Economics 02/10/2009: IMF World Economic Outlook

IMF released its World Economic Outlook for H2 2009 last night. Here are some highlights, more to come later tonight.

Summaries of IMF latest forecasts:

Next, I created an index of overall economic activity that is GDP-weighted. This index is geared in favor of Ireland and other smaller exporting economies by magnifying the effects of GDP growth (as opposed to GNP) and the effects of the current account (reflective of higher share of trade and FDI in Irish economy) and downplaying both price inflation (with larger share of domestic inflation in Ireland imported from abroad) and unemployment (with traditionally smaller both unemployment and labour force participation in Ireland).

Rankings based on the index: Based on the above index of economic activity, ranking countries in order of declining quality of economic environment, shows the extent of our performance deterioration: if in 2007 Ireland ranked 18^th from the top in the developed world, by 2010 we are expected to rank 29^th or fourth from the bottom.
Peer economies comparatives:
Based on the above table, we can compute a relative impact of the crisis 2008-2010 on our competitor economies. Chart below illustrates this, showing that when compared to other economies, only Iceland is expected to show more severe contraction in economic activity than Ireland. More importantly, the gap between Irish performance during the crisis and that of an average economy in our competitor group is 1.5 Standard Deviations away from the mean.
Property markets crisis estimates: based on IMF model of duration and amplitude of property busts, table below reports the relative impacts of the global property slump in the case of Ireland, comparative to the rest of the OECD:
Stay tuned for more...

Economics 01/10/2009: External Debt - still a problem

As of 30 June 2009, per CSO’s today release, “the gross external debt of all resident sectors (i.e. general government, the monetary authority, financial and non-financial corporations and households) amounted to almost €1,689bn. This represents a drop of €7bn or 0.4% …compared to the level shown (€1,696bn) at the end of March 2009.”

“…the bulk of Ireland’s external debt arises from the liabilities of IFSC financial enterprises and also that most of its overall foreign financial liabilities are offset by Irish residents’ (including IFSC) holdings of foreign financial assets.” Hmmm… again this over-emphasis of IFSC. One note of caution - we do not actually know if these 'assets' are valued at fair rates (we do not know what percentage of these assets is valued at mark-to-market, and what percentage is valued at hold-to-maturity bases), so some questions to the quality of the assets can be raised.

“Liabilities of monetary financial institutions (credit institutions and money market funds) consisting mostly of loans and debt securities were almost €691bn, a drop of almost €27bn on the 31stMarch 2009 stock level and down €117bn on the June 2008 level.” In other words, our banks are de-leveraging… as in charts below… but at whose expense?

The reduced liabilities of MFIs “are broadly reflected in the significantly increased Monetary Authority liabilities of €103bn, up by over €98bn since June 2008. These obligations are to the European System of Central Banks (ESCB)...” Aha, de-leveraging by loading up on those ECB loans, then?

But wait, there is more: “The liabilities of other sectors including those of insurance companies and pension funds, treasury companies and other relevant financial enterprises, as well as non-financial enterprises were €624bn, remaining relatively flat compared to end-March 2009. However, compared to end-June 2008, these liabilities had increased by €28bn.” Yeeeeks – banks de-leveraging is pushing ‘other sectors’ – aka the real economy – deeper into debt.

But wait, there is more: “The level of general government foreign borrowing increased by €10bn to €72bn between March and June this year and was €29bn up on the June 2008 level.” Ooops, banks are costing us here too (as do our social welfare rates and public sector wages bills).
Pull one end of the cart up, the other end sinks?

Some details on top of CSO’s release:
Table above shows percentage increases in debt levels across sectors and maturities. Pretty self-explanatory. The Exchequer is borrowing short and increasingly so. But the Exchequer is borrowing long as well, and rather aggressively as well. Monetary Authority is truly remarkable. Incidentally, MA borrowings are mostly short-term (higher than 3:1 ratio to long-term).

Banks (oh, sorry, MFIs) are cutting back debt more aggressively this year than in 2008. And, strangely enough, they are cutting more long-term debts than short-term debts (in proportional terms). Of course, this in part reflects bad loans provisions and pay downs of Irish subsidiaries debt by foreign parents.

Other sectors are rolling up accumulated interest and amassing new loans. Short-term liabilities net of trade credits are up over two years, trade credits flat over last year. What does it tell you about importing activities?
Shares of MFIs in total debt thus are falling across the years, as are FDI shares, but everything else is rising.

Looking at short vs longer term debt issuance by sector:
Monetary Authority is now almost all short-term, Government is increasingly short-termist as well. Maturity mismatch risk is rising as is, but with Nama (a rolling 6-months re-priced bond against 10-20 years work out window on loans) maturity mismatch risk on Government balance sheet will go through the roof.
MFIs short term debt is now also declining, while long term debt has been declining for some time. It would be interesting to have this broken down by foreign vs domestic lenders, but there is no such detail in CSO figures, despite CSO's constant repeating that the figures include IFSC. If IFSC is so important to this analysis - why not report it separately?

Other sectors are relatively flat, which is bad news. Trade credits flat as well.

Overall, lack of significant de-leveraging and in some cases, continued accumulation of liabilities, in the real economy.

Economics 30/09/2009: Unemployment crisis continues

Per CSO release today: “The seasonally adjusted Live Register total increased from 428,800 in August to 429,400 in September, an increase of 600. In the year to September 2009, there was an unadjusted increase of 183,422 (+76.4%). This compares with an unadjusted increase of 192,672 (+77.9%) in the year to August 2009.”

Are things improving? Declines in LR appear to point to two major factors at play here:

• Main sources of layoffs are flattening out, including construction and retail services. This is a sign of stabilization, but it is not a sign of impending improvement, as likelihood of these sectors aggressively rehiring staff is slim in the foreseeable future;
• Large movements from the LR are also a function of more people dropping out of the labour force and signing up for welfare benefits, while ceasing job searches.
  

“The average net weekly increase in the seasonally adjusted series in September was 150, which compares with a figure of 1,350 in the previous month. The standardised unemployment rate in September was 12.6%” - flat on August.

“In the month, the estimated number of casual and part-time workers on the LR was 38,268 males and 32,590 females.” In August, the same figures were 37,749 males and 32,354 females. And so on: table illustrates
How do you explain this? A friend of mine used to be a broker, now drives a taxi. Per official stats, he is doing fine. Per his own state of mind, he is doing the necessary thing to survive. This is the difference between voluntary under-employment and self-employment and its forced version. CSO’s latest figures show the latter.

So per some commentators out there, “the unemployment rate, which didn’t rise this month – the first time that has happened since December ‘07” and this is an improvement. For me, this is like telling someone who’s house just burnt down that all’s fine – there won’t be another fire for a while.

I am still sticking with 14-15% forecast for 2009 peak unemployment, though it might be looking like a bit downside from 14% is possible. Who know – Christmas season (aka desperation levels in retail sector) will tell.

Now, to that other pesky issue – labour force participation. One issue of growing importance is youth unemployment. This is contracting per LR figures. But this contraction is likely masking two factors at play:

1. there is significant seasonality - much of youth employment is part time and linked to higher activities in summer months (hotels, recreational etc sectors), plus
2. there is a number of those who are simply dropping out of the labour force (either those who would have joined, but are not joining now that the jobs evaporated, or those who have been out of work for over a year and stopped searching, or those who have gone back to school or who continued in school transitioning to a new programme).
   

Per QNHS released earlier this month: "Almost all of the decline in the size of the labour market is attributable to a decline in participation of almost 36,000.” Now, remember, that was for Q2 2009 – pre summer months. “This is shown by a fall in the participation rate from 63.7% in Q2 2008 to 62.5% in Q2 2009.” To me, this indirectly confirms that drop-outs from the labour force are most likely to be our younger workers. In QNHS see Table 9: labour force participation rates have fallen by age group as follows for April-June 2007 to April-June 2009:

• 15-19 age group from 29.1% to 22.1% (7 percentage points down)
• 20-24 age group from 77.0% to 73.6% (3.4 percentage points down – less than half of decline in younger category)
• 25-34 age group from 85.5% to 84.7% (0.8 percentage points down)
• Economy-wide from 64.0 to 62.5% (1.5% percentage down)
  

So youths are dropping out of labour force at a rate nearly 5 times those of the average decline.

Hmm… things are improving, rapidly. Dom Perignon 1988 uncorking time, yet?

Economics 30/09/2009: Global Financial Stability Report

Update: There is an interesting note in one of today's stockbrokers' reports: "AIB is to review its selection process for a successor to Eugene Sheehy, according to reports this morning. The Government will not endorse an internal candidate based on renewed signals according to the article. Separately, Minister Brian Lenihan said it was "inevitable" that further public capital will be required by the country's banks after the NAMA transfers."

Two points:

1. If Government is so aggressive in staking its control over AIB's selection of a CEO, why can't the same Government commit to firing the entire boards upon initiation of Nama? Governments change overnight, so why banks' boards are so different?
2. I must confess, I like Minister Lenihan's belated (this blog and other analysts have said months ago that there will be second round demand for funding post-Nama due to RWA changes triggered by Nama, and then due to second wave of defaults within mortgage and corporate loans portfolia) recognition of a simple financial / accounting reality. Strangely enough, the brokers themselves never factored this eventuality in their projections of Nama effect on banks balance sheets.
   

Oh, another little point: Minister Lenihan was last night explaining on RTE that BofI and IAB both raised circa Euro1bn bonds each with the issues oversubscribed by a healthy margin and that these were 3-3.5 year bonds. we should be impressed, then? Au contraire: those foreign investors (in the case of BofI 92% of the bond issue gone to foreign institutionals and banks) are making a rational bet that Ireland will continue to guarantee depositors through 2014 if not even longer, and that the Exchequer will rather destroy the households than see banks go under. In other words, the markets priced Irish banks now as being effectively fully guaranteed by the state - bondholders, shareholders, unsecured debt holders, furniture and office suppliers, staff - you name a counterparty working with Irish banking sector... they are all now implicitly guaranteed by you, me, ordinary taxpayers in Tallaght and elsewhere across the nation. Some success, then.

News: IMF's Global Financial Stability Report Chapter 1 is out today. This is the main section of the report and it focuses on two themes:

1. Continuation of the crisis in financial markets - the next wave of (shallower, but nonetheless present) risks to credit supply in globally over-stretched lending institutions; and
2. Future exist strategies from the virtually self-sustaining cycle of new debt issuance by the sovereigns that goes on to mop up scarce liquidity in the private sector, thus triggering a new round of debt issuance by the sovereigns (irony has it, I wrote about the threat of this merry-go-round link between public finances and private credit supply back in my days at NCB - in August 2008).

The report is a good read, even though it is a voluminous exercise - check it out on IMF's main website (at this hour I am still working with press access copy).

Ireland-specific stuff:
Nice chart above - Ireland was pretty heavy into ECB cash window back in 2007, but by 2009 we became number one junkies of cheap funding. Like an addict hanging about the corner shop in hope of a fix, our banks are now borrowing a whooping 7% of their total loans volumes through ECB. This is a sign of balance sheet weakness, but it is also a sign that the banks are doing virtually nothing to aggressively repair their balance sheets themselves. Why? Because Nama looms as a large rescue exercise on the horizon.
But, denial of a problem is not a new trait. Per chart above, through 2006, Irish banks were third from the bottom in providing for bad loans despite a massive rate of expansion in lending and concentration of this lending in few high risk areas (buy-to-rent UK markets, speculative land markets in Ireland, UK and US and so on). Now, taking the path the Eurozone average has taken since then, adjusting for the decline in underlying property markets in Ireland relative to the Eurozone, and for the shortfall on provisions prior to 2007, just to match current risk-pricing in the Eurozone banks, Irish banks would have to hike their bad loans provisions to 3-3.75%. And this is before we factor in the extremely high degree of loans concentrations in property markets in Ireland. Again, why are we not seeing such dramatic increases? One word: Nama.
Lastly, table above shows the spreads on bonds in the US and Eurozone. Two note worthy features here:

1. The rates of decline in all grades of bonds and across sovereign and corporate bonds shows that they are comparable to those experienced by Ireland. This debunks the myth that Irish bonds pricing improved on the back of something that Irish Government has done ('correcting' deficit or 'setting a right policy' for our economy). Instead, Irish bond prices moved in-line with global trends, being driven by improved appetite for risk in financial markets and not by our leaders' policies;
2. Current spreads on Irish bonds over German bunds suggest market pricing of Irish sovereign bonds that is comparable to US and European corporates. In effect, Ireland Inc is not being afforded by the markets the same level of credibility as our major European counterparts. One wonders why...
   

Economics 29/09/2009: Nama Trust Full Costs

Full balance sheet for either a 'nationalization option' or my Nama Trust idea is here, now with bonds figures (courtesy of Peter Mathews):

Economics 29/09/2009: Socialism is Bad for Your Health

International health services ratings 2009 Euro Health Consumer Index (EHCI) were published today. These provide comparisons for a number of EU countries, plus Switzerland and Canada. Tables below show Irish performance over 2006-2009 in the rankings and the performance of our closest peers - small European economies.

Summary of overall performance:
Before looking at the tables, here are some facts:

• All leading healthcare systems (top 4 in the table) have separated provider of services (mixed models of private, publicly-owned but independent, locally-owned & non-profit) from payee (state) for services.
• Of top 10 performers, 5 have fully separate functions of service providers and payees for service, 3 others have a mixed system. In contrast, Ireland has not even a mixed system, with all primary, emergency and non-elective medical service providers being captured by the state.
• Ireland is ranked a lowly 14th this year, although it is a marked improvement on the past years performance (see below).
• Fully nationalized system of healthcare practiced in Canada scores marginally worse than Ireland in patients rights and access to information. Only Latvia, Portugal, Romania and Spain score worse or equally poorly as Canada in this area.
• Canada scores worse than Ireland in waiting times for treatment. The only other country that scores as poorly as Canada in this area is Latvia.
• In terms of healthcare system outcomes (designed to gauge basic treatments effectiveness), Canada scores as highly as Ireland, with both countries ranked between the 4th and 8th places.
• In terms of range and reach of health services provided within the system, Canada (100) scores marginally above Ireland (92), with Canada ranked between 12th and 14th places, while Ireland ranks between 15th and 22nd places.
• In terms of access and quality of pharmaceuticals within the system, Canada ranks between 26th and 27th. Ireland ranks between 2nd and 8th.
• Thus, contrary to the noise about 'socialised medicine for Ireland's future' movement within Irish Left, global data shows year after year, that using objective criteria, socialised medicine is bad for your health.

Now more detailed tables compiled by me from previous years' reports: