Economics 05/08/2009: Irish Exchequer - back into the furnace for a fresh meltdown

On to the Exchequer Returns for July 2009, then. As I predicted well back in February-March 2009, we are on track to reach the milestone of the total tax receipts falling below €31-32bn for 2009. I have not changed this prediction and I am still sticking to it.

The latest data is a disaster across the board:

• Tax Revenues are down 17.57% yoy in nominal terms, total revenue down 16.82% due to the increase in non-tax revenue, constituting, among other things a massive rip off of Irish consumers at the Dublin Airport and Dublin Port;
• Total current expenditure is up 4.55% yoy in nominal terms;
• As a percentage of GDP, tax revenue used to be 12.19% in 2008, now it is down to 10.99% thanks to the fall off in tax receipts, but overall current receipts declined from 12.41% of GDP to 11.29% - a bit shallower, as the Government continues to squeeze consumers and businesses for non-tax cash;
• Current expenditure has gone through the roof - rising from 14.18% of GDP in 2008 to 16.21% in 2009 - the real cost of public sector excesses (once social welfare increases are factored out);
• Current account deficit ballooned to €8.364bn in January-July 2009, an increase of 155% yoy. This used to account for 1.76% of the nation GDP in 2008. Now it is 4.92% and rising;
• Capital account deficit has gone to €8.075bn in January-July 2009 up 135.3% yoy, and as a share of GDP reaching 4.75% so far, as compared to 1.85% in 2008;
• Subsequently, overall Exchequer Deficit now stands at a whooping €16.44bn - up almost €10bn on 2008, or 145%. The ED now accounts for 9.67% of GDP, up from 3.61% in 2008. Remember that wishful thinking of a single-digit deficit for 2009? Gone in a blink of an eye;
  
• As a percentage of GDP our total annual borrowings have reached 14.72% in January-July 2009, up from 5.8% in 2008.

Table below summarizes these gruesome stats, but what is already clear from this data alone is that despite Mr Lenihan and other officials heralding the turn around in Irish public finances that was 'recognized by international markets', their own data shows that this turnaround was about as real as Mars Attacks was a documentary.
Now onto details.

Tax Heads:

• Customs, Excise, VAT and CAT down 21-26% yoy;
• Income tax and VAT - two taxes paid by consumers - are rising in overall share of total tax revenue, as Mr Lenihan loads the burden of his Government's unwillingness to cut public sector waste onto the shoulders of average families;
• CGT down a whooping 69.35% yoy despite resurgent markets;
• Stamps down 64.12% yoy predictably;
• Unallocated tax receipts up 55% - presumably on the back of the Revenue going after middle classes to milk out every single penny left in their accounts - anecdotal evidence shows exactly such a predatory behaviour with Revenue officers querrying any out of line items such as medical expenses from families with 3-4 kids;
• Corpo tax is up stron 31.55%, but not because of any green shoots on business front - simply due to changes in the scheduling.
  

Table below illustrates
Now departmental expenditure (voted only):

• Clownish numbers from D of Agriculture - spending up 35.12% yoy as the country is going into tail spin. Agriculture used to account for 2.3% of total voted expenditure. It now holds a 3.08 share. Soon, we will have agriculture - contribution to GDP 3%, as a burden on the Exchequer 6%;
• Only 5 departments show double digit reductions on 2008 spending - the minimum target for any serious fiscal stabilization programme in my view. Significantly, CMNR - down 32.16% on 2008, FA - down 19.28%, Transport - down 14.87% and AST down 14.51% are the only ones close or at the target (my minimum target for cuts is in the order of 15-20%);
• CRGA is down 6.05%. When this Government came to power, Brian Cowen has promissed the nation to put Irish at the heart of this Government's policies. Clearly, he is not too enthused about the objective... And yet, seriously speaking, the Department is miles away from serious change: at 6.05 reduction in expenditure, it is 9th ranked in taking appropriate measures out of 13 departments (15 less SFA and H&C);
• Incidentally, H&C are doing their job - they are up only 1.5% yoy despite having to face more demand for free medical services, defaults on medical payments and beraing some of the social welfare costs increases too - Mary Hearney is doing her job;
• Neither Finance Grou (down 9.06% only) nor D of Taoiseach (down 10.25%) are leading in the right direction.

