5/11/2012: OECD Internet economy outlook 2012: part 4

This is the fourth note on the OECD Internet economy report 2012 (part 1, part 2 and part 3 are linked here).

We hear much about the vast gap between Dublin and the rest of the country in digital economy. Usually this refers to the disparity of access. Yet, as the following illustrates, even the 'advantaged' Dublin scores poorly compared to its peers (other capital regionas) in the OECD:

For example, Dublin and Southern and Eastern region are worse than Scotland - the lowest scoring region in the UK. Too bad the folks at the WebSummit and other prime events in digital economy world converging onto Dublin have no clue just how poor we really are in terms of enabling and deploying ICT services-based economy. May be some of them will read these posts or the OECD document before they start extolling the virtues of Irish 'digital' economy.

But enough about the households. What about pioneering, innovative, R&D intensive, knowledge economy business environment here? After all, as I said earlier, ireland is home to so many MNCs in the sector and so one should expect business use of the web to be high...

Oops.. I thought we have hugely innovative start ups and MNCs popping up on every corner... After all, IDA and EI brochures are full of their smiling faces and sunny stories.

And usage is, as with schools, vastly lower than access:

Now, unimpressive record on the share of employees connected to the web and using it...

Equally interesting fact revealed by the above chart is that there is no impressive growth in this metric in 2005-2011 period, despite the fact that overall share should have risen dramatically due to obliteration of jobs in less computer- and web-enabled sectors such as basic consumer services and construction. In other words, the above chart shows conclusively that Irish economy is not becoming more knowledge-intensive even after jobs destruction wave sweeping traditional sectors.

The same ic confirmed by a different metric:

Remember the malarky about MNCs operations in Ireland being of great benefit to 'clustering' and 'spill-over of skills and know-how' to the broader economy? Why, it seems to be pretty much a lie too:

Per chart above, Ireland scores relatively well on internally shared systems and rather poorly on externally shared ones. In other words, if MNCs are creating knowledge and transfers here, they are more likely to keep them to themselves than to allow them to 'spill-over' to outside their own offices.

Ireland-based businesses are not even any good at invoicing via the web:

Of course, the headline figures on earnings generated via e-commerce are high, but these are grossly skewed by MNCs (e.g. google et al):

How I know that? Because the actual usage of e-based sales is poor in Ireland:

So revenue generation ranking above is skewed heavily by few businesses carrying out huge transactions volumes, not by broad reach of e-commerce.

And the same applies to ICT business spending on R&D:

Once again, more on the topic in the next post.

5/11/2012: OECD Internet economy outlook 2012: part 3

In part 1 and part 2 earlier I took a look at some stats coming from the OECD report published today and positioning Irish internet economy overall at the very best at-or-below the OECD average across e-business, connectivity and social use.

Let's continue wading through the massive report (linked in the first post above).

An interesting chart below:

This shows that Ireland overall scores relatively well in terms of schools access to the web - at least we are above the OECD average. But usage of this access is... well - well below the OECD average ranks Ireland closer to 7th from the bottom. So having access (public spending) is not equivalent to quality of use. In fact, ireland has the 5th largest gap in usage relative to access in the OECD.

Irish Government is equally poor at providing useful and user-friendly access to information on the web, on par with our sub-average performance in other ICT-enabled services:

Which is in line with general lack of transparency and engagement with services users on behalf of our State, where fixing potholes still requires a phone call to a local TDs, rather than a more modern and less corrupting approach of simply requesting a service from responsible authorities.

Back to utilization of basic ICT services:

No comment necessary.

And usability by our remarkably highly educated workforce? Why, average, again:

Remember, it's the workforce marvel that attracts MNCs into Ireland - the workforce where even highly educated don't really use the web, and where education system doesn't encourage use of the web in schools, and where stats for P2P file sharing, use in continued education, basic webpage publishing etc are all abysmally poor.

Never mind... just read an IDA brochure and believe!..

5/11/2012: OECD Internet economy outlook 2012: part 2

Here comes the second post on OECD Internet Economy Outlook 2012 report (first in the series was here), focusing on Ireland and the mythology of our 'global ICT services hub'.

So wading deeper into the OECD report, take a look at this chart:

Ireland hardly can boast of an advanced fibre infrastructure that would be consistent with real ICT economy, especially ICT services economy. Per OECD: "Fibre-based broadband connections offer the fastest data transfers..." Now, in many countries, deployment of fibre broadband is lower due to home ownership rates being lower (people tend to invest less in a fixed connection quality when they rent, other things held constant). In Ireland, abysmally low fibre coverage is coincident with very high home ownership rates.

Next up, given lack of fibre coverage, you'd think we should lead the world in overall penetration of the substitutes (e.g. wireless), although, of course, fixed fibre and wireless can be complementary to each other (e.g. fixed line at home, mobile on the go). Alas, not really:

And subsequently, the gap between broadband connections and overall internet connections in Ireland is high by comparative standards:

In fact, we are below both EU27 and OECD average on broadband coverage per above chart.

Next up: the world of data is becoming portable. And in particular it is becoming portably mobile - in other words, more and more access to data is now taking place via mobile devices, rather than portable computers... And in Ireland?

