Economics 02/06/2010: Regional variations in labour markets

While working on a project relating to economic policies in Ireland, I was compiling data on regional variations in various series. Here is a set of interesting graphs detailing the labour force differences across the main regions.

Each data set reflects the latest available QNHS data through Q3 2009 and each is presented in two charts - full history and a snapshot of the crisis dynamics since 2007.

First the unemployment rates
Notice that since time memorial Dublin runs at or below average in terms of unemployment rates. This pattern is no persistently broken, with Dublin unemployment performing remarkably better in this crisis. Also note that the top tier of unemployment black spots in the country also remains relatively resilient over time. This has to put to test any assertion that state policies to deal with longer term unemployment are working.

Take a look at a closer time frame, relating to the current crisis:
You hear a lot about the MNCs and exporting companies holding our line from a total collapse of economy. Well, say the same for Dublin, South-West and Mid-East. Of course, the latter is largely, hmmm, Greater Dublin, really.

The chart above also hints at something more disturbing here. Recall that early rounds of layoffs impacted predominantly construction sector and associated services. Well, look at Midlands and South-East. It does appear that the two regions were experiencing significantly faster rates of jobs losses in the early parts of the crisis than any other region.

One wonders what is the exact distribution of jobs in the country relative to places of residence. This, of course, is a long running question that CSO is refusing to ask on QNHS. What trouble can there be, folks, in asking a recipient to state where they physically work. It would tell us a lot about people's commuting patterns (helping to better plan transport systems) and about where people are actually employed (helping us to better plan associated business services provisions). But no - CSO staunchly refuses to ask. Why? Because the state is most likely unwilling to admit that the National Spatial Strategy and the IDA/EI mandates to produce jobs for regions is failing. Ireland has natural hubs of jobs and jobs creation potential - Greater Dublin area, Cork area, Galway-Limerick area. This is where jobs concentrate and where companies want to be. So how about a challenge to CSO - ask an important question, will you? Have some gumption...

Back to data: labour force participation rates next
What the charts above show is the precipitous decline in labour force participation rates since the peak of H2 2007. And these declines are worrisome, for we normally tend to ascribe the destructive effects of the economic crises to unemployment, forgetting about those who leave the work force altogether. Well - take a look at charts above.

Another disturbing realization on the foot of the above charts is that regions with lowest participation rates also tend to be regions with higher unemployment. This is important because it signals that even in a small country like Ireland, mobility between residential location and work location is still restricted (by distance, lack of proper roads, transport shortages etc). It also suggests that in the long run, areas with higher unemployment tend to become traps for non-participation in labour force. The vicious spiral of being jobless in an area with no jobs creation leads to becoming disillusioned and dropping out of the work force for good.

And this implies higher rates of overall dependency. Remember - these are numbers for able bodied adults. So if we take the rate of unemployed and add to it the rate of those who are not in the labour force, we get a proportion of population that needs someone else to work for them to sustain themselves. Now, a caveat here - of course some of those who are not in labour force are gainfully engaged in work at homes - non-market activities that are productive and include, among other very important ones, like carrying for the elderly or ill, raising children etc. These, however, are not the majority in these numbers. Nor are they likely to be distributed predominantly into higher dependency areas of the country. So conclusions presented below stand:
Predictably, the lowest dependency ratios are in high work regions: Mid-East and Dublin. And although these ratios rose in these two regions through the crisis, they are still well below the national average and leagues below the dependency ratios for the likes of Border and South-East regions. Here's a closer look:
Of course, what these trends mean is that throughout the entire series duration (from 1998) Dublin and Mid-East have acted as a subsidy generating regions for the rest of the country. Someone had to pay for the higher dependency rates in regions that are above country average (since the welfare rates are not varied geographically).

