24/6/15: Ifo Miss is Not a Biggy...

Ifo business climate index for Germany fell from 108.5 in May to 107.4 (expected 108.1) in June, while the business expectations index was down from 103 to 102 (also missing expectation for 102.5) and the current assessment index fell from 114.3 in May to 113.1 in June (missing expectations for a decline to 114.1).

For all the media chatter about missed expectations, Ifo index is trending at levels consistent with close to 3% growth and well within the range of the average for Q1 2013-Q2 2015 period.

As chart above shows, Ifo has been signalling strong growth momentum in Germany for some time now, with volatility of the index reading around period averages being less pronounced than for the euro area as a whole.

The chart also shows recent uptick in economic climate conditions in the euro area as a whole. When we look at period averages, one interesting sub-trend to watch is the step-up change in growth conditions in the euro area as opposed to highly steady growth conditions in Germany.

23/6/15: Ukraine's Debt Haircuts Saga: One Step Forward, Two Steps Back

Two big setbacks for Ukraine in its bid to cut the overall debt burden and achieve targets mandated by the IMF.

First, Moody issued a note today saying that Ukraine will be in a default if it haircuts principal owed to private creditors. The agency said it believes Ukraine can deliver USD15.3bn in savings without haircuts. Ukraine believes it cannot. IMF backed Ukraine on this, but it is not to IMF to either declare a default even or not. Moody further noted that any moratorium on debt redemptions will have long-term implications for Kiev access to international debt markets.

Second, the IMF has signalled that private debt open to haircuts under Kiev-led negotiations does not include debt owed to Russia which is deemed to be official sector debt. This is not surprising, and analysts have long insisted that this debt cannot be included into private sector haircuts, but Kiev staunchly resisted recognising debt to Russia as official sector debt.

Incidentally, Ukraine debt to Russia is structured as a eurobond and is registered in Ireland, as reported by Bloomberg. The bond is structured as private debt, but Russia subsequently re-declared it as official debt. Re-declaration was somewhat of a positive for Ukraine, because a default on official debt does not trigger automatic default on private debt (the reason why the bond was originally structured as private debt was precisely the threat that a default on it will trigger default on all bonds issued by Ukraine). Ironies abound: IMF is happy to declare Russian debt to be official sector debt, because it takes USD3 billion out of the pool of bonds targeted for haircuts. This implies that for Kiev to achieve USD15.3 billion in savings, Ukraine will most likely need to haircut actual principal outstanding to private sector bond holders - something IMF wants Kiev to do. So here, too, Russian side gain is also Kiev's gain.

Ultimately, in my view, Moscow should write down the entire USD3bn in debt owed by Kiev. Because it would be ethical to do, and because it would help Ukraine. But that point is outside the fine arts of finance, let alone beyond the brutal realities of geopolitics.

More background on both stories: http://www.bloomberg.com/news/articles/2015-06-22/moody-s-backs-creditor-math-in-resisting-ukraine-debt-writedown.

23/6/2015: Hans Werner Sinn: Just Grexit!

Hans Werner Sinn (Ifo) to Greece: "Will ya, just default, for the love of..."

23/6/15: In the parallel Universe of Greece: Strangulation is Cure

Greece has been 'repaired' with an application of yet another plaster to a gaping shark wound.

ECB hiked ELA once again, this time, reportedly, by 'just under' EUR1bn.

The terms of 'repairs' are sketchy for now, but for the economy that shrunk 23% since pre-crisis peak in real terms, we have novel - nay, breakthrough novel - measures to support growth included in the deal:

1. Corporate tax is rising from rather un-competitive 26% to highly uncompetitive 29%
2. Corporate profits in excess of EUR500K/pa are hit with 'solidarity' levy of 12%
3. Personal taxes are up, VAT is up, pensions levies are up, property taxes are up
4. Debt relief is not on the cards, as per Angela Merkel, the 180% GDP debt mountain "...is not an urgent question".

Summary of key financials on the 'deal' is here:

In short, we have an equivalent of economic idiocy here: an economy chocked by too much debt is being given a green light to get more debt. In exchange for this debt, the economy will be chocked some more (by some 2.7% of GDP on full year basis), so that more debt given to it can be rolled over with a pretence of sustainability.

As European leaders celebrate this crowning achievement of statism by replaying the same song for the 5th time whilst hoping for a different result. One has to wonder if there is something fundamentally, deeply, inexplicably wrong with the EU logic.

Or may be, just may be, the Greek 'reforms' are a herald of things to come under the Juncker-proposed, ECB et al approved, new Federalismo 2.0 plan? Why, check the leaks on that one: 

http://www.wsj.com/articles/new-eurozone-plan-calls-for-greater-economic-cohesion-within-currency-bloc-1434919204.

22/6/15: Greece v Great Depression

As every well-baked economist would know, there are many ways to pickle misery. Here's one novel jar from the Bloomberg (http://www.bloomberg.com/news/articles/2015-06-22/greece-is-in-a-worse-spot-than-america-was-in-1933):

The above shows Greek real GDP compared to the U.S.' at the same stage in the Great Depression.

Yeah, I know, Euro with all its promises of stability, prosperity, progress, peace, etc, etc, etc...

