10/9/2012: Ireland's flop in securing European Science Funding

Departing from the IMF, European Research Council has released the list of 2012 winning projects that obtained financial support from the Council under the ERC Starting Grant results, totaling €800 million. The link to the list is here.

Now, a quick run through the headline results:

• Ireland scored 4 projects (2 each for TCD and UCD)
• Portugal (not a country we in Ireland usually associate with being the Land of Scholars) scored same as Ireland
• Israel scored 24 projects
• Austria 9 projects
• Belgium 19 projects
• Switzerland 33 projects
• Netherlands scored 51 project
• Finland 8 projects
• Denmark 13 projects
• Sweden 22 projects
• And to add insult to our injury: University of Bristol (UK) and University of Edinburgh scored 5 projects each (more than the entire country of Ireland), while University of Warwick 4 projects (same as Ireland as a whole)
• University College London scored 16 projects
• In some consolation, powerhouse of knowledge, Northern Ireland, scored none

Here's a handy chart from ERC:

But wait, it gets worse. When broken down by nationality of grantees, Ireland has 7 Irish nationals granted research proposals:

Which includes more Irish national academics working ABROAD than in Ireland:

And, among the researchers who got grants in Ireland, there are a number of non-nationals:

You can check the above in here.

So that strategy on funding and managing research in Ireland - it is clearly working marvels... oh, and do you now think Irish Universities poor rankings have nothing to do with real world outcomes?..

10/9/2012: Corporate debt iceberg

Another topic, much ignored by the Irish media and the Government and covered by the IMF in today's releases is the corporate debt.

The chart below shows the extent of debt overhang in Ireland:

Here's what IMF has to say on that (emphasis mine):
"Despite an overall decline in corporate debt, an increasing number of firms are facing difficulties covering interest payments on debt. Interest coverage ratios [ratio of earnings before interest and taxes (EBIT) to interest expenses] have declined, with the interest coverage for the median firm having decreased from 6.9 in 2002 to 0.8 in 2009, and with an increasing number of firms not generating sufficient income to cover interest payments on outstanding debt. ... Moreover, the interest coverage is markedly lower for SMEs, with a median of 0.8 compared to 1.9 for large firms. The decline in firm profitability associated with depressed demand is playing an important role in the reduction in interest coverage ratio. This suggests that financing constraints are particularly important among SMEs and in property-related sectors."

In other words, whatever supply of credit is doing, demand for credit is severely constrained by deterioration in firms' financial sustainability.

Although "Leverage for the median firm (which is a small firm) has fallen to 46 percent of equity, with the usage of bank debt showing a similar decline. The data also indicate that trade credit and other non-debt liabilities play an important role in the financing of SMEs, together with internal financing from retained earnings." Although leverage overall has dropped, debt affordability has fallen off the cliff:

Why? "The decline in firm profitability associated with depressed demand is playing an important role in the reduction in interest coverage ratio. This suggests that financing constraints are particularly important among SMEs and in property-related sectors."


So what can be done? Here's the list of IMF outlined options:


"Credit guarantees or subsidies on SME loans can in principle stimulate SME financing. ... Until recently, Ireland was one of the few OECD countries without some form of loan guarantee scheme. ...However, the international experience with SME lending schemes is mixed. ...Moreover, the historical experience shows that credit guarantee schemes can only be effective when there are competent, financially sound banks, with adequate staff to effectively screen and monitor SME loans. ...

Government support for SMEs will need to be complemented with progress in improving the operational capacity of banks to work out loans. The restructuring of SMEs on a case-by-case basis is resource intensive yet important to ensure that where a viable core business exists, that it has the possibility to invest and grow, and contribute to broader economic recovery.

Considering the number of SMEs, it would not be appropriate to rely principally on court-based bankruptcy procedures. Rather, banks will need to build their capacity to design and implement work outs though out-of-court workout processes. Drawing on international expertise may well be needed to help major banks build capacity in this area.

The government could also explore ways to facilitate the securitization of SME loans. However, liquidity premia currently demanded by market participants even on senior
tranches, plus the inability of the Irish government to offer substantial credit enhancements
on such securitizations given the low sovereign credit rating, imply that, at least for the
moment, the market for securitization of SME loans is limited."

So, in other words: NOTHING can be done on the scale required. We are boxed into the corner with SMEs debt overhang too. All state resources and economy's resources wasted on rescuing the banks bondholdres, folks. No powder left for the rest of the economy. Sit tight and pray for a miracle.



Aside: An interesting observation via the IMF concerning the links between the negative equity and property values and firms formation: "With depressed home prices it has become more difficult to finance a new firm using home equity, which has hampered job creation."

10/9/2012: Insane path of Irish 'wealth'

Another interesting chart from the IMF reports today:

Now, look at the red line - Net Wealth in Ireland, which has dropped to levels below those in Q1 2002, while housheolds' total taxes (VAT and Income taxes combined, excluding other) has ballooned from €17.96bn in 2002 to €23.54bn in 2011. So let's do a simple mental exercise: net wealth is down ca 30%, household taxes are up ca 31%... and we are supposed to:

• Deleverage our own debt
• Deleverage the banks-related debts of the Exchequer

What a better illustration of madness can one find? Oh, wait, I know - the Armchair Socialists' one: "Ireland is a very wealthy country and we must tax wealth to extract funds for the Government". Alas, we are rich... rich as we were more than 10 years ago. Since 2002, folks, it's not the wealth of ours that grew, but the appetite of the State for our wealth.

10/9/2012: Irish Households Debt Overhang: IMF note

IMF published today three papers relating to Ireland's economy. Each of interest on its own merit and I intend to blog about them.

However, here's a chart that actually summarizes pretty well both the extent of the Irish crisis and the sorry state of affairs expected as we exit it:

Here's IMF's explanation for the household deleveraging process out of what is - by the standards of the chart above - a historically unprecedented debt overhang.


"Under the current forecast, households would reduce debt gradually from about  210 percent of disposable income to 185 percent by 2017. Building on the forecast of the
savings rate, the debt path is calculated based on the IMF desk forecast for a muted recovery
of disposable incomes at below GDP growth. Further, the debt path assumes that households use about half of their savings to retire debt, and new lending growth remains moderate, increasing from 1.6  percent of GDP in 2012 to 5.3 percent by 2017."