Table illustrates
Non-voted current expenditure is often overlooked by analysts, but the figures relating to the burden of our debt (just 18 months into the fiscal 'solutions' to our crisis) are telling. Interest on bonds now accounts for 10.2% of our entire tax revenue (up from 6.32% in 2008). Total cost of financing these bonds now amount to 13.55% of entire tax intake (up from 8.46% in 2008). We are already drowning in a sea of debt.

Two other notables in the table above:

• Total non-voted current spending rose 19.24% yoy, with elections cost up 7.54% in 2009 and Oireachtas Commission costs up 6.69% - someone is living large out there in the public sector la-la-land;
• Nat Devel Finance Act spending is also up - 125%, now that is a current expenditure item, not a capital one.
  

Finally, let us take a look at the tax heads performance against the April Budget 2009 profile (remember - the profile is only just 3 months old, so you shouldn't expect much deterioration in the calm and more predictable summer months, if, that is DofF can actually do forecasting). Ahem, not really good:

• Income Tax 2.8% behind target, with a shortfall (cumulative) of €185mln;
• VAT is 6% behind target (as one could have predicted in the wake of our disastrous policy proposed and pushed through by the DofF boffins of raising VAT in a small open economy with competitive retail just across the border;
• Corpo and Excise are ahead of target because the boffins cannot forecast the least volatile and inter-linked (via imports of inputs) tax heads;
• Stamps 17.3% below target - which is predictable, unless you are DofF forecaster. You see, they think, alongside with our bankers, that people will simply bottom-out of not buying property etc. Alas, the bottom in the markets for investment and consumption is a Zero expenditure at home. We have some room to travel there still;
• CGT and CAT heads are now 16.7% and 14.4% below target; so
• Across CGT, CAT and Stamps, DofF boffins average monthly error under Budget 2009 (April) estimates is now around 6.1% per month! Wow - and that is for very well paid job-secure workers who have no other responsibilities aside form Budgetary estimates?
• So total tax receipts are now 3% below target. Linear projection implies another 5.2% in deterioration over DofF projections through December - an annual fall off the target of ca 8%, bringing tax revenue to €31.6bn not €34.4bn as envisioned in DofF's April 2009 framework.

Table below illustrates

And now to the conclusion: it is simply impossible to believe that these numbers can be interpreted by anyone - international or domestic markets participants, shy of the DofF own employees and the delusionary Government we have - as a confirmation that this Government has done anything to address the fiscal crisis. The July stats are simply a loud confirmation of what we knew all along - taxing yourself out of the fiscal overhang does not work! Never will!

Economics 05/08/2009: AIB Statement

AIB’s half-year report to June 30:

• a loss for the period €786 million;
• impaired loans at 8.1% of total loans;
• criticised/troubled loans were at 25% of total gross loans (or in other words, counting the roll overs of the past, AIB is not pushing for ACC Bank levels of stress, which should really make a day for the jokers of the CBFSAI who, as retired Mr Hurley would say ‘rigorously stress tested the bank’);
• bad debt charge of €2.4bn, 3.58% of average customer loans, of which ROI loss was €1.5bn and operating profit was down 33%;
• the bank said it expects customer loan demand to remain weak and deposits hard to get;
• AIB said the establishment of Irish "bad bank" NAMA will be a material event that will influence the future outlook for the bank;
• Costs are 7% lower, and so is income, cost income ratio down from 49.2% to 48.3% (37.5% headline) – an idiocy for a bank operating in the severely contracted growth environment that can only be explained by a side-room deal with the government not to lay off workers in exchange for recapitalisation injections

Now to my favorite – the denial of the obvious. A year ago almost to date, I recall AIB’s Eugene ‘Can’t See Anything Wrong With Me Self’ Sheehy said that Ireland does not have a problem with mortgages arrears. Oh, yes, he did.

So crunching through the report data, table above shows changes in impairments across the book. Home mortgages are recording a pretty hefty rise in arrears. And the table below shows just how severe is the problem in ROI.

