can’t go on, usually doesn’t: last morning, around 9 am Greek Government has finally thrown in the towel and called in the IMF.

As a precursor to this extraordinary collapse of one of the eurozone’s members, Greece has spent the last ten years amassing a gargantuan pile of public debt. Ever since 1988, successive Greek governments paid for their domestic investment and spending out of borrowed cash. Just as Ireland, over the last 22 years, Greece has never managed to achieve a single year when its Government structural balance – the long-term measure of public finances sustainability – were in the black.

Finally, having engaged in a series of cover-ups designed to conceal the true extent of the problem, the Greek economy has reached the point of insolvency. As of today, Greece is borrowing some 13.6% of its domestic output to pay for day-to-day running of the state. The country debt levels are now in excess of 115%. Despite the promise from Brussels that the EU will stand by Greece, last night Greek bonds were trading at the levels above those of Kenya and Colombia.

Hence, no one was surprised when on Friday morning the country asked the IMF and the EU to provide it with a loan to the tune of €45 billion. This news is not good for the Irish taxpayers.

Firstly, despite the EU/IMF rescue funds, Greece, and with it the Euro zone, is not out of the woods. The entire package of €45 billion, promised to Greece earlier this month is not enough to alleviate longer term pressures on its Government. Absent a miracle, the country will need at least €80-90 billion in assisted financing in 2010-2012.

The IMF cannot provide more than €15 billion that it already pledged, since IMF funds are restricted by the balances held by Greece with the Fund. The EU is unlikely to underwrite any additional money, as over 70% of German voters are now opposing bailing out Greece in the first instance.

All of which means the financial markets are unlikely to ease their pressure on Greece and its second sickest Euroarea cousin, Portugal. Guess who’s the third one in line?

Ireland’s General Government deficit for 2009, as revised this week by the Eurostat, stands at 14.3% - above that of Greece and well above that of Portugal. More worryingly, Eurostat revision opened the door for the 2010 planned banks recapitalizations to be counted as deficit. If this comes to pass, our official deficit will be over 14% of GDP this year, again.

All of this means we can expect the cost of our borrowing to go up dramatically. Given that the Irish Government is engaging in an extreme degree of deficit financing, Irish taxpayers can end up paying billions more annually in additional interest charges. Adding up the total expected deficits between today and 2014, the taxpayers can end up owing an extra €1.14 billion in higher interest payments on our deficits. Adding the increased costs of Nama bonds pushes this figure to over €2.5 billion. Three years worth of income tax levies imposed by the Government in the Supplementary Budget 2009 will go up in smoke.

Second, the worst case scenario – the collapse of the Eurozone still looms large despite the Greeks request for IMF assistance. In this case, Irish economy is likely to suffer an irreparable damage. Restoration of the Irish punt would see us either wiping out our exports or burying our private economy under an even greater mountain of debt, depending on which currency valuation path we take. Either way, without having control over our exit from the euro, we will find ourselves between the rock and the hard place.

Third, regardless of whatever happens with Greece in the next few months, Irish taxpayers can kiss goodby the €500 million our Government committed to the EU rescue fund for Greece. Forget the insanity of Ireland borrowing these funds at ca 4.6% to lend to Greece at ‘close to 5%’. With bonds issuance fees, the prospect of rising interest rates and the effect this borrowing has on our deficit, the deal signed by Brian Cowen on March 26th was never expected to break even for the taxpayers. In reality, the likelihood of Greece repaying back this cash is virtually nil.

Which brings us back to our own problems. What Greek saga has clearly demonstrated is that no matter how severe the crisis might get, one cannot count on the EU’s Rich Auntie Germany to race to our rescue. We have to get our own house in order. Unions – take notice – more deficit financing risks making Ireland a client of the IMF, because in finance, as in life, what can’t go on, usually doesn’t.

Economics 23/04/2010: As Greece crashes, Finns are talking gibberish

Sometimes, it is wise for policymakers not to speak to the media. This is usually true when the policymakers have no idea what they are talking about. Case in point – FT’s story (here) about the Finnish PM backing German plan for a new treaty on tougher fiscal deficit and debt measures for the Euro area.