Now, give it a thought, folks.

1. Irish crisis in mortgages is well in excess of anything represented in the above chart;
2. Irish deleveraging over 9 years (2009-2017) will yield mortgages debt reduction of just 25 percentage points even if we use half of our entire savings to pay down the debts;
3. This painful deleveraging will still Ireland's mortgages markets in wore shape in 2017 than the second worst peak  of the crisis (the UK) back in 2007.

And here's the chart showing that all the debt paydown to-date has had zero effect on arresting the degree of Irish households leveraging (debt/asset value ratio) as underlying asset values of Irish properties continue to fall:

It is clear from the above that the Irish Government is out to lunch when it comes to dealing with the most pressing crisis we face - the crisis of severe debt overhang on households' balancesheets.

9/9/2012: Ireland's stellar exports performance?

Three charts that put to the test one of our greatest claims to fame - the claim that Ireland is one of the world leaders in exports performance.

Charts above clearly show that Ireland's performance in exports growth was rather spectacular in the 1990s, strong in 2000-2004 period and below average in 2005-2009 period. However, in 2010-2012 period - the very period when, according to our Government we are experiencing dramatic growth in exports - Ireland's exports performance is, in fact, well below the average for our peers.

As the result of this, despite an absolutely massive collapse in imports, Irish current account performance (external balance that is supposedly - per Government and official analysts, and the likes of Brugel think-tank heads - going to rescue us from the massive debt overhang we have) is underwhelming:

9/9/2012: September Euro area bonds supply

September 2012 bonds supply and auctions for euro area countries (via Morgan Stanley):

9/9/2012: Some pretty big moves in CDS markets

Here are the moves in sovereign CDS since April 1, 2012 through last week.

7/9/2012: Theobroma cacao is not a placebo to cognitive ability

One of really cool studies that really shows economics is much more than dismal science:

The paper by Savastano, titled "The Impact of Soft Traits and Cognitive Abilities on Life Outcomes" (link here) "combines neuroscience, psychology, and behavioral economics to empirically analyze the extent to which academic achievement, the relative weight of rationality vs. fairness in decision-making, and life satisfaction are affected by cognitive ability, persistent personality traits, and short-term stimuli based on psychological priming techniques."

The paper sets an experiment: "Prior to undertaking a course exam and playing the role of the respondent in an ultimatum game, a group of Masters and PhD students were stimulated either emotionally (via chocolate tasting) or rationally (via mathematical problem solving)."

The experiment involved "a chocolate tasting ...on a sample of 83 graduate students who were asked to play the role of the respondent in a one-shot ultimatum game against a computer. A sub-sample of 50 students also undertook one of their exams of their M.Sc or first year of the PhD program in Economics right after receiving the treatment. Students were also asked to complete a standard Big Five Test which was complemented by an Emotion Regulation (ER) Tests to allow disentangling broader aspects of their personality." Other controls were implemented as well.

The core questions were:

1. "how personality traits (Big Five and ER scores) and cognitive abilities (proxied by past school performance) affect educational outcomes, namely the exam score for the two subsamples of students who, respectively, had chocolate or were rationally stimulated prior to undertaking this stressful activity;
2.  the nexus between short-term and long-term determinants of life satisfaction, as well as the extent to which personality traits can help to explain subjective assessment of well-being; and
3. the relationship between personality traits and cognitive abilities on the threshold value of acceptance of the ultimatum game, therefore on rational choices.

Core results are:

1. "This analysis brings good news for “chocolate and its derivatives” lovers. Theobroma cacao is not a placebo; it is statistically confirmed that the brown nectar provides individuals with a shot of positive energy that helps them feel happier. 
2. "If a piece of chocolate is also associated with “positive” soft personality traits, one can also experience some form of persistence in life satisfaction, or other life outcome. 
3. "Like any other external and exogenous shocks, the long-term effects are the sum of different factors, and the relative weight associated to it. There can be a positive relationship between a positive (negative) shock and its short-term impact. 
4. "However cognitive abilities, enduring positive personal traits and rationality help to mitigate the effects in the long-run, when individuals use reappraisal and revise their initial expectations, which together lead to more rational choices. 
5. "It appears that the homo economicus hypothesis is justified in the long term, but subject to the weight of emotionality in the short- run.

If you might think this is all just esoteric academism, don't. The author provides an example of where this knowledge can be applied to specific industry outcomes analysis, e.g. farming.

7/9/2012: Psychological effects of debt

For our brilliant minds in politics and their 'intelectual' parrots who constantly remind us (albeit with, thankfully, decreasing frequency) that negative equity only matters when people need to move, here's one piece of latest research on links between debt (unsustainable) and mental health.

Link.

So, nothing to worry, then. The results are:

• "...Results provide strong evidence  that respondents’ reactions to problem debt have a non-negligible social dimension in which the prevailing local level of indebtedness impacts on individual psychological stress." In other words, other's debt is not just their own problem.
• In a multivariate model "individuals who report they face ‘difficulty’ meeting their housing payments (mortgage or rent) are at least two months late on their housing payments, or who report that meeting their consumer credit repayments presents a ‘heavy burden’ to their household, exhibit worse General Health Questionare scores and greater propensity to suffer from depression". now, note - this is not just about those who are defaulting, but also those who are facing difficulty meeting their repayments.
• Secondly, "...selection into problem debt on the basis of poor psychological health accounts for much of  the observed cross-sectional variation in psychological health between those with and without problem debts. ...individuals who are observed to move into arrears on their housing payments or into reporting a heavy burden of debts between two waves of data exhibited, on average, worse psychological health than those not moving into debt problems in the first wave of data." In my opinion, this is likely the effect of buildup of stress prior to arrears actually arising formally and as households work through their savings, cuts to their budgets and borrowings from relatives on their way into arrears. If so, the longer the delay in dealing with problem debts (and in Ireland it is now counted in years, not months), the worse the psychological outcomes.
• Per negative equity: "...it is shown that mortgage holders who enter into arrears on their mortgage debts in localities where house prices are growing (and so their home equity ‘buffer’ is increasing) suffer less deterioration in psychological health compared to individuals who enter into arrears in localities where house prices are falling (and so their home equity ‘buffer’ is decreasing). Home equity buffers have been shown to be important forms of consumption insurance for households facing adverse income shocks (Hurst et al. 2005; Benito, 2009)." Need I say more.
• "Individuals who exhibit the onset of  problems repaying their unsecured debts in localities with a higher bankruptcy rate ...experience less deterioration in psychological health compared to individuals exhibiting the onset of problem repaying their unsecured debts in localities with lower bankruptcy rates." This is most likely accounted for by much faster and more lenient personal insolvency resolution regime in the UK in general, leaving lower stigma on those defaulting on unsecured debt.
• "By contrast, individuals who exhibit the onset of problems repaying their secured debts in localities with higher mortgage repossession rates are shown to experience more deterioration in  psychological health compared to individuals ...in localities with lower mortgage repossession rates." Again, the UK more developed and more lenient regime for resolving secured debts insolvencies is also at play here, in my view, as repossessions are signals of the deepest form of insolvency, and non-repossession solutions are well advanced. This implies that localities with higher rates of repossessions are more likely to have experienced much greater declines in income, rises in unemployment and/or prices declines in the property markets.

All in, I read the above evidence as the urgent signal that Ireland needs:

1. Immediate reform of its bankruptcy laws to facilitate speedier resolution of debt problems;
2. The reform should focus on pre-bankruptcy resolution mechanisms (as the current Government proposal does suggest) but these mechanisms must be robust and not left to the disproportionate capture by the lenders (as the current Irish Government proposed legislation does).
3. The reform must carry emergency measures to deal with the unprecedented crisis we are facing today - in other words, the reform should not attempt to set a singular new regime for the perpetuity, but have two different regimes - Firstly: a reform to address the emergency situation with much more lenient bankruptcy arrangements for those who have acquired the unsustainable debts in the period 2002-2008, Secondly : a reform to address the future bankruptcy regime, post-emergency. The current legislation is better served for the second purpose, but it does not meet the requirements of the first objective.

7/9/2012: Ireland is not exactly shining in Global Competitiveness terms

Spot that Highly Competitive economy called Ireland?

Yep, that's right:

• Ireland ranks 27th in the Global Competitiveness Index 2012-2013 a great improvement in rankings from 29th place in 2011-2012 won by the massive internal devaluation on the sacrificial fields of defending the overvalued euro.
• Ireland rnaked 35th in Basic Requirements sub-index, 25th in Efficiency Enhancers sub-index and 20th in Innovation and Sophistication Factors sub-index
• Ireland ranks 131st in the world in Macroeconomic Environment,
• 108th in the world in Financial Markets Development,
• 20th in the world in quality of higher education and training,
• 18th in the world in business sophistication, and
• 21st in business innovation.

All results are, of course, skewed positively by the MNCs operating here. 

6/9/2012: ECB's OMT: Negatives slightly outweigh Positives

Here's the distilled version of what ECB did and did not do today. A usual caveat applies - the markets can agree or disagree with this economist's view and other economists will  disagree with this economist's view.



ECB President Mario Draghi attempted to do the tight rope walking and keep markets guessing as to what ECB will do in the end in sovereign debt markets while not deflating the expectations bubble he created with his earlier pronouncements.  That he seemingly delivered on. The core potentialities of his announcements (I stress - potentialities, as in none of these are set in stone and all are subject to huge set of uncertainties) were outlined by me here. These remain functional.

In terms of today's announcement, the overall sentiment is that of a small net negative, driven by the three major negatives: conditionality (linked to the OMT), the three remaining uncertainties (design, deployment and delivery - to be explained below), and sterilization; only partially off-set by positives: unlimited programme (in theory), pari passu purchasing (risk-sharing), maturity focus and collateral easing.

Now on to details:

Positives from the OMT announcement:

• Lack of pre-set limits on bonds purchases is a positive, although, of course, there is always a physical limit and there is also an economic bound to be imposed implicitly by sterilization operations (remember, under sterilization, in effect the ECB will be pumping liquidity into sovereign markets, while pumping same liquidity out of the already distressed private markets). The 'unlimited' purchasing will be severely tested by Italy and Spain (when/if these countries swallow the conditionality costs and join the programme, as Spanish and Italian bonds redemptions for suited horizon (2013-2015) will be in the region of €530 billion or more than 1/2 of the LTROs 1 & 2 combined.
• ECB accepted the premise of official lender participation in future restructurings, by committing to pari passu treatment of its OMT purchases. Sadly for Greece, this comes too late to save some €100 billion or so that could have been restructured under the SMP in the beginning of this year, but is now off-limits. In fact the SMP purchases remain senior. It is unclear if the ECB will mop up SMP holdings into OMT or how these will be unwound. If they are to be held to maturity, they will remain a risk drag for private holders and we have a two-tiered seniority market on our hands.
• Maturity focus remains on 1-3 year horizon, which comfortably works with the economic logic I outlined in the note linked above. However, one issue is that the ECB will hold OMT purchases to maturity, implying a potential redemption cliff for the sovereigns engaged in OMT that can be exacerbated, from the ECB point of view by coincident maturity of the LTROs. 
• Easing of the collateral, and in particular allowance for FX-denominated collateral is similar to what ECB undertook in 2008-2010 period transactions and should provide a wider range support.

Negatives from the OMT announcement:

• Very strong conditionality rhetoric from the ECB, with access to the OMT only via EFSF/ESM and with full macroeconomic conditionality in the form of compliance with the Enhanced Conditions Credit Line (ECCL). IMF oversight involvement is sought, making the OMT a sort of Troika-junior engagement for any country involved. This dramatically reduces the likelihood of any country going into OMT and in particular is a net negative for the countries that might benefit from the OMT when in the process of exiting the current Troika arrangements, such as Ireland and Portugal. In fact, the two countries can only qualify for OMT as they exit Troika deal and this will de facto mean that exiting the Troika deal will re-enter them into another Troika-light deal with OMT - a political no-go territory. It is also a major barrier for Spain and Italy.
• The OMT is a time-buying exercise, in so far as it can only allow the Governments some time (1-2 years) to put in place structural reforms. It does not resolve the crisis itself. The problem is that the Government now have to 
• design the right set of reforms (which is not as straight forward as one can imagine - of the 3 current Troika-programme run countries, only Ireland and Portugal have so far managed to design some sustainable reforms and not all so far, after a number of years of attempting such designs pre-Troika and during the Troika reign);
• deploy the designed reforms (which is a tough process that has to be sustained over time and across political elections. In the sub set of three states currently in Troika programmes, again, only two have managed to partially achieve this, and again, with varying degree of success); and
• the deployed reforms must deliver desired outcomes (subject to heavy set of risks and uncertainties: of the three participant states, none have so far managed to deliver desired outcomes on reforms packages, especially when it comes to achieving economic recovery).
• The OMT will rely on sterilization of monetary supply flows into sovereign bond markets, which means that in order to buy government bonds, the ECB will have to somehow remove liquidity out of the euro system. This can only be achieved by reducing liquidity supply to the real economy and/or financial sector. This, in turn, makes OMT hardly accommodative of private sector growth and can derail the 'delivery' bit in the OMT's DDD challenge outlined above.
• Other negatives worth keeping in mind are: 
• No numerical targets for yields and no way of assessing these ex ante as bonds purchases will be disclosed only on a weekly basis
• No change to collateral eligibility for non-government bonds (other than for government-guaranteed bonds), meaning OMT will have no easing effect on liquidity supply in financial sector.
• Excessive optimism on ECB behalf, with Draghi announcing that the OMT will be a "fully effective backstop that [will] remove tailrisks from the euro area". As I noted earlier, the biggest 'Black Swans' arise when policymakers start believing in non-existence of 'Black Swans'

Update: And here's a map of Draghi's comments on OMT announcement (via Prof Brian M Lucey):

Lets take a note: word 'growth; is the most prominent operative term used and yet, nothing within OMT is about growth. In fact, the policy rate remains unchanged, hence no pro-growth move in policy dimension. The logic of growth-OMT link is a tenuous one at best, and contradictory to the OMT operational objectives. Here's why. OMT - if successful - is supposed to ease the cost of Government's transition to fiscal austerity. It is to be sterilized. Hence, OMT is neither a fiscal nor a monetary tool for sustaining or generating any growth. Other key words to note relate to 'financial' and 'risks' - I commented above on the perverse effect on financial system the OMT is likely have. I have also commented above on the bizarre discounting of risks remaining within the system once OMT is up and running.

Note: I will be working on this post throughout the evening, so stay tuned for additional comments

5/9/2012: Services PMI for Ireland: August

I covered manufacturing PMI for Ireland for August in the previous post (here). This time, lets take a look at the Services Sector PMI released today by NCB.

In July, the Services Sector PMI registered the reading of 49.1 - the third consecutive month of below-50 readings, albeit at statistically insignificant difference from 50. In August, the headline Business Activity index reached 51.7, which is above 50, though once again not statistically significantly so. Still, good to see the number above 51, and at 51.7 we have a signal of modest growth.

Headline trends are:

• 3moMA is at 50.2, previous 3 months average is at 51.1, so we are still in a fragile bounce above 50. 
• 12mo MA is at 50.8, which compares relatively poorly to 12moMA through August 2011 (51.7) and 12mo MA through August 2010 (54.7).
• New Business Activity sub-index also reached above 50 in August, up to 52.6 compared to 49.5 in July.
• New Business 12mo MA is at 50.6 and this compares to same period MA in 2011 of 48.8 and same period MA for 2010 of 53.3. 3moMA is at 50.8 still below previous period 3mo average of 51.5.

You can see the moderating in volatility flat trend just above 50.0 for both series in the charts above that set in around April 2010. Good news, this is above 50.0. Bad news it is throwing fewer and fewer upside surprises. 

To the slight downside on the news front, New Export Business sub-index moderated growth signal from 55.7 in July to 54.1 in August, albeit this is still significantly above 50.0 line. I wouldn't call it a weak reading by any means, but a slippage in the rate of growth.

• 12mo MA through August 2012 is at 53.5 against same period 2011 at 51.0 and 2010 at 54.6.
• 3mo MA is now at 54.7 and this is an improvement on previous 3mo period of 54.1.
• Overall trend is relatively strong here and is sustained, which is good news.

In the chart above another notable trend is in Employment, which registered sub-50 reading once again in August - for the fourth month in a row - at 49.1. The decline in employment sub-index, however was moderated relative to July reading of 48.3.

• 12mo MA through August 2012 is at 48.2 which is virtually identical to same period average of 48.1 in 2011 and 2010.

Profitability also declined and is now at 42.9 - well into contraction territory. 

More on employment and profitability signals in subsequent posts.

Overall we have an improved performance in the Services sector in August, compared to May-July period, which is good news. Confidence is running high, rather too high (relative to actual activity levels), but that is relatively normal coming out of depressing three months around the end of Q2.

5/9/2012: The balance of imbalance: Irish Exchequer deficit in January-August 2012

In the previous two posts I examined the Exchequer receipts and net voted expenditure for January-August 2012. Now, on to the overall balance.

In July 2012, the Exchequer deficit stood at €9.13 billion against July 2012 headline deficit of €18.89 billion. In August, cumulated 2012 deficit rose to €11.35 billion (up €2.22 billion in one month) compared to €20.43 billion in 2011 (2011 monthly rise in August was €1.54 billion).
Fact 1: Irish Exchequer deficit rose at faster pace in August 2012 than in August 2011, so in monthly changes terms, August 2012 was not an improvement on August 2011.

However, the headline figures are incorporating several factors that gold-plate our deficit performance in 2012 compared to 2011, none of which the Government is willing to actually directly separate to identify the true performance. Let's try doing this job for them:

• As mentioned earlier, €233 million on 2011 revenue side came from the one-off sale of the Bank of Ireland shares, while €251 million of corporate tax receipts booked into 2012 is really the revenue from 2011. This means the deficit in 2011 should be adjusted by -€18 million and the balance in 2012 should be adjusted by +€251 million.
• In January-August 2011 the state spent €7.6 billion on recapitalizing banks, while this year the spending was only €1.3 billion plus there was a payment of €450mln in 2012 into the ICF (Insurance Compensation Fund). This means we should adjust the Exchequer balance on 2011 side by -€7.6 billion and 2012 by -€1.75 billion.
• Promo notes 'restructuring' this year meant the net cost of the Notes booked at €25mln, against €3.1 billion in 2011. This means adjusting 2011 deficit by -€3.1 billion and 2012 deficit by €25 million.
• In 2011 revenues from the banks measures - clearly a temporary source, as the EU Commission has warned Ireland already about the future tapering off of these receipts - amounted to €1.27 billion, while in 2012 they amount to €2.06 billion.