22/6/15: IMF Review of Ireland: Part 2: Banks

IMF assessment of Irish banking sector remains pretty darn gloomy, even if the rhetoric has been changing toward more cheerleading, less warning. Here is the core statement:

"Bank health continues to improve, but impaired assets remain high and profitability low. The contraction in the three domestic banks’ interest earning assets continued, albeit at a slower pace in 2014." IN other words, deleveraging is ongoing.

"Nonetheless, operating profitability doubled to 0.8 percent of assets on foot of lower funding costs as well as nonrecurrent gains from asset sales and revaluations (Table 8). Led by the CRE and SME loan books, there was a sizable fall in the stock of nonperforming loans (NPL), by some 19 percent in 2014, although NPLs are still 23 percent of loans." Note, at 23% we are still the second worst performing banking system in the euro area, after Greece.

"This fall, together with rising property prices, allowed significant provision releases while keeping the coverage ratio stable. Profitability after provisions was achieved for the first time since the onset of the crisis. Together with lower risk weighted assets, this lifted the three banks’ aggregate core tier 1 capital ratio by over 1 percentage point, to 14½ percent."

Now, take a look at the chart above: loans volume fell EUR6.5bn y/y (-3.6%), but interest income remained intact at EUR7.9bn. While funding costs fell EUR3.7bn y/y. The result is that the banks squeezed more out of fewer loans both on the margin and in total. Give it a thought: loans should be getting cheaper, but instead banks are getting 'healthier'. At the expense of who? Why, the remaining borrowers. Net trading profits now turned losses in 2014 compared to 2013. Offset by one-off profits.

Deposits also fell in 2014 compared to 2013 as economy set into a 'robust recovery'. It looks like all the jobs creation going around ain't helping savings.

A summary / easier to read table:

Notice, in addition to the above discussion, the Texas Ratio: Non-Performing Loans ratio to Provisions + CT1 capital (higher ratio, higher risk in the system). At 108, things are better now than in 2012-2013, but on average, 2011-2012 Texas ratio was around 104, better than 2014 ratio. And that with 51.7% coverage ratio and with CT1 at 14.5%. Ugh?..

On the other hand, deleveraging helped so far: loan/deposit ratio is now at 108% a major improvement on the past.

Net Stable Funding Ratio (NSFR) - a ratio of longer term funding to longer term liabilities and should be >100% in theory. This is now at 110.5%, first time above 100% - a good sign, reflective of much improved funding conditions for all euro area banks as well as Irish banks' gains.

Liquidity Coverage Ratio (LCR) - monitoring the extent to which banks hold the necessary assets to cover any short-term liquidity shocks (basically, how much in highly liquid assets banks hold) is also rising and is above 100% - another positive for the banks.


Still, the above gains in lending margins - the rate of banks' extraction from the real economy - are not enough for the IMF. "Lending interest rates must enable banks to generate adequate profits to support new lending. While increasing, Irish banks’
operating profitability remains relatively low. Declines in funding costs aided by QE will assist, but there are also drags from the prevalence of tracker mortgages in loan portfolios and from prospects for a prolonged period of low ECB rates. However, with rates on new floating rate mortgages at 4.1 percent at end March, compared with an average of 2.1 percent in the euro area, political pressures to reduce mortgage rates have emerged. The mission stressed the importance of loan pricing adequate to cover credit losses—including the high costs of collateral realization in Ireland—and to build capital needed to transition to fully loaded Basel III requirements in order to avoid impediments to a revival of lending."

Here's a question IMF might want to ask: if Irish banks are already charging almost double the rates charged by other banks, while enjoying lower costs of funding and falling impairments, then why is Irish banks profitability a concern? And more pertinently, how is hiking effective rates charged in this economy going to help the banks with legacy loans, especially those that are currently marginally performing and only need a slight nudge to slip into arrears? And another question, if Irish banks charge double the rates of other banks, what is holding these other banks coming into the Irish market? Finally, how on earth charging even higher rates will support 'revival of lending'?

Ah, yes, question, questions… not many answers. But, per IMF, everything is happy in the banking sector in Ireland. Just a bit more blood-letting from the borrowers (distressed - via arrears resolutions tightening, performing - via higher interest charges) and there will be a boom. One wonders - a boom in what, exactly? Insolvencies?

22/6/15: IMF Review of Ireland: Part 1: Growth & Fiscal Space

IMF published conclusions of its Third Post-Program Monitoring Discussions with Ireland.

The report starts with strong positives:

"Ireland’s strong economic recovery is continuing in 2015, following robust growth of 4.8 percent in 2014. A range of high frequency indicators point to an extension of the solid recovery momentum into 2015, with growth increasingly driven by domestic demand as well as exports. Job creation continued with employment growth of 2.2 percent year-on-year in the first quarter of 2015, bringing the unemployment rate down to 9.8 percent in May."

Actually, based on EH data from CSO, employment growth was even stronger: 2.67% y/y in 1Q 2015 (see here: http://trueeconomics.blogspot.ie/2015/06/20615-irish-employment-by-sector-latest.html). The survey data is slightly different from the QNHS data.

"Tax revenues rose 11 percent year-on-year during the first five months of 2015, while spending remained within budget profiles, so the fiscal deficit for 2015 is expected to be 2.3 percent of GDP, outperforming the budget targets."

"Banks’ health has improved, but operating profitability remains weak and, despite the recent progress in the resolution of mortgages in arrears, 17.1 percent of mortgages have been in arrears for over 90 days, and of these, almost 60 percent have been in arrears for over 2 years."

