Economics 28/9/10: Anglo's bondholders must go

Reuters say Ireland should abandon the Anglo seniors

(emphasis mine)

"The Irish government will reveal the full horror of the cost of rescuing Anglo Irish on Sept. 30. It has already signaled bad news for the 2.5 billion euros of subordinated debt, but it is desperately trying to draw the line and support the 14.1 billion euros of senior debt.

"It's cosseting the bondholders because it fears further damage to its own creditworthiness if it walks away. But if the Anglo bill is as big as outsiders fear, its support will have the opposite effect. Even as the Irish prime minister talked on Sept. 28 of a "manageable plan," the spread on Irish sovereign debt widened to a record 475 basis points.

"The last official estimate of the rescue bill, 25 billion euros, looks hopelessly optimistic. Ratings agency S&P estimates it at 35 billion euros, while BarCap says 48 billion for the sector, or over a quarter of Ireland's 163 billion euro GDP. [My own estimate of 38.6bn on the upper side is now patently below external consensus, despite being branded 'outrageous' and 'outlandish' by several insiders in the past]

"The Sept. 30 statement is expected to contain a best estimate and a worst case. If the best estimate is near S&P's figure, further downgrades of Ireland's sovereign debt are likely. However, if the government were to abandon the senior bondholders, the saving -- equivalent to a tenth of Ireland's GDP -- would give the state the chance to work its way out of its economic hole."

Here we have: S&P, RBS, Barclays, Reuters, WSJ, FT, Sunday Times (Irish edition - hat tip to F.F.) and all genuinely independent analysts are now saying - shave the seniors, burn the subordinates. Government still resisting. For how long can it afford demolishing our own economy to prolong the inevitable?

Economics 27/9/10: Some evidence on entrepreneurship from the US

An interesting study of proprietorship and entrepreneurship from the US used 19 years worth of data (1989-2007) from the Survey of Consumer Finances in the US, to addresses three questions:

1. Are business owners generally more or less financially conservative than their non-business-owning counterparts?
2. Do business owners accumulate more wealth?
3. Do business owners hold a smaller share of their financial assets in risky stock holdings?

The study: BUSINESS OWNERS, FINANCIAL RISK, AND WEALTH by Tami Gurley-Calvez Bureau of Business and Economic Research Department of Economics College of Business and Economics West Virginia University (July 2010 (link) Ewing Marion Kauffman Foundation)

The motivation for these questions is straightforward: “If households that own businesses are investing more heavily in relatively safe assets, then policies that reduce financial risk (such as the availability of high-yield certificate of deposit accounts) might spur business ownership among high ability households with lower risk tolerances. Alternatively, business owners may not view their ventures as risky due to asymmetric information or perceptions of their projects. In this case, policies that facilitate the ability to assess the profitability of business ownership, such as a transparent patent process and systems of regulation and taxation, would be better suited for promoting growth in business ownership.”

Results indicate that business owners are

• financially conservative based on borrowing and savings questions
• but are more likely to be willing to assume above-average risk for financial gain,
• consistent with other studies findings that entrepreneurs save more, business owners accumulate more wealth over time;
• however, business owners and non-business owners invest similar shares of their financial portfolios in safe assets.
  

So business owners are more risk averse in their own business ventures, but are about as risk averse in terms of their investment portfolios allocations as the rest of us.

“Taken together, the results suggest that policies aimed at increasing business ownership should focus on helping households identify high-value business opportunities through transparent tax, legal, and regulatory systems. Efforts to reduce risk should focus on the business venture, such as full loss offsets, rather than focusing on reductions in other financial risks.” (emphasis is mine).

Some interesting factoids that the study throws:

• A massive 12.26% of US households own businesses.
• Business owners are underrepresented in the lower income categories, making up about 3% and 5% of the lowest and second-lowest income quintiles, respectively.
• At the upper end of the income distribution, business owners account for 18% of households in the 80th-90th percentile range and 37% of households in the 90th-100th percentile range.
• Business owners comprise 2% of the lowest quarter of the wealth distribution and 43% of households in the 90th to 100th wealth percentile range.
  

But things are not changing much over time. Per authors: “These results are consistent with Gentry and Hubbard (2004) who report that entrepreneurs account for 11.5 percent of the population in 1989 using the same definition

This, however, is a function to some extent of the fact that business owners earn higher incomes and accumulate more wealth, meaning they are unlikely to stay in lower incomes/wealth percentiles even if they start from there.

“Business owners have higher mean and median income levels. The median income for business owners is $87,000, whereas the median for households not owning businesses is $42,000. Likewise, business owners have more assets and net worth overall and by income category. Business owners have a median net worth of $497,000, and non-business owners have a median net worth of $94,000. The difference is large but the ratio of median net worth for business owners to median net worth for non-business owners of 5.29 is lower than the 8.03 ratio calculated from Gentry and Hubbard (2004) using 1989 SCF data.”

So the last figure suggests that over time, the wealth gap with non-business owners is shrinking. Undoubtedly, a housing bubble helped here.