Despite all the talk about the new generation of mobile users, etc, Irish 'younger and more educated workforce' seems to be not using mobile devices.

Having netted into Ireland all flagships of ICT web communications services providers and having established ourselves as social networking capital of Europe, we show neither a dramatic rate of coverage for internet communications, nor a dramatic rate of growth from 2007 through 2011 in this category:

In fact, per OECD data, we have fewer internet users engaging in social networking than Greece, Portugal, Poland, Slovakia and Hungary (overall, we rank 12th in the group of 24 countries in terms of this parameter).

And we are not exactly content-creative either:

E-commerce is absolutely average in its reach in Ireland too and is growing relatively slowly:

As is internet-based learning:

Do note that e-learning is associated strongly with continued or life-long education, so the above suggests we tend not to upskill much via continued education once we get our degrees. Not exactly a badge of honour.

More on this in the third post.

5/11/2012: OECD Internet economy outlook 2012: part 1

Quite an interesting chart from OECD on Ireland and its peers in terms of the spread / reach of the ICT economy. Now, keeping in mind that Ireland is, allegedly, a 'knowledge-based economy' with prime talent in ICT services, attracting huge share of global ICT services firms, etc... why is, then

Or put in words, why is Ireland is one of only 3 countries with shrinking, not growing proportion of workforce engaged in ICT sector?

Per OECD report (link here), Ireland had 3 firms represented in top 250 ICT firms globally, same as, for example South Africa (which is not calling itself a 'global ICT hub' last time I checked). Nonetheless, Ireland's count is large for our relative size. Alas, in 2000 total revenue of ICT firms in Ireland was estimated at USD29.04bn and that rose to USD42.8bn in 2011 - a rise of 47.4% or a growth rate of 3.6% annually. Not spectacular, considering worldwide sector revenue grew 108% over the same period of time expanding at an average annual rate of 6.9% per annum. In other words, Ireland's ICT 'global hub' managed to grow at slightly above 1/2 the global rate of growth.

Just when you thought things couldn't get much worse. Net revenues of the ICT sector in Ireland amounted to USD3.871 billion in 2000. You would expect this to rise dramatically by 2011, especially since globally net revenues grew 127% over 2000-2011 period. But no: Irish ICT sector net revenues have actually fallen USD3.444 billion in 2011.

Now, wait: gross revenues of ICT sector in Ireland underperformed global growth rates by a factor of almost two, while net revenues have shrunk. This hardly constitutes some huge success in attracting ICT FDI and creating a global ICT services hub.

Now, chart below shows just how much of a 'leading' light our FDI magnet in ICT sector really is:

Good news is that "On average, 20% of total BERD investment is focused on the ICT sector. But the data show very large differences across countries. In 2010, ICT BERD accounted for more than a half of total business R&D expenditure in Chinese Taipei, Greece, Finland and Korea. It accounted for more than 30% in Estonia (30%), Ireland (32%), Singapore (36%) and the United States (33%)." The problem, however, is that Ireland has one of the lowest BERD investment overall in the OECD economies, so 32% of a small number can be less than 16% of a larger one...

So here's the outcome:

I will continue blogging on the OECD report tonight, so stay tuned.

5/11/2012: Academic research and market efficiency

Fascinating article on both the issue of markets efficiency (pricing-in of newsflows) and the impact of herding via learning (triggered by academic research) in finance: here.

A nice addition to our discussions both in TCD and UCD courses.

5/11/2012: Lehman Bros & Irish ISEQ - II

And a bit more on indices dynamics:

Some interesting longer term trends from the major indices and VIX revealing the underlying structure of the Irish and the euro area crises. Note: data covers period through September 2012.

Starting from the top, here are indices of major stock prices, normalized back to February 2005 for comparative purposes. Relative to the peak, currently, CAC40 stands at around -41.9%, while FTSE MIB is at -62.5%, FTSE Eurotop 100 at -31.7%, FTSE ALL Shares at -11.22%, DAX at -8.41%, S&P500 at -6.15% and IBEX35 at -48.5%. Meanwhile, 'special' Ireland's ISEQ is at -66.9%.

Chart Index 1.0 and Index 1.1.

Clearly, Ireland is the poorest performer in the class.

Now, it is worth noting that Ireland's stock market is also 'distinguished' by a very 'special' characteristic of being the riskiest of all markets compared, with STDev of returns at 36.45 (on normalized index). Compared to the French market (STDev=22.34 for the period from the start of 2005 through today), Italian market (STDev = 28.95), FTSE Eurotop 100 (STDev = 18.90), FTSE All Shares (STDev = 13.70), German DAX (STDev = 23.05), S&P500 (STDev =14.55) and Spanish market (IBEX STDev = 23.70), Ireland is a risky gamble. Given that the direction of this bet, in the case of Ireland has been down from May 2007, virtually uninterrupted, the proposition of 'patriotic investment' in Ireland's stocks is an extremely risky gamble.

Normalizing the indices at their peak values (set peak at 100), chart below clearly shows the constant, persistent underperformance of the ISEQ.

