16/12/2012: Stop the nonsense on 'non-payment' of Promo Notes 2012

In recent weeks, the Irish Government has engaged in a willful and undeniable distortion of fact. Here is one example of a senior Minister on the record saying that : ""[The Government] didn't pay the promissory note this year…"
http://www.herald.ie/news/rabbitte-rules-out-31bn-payment-for-anglo-debt-3321386.html

The same was repeated today on RTE programme.

The Ministers must know that according to the official exchequer accounts, the Promissory Note due 2012 was paid in full.

In the Budget 2013 Economic and Fiscal Outlook (official document released by the Department of Finance: http://budget.gov.ie/budgets/2013/Documents/Budget%202013%20-%20Economic%20and%20Fiscal%20Outlook.pdf) contains the following references to repayment of the Promissory Note 2012:

Page C.19, explanatory note to Table 10 (reproduced above): "The 2012 IBRC Promissory Note payment was settled with a Government bond…"

In Table 10 above, 2012 item for "Promissory Note Repayment of Principal" enters -€3.1 billion, fully confirming the repayment was made.

Page C.22 Table 13 clearly identifies 2012 Promissory Notes repayment as being "Non-cash payment in 2012 of IBRC promissory note" and states in the explanatory note below the table that "In 2012 the annual promissory note payment to IBRC was made with a Government bond". The same is entered on page C.5 under the Table 1.

The details of the bond settlement scheme are here:
http://www.finance.gov.ie/viewdoc.asp?DocID=7195

ECB position on what transpired vis the Promo Notes in March 2012 is outlined here: http://www.ecb.int/press/pressconf/2012/html/is120404.en.html quoting from Mario Draghi's responses to press query regarding the note payment (emphasis mine):
"we take note of the scheduled end-March redemption of the promissory notes and a subsequent reduction in Emergency Liquidity Assistance provided by the Central Bank of Ireland. We expect that the future redemptions will be met according to the schedule to which the government has committed itself."

The above was confirmed less than a week later: Few days after repayment of the March 2012 note, Joerg Asmussen, a member of the ECB's executive board, was speaking in Dublin where he "reiterated the ECB's view that Ireland must continue to repay the Anglo Irish Bank promissory note". Asmussen clearly did not believe that Ireland did not pay 2012 installment on the notes.
Soruce: http://www.rte.ie/news/2012/0411/ecb-official-warns-irish-banks-on-debt.html


The transaction of 'non-payment of cash payment' involved Irish State issuing a €3.06bn bond that was funded by Nama for the period of time it took Bank of Ireland to deliver approval by shareholders. Thereafter, the bond was transferred to the Bank of Ireland for 1 year. Which means that comes April 2013, Irish Government must have some sort of an agreement in place as to what to do with this bond. Either the Bank of Ireland agrees to hold it longer, or the bond has to be sold to another holder.

Here is NTMA Issuance Circular for that bond: http://www.ntma.ie/erratum-2015-bond-offering-circular/

Now, note: the coupon on that bond is 4.5%, far less than 5.5% issued in August 2012, after significant improvements in Irish secondary markets bond yields, so 4.5% Promo Notes Bond is a 'better' deal than ordinary bonds. Which means that Bank of Ireland was buying a dodo. Of course, Nama effectively backstopped Bank of Ireland, which simply borrowed money from the ECB to fund the bond.

All of this stuff I explained back in April 2012. But here's a bit worth repeating: in 2012 Promo Notes carried no interest (the last year of a two years holiday), while in 2012 the state paid 4.5% on 3,629.92 million bond. Thus, the cost to the taxpayers of Minister Noonan's 'non-payment' was €163.35 million annualized.

Which means that were Minister Noonan to repeat the exercise comes March 2013, he will be increasing the interest bill on Promo Notes by the above amount on top of the already hefty €1.9 billion one scheduled for 2013.

14/12/2012: Irish external trade in goods: October 2012

Irish trade in goods stats are out for October 2012 and here are the core highlights (aal seasonally adjusted):

• Imports of goods in value have fallen from €4.482bn in September to €4.188 billion in October, a m/m decline of €294mln (-6.56%) and y/y increase of €327mln (+8.47%). Compared to October 2010, imports are up 16.43%
• Imports were running close to historical average of €4.404bn in October, but below pre-crisis average of €4.673bn and ahead of crisis-period average of €4.126bn. Year-to-date average through October was €4.109, so October imports were relatively average.
• Exports increased from €7.349bn in September to €7.468bn in October (up €119mln or +1.62%). Year on year, however, exports are up only €7 million or +0.09% and compared to October 2010 Irish exports of goods are down 1.48%.
• Year-to-date average exports are at monthly €7.687bn which means October exports were below this, although October exports were very close to the crisis period average of €7.433bn.

• Overall, the rise of €423mln in trade surplus can be attributed as follows: 71.2% of trade surplus increase came from shrinking imports, while 28.8% came from rising exports. Not exactly robust performance, especially given exports are up only 0.09% y/y.
• Trade surplus expanded by 14.4% m/m after a rather significant drop off in September. However, october trade surplus at €3.28bn was still the second lowest reading in 7 months.
• Year on year, trade surplus in October actually fell €321 million or -8.91% and compared to October 2010 trade suplus is down 17.65%. These are massive declines and worrying.
• Trade surplus in October 2012 stood ahead of the historical average of €2.903bn and ahead of pre-crisis average of €2.513bn - both heavily influenced by much more robust domestic consumption in years before the crisis. Crisis period average of €3.307 is slightly ahead of October 2012 reading. However, average monthly trade surplus for 12 months through October was more robust (€3.578bn) than that for October 2012.

Here are some charts on the relationship between exports, imports and trade balance:

Accordingly with the above, imports intensity of exports rose slightly in October on foot of a steep fall-off in imports, rising 8.75% m/m. However, the metric of 'productivity' of irish exporting sectors is now down 7.72% y/y and down 15.38% on October 2010. During crisis period, Exports/Imports ratio averages 182.4%, while YTD the ratio averages 188.0%. In October 2012 it stood at 178.3% well behind both longer term trend metrics.

Lastly, the above relatively poor performance of exporting sector came amidst two forces, both representing adverse headwinds for Irish exporters:

1. Global trade slowdown
2. Term of trade deterioration.

October 2012 on October 2011, saw decreases in the value of exports of Chemicals and related
products - down -€253 million (or -6%), and a decrease of €513 million in Organic chemicals, "partially offset by an increase of €208 million in Medical and pharmaceutical products" per CSO. Further per CSO: "The value of exports increased for Miscellaneous manufactured articles (up €91 million), Mineral fuels (up €54 million), Machinery and transport equipment (up €47 million) and Food and live animals (up €39 million)... The larger increases were for imports of Food and live
animals (up €116 million), Mineral fuels (up €96 million) and Machinery and transport equipment (up €92 million)."

So to summarize: headline rise in tarde surplus is driven more than 3/4 by drop off in imports, with exports performing poorly on y/y basis and m/m basis. However, we have to be cognizant of the adverse headwinds experienced by irish exporters in global markets and by the continued effect of pharma patent cliff.

13/12/2012: Some thoughts on gold

Tonight's Prime Time program covering gold is undoubtedly one of the rare occurrences that this asset class got some hearing in the Irish mainstream media. Which is the good news.

Not to dispute the issues as raised in the program, here are some of my own thoughts on the question of whether or not gold prices today represent a bubble.

A simple answer to this question, in my opinion, is that we do not know.

Short-term and even medium-term pricing of gold (in any currency) is driven by a number of factors (fundamentals), all of which are hard to capture, model and value.

For example, currency valuations forward suggest that gold is unlikely to experience a sharp and protracted correction in the US dollar terms, if you believe the Fed QE4 is likely to persist over time. In euro terms, potential for devaluation of the euro implies pressure to the upside to the gold price. Yen price is also likely to play longer-term continued devaluation scenario. Things are less certain when it comes to Pound Sterling price… and so on. Here's just one discussion on one of the above effects: http://soberlook.com/2012/12/precious-metals-hit-by-evans-rule.html?utm_source=dlvr.it&utm_medium=twitter

Another example: drivers for prices on demand side that include rather volatile regulatory conditions in the major gold demand growth markets, such as China and India.

In short, things are much more brutally complex than the PrimeTime programme allowed for.

The reason for this complexity is that gold acts simultaneously (as an asset) in several structural ways:
1) as a simple bi-lateral long term hedge for inflation, equities and currency valuations
2) as a medium term (albeit not entirely persistent) hedge for some asset classes (e.g. equities)
3) as a short term speculative instrument to some investors
4) as a backing for numerous and large volume ETFs
5) as a benchmark backing for numerous and relatively large volume synthetic ETFs
6) as a store of value
7) as a risk management tool for complex structured portfolios
8) as a bilateral safe haven against equities and bonds, political and economic risks, systemic financial markets risks, etc.

These relationships can be unstable over time, can require long time horizon for materialization and are 'paid for' by assuming higher short term volatility in the price of gold. That's right - while PrimeTime contributors spoke about gold price 'correcting' or 'bubble bursting' none seemed to be aware of the fact that if you want to get something you want (hedging and safe have properties being desirable to investors), you should be prepared to pay for it (price volatility seems to be a good candidate for such cost of purchase).

No matter what happens in the short- to medium- term, gold is likely to remain the sole vehicle for the store of value and risk hedging over the long-term. It did so over the last 5,000 years or so and it will most likely continue doing so in years ahead. This property of gold is well established in the literature and is hardly controversial.

There is one caveat to it - due to instrumentation via ETFs, there are some early (and for now econometrically fragile) signs emerging that some of gold's hedging properties might be changing. More research on this is needed, however and only time will tell, so in line with PrimeTime, let's stay on the RTE side of Complexity Avoidance Bias on that one.

There is an excellent summary on what we know and what we don't know about gold by Brian M. Lucey available here:  http://ssrn.com/abstract=1908650 .

Last year I gave a presentation at the Science Gallery on some properties of gold, which is posted here: http://trueeconomics.blogspot.ie/2011/08/20082011-yielding-to-fear-or-managing.html .

Not to make this post a lengthy one, let me summarize my own view of gold as an asset class:

1. In my view, gold can be a long-term asset protection from the risk of expropriation, inflation, devaluations, and tail risks on political and economic newsflow side etc.
2. To me, gold is not a speculative (capital gains) instrument for the short-term and it should not be acquired in a concentrated fashion - buying in one go large allocations. Gold should be bought over longer period to allow for price-averaging to reduce exposure to gold price volatility.
3. Gold allocation should be relatively stable as a proportion of invested wealth - different rules apply, but 5-10% is a reasonable one in my view.
4. Of course, any investment portfolio (with or without gold) should strive to deliver maximum diversification across asset classes, assets geographies etc.

Disclosure: I have no financial interest in or any commercial engagement with any organization engaged in selling gold. Until December 1, 2012 I used to be a non-executive member of the investment committee of GoldCore Ltd and was never engaged on their behalf in any marketing or provision of advice to any of their current or potential clients.

13/12/2012: Italy & Spain escape bond markets scrutiny... for now

Two bond auctions for the largest peripheral euro area countries showed the sign of markets still believing the ECB promises of OMT 'some time soon' and at significant support levels.

Spain aimed to sell up to €2 billion worth of above-OMT dated paper and in the end managed to sell slightly ahead of target: €2.02 billion in 3-, 5- and 28-year bonds. Recalling that OMT is promising to purchase bonds with maturities up to 3 years, the result was pretty strong.

Average yields were 3.358% for 3-year paper (compared to 3.39% back on December 5th), 4-year yield was 4.2% down on 4.766% back at October 4, and 28-year bond yield was 5.893%.

Bid-cover ratios were 4.81 for 3-year (vs 2 on December 5), 3.13 for 5-year (vs 2.47 on October 4) and 2.09 for the 2040 bonds. This was the first time near-30-year bonds were offered since May 2011.

Spain is now out of the woods in terms of funding for 2012 - it has raised this year's requirement back a month ago - but the country will need to raise some €90.4 billion in 2013.


Italy also went to the well today, placing €4.22 billion worth of bonds - below the maximum target €4.25 billion. The bonds placed were: €3.5 billion of 3-year paper at 2.5% (down on 2.64% in November 14 auction, marking the lowest yield since October 28, 2010 auction) and €729 million of 14-year paper at 4.75% yield. Bid-cover ratios were much weaker than those for Spain: 3-year paper attracted ratio of 1.36 down on 1.5 in last month's auction.

Italy's 2013 funding requirement is expected at over €400 billion.

Thus, both Italy and Spain seemed to have benefited once again from the ECB's OMT promises. The problem is out to 2013 - with both Italy and Spain having to raise just over 1/2 of the LTROs 1&2 worth of bonds, the promise of OMT better translate into actual scaled OMT purchases, and the threat of political mess in Italy better stay out of headlines.

13/12/2012: Mortgages at Risk: Acceleration in the Trend

In the previous post (here) I detailed the trends in mortgages arrears in Ireland based on Q3 2012 data released today. Since then, I have seen some comments on the 'dynamics' of the mortgages arrears, suggesting that things are 'getting worse more slowly'.

This is simply incorrect. Here's a chart graphically showing acceleration of overall crisis since Q2 2012:

Note that data through Q3 2010 is imputed by estimating back trend from Q4 2010-Q2 2012 data reported by CBofI. Hence, the jump in orange line at Q3-Q4 2010.

13/12/2012: Irish Mortgages Arrears - Q3 2012

Q3 2012 data for Irish residential mortgages in arrears is out and here is the first summary of horrific details:

• Total number of residential mortgages in arrears more than 90 days rose from 47,627 to 49,482 between Q3 2011 and Q3 2012 - a rise of 3.89% y/y. This marks acceleration in the rate of increase in arrears 90 days + from 1.13% in Q2 2012.
• Total number of mortgages in arrears less than 90 days rose to 86,146 in Q3 2012 from 62,970 in Q3 2011 - an increase of 36.8% y/y, compared to a rise of 45.3% in Q2 2012.
• Total number of accounts in arrears (90 days and over, and under 90 days) rose from 110,597 in Q3 2011 to 135,628 in Q3 2012 - an annual rate of growth of 22.63%. In Q2 2012 the rate of increase was 25.20%.
• Total number of accounts at risk of default (currently in arrears, plus restructured and not in arrears, plus repossessed) rose to 180,314 in Q3 2012, up 6.5% q/q and up 21.95% y/y. In Q2 2012 the rate of annual increase was 20.92%.
• Overal value of mortgages at risk now stands at €31,835,683,000 up 6.0% q/q and 19.8% y/y

Charts to illustrate:

Let's make it simple:

1. Between Q3 2011 and Q3 2012, the % of loan accounts in arrears for more than 90 days rose from 8.1% or all accounts (10.8% of outstanding mortgages values) to 11.3% (15.1% of outstanding mortgages values).
2. A a year to Q3 2012, the number of mortgages at risk of default or defaulted (including mortgages in arrears, restructured and current not in arreas and repossessions) rose from 147,857 to 180,314
3. In Q3 2012, mortgages at risk accounted for 24% of all mortgages outstanding accounts and 29% of the total value of outstanding mortgages, up from 19% and 23%, respectively, in Q3 2011.

That's right - almost 1/4 of all mortgages accounts are now at risk or have defaulted, and almost 30% of the total value of outstanding mortgages is at risk.

Updated: here's the Irish Mortgage Holders Organization response to today's Arrears figures.