Another Day of Carnage

Just pictures...
And this is the day of rates cuts: ECB down 50bps (should have been down 75-100bps, but hey, when was the last time Germans had any guts for serious actions?) and BofE down to 0.5%... If anyone needed a proof that the markets are not treating Irish banks shares as a part of the broader world, preferring instead to price them as sick puppies, here it is:
So is the next stop for this train of sorrow 'Nationalization II: Bank of Ireland'?

Some housekeeping: a handful of updates

A cleaning up of some of my emails provided for a digest of interesting updates on the topics already covered in other posts. Here is an attempt to combine these...

To the QNHS (here) and Live Register data (here):

Per Davy note: "The worst affected areas [of unemployment] are building and those service sectors related to construction and the global financial crisis. Construction employment slid 7.6% quarter-on-quarter, followed by hotels and restaurants (- 3.2%), retail/wholesale (-2.3%) and financial/business services (-1.9%). No pain-sharing is evident in the data: private sector employment dropped 97,400 over the last 12 months while public employment increased by 10,000."

Last night I was a guest on a Late Debate (RTE Radio 1) alongside a SIPTU rep who was clearly traveling in some parallel reality claiming that:

• public sector took all the pain of adjustment to-date;
• those on higher incomes took no pain to date; and
• layoffs in public sector would be equivalent to layoffs in private sector.

Per point 1 - Davy note says it all, but an update on Exchequer results below also highlights the same.
Per point 2 - October Budget 2009 and its update, November Finance Bill II, both imposed progressively increasing Income Tax Levy on higher earners.
Per point 3 - two facts: (1) wage to value added ratio in Public Sectors (average) is ca 30% lower than in the Private Sector and some 1/3 lower than in the Financial and Business Services, and (2) wage to value added ratio in majority of public sector categories is close to or less than 1, so cutting 1 person out of the public sector would cost economy nothing (for ratio of 1) or would save economy some resources (for ratio is <1).
One caveat - of course, within Public Sector there are people who are highly contributive to the economy. For example: both IDA & Enterprise Ireland are aggregated into the above averages. These agencies have been significant contributors to the economic welfare in this country. Similarly, within each category, there is little understanding as to the variance of wage/ productivity ratios. E.g, do higher salaries in our flagship Universities relative to the second-tier third level institutions correspond to the productivity differentials? Knowing internal operations of Trinity, not exactly, but fairly closely. Thus, raising taxes in a 'proportionate' way as the Unions insist will hurt disproportionately more those who earn higher wages because of their higher productivity, even in the public sector.
Per Unions' 'Alternative Universe' - I got a general sense that our Unionists simply do not understand that in all instances, public sector workers depend for their wages on private sector earnings. Somehow, the Bearded Men of SIPTU/ICTU/CPSU/TGWU and the rest of the alphabet soup do not get the concept of who pays for what in this economy.

Per Exchequer Returns, February 2009 (here): there is significant evidence of deep wage cuts in private sector as income tax revenue continued to slide in January and February, despite the introduction of the income tax levy. In addition, current (non-capital) spending was up 3% y-o-y in February 2009. 2009 current spending is now on track to reach over 38% of Irish GNP - matching the record high achieved in 1983. Pure waste!

Financials and Other Stocks: as Davy puts it in a recent note: at the end of February 2009, the entire Irish Financial Sector accounted for only 3.5% of the Irish Stock Exchange capitalization as compared to 37.5% a year ago. This is diversification through attrition. The ISEQ dropped 10.3% in February - its sixth successive monthly decline. This was "the worst February performance in its 25-year history. It underperformed the FTSE Eurofirst 300 index, which also experienced its worst February performance, by 0.6%." A picture is worth a 1,000 words (all courtesy of Davy):
The last chart of course shows that Ireland is a absolute under-performer in its peer group. Davy do not analyse earnings in this context, but the above valuations are hardly making the shares cheaper. Earnings declines are now precipitous for all companies and my suspicion is that P/E ratios are falling. In other words, there is a question to be asked if there are any bargains out there given the earnings projections?Lastly, Davy provide a good snapshot of the bond markets dynamics in the chart reproduced above. Spot the odd-one-out? Note the timing of our departure to the Club Med of Near-Insolvent States - bang on coincident with Mr Lenihan's Budget... This should be a warning to everyone who is desperate for this Government to do something about the crisis: doing 'something', as opposed to doing the right thing, will make matters worse. Clearly, the markets are not seeing higher taxes and a lack of spending cuts (Budget 2009) as 'doing the right thing'.

Mansergh Calls for 'Celtic Tiger' Fat Cubs to pay their share in the downturn: Mr Mansergh - Bertie's pet in the Dail and a Junior Minister in the Cabinet - called yesterday for the tax measures in the mini-budget to focus on making sure that those who benefited most during the Celtic Tiger era pay more in taxes. Great idea from the Grand Weasel of Irish Politics. How about we start with Mr Mansergh himself - a person whose ministerial salary is out of touch with reality, and whose pension benefits are so lavish, that some bankers would envy the returns on so few years of such a non-demanding work as that of a Junior Minister for State with responsibility for the Arts. Mansergh serves in the cabinet which, with exception of 3-5 Ministers, is remarkable for its inability to do its job at a basic level. Yet the cabinet is being paid more than its counterparts in the US, UK, EU15 or indeed anywhere else in the developed/ democratic world. So, be my guest, Mr Mansergh - pony up, say 50% of your own income - you and your colleagues and their senior public service underlings are the Fat Celtic Tiger Cubs.

Live Register: another month, another record

Remember a record rise in the unemployment benefits claimants of 33,000 in January? Today’s figures show that the new claims rose by an additional 26,700 in February. But do not get your ‘Out of the Recession’ placards yet. January figures were negatively impacted by the cumulative lay-offs following the Christmas holidays. In other words, when seasonal factor is controlled for, February layoffs were probably as bad, if not worse, than the already abysmal January numbers.

Overall, the Live Register now stands at 352,800, the largest on record up 165,000, or almost 90% y-o-y. Now, each new 1,000 claimants cost the Exchequer some €15ml in social welfare and lost tax revenues. This implies that y-o-y the Exchequer lost €2.475bn. Surely, raising taxes (and thus undercutting employment in the private sector) is not a way forward?

Even without any new tax measures, I expect that the number of unemployment benefits claimants will rise to 450,000-480,000 by the end of 2009 (in annual average terms – 465,000). This will imply a social welfare spending overshoot of some €1.3bn and a tax loss of ca €630mln relative to January DofF budget estimates (here).

The Live Register-based estimate of the unemployment rate was 10.4% in February, up from 9.6% in January. We are back in 1997 world and falling.

Without too many dull details, the official unemployment figures (QNHS) show an unemployment rate of 7.7% for September-November 2008 (just like everything else in the world of the CSO’s apparatchiks, Q4 in unemployment statistics is not the same as Q4 in the real world). Now, the Live Register for this period showed 7.4% unemployment rate – an underestimate on QNHS. And we are now seeing the second quarter of continuous underestimates of the true unemployment rate being produced by the Live Register.

What does this mean? Well, it means that an army of part-time workers that resulted from ‘hidden’ layoffs in 2008 – when large number of construction and other workers were forced into part-time employment – is now becoming full-time unemployed. And the labour force itself is shrinking. By 15,000 in Q4 2008.

Hmmm… Ulster Bank now predicts 14% unemployment rate by the end of 2009. In January, I claimed that the unemployment will rise to 11-12% by December. Oh, how wrong was I. My new estimate – in light of Live Register for the last two months and QNHS for Q4 2008 is that we will be somewhere around 13.8-14.6% and that is assuming that laid-off foreigners leave in bus loads…

And, sadly, that is the fate of our fabled uber-educated Irish labour force, as the Government likes to point out… In immortal words of the Hitchhiker’s Guide:
"Please relax," said the voice pleasantly, like a stewardess in an airliner with only one wing and two engines, one of which is on fire, "you are perfectly safe."

Oh, no, we are not!

How bad will it get? IMF study

Here is a new insight into recessions dynamics. This time from the IMF (see link here).

What Happens During Recessions, Crunches and Busts? by Stijn Claessens, M. Ayhan Kose, and Marco E. Terrones (IMF WP/08/274) looks at "the linkages between key macroeconomic and financial variables around business and financial cycles for 21 OECD countries over the period 1960–2007."

Data set covers 122 recessions, 112 (28) credit contractions (crunches), 114 (28) episodes of house price declines (busts), 234 (58) episodes of equity price declines (busts).

The authors "find evidence that recessions associated with credit crunches and house price busts tend to be deeper and longer than other recessions... Episodes of credit crunches, house price and equity price busts last much longer than recessions do [4 quarters on average]. For example, a credit crunch episode typically lasts two-and-a-half years and is associated with nearly a 20% decline in credit. A housing bust tends to persist even longer—four-and-a-half years with a 30% fall in real house prices. And an equity price bust lasts some 10 quarters and when it is over, the real value of equities drops by half."

Of course we are experiencing far deeper contractions in house prices and equity valuations than an average bust.

"Most importantly, recessions associated with credit crunches and house price busts are deeper and last longer than other recessions do. In particular, although recessions accompanied with severe credit crunches or house price busts last only three months longer, they typically result in output losses two to three times greater than recessions without such financial stresses. There is also evidence that the extent of declines in house prices appears to influence the depth of recessions, even after accounting for the changes in other financial variables, including credit and equity prices, and various other controls."

Where is Ireland in all of this? We have:

• housing bust;
• credit bust;
• equity market bust;
• severe recession.

16-23% contraction in real output in Sweden and Finland in the recent past is a guide, according to the IMF study, for the type of recession we are in. Overall, there were only 4 episodes of coincident credit, equity and house prices busts.

Using econometric estimates (Tables 13.A and 13.B in the paper), we can parametrize the IMF model to estimate the expected contraction in Irish economy during the current crisis. Table below lists the underlying assumptions (in % changes) and results.Thus, under benign Scenario 1 assumptions, overall income contraction in Ireland over the recessionary cycle is expected to reach 13.5%, while under more severe Scenario 2 the contraction can result in a fall in real income of 16.1%. My personal view - we are going to see the latter rather than the former.

IMF study allows us to estimate the share of overall contraction that is attributable to the housing shock absent credit bust - in other words, due to purely domestic factors. This ranges from 66.6% in Scenario 1 to 63.5% in Scenario 2 - in both cases, a lion's share of the recession-induced economic pain is due to 'domestic' causes. At the same time, the share of recessionary decline in income that is attributable to 'external' or global factors (all shocks net of housing price bust) is ranging between 12.7% and 20.7%.

So much for the argument that we are in trouble because the rest of the world.

The Latest Exchequer Figures: can Biffo turn Gruffalo?

Gruffalo is a marvelously hideous and not-so-bright character in my son's favorite books. Today's Exchequer figures and the talk about the need for higher taxes and courageous Government policies remind me of this imaginary animal.

The preliminary Exchequer receipts show that we are on track to deliver on my forecast from February 8 (here) that estimated a tax revenue this year between €33.3bn (moderate case) and €34.5bn (benign scenario). Ulster Bank's Pat McArdle - an excellent economist with good knowledge of the budgetary nitty-gritty - agrees (his forecast produced today is €34bn). Of course, to remind you, DofF official forecast revenue is €37.7bn. Ya wish, baby!

It feels good (even in these sad circumstances) to be the first to deliver a correct prediction. The post - linked above - and the precedent ones (Update I and the original post) were bang on the money. The mini-budget is now inevitable by the end of March - spot on my prediction for tax increases before April made in December issue of Business&Finance and here.

Ulster Bank note (full credit to Pat McArdle) shows the rate of DofF's descent into forecasters' hell:

Forecast date: 6 Dec 2006 - €56.3 billion

Forecast date: 5 Dec 2007 - €51.8 billion

Forecast date: 14 Oct 2008 - €42.8 billion

Forecast date: 9 Jan 2009 - €37.0 billion

Current figures: Ulster Bank - €34.0 billion, my - €33.3-34.5 billion

As of today, we are some €22-23bn ahead of DofF-forecast for the shortfall. This, as McArdle rightly points out (I produced the same figure back in February) is approximately what we have to find to plug the hole in the side of our public spending Titanic.

Think about it: the hole is almost 70% of the entire revenue projected for this year. Can we plug the hole with a Gruffalian (draconian) 50% income tax increase?

Here is the breakdown of the revenue figures (again from Ulster Bank note):

I've said time and again that the Laffer Curve and tax minimization will imply that the revenue will fall as taxes rise or at the very least it will not rise in 1-to-1 relationship to tax rates increases. We have evidence of this. VAT receipts have fallen at more than 4 times the rate of fall in national income and in line with retail sales. Income tax receipts are down at ca 1.5 times of income contraction (and this is before self-assessment returns come in).

And as far as tax minimization goes - many of those on both high and low incomes are sole traders or business proprietors. These categories of workers do not pay income tax on a regular basis, bunching much of their payments into October. They do pay more regular VAT and this smooths quarterly VAT returns. Comes October, they will do everything legally possible to make sure Biffo-the-Gruffalo, Bromidic-Brian and Mary-the-Lottery-Winner don't get their paws on hard earned cash. In addition, the sole-traders on lower earnings will never be brought into the tax net, no matter how much the Government widens it, because they will 'adjust' their income to just below any feasible new threshold.

I did some crude maths on the two effects and here are my estimates.

First the assumptions. I assume that both Laffer Curve and Tax Minimization effects will reduce 1% increase in the rate of:

• Income tax to a 0.68% increase in underlying revenue (with Laffer effect reducing tax rate increase contribution by 20% and a Tax Minimization effect reducing it by further 15%),
  

• Corporate tax to a 0.6% increase in underlying revenue and
• Excise taxes to a 0.4% increase in underlying revenue.

Now, note I am not assuming that the Laffer effect will result in a fall off in revenue, but that it will only undermine the rate of revenue expansion. I then computed two scenarios:

Scenario 1: 'Biffo gets upset' - increasing excise tax rates by 20%, income tax rates by 25% and corporate tax rate by 10% across all possible bands. Under this scenario, gross annual revenue rises to €33.5bn assuming January-February slaughter of the Exchequer continues. To assure that budgetary deficit does not exceed DofF estimate of 9.5% of GDP, promised by Biffo to Brussels in January, and allowing for a 5% decline in GDP, Brian-Brian-and-Mary must come up with €6bn in fresh public sector cuts on top of the above tax increases and the pensions levy!

Scenario 2: 'Biffo goes Gruffalo' - increasing excise tax rates by 25%, income tax rates by 50% and corporate tax rate by 25% across all possible bands. The Gruffalo-Biffolo must come up with €3.1bn in fresh public sector cuts!

And that's before any second order effects of tax increases (dynamic Laffer Curve) and no spillover from higher taxes into weaker economy.

Pat McArdle estimates the required additional cuts to be around €4bn this year. Ok, close enough... An impossible task for Mr Cowen's gang of public sector appeaseniks.

A sight of carnage: US

DJIA has fallen past the psychologically important 7,000 marker to trade at 6,763.29 at the time of writing this - well below its previous 52-week intraday low of 6,952.06. As it stands, the Dow is now at the levels last seen in April 1997. The chart below illustrates.The drivers for the latest slide are clearly the renewed pressure on financials and the fact that the Obama Honeymoon is over - the markets are now turning sceptical about the new administration's ability to push the economy out of a depression spiral. Concerns are mounting as to the inflationary effects of the current policies amidst a general conviction that there will be no upside to economic growth. The traditional partisan Democrat policies are now being seen as setting the stage for a return to the dark ages of Jimmy Carter in the near future.

The graph below (courtesy of Calculated Risk) illustrates:Notice that although the downgrades are much steeper today than in the 1970s, the trajectory of the most current downgrades (slope) is virtually identical to the 1973-1974 crisis. A fellow in the US investment community (thanks for the question HM) just asked me how this can happen, given oil is scrapping the bottom of the barrel in price terms while inflation is yet to rear its ugly face - the opposite of the stagflationary 1970s scenario. Here is an explanation.

The fiscal stimulus package unveiled by Obama is designed to increase inflation-inducing public spending by unprecedented amounts. At the same time, personal income is rising again, while propensity to consume is improving. These are the driving forces of the renewed inflation that can appear just as suddenly as deflation set in late last year.