Accounting for the above one-off and temporary measures, the underlying deficit figures are:

• 2011 January-August period: €10.98 billion or €9.71 billion if we omit accounting for banks receipts;
• 2012 January-August period: €11.88 billion or €9.82 billion if we omit accounting for banks receipts.
• Hence, January-August 2012 period deficit, comparable to that for the same period in 2011 is worse, not better, by €109-896 million depending on whether we consider windfall differences in temporary revenues from banks.

Fact 2: On comparable basis, stripping out one-off measures and temporary allocations, Irish Exchequer deficit is worse in the first 8 months of 2012 than it was in 2011.

4/9/2012: Six Key Facts About Irish Government Spending: August 2012

In the previous post I looked at the receipts side of the Exchequer returns for January-August 2012. Now, let's take a quick tour through the expenditure side.

In January-August 2012, the Government total Net Voted Expenditure stood at €29,593 million or €244 million (0.8%) above the same period of 2011. In other words, the Government is spending more in 2012 than it spent in 2011 on the expenditure side that it actually controls. In July 2012, the overrun was €138 million or 0.5%.

Fact 1: things are getting worse month on month, not better, on the spending side

Fact 2: things are getting worse year on year, not better, on the spending side

Current Net Voted Expenditure rose €444 million (+1.8%) y/y in January-July 2012 compared to same period of 2011. In August, this figure went up to €659 million (+2.4%).

Fact 3: the core driver for rising Government spending is Current Expenditure, and the increases in spending in this area are getting worse, not better, with time. 

On the total expenditure side, the Government is now exceeding its target for 2012 (these are revised targets published in May, so the overruns are compared for just 4 months running) by 1.1%, and on current expenditure side these overruns are at 1.6%. In July 2012 the same figures were +0.8% and +1.3% respectively.

Fact 4: even by revised targets the Government is already behind its set objectives, just 4 months into running and the set-back is accelerating month to month.

In July 2012, five departments exceeded their targets on current expenditure side, including (as expected) Health (+1.0%) and Social Protection (+4.4%). In August 2012, six departments were in breach of their targets on current spending, with Health performance deteriorating (+1.5%) while Social Protection performance showing shallower miss on target (+4.2%).

Fact 5: More departments are slipping into underperformance relative to target in August than in July.

In August, five departments posted increases y/y in Current Net Voted Expenditure, in July there were seven departments in the same position.

Fact 6: year on year cuts in spending in smaller departments are not sufficient to offset increases in spending in larger departments. 

Capital expenditure has fallen €415 million (down 20.9%) y/y and is now €120 million (7.1%) below the target. In an ironic twist, these 'savings' will be totally undone through the Government capital expenditure boost once privatization process gets underway. 

However, annual estimates assume 13.4% or €562 million reduction in capital spending. With 74% of thse already delivered on, it is hard to see how the Government can extract more savings from this side of the balancesheet to plug the widening gap on the current expenditure side.

To summarise, therefore, the Irish Government continues to increase, not decrease the overall Exchequer expenditure year on year and is now behind its own targets. 

Neither the receipts side of the fiscal equation, nor the expenditure side are holding.

4/9/2012: The Fog of Exchequer Receipts: August 2012

The Exchequer receipts and expenditure figures are out for August and the circus of media rehashing that way and this way the Department of Finance press releases is on full blast.

From the way you'd read it in the media outlets, tax receipts are up, targets are met, deficit is down, spending is down. The problem is that the bunch of one-off measures conceals the truth to such an extent that no real comparison is any longer feasible for year on year figures. The circus has painted the Government finances figures so thickly in a rainbow of banks recaps, shares sales receipts, tax reclassifications, tax receipts delays and re-bookings etc that the Government can say pretty much whatever it wants about its fiscal performance until, that is, the final annual figures are in. Even then, the charade with promo note in March will still have material influence on the figures, as will tax reclassifications and delayed tax receipts booking.

With this in mind, let's try and make some sense out of the latest Exchequer receipts results, first (expenditure and balance in later posts).

Take total tax receipts for January-August 2012. The official outrun is €22.076bn which is 1.7% ahead of target set in the Budget 2012. Alas, monthly receipts of €1.763bn is 7.1% short of target. In July 2012, monthly tax receipts were 0.2% below target. So:
Point 1: As a warning flag: revenues are now running increasingly below target levels.

Year on year tax receipts were down 1.7% in July on a monthly basis and were up 9% on aggregate January-July basis. Year-on-year receipts were down 5.7% in August on a monthly basis, and were up 7.7% on January-August aggregate basis.
Point 2: As another warning flag: tax receipts are now running for two months under last year's and this is even before we adjust for 2011-2012 reclassifications and delayed bookings of some receipts.

Now, the Department of Finance states in the footnote to its tax receipts analysis that: "Adjusting for delayed corporation tax receipts from December 2011 and the techncial [sic] reclassification of an element of PRSI income to income tax this year, aggregate tax revenues are an estimated 5.2% year-on-year at end-August, coproration [sic] tax is up 6.7% and income tax is up just under 10%". What does it mean? this means that by Department estimates, the two factors account for roughly €511 million in combined bookings into 2012 that are not comparable to 2011 figures.

Subtracting €511 million our of the total cumulated receipts implies tax receipts for January-August 2012 of €21.565bn which would be 0.7% below the Budget 2012 target. Thus,
Point 3: Tax receipts, on comparable basis, are running at below target, not ahead of it, albeit the difference is still materially small.

Here's what else is interesting, however, at the end of June the Department provided an estimate for the above adjustments of ca €472 million, at the of July it was €467 million and now at €511 million. Even allowing for rounding differences on percentages reported this looks rather strange to me.