All so far known, all so far predictable.

Here is what IMF thinks in terms of forward outlook.

On Fiscal side: "The deficit is likely to come in well below budget again in 2015. This welcome progress should be locked by avoiding any repeat of past spending overruns. The deficit reduction projected for 2016 is too modest considering Ireland’s high public debt and strong growth, making it critical that revenue outperformance— which appears likely— be saved as the authorities intend."

Wait, Spring Statement by the Government clearly does not suggest 'saving' of revenue outperformance as intended policy objective. If anything, spending these 'savings' is on the cards. So a bit more from the IMF:

"Medium-term spending pressures related to demographics and public investment indicate a need to build revenues and it is critical that any unwinding of savings in public sector wages be gradual. Tax reforms should be focused on areas most supportive of job creation and productivity while protecting progress achieved in base broadening."

Again, this does not bode well with the Spring Statement intentions to unwind, over two years, reductions in public sector earnings costs, and reducing tax burden at the lower end of the tax base. Whether these measures are right or wrong, IMF seems to ignore them in their analysis, as if they are not being planned.

And slightly adding depth: "Staff estimates that improvement in the primary balance in structural terms is modest in 2016, at about ¼ percent of GDP, as the reduction in the overall deficit partly reflects an expected decline in the interest bill and a narrowing of the output gap." In other words, efforts / pain are over. We are cruising into improved performance on inertia. IMF does not exactly like that: "A stronger adjustment, of at least a ½ percent of GDP, would also be appropriate in 2016 in view of Ireland’s high public debt and strong growth, implying an overall deficit target of about 1.5 percent of GDP. However, it appears most likely that revenues will exceed official projections, which are for tax revenue growth before measures that is significantly below nominal GDP growth, and also given that revenue outperformance has underpinned Ireland’s track record of over delivering on fiscal targets for a number of years." Wait, what? Not spending cuts drove Irish effort? Revenue outperformance? Aka - taxes and indirect taxes and hidden charges.

So the good boy in the back of the classroom needs to get slightly better: "The commitment of the Irish authorities to comply with their obligations under the Stability and Growth Pact, including the Expenditure Benchmark, means that revenue outperformance in 2016 and later years will not be used to fund additional expenditure; the need for a change from the past procyclical pattern of spending the revenues available was a key lesson drawn from the crisis that is firmly embedded in their new fiscal policy framework."

Yeah, that in the year pre-election? Are they mad, or something?

Just in case anyone has any illusions on what the Fund thinks about the forthcoming injections of pain relief planned by the Government, here it is, slightly hidden in the lengthy discourse about longer-term risks. "Looking to the medium term, sizable adjustment challenges indicate a need to build revenues while the limited fiscal space should be used to support durable growth. The authorities’ expenditure projections account for demographic pressures as growing cohorts of both young and old increase demands for education and health services. …Staff recommended that the authorities consider steps to raise revenues to help address these pressures…"

More revenue to be raised. And yet the Government aims to cut taxes. Oh dear...


Back to the positives: IMF upgraded its growth projections for short-term forecasts:

"Compared with the 2015 Article IV consultation concluded in late March, growth projected for 2015 is revised up to almost 4 percent from 3½ percent, with a more modest increase in 2016." 2016 growth is now projected to be at 3.3% from 3.0% projected at the end of March 2015. 2017 growth forecast was lifted from 2.7% in March to 2.8% now. However, 2018 forest was balanced down to 2.5% now from 2.6% in March report.

Back in March, private consumption was expected to grow 1.5% in 2015, 1.6% in 2016, 2.0% in 2017. This is now revised up to 1.6% in 2015, 1.9% in 2016, with 2017 remaining at 2.0%.

However, IMF revised down its projections for gross fixed investment growth. In March report, the Fund forecast investment to grow 9.5% in 2015, 7.5% in 2016 and 6.0% in 2017. This time around, IMF expects investment growth of 9.2% in 2015, 7.3% in 2016 and 5.5% in 2017.

Interestingly, IMF also introduced some modest upgrades to Irish net exports, though it noted that given exceptionally high rates of growth in goods exports in recent months, even the upgraded forecast might be too pessimistic.

However, with all said and done, the IMF still produces a slightly cautious medium-term outlook: "Staff’s medium-term outlook is little changed from that in the 2015 Article IV consultation, with medium-term growth on the order of 2½ percent being similar to the 3 percent projected by the Irish authorities in their recent Stability Programme Update (SPU)." Which means that, in basic terms, Irish official forecasts are probably within error margin of the IMF forecasts, but are a bit more optimistic, nonetheless.

Quite interestingly, IMF finds no substantive risks to the downside for Ireland, going effectively through motions referencing Greece and domestic debt overhang. Even interest rates sensitivity of the massive debt pile we carry deserves not to be cited as a major concern.

22/6/15: Of Nama and Cromwell via GAA

A nuclear commentary on Nama from GAA (of all places): http://www.independent.ie/sport/gaelic-games/gaelic-football/colm-orourke-nama-overseeing-greatest-plundering-of-irelands-land-assets-since-cromwell-31317345.html

Expect a token handout from Nama to GAA next...