“Finland is sympathetic to controversial German proposals for a fresh European Union treaty if necessary to enforce fiscal and economic discipline in the eurozone after the Greek debt crisis.” Mr Vanhanen, PM of Finland, said “the priority should be to look for ways to tighten rules within the existing treaty, including the withdrawal of EU structural funds from countries that ignore official warnings from Brussels over excessive budget deficits”.

So far, so good.

Per FT, “his comments came amid the most serious crisis in the euro’s 11-year history, with Greece on the brink of a bail-out from the IMF and fellow eurozone countries. “Greek debt is not so big but there is a domino threat so we need to isolate the problem as early as possible,” said Mr Vanhanen” (italics are mine, of course).

Oops! Did he really say that? At 117% of GDP at the end of 2009, and pushing toward 130% by the end of this year, Greek debt is ‘REALLY BIG’, folks. This is precisely why Greek bonds are trading now at the yields close to those of junk-rated Pakistan!

Mr Vanhanen “insisted the crisis must not be allowed to disrupt plans by Estonia to join the euro next January and said the eurozone must keep its doors open to aspirant members.” Why not? He warned that “any delay would “send totally the wrong message” to other aspirant members, such as Latvia and Lithuania, which are making tough budget cuts and other reforms to keep alive hopes of euro entry.”

So hold on, Mr Vanhanen. You say that these countries are undertaking reforms only in order to comply with the euro entry rules, not because these are the right things to do? What hope do we, the Eurozone taxpayers, have that once admitted into the club these countries will not turn Greek? None, certainly, judging by Mr Vanhanen remark.

My humble advice – if you are a politician with no expertise in economics or finance, don’t give interviews.

Economics 23/04/2010: Further details on Irish deficit numbers

More detailed analysis from the Eurostat on reclassification of the Irish deficit is available now. The link to the document is here. Go into Ireland file, spreadsheet for 2009.

Here is what is now apparent from the Eurostat analysis (italics are mine):

"In normal circumstances, under the National Pensions Reserve Fund Act, an amount equivalent to 1% of GNP (about €1.5bn) is paid by the Exchequer into the NPRF every year, in 12 equal monthly instalments. In May 2009, the total due to be paid under this arrangement for the remainder of 2009 and 2010 was paid in one tranche, in order to allow NPRF to fund the bank equity purchase entirely from liquid assets. (The actual 'extra' amount paid at this time was some €2.5bn, given the amount already paid or due to be paid under the normal Exchequer- NPRF funding arrangement.) The impact on Government D4_pay in 2009 is therefore the cost of borrowing this extra €2.5bn earlier than it would otherwise have to have been borrowed..."

In other words:

• The Government has by-passed voted-in Budgetary procedures to inject €2.5 billion in additional funding into Anglo by front-loading future NPRF funds into 2009 provision. There was no Dail vote on this.
• The Government pretended that the additional 2010 funds injected were not borrowed for under General Government Balance, thereby de facto claiming a right to transfer future expected receipts into 'liquid' current receipts. There was never any Dail vote to allow for this, as far as I know.
• This is not the only time that the Government exceeded its remit in by-passing the Dail vote in relation to recapitalizations. One can argue that the entire Anglo recapitalization was planned and committed in advance of the Dail vote on the issue.

Furthermore, under contingent liabilities section 7:

"7. Special purpose entities included here are those where government has a significant role, including a guarantee, but which are classified outside the general government sector (see the Eurostat Decision and accompanying guidance note for details). Their liabilities are recorded outside the general government sector (as contingent liabilities of general government)."

Per table 2 in the same spreadsheet, the above does not cover the Guarantees which amount to over €281 billion in 2009 (line 5). And in fact, these refer to Nama. Now, notice that 'imputations relating to the financing costs should be included' in line 4, which does count as a full General Government liability. Guess where the euribor cost of Nama bonds should be entered? Thus, Irish deficit might also include the 1.25%-odd payments to the banks from Nama bonds, or, assuming €35 billion issuance of these bonds - €437.5 million in additional deficit not accounted for in the Budget 2010.

Now, recall that in 2007 euribor has reached well over 4%. Suppose we go to a 3-3.5% euribor pricing on Nama bonds, rolled over annually. In subsequent years, if Eurostat retains this classification of liabilities, up to €1,225 million will be added to our deficits courtesy of Nama.

Economics 22/04/2010: Ireland's deficit tops Greece

Updated below

Breaking news: Eurostat just revised Irish General Government Deficit figures from 11.7% officially reported in Budget 2010 to a whooping 14.3%, raising our deficit above revised Greek figure. Here is the link to the note.

Excerpt: "Ireland had its budget deficit revised even more [than Greece] -- to 14.3 percent from the initially reported 11.7 percent. Irish Finance Minister Brian Lenihan said this was a result of a technical reclassification associated with government support provided to the banking sector. "It is important to note that the underlying 2009 general government deficit for Ireland is 11.8 percent of GDP, which is broadly similar to that projected in December's budget," he said. "There is no additional borrowing associated with this technical reclassification. This is a once-off impact, and will not affect the government's stated budgetary aim of reducing the deficit to below 3 percent of GDP by 2014," Lenihan said."

That would be putting a brave face on what now amounts to the most deficit-ridden country in the EU!

One question remains to be answered - given that all 2009 recapitalization funds for banking sector came from NPRF, what 'technical reclassification' yielded this massive upward revision?

Update: There has been a lot of talk in the blogosphere about the 'silver lining' to today's news. In particular, one argument is making rounds that goes as follows: "Since our deficit has increased for 2009 to 14.3%, then the reduction to 10.6% envisioned in the Budget 2010 will be even more impressive to the markets".

Here is why this argument is fallacious:

1. Today's revision of deficit for 2009 represents a reflection by Eurostat that cash injected into the Anglo Irish Bank by the state was borrowed via general spending fund in the open markets and as the result constitutes deficit financing. If so, where do you think this year's banks recapitalization will come from? Uncle Sam? or may be Angela Merkel? These recapitalizations are not, repeat not factored in the Government Budgetary projections per Budget 2010. The Eurostat rulling means that should the Government borrow the €10-12 billion to recapitalize the banks in the markets this year, this too will be reflected in our deficit. Now do the math - Government budget allows for €18.7 billion in General Government Deficit or 11.6% of GDP in 2010. If we add to this the lower bound of recapitalization estimates, our deficit rises to over €28 billion or a whooping 17.4% of GDP. Even if the Government wrestles out of the NPRF more cash to plug the banks balancesheet black hole, and assuming that our borrowing for banks purposes goes up by just half of the announced requirement, our Gen Gov Deficit will reach 14.7% of GDP. At which point we can all shout 'Eat our shorts, Greece!' once again.
2. Today's revision clearly shows that the Government has been caught red-handed in attempting to avoid labeling our true General Government liabilities as such. This is about as reputation-destroying as Greece's use of financial derivatives in the past.
   
3. An argument of a 'silver lining' assumes that as a one-off increase, this deficit revision does not matter going forward. This, in effect, is equivalent to saying that no cyclical deficit matters, no matter how big it is. Of course, such an argument is absolutely devoid of any anchoring in finance or economics. Cyclical deficits add up to total deficits. Total deficits - cyclical or not - add up to the total debt. This is exactly how Greece got itself into the bin!
   

Economics 21/04/2010: De-capitalizing Credit Unions

Per latest leaks from the financial regulators: In order to allow credit unions greater flexibility in re-scheduling loans, Section 35 of the Credit Union Act 1997 is amended to increase the proportion of the loan book of individual credit unions comprising loans of greater than five years duration, subject to appropriate liquidity provision and accounting transparency.

This, in effect, is the plan for de-shoring up capital reserves at the Credit Unions, which so far have the lowest level of financial transparency in operations amongst all financial institutions licensed to conduct retail business in the country. Whatever hides underneath that iceberg, one can only wonder. However, it is now clear that our regulators are concerned with the unions' ability to re-negotiate non-performing loans and to, thereby, avoid calling in loans on ordinary households.

Credit unions under this provision will be allowed to extend loans maturity, providing relief to the households who cannot repay their debts. However, unless householders' problems leading to delinquency on loans are temporary and short-term in nature, this measure will simply dig a deeper debt hole for already financially distressed families.

