Economcis 18/01/2010: Sunday Times 17/01/2010

Another recent article in the Sunday Times:

December Live Register figures show that this column’s earlier prediction of further deterioration in the employment and labour force conditions in Ireland for Q4 2009 – Q1 2010 are, unfortunately, coming true.

The Live Register now stands at 426,700 or 1,200 above the previous record set in September. Unemployment is estimated at 12.5 percent, and rising. Declining labour force participation and net emigration are now the only two factors that keep the unemployment rate from touching 14 percent today.

But the latest data shows that the situation on the jobs front is still worsening. Between December and November, Ireland’s ranks of unemployed swelled by 4,200, more than cancelling out the reduction in numbers achieved in October. Since March 2007 Live Register counts have fallen only once, despite the fact that we are now drawing record numbers of young would-be-workers back into colleges and training programmes.

The trend suggests that by the end of this year, we are likely to reach 13.5 percent official unemployment or higher. While the ESRI and many independent economists have highlighted the possibility that elevated levels of joblessness will persist for some time, few are willing to face the reality that the current trends and previous crises experiences across Europe, suggest that Irish long-term unemployment can remain at more than five times the rate prevailing during the Celtic Tiger era through 2020.

Broad as they are, the Live Register figures hide a much more unpleasant arithmetic that relates to the issues of growing long term unemployment, declining labour force, and the inadequacy of our policy responses to the crisis.

December Live Register shows that the majority of the seasonally adjusted increases in unemployment occurred in over 25 years of age group of workers – suggesting that the jobs losses are continuing to accumulate in core employment sectors.

More detailed QNHS results for Q3 2009 show that industry and manufacturing are now leading other sectors in terms of jobs losses. This week’s data for Q4 2009 industrial production confirms the bleak prognosis for jobs in these sectors. Computer, electronic and optical products and the overall modern manufacturing sectors are now deteriorating at the rates where employment levels in these high value-added activities are likely to come under threat in months ahead.

With more skilled and better educated workers joining the dole queues, the prospects of finding future employment for the previous Live Register signees are getting worse by the week. Many of these workers are now on the Register for 10 months or longer. In fact, from the beginning of the crisis through March 2009, some 196,000 people signed up for unemployment. Majority of these people have by now exhausted their redundancy payments and are facing transition to social welfare. They are Ireland’s new army of the long-term unemployed.

Long-term or structural unemployment is much more severe than that driven by a recession. Long term joblessness almost invariably leads to a loss of skills and lower marketability. It also results in a significant decline in incentives to seek employment or invest in future skills. Even in publicly-financed training programmes, internationally, the length of unemployment spell is negatively related to the training programmes outcomes.

Just how sticky the problem of long term unemployment is can be illustrated by the fact that during the Celtic Tiger era, as hundreds of thousands of foreign workers moved to Ireland, our long term unemployment remained static.

And Ireland is not unique in this experience. In the US, long term unemployment remained unchanged from the 1980s through mid-1990 s until the Clinton Administration reforms of the social welfare system. Across the Euro area, during the growth years of the last decade, significant declines in short term unemployment were accompanied by high long term joblessness.

Per latest data, in a year to October 1, 2009 for every five persons joining the Live two have moved into long-term unemployment, while more than one dropped out of the labour force. Thus, since the start of the crisis in Q4 2007, more than 140,000 people have either joined the ranks of the structurally unemployed or stopped searching for a job.

For these workers, there are virtually no existent policy platforms addressing the issues of skills and job search incentives.

Only holistic reform of the social welfare (aimed at reducing incentives to stay outside the workforce), a substantial cut in the minimum wage, plus a robust businesses-led jobs creation can return this pool of potential talent back to productive economy. A cut in an excise duty on booze, a car scrappage scheme and a microscopic drop in Vat comprising Government’s latest package of fiscal supports for a recovery simply won’t do.

Instead of businesses-oriented programmes aimed at stimulating exporting and domestic investment, our jobs creation policies are now shifting jobless off the official register into the twilight zone of hidden unemployment. CSO data quantifies two programmes, set up in 2009, through which taxpayers pay the unemployed to undertake Fas-supervised ‘jobs’. These individuals are not included on official unemployment roster. The Short-Term Enterprise Allowance (STEA) scheme pays workers to engage in self-employment. The Work Placement Programme engages welfare recipients in unspecified subsidized ‘employment’. In total, 3,785 individuals were ‘employed’ under both programmes at the end of September 2009.