22/6/15: Another Adrenaline Injection by Dr. ECB

Yesterday, I noted that Greece is now on a daily drip of liquidity injections by ECB via ELA (http://trueeconomics.blogspot.ie/2015/06/21615-ecb-ela-for-greece-welcome-to.html) and so here we have the latest. Per reports, ECB hiked Greek ELA today to EUR87.8 billion.

Meanwhile, there are rumours of a 'deal' being agreed, albeit only 'in principle'. Draghi is meeting Tsipras later today and we will also have an emergency summit. So a beehive of activities all over the shop.

21/6/15: ECB ELA for Greece: Welcome to a Daily Drip of 'Solvency'

Two days ago, I speculated on ECB's motives for drip-feeding ELA liquidity provisions to Greek banks (http://trueeconomics.blogspot.ie/2015/06/1962015-greek-ela-and-ecb-whats.html). And I have noted consistently that ELA is now running against available liquidity cushion, meaning Greek banks are now simultaneously, skirting close to ELA limits in terms of

• Eligible collateral, and
• ELA funds available to cover deposits outflows.

So, not surprisingly, two links come up today:

1. Ekathimerini reports that Greek banks have enough ELA-supported liquidity to sustain capital outflows through Monday only: http://www.ekathimerini.com/4dcgi/_w_articles_wsite2_1_20/06/2015_551285 as on the day of EUR1.8 bn ELA extension approved by the ECB< Greek banks bled EUR1.7 billion in deposits, bringing week's total to EUR4.2 billion in outflows, and
2. Reuters report that the ECB has been all along planning to review/upgrade ELA after Monday emergency summit: http://www.reuters.com/article/2015/06/19/us-eurozone-greece-pm-idUSKBN0OZ0DP20150619

Thing is, Greek banks are now solvent solely down to an almost daily drip-feeding of liquidity by the ECB. Which, sort of, shows up the entire charade of the dysfunctional euro system: the pretence of monetary and financial systems stability is being sustained by not just extraordinary measures, but by an ICU-like mechanics of assuring that a patient is not pronounced dead too soon...

21/6/15: BankCheck Report into Anglo / IBRC Overcharging

So here, as promised, the full BankCheck report on Anglo/IBRC overcharging. I provide no comment. You can click on each individual frame to enlarge.

20/6/15: Irish Employment by Sector: Latest Data

Here are the latest stats for Irish employment across sectors, based on the EHECS Earnings Hours and Employment Costs Survey Quarterly reported by CSO:

Overall, there were 1,574,800 people employed across all sectors of economy in 1Q 2015, which represents an increase of 2.67% y/y. In 4Q 2014 y/y rise was 2.33%. Current level of employment is 9.9% below 1Q 2008, but since 1Q 2011 (during the tenure of current Government) the economy added some 59,700 jobs - a rate of jobs creation of 14,925 per annum. The rate of jobs creation did accelerate in the last twelve months: between 1Q 2013 and Q1 2014, the economy added 26,800 jobs and between 1Q 2014 and 1Q 2015 it added 41,000 jobs. Nonetheless, compared to 1Q 2008 there were 192,400 fewer workers in the economy at the end of 1Q 2015.

Here is the summary of changes (%) between 2008 average (do note this), 1Q 2014 and 1Q 2015 by sector:

Our 'smart' and 'knowledge' economy currently operates at employment levels in Information & Communication sector of some 59,800 (quite low, surprisingly, given the hype about the sector growth). And this represents an increase of only 1,800 (+3.1%) y/y, and a drop on 1Q 2008 levels of 5,000 jobs. Another category of 'smart'/'knowledge' workers is Professional, scientific and technical activities. Here things are even worse. Total level of employment in this category at the end of 1Q 2015 stood at 79,000, which represents a drop of 5,100 y/y (-6.1%) and a decline of 2,600 on 1Q 2008.

This dovetails with the evidence on STEM-related employment presented here: http://trueeconomics.blogspot.ie/2015/06/20615-stem-to-bull-time-to-rethink.html

Overall, only two areas of activity have managed to post higher 1Q 2015 employment levels than 1Q 2015: Education (+3,900) as well as Human Health and Social Work (+19,000).

20/6/15: Danske Outlook & Forecast for Ukraine

Danske Bank outlook and forecast for Ukraine:

20/6/15: Danske: Outlook & Forecast for Russia

Danske Bank latest outlook and forecasts for Russia:

20/6/15: WLASze: Weekend Links of Arts, Sciences & zero economics

Couple of non-economics related, but hugely important links worth looking into... or an infrequent entry into my old series of WLASze: Weekend Links of Arts, Sciences and zero economics...

Firstly, via Stanford, we have a warning about the dire state of nature: http://news.stanford.edu/news/2015/june/mass-extinction-ehrlich-061915.html. A quote: "There is no longer any doubt: We are entering a mass extinction that threatens humanity's existence." if we think we can't even handle a man-made crisis of debt overhang in the likes of Greece, what hope do we have in handling the existential threat?

Am I overhyping things? May be. Or may be not. As population ages, our ability to sustain ourselves is increasingly dependent on better food, nutrition, quality of environment etc. Not solely because we want to eat/breath/live better, but also because of brutal arithmetic: economic activity that sustains our lives depends on productivity. And productivity declines precipitously with ageing population.

So even if you think the extinction event is a rhetorical exaggeration by a bunch of scientists, brutal (and even linear - forget complex) systems of our socio-economic models imply serious and growing inter-connection between our man-made shocks and natural systems capacity to withstand them.


Secondly, via the Slate, we have a nagging suspicion that not everything technologically smart is... err... smart: "Meet the Bots: Artificial stupidity can be just as dangerous as artificial intelligence
http://www.slate.com/articles/technology/future_tense/2015/04/artificial_stupidity_can_be_just_as_dangerous_as_artificial_intelligence.html.

"Bots, like rats, have colonized an astounding range of environments. …perhaps the most fascinating element here is that [AI sceptics] warnings focus on hypothetical malicious automatons while ignoring real ones."

The article goes on to list examples of harmful bots currently populating the web. But it evades the key question asked in the heading: what if AI is not intelligent at all, but is superficially capable of faking intelligence to a degree? Imagine the world where we co-share space with bots that can replicate emotional, social, behavioural and mental intelligence up to a high degree, but fail beyond certain bound. What then? Will the average / median denominator of human interactions converge to that bound as well? Will we gradually witness disappearance of human capacity of by-pass complex, but measurable or mappable systems of logic, thus reducing the richness and complexity of our own world? If so, how soon will humanity become a slightly improved model of today's Twitter?

Thirdly, "What happens when we can’t test scientific theories?" via the Prospect Mag: http://www.prospectmagazine.co.uk/features/what-happens-when-we-cant-test-scientific-theories
"Scientific knowledge is supposed to be empirical: to be accepted as scientific, a theory must be falsifiable… This argument …is generally accepted by most scientists today as determining what is and is not a scientific theory. In recent years, however, many physicists have developed theories of great mathematical elegance, but which are beyond the reach of empirical falsification, even in principle. The uncomfortable question that arises is whether they can still be regarded as science."

The reason why this is important to us is that the question of falsifiability of modern theories is non-trivial to the way we structure our inquiry into the reality: the distinction between art, science and philosophy becomes blurred when one set of knowledge relies exclusively on the tools used in the other. So much so, that even the notion of knowledge, popularly associated with inquiry delivered via science, is usually not extendable to art and philosophy. Example in a quote: “Mathematical tools enable us to
investigate reality, but the mathematical concepts themselves do not necessarily imply physical reality”.

Now, personally, I don't give a damn if something implies physical reality or not, as long as that something is not designed to support such an implication. Mathematics, therefore, is a form of knowledge and we don't care if there are physical reality implications of it or not. But physical sciences purport to hold a specific, more qualitatively important corner of knowledge: that of being physically grounded in 'reality'. In other words, the very alleged supremacy of physical sciences arises not from their superiority as fields of inquiry (quality of insight is much higher in art, mathematics and philosophy than in, say, biosciences and experimental physics), but in their superiority in application (gravity has more tangible applications to our physical world than, say, topology).

So we have a crisis of sorts for physical sciences: their superiority is now run out of the road and has to yield to the superiority of abstract fields of knowledge. Bad news for humanity: deterministic nature of experimental knowledge is getting exhausted. With it, determinism surrounding our concept of knowledge diminishes too. Good news for humanity: this does not change much. Whether or not the string theory is provable is irrelevant to us. As soon as it becomes relevant, it will be, by Popperian definition, falsifiable. Until then, marvel of the infinite world of abstract.

20/6/15: STEM to Bull: Time to Rethink Irish Tech Propaganda?

So we are being told there are brilliant opportunities available in employment in Sciences, Technology, Engineering, & Mathematics (STEM) fields in Ireland and that the demand for workers in these sectors is outstripping anything anything else.

As always, reality is a bit more complex than the wholesale sloganeering suggests.

Here is the latest data for annual average earnings by activity:

As you can see from the above, STEM-related occupations are not exactly homogeneous... Take Human Health, where there is very severe rationing of medical degrees and education opportunities coinciding with falling earnings. And look at non-STEM sectors, like Finance, where there are growing earnings.

Next, take pharma sector - a core STEM sector where, allegedly, there are plentiful employment opportunities in Ireland. Per Enterprise Ireland: "Employment in the sector has grown from 5,200 in 1988 to 25,300 in 2010" (http://www.een-ireland.ie/eei/assets/documents/uploaded/general/Pharmaceuticals%20Fact%20sheet.pdf). Which sounds impressive.

But, here is the definitive CSO data (latest we have is 2013):

Between 2006 and 2013, employment in the sector (primarily containing pharma sub-sector) has dropped, not risen, going from 29,010 in 2006 to 23,948 in 2013. And do note: Enterprise Ireland document linked above attributes all jobs in the Checmical & Pharmaceutical sector in 2010 to Pharma sub-sector. Which, of course, is clearly not the case.

Do we really want to treat STEM as a 'panacea' for incoming new students and for the economy? Or should we stop propagandising individual sets of skills and support students best matching their ability and interest to educational offers? After all, call me old-fashioned, but a good writer is infinitely more productive (and socially valuable) than a bad engineer or a discouraged coder.

20/6/15: Keep Faith in Ireland's Energy Regulator

So remember the promise of CER-driven regulatory pricing of energy in Ireland? It went something like: we set high tariffs to encourage competition which will lower prices in the long run.