Economics 25/9/10: Accounting for our exports

Quarterly national Accounts offer a rich set of data. Listening to all the talk about turnarounds and Government policies, I wondered -

• We know that Irish Government has little to do with our exports, which are largely determined by demand outside Ireland over which our leaders have no control;
• Exports have been performing strongly over the recession
• Exports, net of imports enter both GDP and GNP figures

So a natural question from my point of view was: "Absent net exports, how badly was our economy hit by the Great Recession?"

Here are the charts, taking our GDP and GNP (seasonally adjusted, expressed in current market prices) and subtracting net exports (exports less imports).
And same in terms of year on year growth rates:
Now, let's put together our growth rates for GDP and GNP ex-net Exports and standard GDP and GNP growth rates (gross of net exports, expressed as before in current market prices, with seasonal adjustments):
To me, this paints a pretty clear picture. Given that the Government has provided virtually no supports for our exporters, the gap between each solid line and each dashed line shows the true extent of net exports contribution to growth in GDP and GNP. And this gap also shows that the economy more directly controlled by the Government has been tanking at a much steeper rate than the economy which includes our exporting firms.

Let's put a cumulative figure to this same picture:
So in those parts of Irish economy where our Leaders had a say (red) we have suffered a decline in domestic income of cumulative 34.35% since 2007. In economy which includes the part which our Leaders have very little control over, the decline was 23.7%. One wonders if there is any truth whatsoever to the leadership claims on economic policy front we've been hearing in recent days?..

Economics 24/9/10: EU-wide slowdown confirmed

Eurocoin for August 2010 has confirmed that composite leading indicators for the Euro area growth are pointing to continued deterioration in growth in Q3 2010. Eurocoin has declined to 0.37 i n August from 0.4 in July, marking a 5th consecutive monthly drop.

Here's the chart:
My forecast for next Eurocoin to reach 0.34 in September and Q3 2010 growth to slide to 0.2-0.25%. My previous forecast for Eurocoin for August-September (issued in June and confirmed in July) was 0.34.

Economics 24/9/10: Still deep in denial?

Updated

In the real of bizarre, we have two fresh statements from Irish officials.

First, NTMA issued a statement claiming that Irish authorities - aka Irish taxpayers - will make up any shortfall on the banks capital side. One wonders if the NTMA has acquired new powers from the State - this time around, to determine our budgetary policy. You see, per European authorities, capital support for the banks is a matter of national deficits. National deficits are a matter of fiscal policy. Fiscal policy is firmly a matter for the Exchequer (i.e the Government). NTMA is neither the Exchequer, nor the Government. What business does it have in making promisory statements to the markets concerning the matters of fiscal policy?

Second, per Reuters report: "An Irish official told The Daily Telegraph that Dublin will "explore the appropriate burden-sharing arrangements" over coming weeks as it fleshes out its plan to break up the nationalised bank. Anglo Irish may ultimately cost Irish taxpayers as much as €25bn". So let's quickly summarize the statement:

1. After the economy posted a double dip (GDP side), having lost some €13,000 per every working person in income since the beginning of this Great Recession,
2. After all independent analysis has pointed, for some 21 months now to the need to cut loose the subordinated (and senior) debt holders in Anglo, plus subordinated debt holders in other state-supported banks,
3. After the above calls by independents was echoed in recent weeks in the international analysts opinions (e.g. RBS),
   
4. After independent analysts have correctly estimated Ireland's exposure to Anglo to be in the region of €33-39 billion, the estimate once again echoed in international analysts estimates (S&P),
5. After international bond markets have shown total disapproval for the Government handling of the recession, bidding both bond yields and CDS spreads to historic highs
   

our officials remain in a deep denial about both the extent of the problems and the required course of action.

Economics 24/9/10: Double Dip is now official

With a slight delay - here are the latest figures from the Quarterly National Accounts released yesterday.

The headline number is GDP double dip - Q2 2010 posted a decline in real GDP of 1.2%, deeper than the decline in GNP (-0.3%), signaling weakening side of the external economy.
In constant market prices and seasonally adjusted, Q2 GDP stood at €41,130mln down 1.81% on Q2 2009 and -1.21% on Q12010. Cumulative H1 2010 GDP was 1.28% below H1 2009. Despite shallower contraction in GNP, domestic income has suffered a much deeper contraction in the year to date. Quarter on quarter contraction in GNP between Q1 2010 and Q2 2010 was 0.278%, year on year GNP fell 4.05% in Q2 2010. H1 2010 GNP was 4.42% below H1 2009.

Let's put this into a perspective. Over the course of H1 2010, Irish economy lost €3,087mln in income. Per latest QNHS, there were 1,859,100 people in employment in the country, which means that our economic loss in H1 2010 amounted to €1,660 per working person. Since H1 2007, our economic losses total €13,078mln or €7,035 per working person. Annualized losses in national income now run at roughly €14,000 per working person since the Great Recession began.

The gap between GDP and GNP has narrowed as a result of horrific performance of GDP:
The slight recovery in GDP/GNP gap is, of course of little comfort.

Core components by sectors:

Spending and investment remain depressed: