Economics 04/11/2009: Live Register - don't touch that champagne yet...

While the Live Register figures (out today) have shown some significant moderation trend for some months now, the latest data remains gloomy. There is a misplaced emphasis on reading the headline statistics too much and ignoring the underlying movements of displaced workers.

The conclusion advanced by many analysts is that October figure shows a seasonally adjusted decline in the LR of 3,000 - the largest drop in LR since the 3,900 decline in April 2005 and the first decline since March 2007. Good news.

The headline numbers of people in receipt of unemployment benefits now stands at 422,500 or 62% above the same period a year ago. This calls for a revision of the expect year-end number to below 500,000. Many analysts jumped in with a conclusion that this will mean the exchequer can breath easier now, because each 10,000 fewer people on LR means the savings of Euro100mln to the Exchequer. Hmmmm... I don't think so.

The savings above reflect the assumption that those off LR are moving into jobs. What if they move into the welfare? Ok, 10,000 people off the LR means savings of Euro 100mln from lower unemployment benefits. If you move to supplementary welfare benefits, the cost of these is identical to job seeker allowance (Euro 204.30 per week), but you will also qualify for more assistance. A temporarily unemployed person might be able to pay out of savings for housing and job searching costs and might be staying outside state-financed training and education programmes. A long-term unemployed person will not, implying a massive cost run up for the state. A 10,000 cost basis for an unemployed LR-listed person quickly turns into a 20-40,000 cost tag for a long-term unemployed.

Now, LR data does not give us a breakdown of tenure in unemployment or other characteristics, but what we do know from today's data is that:

1. Males dominated the reductions in LR numbers with a fall of 2,300 amongst males and just 700 amongst the females. Let me ask you this question - if males increases in LR were driven by construction sector collapse, have any of you seen so many new cranes working in Dublin or elsewhere in the country to warrant 2,300 of these construction workers getting jobs all of a sudden? Neither did I. So most likely, these males are simply exceeding the time limit on unemployment benefits and are now eligible for much more substantial aid available under the general social welfare rates and allowances.
2. Timing of males unemployment increases suggests that we are now seeing reductions in male unemployment coincident with roughly 9-12 months lag from entry point. What does this tell us? Indirectly, this might mean that those who became now long-term unemployed by official definition are simply opting to sign onto welfare rolls and exit the labour force.
3. We are in the beginning of a new academic year. Is it possible that a number of those previously unemployed now became full-time students again? It is. While this is great news, as it means that they will stand a chance of enhancing their education, it is not the good news regarding unemployment in this country.
4. Emigration is another likely factor driving some of the declines in unemployment. Back in September data, details on Irish v Non-Irish nationals on LR showed that the rate of unemployment increases amongst non-nationals was contracting faster than for the Irish nationals. Detailed figures on this matter for October will come out on Friday, so stay tuned.
5. Lastly, the main bit of information relevant to this analysis. Out of 3,000 fewer LR signees, 2,900 came from under 25-year old group. Only 100 of the reductions came from the over 25 years old group. Incidentally, this suggests that LR reductions due to emigration are most likely impacting primarily Irish nationals leaving the state, rather than Accession states’ nationals going back to their countries of origin.

This speaks loudly in support of my assertion that the following forces (in decreasing magnitude of their contribution to falling unemployment) are at play:

• Labour force exits into welfare benefits;
• Net outward emigration of the young.

In my view, both reasons offer nothing to cheer about.

Economics 03/11/2009: Exchequer drama continues

So Exchequer returns for October are in. As usual, charts illustrate:

The miracle of 'stabilising revenues' first. Per above chart, stabilisation, across some categories, has been achieved simply by choosing an unrealistically conservative target for October revenue. The reasons for this conservatism are a matter of guess, but:

• DofF undoubtedly knew that there will be gains in revenue in October due to seasonality, yet they opted to neglect these;
• There was, most likely, an expectation that improved October returns relative to target will provide Government with some added cushion for the Budget day; yet
• Because receipts have deteriorated so far throughout the year, the DofF 'piggy bank' lowering of the target for October was not enough to generate a surplus over the target.

The Grand Plan backfired:

As charts above highlights, tax heads are performing worse and worse relative to 2008 across the board. Worryingly - Corpo taxes and Income taxes are tanking once again and this is before self-assessed tax forms poured in.

Hence, measured in terms of their respective contributions to meeting the tax profile set out in April 2009 Budget, we are now down to just two tax heads with net positive contribution - Corpo (which will see its positive effect eroded as timing changes imply that Corporation Returns are now all but exhausted for the rest of this year) and a tiny positive contribution from Excise that is about to turn negative. In short, it looks like by November all tax heads will be underperforming targets - which will be a real feat of forecasting, then. 

Subsequently, no one should be surprised by the fact that Exchequer deficit is widening on 2008 figure. Borrowing is once again diverging beyond 2008 levels (chart above). And the gap between total receipts and total expenditure is widening (chart below)

Couple more charts: one below showing just how conservative was October target and how this has led to the so-called 'improvement' in on-target performance.

And the following chart shows that the data does not support an assertion that April Budget was successful in arresting or stabilising the expansion of our deficit:

So much, then, for all the brave proclamations about 'making necessary adjustments' and 'taking the right medicine'...

Economics 02/11/2009: Central Bank Credit Data - Renewed Crisis Dynamics

So Irish Central Bank monthly data – out last Friday – provides some more fodder for thought about what is going on with credit flows in the country most dependent on ECB repo window (see here).

First consider the aggregates on money supply side:
This clearly shows that whilst M1 money supply has expanded by just under €3bn (or 3.4%) between August and September 2009, M2 money supply has contracted by over €4.1bn or 2.11%. The contraction is primarily driven by the decline in deposits with set maturity of up to 2 years which have fallen by a whooping €7.43bn or 7.9%. Part of this was probably used to deleverage shorter-term debt securities (up to 2 years in maturity) – which have declined by €2.66bn or just under 5.5%. But whatever happened with the rest of deposits is hard to explain out of the CB data. Deposits with medium term maturity constitute the most stable measure of future lending capacity in the credit sector and this decline does not signal much needed stabilization in future lending conditions.

Now to more detailed data on consolidated balance sheet. First, liabilities side:

The above chart clearly shows that all liabilities, save for Non-Government Deposits and Government Deposits with the Central Bank, are still trending up. Net external liabilities are certainly in reversion after June local trough and are now dangerously reaching for February 2009 crisis levels. Bad news?

Well, aggregates are showing something very similar:
Total liabilities are now in excess of the non-Government credit volumes once again for the second time this year. First this condition was observed in January-February 2009. Next, we have crossed once again to the situation of private sector credit falling below total liabilities in August 2009. September 2009 re-affirmed the trend as the gap between two time series widened to the second highest level in 2009 so far with January gap of €27.7bn and September gap of €22.0bn. So non-Government credit flows are no longer covering total liabilities… Bad stuff? Wait…
On the assets side, the above shows that save for Government debt which is converted through accountancy double-entry into Government Credit (up 77.9% year to date in September), not much else is rising, with fixed assets down 14% year to date, interest earnings on non-government credit down 49.6%, official external reserves up 11.35%.

On private sector credit decomposition:
Total private sector credit (PSC) has declined from the peak achieved back in November last year to current €378.1bn or 6.4%. This is dire and the decline is actually accelerating since beginning of September. Table summarizes:
The same is true for non-mortgage credit and mortgage credit. Importantly, the data on mortgage credit and non-mortgage borrowing shows that there is no deleveraging in sight for Irish households. Residential mortgage lending today continues to remain at well above the peak markets level for house prices. In 2007, average monthly level of mortgage debt in Ireland stood at €131.1bn. In September 2007, the level was €136bn or 8.83% below the latest level recorded in September 2009. Thus, as negative equity pressures continue to increase due to falling house prices and as rents continue to destroy yields on property, Irish mortgage holders are simply prevented from deleveraging in the credit cycle by falling incomes and rising taxes.

This does not bode well for the short-term prognosis for the Irish financial system (reliant heavily on low default on mortgages assumptions amidst a full blown meltdown of the development loans) and for the Irish construction sector and property markets (reliant on some sort of a return of the buyers to the collapsed market for properties). It also does not support any hope of the stabilization in the property-related tax revenues.
Hence, although credit contraction has set in firmly back in June (with credit to private sector posting negative growth in yoy terms since then), mortgages credit is lagging (implying that we are yet to witness true crunch on mortgages – something that is likely to happen once the banks set out in earnest to rebuild their margins by hiking mortgages rates post-Nama) and non-mortgage credit is back on the rise (potentially reflecting accumulation of credit arrears by financially stretched households).

The same picture, of building pressure on the arrears side can be glimpsed from the changes in trends for credit cards spending. New purchasing using credit cards has lagged repayments in January-August 2009. In September, more charges were incurred than paid down. The same (albeit on a vastly smaller scale) took place in business cards. Hence, balances are now rising across all credit card debts, as shown in the chart below.

Net result of all of this: outstanding indebtedness of Irish private sectors is no longer declining. The rate of growth in overall debt levels has hit 0 in May 2009, bounced back to positive territory in June-July 2009 and failed to hit negative (deleveraging territory) since then.

