Economics 23/04/2010: Further details on Irish deficit numbers

More detailed analysis from the Eurostat on reclassification of the Irish deficit is available now. The link to the document is here. Go into Ireland file, spreadsheet for 2009.

Here is what is now apparent from the Eurostat analysis (italics are mine):

"In normal circumstances, under the National Pensions Reserve Fund Act, an amount equivalent to 1% of GNP (about €1.5bn) is paid by the Exchequer into the NPRF every year, in 12 equal monthly instalments. In May 2009, the total due to be paid under this arrangement for the remainder of 2009 and 2010 was paid in one tranche, in order to allow NPRF to fund the bank equity purchase entirely from liquid assets. (The actual 'extra' amount paid at this time was some €2.5bn, given the amount already paid or due to be paid under the normal Exchequer- NPRF funding arrangement.) The impact on Government D4_pay in 2009 is therefore the cost of borrowing this extra €2.5bn earlier than it would otherwise have to have been borrowed..."

In other words:

• The Government has by-passed voted-in Budgetary procedures to inject €2.5 billion in additional funding into Anglo by front-loading future NPRF funds into 2009 provision. There was no Dail vote on this.
• The Government pretended that the additional 2010 funds injected were not borrowed for under General Government Balance, thereby de facto claiming a right to transfer future expected receipts into 'liquid' current receipts. There was never any Dail vote to allow for this, as far as I know.
• This is not the only time that the Government exceeded its remit in by-passing the Dail vote in relation to recapitalizations. One can argue that the entire Anglo recapitalization was planned and committed in advance of the Dail vote on the issue.

Furthermore, under contingent liabilities section 7:

"7. Special purpose entities included here are those where government has a significant role, including a guarantee, but which are classified outside the general government sector (see the Eurostat Decision and accompanying guidance note for details). Their liabilities are recorded outside the general government sector (as contingent liabilities of general government)."

Per table 2 in the same spreadsheet, the above does not cover the Guarantees which amount to over €281 billion in 2009 (line 5). And in fact, these refer to Nama. Now, notice that 'imputations relating to the financing costs should be included' in line 4, which does count as a full General Government liability. Guess where the euribor cost of Nama bonds should be entered? Thus, Irish deficit might also include the 1.25%-odd payments to the banks from Nama bonds, or, assuming €35 billion issuance of these bonds - €437.5 million in additional deficit not accounted for in the Budget 2010.

Now, recall that in 2007 euribor has reached well over 4%. Suppose we go to a 3-3.5% euribor pricing on Nama bonds, rolled over annually. In subsequent years, if Eurostat retains this classification of liabilities, up to €1,225 million will be added to our deficits courtesy of Nama.

Economics 22/04/2010: Ireland's deficit tops Greece

Updated below

Breaking news: Eurostat just revised Irish General Government Deficit figures from 11.7% officially reported in Budget 2010 to a whooping 14.3%, raising our deficit above revised Greek figure. Here is the link to the note.

Excerpt: "Ireland had its budget deficit revised even more [than Greece] -- to 14.3 percent from the initially reported 11.7 percent. Irish Finance Minister Brian Lenihan said this was a result of a technical reclassification associated with government support provided to the banking sector. "It is important to note that the underlying 2009 general government deficit for Ireland is 11.8 percent of GDP, which is broadly similar to that projected in December's budget," he said. "There is no additional borrowing associated with this technical reclassification. This is a once-off impact, and will not affect the government's stated budgetary aim of reducing the deficit to below 3 percent of GDP by 2014," Lenihan said."

That would be putting a brave face on what now amounts to the most deficit-ridden country in the EU!

One question remains to be answered - given that all 2009 recapitalization funds for banking sector came from NPRF, what 'technical reclassification' yielded this massive upward revision?

Update: There has been a lot of talk in the blogosphere about the 'silver lining' to today's news. In particular, one argument is making rounds that goes as follows: "Since our deficit has increased for 2009 to 14.3%, then the reduction to 10.6% envisioned in the Budget 2010 will be even more impressive to the markets".

Here is why this argument is fallacious:

1. Today's revision of deficit for 2009 represents a reflection by Eurostat that cash injected into the Anglo Irish Bank by the state was borrowed via general spending fund in the open markets and as the result constitutes deficit financing. If so, where do you think this year's banks recapitalization will come from? Uncle Sam? or may be Angela Merkel? These recapitalizations are not, repeat not factored in the Government Budgetary projections per Budget 2010. The Eurostat rulling means that should the Government borrow the €10-12 billion to recapitalize the banks in the markets this year, this too will be reflected in our deficit. Now do the math - Government budget allows for €18.7 billion in General Government Deficit or 11.6% of GDP in 2010. If we add to this the lower bound of recapitalization estimates, our deficit rises to over €28 billion or a whooping 17.4% of GDP. Even if the Government wrestles out of the NPRF more cash to plug the banks balancesheet black hole, and assuming that our borrowing for banks purposes goes up by just half of the announced requirement, our Gen Gov Deficit will reach 14.7% of GDP. At which point we can all shout 'Eat our shorts, Greece!' once again.
2. Today's revision clearly shows that the Government has been caught red-handed in attempting to avoid labeling our true General Government liabilities as such. This is about as reputation-destroying as Greece's use of financial derivatives in the past.
   
3. An argument of a 'silver lining' assumes that as a one-off increase, this deficit revision does not matter going forward. This, in effect, is equivalent to saying that no cyclical deficit matters, no matter how big it is. Of course, such an argument is absolutely devoid of any anchoring in finance or economics. Cyclical deficits add up to total deficits. Total deficits - cyclical or not - add up to the total debt. This is exactly how Greece got itself into the bin!
   

Economics 21/04/2010: De-capitalizing Credit Unions

Per latest leaks from the financial regulators: In order to allow credit unions greater flexibility in re-scheduling loans, Section 35 of the Credit Union Act 1997 is amended to increase the proportion of the loan book of individual credit unions comprising loans of greater than five years duration, subject to appropriate liquidity provision and accounting transparency.

This, in effect, is the plan for de-shoring up capital reserves at the Credit Unions, which so far have the lowest level of financial transparency in operations amongst all financial institutions licensed to conduct retail business in the country. Whatever hides underneath that iceberg, one can only wonder. However, it is now clear that our regulators are concerned with the unions' ability to re-negotiate non-performing loans and to, thereby, avoid calling in loans on ordinary households.

Credit unions under this provision will be allowed to extend loans maturity, providing relief to the households who cannot repay their debts. However, unless householders' problems leading to delinquency on loans are temporary and short-term in nature, this measure will simply dig a deeper debt hole for already financially distressed families.

And the news have implications for the banks. Recall that in theory credit unions should have been the most conservative lenders in the nation. If they are now experiencing significant pressures on their consumer loans, what can be said about the banks who hold jumbo mortgages, top-up mortgages and car loans leveraged up to 6-8 times peak 2007 income?

How long can this charade last?

Economics 20/04/2010: IMF report on global financial stability

IMF's GFSR report for Q1 2010 is out today, and makes a fantastic, albeit technical reading of the global financial system health. Ireland features prominently.

First, Ireland, alongside with Austria, the Netherlands and Belgium are the four leading countries responsible for contagion of markets shocks to the rest of the Euro area. Own fundamentals drove, per IMF team, Irish sovereign bond spreads more than those for any other country in the common currency area, dispelling the Government-propagated myth that our crisis was caused by the US and the global financial markets collapse. Chart below - from the report - illustrates:
Between October 2008 and March 2009, Ireland's contribution to cross-Euro contagion was 12.3% of the total Euro area distress probability - second highest after Austria (16.7%). For the period of October 2009 - February 2010, the picture changed. Greece came in first in terms of distress contagion risk - at 21.4%, Portugal second with 18.0%. Ireland's role declined to 8.1% - placing us 6th in the list of the worst contagion risk countries. A positive achievement, beyond any doubt. But again, IMF attributes the entire probability of the risk of contagion from Ireland to the Euro zone down to domestic fundamentals, not external crisis conditions.

This progression has not been all that rosy for the sovereign bonds:
Notice that Ireland's term structure of CDS rates has barely changed in Q4 2009-Q1 2010. Why is that so? Despite the Budget 2010 being unveiled in between, the markets still perceive the probability of Ireland defaulting on sovereign debt in 5 years times relative to 1 year from now as pretty much unchanged. This would suggest that the markets do not buy into the Government promise to deliver a significantly (dramatically and radically) improved debt and deficit positions by 2015! In other words, the Budget 2010 has not swayed the markets away from their previous position, leaving Ireland CDS's term structure curve much less improved than that of the other PIIGS.

Here is another nice piece of evidence. Guess who's been hoovering up ECB lending?
And if you want to see just why Irish banks will be raising mortgage rates regardless of what ECB is doing, look no further than this:
The chart above, of course, covers 2008 - the year when Anglo posted spectacular results and AIB raised dividend. Imagine what this would look like if we are to update the figure to today. Also notice that in terms of return on equity, Irish banks were doing just fine with low margins back in 2008 and before. The reason for this is that our lending model allowed for that anomaly: banks were literally sucking out tens of billions of Euro area cheap interbank loans and hosing down a tiny economy with cash. As long as the boom went on, it didn't matter whether the bankers actually had any idea why and to whom they were lending. Now, the tide has gone out, and guess who's been swimming naked?

Interesting note on the equity markets. looking at historic P/E ratios, the IMF staff concludes that back in February 2010 "For advanced economies, equity valuations are within historical norms". Except for Ireland, which deserves its own note: "Forward-looking price-to-earnings ratios of Ireland appear elevated due largely to sharp downward revisions in earnings projections."

So, read this carefully: Irish stocks were overvalued - based on forecast forward P/Es - back in the time of the paper preparation. Using z-scores (deviation of the latest measure from either the historical average or the forward forecast based on IMF model) for Irish equities are: +2.1 for shorter horizon (a simplified 96% chance of a downward correction) and +0.9 for longer term forecasts (roughly 63% chance of downward adjustment). In other words, the market is overpriced both in the short term and in the long run. Worse than that, we have the highest short and long term horizon over pricing in the world!

In housing markets, our price/rent ratio z-score is +1.1 (74% probability of deterioration), which means we are somewhat close to the bottoming out but are not quite there. How big is the 'somewhat' the IMF wont tell, but it looks like we are still 1.1 standard deviations above the equilibrium price. Price to income ratio - the affordability metric is at +0.8 stdevs, so prices might still have to fall further to catch up with fallen incomes (57% probability).

Economics 19/04/2010: INBS - Titanic hits the ocean floor...

INBS has reported a €2.49bn loss for FY 2009 on the loan book just under €11bn, with roughly €8.5bn of this attributable to development and investment in property markets. Provisions amounted to €2.8bn, so in other words, the Kingdom of Irish Local Finance has managed to pile up an impressive 25.5% impairment charge on the book that has already taken a hit in 2008. Between 2008 and 2009, INBS has managed to post impairments of 30%.

Actually, here is a better view: 96% of all losses are on commercial development books, which means INBS has been lending money to folks whose default rates are currently running at more than 33% yoy! These are recognized default rates, which conceal the fact that many of the INBS' loans (just as in the case of other banks) would really be deep in red, were they not re-negotiated and switched into 'interest holiday' loans back in 2008-2009. Now, remember the numbers released by Nama? 2/3rds of the loans not paying interest. Apply that to the INBS books - the expected impairment charge for 2010-2012 will be around €5.7bn. And that's only for the non-householders' loans...

The numbers are truly outstanding by all possible measures.

INBS's administration expenses rose to €46mln from €45mln in 2008, and the bank has managed to accumulate €7 million in professional fees as one-off expenses, presumably relating to the management efforts to shore up the hull of a sinking boat.

Per Irish Times report, CEO Gerry McGinn said the greatest management challenges were in relation to the commercial loan portfolio. "The society has manifestly been seriously under-resourced in many areas of its business activities and support functions, but most especially in commercial lending," he siad.

Under-resourced? As if throwing more cash at staff and consultants would have prevented them from issuing so absurdly poorly priced and analyzed loans?

At this stage, especially given Mr McGinn's denial of the reality (that the INBS is a burnt-out force with not a modicum of decorum to pretend that it can act as a functional lender) any more taxpayers cash directed to the INBS would be a pure and gratuitous waste!

Economics 20/04/2010: Fas training for ex-Dell workers

Last week, media report (Silicon Republic, 16/04/10, 300 out of 1,900 former Dell workers received FAS training) provided some evidence that was supposed to show us just how effective Fas training systems can be.

"The Steering Committee responsible for advising on the implementation of the European Globalisation Adjustment Fund (EGF) for the 1,900 former Dell workers in Limerick has revealed that 300 have received FAS training so far... The committee ...is chaired by Oliver Egan, assistant director general in FAS. Another meeting is scheduled for towards the end of this month."

So hold on - so far, we know, there were meetings. And more meetings will happen.

"The Minister for Labour Affairs, Dara Calleary TD, commented: “There is a lot which has been done already and is being done with EGF support in the mid-west and which is perhaps only now starting to become visible”."

What is Minister on about here? (italics are mine): "In relation to concrete measures the Minister highlighted:

• The guidance service FAS provided to more than 1,900 former workers to date with some 300 persons receiving training in 2009 [note: this is a standard practice for large scale layoffs. How many of these 'graduates' actually found a job?]
• That in the first quarter of 2010, training and educational activity has increased with more than 200 EGF clients currently enrolled in evening classes, more than 250 EGF clients are registered with the Limerick City Adult Education Service [is that registration a pre-condition for some additional unemployment or other financial support?];
• That both Limerick Institute of Technology and University of Limerick have implemented a broad range of educational programmes for EGF clients [how many are enrolled? what types of programmes? what is the expected completion date?];
• That more than 150 clients having availed of EGF training support grant administered by FAS to date [so we have 1,900 workers laid off enrolled total, 300 completed Fas training, 150 are receiving a special subsidy, 100 more are 'registered'];
• That Fas runs a community-based initiative for more than 100 EGF clients [community-based initiatives rarely lead to gainful employment];
• That some 225 clients are registered with the City and County Enterprise Boards and are undertaking start-your-own-business programmes [Who administers these programmes? What are graduation rates and what are the success rates for new entrepreneurs?];
• The commencement of a dedicated EGF internship programme in partnership with the medical devices sector which will see more than 80 clients attending a series of workshops in April with successful candidates progressing into the full internship programme in June 2010 [This is perhaps the closest that Fas would ever come to giving these workers real hope of a gainful employment].

So, over 6 months after the layoffs, there are absolutely no hard numbers Minister Calleary can supply to show any success in progressing the former Dell workers into gainful employment. Surely, this is disturbing, given that Fas work does not come cheap and given that Minister has managed to set up a score of various schemes and taskforces - none of which are free to the taxpayers.

"I have committed to reviewing the overall programme in June to ensure that we are maximising the reach of the programme and to identify any additional or innovative measures that might be further considered,” Mr Calleary said. Really? So far, there are no indications that the review is going to be effective in assessing Fas' effectiveness in designing, administering and deploying these programmes.