Economics 2/10/10: EU Commission official view of Minister Lenihan's plans

Much debate has been thrown around about the EU Commission position on the latest Government announcements concerning banks recapitalizations. Here is the fact (linked here) - note comments and emphasis are mine:

Full quote: MEMO/10/465, Brussels, 30 September 2010 "Statement by Competition Commissioner Almunia on Irish banks"

"European Competition Commissioner Joaquin Almunia welcomes the comprehensive statement issued by the Irish Finance Minister on banking. Commissioner Almunia said:

"I welcome the statement on banking which brings clarity with regard to the remaining transfer of assets to NAMA and the capital needs of some banks and building societies. [Note there is no finality assertion here on the estimates]. Regarding NAMA, the announced changes to the way it manages loans are in line with the Commission's approval of the NAMA scheme.

"Concerning Anglo-Irish Bank, from a competition point of view, it is clear that the foreseen restructuring and resolution of the bank addresses competition distortions created by the large amounts of aid at stake. Once the Commission receives the details of the plan, it will proceed rapidly towards taking a final decision. [The gombeens haven't yet supplied the Anglo Plan to the Commission, despite the claims made today on RTE Radio by Minister Hanafin to the contrary]

"I also welcome the announcement that subordinated debt holders will make a significant contribution towards meeting the costs of Anglo. This is in line with the Commission's principles on burden sharing since it both addresses moral hazard and limits the amount of aid, with benefits to the taxpayers. [So Commission operates under the direct assumption that subbies will be soaked. And that this will correspond to the spirit of the European common markets.]

"I note that Allied Irish Bank will need to receive further capital in the form of State aid, which will have to be notified to the Commission for approval. I will of course follow this process very closely. I have no doubt that, as in all previous cases, the collaboration between the Irish authorities and the European Commission will be satisfactory. [No blanket endorsement of new AIB capital injections]

"I note positively that Bank of Ireland will be able to continue the restructuring process without further recourse to State resources. The Commission in July 2010 approved the aid and the restructuring plan of Bank of Ireland, and is monitoring its implementation."

"With regard to building societies INBS and EBS, the Commission remains in close contact with the Irish authorities. For INBS, the Commission will await the notification of the additional capital as well as the details on the institution's future, and will assess them thoroughly and swiftly. For EBS, the Commission is in the process of finalising its initial assessment of the restructuring plan submitted end May 2010. "

So let's recap Commission's official opinion:

• Anglo subs must be haircut;
• No Anglo plan delivered to the Commission;
• No Anglo recapitalization additions endorsed;
• No AIB recapitalizations (announced by Minister Lenihan) are endorsed
• No INBS and EBS measures endorsed
  

Economics 1/10/10: External Debt

Yesterday, CSO published Q2 2010 data on our International Investment Position.

Here are some highlights:

"At 30 June 2010, the gross external debt of all resident sectors (i.e. general government, the monetary authority, financial and non-financial corporations and households) amounted to €1,737bn." So Irish total gross external debt rose €63bn qoq.

Our total foreign liabilities stood at €2,643bn and are offset by €2,500bn of foreign assets.

The liabilities also include €1,218bn of equity and derivative liabilities that do not form part of external debt.

Liabilities of the Monetary Authority (to ECB) that consist almost entirely of short term loans and deposits, amounted to €66bn, an increase of €28bn on Q1 2010, but down €38bn on Q2 2009.

General government foreign borrowing decreased by over €3bn to €80bn between end-March and end-June 2010.

The liabilities of other sectors (financial intermediaries and non-financial corporates) increased by €17bn from Q1 and at €657bn represented 38% of the total debt, a similar share to the
previous quarter.

Direct investment liabilities increased by €17bn to €262bn in Q2

Liabilities of monetary financial institutions (credit institutions and money market funds) consisting mostly of loans and debt securities were €672bn, an increase of over €5bn on Q1, but down €18bn on Q2 2009.

Few charts. Starting with levels of assets and liabilities:
Next, balance:
Notice declining surplus in Other Sectors.

Combining assets and liabilities:
Lastly, removing Government from the equation:
Clearly, a sign of expanding liabilities and rising assets, with net balance on the negative side slightly worse than in Q1.

Summarizing these in tables:

Economics 1/10/10: Retail sales data

Oh, let's cut the bull, folks. The retail sales data is making rounds the banks 'economists' notes with all the hoopla of the 'positive news' arguments. So things are turning corners?.. Actually, not really.

With motors:

• Value of sales rose 1.3% mom in August and a re down 1.7% yoy;
• Volume of sales was up 1.1% mom and 1.3% yoy

Conclusion, with motors included, we are still selling more stuff at ever-lower prices, though this time around declines in prices did not outpace increases in volume. Which means that no jobs are being created. If we take on board the fact that Euro remains relatively weak compared to last year vis-a-vis our main trading partners outside the Euro zone, implying we are buying imports at a higher price, the margins in retail sector gotta be shrinking even more than the volume/value gap above suggests. Which, in turn, implies that there aren't any new jobs being created in the retail sector on the back of the latest 'turnaround'. The whole thing about 'great news on retail sales front' is a damp squib.


And if you want to see even deeper into the official spin, take a look at ex-motors retailing:

• Value of core sales was flat mom in August and is down 3.6% yoy;
• Volume of core sales was up 0.2% mom and 1.4% yoy

So declines outpacing volume increases is clearly operative here.

Dig deeper and take a look at the breakdown of sales across main business lines.

• The largest increases in value took place in Books, Newspapers & Stationary (+4.7%). Given all the great news we've heard about Ireland in August, this is hardly surprising.
  
• Second largest value increase (ex-motors) mom took place in... errr... Fuel (+4.5%). That wouldn't be an indicator of our consumer confidence in the future, but the price increases in the sector where prices are controlled by the Government.
• Durables continued to tank: Electrical goods (-3.2% value and -2.5% volume mom), Furniture and Lighting (-1.% and -0.7% respectively) - again, not a great sign.

The worst part of this data is that it continues to show that there is no restart to household investment in sight. Before the households begin investing, they will usually start consuming more durable goods. This is clearly not happening.

Economics 29/9/10: IMF or EFSF hypotheticals

Hypothetical discussion of options for external assistance for Ireland in today's Irish Examiner - here, text link - here, associated publicity - here.

Economics 29/9/10: Agricultural prices

Last month I made a number of warnings concerning the price increases in some food sectors, specifically - milk and milk products. These warnings were based on my analysis of the figures for global commodities price trends and the newsflow from Russia and Central Europe. I also warned that Ireland is not insulated from these price changes due to the open nature of our trade.

The latest data from CSO today shows that my predictions are turning out to be right.

Per CSO (emphasis is mine): "Comparing July 2010 unadjusted sub-indices with July 2009 shows that:

• Milk, potatoes, sheep, vegetables, cattle and pig prices increased by 38.0%, 32.4%, 17.8%, 3.0%, 2.9% and 2.2% respectively, while cereal and poultry prices decreased by 28.9% and 2.8%.
• Energy prices increased by 15.5%, while seeds, feeding stuffs, fertilizers, plant protection products and veterinary expenses decreased by 9.3%, 8.1%, 5.2%, 0.9% and 0.1% respectively.

Of course, energy prices increases (driven by a 20.1% hike in motor fuels, year on year, but offset - before introduction of the new electricity price hikes and levy - by a -3.1% decline in the price of electricity) are reflective of our wonderfully consistent economic policies that see simultaneous:

• increases in state-controlled inputs prices and
  
• deflation of wages,

thereby undoing competitiveness gains in the private sector by overcharging in state-controlled sectors.

In monthly terms, unadjusted output prices in July were:

• Milk down -0.1%
• Cereals no change

These numbers are not yet pricing the full extent of August events, so expect uptick in Q3 figures to be significant.

Economics 29/9/10: Live Register

Live Register figures are out for September with the latest CSO numbers showing both an improvement and a deterioration in the labour market. Here are the details.

"On a seasonally adjusted basis there was a monthly decrease of 5,400 in the Live Register in September 2010. The number of persons on the Live Register now stands at 442,417 which represents an annual increase of 22,563 (+5.4%) in the unadjusted series. This compares with an increase of 30,198 (+6.9%) in the year to August 2010."

It is worth noting that the latest decline in the LR is not a "new event", in so far as there have been other events of declining LR (mom in seasonally adjusted series). It will require more than 1 month move down to establish any sort of confidence about the underlying trends reversals:

In terms of weekly and monthly changes, the latest results are certainly welcome:
But the underlying causes of the decline in LR are certainly continuing to point to further pressures in the job market. Per CSO (comments and emphasis are mine):
"In September there were 39,960 new registrants on the Live Register, which compares with 36,194 in the previous month [new registrants to LR rose significantly month on month in September, implying clearly that decline in overall LR was not driven by improvement in the labour market, but by exits from LR by workers who run out of benefits].

"New registrants consisted of 16,952 JB claims (42.4%), 21,276 JA applications (53.2%) and 1,732 other registrants (4.3%). It should be noted that the number of new registrants is not the same as the overall change in the number of people on the Live Register which is affected by
closed claims and the movement of people between schemes. [It is also worth noting that training schemes increases imply reduced LR, but hardly lead to actual jobs gains]

"On average 9,990 new registrants joined the Live Register each week in September, comprising 5,905 males (59.1%) and 4,085 (40.9%) females. By comparison, in March 2010 9,935 new registrants joined the Live Register each week, consisting of 6,340 males (63.8%) and 3,595 (36.2%) females."

These trends - reflecting in my view exits from LR, rather than new jobs gains - is reinforced by the data that in September there was a monthly decrease of 2,412 (-3.1%) in the number of non-Nationals on LR, which suggest strong outflow of workers due to net emigration.

Implied unempoloyment rate now stands at 13.7%, down from 13.8% in August.
This means I will not be changing my forecast for Q3 unemployment to reach 13.9%.