Note the increase in the relative importance of defaulting mortgages in Ireland in qoq terms – from 66.26% of the total impaired mortgages pool to 80.2%!

And for overall stressed and impaired loans:

Department of Finance I: We love Ourselves and our Bosses

So Department of Finance has released its Capacity Review, 2009 a 61-page long document that is a gem of obtuse, double-speak bureaucratise, can't-get-my-head-out-of-that-rare-end-of... language that only a human pickled for decades in some sort of a secret Soviet Preservative can produce. It is, as I said, a gem and it is available here.

First, the off-the-starting-line analysis - the fact that this document was actually published is not a testament to the Department's 'openness' or 'transparency', but to the arrogance of its managers, who think that its contents actually present some sort of a strategy blueprint for the future and a fair assessment of its capabilities as of today.

Now, to the details (italics are mine):

Page 4 of the Executive Summary reads "The outcome of the consultation process and the discussions of the steering group for the review highlight 5 key messages which should shape and guide the future development of the Department’s role and capability. These 5 messages are:

1. The Department must continue to rise to the new challenges it faces, not because it is not
already doing a lot of things well, but in view of the combined impact of the internal and external
challenges set out in Chapter 5. [So, things are fine folks, we are just going to be doing what we've been doing to date. No need to stare. Oh, and by the way - the Department is clearly aiming to rise to the challenges, which should really be the same as in 'should be doing it's job', but hey - that would be too prosaic for warranting a Capacity Review...]

2. The Department must take a stronger outcomes-focused leadership role within the public service. This means taking a lead role and exercising central co-ordination and oversight in a more proactive and direct way in future. However, this must NOT mean micro-management or an over emphasis on process management. [Hold on, who appointed the DofF to the function of leadership within the Public Service?]

3. The quality of the Department's staff and a culture of excellence in performance are integral to meeting the challenges; these must be supported and enhanced through significant organisational and cultural change. [And that change would be?.. Oh, sorry - that would be a matter for another Strategic Review, then...]

4. Resources need to be continually deployed to match emerging priorities as has recently arisen in the financial services area. This includes the identification of functions the Department should not be performing or should be doing in different ways; and [Yes, you read it right - the DofF will be identifying itself those functions it should not be performing... Like a sovereign Legislature of sorts, not a Civil Service department (reporting to the elected Government)...]

5. Delegation and accountability must travel hand in hand, internally and externally. This should
allow for necessary streamlining of management grades. [This amazing - delegation and accountability normally start with the ability to hold the job, then with promotion - at least in the private sector. But in DofF - both are all about the management grades... This is our public sector culture at its worst].

And now to Staretegic Recommendations (note the word - recommendations):

Recommendation 1: Take a pro-active role in the modernisation of the Public Service
...In partnership with the Department of the Taoiseach, implementation of the Government Decision in relation to the Task Force on the Public Service must be a key task of the Department of Finance. [It is a real testimony to the arrogant, self-serving nature of the Public Sector in this country that DofF needs a statement of the bleeting obvious - it is required to implement the Government Decision, without questioning it, and without an external Capacity Review... They are being paid to do their job, they are not being recommended to do it!]

Recommendation 2: Lead e-Government
This recommendation complements (1) – progress in this area is crucial to the delivery not only of Public Service Reform and Modernisation and [sic] but also to development of the economy and society overall. [Without the DofF efforts on e-Goverment, it is clear that the entire humanity will suffer irreversible damages... This is from a Department that cannot produce a simple excel format for its own expenditure and revenue statements, reliant on a pdf format that is so far into the Stone Age version, you can't read it as a table into any spreadsheet...]

Recommendation 3: Take a more pro-active role in co-ordinating the State’s response to all spending proposals emerging from Social Partnership and any negotiations which ensue [The real masters of this country - the Social Partners... that routinely bite the dust on disagreements with the Trade Unions only to be resurrected like Phoenix from ashes to arrive at another carving up of the taxpayers' wealth pie between various cronyist interests... And this is a great benchmark of policymaking to pin your country's Fiscal and Financial Stability on?]
Recommendation 4: Support the development of a modern and sustainable Pension System
The Department of the Finance must continue to work with other Government Departments to meet the key pensions policy challenge of ensuring self-sustainability over the long term in a situation where the task of financing increased spending demands on the pensions system will fall to a diminishing proportion of the population. [Here is an amazing statement - the DofF should be fully aware that Public Sector pensions are not sustainable and that they cannot be made self-sustainable, for in order to pay for them, some grades and employees will be required to contribute more than 100% of the own salaries to pension funds.]