Economics 02/06/2010: Live Register - no longer flatlining

Liver Register numbers are out today, erasing much of the optimism that might have been building up about unemployment figures over the last couple of months. Here are the updated charts:
Unemployment rate is now rising again, reaching 13.7% after staying flat for the last four months at 13.4%. My forecast in January was that we will hit 13.5% in May. I was wrong. Well, not as wrong as some of our 'official' forecasters who were saying that we are turning the corner on unemployment...

Let's put today's news into perspective:
Notice 'missing' bubbles before May? That is because we had no growth in LR figures (they were actually shrinking) in February-April. Since the beginning of the year, mom, LR increased by 5,800 in January, fell by 2,300 in February, rose by 600 in March and contracted by 500 in April. With May increase of 6,600, we now have a net addition to the LR over the first 5 months of the year of 10,200. The Exchequer cost of these will be around €325 million per annum. In fact it will be probably higher as contractions in employment most likely have taken place in higher value added sectors, given that construction sector has virtually no jobs left to lose.

Taking a slower snapshot of the LR:
You can clearly see an uptick in the series in May. Given how relatively 'sticky' (trend-driven) LR is, this suggests that we might be heading for a new acceleration.

Next consider average weekly series. These are not seasonally adjusted:
However, taking seasonally adjusted data and extracting monthly series shows that we are firmly above the 'stabilization' line of zero change in the LR mom:
So here you have it - labour markets beg to differ from the Government's official line that 'all indicators point to a recovery'...

Economics 02/06/2010: Central bank data analysis

Latest monthly data from the CB is out and here are a couple of updates on series I've been covering before.

First harmonized competitiveness indicators (EU-wide data update coming soon):
Notice some serious progression on competitiveness front is finally starting to take place. This is good. The trend is also good - strong downward trajectory in the series since November 2009. Accelerating again since March. Data lags should not be this significant, so I will be keeping a watch on earnings data from the CSO.

For all the good news, so far we are still in the zone of low competitiveness, down to March 2006 level and well above the period when Ireland Inc was performing at much stronger rates in the 1990s. Remember, these are real indicators, so price levels changes since the 1990s are factored in already.

Private sector credit. First the totals:
We are back to August 2007 levels and the fall rate is slowing down. Year on year change, subsequently, is flat at -9.3% same as in March. Too early to call it a recovery or even a full stabilization, as seasonality suggests that we might see some trend reversal in the short run. Remember, these are declines on already bottom-hitting 2009!

Next: mortgages.
Levels are down to July 2008 and the rate of decline is -1.6% yoy, compared to -1.4% in March. This, however, can be due to a significant declines in mortgages due to write-offs of defaulting loans. In addition, this deterioration rate might be also masking the fact that pretty much anyone in distress who could have done so has already re-negotiated their mortgages in 2009. Thus, only the really tough cases are still sitting out there.

The data on actual new borrowing is below. At the aggregate levels, there is no turn around in household investment, which, of course, is the main leading indicator of recoveries. Also worrisome is the fact that there is no deleveraging of mortgages debt.

Private sector credit outside mortgages is dynamically virtually identical to the total private sector credit figure reported above. Year-on-year changes seem to be reflective of some seasonal effects, with improved rate of contraction in April. General trend is for flatter rates of decline overall since about January. This means little, however, as we need a term structure decomposition of credit in order to tell if this is really a flattening of the downward trajectory or simply restructuring of non-performing lines of credit.

Now, let's take a look at actual changes in rates and volumes in PS credit. First, new loans:
Notice that both for corporates and households, longer term rates are moving up, while shorter term rates are moving down. This likely reflects banks' and interbank credit markets' expectation for a steepening in the interest rate curve, plus some easing in wholesale cost of credit in March. Also note that mortgage rates for new, and especially for fixed rates, mortgages are rising. Hardly a robust support for the housing market.

On corporate investment side, sizable declines for short term maturity loans - operating capital, and reasonably improving environment for larger investment-suitable loans with longer term fixes.