The problem is: the long run never arrives, while prices remain set sky high, effectively extracting cash out households to sustain huge pay perks in the energy sector and massive white elephant investment schemes by dominant players in the markets.

Want evidence - take Eurostat data (http://ec.europa.eu/eurostat/documents/2995521/6849826/8-27052015-AP-EN.pdf/):

Our 'independent' regulation model means that state-owned quasi-monopolies are fleecing consumers at the rate of pricing that is the highest in the EU. Lower incidence of energy-linked taxes and levies results in total end price to consumer being the third highest in the EU. But in terms of what producers collect - it is the highest. Say 'cheers' next time you pass by the surreal 'charging' stations that ESB erected around Dublin for imaginary electric cars. They are paid for by you and me. Say 'thanks' next time you hear that ESB average salaries are in excess of EUR80K/pa - they too are paid by you and me.

That is some achievement of our 'independent' regulator. The same one who is now regulating Irish Water that promises, again in the proverbial long run, to deliver better services at better cost.

Have faith and keep paying!

19/6/2015: Two charts plotting long term GDP crises and cumulative growth

One hell of a neat chart plotting cases of largest GDP drops in history (since 1950) by country and period:

via @FT, h/t @ReutersJamie 

Note Russia, Ukraine, Georgia and rest of the former USSR.

Now, using IMF database, and referencing the first year when there is sufficient consistent level of data covered in the database (1993), here is a chart plotting 50 lowest growth states in the global economy in terms of cumulative real GDP increases between 1993 and 2014:

Have fun with this.

19/6/2015: Greek ELA and ECB... What's the Rationale?

The price of getting Greece ejected or pushed out of the euro has now risen once again as ECB added to the ELA provided to Greek banks amidst a bank run that is sapping as much as EUR800mln per day.

In basic terms, ECB is allowing lending via Eurosystem to Greek banks to fund withdrawals of deposits. Once deposits are monetised and shifted out of Greek banks, Eurosystem holds a liability, Greek depositors hold an asset and the latter cannot be seized to cover the former. ECB was very unhappy with doing the same for Ireland at the height of the crisis, resulting in a huge shift of ELA debt onto taxpayers' shoulders via Anglo ELA conversion into Government bonds.

But ECB continues to increase Greek ELA. Why? We do not know, but we can speculate. Specifically there can be only three reasons the ECB is doing this:

Reason 1: increase the cost of letting Greece go. If Greece crashes out of the euro zone, the ELA liabilities will have to be covered out of Eurosystem funds, implying - in theory - a hit on member-states central banks. In theory, I stress this bit, this means higher ELA, greater incentives to keep member states negotiating with intransigent Greece. Why am I stressing the 'in theory' bet? Because in the end, even if Greece does crash out of the euro area, ELA liabilities can be easily written off by the ECB or monetized (electronically) without any cost to the member states.

Reason 2: keep Greece within the euro area as long as possible, thus allowing the member states to hammer out some sort of an agreement. In theory, this implies that the ECB is buying time by giving cash to Greek depositors so they can run, in hope that they continue to run at a 'reasonable' rate (at, say, less than EUR2 billion per day or so). In practice, however, this is a very short-term position.

Reason 3: ECB is monetizing Greek run on the banks in hope that Greece does crash out of the euro. Here's how the scheme might work: increasing ELA for Greece weakens Greek banks and, simultaneously, strengthens the incentives for Greece to exit the euro once deposits left in the system become negligible and the economy is fully cashed-in. On such an exit, Greek residents will be holding physical euros that cannot be expropriated by the Eurosystem, and thus Greece can launch drachma at highly devalued exchange rate, while relying on a buffer of cash in euros held within the economy.

I am not going to speculate which reason holds, but I will note that all three are pretty dire.

Take your bets, ladies and gentlemen.

17/6/2015: Mr. John Flynn’s Letter to the Banking Inquiry

Here is a letter by Mr. John Flynn informing the Banking Inquiry Chairman, Ciaran Lynch, T.D. about the issue of overcharging at the Anglo Irish Bank, subsequent extent of the problem in legacy-resolution institutions and detailing the substance of the developments in the U.S. court case relating to Anglo overcharging:

Note: I was informed by Mr. Flynn that he received no substantive reply to his communications to the Banking Inquiry.

Note: You can follow the topic of overcharging and other sharp practices and questionable strategies deployed in the post-banking crisis resolution process in Ireland here:

1. Deputy Peter Mathews June 2015 speech on the issue of overcharging by Anglo, its legacy and issues relating to Nama was covered here: http://trueeconomics.blogspot.ie/2015/06/1062015-bombshell-goes-off-on-anglo.html
2. My summary view of the Anglo’s sharp practices toxic legacy: http://trueeconomics.blogspot.ie/2015/06/11615-anglos-toxic-legacy-it-is-still.html
3. Mr. Declan Ganley’s Affidavit from 2013 concerning overcharging: http://trueeconomics.blogspot.ie/2015/06/12615-anglo-overcharging-saga-ganley.html
4. Deputy Mick Wallace’s speech in June 2015 delivered in the Dail on the subject of Nama and Anglo legacy with my introduction of the concept of value destruction: http://trueeconomics.blogspot.ie/2015/06/14615-why-read-wallaces-speech-on-nama.html 
5. Mr. John Morrissey’s legal letter on overcharging: http://trueeconomics.blogspot.ie/2015/06/11615-full-letter-concerning-ibrc.html 
6. Nama value destruction contextualised in a sample of 10 deals concluded by the agency: http://trueeconomics.blogspot.ie/2015/06/17615-10-cases-worth-asking-nama-about.html
7. Mr. John Flynn’s letter to the members of the Dail covering Irish and U.S. evidence on overcharging: http://trueeconomics.blogspot.ie/2015/06/17615-mr-john-flynn-letter-to-tds-on.html 

18/6/15: Russian Central Bank Targets Rebuilding of Foreign Reserves

Recently, speaking at a banking conference in St Petersburg, Elvira Nabiullina, head of the Central Bank of Russia outlined the CBR position on foreign exchange reserves. Nabiullina note that Russian reserves are large - sufficient to cover almost 11 months of imports. However, Nabiullina's 'comfort zone' target for the reserves to cover 2-3 years of "substantial capital outflows", implying she would like to see Russian reserves rising back to USD500 billion mark. Nabiullina is now targeting purchases of forex over the next few years to drive up reserves and to that objective she has been buying on average USD200mln worth of forex per day since mid-May.

In line with forex reserves rebuilding objective, Nabiullina cautioned about markets expectations of further large scale cuts to interest rates as the CBR is trying to balance out inflation targeting (requiring tighter monetary policy), investment supports (requiring looser policy) and accumulation of reserves (implying looser policy).

Per Nabiullina: "Attempts to reduce the interest rates too fast or even acquire certain assets may simply lead to stronger inflation, to an outflow of capital or to dollarisation of the economy, and that would slow down the economic growth, other than promote it."

In its latest outlook, CBR forecast unemployment reaching 6.5% this year from the current rate of 5.6%, before falling to 5.6-5.8% by 2018. GDP is expected to shrink 3.2% in 2015, returning to trend growth of 1.7-2.4% around 2017-2018. Inflation is expected to hit 11% at the end of 2015 with rather optimistic outlook for a decline to "less than 7%" by June 2016, and "close to the target level" of 4% in 2017.

Net capital outflows are expected to decline from USD90 billion in 2015 to USD55-65 billion in 2018. "We are expecting the financial sanctions against Russia to remain in place. Payments on foreign debts during this period will constitute the bulk of the capital outflow. It will gradually reduce from $90 billion to about $55-65 billion during 2015-2018, depending on the scenario," according to Nabiullina.

Russian International Reserves reached USD360.6 billion at the end of last week, up on USD356 billion low registered in April 2015. Still, the reserves are down USD117.7 billion y/y (-24.6%) and down USD132.73 billion (-26.9%) on pre-sanctions period.

18/6/15: Tripling Permissions... and Where's That Construction Boom?

CSO released Planning Permissions figures for Q1 2015 with the following summary:

Which certainly conveys a sense of a veritable boom going on in the construction sector future activity pipeline. Yes, tripling of the apartments permissions and doubling of total dwelling permissions.

But here are the numbers in their more sober presentation. Please, mind - these are numbers from CSO itself.

• Total number of planning permissions granted in Ireland in 1Q 2015 stood at 3,895. which is 11.2% higher than in 4Q 2014, but only up 1.62% y/y. In 1Q 2014, the same rose 17.04% which is much faster than in 1Q 2015. So the boom is getting less boomier.
• Current level of planning permissions granted is 77.5% lower than at the peak while at absolute minimum of the crisis it was 81.1% lower. In other words, we are not that far from the crisis trough.
• Current level of planning permissions granted is 10.27% below the absolute minimum achieved in 1975-1999 period.
• The record busting quarter of 1Q 2015 is actually 13.76% below the quarterly average between 1Q 2011 and today.
• Dwellings saw planning permissions granted rise to 1,065 in 1Q 2015 which is 21.3% ahead of 4Q 2014 (remember - seasonal variation not accounted for). 1Q 2015 number is 19.5% ahead of 1Q 2014, so there is nice growth here y/y.
• Still, 1Q 2015 reading for dwellings permissions granted was 85.9% lower than pre-crisis peak, 26.9% lower than 1975-1999 period lowest recorded number and is 35.4% lower than the quarterly average for the period from 1Q 2011 through 1Q 2015.
• In Sq. Footage terms: total volume of planning permissions granted in 1Q 2015 came in at 952,000 sq.m. which is 28% ahead of 1Q 2014, but 85.8% below pre-crisis peak. Things are getting healthier here, but still off very low levels.

You can judge the trends for yourself in the following charts:

Boom here?

Or boom here?

Or maybe a boom here?

Ah, at last, a boom here?

Oh dear... gotta be next time...

17/6/15: Mr. John Flynn Letter to TDs on Anglo/IBRC/Nama Overcharging

Here are the direct exerts from the correspondence sent by Mr. John Flynn to a number of TDs in relation to the Banking Inquiry on December 22, 2014. Italics in bold are mine (for emphasis). 

“I am attaching various information …which results from BankCheck …report into overcharging at Anglo Irish Bank.  Following a three year (and ongoing) investigation, I am attaching its interim report of May 2014.  

The overcharging identified continues to fall on borrowers to this day through Anglo Irish Bank legacy loans inherited by IBRC, NAMA and the various Private Equity funds that have acquired them, because both methods of overcharging that were discovered continue to rack up excess interest.”