On non-tax revenues:

• In 2011 the Government collected €233 million from selling its shares in Bank of Ireland. This year - nil booked on that. Which largely accounts for the capital revenues being down from €1,036 million in 2011 to €813 million in 2012.
• Again on the capital receipts side, total EU contributions to Ireland in January-August 2012 stood at €68.401 million against €43.671 million a year ago.
• Total non-tax revenue on the current line of the balancesheet is €2.403 billion in January-August 2012 and this is up 49.4% on the same period in 2011.
• Of the increase registered in 2012 compared to 2011, €487 million came from increases in clawbacks from the banks and Central Bank of Ireland remitted profits. In other words, that was roughly half a billion euros that could have gone to writing down mortgages, but instead went to the Government. €302 million more came from the Interest on Contingent Capital Notes, which is the fancy phrase to say it too came from the banks. Thus, all in, current non-tax revenues increases of €794.1 million were almost fully accounted for by the increases of €789 million in the state clawbacks out of the insolvent and semi-solvent banks that the state largely owns.

Point 4: Unless you believe that the banks conjure money out of thin air, any celebration of non-tax receipts improvements in January-August 2012 compared to 2011 is a celebration of Pyrrhic victory of the Exchequer witch craft inside our (as banks customers and mortgage holders) pockets.

Now, let's add all receipts together:

• Total Exchequer receipts in January-August 2012 stood at €25.937bn against €23.146bn in 2011. 
• The 'rise' in total Exchequer receipts of €2,791 million in 8 months of 2012 compared to the same period in 2011 includes €511 million in tax adjustments (re-labeling) and carry over from 2011, plus €789 million in new revenues clawed out of the banks. In addition, €645.7 million is booked on receipts side via the Sinking Fund transfer (which is netted out by increased expenditure).
• So far, over the 8 months of 2012, the actual net increase in total (tax, non-tax current and non-tax capital) receipts is ca €845 million, or 3.7%.

Point 5: Disregarding expenditure effects (to be discussed later), Irish Exchequer has managed to hike its policy-controlled receipts by 3.7% y/y over the January-August period. Better than nothing, but a massive cry from the headline figure of 7.7% increase in total tax receipts and 12% rise in total receipts.

4/9/2012: H1 2012 Trade in Goods & busted expectations

At first I resisted (rather successfully) for a number of days from blogging about the trade in goods stats for June released on August 16th. Aside from the already rather apparent pharma patent cliff and resulting collapse of exports to the US, there is little to be blogged about here. Well, may be on some BRICs data, but that will come later, when I am to update bilateral trade with Russia stats.

Then, playing with the numbers I ended up with the following two charts showing trade stats for H1 2012:

As dynamics show in the chart above, Ireland's goods exports are... err... static in H1 2012 compared to H1 2011 - down 1.69% y/y compared to H1 2011 and this comes against a rise in exports of 5.91% y/y in H1 2011 (compared to H1 2010). The exports-led recovery has meant that in H1 2008 exports are up just 3.62% on H1 2008 and are down 0.58% on H1 2007. Recovery? What recovery?

Of course, over the same period of time, imports fell 3.14% on H1 2011 (after rising 9.25% y/y in H1 2011 compared to H1 2010), and in H1 2012 imports stood at 20.09% below their H1 2008 and down 23.20% on their H1 2007 levels.

Which means that our exports-led recovery is currently running as follows: imports are down substantially more than exports (which is accounted for primarily by the collapse in domestic demand and investment activities), while exports are running only slightly behind their pre-crisis levels.

Thus, trade balance was up 0.05% y/y in H1 2012, while it is up 58.49% on H1 2008 and 51.48% on H1 2007. The body that is the Irish economy is producing  pint of surplus blood by draining 5 pints and re-injecting 4 pints back. Hardly a prescription for curing the sick according to modern medicine approach.

But that alone is not what keeping me focused on the numbers. Instead, it is the hilarity of our captains' expectations when it comes to the proposition that 'exports will rescue us'. Many years ago, in the days when the crisis was just only starting to roar its head, I said clearly and loudly: exports are hugely important, but they alone will not be sufficient to lift us out of this mess. Back then, I had Brugel Institute folks arguing with me that current account surpluses will ensure that ireland's debt levels are sustainable. Not sure if they changed their tune, but here's what the Government analysis was based on, put against the reality.

In the chart below, I took 3 sets of Government own forecasts for growth in exports for 2009-2012, extracted from Budget 2010, 2011 and 2012. I then combined these assumptions into 3 scenarios: Max refers to maximum forecast for specific year projected by the Department of Finance, Min references the lowest forecast number, and the Average references the unweighted average of all forecasts available for each specific year. I applied these to exports statistics as reported for 2009 and plotteed alongside actual outrun:

Current H1 2012 outrun for exports is €449 million lower than the worst case scenarios built into the Budgets 2010-2012 by the Governments. It is also €4,399 million behind the highest forecasts.

Put differently, the outcome for H1 2012 is worse than the darkest prediction delivered by the Department for Finance.

Of course, the exercise only refers to goods exports and must be caveated by the fact that our services exports might take up the slack. So no panic, yet. And a further caveat should be added to reflect the fact that the above is not our exporters fault, as we are clearly suffering from the tightness in global trade. On the minus side, there's a caveat that the pharma patent cliff has been visible for years and that the Government has claimed that they are capable of addressing this.

Sleepless nights should not be caused by the latest stats, yet. But if things remain of this path, they will come.

4/9/2012: Imagining the banks costs

Excellent info-graphic on the cost of Ireland's banks rescue to the economy via Stephen Donnelly (TD, Independent):

And the link to the original.

3/9/2012: Ireland's Manufacturing PMI for August

Today's release of the NCB Manufacturing PMI data for Ireland for August 2012 came in with both a positive and a negative surprises. The positive side of the news is that the headline index did not dip below 50 (contraction territory) but stayed at 50.9 in August, down on 53.9 in July, but above 49.7 in August 2011. In other words, the rate of Manufacturing sector growth has slowed down markedly, but remained positive in August.

The slowdown is significant, however, with current reading (50.9) not statistically distinguishable from zero growth level of 50.0, against statistically significant expansion recored in July.