Chart Index2.0

Now, let's take a look at the core driver of global fundamentals: risk aversion as reflected in VIX index. In general, rising VIX signals rising risk aversion and should be associated with falling stock valuations. Once again, for comparative reasons, we use indexed series of weekly returns for 1999-September 2012. Up until the crisis, Irish stock prices behaved broadly in line with the same relationship to VIX that holds for all other major indices. Chart below illustrates this for FTSE Eurotop 100, but the same holds for other major indices. VIX up, risk-aversion up, stock indices, including ISEQ, down.

Chart VIX1.1

Around Q1 2009 something changed. ISEQ lost any connection with 'reality' of the global markets and acquired life of its own. Or rather - a zombie life of it own. No matter what the global appetite for risk was doing, Irish stocks did not have much of a link with global investment fundamentals.

Another interesting point of the above chart is that Lehman Brothers were not a trigger for Irish crisis (as many of us have been saying for ages, despite the Government's continued assertions to the contrary). Irish market peaked in the week of May 21st, 2007, Lehman Brothers folded on September 15th, 2008, with most of the impact in terms of our indices occurring at September 15th-October 6, 2008, some 16 months after Irish markets began crashing. Prior to Lehman Brothers bankruptcy, ISEQ dropped from a peak of 147.3 to 61.6, while following the Lehman Brothers and until the global stock market trough of March 2, 2009, ISEQ fell to roughly 31.9 reading. So even in theory, Lehman bankruptcy could have accounted for no more than 29.7 point drop on the normalized ISEQ, while pre-Lehman drivers collapsed ISEQ by 85.7 points. 

More revealingly, ISEQ steep sell-offs through out the entire crisis have led, not followed, sell-offs in major indices. In other words, if Lehman caused the global market meltdown, then ISEQ 'caused' Lehman bankruptcy. Which, of course, is absurd.

There are many other stories that can be told looking at the Irish Stock Exchange performance, especially once higher moments to returns distribution are factored in, but I shall leave it to MSc students to explore.

5/11/2012: Lehman Bros & Irish ISEQ

Here's an interesting little factoid. The theory - usually advanced by the Irish Government - goes that Lehman Brothers bankruptcy has been a major driver of the Irish crisis. I have disputed this for ages now and more and more evidence turns up contrary to that when more and more data is considered.

Now, here's a new bit.

Suppose Lehman Bros did contribute significantly to the Irish crisis gravity. In that case, given Lehman Brothers bankruptcy contributed adversely to the global markets, we can expect a dramatic contagion from the global markets panic to Irish markets. One way to gauge this is to look at the changes in correlations between the measure of overall 'panic' in the international markets and the behaviour of the returns to Irish stock market indices.

Let's take ISEQ index for Irish markets and VIX for a measure of the panic sentiment in the global markets. Let's take weekly returns in ISEQ and correlate them to weekly changes in VIX. I use log-differencing in that exercise and 52 weeks rolling correlations.

What should we expect to see? If the 'Lehmans caused Irish crisis or worsened it' theory holds, we should expect correlation between ISEQ weekly returns and changes in weekly VIX readings to be negative (VIX rising during the crisis signals rising risk aversion in the markets). For Irish markets to be influenced significantly, or differently from other markets around the world, such negative correlations should be larger in absolute value than for other countries.

What do we see? Here is a table of averages:

Contrary to the hypothesis of 'Lehmans caused Irish crisis', we see that throughout the period of the crisis, ISEQ suffered shallower, not deeper, spillover from global risk aversion to equity valuations, save for Spanish IBEX index. In other words, evidence suggests that Irish 'disease', like Spanish 'disease' was driven more by idiosyncratic - own market-specific - factors rather than by global panic.

Here's the chart, showing just how consistently closer to zero ISEQ correlation to VIX was during the post-Lehman panic period:

And here is a chart showing skew in the distribution of weekly returns which shows that during the crisis, Ireland's ISEQ suffered less from global markets 'bad news' spillovers (at the point of immediate global markets panics, such as Lehmans episode), but exhibited  a much worse negative skew than other peers in the period from June 2010 through Q1 2012.

5/11/2012: Bank credit to SMEs - demand side

My paper with Javier Sánchez Vidal, Ciaran Mac an Bhaird and Brian M. Lucey "What Determines the Decision to Apply for Credit? Evidence for Eurozone SMEs" is available here.

30/10/2012: Eurocoin signals continued recession in October

Euro area economy did not improve significantly in September-October, according to the leading composite indicator eurocoin published by the CEPR and Banca d'Italia.

Per eurocoin,

• October growth reading stood at -0.29%, statistically indistinguishable from -0.32 and -0.33 recorded in September and August, respectively. 
• October marks thirteenth consecutive month of contraction being signaled by eurocoin
• Crucially, 3mo MA is now at -0.313 which is the same as 2008-2009 average (-0.31). 6mo average is at -0.23.
• We are now into the fourth month of statistically significant sub-zero readings.

As charts below show, ECB remains in the operating range where inflationary target is not consistent with Taylor Rule target.

And here's a chart from Morgan Stanley Research showing PMI-based indicators are also pointing South:

30/10/2012: Feeble defense for tax arbitrage

Saturday, October 27, 2012: http://www.irishexaminer.com/ireland/gilmore-bids-to-reassure-merkels-heir-apparent-212198.html#.UI2WTN8hVo4.twitter

"Ireland’s corporation tax rate was in the sights of the man most likely to succeed Angela Merkel as German chancellor when he met Tánaiste Eamon Gilmore in Berlin. Peer Steinbruck, the Socialists’ candidate to lead the party in next year’s election, also said he doesn’t personally believe in using EU funds to pay down bank debt."