Recommendation 5: Ensure the maintenance of financial stability, the repair and long-term viability of the banking system and the reform of financial regulation [This does not refer directly to NAMA, but it talks about minimising the risk to the Exchequer. Incidentally, the word 'taxpayer' is not mentioned in the entire document even once. This is also an important recommendation from the point of view of human capital resources that DofF does not possess - discussed below]

Recommendation 6: Optimise Civil Service Training and Development [AKA, blabber]


(II) STRUCTURE

Recommendation 7: Develop a more flexible team based organisational structure [all about processes - not goals or objectives, but processes].

Recommendation 8: Streamline the Management Structure of the Department
The top management structure should be de-layered over time from the current sixteen positions at Assistant Secretary level and higher. This will involve both a greater degree of direct responsibility for the two top posts and a greater delegation of responsibility to the next management layers (Assistant Secretaries/Directors). [Notice, over time... indeterminate and ultimately not goal-posted - a train to nowhere].

Recommendation 9: Streamline requests for returns from other Departments and Offices
The Department of Finance should take further steps to eliminate duplicate requests for returns and statistics from Departments by increasing internal coordination and the management of such information. ICT has a crucial role in this area. [The fact that DofF employs no statisticians, and that its own staff ability to process and manage data in modern ways (see my comment on its disclosure documents format) is legendary for being poor, I guess 'streamlining' is really a secondary problem - getting basics right would be a much higher priority].
Recommendation 10: Develop HRM function; reorganise Corporate Services Division
[Yeah, folks, they have no HRM and CSD is their word for Services to DofF employees - in case you though it is about services provision for private sector...]

I skip 11 - too much Orwelian speak for a human being to wade through...
Recommendation 12: Increase delegation of work and accountability at all levels to allow for a more balanced structure and the development of staff at all levels The organisational re-design ...must be underpinned by fundamental changes in the approach to delegation of work and accountability for decision-making in the Department not only to remove the requirement for senior management to be occupied by day-to-day operational and routine decision-making and
allow more time to be directed at high-level strategic issues and planning but also to develop and provide opportunities for staff. The HRM function recommended at 10 above should support this by facilitating Divisions to build capacity at all levels. [I would have thought that this is about accountability for getting things wrong, but oh, no - we can't have that in our public sector. It is about who is accountable for making sure the loo has TP in it in ample supply - a Principal Officer or a Director?]

Recommendation 13: Enhance communications
The Department should further develop both its internal and external communications to reinforce roles and responsibilities and to optimise the flow of information to and from Departments, staff and external customers [This is like telling a elephant to be more graceful in polka dancing].

Recommendation 14: Enhance and support Mobility Policy
[No - not mobility of key specialists from the private sector to the desperately under-skilled 9more on this below) DofF - mobility of its own staff, lest they become bored of their menial tasks before Recommendation 12 takes hold at that TP-in-the-loo supply function junction].

Recommendation 15: Access to Specialist Skills
The Department should consider designating a greater range of posts for the redevelopment of specialist skills within the specialist areas of ICT, economic, accounting/actuarial and HR disciplines [Yeah, right... finally they are admitting they have no expertise in economics, accounting and actuarial sciences... but more on this below]
Recommendation 16: Pro-active staff-development
...a specific commitment to on-the-job training and mentoring of staff, including those who are newly recruited, promoted or assigned. Performance issues must be addressed and remedied at the earliest possible stage. [You mean there is no performance assessment in place already? There are no adequate remedy strategies in place? Newly recruited staff is not encountering a commitment to on-the-job training? How long has DofF been in operation? Months? Weeks? Days?]