And the news have implications for the banks. Recall that in theory credit unions should have been the most conservative lenders in the nation. If they are now experiencing significant pressures on their consumer loans, what can be said about the banks who hold jumbo mortgages, top-up mortgages and car loans leveraged up to 6-8 times peak 2007 income?

How long can this charade last?

Economics 20/04/2010: IMF report on global financial stability

IMF's GFSR report for Q1 2010 is out today, and makes a fantastic, albeit technical reading of the global financial system health. Ireland features prominently.

First, Ireland, alongside with Austria, the Netherlands and Belgium are the four leading countries responsible for contagion of markets shocks to the rest of the Euro area. Own fundamentals drove, per IMF team, Irish sovereign bond spreads more than those for any other country in the common currency area, dispelling the Government-propagated myth that our crisis was caused by the US and the global financial markets collapse. Chart below - from the report - illustrates:
Between October 2008 and March 2009, Ireland's contribution to cross-Euro contagion was 12.3% of the total Euro area distress probability - second highest after Austria (16.7%). For the period of October 2009 - February 2010, the picture changed. Greece came in first in terms of distress contagion risk - at 21.4%, Portugal second with 18.0%. Ireland's role declined to 8.1% - placing us 6th in the list of the worst contagion risk countries. A positive achievement, beyond any doubt. But again, IMF attributes the entire probability of the risk of contagion from Ireland to the Euro zone down to domestic fundamentals, not external crisis conditions.

This progression has not been all that rosy for the sovereign bonds:
Notice that Ireland's term structure of CDS rates has barely changed in Q4 2009-Q1 2010. Why is that so? Despite the Budget 2010 being unveiled in between, the markets still perceive the probability of Ireland defaulting on sovereign debt in 5 years times relative to 1 year from now as pretty much unchanged. This would suggest that the markets do not buy into the Government promise to deliver a significantly (dramatically and radically) improved debt and deficit positions by 2015! In other words, the Budget 2010 has not swayed the markets away from their previous position, leaving Ireland CDS's term structure curve much less improved than that of the other PIIGS.

Here is another nice piece of evidence. Guess who's been hoovering up ECB lending?
And if you want to see just why Irish banks will be raising mortgage rates regardless of what ECB is doing, look no further than this:
The chart above, of course, covers 2008 - the year when Anglo posted spectacular results and AIB raised dividend. Imagine what this would look like if we are to update the figure to today. Also notice that in terms of return on equity, Irish banks were doing just fine with low margins back in 2008 and before. The reason for this is that our lending model allowed for that anomaly: banks were literally sucking out tens of billions of Euro area cheap interbank loans and hosing down a tiny economy with cash. As long as the boom went on, it didn't matter whether the bankers actually had any idea why and to whom they were lending. Now, the tide has gone out, and guess who's been swimming naked?

Interesting note on the equity markets. looking at historic P/E ratios, the IMF staff concludes that back in February 2010 "For advanced economies, equity valuations are within historical norms". Except for Ireland, which deserves its own note: "Forward-looking price-to-earnings ratios of Ireland appear elevated due largely to sharp downward revisions in earnings projections."

So, read this carefully: Irish stocks were overvalued - based on forecast forward P/Es - back in the time of the paper preparation. Using z-scores (deviation of the latest measure from either the historical average or the forward forecast based on IMF model) for Irish equities are: +2.1 for shorter horizon (a simplified 96% chance of a downward correction) and +0.9 for longer term forecasts (roughly 63% chance of downward adjustment). In other words, the market is overpriced both in the short term and in the long run. Worse than that, we have the highest short and long term horizon over pricing in the world!

In housing markets, our price/rent ratio z-score is +1.1 (74% probability of deterioration), which means we are somewhat close to the bottoming out but are not quite there. How big is the 'somewhat' the IMF wont tell, but it looks like we are still 1.1 standard deviations above the equilibrium price. Price to income ratio - the affordability metric is at +0.8 stdevs, so prices might still have to fall further to catch up with fallen incomes (57% probability).

Economics 19/04/2010: INBS - Titanic hits the ocean floor...

INBS has reported a €2.49bn loss for FY 2009 on the loan book just under €11bn, with roughly €8.5bn of this attributable to development and investment in property markets. Provisions amounted to €2.8bn, so in other words, the Kingdom of Irish Local Finance has managed to pile up an impressive 25.5% impairment charge on the book that has already taken a hit in 2008. Between 2008 and 2009, INBS has managed to post impairments of 30%.

Actually, here is a better view: 96% of all losses are on commercial development books, which means INBS has been lending money to folks whose default rates are currently running at more than 33% yoy! These are recognized default rates, which conceal the fact that many of the INBS' loans (just as in the case of other banks) would really be deep in red, were they not re-negotiated and switched into 'interest holiday' loans back in 2008-2009. Now, remember the numbers released by Nama? 2/3rds of the loans not paying interest. Apply that to the INBS books - the expected impairment charge for 2010-2012 will be around €5.7bn. And that's only for the non-householders' loans...

The numbers are truly outstanding by all possible measures.

INBS's administration expenses rose to €46mln from €45mln in 2008, and the bank has managed to accumulate €7 million in professional fees as one-off expenses, presumably relating to the management efforts to shore up the hull of a sinking boat.

Per Irish Times report, CEO Gerry McGinn said the greatest management challenges were in relation to the commercial loan portfolio. "The society has manifestly been seriously under-resourced in many areas of its business activities and support functions, but most especially in commercial lending," he siad.

Under-resourced? As if throwing more cash at staff and consultants would have prevented them from issuing so absurdly poorly priced and analyzed loans?

At this stage, especially given Mr McGinn's denial of the reality (that the INBS is a burnt-out force with not a modicum of decorum to pretend that it can act as a functional lender) any more taxpayers cash directed to the INBS would be a pure and gratuitous waste!

Economics 20/04/2010: Fas training for ex-Dell workers

Last week, media report (Silicon Republic, 16/04/10, 300 out of 1,900 former Dell workers received FAS training) provided some evidence that was supposed to show us just how effective Fas training systems can be.

"The Steering Committee responsible for advising on the implementation of the European Globalisation Adjustment Fund (EGF) for the 1,900 former Dell workers in Limerick has revealed that 300 have received FAS training so far... The committee ...is chaired by Oliver Egan, assistant director general in FAS. Another meeting is scheduled for towards the end of this month."

So hold on - so far, we know, there were meetings. And more meetings will happen.

"The Minister for Labour Affairs, Dara Calleary TD, commented: “There is a lot which has been done already and is being done with EGF support in the mid-west and which is perhaps only now starting to become visible”."

What is Minister on about here? (italics are mine): "In relation to concrete measures the Minister highlighted:

• The guidance service FAS provided to more than 1,900 former workers to date with some 300 persons receiving training in 2009 [note: this is a standard practice for large scale layoffs. How many of these 'graduates' actually found a job?]
• That in the first quarter of 2010, training and educational activity has increased with more than 200 EGF clients currently enrolled in evening classes, more than 250 EGF clients are registered with the Limerick City Adult Education Service [is that registration a pre-condition for some additional unemployment or other financial support?];
• That both Limerick Institute of Technology and University of Limerick have implemented a broad range of educational programmes for EGF clients [how many are enrolled? what types of programmes? what is the expected completion date?];
• That more than 150 clients having availed of EGF training support grant administered by FAS to date [so we have 1,900 workers laid off enrolled total, 300 completed Fas training, 150 are receiving a special subsidy, 100 more are 'registered'];
• That Fas runs a community-based initiative for more than 100 EGF clients [community-based initiatives rarely lead to gainful employment];
• That some 225 clients are registered with the City and County Enterprise Boards and are undertaking start-your-own-business programmes [Who administers these programmes? What are graduation rates and what are the success rates for new entrepreneurs?];
• The commencement of a dedicated EGF internship programme in partnership with the medical devices sector which will see more than 80 clients attending a series of workshops in April with successful candidates progressing into the full internship programme in June 2010 [This is perhaps the closest that Fas would ever come to giving these workers real hope of a gainful employment].

So, over 6 months after the layoffs, there are absolutely no hard numbers Minister Calleary can supply to show any success in progressing the former Dell workers into gainful employment. Surely, this is disturbing, given that Fas work does not come cheap and given that Minister has managed to set up a score of various schemes and taskforces - none of which are free to the taxpayers.