On volumes side, there is a worrisome increase in all shorter term loans - a sign that both companies and households are reliant increasingly on short bank finance for operational and short-term credit. This might mean two things:

1. These increases might reflect increase in supply against a pinned up demand; or
2. These increases might be consistent with increased cash flow pressure on companies (if non-payment and defaults by clients is rising) and households (if arrears are building up on the side of unemployed and underemployed after the households have gone through their savings and redundancies).

We can't tell which one of these forces is operative here. But it does not look to me like operational demand is rising naturally. Remember, so far we only have strong exports performance across the economy. This means you would expect an increase in trade credits (short-term). Most of trade finance in Ireland is actually not done via Irish banks, but through MNCs-own global arrangements. Apart from exports, it is hard to see where organic demand for short term loans would come from.

An even more interesting picture is emerging when we look at existing clients:
Notice how all of the rates changes (except for 5 year plus maturity corporate loans) are trending up? Are the banks ripping off their existent client base to beef up their margins? Well, lets put these changes side by side:
Notice that the above table comparisons are really only loose approximations. But there is a remarkable regularity with which existent loans holders are being loaded with the almost opposite type of changes in rates charged as compared with new clients.

Economics 1/6/2010: Numbers game at Anglo

Last night, I sat down to run through possible scenarios for the Anglo's 'The Bad and the Ugly' Banks division. You see, something was telling me right off the start that the idea of a 'Good' Bank just doesn't really square off with our knowledge of the bank's operations to date.

So I posited to myself the following question: given Nama transfers and rumored split off of €12-15bn worth of loans into a 'good' bank, can the resulting entity be viable? Like a scientist in a lab, I donned on a white coat (well, really my favorite UofChicago sweatshirt), pulled out a Petri dish (my Excel) and started observing the split of that outright not-so-beautiful and very toxic (to the taxpayers) bacteria, called Anglo...

Here are the results, first in numbers and then in plain English:

Step 1: recall we have pumped €10.3 billion worth of promisory notes into the bank alone. Relying on my yesterday's analysis (see details here), I reproduced the demand that a 'Good' Anglo will generate for funding these promisory notes. Now, a reminder - these numbers (penultimate column) correspond to interest only charge on Anglo from the promisory notes. They exclude principal repayment and other recapitalization funding already in the bank.
Bah, I said, the thing in the Petri dish of mine looks pretty ugly. Ugly as in unable to cover the taxpayers-due interest on capital it receives at the first glance.

Ok, I said to myself, but may be were the new 'Good' bank to grow over time, it will become relatively viable with time? Suppose the 'Good' bank generates no impairments going forward (unrealistic assumption, but suppose it does), suppose that 'Good' Anglo grows its book at 5% (generating no new impairments). Further suppose that there's some value in the 'Bad' bank - so assume 20% of the loans transferred to it perform in the future (an extremely optimistic assumption, but what the h***ll, not much out of line with the general assumptions the Government has been making all through its management of the crisis).

The question I asked then was: with all these rosy assumptions in place, what amount of interest payments annually can Anglo afford?

To compute this, I took several scenarios:

1. I allowed 'Good' Anglo to take €12 or €15 billion in loans on board;
2. I assumed that it generates 2% of the loan book annually (another optimistic assumption - as it corresponds to an efficiently operating bank in terms of costs, book of business and funding costs - all of which are not exactly characteristic of the Anglo)
3. I then assumed three different potential burden levels on interest (recall, no principal) repayment at 30% of the total annual return by the bank, 25% and 20%. Let me explain here that a 30% number is utterly unrealistic, implying that almost a third of the entire operating revenue of the bank will be used to pay interest on a small share of its capital funding. This will, in effect, leave no surplus to pay bonuses (of any kind) and dividends (of any kind) as well as to finance bank's insurance etc. 25% mark is also unrealistic, while 20% is back-breaking for a bank, but can be probably sustained over a couple of years.

Table below shows the results by stating the amount of interest repayment that the bank can generate across both its 'Good' and 'Bad' divisions. Blue-bold numbers mark the first time that the annual interest funding requirement gets met.
All of this is fine, I said to myself next, but before the interest requirement is first met on the annual basis, there are years of the bank not covering the interest bills. These will cumulate.

My next question, therefore was: How soon can the bank break into the 'black' vis-a-vis interest repayment alone?
Table above shows the cumulated interest arrears from the €10.3 billion in promisory notes. It clearly shows that under all scenarios, save one (the most optimistic scenario) the entire Anglo operation cannot be expected to generate enough cash to cover even the portion of its interest bill. In fact, under the more realistic scenario (last two columns), Anglo - 'Bad' and 'Good' combined - will continue to accumulate interest arrears on the taxpayers funds (ex €4 billion in direct capital it received) through 2020.

There is no principal repayment charge in the above, nor is there a chance of receiving anything close to the interest bill, even assuming that we do not roll up interest on the cash we put in. In simple words - the entire Anglo operation is so fundamentally bust, that the taxpayer is likely to never receive even a few cents on the euro of the money we've put into it.

The only thing that grew in my Petri dish was a voracious bacteria capable of hoovering taxpayers money at a speed unimaginable to any other bank.

One wonders if that is what Mr Alan Dukes and our Government mean when they are saying that proceeding with keeping Anglo on a respirator amounts to minimizing the cost to the taxpayers.

Economics 31/05/2010: Anglo's latest cash call

This just in - the Government has decided to give Anglo, yes, that very Anglo which is Ireland's real zombie bank with no prospect - even theoretical one - a fresh capital injection of €2 billion (here). This brings taxpayers' capital injected into the bank to €14.3 billion to-date.

The official information by DofF claims that because the injection comes in a form of a promisory note, payable over 10-15 years, there will be lesser impact on the taxpayers today. However, although the official announcement does not say so, this term structure of payments means that our future deficits will be front loaded (pre-committed to the amount announced today), implying that for Ireland to reach required 3% deficit/GDP limit by 2015, we will have to face an increased funding requirement for Anglo over time.

This requirement must be provisioned today, since the notes work in the following way:

• At any point in time between today and 10-15 years from now, Anglo can waltz into DofF's offices and ask for any share - between 0.00001% and 100% of the amount issued on the promisory note.
• At that moment, the Government will have to come up with cash pronto, which means - no time to issue separate bonds.
• Which implies that the very second Mr Dukes asks for cash, our deficit goes up by that exact amount.

Now, prudentially, we should have set an escrow account and provided for this funding. In practice, as is clear from the DofF release, no provisions will be made. The entire, and I repeat, the entire risk of the drawdown therefore is leveled on the shoulders of taxpayers. The DofF in effect is praying to the forces of fortune that Anglo won't come in with a request for funds tomorrow, and/or that any request will not be for the entire sum of the promisiory note.

Now, let us revert back to the 'bank' called Anglo. The State has now committed €10.3 billion in promisory notes. These carry interest rate of... well, I am not sure... but suppose it is 5% to cover the cost of borrowing for these funds in the market, once the funds are disbursed. Assume that 10% of that (actually below a normal charge for a letter of credit for an insolvent company) is outstanding annually until a drawdown. Make a further assumption: assume that Anglo will draw the entire amount in equal annual installments over 5 years - an assumption that is also extremely conservative.

At 5% per annum, Anglo's liabilities to the taxpayers are:
Let me quickly and briefly explain the last 2 columns above. The penultimate column shows the sum of interest charges (at 5% on drawn funds), plus underwriting charge (at 0.5% for undrawn promisory note funds remaining) that Anglo should be paying over the next 10 years, assuming draw down is evenly spread over 5 years on both tranches. The last column then states the amount of loans that are performing that Anglo needs to have on its books in each year to cover the loans interest, not the principal, but interest, assuming that Anglo uses 0.5% of the loans to cover its interest rate, which would roughly amount to 25-30% of its entire interest income on the loans (note - that is really a severe case of the credit squeeze on a bank, but hey, suppose they manage without breaking the back).

