17/12/2012: Christmas Message from the IMF

Full IMF statement on Programme Review for Ireland is linked here. Very positive, per usual, with some cautionary note at the end. I will quote that part, you can read the platitudes.

"Looking ahead, however, a more gradual economic recovery is projected, with growth of 1.1 percent in 2013 and 2.2 percent in 2014, with public debt expected to peak at 122 percent of GDP in 2013. This baseline outlook is subject to significant risks from any further weakening of growth in Ireland’s trading partners, while the gradual revival of domestic demand could be impeded by high private debts, drag from fiscal consolidation, and banks still limited ability to lend. If growth were to remain low in coming years, public debt could continue to rise, in part reflecting the potential for renewed bank capital needs to emerge."

Irish Government Budget 2013 is built on the assumed growth of 1.5% (0.5 ppt ahead of IMF forecast) in 2013 and 2.5% in 2014 (0.3 ppt ahead of IMF forecast). Government debt is forecast by the Budget 2013 to peak at 121% of GDP, against IMF forecast of 122%.

Mr. David Lipton, First Deputy Managing Director and Acting Chair, said: "Vigorous implementation of financial sector reforms is needed to revive sound bank lending in support of economic growth. Key steps forward include arresting the deterioration of banks’ asset quality, reducing their operating costs, and lowering funding costs through orderly withdrawal of guarantees. The personal insolvency reform being adopted should facilitate out-of-court resolution of household debt distress, especially if complemented by a well functioning repossession process to help maintain debt service discipline and underpin banks’ willingness to lend."

Note the renewed emphasis on repossessions.

And to top it all, the IMF repeated a call for 'breaking the link between banks and the sovereign'. This marks a series of similar statements seemingly addressed at the EU leadership and I won't be surprised if the Fund were to focus on this issue much more as the EU continues to prevaricate on restructuring Irish debt.

So ehre we have it, folks - homes repossessions and debt relief for the sovereign. Prepare for the Benchmarking 3.0 once that 'debt relief' is delivered, then.

17/12/2012: Don't write manufacturing off - part 2

In the previous post I reproduced the summary chart from McKinsey research paper on the future of manufacturing (linked in the post). Here is a more detailed version of the same:

Again, few points worth raising in Ireland's development context: given our openness to trade and limited domestic markets, as well as strong access to global labour markets, we should be prioritizing development that focuses on:

1. Trade intensity (with intensities at around and above 50%)
2. Value intensity (with intensities at around and above 30%)
3. R&D intensity (with intensities at least in double digits)
4. Labor intensity (with intensities at least in double digits)

From the above 4 criteria, equally weighted, our priorities (scores in brackets reflect sum of values across the above 4 criteria), we have:

• Computers and office machinery (155)
• Semiconductors and electronics (132)
• Medical, precision, and optical (123)
• Furniture, jewelry, toys, other (105)
• Other transport equipment (94)
• Textiles, apparel, leather (92)
• Machinery, equipment, appliances (82)
• Chemical (80)
• Motor vehicles and parts (77)
• Electrical Machinery (76)

Interesting view?

17/12/2012: Don't write manufacturing off

Here is an amazing (yep, amazing) report from McKinsey on the future of Manufacturing: http://www.mckinsey.com/insights/mgi/research/productivity_competitiveness_and_growth/the_future_of_manufacturing

And here is a really fascinating eye-opening chart from it:

What are the interesting bits in the above?

1. The US retained its position as number 1 manufacturing source in the world (note - with recent emergence of on-shoring trend for US manufacturing, this is likely to stay)
2. China moved - predictably - quite fast in the league table
3. India's performance has been relatively weaker than that of China - not surprising 
4. Russia - in 2000 only 21st in the world is now 11th
5. Brazil moved from 15th in 2000 to 6th
6. Indonesia moved from 20th in 2000 to 13th
7. Germany dropped from the 2nd in 1980 to the 4th
8. Italy rose from the 6th in 1980 to the 5th
9. France dropped from the 5th to the 8th
10. In 1980 and 1990, EU had 5 countries in the top 10, in 2000 - 4 countries and the same number in 2010 - a rate of relative decline
11. Big loser is Canada, rising from 10th in 1980 to 9th in 2000 and falling to 15th in 2010.