On the other hand, today's energy in he economy is no longer oil. Instead it is credit and cash. Both are in short supply and near peak level of prices. The oil price is largely irrelevant lagging indicator of global demand, not of the productive capacity of economy. The flow of credit is the latter and not the former.

So the Obama-styled Carterism is going to manifest itself in higher inflation down the road and falling or stagnant real output, as price of the modern 'energy' - credit and money - is going to remain high.
Then again, the US has had it easy so far, compared to Ireland... Chart above illustrates.

May be Mr Cowen can bring some Irish bonds as a gift to the White House for the Paddy's Day? Cheaper than shamrocks and equally symbolically useless.

P.S. There is an excellent summary of the US Economic Conditions for February 2009 at Calculated Risk site (here).

Heard enough? Part 2: Coughlan Loses Her Briefs... literally

The following is based on the Address by Tánaiste and Minister for Enterprise, Trade and Employment Mary Coughlan to the 72nd Fianna Fáil Ardfheis.


“Just like the wider public therefore, all of us in this room are, or someone close to us is, in some way affected by the current economic downturn. It could be the PAYE worker, anxious about the threat of redundancy hanging over her job,” says Ms Coughlan who spent last months scavenging across the country in search of new jobs launch ceremonies instead of working late nights in her office on how best to alleviate the crisis. Her job and the jobs of those her Government protects - the public sector workers - are not on the line.

“It could be the border shopkeeper, struggling to compete against his Northern neighbour,” says a Minister whose Government imposed increases in VAT and other business-impacting tax hikes that helped to push Irish consumers across the border.

“It has become clear that over the past two decades, our rate of growth and success has been such that, as a nation, we perhaps started to believe our own publicity. While the severity of the current global downturn was not predicted, our own exuberance in recent years has left our public finances, and our banks, more exposed to the whims of international money markets than may otherwise have been the case.”

Surely by ‘we’ Ms Coughlan means herself and the Governments in which she served over the years. The same Governments that produced and publicised the propaganda about our economy. That indulged in an orgy of waste on the back of stamp duty windfalls. That fueled these windfalls by tax breaks and restrictive planning practices. That wasted billions on projects that no one needed only to secure the votes of narrow interest groups. That were led by a person who declared publicly to be a socialist (aka tax-and-spend appeasenik of every political interest at the expense of the country) and whose integrity and honesty have been publicly questioned in the court of a Tribunal. Surely by ‘we’ she meant herself and her colleagues in senior ministerial positions?

“We will not shirk our responsibility when making tough decisions around controlling our public finances, stabilising our banking sector and implementing our strategy for recovery,” said Ms Coughlan whose Government has managed to evade any serious decisions on economy (from cutting spending to introducing a meaningful recovery plan) since it came into office in Summer 2008. The Minister who, in a moment of patent departure from reason, proposed last week that banks can benefit from 'business expertise' of Enterprise Ireland - an organization that by its own brief limitations has never been involved in managing businesses or even assisting a company with revenues in excess of €100mln.

So let us get to that unpalatable veiny single morsel of boiled-out beef in Ms Coughlan’s views.

“People must be confident that Fianna Fáil is solid in its resolve to secure their children’s futures on this island, through our commitment to education, training and the creation of good jobs.” In other words – there is nothing new in Mary’s thoughts beyond a feeble attempt at economic development policy the Government produced last Fall (reviewed here). But hold on, we already have, according to Mary-Brian-and-Brian spin, a highly educated world class labor force. FAS schemes for training have been expanded already – in December 2008 and again in January 2009 - despite that organization's comprehensive failure to even audit its own accounts.

And as far as creation of good jobs is concerned, well, take Mary’s words on this: “Delegates, it has fast become a politically expedient national pastime to run ourselves down and to oppose for opposition sake. It is a philosophy that professes ignorance of the so many positives that we have going for us on this island. These are the positives that saw me announce [Euro] 24 million in research funding to create the jobs of future on Wednesday; that had me announcing new jobs in Carlow on Thursday; and 134 new jobs in Shannon on Friday.”

Ahem, at say €60K a pop per annum for a ‘good job’ Ms Coughlan is whimpering about no more than 200-250 jobs being created in the environment where a weekly jobs loss is averaging ca 9,000!

But for Mary, “these are the positives that make Ireland the location of choice for the Googles, Facebooks, Ebays, Yahoos and Amazons of the world. So delegates, the dangerous spiral of negativity must stop.”

Indeed, Mary, we are a location of choice for transfer pricing. For now and not for long. All of these companies carry out primary R&D and core business activities outside of Ireland. And scores other multinationals are closing plants and laying off workers. Google itself is on the verge of transferring the handful of R&D staff it has here out of Ireland.

The Live Register published last month and the QNHS published last week (here) are a testament to the comprehensive failure of Ms Coughlan to secure competitive business environment for Ireland Inc. What is even more egregious in her remarks is that Ms Coughlan seem to have no time for an idea that Ireland needs to become something more than a tax clearance warehouse for the MNCs. That it needs competitive indigenous firms and competitive multinationals adding real value to this economy.

“As members of Fianna Fáil, we will remain steadfast in this commitment, irrespective of the temptation of short term political popularity.” I have commented on the idea of this Government’s steadfastness in its commitments to cut budgetary overspend before (see here), so without going into details, here is a summary: in July, September, October, December 2008, January and February 2009 the Government went on the record claiming the 2009 cuts will add up to €2bn on top of €440mln that was promised in savings for 2008. In the end, the Government is still (8 months since the original promise) walloping about implementing a cut of no more than €1.1bn in 2009 and has missed its savings target for 2008 by more than €700mln. Clearly, Ms Coughlan was out to lunch, oops - out launching new jobs - all this time since July 2008 to notice.

Mary used a promise of local elections as “an opportunity for Fianna Fáil, not only to address local issues, but to explain the seriousness of the situation facing our country…” to the voters.

I certainly hope FF backbenchers are not as daft as Mary thinks them to be. Imagine FF local council candidates knocking on the door of PAYE families who were skinned by Mary's Government and are facing a significant chance of losing one or even two wage earners, declaring ‘Man, Fianna Fail is here to tell you that things are hard!’ In light of Ms Coughlan’s speech her Government’s platform for local elections should be printed with ‘Don’t Panic!’ on its front cover followed by ‘Now, Panic!’ on the back.


Overall, Ms Coughlan’s speech was so devoid of any serious meaning that it confirms her comprehensive failure as a Minister for Enterprise, Trade and Employment.

As a Minister for Enterprise, Ms Coughlan has managed to use the words ‘enterprise’, ‘firm’, ‘company’, ‘corporation’ and ‘plc’ zero times in her speech. She used the word ‘business’ only once in the context of a hypothetical reference to a small business owner only.

As a Minister for Trade, Ms Coughlan failed mention once our exports, exporters or trading sectors, she did not use words ‘imports’ or ‘trade’ or ‘investment’ (except for a reference to shares losses), nor the words relating to foreign exchange fluctuations or transport costs and infrastructure - all vital aspects of trade. She comprehensively failed to mention anything related to retail competition or policy, to planning, to development, local authorities charges, VAT, minimu wage, work permits, anything that forms a core of our country's competitiveness - her core job responsibility.

As a Minister for Employment she has managed to avoid the word ‘unemployment’ (and its derivatives), and used the word ‘jobs’ only in the context of the positions she either launched herself or provided funding for.

As a Minister in a democratically elected Government she has managed to denounce the critics of her Government’s handling of this crisis at least twice, devoting absolutely none of her speech to covering her own Ministerial briefs.

In your words, Ms Coughlan, “the dangerous spiral of negativity must stop”. I agree. Lets do it by removing its cause - you, Minister!

Heard enough? Part 1: Mr Lenihan's cheap talk

In a series of 3 post I will look at the speeches delivered by Brian Lenihan, Mary Coughlan and Brian Cowen to their party ardfheis this weekend.

Tax increases part of economic solution - Lenihan
Based on Irish Times report from February 28, 2009, 20:31


“Higher taxes for everybody will be introduced in Ireland, the Minister for Finance, Brian Lenihan has declared, ‘Yes, the wealthy groups will have to pay. But everybody will have to pay something,’ the Minister told the Fianna Fáil ardfheis.”

Back in August 2008 and later in the annual edition of Business & Finance, I predicted exactly this outcome and timing for the tax increases announcement.

The sad part, of course, is that were we to cut the waste choking our public sectors, we would have had no need to raise taxes. Once again, since late July 2008 I offered proposals that would have provided requisite and ample capital repairs to the banks while reducing the burden of this recession on the households. Brian Lenihan decided instead to sacrifice the financial security of private sector workers in order to appease his protected constituency around the Liberty Hall.

There was one truth in what Mr Lenihan was telling his party: no matter how much he taxes the rich (aka anyone earning over €100,000), the tax impact of such measures will be minimal.

Why?

Firstly, per Minister Lenihan, “two in every hundred people earn more than €200,000 a year, and they pay 28 per cent of all the taxes; while six in every hundred earn over €150,000, and they contribute 28 per cent of the total; while 6 per cent earn more than €100,000, and they pay nearly half of the Exchequer’s returns." Raising their tax bill by 10% will yield less than 3-4% of the current returns, or around €1.4bn. A chop change for Mr Lenihan’s public sector cronies. At the rate of spending to which our public sector became accustomed, the entire 10% tax hike would evaporate in 24 days!

Secondly, any tax increases will lead to a wholesale tax optimization drive by anyone outside the PAYE system – and that covers the majority of the Lenihan's ‘rich’. Taking an assumption that some 3/5 of the 'rich' own their business or professional practice and they can reduce their tax exposure by a modest 20%, a draconian 10% hike in taxes will yield well below €1bn in added revenue.

One should acknowledge the fact that after some 8 months of continuous failure to govern, Mr Lenihan finally offered a flaccid apology to his party (the country is still waiting for one, Brian): “if we could have foreseen the extent of the international crisis, we would have done things differently… There is little to be gained in beating ourselves up over this."

But he reversed even this attempt at humility by charging the country for the deficit financing that he and his predecessor in DofF have pursued. Let's be honest, Minister, it was you and Brian Cowen who decided to award lavish wage increases to the public sector. The country did not ask for the wages of the ESB workers to be hiked to above €80,000 pa on average. Nor did it ask for e-voting machines, €250K+ contracts for consultants, pay rises for Ministers and senior civil servants, an army of paper pushers you've hired for HSE, billions wasted on white elphant projects around the country in attempts to buy votes in advance of each election, and so on. The blame for this mess is your Government's.

"We have to get on and do what we can and do it in a united way.” Oh yes, Minister. United we stand: you with your aristocratic salary, drivers, cars, pensions and so on, your colleagues and immediate subordinates enjoying most of the same, and the people you are going to tax out of their homes, childcare and schooling money, the elderly whose meagre incomes you are going to butcher with higher VAT and other charges. Spare us your whingeing, Brian – take a pay cut yourself! A 50% cut would restore your wages and pension in line with those in other advanced democracies.

“We have an €18 billion hole in the public finances,” said our well-informed Minister. Actually, the hole is more like €21bn and that was before we add new unemployed to welfare rolls. NTMA admitted this much when it said last week that we will have to borrow up to €25bn in 2009. Where were you, Minister, when they made this announcement?

“The world is looking on,” said the Minister. It no longer does. Last Friday the world sold some 90mln shares in BofI and AIB. The world holds no belief in you and your Government and neither does the country. Why? You did nothing to address the real crises for some 8 months since you took the reigns of the Exchequer in July 2008. Between July 2008 and today you've repeatedly insisted that your Government will implement at least €2bn in savings this year. Your Department has built this into the budgetary forecasts for 2009-2013. To date, you've deliverd a puny €1.1bn in savings. The world is no longer willing to be fooled by you!

“We need to persuade those who might invest here that we are capable of taking the tough decisions now to get our house in order.” Too late to sob, Brian. The numbers of those who would consider investing in this country is now standing so dangerously close to nill that even companies with substantial capital already allocated to these shores are cutting their operations and laying off workers. After years of your and your colleagues waffle about 'competitiveness', 'productivity', 'education', 'knowledge economy' they have no trust in this Government.

He went on: “We voted through the Bill that gives effect to levy that will see public servants pay on average 7.5 per cent to the cost of their pensions. …The public service pay bill accounts for one third of all expenditure”. So let’s do the maths. That 7.5% levy, net of tax deductions, is going to take only 1.5% of the total Exchequer expenditure or ca €700mln. But in July, September, October, December 2008, January and February 2009, you, the Minister, went on the record claiming the cuts will add up to €2bn on top of €440mln that you promised to save (and also did not deliver) in 2008!

What a farce!

Trade and Unemployment Stats

Trade meltdown
Our latest trade situation is dire (here).

Although “Seasonally adjusted imports fell by 11% in December relative to November
2008 and exports fell by 4%,” in monthly terms things were much worse: “Relative to October 2008, imports fell by 1% in November 2008 while exports fell by 4%.”

So the overall dynamic is that exports are now collapsing at a faster rate than the deterioration in imports.

The reason is simple – imports started to suffer on the back of a much deeper contraction in the economy and this process was exacerbated by the Government-induced pillaging of personal disposable incomes since July 2008 announcement concerning the upcoming Budget 2009 - the first time Messrs Cowen and Lenihan have dipped deeper into our pockets. Exports lagged this process because our main buyers were more resilient to the global economic downturn than we are, because their Governments largely were not so insane as to raise taxes amidst a recession, and because Ireland-based multinationals engaged in a massive exercise to rationalize their taxes – booking more transfer pricing (thus supporting both imports and exports) via Ireland Inc. The chart - taken from CSO's release - shows exactly this timing and trade balance dynamics...Evidence? “The January-November figures for 2008 when compared with those of 2007 show that: Exports decreased from €83,062m to €79,873m (-4%)” with
• Computer equipment exports decreased by 27% (exactly offsetting a 26% decrease in imports in this category, implying very aggressive transfer pricing by the likes of Dell and others),
• Organic chemicals by 10%,
• Vegetables and fruit by 42%,
• Industrial Machinery by 15% and Metalliferous ores by 21%.
• Chemical materials increased by 35%,
• Medical and pharmaceutical products by 12% (imports in this category were up 18%),
• Professional, scientific and controlling apparatus by 30% and
• Petroleum products by 41%.

There is little evidence in the aggregate numbers that Irish exporting companies are suffering from the Sterling devaluation: shipments of goods to Great Britain fell by 5%, while shipments to Switzerland decreased by 22%, the Netherlands by 16%, Germany by 10%, and the Philippines by 49%. Dollar devaluation is not biting either with shipments to the US up by 2%, although most of this is probably due to transfer pricing.

Despite stronger Euro, imports of goods from Great Britain decreased by 7%, China by 18%, the United States by 6%, Japan by 28%, South Korea by 39% and within the Eurozone – from France by 13%, and Germany by 15%. Goods imports from Denmark increased by 50%, the Netherlands by 6%, Poland by 65%, Russia by 73% and Finland by 33%.

Yieeeks!

Unemployment - the bust is getting bustier...
Per QNHS data, also released today (here):

Q4 2008 there were 86,900 or 4.1% fewer people working in Ireland – “the largest annual decrease in employment since the labour force survey was first undertaken in 1975. This compares with an annual decrease in employment of 1.2% in the previous quarter and growth of 3.2% in the year to the fourth quarter of 2007.” Desperate stuff…

The overall employment rate among persons aged 15-64 fell to 65.8% from 69.0% in Q4 2007 with current employment rate running at the level of H1 2004, effectively implying that the last 4.5 years worth of growth have gone up in smoke within a span of less than 1 year.

There were 170,600 persons unemployed in Q4 2008 - an increase of 69,600 (+68.9%) in the year. The total number of persons in the labour force in the fourth quarter of 2008 was 2,222,700 – a decrease of 17,200 or 0.8% over the year. “This is the first annual decline in the size of the labour force since 1989,” says CSO. It is safe to assume that these figures do not include an outflow of foreign and domestic workers from Ireland. Overall, jobs destruction is thus much deeper than the QNHS figures imply.

All age groups showed an increase in unemployment with those aged 25-44 showing the largest increase (+33,500). The latter effect is, of course, due to the idiotic labour laws that imply that for any company it is virtually impossible to lay off older workers. This, in turn, leads to a situation where the productivity of individual workers becomes irrelevant to the decision to lay them off or to keep them on a payroll. The long-term unemployment rate was 1.8% compared to a rate of 1.2% in Q4 2007. The standardized unemployment rate was 7.7% in Q4 2008, up from 6.4% in Q3.

Conclusion:
In a normal democracy, the Government would probably fall on figures like these, but whichever way you spin the figures – Mary Coughlan being the Minister in charge of both Trade and Employment should find some final remnants of grace and tender her resignation.


As a side note, consider figure below:
Per CSO: “There were an estimated 476,100 non-Irish nationals aged 15 years and over in the State in the fourth quarter of 2008. Of these 349,300 were in the labour force, a decrease of 5,400 in the year to Q4 2008. An increase of 49,700 had been recorded in the year to Q4 2007. According to ILO criteria, 316,000 non-Irish nationals were in employment, a decrease of 18,700 over the year. A further 33,300 were unemployed, an increase of 13,300 in the year to Q4 2008. Nationals of the EU accession states showed a decline in employment of 16,800 and an increase in unemployment of 7,500 over the year. The unemployment rate for non-Irish nationals was 9.5% compared with an unemployment rate of 7.3% for Irish nationals.

In the fourth quarter of 2008 non-Irish nationals accounted for over 15% of all persons aged 15 and over in employment. Over 34% of workers in Hotels and restaurants, 18.8% in Other production industries and 16.7% in Wholesale and retail trade sectors were non-Irish nationals. The largest decreases in employment for non-Irish nationals occurred in the Construction (-10,100), Hotels and restaurants (-7,400) and Wholesale and retail trade (-5,100) sectors.” Now, detailed tables in the release show that in fact virtually no foreigners were employed in the public sector (ex health and education) per chart below.

Foreign nationals employment, 1,000s.So the total decline in foreing workers in mployment numbers of 86,900 was fully accounted, per CSO Table A1 as becoming either Unemployed (69,600), or out of the Labour Force (17,200), while 48,500 were Economically Inactive. Any idea how many actually left our shores?

IL&P: next in line? Update III

And it all is going so swimmingly along the lines of my predictions... except...

Volumes on IL&P were actually up relative to the markets per the first chart below (most likely due to the retail investors still running through some spare cash),and subsequently, correlation between IL&P and the broader sector is staying out of the range where IL&P price deterioration can be attributed to the market-wide downgrade alone (chart below),
but the general price direction of IL&P is pretty much bang on my forecast (per second chart below): after a short uptick earlier in the week, we are again in the rapid downward momentum relative to other banks stocks.The twin stories unfolding alongside each other:

• renewed Bear market momentum for the Irish banking sector, and
• more severe downgrades in IL&P than in the sector itself

are not over yet, so expect a bumpy ride today and more downgrades next week. This week, the catalyst for the sector was a clearly anemic bond issue signaling a threat to the banks guarantee scheme and to the capacity of the state to continue injecting capital into the banking system. Next week - balance sheet worries, lack of any coherent plan on bad assets on behalf of the State plus the Live Register figures - out on Wednesday - will be back to the fore... Oh, and there is an added pressure emerging as well - the rising risk premium on political instability...

Kranty - the end of the road? Updated

Updated below

"Kranty" is a Russian slang for German "Kaput", Italian "Finita la Comedia", or in plain English "The end of the road". You get the wind... So is the latest 3-year Irish bond issue of €4bn at 170bp over mid-swaps the end of the road for Irish Exchequer borrowing? The FT's Alphaville blog seems rather pessimistic (here). FT's blog musings aside, for a country which has seen CDS levels in excess of those paid on the senior debt of an embattled English retailer just a couple of weeks ago, the question is no longer of the extent of markets pessimism, but of fiscal survival.

And the latest bond offer is puzzling.

Borrow short to lend long?
First the 3-year term. It is equivalent to borrowing short to lend long, for even the DofF forecasts (rosy as they may be) imply that in 2012 - the bond will mature in the environment of a deficit of 4.75% of GDP and a General Gov Balance absent serial €16.5bn savings between now and then) of 12.25% of GDP. In other words, no one can seriously expect the Government to pay down the bond.

So why is this 3-year term? Is it because the NTMA could not place any new bonds on these terms with a longer maturity? Is it because the market pricing for a new 5-year bond would have implied an admission of a junk-level risk on Irish Government debt? The indications that an answer to these questions might be, sadly, a 'Yes' is in the details of the bond offer itself.

Costly, but small
This time around we are raising only 2/3rds of the volume of funds raised in January's €6bn placement. Given that the Government, post January issue, was in the need to somehow raise ca €19bn of new funds to plug its deficit this year alone, €4bn today is peanuts. Why not go to the markets early and raise, say €10bn? We know we'll have to do this at some time later in the year, by when many other countries would have gone to the markets and the spreads would have widened for all, including the Germans? In short, a miniscule placement today also suggests that quite possibly, NTMA could not place a sizable issue into the market.

Lastly, there are questions about the pricing of the bond. The FT blog outlines this problem perfectly: the latest bond "spread is almost five-times that of Barclays’ UK guaranteed 3-yr £3bn deal this week, which priced at 35bp over mid-swaps and Roche’s huge €5.25bn 4-yr deal at 225bp over". Yes, it is pricey, but it is not priced to sell.

Getting under the radar?
What is even more dodgy is that the NTMA claimed that the bond was over-subscribed to the tune of €1.2bn over the placed €4bn amount. In other words, the NTMA decided not to take more money today under the present bond issue despite knowing that it will have to tap markets for much more than that in the near future (here). Why? I have nagging suspicion - and this is speculative at this moment in time - that the bonds were issued to be placed primarily with the banks who can now roll them over to the ECB's lending window. Clearly, as a test case for the future, such a 'roll-over' had to be modest enough for the ECB (or other European states) not to smell a rat. Hence the €4bn ceiling.

Of course, there can be other possible explanations for the bizarre nature of the issue, but these are equally unflattering (see the update below). However a mere suspicion that something as problematic as the state issuing bonds for placement via the banks at the ECB would be a sign of desperation...

ECB's blind eye to Ireland?
From ECB's point of view, this might fly for only a short period of time. Here is why. The ECB is fully aware that the Irish Exchequer is bound to come knocking at its doors sooner, rather later. Yet, a publicly open and transparent loan from the ECB would have to carry serious policy prescriptions with it that would be matching those impose by the IMF on other countries: a 15-25% pay cut for the public sector, a 10-15% contraction in public expenditure across the board, a reform of public sector pensions and a significant divestment by the state out of its industrial shareholdings. These policies - necessary to keep cool other would be borrowers from ECB - will cost Brian-Brian-Mary their jobs and can potentially derail the Lisbon II ratification.

Hell, they might spell the end to the Euro itself, as a transparent rescue loan to Ireland will be followed by the demands for the similar lending from Italy, Greece, Spain, Portugal and possibly Austria.

So the ECB is absolutely desperately trying to find some face-saving formula to allow Ireland access to funds without opening the door for other Eurozone states and without imposing punishing conditions on our incompetent Government and overweight public sector.

Hmmmm... has anyone gave it a thought how are we going to squeeze out the remaining €15bn without anyone noticing, then?

Update I
It is now being rumored (hat tip to BL) that the NTMA was originally in the market for placing €6bn worth of bonds, got interest in €5.2bn, but due to extremely low offers (high yields) was forced to claw the issue back to €4bn. It correct, this implies that we have issued a bond with subscription rate of only 67% - by any reasonable measure constituting a failure by the state to finance less than 1/4 of its annual budgetary requirement. In other words - a failure of borrowing on a 3-year basis. Things can't get much more embarrassing than this, folks. And yet, to this moment, I have not seen a single media article, actually recognizing this reality. Is our media going 'soft'? or have we, engulfed in a rediculous charade of the Anglo Irish Banks scandals forgot about the reality of having to tap the markets for at least €15bn more in cash, having in effect failed to raise the mere €6bn last night?..

Time for heads to roll?

Per Thomson Reuters report,

"Outflows of funds from Ireland in recent weeks have not reached a critical level despite market stresses, Finance Minister Brian Lenihan said on Tuesday. 'There has been stresses in the markets in recent weeks,' Lenihan said. 'There has been some outflow of funds -- it has not reached a critical level,' he told public broadcaster RTE, declining to give further details.

Lenihan told Reuters in a separate interview that Ireland's financial system has been under major stress since the state nationalised Anglo Irish Bank in January, but the country's other lenders were not afflicted by the same sort of corporate governance issues."

Apparently, tomorrow's papers are carrying Lenihan's claim that banks executives are trying to shift blame for the crisis on the Government. Well, if true, I am with the executives on this one:

1. The markets were fully aware of the problems with the Anglo Irish Bank's balance sheet and issues at other banks well before the middle of the Summer 2008 - hence massive downgrades in the share prices and large short-selling activity in banks shares;
2. This should have alerted both the Financial Regulator and the Government to the issue at hand. In fact, it was the CBFSAI that banned short-selling and conducted an 'investigation' into short traders dealing in Anglo Irish shares. Doing so, the Government has in effect caused the fire-sale closure of Sean Quinn's CFD positions and necessitated a loan-for-shares deal.
   
3. Before September 30 guarantee the Cabinet had at least two different proposals for dealing with the crisis, both requiring some time to formulate and clear through the legal eagles, implying the Government was aware of the problem beforehand;
4. The Government knew of the problems on the fiscal side at least since July 2008 - Minister Lenihan himself admitted so much, yet it failed to take any significant action to bring the matter under control - to date;
5. The Government was fully aware of the rate of deterioration in Irish property markets and the economy or was simply deaf and blind to the warnings and analysts' estimates;
6. Minister Lenihan was in charge of Finance at the time when his subordinates (including CBFSAI) had in their possession full information concerning Mr Fitzpatrick's loans and his own staff (at the FR and potentially at DofF) nodded through the controversial loans-for-shares deal;
7. FR and CBFSAI have cleared the extraordinary support scheme between IL&P and Anglo;
8. Mr Lenihan's own department last week confirmed the story that some €10bn in 'funds or deposits' moved out of Ireland in one week - if such a flight not catastrophic, what is?
9. Mr Lenihan should be fully aware that the nation's banking system was 'under major stress' well before this January and in fact since mid 2008, yet he still insists on making silly statements that no person with an ounce of markets exposure can take seriously...

The list can go on and on, but the core of this is pretty clear: Brian, Brian and Mary either knew all or most of this or are guilty of gross incompetence or both. Take your pick. My personal belief is that Brian Cowen is largely informed about the state of affairs, but remain politicaly partisan and unwilling to make any coherent policy decisions. Minister Lenihan is an unfortunate party to Mr Cowen's inability to act. When it comes to Ms Coughlan - she is simply not fit for the job. But none of this excuses the state of affairs at the helm of Ireland Inc.

Either way, if heads were to roll, we should start from the top of the Government and then move onto CBFSAI and DofF. Enough covering up this charade - the buck stops somewhere and the rotten leadership is the best place for it to rest!