16/7/2012: IMF downgrades growth prospects for 2012-2013

A notably interesting, if worrying, World Economic Outlook update from the IMF today. Titled “New Setbacks, Further Policy Action Needed” the document sounds several key warnings:

• In the past three months, the global recovery, which was not strong to start with, has shown signs of further weakness.
• Financial market and sovereign stress in the euro area periphery have ratcheted up, close to end-2011 levels.
• Growth in a number of major emerging market economies has been lower than forecast. …these developments will only result in a minor setback to the global outlook, with global growth at 3.5 percent in 2012 and 3.9 percent in 2013, marginally lower than in the April 2012 World Economic Outlook.
• These forecasts, however, are predicated on two important assumptions: that there will be sufficient policy action to allow financial conditions in the euro area periphery to ease gradually and that recent policy easing in emerging market economies will gain traction.
• Clearly, downside risks continue to loom large, importantly reflecting risks of delayed or insufficient policy action. In Europe, the measures announced at the European Union (EU) leaders’ summit in June are steps in the right direction.
•  The very recent, renewed deterioration of sovereign debt markets underscores that timely implementation of these measures, together with further progress on banking and fiscal union, must be a priority.
•  In the United States, avoiding the fiscal cliff, promptly raising the debt ceiling, and developing a medium-term fiscal plan are of the essence. In emerging market economies, policymakers should be ready to cope with trade declines and the high volatility of capital flows.

Some growth forecasts snapshots of the IMF update for 2012 and 2013:

• US gets downgraded on growth for both years by 0.1% from 2.1% in April 2012 to 2.0 in July 2012, and for 2013 from 2.4% to 2.3%.
• Meanwhile, Euro zone gets no change in 2012 forecast (at -0.3%) and a downgrade by -0.2% to 0.7% for 2013 forecast.
•  Let’s recall that Eurozone is Ireland’s ‘hope’ and ‘engine for growth’ according to our Government. And it is expected to perform markedly worse than any other advanced region in both 2012 and 2013. 
•  Note that the most ‘dynamic’ large euro zone economy – Germany – is now expected to grow by a ridiculously low 1.4% in 2013 on top of an absurdly low 1.0% in 2012.
• Elsewhere, China and India both got seriously downgraded in terms of growth prospects for 2012 and 2013 compared to IMF forecasts 3 months ago.

Chart below shows some monetary and banking sides of the euro crisis.

“Overall, global growth is projected to moderate to 3.5 percent in 2012 and 3.9 percent in 2013, some 0.1 and 0.2 percentage point, respectively, lower than forecast in the April 2012 WEO…

Growth in advanced economies is projected to expand by 1.4 percent in 2012 and 1.9 percent in 2013, a downward revision of 0.2 percentage point for 2013 relative to the April 2012 WEO. The downward revision mostly reflects weaker activity in the euro area, especially in the periphery economies, where the dampening effects from uncertainty and tighter financial conditions will be strongest.”

“Growth in emerging and developing economies will moderate to 5.6 percent in 2012 before picking up to 5.9 percent in 2013, a downward revision of 0.1 and 0.2 percentage point in 2012 and 2013, respectively, relative to the April 2012 WEO… Growth is projected to remain relatively weaker than in 2011 in regions connected more closely with the euro area (Central and Eastern Europe in particular).”

16/7/2012: IMF Fiscal Monitor Update - Ireland

IMF just published its Fiscal Monitor Update for July 2012 with some interesting data. I will focus here on forecast changes and updates to Advanced Economies, including Ireland.

 Chart above shows changes in the cyclically adjusted fiscal balances (structural deficits) which clearly highlight Ireland as a relative laggard in the fiscal adjustment process. Despite this, IMF concludes in the case of Ireland that:

Not exactly time to grab champagne yet... In its Table 1 IMF supplies Fiscal Indicators for the countries for 2008-2013 period, inclusive of revisions from April 2012 report to July 2012 report. And I plotted these in the charts below:

First chart covers Overall Fiscal Deficits for 2011, 2012 and 2013 per latest (July 2012 forecasts):

Clearly, Ireland had the worst fiscal deficit in 2011 of all EA17 states covered by the IMF update.  But we are also expected to post the worst deficit in 2012 and 2013.

Adding insult to injury, chart below shows that IMF downgraded our deficit cutting prospect for 2013 by 0.2 ppt, which is the worst case (on par with Spain) of a downgrade for an EA17 state covered. Note: we did get an upgrade from April to July forecasts for 2012 results.