Before we move on to the beefier parts of the Review, here are some facts:

• 70% (table 4.4) of DofF employees thought they were doing a good job, even though they were concerned with losing institutional memory and lacked the skills to do core work. Preciously incongruous!
• (table 3.1) shows that DofF has more chiefs per employee count than the rest of the core Civil Service - they all are Chiefs, because the taxpayers are their Indians...
• Assistant Principals' grade - the core of the DofF - per page 28 upwards of 10% appear to have no degree level educational attainment and less than half have MA or MSc or MBS qualifications.
  
• Principal officer level only 20% seem to have any qualifications in economics, and there are only 4 degree holders in banking or banking and finance or finance or accounting;
  
• Administrative Officer level 23% have “single” degrees in economics and 28% “joint”. There appears to be nobody with MSc-level qualifications in accounting/finance, actuarial studies or statistics.
  
• There are no qualified PhDs, or Doctoral level graduates of any kind mentioned in the document.
• There are no CFA, QPA, CPA, no certified professionals mentioned at all.
  

Yeah, right... so let us take out the Degrees in Underwater Basket Weaving:
MSc in Economic Policy Analysis - a joke that wouldn't get you employed in a small regional bank as a bank teller in a proper country... -2
MSc in HRM - well, they've admitted this function is not working anyhow so -5
Industrial relations - since Social Partners are all about that, cut this out too as a non-core thing for DofF -1
MSc in Others (apparently from Rosswell or Plant Mars) -2
MSc in Public Management / Public Administration / Public Service Studies - you can get that one by literally going to work in the public sector and doing not much else -12
Training and Education - what is this? a secondary school? -2

So total number of MSc holders = max 84 relevant/remotely relevant to the job... not exactly an overly-educated (but certainly a well paid) bunch... that is supposed to lead the Public Sector in reforms and blah-blah-blah in the age of knowledge economy...

End Part 1

Economics 04/08/2009: NAMA, Liam Carroll & Short Termist Bonds

I should make it a habit to direct every NAMA post reader to my proposal for NAMA 3.0 here.


Yeps, Supreme Court came in on the side of the Government, throwing a lifeline to NAMA and forcing taxpayers into deeper losses. My earlier note stand now (see here) with all the gory implications for losses on Mr Carroll's loans now being back in the NAMA court.

But two birdies have chirped to me that there is more brewing up in the land of NAMA-fantasy. Apparently, the rumor has it, the Government plan is to issue short term bonds to cover NAMA liabilities. Given that NAMA will start issuing bonds in 2010 for this undertaking, the short term nature rumored is for a 2011-2012 bonds.

This, if true, makes no sense for several important reasons. Here are some:

(1) Issuing short-term debt with maturity before 2013 is equivalent to a financial suicide. The reason is simple - there is no credible (or for that matter even an incredible one) commitment from the ECB that

• such issuance can be rolled over at the same or lower interest rates to cover maturing bonds; and
• the EU will allow these bonds to remain off the balance sheet of the Government upon the roll over.
  

(2) Issuing short term bonds will be a fiscal suicide, for their maturity, and roll-over date, will fall dead on in the years of heavy Exchequer borrowing and maturity of other - 2008-2009 issued bonds. Given that the market demand for fixed income paper worldwide will be thinner then (due to increased appetite for equities-linked risk), a flood of rolled over bonds can risk derailing the borrowing programmes for Irish sovereign debt. Now, if you are a forward-looking investor, expect Irish yields to run away from the benchmarks once again, then.

(3) Short term maturity does not take into account the main risk to NAMA valuations, namely that by 2011 or for that matter 2013, the assets taken over by NAMA will be priced at any significant upside relative to what NAMA will pay for them, implying that, under short-term issuance, this Government will face the need to

• engage in a massive refinancing operations
  
• at the time when its balance sheet liabilities will be almost at their peak (see Department of Finance projections);
• pay higher expected cost of borrowing than today; and
• potentially, load the NAMA liabilities onto Government own balancesheet, while
• facing market prices and demand for real assets that is well below the valuations applied by NAMA.
  

If you look at the latter point. DofF uses 7 year U-shape cycle as its basic assumption. Peter Bacon last week stated that the cycle is expected to be 5-10 years. My estimations, based on NBER research (here), show that the average duration of the U-shaped cycle in historical data for OECD economies for 1970-2003 episodes of house prices collapse co-measurable with the one we are experiencing today is between 18 and 23 years. This range is dependent on how you time the cycle, but it refers to a nominal price cycle, unadjusted for Forex devaluations that accompanied such cycles in other countries and inflation. Japan (in down cycle since 1989-1990), Germany (since 1972-73), Italy (since 1981) and Sweden (since 1979) have not recovered to date.

Considering rolled up interest charges on impaired loans, banks' restructuring of interest payment schedules on so-called 'performing' stressed loans that in any other country would be classified as having defaulted, NAMA will be purchasing assets from the banks at an extremely shallow effective discount.

For example, a discount of 30% applied to a loan with 1.5 years (since July 2008 through December 2009) rolled up interest at 10%, and a built in re-financing cost of 1% will be equivalent to an effective discount of just 18.1% relative to the original principal of the loan itself. If, in the mean time, the underlying asset value itself has depreciated by, say 40%, then
NAMA will be buying a Euro 60 asset for Euro81.86. Now, in order for NAMA to recoup the original cost of purchase (not counting the cost of financing the purchase and managing the asset etc), the asset value needs to appreciate by a compound 36.4% within the span of the bond
finance. Thus between now and 2011 when the alleged bonds should mature, the annualized rate of appreciation required on the assets for NAMA just to recoup the original loan amount would have to be 16.8% per annum!

If anyone in the Department of Finance thinks this is a sane bet on a market turn-around, God help us.

Short-term financing of long-term obligations, as we should have learned in the current crisis, is equivalent to giving steroids to an unfit athlete and sending him out to run a marathon.

Though to repeat once again - this is just a speculation at this moment in time although two independent sources have tipped me on this one.

Economics 04/08/2009: NAMA & Liam Carroll - the saga continues

Oh, you have to love the drama and tension surrounding NAMA.

The latest thing to hit the rumour mill as we expect this afternoon our Suprem Court's rulling on Liam Carroll's appeal of the High Court decision to deny his companies examinership protection is that, allegedly, BofI and AIB are considering a buy-out of ACC Bank. Now, this is a rumor at this moment in time, and I have to stress this once again - it is a rumor - but given that:

• ACC can be, probably had for ca Euro130-140mln;
• ACC's books are so toxic (30% plus impairement across the property portfolio, 39% impairment across commercial property alone that its parent Rabo Bank would simply love to get rid of it for any sort of money;
• ACC's removal from the challenge to Liam Carroll and other developers would allow the big 3 of Ireland to continue on their chosen paths to the taxpayer-financed feeding trough of NAMA;
• ACC's buyout wouyld please the masters in the Government; and
• NAMA would more than compensate the buyer for the extra cost (say ACC is bought at a 50% discount to the book, then NAMA buys roughly 75% of former ACC 'assets' at 30% discount, implying a nifty return of Euro 5 per original expenditure of Euro 100, and you get to keep 25% of the ex-ACC assets too...

It would be no brainer for the AIB or BofI to load up on more toxic stuff to swap it for taxpayers cash.

From our, taxpayers' perspective, this is equivalent to throwing children off the sleigh in hope of holding back the wolves. The only hope we have at this stage is that a swift turning down of Carroll's appeal by the Supreme Court throws these schemes wide open.

Economics 03/08/2009: EU unemployment - no Green Shoots in sight

EU unemployment still climbing up: in June - the latest available data - 21.5 mln people, 8.9% of the labour force - were out of work in the EU27. The unemployment rate reached 9.4% for the Eurozone, the highest level since 1999. Spain (18.1%), Baltics (Latvia 17.2%, Estonia 17%, Lithuania 15.8%) led the EU27 in unemployment rate, followed by Ireland (12.2% and catching up).

The number of people unemployed increased by 246,000 in June relative to May. This is much slower than the gain of 646,000 recorded in March, but it nonetheless a continued increase.

So see if you can spot the 'green shoots' or bottoming out in unemployment that the EU has been talking about on the back of the latest figures (chart above). No flattening in the rate of increase since April 2009 moderation on March disastrous figures...

The above tow charts are rather telling as well.