"I have committed to reviewing the overall programme in June to ensure that we are maximising the reach of the programme and to identify any additional or innovative measures that might be further considered,” Mr Calleary said. Really? So far, there are no indications that the review is going to be effective in assessing Fas' effectiveness in designing, administering and deploying these programmes.

Economics 16/04/2010: The incoming train II

It is a good feeling to be ahead of the curve, especially when the curve is drawn by the likes of FT. Per today's FT Deutschland report: the ECB is warning about a new crisis, a return of global imbalances in the coming years. In its monthly report the ECB warns: “At the current juncture, global imbalances continue to pose a key risk to global macroeconomic and financial stability . . . The stakes are high to prevent a disorderly adjustment in the future that would be costly to all economies.” Jurgen Stark is predicting that we have entered a new stage in the financial crisis – a sovereign debt crisis which means that “dealing with [the resulting severe macroeconomic imbalances] will represent one of the most daunting challenges for policymakers in modern history.”

My own take on the same topic was published here.

Another issue, also raised repeatedly on this blog, is discussed in Joachim Fels' (Morgan Stanley) piece on FT Alphaville (here). Fels makes a claim that countries with a high degree of inflation aversion (Germany) might have an incentive to quit. Fels suggests three warning points for the crisis to develop:

• First, any signs of moral hazard emerging in the fiscal policies in the euro area
• Second, ECB failure to raise interest rates on time to cut inflationary pressures, and
  
• Third, the political pressure rising against the Euro in Germany.

Hell, by these metrics, we are already in the midst of the euro collapse by 2 out of three measures (first and third). Alas, the second metric is a bogus one. There is plenty of evidence to show that ECB has not been an 'inflation hawk', acting often pro-cyclically before and targeting the likes of PMIs instead of hard inflation and monetary parameters. So the real question here is: What's the potential trigger for an exit?

Greece asking for the pledged money won't do. If you think in terms of game theory, once that happens in earnest (and it might be today or over the weekend), Germany will face the following two options:

1. Grant request for assistance in full and thus pre-commit itself to the common currency at the sunken cost of an exit of ca 10-12 billion euro that it will commit to Greek deficits financing;
2. Exit now, saving the aforementioned money, but destroying its political capital within the EU.

The problem is that the net cost of (1) is much smaller than the net cost of (2). And this means there has to be another - non-Greek - trigger. Italy or Spain?

Economics 15/04/2010: Greece problems back to the frontline

So, as I have predicted in the interview with BBC World Service (excerpt here), the markets have little faith in the Greeks and, indeed, in the EU’s ability to effectively underwrite Greek crisis.

Greek bond yields are now rising again on the investors’ view that German, French and Irish legislators might veto the deal. And in Germany there is a growing movement to challenge the Greek deal in a constitutional court, as being an illegal subsidy. The yield on Greek two-year bonds jumped 66bps yesterday reaching 6.99% and 5-year CDS rose 56bps to 436bps.

And FT’s Daniel Gros argues that the EU package is unlikely to solve anything, as the country needs about €30-50bn annually, depending on the future deficits path assumptions. Either way, 3-year package of up to €45bn won’t cut it. And the interest bill savings are also too thin – under the EU proposed deal, Greece will be facing an interest rate of ca 5%, which will provide the country with only €900mln in annual savings relative to market rates. Going lower to 4% - something opposed by Germany – will raise savings to ca €1,350 million per annum – still short of what is needed. Per Gros: the Greek problem is not one of liquidity but of insolvency.

And the IMF is severely constrained in what it can do in Greece by the fact that it can only lend 10-12 times the reserves position that Greece holds with IMF. And this means, at a maximum €15 billion.

So here we go – for all who thought the story is over, the most likely thing is that the actual story is just beginning.

Economics 13/04/2010: As bad as Northern Rock back in 2008?

So we have some more clarity on the state of our credit flows, courtesy of the latest monthly report from the Central Bank. And boy are we sick. At the height of the financial crisis, Northern Rock had 303% loans to deposits ratio. Ireland Inc? 269% absent risk adjustments on short-term deposits, and 323% once short term deposits risk of call-in is set at 10%.

Ouch! Irish financial system doesn’t resemble Quinn Insurance – it resembles Anglo!