2/8/2012: Irish Exchequer Fog: Reality Isolated?

Let’s take a look at the Exchequer numbers for January-July period out today.

Tax revenue shows an increase from €18,633 mln in January-July 2011 to €20,313mln in same period 2012. 

This is primarily accounted for by increases in Income Tax (which are running pretty much in line almost exactly with what the USC reclassification would have yielded). The Department states that "Income tax is €159 million (2.0%) ahead cumulatively and is over 11% up on the same period last year on an adjusted basis. This is a strong performance." However, as far as I can understand the numbers, the adjustment only includes PRSI and does not cover reclassification of the entire USC (Health Levy). Which suggests that even 2% might be questionable. Per April note (link here) PRSI reclassification was 'estimated' by the department to run €300 million in 2012. It could be, in the end, 280mln or 330mln - take our guess, but it is significant.

Another 'major' factor is a rise in corporation tax of some €400 million of which more than half is accounted for by carry-over of tax from 2011 into 2012, not new tax receipts. Here's the Department note from April (linked above): "The Department is also taking this opportunity to adjust the corporation tax profile for the €251 million in receipts which were  expected in December 2011 but were  only received into the Exchequer account in January 2012". So setting aside timings of the corporation tax and netting out €251 million of carry-over, how much is corporate tax really up? The answer is - we do not know. But not by much enough to be excited about this.

There was a €200 mln odd rise in VAT - the real impact of the Budget 2012. Which means that on the net, there are very few real increases in revenues. Total taxes went up by €1,680mln odd, but on a real comparable basis, they went up less than €1,254mln over seven months! Again, this is before we clarify what exactly happened with the Health Levy. With Health Levy effects, the impact would have been probably closer to €250mln (I am using here 2009 figures for Health Levy and PRSI to estimate).

Non-tax income rose from €1,545mln to €2,355mln – of which almost €300mln is accounted for by increased revenues by the Central Bank and another €200mln odd is from the stronger receipts on the Banks Guarantee. There was €300mln interest on Contingent Capital Notes - also from banks. Sort-of the zombie giving back odd €800mln to the town it is killing. This is the 'reforms' the Government instituted to correct for the fiscal imbalances? Not quite: earlier this year the EU warned Ireland to not consider these 'revenues' as a part of long-term adjustment as they are bound to disappear in time.

Voted Current Expenditure – the stuff that this Government is supposedly cutting back – has actually increased – from €24.008bn in 2011 to €24.563bn in 2012.

Non-voted current expenditure is up more than €2 billion: from €3.556bn in 2011 to €5.573bn in 2012 – primarily driven by increases in the cost of servicing Ireland’s debt from €2.426bn in 2011 to €3.801bn in 2012. Timing effect on sinking fund contribution of €646mln also put a dent.

This means total current expenditure rose (not fell) from €27,564mln in 2011 to €30,136mln in 2012. This is very poor performance, folks.

Thus, current account deficit also increased in January-July 2012 from €7,386mln to €7,468mln.

Sinking fund transfer debit above was offset by credit to the capital receipts, which has meant that capital-related exchequer receipts rose to €1.454bn in 2012 compared to €789.9mln in 2011. Again, there is nothing miraculous here – the state simply transferred funds from one pocket to the other.

On the capital expenditure side, however, there are – on the surface – huge ‘savings’ year on year. Total capital spending amounted to €12,298mln in January-July 2011, but that was ‘cut’ to €3,112mln in same period 2012.

How were such miraculous savings achieved? Well, simple, really. In 2011 the state spent €10,655mln on “Non-Voted (Expenditure charged under particular legislation)” items and in 2012 this line of spending was only €1,775mln. 99% of these expenditures in both 2011 and 2012 relate to banks recapitalizations (and in 2012 added insurance fund support loan of €449.75mln). So the entire savings delivered by the Government amount to putting less money into Irish banks recapitalizations.

Here’s the summary of these ‘savings’.

TABLE

But wait, things are even worse! In 2011 Irish Government paid down the promissory note to the Anglo-Irish Bank in the amount of €3.085bn. This increased Government spending in that year. This year, the Government had converted the note into Government debt, and thus got to claim that there was no payment made, so instead of €3.085bn in spending, the State registered just the cost of conversion €25mln this time around.

All in, of the entire deficit reduction claimed by the media, full €8.9 billion of the ‘savings’ are simply what the Irish Government (rightly) claimed a year ago to be ‘temporary’ one-off measures. In other words, there is no reduction in deficit via expenditure side.

Let's do one final exercise: if we subtract one-off measures from the capital side, total - current and capital accounts exchequer deficit in the first seven months of 2011 was €8.24bn, in the same period of 2012 it is €7.35bn adding to it the reclassification measures and corporate tax carry over implies like-for-like deficit in 2012 of €7.78bn. Which means 'savings' of ca €426mln. 

Of these €306mln is accounted for by timing differences and cuts to voted capital spending which the Government is going to more than undo using the latest 'off-balancesheet' stimulus. And an unknown amount is due to Health Levy reclassification, let's say ca €250mln so far (an under-estimate for 2009 figures, but...) for which the Department does not appear to adjust the numbers. All in, Irish Exchequer finances have most likely deteriorated on comparable terms by around €80million in 7 months through July 2012 compared to 2011.

These are then the colossal savings that the headlines like "Ireland Cuts Deficit in Half" simply mis-represent.


Update: Someone highlighted that the Health Levy was incorporated into the PRSI receipts. My view of the Health Levy is based on this document.

2/8/2012: Inverting reality?

I have to share with you this:

The link to the RTE piece on this research is here. 


The link to my analysis of Irish Manufacturing PMIs which, according to the KBC Bank Ireland/Chartered Accountants Ireland Business Sentiment survey, is the sector constrains growth as opposed to domestic services that allegedly support growth is here.


Updated: Today's Services Sector PMI release for Ireland confirms my criticism of the Confidence Survey with Service sector posting a third consecutive month of decline in activity 49.1 in July from 49.7 in June. Thus, we now have: 3 consecutive months of expanding PMI on Manufacturing side, 3 consecutive months of contracting PMI on Services side. Largest decline in Services (44.5) was in domestically-focused Business Services segment.

2/8/2012: Latest Euromoney Country Risk Survey results

Recent Country Risk survey by Euromoney shows some interesting trends relating to the Russian economy. Here are the headlines:

"The five economies of the Brics have seen an aggregate ECR score loss of 6.4 points this year, lowering the average score by 3.1 points to 56.8. South Africa (-2 points), Brazil (-1.9) and India (-1.6) have endured the worst declines in sentiment, resulting from concerns about export market conditions, amid waning demand for commodities and increased domestic security risks. However, all five have seen large declines in their economic assessment scores, as contributors have reassessed their expectations for global growth and have acknowledged the slowdown in China’s breakneck pace of expansion."

Moreover: "Four of the five Brics (Russia the exception) have also endured lower political risk scores – led by India (down 0.9 points) and China (-0.8)."

Summary of scores changes:

Specifically on Russia:

"ECR economists still regard Russia as the weakest of the Brics, ranking 60 in the world, despite the three main ratings agencies placing India below Russia. India might have a lower economic assessment than Russia, but its political and structural risk assessments are more favourable, according to ECR contributors, with particularly large gulfs in the scores for government non-payments/non-repatriation, information access/transparency, institutional risk, the regulatory and policy environment, and demographics – factors seemingly not being reflected in the various credit ratings. This might be due to the comparative security provided by Russia’s status as one of the world’s largest energy producers."

Despite this, current survey shows little deterioration in Russia's risk score with June 2012 risk assessment on par with China:

See more on the survey results here.

Disclosure: I will be joining Euromoney survey panel starting with the next survey.

2/8/2012: A hell of a non-event

After all the hype and the pomp of recent weeks, today's ECB council and Mario Draghi's subsequent pressie were anti-climatic. Nay, they were outright bizarre, given the 'priming' achieved over the last week. The timeline of the whole fiasco is below - for the fun of it taken off twitter (please note: no tweets affiliations provided due to the way the data was extracted, so apologies to all).

The headline conclusion is as follows:

Sig Draghi's 'Big Bang':

1. ECB 'may' address the seniority issue of ECB over private holders of PSI bonds - an issue that should've addressed more than 3 months ago, 
2. ECB 'might' buy some Spanish/Italian bonds but ECB won't tell how much or when, 
3. It is up to 'Governments' to do something about all of this and apply to EFSF, but
4. ECB will now 'plan modalities' like the rest of the EU has been planning over the last 3 years.

Outcomes:

1. Draghi has managed to bid down Italian and Spanish bonds
2. Draghi manages to further undermine his & ECB's credibility
3. The idiots who bought into peripherals on foot of expectation Draghi was about to start buying them based on his July 26th speech should have seen it coming: Draghi: In the speech on July 26th in London, I made no reference to a bond-buying programme

*DJ Draghi: Govt Council May Consider Undertaking Further Non Standard Measures #wsjeuro
*DRAGHI SAYS INVESTOR CONCERNS ON SENIORITY WILL BE ADDRESSED
*DJ Draghi: Will Design Appropriate Modalities for Such Measures Over Coming Weeks #wsjeuro
*DRAGHI SAYS ECB MAY TAKE MEASURES TO ENSURE POLICY TRANSMISSION
*DRAGHI SAYS TENSIONS IN FINANCIAL MARKETS AMONG RISKS
*Markets rally Mario Draghi on comments about eurozone. IBEX and MIB up by around 2%
*Draghi: Governing council may undertake outright open market operations of a size adequate to reach its objective. But no firm commitments
*DJ Stoxx 600 Index Up 1% As Draghi Speaks #wsjeuro
*DJ Draghi: Inflation Likely to Decline Further in 2012, be Below 2% in 2013 #wsjeuro
*So is Draghi strategy to bid down IT+ESP bonds to buy them cheaper?
*Oh, the Italian 10-year yield just tightened several bps
*Draghi talked markets by 5%. Delivered a delay. Huge blow to credibility
*IBEX and MIB rally losing steam as ECB chief Mario Draghi statement continues
*FTSE goes from up 50 to Negative on Draghi NON comments
*DJ Draghi: Sees Significant Progress on Fiscal Consolidation in Recent Yrs #wsjeuro
*DRAGHI SAYS IMPORTANT FOR BANKS TO BOOST THEIR RESILIENCE. Yes. with all those epic earnings
*RT @EKourtali: aaand : Italian, Spanish 10-year yield spreads over German bunds reverse earlier tightening (tradeweb)
*WAAAAAAR RT @djfxtrader: #Germany's Bundesbank to DJ-WSJ: No comment on #ECB Council Decision
*DJ Stoxx 600 Index Slides Into The Red on Draghi Comments; Down 0.2% #wsjeuro
*The Market Rally Has Now Completely Vanished Amid Mario Draghi's Press Conference read.bi/N0Vn3x
*FTSE, DAX, CAC, MIB, IBEX now in negative territory as ECB boss Mario Draghi fails to deliver on eurozone action pledge
*Draghi: we have discussed possible reductions in interest rates, unanimous decision this wasn't the time #wsjeuro
*Press conference Mario Draghi: Introductory statement to the press conference via ECB PR bit.ly/Qzrdon
*Draghi: first thing is that govts have to go to the EFSF. As I've said several times the ECB cannot replace govts #wsjeuro
*LIVE: Draghi implies that seniority and EFSF/ESM measures have to happen before the ECB takes action. read.bi/Ncwtuj
*Draghi: ECB may undertake outright open market intervention of a size adequate to reach its objectives #wsjeuro
*"Many of the details [of seniority and EFSF use] will be worked out by the [ECB]" in the coming weeks. read.bi/NLo06l
*ITA +20bps SPA +10bps since Draghi started
*Draghi: the effort will be focused on the shorter part of the yield curve #wsjeuro
*"This effort is going to be focused on the shorter part of the yield curve...which will introduce discipline on the longer part." -Draghi
*DJ Draghi: This Effort is Very Different from Previous Bond-Buying Program #wsjeuro
*Markets not happy. CAC-40 turned negative having been up 1.2% earlier in #Draghi's press conference. #wsjeuro
*"I'm a little surprised by the amount of attention this received in recent press." -Draghi on saying no to ESM bank license. "Not up to us."
*The current design of the ESM does not allow to be recognized as a suitable counterparty. (for ECB repo) -Draghi
*Oh man the Spanish 10-year did not like that ESM remark. Nor Italy.
*Euro sinking like a stone. Down 200 pips since peak at start of press conference.
*SPANISH TWO-YEAR NOTE YIELD 14 BPS LOWER AT 4.80%
*Euro /Dollar breaks 1.2200
*Meanwhile... Italy Govt Bonds 10 Year Gross Yield 5.934%
*EURO EXTENDS DECLINE AGAINST YEN; WEAKENS 0.5% TO 95.42
*Markit iTraxx Europe already widened 5bps since start of Draghi speech - now at 159.5bps
*Draghi: You shouldn't assume we will or will not sterilize SMP purchases. The committees will have to tell us what is right.
*Draghi: Endorsement to do whatever it takes to preserve euro has been unanimous, but clear Mr Weidmann, BuBa have reservations #wsjeuro
*Spain CDS already 22bps wider at 560bps
*Spain's IBEX35 share index now down by almost 5% after ECB chief Mario Draghi failed to deliver on his eurozone action pledge.
*Italy Govt Bonds 10 Year Gross Yield 6.00%
*FTSE MIB -2.44%
*FTSE MIB -3.00% -- Italy Govt Bonds 10 Year Gross Yield 6.055% -- ITALY 10 - GERMANY 10 SPREAD 473bps
*IT GETS WORSE: US Futures sliding harder after Mario Draghi flop read.bi/NLpsFS
*Draghi: Even if we were ready to act now, there are not grounds to do so bit.ly/QzAPzq
*Italy Govt Bonds 10 Year Gross Yield 6.129%
*Spanish stock market has plunged 600 points in last few minutes, now down 5% pic.twitter.com/JHQZDAtl
*Draghi on whether ECB willing 2 buy private sector assets - "no reason to be specific on what other options are" - eh, left it open?
*DJ Draghi: Statement on Bond Buys Wasn't a Decision, it was Guidance #wsjeuro
*Draghi stresses bond-buying language: "MAY DECIDE" if conditions are met #wsjeuro
*Italy 10-Yr Erases Gains, Yield Rises 23bps to 6.16%
*EMU epitaph: "I want to stress the ECB remains the guardian of price stability and that remains its mandate." - Draghi.
*Bond market to Draghi: If you'd like to buy bonds, we'll make them cheaper for you... bit.ly/QzLfPG
*RT @edwardnh: Draghi has lost all credibility now. The ECB is going to do nothing. Watch yields rise.
*Draghi: it is pointless to go short the Euro. Well, if you went short the euro when Draghi started speaking you are up 200 pips
*Draghi: "It's pointless to go short on the euro because the euro will stay." The first point hardly implies the second.
*Trichet: "Speculating on Greece defaulting is a certain way of losing out" July 27, 2011. And then... bit.ly/NVWP6b
*FTSE MIB -3.17%
... and some more
*Spanish 10s hit 7% bit.ly/QA24Ks
*Priceless! RT @FGoria: S&P: Portugal 'BB/B' Ratings Affirmed; Outlook Remains Negative On Exposure To Spain

2/8/2012: A bit of an Olympic bubble?

Hosting Olympics is considered to be a great boost to the economy and yield long term benefits from infrastructure investments, branding of the host city etc. Right?

Here's a study (link):

"Summer Olympics bring hundreds of thousands of visitors and generate upward of $10 billion in spending for the host city. This large influx of tourism dollars is only part of the overall impact of hosting the Olympic Games. In order to host the visitors and sporting events, cities must make sizable investments in infrastructure such as airports, arenas, and highways. 


Additionally, the publicity and international exposure of a host city may benefit international trade and capital flows. 


Proponents argue that this investment will pay off through increased economic growth, but research confirming these claims is lacking. 


This paper examines whether hosting an Olympiad improves a city's long‐term growth. 


In order to control for the self‐selection of cities that host Olympic Games, this paper matches Olympic host cities with cities that were finalists for the Olympic Games, but were not selected by the International Olympic Committee. A difference‐in‐difference estimator examines post‐Olympic impacts for host cities between 1950 and 2005. 


Regression results provide no long‐term impacts of hosting an Olympics on two measures of population, real Gross Domestic Product per capita and trade openness."

2/8/2012: One hell of a chart!

One hell of an awesome chart, folks:

Clearly shows the strong, sustained break-out in Irish manufacturing PMI which started around April 2012, ending the period of sub-50 average readings between June 2011 and March 2012. And this amidst a massive slowdown in global trade and euro area economies.