Economics 31/10/2009: Latest data on Irish Resident Foreign Assets Holdings

CSO released (yesterday) latest data on Resident Holdings of Foreign Portfolio Securities. Charts below illustrate the trends.

First the aggregate stuff:
Notice that 2006-2007 overall trend implies peaking of foreign assets holdings by Irish residents at 2007, and a decline in asset holdings in 2008 to the levels below those recorded in December 2006. This is clearly reflective of the general external crisis in asset markets and is expected to record even further and more dramatic deterioration in 2009. Holdings of bonds and notes also declined from a peak on 2007, but less dramatically in relative terms - reflective of flight to safety into public debt markets by many investors. Again, similar trend to global. Equity holdings took the most sever beating, in line with global markets.

One interesting point is that Money Markets instruments holdings (not plotted above) have also declined in 2007 and 2008. This suggests two idiosyncratic developments in Ireland:

• risk reductions took place in 2007, well before the full-blown global crisis of 2008, but in line with a financial markets crunch that began in August 2007;
• both cash and equities were likely to have been used by Irish residents to offset leveraged losses (these are the most liquid instruments that can be used readily to meet margin calls) and this process was on-going in 2007, suggesting serious leveraging exposure to derivatives markets in Irish resident portfolios - a conclusion that would time declines in money markets instruments back to August 2007, when derivatives markets collapse triggered subsequent run on equities).

Now to some more detailed sub-categories of assets. Starting with total foreign asset holdings by country of asset origin:
There is a clear indication here that Irish resident portfolia are heavily geared toward UK and US assets (nothing surprising, as these allocations are only slightly ahead of global diversified portoflia bias toward these two countries). There is also present a relatively heavy allocation bias toward European and EEC securities. However, the real area of geographic diversification imbalance is found amongst the middle income (BRICs) and emerging markets allocations.

Ditto for bonds and Notes:
In terms of Equity allocations:
There is a clear imbalance in Irish resident positions with equity exposure to only a select subset of OECD economies. There is virtually no presence of high growth economies in the overall equity portfolios in Ireland.

Economics 30/10/2009: Assets/Liabilities data - How IFSC beats domestic investment sectors

See as ever entertaining press release from Ryanair below.

Per CSO release today: End-December 2008, Ireland’s international investment position (IIP) was:

• stocks of foreign financial assets of €2,194bn - a drop of €76bn on the end-2007 level of €2,270bn
• liabilities were down by almost €7bn from €2,307bn to €2,300bn
• Irish residents therefore had an overall net foreign liability (or deficit) of just over €106bn at the end of last year, up over €69bn from 2007 figure of €37bn.

Now, decomposition of these net liabilities is telling: In overall commercial financial sector:

• Monetary financial institutions (MFI - i.e. credit institutions and money market funds) had assets amounting to €1,065bn at the end of 2008. On the liabilities side, the MFI sector accounted for €1,146bn so total net liabilities of MFI sector in Ireland were at €81bn.
• Other financial intermediaries (OFI i.e. investment funds, insurance companies and pension funds, asset finance companies, treasuries, etc) accounted for €980bn of foreign assets. OFI liabilities were €921bn, implying net assets (not net liabilities) of €51bn.

Thus, our commercial financial sector at the end of 2008 had foreign assets of €2,045bn (or over 93% of total foreign assets) and liabilities to non-residents of €2,067bn (or almost 90% of total foreign financial obligations), resulting in a net foreign liability of €21bn.

But the real gem is in the bottom section of CSO report. For months now CSO and Ireland’s CBFSAI were at pains to distance themselves from the IFSC. Every time someone pointed to a massive debt mountain Ireland Inc is bearing on its (private sectors’) shoulders, our Central Bank shouts ‘Foul – it’s all the fault of the IFSC’. Few (including myself) made arguments that this is too simplistic: IFSC is both an asset and a liability to our economy, and thus one cannot simply ignore its debts when one wishes to do so.

Well, CSO’s data actually shows that IFSC is hardly a culprit in the All-Ireland race to become a leading sector in net liabilities: “At the end of 2008, IFSC assets abroad amounted to €1,663bn or over 81% of the sector’s foreign assets (and almost 76% of Ireland’s total foreign assets).” IFSC liabilities stand at €1,646bn (nearly 80% of the commercial financial sector aggregate and over 71% of Ireland’s total foreign liabilities).

Yet IFSC recorded a net asset position at the end of 2008 of almost €18bn. While much smaller in size relative to IFSC, non-IFSC commercial financial enterprises (17% of total foreign assets and 18% of total foreign liabilities) have managed to run up a net liability of €39bn. That is a swing of €57bn between IFSC’s healthier books and non-IFSC’s sicker ones.

Think non-IFSC guys are now firmly on track to win the leading position in that All-Ireland race to highest indebtedness? Nope. The monetary authority, general government and non-financial enterprises had end-2008 foreign assets of less than €149bn (about 7% of the total) and liabilities of almost €234bn (just over 10% of the total). So the public sector net liabilities were a whooping €85bn, a swing against IFSC position of €103bn.

Scary stuff? Well, not yet - look at the following charts:
Chart above shows assets side of our International Investment Positions (IIP). All point to clear declines in 2008, except for 'Other' (aka derivatives written by our speculation-prone folks) and 'Direct Investment' (aka completion of Bulgarian and Romanian property syndicates)...
Chart above illustrates liabilities side of our IIP. All liabilities are up except for FDI into Ireland (which is falling - more on this below), and Portfolio Investments - which were hammered by global equity markets meltdown.

So net positions next:
Clearly, comments in the charts are self-explanatory. Good stuff (FDI) is falling, bad stuff is rising (Portfolio Investment Liabilities, Other Liabilities and Total Liabilities)... But take a closer look at Foreign Direct Investment (FDI) into Ireland, and our Direct Investments out of Ireland:
No more comment needed.

The last standing is the pesky IFSC issue - is it a problem for clean Ireland Inc, or is it actually an asset for lagging Ireland Inc? Take a look:
Conclusion - obvious. Can we get the IFSC guys to run our domestic financial services sector? Please!

Why one has to love Ryanair? Because it does what it promises on the tin:
No comment needed. As always.

Economics 30/10/2009: Reliance or dependency

Quick points on post-Nama recapitalisation, credit flows from ECB to Ireland and Frank Fahey encounter with an egg...

I have done some sums on demand for equity capital by Irish banks post-Nama. Assuming underlying conditions for loans purchases as outlined in Nama business plan, using 6% core equity ratio as a target (remember, this is a lower target by international standards) and assuming no further deterioration in the loans books quality post-Nama:

• AIB will require €3.2-3.5bn in equity capital post-Nama;
• BofI will need €2.0-2.6bn;
• Anglo will need €4.5-5.7bn;
• INBS/EBS & IL&P will require total of €1.1-1.2bn.
• Total system demand for equity will be in the range of €9.7-12.4bn.

Approaching the same issue from the angle of Risk-Weighted Assets, system-wide demand for equity will be around €10.8bn post-Nama. This will extend Nama-associated rescue costs to:

• €54bn in direct purchases;
• €5bn in completion 'investments' with estimated further €3-5bn in future completion additional funds;
• €1bn in legal, advisory and management costs;
• €9.7-12.4bn in equity injections;
• Past measures €11bn.

Net of interest costs and losses, total price tag looks now like €84-88.5bn. This, for a system that can be fully repaired through a direct equity-based recapitalisation at a cost of roughly €32bn.


Our agriculture is the heaviest subsidised in the EU (and indeed in the world). This fact has never troubled our policymakers, as if subsidies are a sign of industry viability and strength, as long as they are being paid by other countries taxpayers (as in the case of CAP).

Now, we have become the biggest ECB liquidity junkie by far. Table below from RBS research note shows the dramatic level of financial life support our economy requires.
Note that the above list of countries includes heavily crisis-impacted Spain, the Netherlands, Belgium, APIIGS (less Ireland), aggregated in the 'Other' grouping. And yet... they all have larger economies than Ireland and smaller demand for liquidity injections.

Does anyone still believe that Nama can add liquidity to our economy? Or that such an addition can improve lending conditions? Apparently, ECB-own lending operations were not able to do so to date...


And on related note, there is an interesting quote from Dr Alan Ahearne in a recent article in the Southern Star newspaper (here):

"As one economist warned last year, ‘buying the assets at inflated prices would amount to a back-door recapitalisation of the banks’. Best practice ‘is for the banks to recognise the losses on these loans up front and sell the assets at fair market value’. Whose words? Dr. Alan Ahearne – now economic advisor to Brian Lenihan and one of the chief advocates for NAMA. Go figure."

Well, not much to figure, really - call this miraculous conversion a '€100K effect' triggered by new employment...

Oh, and while we are on Nama, here is an excellent 'Public Anger at Nama' account of the latest Leviathan encounter by Peter Mathews. I wonder if Senator Boyle and Frank Fahey get the point - people are angry at the way the country is mismanaged, but they are even angrier at being pushed into Nama.