One must question the ability of these workers to sustain employment without state subsidies at any time in the foreseeable future.

Absolutely nothing is known about the longer-term success of Fas-assisted programmes in general. Meanwhile, in countries where ‘involuntary entrepreneurship’ activities, such as STEA, are widespread, these programmes are often blamed for driving workers to accept sub-optimal jobs path in exchange for immediate income. In other words, involuntary entrepreneurship prevents many workers from actively seeking better jobs and/or investing in new skills.

A key to success of the work placement programmes rests with three broader principles, none of which appear to have been addressed by the policies put in place since the inception of the crisis.

First, selection mechanisms that determine who gets to participate in the programme must ensure that both the workers and the self employed are fully equipped for the challenges of the programmes. In the case of Fas-supported social welfare recipients programmes, the issue is whether the programmes actually select the best suited recipients with prior experience in the workforce.

Second, choice of businesses attracted into such programmes must be based on their ability to provide broadly marketable skills. Often, placement programmes box participants into jobs with firm-specific skills. Such programmes are only successful if they involve large and well-anchored employers. Even then, a restructuring or scaling down of Irish operations can leave these programmes participants with no transferable skills.

Third, the incentives to retain these participants in the labour force after the funding runs out must be put in place before the programmes commence. Clearly, absent a comprehensive reform of our social welfare system and minimum wage laws, this critical aspect of the programmes has not been followed through.

December Live Register figures show that this column’s earlier prediction of further deterioration in the employment and labour force conditions in Ireland for Q4 2009 – Q1 2010 are, unfortunately, coming true.

The Live Register now stands at 426,700 or 1,200 above the previous record set in September. Unemployment is estimated at 12.5 percent, and rising. Declining labour force participation and net emigration are now the only two factors that keep the unemployment rate from touching 14 percent today.

But the latest data shows that the situation on the jobs front is still worsening. Between December and November, Ireland’s ranks of unemployed swelled by 4,200, more than cancelling out the reduction in numbers achieved in October. Since March 2007 Live Register counts have fallen only once, despite the fact that we are now drawing record numbers of young would-be-workers back into colleges and training programmes.

The trend suggests that by the end of this year, we are likely to reach 13.5 percent official unemployment or higher. While the ESRI and many independent economists have highlighted the possibility that elevated levels of joblessness will persist for some time, few are willing to face the reality that the current trends and previous crises experiences across Europe, suggest that Irish long-term unemployment can remain at more than five times the rate prevailing during the Celtic Tiger era through 2020.

Broad as they are, the Live Register figures hide a much more unpleasant arithmetic that relates to the issues of growing long term unemployment, declining labour force, and the inadequacy of our policy responses to the crisis.

December Live Register shows that the majority of the seasonally adjusted increases in unemployment occurred in over 25 years of age group of workers – suggesting that the jobs losses are continuing to accumulate in core employment sectors.

More detailed QNHS results for Q3 2009 show that industry and manufacturing are now leading other sectors in terms of jobs losses. This week’s data for Q4 2009 industrial production confirms the bleak prognosis for jobs in these sectors. Computer, electronic and optical products and the overall modern manufacturing sectors are now deteriorating at the rates where employment levels in these high value-added activities are likely to come under threat in months ahead.

With more skilled and better educated workers joining the dole queues, the prospects of finding future employment for the previous Live Register signees are getting worse by the week. Many of these workers are now on the Register for 10 months or longer. In fact, from the beginning of the crisis through March 2009, some 196,000 people signed up for unemployment. Majority of these people have by now exhausted their redundancy payments and are facing transition to social welfare. They are Ireland’s new army of the long-term unemployed.

Long-term or structural unemployment is much more severe than that driven by a recession. Long term joblessness almost invariably leads to a loss of skills and lower marketability. It also results in a significant decline in incentives to seek employment or invest in future skills. Even in publicly-financed training programmes, internationally, the length of unemployment spell is negatively related to the training programmes outcomes.

Just how sticky the problem of long term unemployment is can be illustrated by the fact that during the Celtic Tiger era, as hundreds of thousands of foreign workers moved to Ireland, our long term unemployment remained static.

And Ireland is not unique in this experience. In the US, long term unemployment remained unchanged from the 1980s through mid-1990 s until the Clinton Administration reforms of the social welfare system. Across the Euro area, during the growth years of the last decade, significant declines in short term unemployment were accompanied by high long term joblessness.

Per latest data, in a year to October 1, 2009 for every five persons joining the Live two have moved into long-term unemployment, while more than one dropped out of the labour force. Thus, since the start of the crisis in Q4 2007, more than 140,000 people have either joined the ranks of the structurally unemployed or stopped searching for a job.

For these workers, there are virtually no existent policy platforms addressing the issues of skills and job search incentives.

Only holistic reform of the social welfare (aimed at reducing incentives to stay outside the workforce), a substantial cut in the minimum wage, plus a robust businesses-led jobs creation can return this pool of potential talent back to productive economy. A cut in an excise duty on booze, a car scrappage scheme and a microscopic drop in Vat comprising Government’s latest package of fiscal supports for a recovery simply won’t do.

Instead of businesses-oriented programmes aimed at stimulating exporting and domestic investment, our jobs creation policies are now shifting jobless off the official register into the twilight zone of hidden unemployment. CSO data quantifies two programmes, set up in 2009, through which taxpayers pay the unemployed to undertake Fas-supervised ‘jobs’. These individuals are not included on official unemployment roster. The Short-Term Enterprise Allowance (STEA) scheme pays workers to engage in self-employment. The Work Placement Programme engages welfare recipients in unspecified subsidized ‘employment’. In total, 3,785 individuals were ‘employed’ under both programmes at the end of September 2009.

One must question the ability of these workers to sustain employment without state subsidies at any time in the foreseeable future.

Absolutely nothing is known about the longer-term success of Fas-assisted programmes in general. Meanwhile, in countries where ‘involuntary entrepreneurship’ activities, such as STEA, are widespread, these programmes are often blamed for driving workers to accept sub-optimal jobs path in exchange for immediate income. In other words, involuntary entrepreneurship prevents many workers from actively seeking better jobs and/or investing in new skills.

A key to success of the work placement programmes rests with three broader principles, none of which appear to have been addressed by the policies put in place since the inception of the crisis.

First, selection mechanisms that determine who gets to participate in the programme must ensure that both the workers and the self employed are fully equipped for the challenges of the programmes. In the case of Fas-supported social welfare recipients programmes, the issue is whether the programmes actually select the best suited recipients with prior experience in the workforce.

Second, choice of businesses attracted into such programmes must be based on their ability to provide broadly marketable skills. Often, placement programmes box participants into jobs with firm-specific skills. Such programmes are only successful if they involve large and well-anchored employers. Even then, a restructuring or scaling down of Irish operations can leave these programmes participants with no transferable skills.

Third, the incentives to retain these participants in the labour force after the funding runs out must be put in place before the programmes commence. Clearly, absent a comprehensive reform of our social welfare system and minimum wage laws, this critical aspect of the programmes has not been followed through.

At this stage, there is no evidence that either Fas or any other body responsible for Ireland’s jobs support programmes have a comprehensive system of policy formulation and controls to assure that those participants who complete the programmes will not be once again drawn into the welfare system.


Box-out:

As was noted in this column last week, the stellar performance of Irish exports in 2009 was driven largely by the booming pharmaceutical sector, which posted a 12 percent increase in overseas sales in 12 months to December. However, the future of this sector is shrouded in uncertainty. Take the following major threats looming on the horizon. In Cork, Pfizer-Wyeth manufactures its blockbuster drug, Lipitor (with sales of US$12 billion in 2005 and rising since) for shipments to Europe, Middle East and Africa. Comes November 2011, Lipitor will face steep competition from generic manufacturers. The effect of Lipitor coming off patent protection is hard to estimate, but given Pfizer’s merger with Wyeth – some rationalisation globally will have to take place to justify high valuations of the combined firm. Out-of-a-blockbuster Irish operations might just be a convenient target. Roche-Genentech and Merck-Schering-Plough marriages are also facing some tough decisions on what to do with their existent older plants.