How do I come up with this 25-30% estimate? In a normal year, one can expect a fully efficient bank to make ca 2% of their loans volume in revenue. If it pays 0.5% of that amount to cover costs of promisory note, it will be swallowing 25% of the revenue base.

Now, Anglo is transferring to Nama some €35 bn worth of loans, leaving it with ca €30 billion in remaining loans on its books. Of these, roughly 60% is expected to go into the 'bad' bank - in other words, roughly €18 billion worth of loans won't b performing. This leaves it with roughly 40% of loans or €12 billion on the side available for revenue generation. It needs ca €28 billion to cover the cost of the prmisory notes alone...

Get the picture? Even if you dispute my assumptions and half all the costs of the promisory note carry, you still can't get Anglo balance sheet to cover the cost (not the principal) of what it is borrowing from the taxpayers. This puts into perspective the DofF claim that: "As the Minister stated last March the overriding objective of the Government is to minimise the cost to the taxpayer of the restructuring of Anglo Irish Bank".

Economics 31/05/2010: How much more evidence do we need?

In the spirit of my earlier posts on the matter - here is today's press release from Ryanair. Let me add, uncontroversially, that I fully subscribe to Ryanair view that our travel tax (defacto assigned in the Irish Times op ed to Gurdgiev-Ryanair [campaign against the] tax, but since then spreading to include on the opposition side all main airlines based in Dublin) has been hurting tourism in Ireland, while imposing an arbitrary, unnecessary and unjustifiable burden on ordinary families here.

RYANAIR BELIEVES IRISH GOVT HAS CAUSED OUR TOURISM COLLAPSE AS GROWTH RETURNS TO OTHER EU COUNTRIES

INDEPENDENT REPORT SHOWS THAT ONLY COUNTRIES WITH TOURIST TAXES CONTINUE TO DECLINE

Ryanair, Ireland’s largest airline, today (31^st May) published irrefutable evidence that the Irish Govt is responsible for the collapse in Irish tourism as new (independent) statistics show traffic growth has returned to those EU countries that do not impose tourist taxes. These statistics disprove Minister Dempsey’s claims that the fall in traffic and tourism is ‘an international phenomenon’ and proves that Irish tourism is being devastated by the Govt’s €10 tourist tax.

The RDC Aviation report (attached) highlights that Irish seat capacity (which drives passenger numbers) collapsed by over 140,000 in April and by over 700,000 so far in 2010. Seat capacity continues to decline in Ireland, the UK and France - the only European countries which continue to impose tourist taxes. By contrast, growth has returned to countries which have scrapped tourist taxes (Belgium and Holland) or reduced airport charges, in some cases to zero, (Spain) to stimulate tourism growth.

Ryanair warned that this downward trend at Irish airports will worsen throughout 2010 as the DAA makes Ireland even more uncompetitive with a 40% increase in the airport charges to pay for its €1.2bn T2 white elephant.

RDC Aviation: Irish Airport Capacity Jan-Apr

Year	Seats
2009	5,021,727
2010	4,321,433
Decline	– 700,294

Ryanair’s Stephen McNamara said:

“The RDC Aviation report shows that those countries, like Ireland, which impose tourist taxes continue to decline and disproves the Dept of Transport’s claims that the continuing record collapse in traffic at Dublin Airport is ‘an international phenomenon’. The Irish Govt’s €10 tourist tax and high charges at the DAA Monopoly have made Dublin an uncompetitive, expensive destination. Growth has returned throughout Europe except in Ireland, the UK and France which are the only major European countries to tax tourists instead of welcoming them.

“Ireland’s traffic and tourism decline will increase when charges at the DAA Monopoly rocket by over 40% in October as the Dept of Transport rewards the DAA for its traffic decline and the €1.2bn white elephant, T2. Unfortunately 2010 will be even worse than 2009 in terms of lost visitors, jobs and tourism revenues in Ireland. It is time to axe this stupid €10 tourist tax and slash the DAA’s high fees”.