Here is core stats summary:

• Headline seasonally adjusted PMI is now running at below 3mo MA (52.6), and 6mo MA (51.8). However, thanks to July reading, Q3-to-date average is at 52.4 (statistically above 50.0) and well ahead of 51.5 in Q2 and 49.8 in Q1. 
• August marked the 6th consecutive month of above 50 readings.
• New Orders sub-index also fell in August from 55.8 in July to 51.8 in August. Again, August reading was not statistically significantly different from 50.0. 3mo MA is now at 53.7 and 6mo MA is at 52.7. Q3 to-date average is 53.8 and this is well ahead of Q2 2012 average of 52.0 and Q1 2012 average of 49.9.
• New Export Orders sub-index also posted moderation in growth from July 56.7 to August 53.4, although 53.4 remains a solid signal of expansion. August now marks 6th consecutive month of the sub-index above 50 readings. 3mo MA is at 54.2 and close to 6mo MA of 54.0. Q3 2012 average to-date is at brisque 55.1 against Q2 2012 average of 52.8 and Q1 average of 51.9. 
• One has to keep in mind that the above performance puts Irish manufacturing sector activity well ahead of the euro zone peers and our exporting performance well above the entire EU member states' performance.

Chart to illustrate:

Output sub-index confirmed the above trends, slipping from 54 in July to 51 in August. Again, expansion is not significantly different from zero, but still good to see the index staying above 50 in level terms. 3mo MA is at 53.2 and 6mo MA at 52.0. Quarter to quarter changes are: Q1 2012 average of 50.2, Q2 2012 average of 51.4 and Q3 2012 average of 52.4.

Chart below snapshots core series trends over shorter horizon:

Chart below shows time series for other sub-indices.

Quick synopsis of changes in prices and employment. As usual, I will be doing more detailed analysis of profitability and employment after we have Services PMI data as well, so stay tuned:

• Output prices have continued decline, albeit at slower pace than in July, while input prices returned to rapid inflation (56.8 in August from 47.8 in July).
• 3mo MA for input prices is now at 51.4 against 48.6 3moMA for output prices. 
• This points to shrinking profit margins. However, the pace of margins contraction is now slower than in Q1 and Q2.

• Manufacturing sector employment posted another (6th consecutive monthly) expansion in August, though the rate of growth in employment has moderated from 53.1 in July to 51.1 in June. Q3 average-to-date is at 52.1 which is down on 54.4 for Q2. 

So overall, the data coming out in August is a mixed bag. Comparative to the euro area peers, manufacturing in Ireland is doing as well as can be hoped for. Alas, the rates of economic growth we require to sustain our debt deleveraging are hardly benchmarkable against our peers. And on that side, things are not encouraging. 

Let's wait for Services data next...

3/9/2012: Euro Area PMIs for August

I will be blogging on Irish Manufacturing PMI for August 2012 later today (the headline numbers are encouragingly positive, albeit growth rate has slowed down markedly on July), but here's the summary of Euro area PMIs and growth dynamics from Pictet:

The two charts are confirming the dynamics presented here on the foot of eurocoin leading indicator for growth.

2/9/2012: Gun, no bullets, a charging bear

Via an excellent recent post on the SoberLook, here's a chart showing a Central Bank with no ammunition left to fire at the charging bear:

The chart plots the rapid rise of monetary base in Japan courtesy of BOJ.

And as to the portrait of the bear (via same post):

The above plots Japan's GDP y/y changes. Here's the point - in 20 years between 1995 and 2014 there will be not a single 5 year period in which Japan did not have a recession. Not a single one.

Now, recall that 'we will do everything necessary to rescue euro and, believe me, it will be enough' statement from Mr Draghi... BOJ needless to say tried the same... it has been working marvels for Japan's economy, albeit the yen is still there.

31/8/2012: Eurocoin for August 2012

Euro area leading growth indicator from Banca d'Italia and CEPR has posted eleventh consecutive monthly contraction in August, reaching -0.33 from -0.24 in July. This marks the worst reading for eurocoin since July 2009. 2008-2009 average was -0.31, so the current reading is worse than average for the first wave of the crisis.

A year ago, the indicator stood at +0.22, implying a growth swing of 2.1-2.3% annual.

3moMA indicator is now at -0.25, annual expected rate of decline is at -1.3%.

Charts to illustrate:

31/8/2012: Net, gross, gloss - FDI in Ireland 2011

So CSO headlines today that Irish Net Direct Investment Position improved to €48 billion at the end of 2011. which is fine, until you read actual numbers. Here is the synopsis from CSO itself (emphasis is mine):

"Irish stocks of direct investment abroad fell by €12bn from an end-2010 position of €254.5bn to €242.5bn at the end of 2011. ...The decline between the end of 2010 and end of 2011 was mainly due to a fall in investment of €26bn in enterprises located in Central American Offshore countries. European based enterprises partially offset this decline."

Hence, Factor 1 - explaining most of the €7.2 billion in net position change is drop in investment schemes used by Irish resident companies to wash-off tax liabilities.

Next: "The level of total foreign direct investment into Ireland also fell between the end of 2010 and the end of 2011. The decrease was €19.2bn [massively in excess of net contraction in outward investment from Ireland] giving an end-2011 position of €194.5bn. The main contributors were decreases of €18bn from US and €10bn from Central America partially offset by increased investment of almost €20bn from European countries."

Hence, Factor 2 - FDI into Ireland has actually dropped, gross, by 9% year on year (please keep in mind, irish Government has cited increased FDI into Ireland as one core 'success' metric).


"Comparing the net end-year positions Ireland’s net FDI increased from €40.8bn at the end of 2010 to €48bn at end-2011."

I know I am supposed to be cheerful about the headline CSO produced, but...

31/8/2012: Poor newsflow for Friday

Clearly confidence-instilling newsflow from the euro area today:

"Euro area annual inflation is expected to be 2.6% in August 2012 according to a flash estimate issued by  Eurostat, the statistical office of the European Union. It was 2.4% in July."

ECB is expected to downgrade EZ growth forecasts once again, per this report.

"The euro area (EA17) seasonally-adjusted unemployment rate was 11.3% in July 2012, stable compared with June. It was 10.1% in July 2011. The EU27 unemployment rate was 10.4% in July 2012, also stable compared with June. It was 9.6% in July 2011." So the contagion to EU10 from EA17 is now feeding through.

And a scarier chart on youth unemployment via ZeroHedge:

And two charts to remind you where we are heading:

All of which is pretty much summarized in another blog post on euro area growth, here.

31/8/2012: James Hamilton on oil prices

An insightful (as always) and economically significant points raised in this interview (via OilPrice.com) by Prof. James Hamilton (UCSD and Econbrowser) on oil prices and demand/supply drivers:

• Why we shouldn't get too excited with the shale revolution
• The "Real" cause of high oil prices
• The incredible opportunity presented by natural gas
• Why long term oil prices will creep upwards
• The geopolitical hotspots that could cause an oil price spike
• Why sanctions could cause Iran to lash out
• Why speculators and oil companies are not to blame for high oil prices.
• Changes we can expect to see under a Romney Administration
• Why Short term oil price forecasts are worthless
• Peak oil & Daniel Yergin 

Certainly a worthy read.

31/8/2012: Financial Innovation : Positives v Negatives

Following on my previous post, here's a new paper by Frankin Allen titled "Trends in Financial Innovation and Their Welfare Impact: An Overview" (link here) published in the European Financial management (vol 18, issue 4).

Core paper findings are:

• "There is a fair amount of evidence that financial innovations are sometimes undertaken to create complexity and exploit the purchaser... As far as the financial crisis that started in 2007 is concerned, securitization and subprime mortgages may have exacerbated the problem.  
• "However, financial crises have occurred in a very wide range of circumstances, where these and other innovations were not important.  
• "There is evidence that in the long run financial liberalization has been more of a problem than financial innovation.  
• "There are also many financial innovations that have had a significant positive effect.  
• "These include venture capital and leveraged buyout funds to finance businesses.  In addition, financial innovation has allowed many improvements in the environment and in global health." 

The paper concludes that "On balance it seems likely its effects have been positive rather than negative."

I find the arguments strained. Much of the financial innovation that Allen declares to be positive is innovation that is driven directly by either force of the states or co-financed by the states. Thus these forms of innovation are not really innovative at all, but superficial. For example - debt-for-nature swaps are hardly a form of financial innovation but rather a form of state subsidy. Likewise, much of carbon permits trading is driven by restrictions imposed by the states via coercive systems. These might be positive - the point is not to dispute their social or environmental or economic value - but they are not what I would term 'financial innovations'.

About the only positive financial innovation that Allen cites that does not involve such state interventions is leveraged buyout. Allen does cite evidence that this had a positive effect, but in the periods immediately preceding some financial crises (the latest one being case in point, as was Japan's crisis of the 1990s and Nordic countries crises of the early 1990s etc) leveraged buyouts carry excessive leverage. Thus, the only unequivocally positive effect such buyouts might have at the times of rising debt overhang, in my view, is the effect of triggering future insolvencies that clear the path (via creative destruction) to new or more efficient incumbent firms growth. This positive effect, however, has little or nothing to do with the financial innovation per se.

Lastly, let me point that I am not disputing that some (the issue is really more of how much and of what variety) financial innovation is positive, but that Allen's article fails really to prove his hypothesis. Neither does it do any justice to the article to state that "the long run financial liberalization has been more of a problem than financial innovation" without actually proving this.

30/8/2012: Does Banking & Financial (De)regulation iImpact Income Inequality?

A new paper, titled "Bank Regulations and Income Inequality: Empirical Evidence", by Manthos D. Delis, Iftekhar Hasan and Pantelis Kazakis (Bank of Finland Research Discussion Paper 18/2012, linked here) studied the effects of financial regulations (deregulation) on income inequality in 91 countries over the period of 1973-2005.

The study yields some very interesting results (emphasis is mine):

• "In general, the liberalization policies from the 1970s through the early 2000s have contributed significantly to containing income inequality."
• "... Abolishing credit controls decreases income inequality substantially, and this effect is long- lasting."
• "Interest-rate controls and tighter banking supervision decrease income inequality; however, these effects fade away in the long term."
• "For banking supervision, the negative effect on inequality [higher supervision leads to lower inequality] is reversed in the long run, a pattern associated with stricter capital requirements that tend to lower the availability of credit". 
• "... Abolishing entry barriers and enhancing privatization laws seem to lower income inequality only in developed countries."
• "... The liberalization of securities markets {expanding securitization] increases income inequality." 

What are the policy implications of these findings?

• "Bank regulations and associated reforms aim at enhancing the creditworthiness of banks and at improving the stability of the financial sector. Several studies over the last decade show that regulations do matter in shaping bank risk (e.g., Laeven and Levine, 2009; Agoraki et al., 2009) or in affecting bank efficiency (Barth et al., 2010) and the probability of banking crises (e.g., Barth et al., 2008)."
• "Yet, what if bank regulations have other real effects on the economy besides those associated with banking stability? And, more important, what if these real effects counteract the intended stabilizing effects?"

Two issues should be considered in answering these questions:

1. "The literature on the relationship between bank regulations and financial stability is inconclusive. In fact, different types of regulation may have opposing effects on financial stability, according to the existing research."
2. "... even if we assume that bank regulations like more stringent market-discipline requirements lower banks' risk-taking appetite and enhance stability (Barth et al., 2008), the empirical findings here suggest that these effects are asymmetric and certain liberalization policies (i.e., liberalization of securities markets) or regulation policies (i.e., higher capital requirements) actually increase income inequality. That is, banks pass the increased costs of higher risks (coming from the liberalization of securities markets) and higher capital requirements on to the relatively lower-income population that lacks good credit and collateral. In other words a trade-off between banking stability and inequality may be present" [Note: this trade-off, I would argue, is most certainly a problem for Ireland today, with future borrowers operating in the environment of reduced family wealth due to property bust and financial assets depletion]. 

"Given the contemporary discussion surrounding (i) the rebirth of Glass-Steagall-type regulatory reforms as they relate to securities trading, and (ii) the discussions under Basel III to increase the risk-adjusted capital base of banks, there may be more to think about before taking those steps."

"On the good side, three clear suggestions emerge from this paper and are also consistent with the findings of Beck et al. (2010)": 

1. "... the liberalization of banking markets, primarily through abolition of credit controls, helps the poor get easier access to credit. This in turn allows them to escape the poverty trap and substantially raise their incomes." 
2. "... appropriate prudential regulation should provide less costly incentives to banks to increase regulatory discipline without hurting the relatively poor. Information technologies that would lower the cost of transparency and more effective onsite supervision that would enhance the trust in the banking system may help achieve this goal."
3. "... economies first need a certain level of economic and institutional development to see any positive effect of the abolishment of entry restrictions and privatizations on equality..."