Let's take a look at Cyclically-Adjusted Deficits measured as % of potential GDP (aka structural deficits):

Again, per chart above, Ireland had the worst EA (covered states) cyclically-adjusted deficit in 2011, followed by the expected worst deficits in 2012 and 2013. We posted the second worst downgrade for 2013 forecast (Spain was first). As before, we got an upgrade on cyclically-adjusted deficit forecast for 2012 - which is good news.

Now, what about that fabled Irish leadership in austerity? Chart below shows the depth of structural deficits reductions from 2009 through 2012 (forecast consistent with July update):

It turns out, per chart above, that our championship in austerity is really behind that of Greece (-14%),  Portugal (-6.7%) and Spain (-4.7%).

And the really worrisome update is reserved for Government debt levels. Back two years ago I predicted that Irish debt/GDP ratio will top over 120% marker. Back then, I was criticized for this because an army of our 'green jersey' economists and commentators decided that 120% is a magic number we will never reach. The reason for their ardent defense of this imaginary line in the sand is that they bought into the ECB and EU line that 120% is 'sustainability bound' for public debt. Of course, I never aligned with the idea that 120% debt/GDP ratio is a magic 'sustainability bound'. But, now, take a look at chart below:

Per IMF latest forecast, Ireland's 2012 Government debt will reach 117.6% of GDP (up on 113.2% forecast for 2012 back in April) and in 2013 it will peak at 121.1% of GDP (up on 117.7% forecast for 2013 back in April).

Note that for all our efforts, our Government debt/GDP ratio will be relatively close in 2013 to that of Italy (126.4% of GDP) and above Portugal (118.6% of GDP).

Pretty ugly.

13/7/2012: CERN and Other 'Alternatives'

There is an interesting debate going on right now in Ireland about our membership in CERN project.

The debate is exemplified by some claiming that Ireland funds 'other' programmes of similar expenditure magnitude and therefore, we can fund CERN membership as well. Here is one example, just for illustrative purposes (not to pick on the specifics, but to illustrate):

This type of an argument is doubtful at lest on 3 fronts: 

1. It assumes that €20mln on methadone support (other programme) yields lower value 4 money than CERN membership. Which is unproven. I am yet to see a feasibility study for:
• CERN membership 
• Methadone support withdrawal
• Comparative between two actions
2. It assumes that CERN membership will return 'jobs & science' for Ireland. Which is unproven & not supported by any assessment, as far as I know. I place tremendous value on science, especially on primary science. Primary science is supported by CERN with some promises (note - promises) of applications. However, Ireland has many other, and arguably potentially more pressing needs for financing in science. Perhaps, to support physics and other primary fields relating to CERN, an alternative to CERN membership can be developed via collaborative research or 'partial' (per-project) membership? If we have brilliant ideas to be tested at CERN, surely German or French or UK etc researchers would love to co-author with our physicists on these? If no, something is deeply amiss in the field.
3. It assumes that we have a choice between supporting methadone dispensing (other spending lines) and supporting CERN. This is only true if the two spending alternatives presented are comparable ones in terms of social and public safety goods and economic returns. I doubt there is any evidence to support this either.

In short, yes, there is plenty of spending waste in Government programmes, including in sciences and public health. No, this does not mean we should simply swap one programme for another because they 'spend similar' amounts. But, yes, we need serious assessments of potential membership in CERN.

12/7/2012: Wealth taxes - coming up next to Europe near you...

And so wealth taxes (on those who are not all that wealthy, in fact) is a matter of EU-wide policy now, thanks to Schauble: link here and here. Note, the idea is to tax property assets in excess of €250,000 - with an additional one-off levy of 10% on top of other taxes and presumably, as per talk in one of the links about 'capital taxes' other assets can be included. And the original source for the grand idea is here.

Thus, the logic goes, you've saved for the retirement (which requires at least as much in provisions as the tax bound) and you are not a drag on social pensions system. Off you go, pay up...

One question - what happens if two years from now property values drop and your property 'wealth' declines to below €250K... do you get a refund?.. Question two - what happens when tax is levied and as the result, property markets go into further contractions, forcing question one above to the forefront?.. Question three - what happens in the long run when taxes have depleted not only disposable (investable) incomes, but also investable (and largely illiquid) wealth - do pensions provisions go up?.. do Governments step in to provide cheap capital for investment?.. does Schauble and his friends drop their own pensions demands to compensate economy for €230 billion they've sucked out of investment pool?..

Idiots squad has never been so much enforced in Europe as today.

7/7/2012: Banking union - a bit of a folly

Daniel Gros makes a cogent argument on banking union at vox.eu : http://bit.ly/L0tmUR

However... his argument is partially self-defeating.

Unified banking operations for an Italian bank with german subsidiary he uses as an example, by allowing transfer of liquidity (funds / deposits) from German subsidiary to cover Italian parent's liquidity demand that arises from Italian bank's overall elevated riskiness would be, in effect, a case of mis-pricing risk for German customers of the Italian bank. Should these customers re-price risk post-banking union, the customers will walk out of the subsidiary and the Italian parent bank will still be short of liquidity.

Thus, unless Italian bank is made a German bank (or until), the problem will remain. The only way for the supervisory authority to avoid the problem arising in the short run is by deceiving German customers of the Italian bank.

In addition, in order to make an Italian bank into a German bank, common supervision will require full convergence of all banking models to a common denominator. Whether such a convergence yields a better Italian bank (by the standards of the day) and / or a less safe German bank is a matter of more than supervision, but of a full regulatory convergence.

3/7/2012: Curb your enthusiasms?

So, the NTMA have issued a (welcome) note that Ireland is to resume auctions of T-bills. The note states that "on Thursday 5 July 2012. The NTMA will offer €500 million of Treasury Bills with a three-month maturity in its first such auction since September 2010." 

The details of the auction on 5 July are as follows: 

• Auction size: €500 million. 

• Maturity: 15 October 2012. 

• Auction opens: 9:30 a.m. 

• Auction closes: 10:30 a.m. 

• Settlement date: 9 July 2012. 

This is potentially (pending results of sale, namely yield, volume and percentage allocation to non-captive banks and funds) a minor positive for Ireland. Minor, because:

1. Bills are NOT bonds - bills are short-term instruments, traditionally under 12 months maturity (bonds are over 1 year maturity).
2. Bills issued currently fall to mature within the period of existent EFSF funding programme, so in effect there will always be funds to cover these, short of a catastrophic collapse of the euro during the duration of the bills.
3. Issuance of bills has nothing to do in terms of signaling the state of public finances health or economic conditions health of the issuer, as both Greece (see here) and Portugal (here) have issued these during their tenure in the rescue programmes.
4. Portugal issuance (linked above) covered 18-mos bills, which would constitute a stronger positive signal than that of planned Irish sale, if there was any whatsoever informational content to these auctions.
5. Ireland has issued T-bills back in September 2010, and then it was NOT a signal of any confidence in Ireland's financial health.

The media statements that this sale shows that 'Ireland is back to bond markets' is fully incorrect. T-bills market is not the same as bond market. And T-bill instruments are distinct from the bonds. For example, T-bills were not covered by PSI default in Greece, unlike bonds.

Funding public spending via T-Bills is a (marginally?) riskier undertaking for the Exchequer because it implies transfer of any potential maturity mismatch risk onto the Exchequer. Maturity mismatch risk arises when the Government uses short-term debt to finance longer-term spending commitments.

So what is the 'positive' then in NTMA news? For now - just a hope we do not get a complete rejection (which is highly unlikely, as NTMA has primed the market already). We need to see results of the auction to tell if things are positive or not - e.g. how high is the demand from outside Ireland? how expensive is the funding obtained compared to secondary bonds markets on shorter maturity end? etc.

H/T for some of the above to: Prof Karl Whelan, Prof Brian M Lucey, Owen Callan (Danske Markets)

Update:  There is a nagging question begs asking - why does Ireland need T-bill? Portugal and Greece might have used T-Bills to manage expenditure in the interim of disbursals of EFSF funds, which, especially for Greece this year, have been uncertain. Ireland is fully compliant with Troika requirements and is getting its money on schedule, with no uncertainty. In effect, therefore, either we are facing a shortfall on funding within the programme (unlikely in my view) or we are using T-bills (more expensive money raising) to finance that which we can finance at cheaper rates via Troika funds. The latter option is double-daft as the repayment of T-bills will be done out of the same Troika money. In this latter case, of course, the motivation can be to simply 'generate feel-good news' by the Government that 'Ireland is back to the (bond) markets'...