Now, here's the problem: Steinbruck has been "deeply critical of Ireland’s generous corporation tax, blaming it for Germany losing income from German companies, when he was finance minister in the previous coalition government with Ms Merkel."

Per report, "the Tánaiste tried to reassure him that Ireland’s tax rate of 12.5% — the second lowest in the EU — posed no threat to Germany… …Over 1,000 multinationals are based in the country and last year was a record for inward investment. "This is not a threat to Germany or to our other partners in Europe — there are more jobs in Irish companies operating in Germany than there are in German companies operating in Ireland. "In fact, in many instances we are competing for mobile investment with other parts of the world and not with our fellow European," said Mr Gilmore."


One wonders if Mr Gilmore is simply playing an ignorant or is indeed unaware of the fact that beyond his own prowess of policy foresight, other countries in Europe, including Germany, would like to see European HQs of non-EU MNCs set up in their jurisdictions? Or perhaps Mr Gilmore thinks that Peer Steinbruck is some naive school-teacher-turns-politico and that the German Socialist has no desire to correct for often absurd tax arbitrage on which Germany is losing billions in tax revenues and which Ireland facilitates (see links here : http://trueeconomics.blogspot.ie/2012/10/13102012-irish-corporate-tax-haven-in.html). This tax arbitrage not only imposes direct cost on Germany (via German MNCs accounting practices via Ireland operations), but also massive indirect costs as non-German MNCs trade into German economy bypassing German tax system.

In reality, all tax havens are small open economies, so Mr Gilmore's 'Ireland is small, so it needs special tax regime' argument is hardly a defense.

30/10/2012: Not all austerity is equal

August 2012 paper (link: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2153486 ) "The Output Effect of Fiscal Consolidations by Alberto F. Alesina , Carlo A. Favero and Francesco Giavazzi published by CEPR (Discussion Paper No. DP9105) looked at "whether fiscal corrections cause large output losses." Italics are mine:

The authors "find that it matters crucially how the fiscal correction occurs. Adjustments based upon spending cuts are much less costly in terms of output losses than tax-based ones. Spending-based adjustments have been associated with mild and short-lived recessions, in many cases with no recession at all. Tax-based adjustments have been associated with prolonged and deep recessions.

The difference cannot be explained by different monetary policies during the two types of adjustments. Studying the effects of multi-year fiscal plans rather than individual shifts in fiscal variables we make progress on question of anticipated versus unanticipated policy shifts: we find that the correlation between unanticipated and anticipated shifts in taxes and spending is heterogenous across countries, suggesting that the degree of persistence of fiscal corrections varies."

"Estimating the effects of fiscal plans, rather than individual fiscal shocks, we obtain much more precise estimates of tax and spending multipliers". And "the key result is that while expenditure-based adjustments are not recessionary, tax-based ones create deep and long lasting recessions." The reason for this that "the aggregate demand component which reflects more closely the difference in the response of output to ECB and [tax-based] adjustments is private investment. The confidence of investors proceeds with the economy and therefore recovers much sooner after a spending-based adjustment than after a tax-based one. ...These results are consistent with the descriptive statistics presented in Alesina and Ardagna (2012) who show that the fiscal stabilizations which have the mildest effect on output are those that are accompanied by a set of structural reforms which signal a "decisive" policy change. They [like the present study] do not find any difference in the monetary pol- icy stance between spending-based and tax-based adjustments, but mostly differences in the policy packages regarding supply side reforms and liberalizations."

29/10/2012: German banks exposure to GIIPS

Here's a pic courtesy of Morgan Stanley Research of the German system exposure to GIIPS - pre-crisis, and now:

That is a massive deleveraging (if you look at now, through September), but it is also a massive exposure. Few years ago I said that German banks didn't have a property bubble at home. The had one abroad (in GIIPS) instead. Now, with their banks close to 2005 levels of exposure, it is pretty clear where the Euro area policy train is heading before the station 'Legacy Debts' is reached.

29/10/2012: More on CDS markets woes

Few days ago I mentioned I stopped watching CDS on a daily basis... and here is more on the same: link.

Well done, Europe. Nothing like sledgehammering the markets. Step next: shove loads of sovereign debts into ESM, OMT and on the 'emergency' lending lines at ECB and NCBs. That'll teach the markets how to price risk.

29/10/2012: Euro Area and GIIPS: banks & bonds

An interesting set of two charts from BIS (through Q2 2012) documenting Euro area banks' exit from GIIPS (click to enlarge):

29/10/2012: BAML note on Ireland's Troika Review

A glowingly positive, albeit un-detailed, under-researched and rather tenuous on the subject covered, note from BA Merrill Lynch on Ireland's latest quarterly Troika review (link). This suggests that (1) all that matters for Ireland is 'exiting' Troika bailout, (2) OMT take up of a whooping €24bn of banks debts is just a matter of technicality, to be resolved in early 2013 (oh, we wish) and (3) the ECB is somehow going to find it plausible to support the banking-fiscal systems tie up that according to ECB and the rest of Troika is performing well without ECB/OMT/ESM support.

Now, what logic can lead BAML to conclude any of the things above remains a mystery.

My own view on the Troika review is provided here.

28/10/2012: Long term investor risk perceptions

Blackrock research on risk attitudes of long-term investors:

So within 1year we have a massive flip on perceptions concerning pensions decisions, amidst a relatively robust markets performance.

28/10/2012: BNP note on Spanish Bonds risks

A neat summery from BNP on (1) current bond ratings, and (2) links between ratings and eligibility for inclusion in bond indices:

And a few words on the importance of Spanish ratings risks to ESM/OMT etc:

"As has been demonstrated throughout the EU debt crisis, credit ratings can have a material impact on sovereign bond markets. ...However, not all downgrades have the same effect on bond yields. More specifically, the loss of an AAA rating (S&P on France and Austria, for example) and, more importantly, the loss of investment-grade status (Greece, Portugal) matter more than other downgrades and may have dire consequences for sovereign bonds, because of the significance of those two ratings levels as critical thresholds for investors."

"The downgrade to sub-investment grade, in particular, is linked to the eligibility criteria for various global bond indices, i.e. the minimum rating required for a sovereign bond to be included in an index. Fund managers tend to track the performance of major bond indices and, as a result, when a country’s sovereign bonds drop out of an index due to ratings ineligibility, investors have to adjust their portfolios and offload the country’s bonds. So, any downgrades to sub-investment grade could lead to massive selling flows and have a huge impact on the bond yields of the country in question. More than that, quite often, markets tend to front-run the ratings agencies and start to offload the bonds of the country they suspect may be downgraded to sub-investment grade in the near-term future."


"... Currently, Spanish ratings are getting extremely close to those same [as Portugal in 2011 downgrade case] eligibility thresholds. In general, BBB- is the critical limit for bond index eligibility, but different indices have different rules on calculating a single rating for each country (they can use, say, the average, middle, best of all, or specific ratings). For Spain, currently rated BBB-/Baa3/BBB, any trio of one-notch downgrades is going to push the average rating below the eligibility threshold."

"Credit ratings are important not only with respect to eligibility for the major bond indices, but also in calculating the haircut the ECB applies to collateral posted by European banks. According to the ECB’s graduated haircut schedule, an extra 5% haircut is applied to ratings in the BBB+/BBB/BBB- range (the ECB uses the best rating of S&P, Moody’s, Fitch and DBRS). This extra 5% haircut applies only to category 1 assets, which include government bonds. For other assets, like bank, corporate and agency debt, this extra haircut can reach up to 23.5%, creating severe additional collateral requirements for banks."

"This is particularly important for Spanish banks, which tend to absorb around EUR 400bn of liquidity from ECB’s open market operations. The ECB recently announced that it is suspending the application of the minimum credit-rating threshold to its collateral eligibility requirements for the purposes of the Eurosystem’s credit operations for marketable debt securities issued or guaranteed by the central government of countries that are eligible for OMTs or are under an EU-IMF programme and comply with the associated conditions. However, this does not affect the application of the previously mentioned graduated haircut approach."

"So, focusing on Spain, a one-notch downgrade by DBRS would mean that marketable securities issued by Spain would fall into the higher haircut range and Spanish banks would have to post additional collateral with the ECB. A trio of one-notch downgrades by S&P, Moody’s and Fitch would push the Spanish average rating below BBB- and Spanish bonds out of those bond indices that use the average rating as the threshold for eligibility. For those bond indices that use the middle rating of S&P/Moody’s/Fitch (or the better of the first two), a one notch downgrade by each of Moody’s and S&P would be enough to push the single rating below the eligibility threshold, too. Because of this, any upcoming developments in relation to (1) direct bank recapitalisation by the ESM, (2) a Spanish request for a precautionary programme, (3) economic and social developments in Spain and (4) funding rates are going to be critical, as they could prompt further downgrades, with severe implications for the Spanish bond market."

"If any of these downgrade combinations takes place before Spain has made an official request for a programme, we believe a request would, in effect, become inevitable. At the same time, if Spain asked for a programme tomorrow, this would not necessarily mean that any further downgrades would be off the cards. Almost all of the ratings agencies have said that they will have to assess whether ESM intervention is likely to become a complement to or a substitute for market access. If it turns out to be the latter, this would be in line with a downgrade to the sub-investment-grade category."

"At this point, we should mention that if Spanish bonds are removed from the global bond indices, this could have an impact on Italian bonds as well. The reason is that some investors may have replaced their Spanish bond holdings with an Italian bond proxy in order to benefit from better liquidity and protect themselves from panic selling, should Spain be downgraded further. As a result, if Spanish bonds’ drop out of various indices, these investors could suddenly find themselves overweight Italy versus the index, so they would have to sell some of their Italian bonds to re-adjust their weightings and track the index."

"We saw this kind of move when Portugal was downgraded to junk by Moody’s in July 2011 (taking into account that this was not completely expected by the markets and PGB liquidity had already dried up). In the five days after Portugal’s downgrade, 5y Italian and Spanish yields jumped by 95bp and 65bp, respectively."

Nasty prospect, albeit the risks are diminishing, in the short run, imo.

28/10/2012: ECB and technocratic decay?

Some interesting comments from BNP on ECB and Mr Draghi's tenure to-date. The note is linked here.  But some quotes are enlightening [comments are my onw]:

"While the ECB justifies the OMT as being to improve the functioning of the monetary system, the fact it has done nothing to help the monetary system in Ireland or Portugal suggests the scheme is about fiscal financing." [I fully agree]

"The balance-sheet implications of buying in the secondary market are the same as if bonds had been bought in the primary market. Mr Draghi’s adherence to the spirit of the Treaty is in question. We support his flexibility, however." [In the short run - yes, Draghi's flexibility is a necessary compromise. Alas, in the long run it is of questionable virtue. Hence, as I remarked ages ago, it's not the measures the ECB unrolls in the crisis that worry me, but the impossibility of unwinding them without wrecking havoc on the economy.]

"...Mr Draghi did [cut rates] in November and December [2011], taking rates back to where they started the year before the two misguided mid-2011 hikes. Mr Draghi cut rates again in July 2012, not only taking the refi rate below the 1% barrier (to 75bp), but also cutting the deposit rate to zero, apparently in an attempt to reinvigorate the interbank market (so far, fruitlessly). Mr Draghi should be praised for cutting rates and for overcoming the 1% barrier, in our view." [I agree.]

"However, he seems to be reluctant to take the deposit rate below zero, which looks timid. Moreover, he has failed to stimulate private credit supply. The LTRO has facilitated the expansion of credit to governments, but to some extent, this has crowded out private-sector credit, where growth is now down 0.8% y/y (-0.4% adjusted for sales and securitisation). The line that this is due to weakness in credit demand is a feeble excuse for the ECB failing to do enough to stimulate supply or to circumvent the lack of credit supply, for example, through credit easing. This has been the major failure of Mr Draghi’s tenure." [I am not so sure on BNP rejecting the idea of weak demand. Most likely, both weak supply and demand are reinforcing each other. More on this once we have our paper on SMEs access to credit published in working paper format, so stay tuned].

And the last blast, the potent one: "If central bankers don’t want politicians to mess with central banking, central bankers would be wise not to mess with politics. Mr Draghi was intimately involved in Italian politics and the demise of former Prime Minister Silvio Berlusconi’s tenure in the summer of 2011. More recently, his plans for the OMT were reportedly shared with the German chancellor’s office well in advance. The ECB is a very political animal under Mr Draghi. As the only institution with pan-eurozone power, a prominent role for the ECB in crisis resolution and a strong link to politics
may be unavoidable, and even desirable. But ultimately, such links may return to haunt it." [Yep, I agree. Mr Draghi's competence in office comes with a typical European price tag - get a technocrat and surrender checks and balances. This both signifies to the sickness at the heart of Europe (technocracy displacing democracy) and the inability of the 'patient' to develop institutional path for dealing with this sickness (with EZ potentially/arguably facing either a collapse in the hands of democracy or decay in the hands of technocracy).]

28/10/2012: Some more EZ forecasts from Citi

Two more charts from Citi Research highlighting some growth differentials within the Euro area (note second chart - Ireland position).

As I mentioned before, these are not my views, these are Citi forecasts. Where I broadly agree with Citi on: 1) Ireland is likely to outperform EZ average growth in longer term (I am not sure about 3.0 and 3.1 percent growth in real terms in 2015-2016); and 2) EZ growth is likely to average around or below 1% in 2014-2016. More short-term, I doubt EZ will stay in a recession territory in 2013 (full year) and in 2014.

27/10/2012: Ireland, Euro Area and US 2013-2016

Another interesting set of data from the Citi Research:

Table 1: These are Citi forecasts for real GDP growth. Two pints of interest:

1. Ireland v Euro area: 2.4 v 0.3 average rates of growth forecast for 2013-2016
2. US v Euro area

On the second point, chart below clearly shows support for my long-held thesis (since 2002 at leas) that in the long run, it is not the US that is decoupling from the World economy, but Europe...

Note: these are not my forecasts. My outlook differs from Citi outlook.

27/10/2012: Irish Exports to Emerging Markets

Some good news (via Citi Research):

The above shows the sizable extent of Ireland's trade with Emerging Asian economies.

However, not all is great in the field of Irish trade diversification:

If you look closely in the chart above (here's a snapshot):

It is pretty clear that Ireland's exports as a share of GDP have declined in 2000-2011 period for Asia, Mid East, Africa and Latin America. This represents a worrying trend, since these are the regions of future growth and, more importantly, these are also the regions more suited for our indigenous exporters. Much of the decline, in my view, is probably driven by exits of some MNCs from servicing these markets via Ireland.

27/10/2012: UK Q3 2012 'Growthology'

So UK is out of the second-dip recession? But, seemingly not out of the Great Recession:

via Citi Research.

At this speed of a 'recovery' UK folks can look forward to a down-cycle peak-to-peak of 5.5 years this time around, as compared to 4 years in the 1930s, 3 1/4 years in the 1970s and 1980s and 2 3/4 years in 1990s.

Never mind... it was so all curable by the Olympics & the Jubilee... Or as Citi put it:
"The rebound from the Jubilee in Q2 probably added about 0.5% to Q3 growth, while the direct effects of Olympic ticket sales added roughly 0.2%, and the ONS notes that there may have been wider positive effects from the Olympics on service sector growth (and this is the sector which was much stronger than we expected). So underlying growth in Q3 may have been 0.2-0.3% QoQ. In our view, the underlying path of the economy has been fairly flat throughout the last four quarters, with erratic swings in individual quarters: GDP fell in Q1 and Q2, reflecting weakness in construction in both quarters plus the adverse effects on activity of the Queen’s Jubilee, and the Olympics plus rebound from the Jubilee played a major role in the positive Q3 figure. The more that Q3  benefited from temporary Olympics-related positives, the more likely that Q4 GDP growth will disappoint as that boost fades."

27/10/2012: UBS on Irish banking debt restructuring

UBS' European Weekly Economic Focus is dealing in detail with the prospects of Ireland getting a deal out of the EU Summits promises to break the links between the banks liabilities and sovereign liabilities. Comments are mine.

"Taking the June 29th statement at face value, there is a strong case for supporting Ireland by breaking the link between the government and the financial system." 

[I wholeheartedly agree - the case can be made across a number of points: (1) Ireland de facto underwritten the euro system in the early stage of the crisis; (2) the cost of (1) to Irish taxpayers is unprecedented in modern history; (3) Irish banking fallout is partially based on absolutely mis-shaped monetary policy pursued by the ECB; (4) Ireland is the only country in the euro periphery, in my view, that has potential to organically grow out of the current Great Recession, assuming the country gets a significant (€40-45 billion) writedown on the banks debts; and more]

"There are two potential routes for euro zone support to the Irish state. The direct route involves the ESM acquiring all or a part of the government’s stake in the banks, thereby assuming responsibility of the Irish lenders and absolving that liability of the Irish state. The alternative, less generous, approach is a relief on the promissory note/ELA commitments by the ECB."

[I disagree - the impact from both of these measures taken individually will be minor. What is needed is a combination of the two measures, with ELA commitments writedown of at least €30 billion. The reason for this is simple: the ESM will not be able to take on IBRC liabilities even in theory as IBRC is not a functional bank. Hence, route 1 outlined by UBS can amount to ca €5-6 billion in maximum potential recovery to the Irish state. Route 2 take by itself alone will simply see marginal relief on the net present value of promo notes liabilities, something close to €3 billion yield. Hence, even combined, such measures are unlikely to generate more than €10 billion, or roughly 1/8th of the assumed current and future liabilities.]

"In our view, there is very little chance that the ESM will acquire a stake in Irish lenders any time soon, for the simple reason that a direct ESM intervention requires the establishment of a euro area bank regulator and that would take a long time, in our view." [I agree. And worse, not only ESM has to be fully established, it also has to be fully operational and, potentially, have a track record of sorts before it can be used to underwrite banking sector directly.]

"What’s more, Ireland will need to remain a programme country for longer. Depending on the potential scale of the intervention, the first argument is likely more important that the second, but either way this route is not likely to be available for a long time." [I fully agree and this is the reason why I argued earlier this week that the Irish Government push to 'exit' the programme is rushed and unwise.]

"How about a recapitalisation via the sovereign? To start with, this approach does not help sever the link between the sovereign and the banks, one key driver for euro area intervention. More importantly though, it is not clear to us that Ireland will qualify for that sort of intervention even if it tried, for the simple reason that ESM funds can only be provided to limit ‘the contagion of financial stress’. The financial sector in Ireland is no longer a threat to the rest of the euro area and, as such, it would not qualify for ESM intervention. 

[I spoke about this factor for a number of years now. As long as Ireland continued replacing private liabilities to bondholders and inter-bank funding sources with sovereign obligations, it continued to dilute its own power in the bargaining game. I warned years ago that once we complete this process, we will be left alone. No tramp cards in our hands. Fully exposed to carrying the weight of banking debts on taxpayers shoulders. This Government and the previous one have failed to listen. Now, its a payback time.]

"The only way around this is if the ESM facility is made available retrospectively, but that is unlikely if the statement from the Dutch, Finnish and the German finance ministers where they rejected ESM assistance for ‘legacy assets’ is true." 

[At the time of June 29th summit I wrote about the cumulative potential exposures that such retrospectively can yield. It was clear then, as it is clear now, that ESM will not be able to absorb all potential calls on such a measure. Hence, Fin Mins statement breaking retrospectively clause is fully rational and expected.]

The rest of the note is based on a superb and must-read analysis by Karl Whelan of the promo notes.

In summary - and this is my view - Irish policymakers have carelessly forced the country into a corner: we worked hard to assure some stabilization in fiscal space, which in turn undermined our ability to get meaningful relief. Congratulations to our policy makers who seemingly traded the interests of the longer term debt crisis resolution for friendly pats on the back from Europe.

26/10/2012: Sectoral breakdown of Retail Sales

In the previous post I looked at the Retail Sales dynamics from the point of view of whether September and Q3 2012 data show any really exciting change in trend to warrant exceptionally upbeat headlines. There were, basically, none.

But what about all the 'sales increases' rumored and even discussed in the analysts' reports?

Let's take at annual growth rates for Q3 by broad categories of sales:

As chart above clearly shows, majority of the categories are under water when it comes to y/y comparatives for Q3 2012.

And the same applies for Volume of sales:

Now, let's take a look at each category individually:

• Books, Newspapers, Stationery & Other Goods: down 4.8% in Value and down 4.5% in Volume y/y in September, down 4.5% y/y in Q3 2012 in Value and down 4.3% y/y in Q3 2012 in Volume. No good news here.
• Hardware, Paints and Glass: down 3.8% y/y in Value and down 4.3% y/y in Volume in September 2012, also down 4.8% in Value and 5.3% in Volume for Q3 2012 compared to Q3 2011. No good news here.
• Other Retail Sales: down 3.3% in Value and down 3.1% in Volume, same down 4.2% in Q3 2012 y/y in Value and down 3.8% in Volume. No good news here.
• Furniture & Lighting: down 2.3% in Value and up 2% in Volume in September in y/y terms, which means that the sector is trading down on revenues amidst a deflation. In Q3 terms relative to Q3 2011: the sector is down 3% in Value and up 0.8% in Volume - again, deflation and falling revenues. I wouldn't call this a good news.
• Clothing, Footware and Textiles: down 1.7% in Value and down 0.6% in Volume in September, down 2.3% in Value and 1.4% in Volume in Q3 2012. No good news anywhere here.
• Food, beverages & Tobacco: down 0.3% in Value in September and down 0.9% in Volume. In Q3 terms the sector is down 0.9% and 1.5% in Value and Volume respectively. All signs are, therefore, flashing red. Alongside the trends in Food and Beverages (below), the above suggest significant contraction in legal sales of tobacco, possibly due to increased tax evasion and smuggling.
• Household Equipment: up 0.8% in Value and 5.6% in Volume, which means that deflation is erasing some 86% of the revenues out of the increased activity. In Q3 2011-Q3 2012 terms, the sector is up 0.1% in Value and up 5% in Volume. In effect, revenues standing still, while volumes of activity rising. Last time I checked, the revenues pay for staff, while volume sales pay for warehouses.
• Pharmaceuticals, Medical & Cosmetic Articles: the less elastic in demand category of goods saw September sales rise 1.2% in Value and 2.7% in Volume, while Q3 sales saw increases of 1.2% in Value and 2.3% in Volume. This is a sector that did well out the recent data both in terms of value and volume of sales rising. All of these sales are, however imports.
• Motors and Fuel sales rose 2.9% in Value and fell 0.5% in Volume in September. Q3 change y/y was -1.1% in Value and -4.1% in Volume. Here's an interesting thing: Fuel sales - the coincident indicator for economic activity - were up 3.5% in Value and down 5% in Volume in Q3 y/y, which means that once we strip the inflation (which goes to fund Irish Government and foreign producers at the expense of the real economy here), the sales are down and this does not bode well for Q3 economic activity.
• Food business: is booming, rising 3.8% in value and 2.4% in Volume (suggesting inflation in food sector) in September, rising 3.1% in Value and 1.9% in Volume (confirming inflation) in Q3 2012 y/y. Now, food sales, especially in rainy July-August, could be strongly influenced by people staying at home. The same is true for the expected effects of reduced travel during summer months as fewer of us can afford trips out of Ireland and those who still can taking shorter breaks.
• Bars had a cracking September on foot of a number of higher profile events - rising 3.9% in Value and 2.3% in Volume. However, Q3 figure confirms what is suggested by the food sector performance (above): sales are down 1.9% in Q3 y/y in Value and down 3.4% in Volume. In other words, controlling for one-offs, there is no good news in the sector.
• Lastly, Electrical Goods. Given the switch to digital TV this month, it can be expected that sales were up 5.5% in Value and 11.2% in Volume in September, while Q3 figures were up 6.7% in Value and 12.7% in Volume. Interestingly, these sales rose 4.9% y/y in Value in Q2 2012 and 11.3% in Volume. But in Q1 the same sales were down 5.3% y/y in Value and up only 1.6% y/y in Volume. Overall, during the Great Recession the sector did better than any other sector: in Q3 2012 the index for the Value of Sales in the sector stood at 76.3 (100=2005), which is the fourth highest in the overall sectors categories. For the Volume of sales, index stood at 141.1 - the best performance by far of all sectors. 

So the key summary: Non-food retail sales excluding motor trades, fuel and bars: down 0.6% in Value and up 1.5% in Volume in September - aka deflation and falling revenues. In Q3 2012 compared to Q3 2011: down 0.7% in Value and up 1% in Volume - again, deflation and shrinking revenues. Care to suggest this is 'good'? It is better than outright y/y drop of 3.3% in Q2 2012 in Value and a decline of 1.6% in Volume, and better than -5.6% in Value and -4.3% in Volume recorded in Q1 2012, but it is comparable in Value terms to Q4 2011 (down 0.6% y/y), although still better in Volume terms (-0.7% y/y). 

Still, getting worse at a slower rate is not equivalent to getting better. And it is most certainly not a 'solid retail sales in Q3' result that is being claimed by some analysts.