Economics 28/04/2010: 'Duin de rite ting'

A brilliant chart from one of the readers (hat tip to Jonathan):
May Toyota forgive me a pun, but is this a stuck (downward) accelerator problem?.. After all the 'right things' done to our economy, why are we still leagues away from even our fellow PIIGS travelers?

Economics 28/04/2010: More on Greece contagion

Contagion from Greece is clearly a problem for the EU at this stage. Looking back into some older data, February 2010 note from Credit Suisse (linked here)
Spot Ireland at position number 7? That was then. The figures refer to 2009, which means that since then, pressures on Iceland, Hungary and Latvia have receded. In addition:

• Our 2009 deficit has been revised to 14.3%
• Our CA deficit has worsened (as imports are falling at a lower rate and exports are now performing less robustly)

So re-weighting the score in the right hand column of the table, Ireland gets closer to 38.1-38.3, Portugal moves to 39.4-39.5, Greece to 45. We are number 3 on the list...


PS: If you want to see an example of absolutely and even alarmingly distorted logic - read this. One of the best examples of bizarre ramblings that pass for 'analysis' in Ireland. I mean what else can you call a note that:

• Admits that Ireland has record deficits of all EU countries;
• Admits that debt levels are very high;
• Admits that we are close to Greece;
• Admits that Greece is deep trouble, and then
• States that "The Greek recesion [sic] had been milder than the EU average, and recovering, before austerity measures were adopted" and thus
  
• Makes an implicit claim that the spectacular collapse of Greek economy witnessed by the entire world and threatening contagion to all of the EU has been caused by Greece not running enough deficits!
• And concludes that: "By contrast, other EU countries adopted fiscal stimulus measures [without identifying which states did so, what were the implications of these, etc]. Their debt has stabilised along with economic activity [a mad claim, given that stimulus measures were financed out of debt increases] and they have been rewarded with much lower bond yields than Ireland [absolute groundless claim, as none of the countries that adopted stimulus had the same fundamentals as Ireland going into the recession or during the recession and furthermore, none of the countries, other than PIIGS experienced similar bond yields dynamics to Ireland]"

I mean this stuff is actually factually incorrect and logically inconsistent!

Economics 28/04/2010: Our week so far

So will Germany open a 'needle exchange' for Europe's debt junkies (para-phrasing Laughinbear comment)? Check CNBC's rankings of debt by nation (here - all rankings slide show)... Greece is No 16, Ireland is No1! Link here.

Ireland 10-year yields are at 5.6% and moving in tandem with Portugal and Greece. Here is a revealing weekly step-function for our 10-year notes (hat tip to Brian Lucey):

Economics 27/04/2010: Greece - the end is tragic!

2-year yields close of today:
EU = 0.7%
Ireland = 3.6%
Portugal=4.8%
Greece = 16.4%
This is it, folks. No where else to run. Greek interest on public debt would swallow over 19 percent of their GDP annually!

Clearly, Ireland should do what Greece did, according to the folks at Tasc, the Irish Times and in the Siptu building. Ramp up borrowing to stimulate economy...

Economics 27/04/2010: Greece & Ireland - tied by the risk of contagion

As the Greek, Portuguese, Italian and Irish bonds are melting in the markets' gaze at the countries fundamentals, one quick reference number is worth repeating. Per Chapter 1 of the latest Global Financial Stability Report from the IMF (linked here), the overall risk of contagion from a systemic crisis in one Euro area country to another (as measured by the percentage point contribution to total distress probability) for Greece was:

Contagion from Greece to:
October 2008-March 2009

• Portugal = 9.8%
  
• Italy = 9.9%
  
• Ireland = 12.5% (highest of all Euro area countries)
  
• Spain = 9.0% (in line with the Euro area total)
  
• Euro area as a whole = 8.8%

October 2009-February 2010

• Portugal = 23.6% (in line with the Euro area total) - up 13.8 pps
  
• Italy = 24.2% - up 14.3pps
  
• Ireland = 31.3% (highest of all Euro area countries) - up 18.8 pps
  
• Spain = 23.9% (in line with the Euro area total) - up 14.9 pps
  
• Euro area as a whole = 21.4% - up 12.6 pps
  

So spot the odd one here. As the crisis evolved, despite our Government's talk about 'Ireland turning the corner' and 'doing the right thing', our economy became actually closer and closer linked to Greece. More so than any other member of the PIIGS club. Some achievement that is...

Now, spot the similarity in responses to the crisis in Greece (here) and Ireland (here) and tell me - are we really that much better off in terms of macro fundamentals than Greece, especially given that Greek policymakers are at the very least not held hostage to a Social Partnership in which the likes of Tasc-informed Unions have a direct say?

Economics 26/04/2010: Bank of Ireland Conversion Deal

Bank of Ireland deal: per latest report from the RTE, the State's shareholding in BofI will increase to 36% from 16% through a conversion of €1.7bn of funds given to the bank last year into ordinary shares. The bank will now attempt to raise the other €1.7bn in equity from private markets with a rumored discount on first-offer of 40%.

Minister for Finance Brian Lenihan said that 'This transaction is good news for our economy, good news for the taxpayer and good news for Bank of Ireland's shareholders and investors.'

This is another extraordinary statement made by the Minister. The Minister has just informed the nation that we are overpaying some 11%+ (see below) for the shares gained under this conversion, since 'the transaction has been agreed on market terms'.

Aside: the Minister does not appear to clearly understand the terms of conversion he agree to, as 'market terms' would mean that the state is converting at a current price (Friday close of €1.80) less cumulated dividends (2 years @8%), less the discount extended to the market (38-42%). 'Market terms' therefore would imply conversion at €0.88 per share, not €1 per share achieved.

Finally, the Minister failed to negotiate a discount that should be due any large-scale investor. All in, the estimated overpayment of 11% is really a likely underestimate. In exchange for our money, we, the taxpayers, got a pile of over-priced shares which are about to be diluted!

Looking closer at the details: BofI plans to raise €500mln from private placements with institutionals, priced at €1.53 or 15% discount on Friday close price. The main issue will be €1.2bn (net) with 38-42% discount. Preference shares held by the taxpayers will be converted at €1 per share (they were bought at €1.2 per share and paid no dividend), which actually means we de facto are paying €1.16 per share, while existing shareholders can get shares at as low as €1.04-1.06. Government-held warrants are priced at ca €491mln.