Of course, big pharma is not the only sector under pressure. Intel’s Leixlip plant last time saw investment in 2005-2006 under Fab 24.2 programme. Given life expectancies for semiconductor lines, the Leixlip facility is up for a new round of funding in the next couple of years. Or is it? To-date, IDA and Ireland-based MNCs were able to sustain high levels of inward investment to support renewal of the plants and product lines. However, as Dell’s experience shows, it takes only months for a US$15 billion manufacturer to pick up and move out of the state. It will take years to find a replacement.

Economcis 18/01/2010: Sunday Times 10/01/2010

The following article was published in the Sunday Times on Janaury 10, 2010. This is an unedited version.


Since the beginning of the current crises, through the abandoned economic policy programme of December 2008, to Budget 2010 our Government has been paying lip service to Irish exporters. The rhetoric, however, never matched the reality when it came to providing support for the sector.

Irish aggregate exports have performed in exemplary fashion through the downturn despite a number of very severe external shocks and some new internal bottlenecks affecting the sector.

Per latest CSO data, total Irish exports declined by only 1% in 2009: from 155.4 billion to €153.9 billion. In the mean time, Irish GDP has fallen by an estimated 7.5% and GNP collapsed by a massive 10.4%. And the role of exports in this economy continues to grow. In 2008, Ireland exports amounted to 99.5% of GNP, contributing 0.9% to our economic growth – the highest contribution in the year. Last year, the value of our exports rose to 116% of GNP, with exports accounting for an estimated 2.7% of the decline in GDP. Once again the best performance of all components to growth.

This stellar performance came at the time when external environment was rapidly deteriorating – in terms of both demand and overall trading conditions.

Over the course of 2009 as goods exports flows from 67 developed and middle-income economies have contracted by 23%, Irish merchandise exports were down only 1%. Two sub-sectors – pharmaceuticals and medical devices – have posted robust growth of 12% and 4% respectively over the course of 2009. Excluding these two sub-sectors, merchandise exports from Ireland (down 16% year on year) were still more resilient than overall world trade.

Credit and banking crisis had a direct impact on our trade. In the first half of 2009, Irish exports of services have experienced a severe contraction due to the collapse in international financial services activities. Only a strong performance by the business services and above-average performance by computer services have allowed for some recovery from this shock, with the value of overall services exported from Ireland falling just 1% to €68.4 billion over the course of full year.

Much has been written about devaluation of the dollar and sterling. The deterioration in our terms of trade vis-à-vis the rest of the world was indeed dramatic, contributing to a severe fall off in exports to the UK and Northern Ireland. Irish exporters also faced a significant shift in purchasing by the UK retailers away from Ireland. This was particularly noticeable amongst food and drink exporters – the sector that has the largest penetration by our indigenous companies.

Another factor much overlooked amidst financial markets turmoil was the drying up of the export credit facilities from the banks. Irish Exporters Association, other bodies and a number of economists, including myself, have for two years advocated the need for putting in place a meaningful programme of Government export credit guarantees. Per international data on trade credit flows, such programmes operate in some 57 countries These programmes are usually viewed as being low cost or even revenue-neutral. The risk to the Exchequer from guaranteeing a short-term credit for signed contracts for shipments is minimal if properly implemented and structured.

Initially, the Government has promised to allocate funding for the programme back in October 2008. By January 2009, its scale was cut to a meagre 1.5% of our indigenous exports. The plan was finally shelved just two weeks before Budget 2010 day. In place of trade credit supports, the Minister for Enterprise Trade & Employment has offered Irish exporters a promise to look into providing and ‘employment subsidy’ scheme. The Minister never explained what such a scheme can do for the exporters, nor how she arrived at the conclusion that a long-term jobs subsidy undertaking is less risky than a short-term export credit insurance. Of course, evidence from our European counterparts shows that jobs subsidies have virtually no positive impact on sustainable employment even at the time of robust jobs creation.

On December 1, just as Brian Lenihan was putting final touches to his Budget speech that contained sugary references to Irish exporters, the UK Government announced an extension to the Fixed Rate Export Finance facility through a specially-designated Export Credits Guarantee Department (ECGD). ECGD which also provides “insurance against non-payment risks and guarantees for bank loans to buyers of UK goods”, allows exporters to provide medium and long-term finance to their overseas buyers at fixed rates of interest. The rates charged under the scheme are established through the OECD, and are adopted by all major export credit agencies worldwide. These schemes are more risky than short term credit insurance rejected by the Irish Government.

Of course, the irony has it, Minister Lenihan also contributed to the exporters woes by placing a new charge on transport costs in the Republic and internationally via the Carbon Tax. This Government has already introduced one export-impacting tax back in October 2008. The so-called travel tax of €10 per departing passenger has now been linked to declining Exchequer revenue and the damages done to Irish tourism, hospitality and transport exports by a group of international transport economists, through my own analysis and Government-appointment panel of industry experts. With Carbon Tax we now have two measures that explicitly threaten our exports.

These policy contradictions set the stage for 2010.

Overall, 2009 marked the worst year on record for domestic food and drink exporters, as well as computer hardware and other manufacturers. Given that these sectors account for over 50% of the total exports-supported employment in the country, there is increasing urgency for enacting some meaningful support policies aimed at sustaining our export activities and employment. The idea that we first let companies sink on the lack of trade finance and then provide them with subsidised unskilled labour through employment support schemes run by our fabulously ineffective Fas, as the Government is suggesting, makes absolutely no sense.

Another significant concern for 2010 relates to the lagging imports by MNCs-dominated sub-sectors, such as pharma, medical devices and computer hardware. These sectors import majority of material inputs into their production from abroad and low imports relative to exports here suggest two possible trends.

Firstly, increased volumes of exports from some of these sectors in 2009 are most likely driven by record transfer pricing bookings through Irish operations. This is normal for any international operation in a recession, when companies scale back on capital investment and ramp up their tax optimization operations. While such developments have benefited Ireland in 2008-2009, continuation of these activities is not assured in 2010. Should there be a restart of global investment cycle (with some signs already pointing to improved capital investment in the BRIC economies and Asia), the incentives to book artificially inflated profits through Ireland will decline in relative importance.

Second, lagging imports growth shows that the MNCs might be unsure about the need to maintain high levels of inventories in Ireland. This in turn indicates the relative fragility of the expanded exports levels for these companies and puts overall Irish exports further at risk.

Lacking any real policy supports for the exporters, the Irish Government has resorted to the tactics of deflection and evasion. For example, in December 9, Minister for State with responsibility for international trade, Billy Kelleher TD was forced to defend the Government unwillingness provide exports credit insurance scheme proposals by referring in the Senad to Nama, banks recapitalization and even the nationalization of the Anglo Irish Bank.

In 2010, even the expected return to global growth in trade volumes is unlikely to push Irish exports beyond 2% annual growth mark, according to the latest forecasts from the Irish Exporters Association released this week. And even this forecast is predicated on continued improvements in Irish economic competitiveness and no further adverse changes in the euro position vis-à-vis other major currencies.

Instead of empty rhetoric, our exporters deserve a real chance to drive this economy out of the slump. Hoping that Nama will solve all of our problems simply won’t do.

Box-out:

Per latest CSO release, in Q3 2009, the gross external debt of all resident sectors in Ireland stood at €1,637bn or €51bn down on the Q2 2009 level. But, per same CSO release, the liabilities of Ireland-based monetary financial institutions (aka our financial system inclusive of IFSC) were virtually unchanged quarter on quarter at €691bn with their share of total debt rising from 41% in Q2 2009 to 42% in Q3. Similar dynamic took place in Other Sectors – comprising insurance companies and other financial enterprises, plus non-financial companies – where debt as of Q3 2009 stood at €618 billion or 38% of the total, up from 37% in Q2 2009. Direct investment sectors liabilities rose over the quarter by 2 billion and General Government increased. This implies that virtually all of the quarterly decrease in our indebtedness came from the Central Bank funds changes. This is why excluding the Central Bank and Government liabilities, total economy debt rose from 1.513 trillion in Q2 2009 to 1.508 trillion in Q3 2009.

But what the CSO and the media reporting on the figure didn’t tell us is since Q3 2007, the overall debt levels in Other Sectors rose by a cumulative of 15.6%, in Direct Investment sector by 9.3%, and our total debt rose by 8.33%. Only banks have so far managed to de-leverage in Ireland (down 9.8% on Q3 2007) thanks to the taxpayers’s cash. Which brings us to a sad but inevitable conclusion – while banks use our money to write down their bad debts, is it any surprise that the real debt burden in the Irish economy is not declining?

Economics 18/01/2010: Sunday Times 03/01/2010

A friend just highlighted to me that I have not posted my articles for Sunday Times since late 2009. In the next few post, I will correct for this omission.

First, unedited version of January 3, 2010. Note the box-out - covering very interesting development on Nama.

Over the last few weeks, a new consensus has emerged on the direction for Ireland in the New Year. Caught in the headlights of the Government PR blitz post-Budget 2010, the media and our quasi-governmental economic commentariate (Quagec) have firmly forgotten the simple fact that the bottom of the economic canyon we find ourselves in will require much more than a wishful New year’s resolution on behalf of the Exchequer. It requires a miracle of decoupling from our Euro zone’s sick twin – Greece – in real economic terms to restore full confidence in this economy.

Throughout 2009, our policymakers grumbled that Ireland was unfairly treated by international markets. As our CDS and bonds spreads were moving in tandem with those of Greece, the sop story from our Quagec was: “Ireland has a better starting position in terms of lower debt burden and it has taken the necessary pain. We are much closer to Berlin than to Athens.”

This, of course, was nothing more than economic gibberish dressed up to sound impressive. Past performance is no guarantee of future returns. It is the prospect of the future that is driving our risk valuations instead.

So what are the New Year’s prospects for our fundamentals?

The Greek Government is aiming for a 2010 deficit of 8.7% of GDP, although Greek parliament has approved budgetary estimate of 9.7%.

Ireland’s Exchequer deficit in 2010 is likely to reach 11.6% of GDP or nearly 15% of GNP, given the prospect for another year of a widening GDP/GNP gap. These stratospherically high numbers do not account for the cost of recapitalising the banks and for Nama. Should even a half of the estimated banks recapitalization costs hit the Exchequer in 2010, our public deficit is likely to exceed that of Greece by 3.7 percentage points in terms of GDP and up to 7 percentage points in terms of GNP.

Behind these headline figures there are other multiple reasons for the deterioration in our fiscal position in 2010.

Rising unemployment will persist through the first half of 2010, imposing new burdens on our already mammoth social welfare bill. These costs will be multiplied by the ongoing and accelerating process of unemployment benefits claimants transitioning onto full social welfare benefits as their supplementary savings and redundancy payments are exhausted.

Irish Exchequer, unlike its Greek counterpart, will be facing a multi-billion euro claim in terms of recapitalizing the banks. This bill is expected to reach above €10 billion for the six guaranteed institutions on top of the costs of Nama.

In 2009 Ireland-based multinational companies have booked massive transfer pricing profits through their Irish operations. 2010 might this activity collapsing. Over 2010, the US and Asia-Pacific region are expected to re-enter the economic growth cycle. Traditionally, this involves a restart of investment cycle. This, in turn, means that the firms will place much lower importance on maximising tax efficiencies via their off-shore operations. The risks for Ireland Inc here are slower inward investment and lower tax revenues, with many of the jobs pre-announced by the IDA in its recent report potentially delayed.

Looking forward, 2013-2014 will see Irish deficits still exceeding those in Greece, even if the New Year’s resolutions by Minister Lenihan are delivered on target. The latter, of course, is doubtful.

Firstly, all Budget 2010 measures announced by the Exchequer are gross, not net, implying that no more than roughly 80% of these can be achieved in real terms once second order effects and automatic stabilizers are counted in. Secondly, Government public sector pay reductions are now coming into doubt with Irish public servants facing a real pay cut of no more than 3-4% for top grade officials.

Getting back to the real economy. For 2010 our officials are forecasting a 1.3% decline in GDP and a 1.7% fall in GNP. The risk here is to further downside. Should Ireland-based MNCs divert their activities to investing in rebuilding their productive capacity in world’s faster growing economies, the GDP might fall by another 0.1-0.2 percentage points. Should housing prices decline another 8-10% as my estimates suggest, the wealth effect alone will shave off 0.1% from our annual output. Unless consumer spending improves substantially, we might be looking at 2010 producing a fall in GDP to the tune of 1.5-1.7% and a decline in GNP of around 1.8-2%.

But what can be the driver of consumer spending increases in 2010? Sky-high taxes and a promise of more taxation rises in 2011 delivered by Minister Lenihan on the Budget Day? Or a hope for continued historically low cost of borrowing?

Don’t hold your breath for the latter. Starting with the first month of Nama operations – which might come as early as February – Irish banks will be increasing the cost of adjustable rate mortgages. The unfortunate souls who hold these loans will end up paying 50-75 basis points more over the course of 2010, regardless of what the ECB might do.

With the ECB widely expected to raise rates in the second half of the year, we might be heading for 2010 ending with mortgage rates priced at around 100 basis points higher than they are today. A new wave of mortgage defaults will be in the making.

Once again, the Greeks are hardly at the races when compared to Ireland’s house prices collapse, or to our stock market crisis to date, or even to our expected mortgage defaults yet to hit the banks in 2010-2011.

The real indicator of stability of our economy compared to that of Greece is the extent of non-financial sectors debts. In Ireland, this figure currently stands at over €1.16 trillion (roughly $570 billion ex-IFSC). Comparable figure for the Greek economy is $35.4 billion – 16 times lower than for Ireland. Irish total gross debt (inclusive of IFSC) was $2,387 billion in Q2 2009 – some 430% the size of the Greek.

All of this goes to prove two things. Firstly, throughout 2009, rational investors operating in fully functioning bond markets were correct in discounting Ireland alongside Greece as the two weakest economies in the Euro area. Secondly, no matter what you might hear in weeks to come from our Quangec, we far from having passed our hardest tests in the current crisis.



Box-Out:

On Christmas eve, while the national news outlets were unrolling their festive medley of jolly carols and light entertainment, the Department of Finance has published a 2-page document, titled Nama (Designation of Eligible Bank Assets) Regulations 2009. The document’s objective was to define the assets eligible for transfer to Nama. Article 2 (a)-(d) state that Nama will be allowed to purchase at our, taxpayers, expense virtually any type of assets (short of credit card debts, but not personal loans or car loans) that are secured against some sort of development land asset. This covers pretty much every credit instrument known to man – from a plain vanilla loan to a structured credit agreement, all the way to a complex derivative contract. Even loans secured against equity shares in the undertaking to develop land, regardless of whether such an undertaking was primarily involved in property development or engaged in this activity as a side-show, will be eligible for taxpayers’ purchase. Undertakings that are eligible for such a treatment include not only plcs and established private businesses, but also opaque private partnerships and ‘over-night’ syndicates.

Take for example the infamous Glass Bottle site in Ringsend. The new edict means that the loans extended to developers and the investors engaged in a partnership, plus all the loans secured against the shares in the partnership and other concerned undertakings linked to the partnership, all and any other loans extended to anyone else who pledged as security any asset related to the site or its developers or investors are all eligible for the transfer.

In other words, the latest legal installment to Nama operational statues makes the state-financed bad bank a target for unceremonious dumping of all forms of toxic risky instruments from the banks balance sheet, regardless of claims seniority. And that, in turn, implies that Nama might end up holding conflicting security seniorities against itself. Good luck untangling that.

Not exactly a policy I would support

You can't accuse Ruskies of the lack of freedom of speech...

I wonder if this qualifies for Irish blasphemy law violation...

Economics 17/01/2010: Back to the future in risk-aversion?

Are markets settling for a renewed pressure of higher risk aversion strategies?

Given the fact that the US (and generally OECD) economic conditions remain extremely weak, the markets might be signaling a reversal of the risk attitudes - overdue after the rallies of the second half of 2009. The first signals came in from the bond markets, where even sick puppies, such as Ireland, have enjoyed some bounce in recent weeks. One can argue that the Greeks are getting away with a murder, as their CDS and spreads are following much shallower dynamic than one would have expected in light of continued concerns as to the credibility of their fiscal adjustment plans.

But the real ticker for troubles potentially brewing ahead is the overall markets behavior.

Here is one interesting chart:

 

For last week: TIPS up, bonds up, everything else - down. Not exactly a confidence game. And this is compounded by the January effect not playing out this year so far.

Now, VIX:

Now, not yet as pronounced as on level performance for the markets themselves, but note MCAD cross over and reduced divergence in the last 5 trading days, teamed up with S&P negative movement. Both suggest that VIX downward trend might be breaking.

Irish data is yet to show a clear trend/pattern or resistance breaks -

IFIN is pointing to a gently rising momentum in volatility, ISEQ broader index shows a gentle decline. Plus the highest frequency data I do have relates to daily close prices.  But, of course, there are lags relative to the US markets, so something to watch here.

Economics 16/01/2010: PhDs employment

One of the comments to my earlier post today got me thinking about a simple question: what are the prospects for employment in Ireland for all those PhDs we are preparing to stamp out in the next few years?

In truth, of course, the answer to this question is: I don't know. But some data mining and a quick back of the envelope analysis can shed some light on the issue.

Per CSO's Business Expenditure on Research and Development 2007/2008 document, we have: "...estimates indicate that research and development expenditure should have increased to almost €1.7bn in Ireland in 2008. Enterprises indicated that they expected to spend €905m on labour costs, €510m on other current costs, €205m on instruments and equipment (excluding software) and €65m on land and building costs." This gives us the overall ratio of labour costs to total spending at roughly 55%.

"There were 13,950 persons engaged in research and development activities in Ireland in 2007. In total there were 8,250 researchers of which 1,200 were engaged as PhD qualified researchers, 2,950 technicians and 2,750 support staff."

So average labour cost per one R&D staff member: €64,875 per annum. Labour costs are usually comprised of roughly 60% salary/wage and 40% non-wage costs (taxes, insurance etc). This means average wage per person engaged in R&D activities in Ireland was around €38,900 per annum. Not a hell of a lot, by any measure. Just about 76% of the average earnings in our illustriously educated public sector.

"There were 10,950 Full Time Equivalent (FTE) research staff in Ireland in 2007. Almost 1,050 of these FTEs were PhD qualified researchers while there were more than 6,200 other researcher FTEs." Another useful fact to show the ratios of PhDs to non-PhDs required in the private economy.

"There were more than 1,200 enterprises engaged in research and development activities in Ireland in 2007. More than two thirds of all enterprises spent less than €500,000 on research and development activities, a fifth spent more than €500,000 and less than €2m while 14% spent €2m or more." Figure 1.5 provided specific allocations by enterprise spend which I used in following calculations.

Now,  suppose Irish enterprises double their expenditure on R&D while preserving distribution of relative spending as is. Suppose furthermore, they increase by 20% the proportion of R&D spending that goes to support employment (as opposed to capital). The total demand for PhDs in Ireland will be – wait for it – 2360.

HEA stats show that total enrolment – not the stock of existent PhD graduates – in PhD programmes in Ireland was 5,637. And that is not enough, according to the DofE plans, which require at least a 25% increase on enrolment levels achieved so far to reach the target of doubling the number of PhDs from 2004-2005 levels. Oh, yes, folks: if businesses double their spending and increase their intensity of use of PhDs in doing this research by 20%, the resulting increase in PhD positions over currently occupied will be just 18% of the total pool of enrolled PhD students in the country.

Suppose our State heroically steps in to hire 50% of all freshly minted PhDs. That brings potential PhD-level employment - after the doubling of R&D spending by our enterprises - to, say 40%. Suppose graduation rate from PhD programmes is 60% (it is actually getting higher by the minute as lower quality institutions hoover up state funding for PhDs). This still leaves some 380-400 PhDs floating around looking for jobs.

And this is before we add on those countless Irish PhD students studying in the UK, US, Australia, across the EU. And before we add those PhDs coming into Ireland from Europe. And before we take on roughly 10% annual enrollment growth rate that HEA has been delivering on.

No matter how you skin the numbers, they simply do no add up.