Here is another revealing chart, mapping 5 broad categories of manufacturing sectors based on specific inputs intensities:

Let's give it a thought. Ireland is a location most suited for R&D intensive and labour (skilled) intensive sectors, as we have neither sufficient capital, nor access to cheap energy (sorry, the renewables bugs - these are not cheap and not abundant). We also want to aim for high trade intensity and high value density. Which means priority sectors for us should be:

• Motor vehicles, trailers, parts
• Other transport equipment
• Electrical machinery
• Machinery, equipment, appliances

Tier 2 priorities (mostly driven by imported capital due to their high capital intensities) should be:

• Chemicals
• Computers and office machinery
• Semiconductors and electronics
• Medical, precision, and optical

Interestingly, and rather counter contrary to the perceived effects of the web-based economy, R&D intensive areas of the economy remain manufacturing:

These are just some of the fascinating insights. I will try blogging on the report some more in later posts.

17/12/2012: More spin on Promo Notes 2012

Here's the latest saga on Anglo Promo Notes 'non-payment' in March 2012:

This relates to the past here on the topic.

The point raised, allegedly, by the Department of Finance is as follows: Promo Note was 'settled' not in cash, but by issuance of a bond, so that

1. Irish Government issued a bond (which is to say borrowed money) to the IBRC
2. IBRC took the bond to the 'market' to obtain cash in exchange for it
3. Absent a 'market' for this bond, Bank of Ireland took the bond on for one year and paid the IBRC €3.06 billion (presumably, Bank of Ireland borrowed the funds to do so from the ECB using the bond as the collateral)
4. The IBRC paid down the ELA with the money.
5. ELA was written down by the required amount in 2012.

Let's re-narrate this in more simple terms:

1. Irish Government official went to a restaurant for a working lunch without having any money
2. The official, upon consuming lunch, wrote an IOU for €100 covering the bill to her lunch companion who had a credit card with him.
3. The credit card was maxed-out, so the second official called his bank and arranged for a 1-day overdraft facility from the bank to cover the bill, using as security the IOU from his lunch companion.
4. The credit card owner then used the credit card new facility and paid €100 bill.
5. The restaurant recorded payment of €100 bill.

Now, two questions:

Question 1: was the bill paid? Answer: yes. Proof: if no, then the restaurant could claim that no payment was received, so no tax is due on the proceeds from this payment. I doubt the Revenue will be so keen to allow this.

Question 2: did the original official pay the bill? Answer: it depends on which scenario will take place in 1 day: Scenario A: Original official does not intend to settle the debt (IOU) - in which case she defaults on loan from the second official and no payment by her was made under the IOU agreement. Scenario B: Original official honors her commitment, and the original IOU was a form payment.

However, Question 2 is purely academic from the standpoint of whether the lunch was paid for or not - it was paid. Full stop.

Substitute 'Promo Note' for 'lunch' and you have it. Promo note 2012 was paid. QED

16/12/2012: Europe's Social Welfare State gets German Warning

"If Europe today accounts for just over 7 per cent of the world’s population, produces around 25 per cent of global GDP and has to finance 50 per cent of global social spending, then it’s obvious that it will have to work very hard to maintain its prosperity and way of life."

Wonder what 'extremist' right-wing 'demagogue' said this? Why, Angela Merkel...

Read the full story here.

But here is some data from the OECD


Estimates of real public social spending and real GDP (Index 2007=100) and public social spending in percentage of GDP (right scale), 2007-2012

Source:

Projected public social spending as a % GDP and as a % “trend GDP” and real GDP, 1980-2012  (select countries):

Source for above: http://www.oecd-ilibrary.org/social-issues-migration-health/is-the-european-welfare-state-really-more-expensive_5kg2d2d4pbf0-en

And here is the latest OECD data (2009, published 2012):

Back in 2009, Ireland ranked 18th in the OECD in terms of private spending on Social Expenditures as % of GDP and 14th in the OECD in terms of public spending. We ranked 15th in terms of overall Social Expenditures. In comparison, Swiss spent 19.4% of their GDP, against Ireland spending 25.8%.

Setting aside Irish case, Ms Merkel has a point. EA12 average public spending is 26.8% of GDP against the OECD average of 22.1%, while private spending average is 2.4% against the OECD 2.5%. In other words, EA12 spend more publicly, less privately, on social expenditure.

16/12/2012: A Bucket of the Bad with a Pinch of the Ugly

I wanted to post this chart for some time now, but kept forgetting about it. The chart comes from RBS research on banks from November 2012 and is based on data through Q3 2012.

The interesting bits - beyond the overall apparent weakness of the European banks, as highlighted in the headline, is which banks are the weakest. Basically: Mediobanca leads, with Danske and Banco Popolare in second. Which brings us to the irony of Danske's latest marketing push for becoming a bank for the 'New Normal' (see here). Oh, the irony...