Note: this is aserious allegation that echoes other claims submitted on the subject. The reason is simple: investment funds acquired distressed and other loans priced based on current interest yield (at least in part). If the current yield incorporated overchraging, and this was not disclosed to the buyers of the assets, then the sale of these instruments can be of questionable validity and can be potentially contested by the buyers of these assets. Likewise, any parties that continue overcharging while holding the loans can also be subject to legal action and incur costs of such practice. Beyond continued overcharging, the legacy of this sharp practice by the Anglo is also contained in those cases where a new (legitimate) interest rate applies on past interest charges incurred under the TIBOR. The can of worms gets bigger and bigger with every day the situtation remains unresolved.

“As admitted when questioned by us in the IBRC Chapter 15 Bankruptcy proceedings in the United States Bankruptcy Court for the District of Delaware, on October 8th 2013, the IBRC Special Liquidators stated that IBRC “did realise that it had an overcharging issue”. The IBRC purportedly set up a steering committee, chaired by Mr Mike Aynsley to deal with that issue. Reports were prepared and finalised by the end of 2010. The said reports were then forwarded to the board of IBRC, the Regulator and the Central Bank for their review and comment in order to, “make sure that everybody was comfortable in the work that was undertaken, and trying to get to the bottom of the cost of funds issue, which they (sic) contractual rate of interest that was being charged was different than the actual rate of interest being charged.” That report and the report of the Special Liquidator which examined the the IBRC report has never been published and their contents are unknown to the public.”

So what we have here is the allegation that:

1) IBRC knows and recognises the problem;

2) IBRC – alongside others – have notified the problem to the authorities;

3) No action has been taken by anyone; and

4) No action has been taken identify other injured parties and to inform the public.

Draw your own conclusions what these points, taken together, amount to.

There is more when it comes to the overcharging allegations: “The attached BankCheck report mainly addresses the matter of manually altered systemic LIBOR/DIBOR/EURIBOR manipulation from 1990 to 2004 and not the 360/365 systematic computer generated overcharging from 2002 to date, whereby the bank overcharged its customers with an extra 5 days interest per annum - as held by Ms. Justice Finlay Geoghegan in her Judgment of October 2014 in Anglo Irish Bank v John Morrissey (Record No. 2011/1548). The reason for the limitation of the BankCheck investigation is that while the 360/365 "scam" could possibly be explained away as "a computer error”  the daily random manipulation of the LIBOR rate could not.  The Report is currently being updated, as further information has been made available to us since May 2014.”

This raises the second point of overcharging – on top of the original. Not only Anglo imposed false charges on its customers, it also altered the base (the duration) over which the interest accrued. By switching from 360 days contracted arrangement to 365 days basis for calculation of interest charges, while retaining the rate, Anglo de facto, it has been found, charged an extra 5-days/per annum premium on the loans. Explaining this as a computer error is a bit generous, but even if we allow for such, there is a pesky issue of compensation for an error and culpability. After all, remember an actual computer systems error in the case of the Ulster Bank for which the bank was fined heavily and paid out compensation to its clients?

Here is an interesting bit: per Mr. John Flynn, “I have not included back up data (including fallacious daily LIBOR term sheets published from within Anglo Irish Bank) with this initial email as it is voluminous, but it is available …. if you wish to pursue the matter further.”

According to Mr. Flynn, neither the banking inquiry, nor anyone else contacted in the Dail, have requested the evidence. Worse, with exception of standardised replies from two TDs, there has been no engagement with the author of the statement and the holder of the evidence.

Please note, the allegations contained in the quotes below are those of the author of the letter, and I am simply providing these clearly separate from my comments on these.

You can follow the topic of overcharging and other sharp practices and questionable strategies deployed in the post-banking crisis resolution process in Ireland here:

1) Deputy Peter Mathews June 2015 speech on the issue of overcharging by Anglo, its legacy and issues relating to Nama was covered here: http://trueeconomics.blogspot.ie/2015/06/1062015-bombshell-goes-off-on-anglo.html

2) My summary view of the Anglo’s sharp practices toxic legacy: http://trueeconomics.blogspot.ie/2015/06/11615-anglos-toxic-legacy-it-is-still.html

3) Mr. Declan Ganley’s Affidavit from 2013 concerning overcharging: http://trueeconomics.blogspot.ie/2015/06/12615-anglo-overcharging-saga-ganley.html

4) Deputy Mick Wallace’s speech in June 2015 delivered in the Dail on the subject of Nama and Anglo legacy with my introduction of the concept of value destruction: http://trueeconomics.blogspot.ie/2015/06/14615-why-read-wallaces-speech-on-nama.html 

5) John Morrissey’s legal letter on overcharging: http://trueeconomics.blogspot.ie/2015/06/11615-full-letter-concerning-ibrc.html 

6) Nama value destruction contextualised in a sample of 10 deals concluded by the agency: http://trueeconomics.blogspot.ie/2015/06/17615-10-cases-worth-asking-nama-about.html 

17/6/15: Brian Lenihan: The Documentary

RTE documentary about Brian Lenihan http://www.rte.ie/player/ie/show/10432424/.

A person who, in my opinion, has left a very complex, important legacy and, in many ways, deserves more positive credit for his work, courage and determination than some of us sometimes give him. History, as always, will be a better judge. And I believe, it will judge him highly.