Saturday, January 16, 2010

Economics 16/01/2010: Fun and games

In the spirit of the new attitudes at this blog: a 'No Comment Needed' section will be appearing in these pages on occasion. This is one such occasions: story in the Indo linked here is certainly worth a read. It left me breathless!

And here is another link - this one made me cry with laughter. To describe 80,000 people disagreeing on pronunciation in an obscure (from the point of view of the entire humanity and the vast majority of Irish people themselves) linguistic parlor game as a schism is about as absurd as to label a queue of three at your local Tesco till a sign of food shortages hitting the Western World.

What the story does really tell us is the extent to which our state focus on engineered national identity (with Gaelic at the heart of these efforts) crowd out our real culture and history - global, internationally convertible and fully integrated culture of our world class writers, several superb painters, a handful of world class composers, masses of folk arts practitioners and so on. Instead of studying obscure and globally irrelevant historical and cultural events and figures, our children will do better learning Western and Eastern philosophers, histories, thinkers. They are better off learning Latin and Greek tragedy, Roman and Renaissance literature, the ideas of Enlightenment and so on than be boxed into a proto-nationalistic dead-end street of the Romantic version of the 'Irish identity' now fully embraced, practiced and subsidized by our state.

When 80,000 people can evolve such distinct dialects and attitudes to their language, replete with total breakdown of communications between the two, one has to fear that our cultural isolationism has finally yielded its inevitable denouement: cultural inbreeding. Irish Times, of course, can not be accused of spotting this much...

Also, my favorite blog, Calculated Risk (here), has recently highlighted the topic I've been covering for some time now - the Fed cutting back its liquidity operations (for now, via balance sheet adjustments). Good to see my earlier predictions coming true.

Another item: the latest listings of academic jobs for January 2010 show trouble brewing in the European paradise of the 'knowledge economy'. Early in 2009 I have stated in Sunday Times article that in few years time we might end up with an army of unemployed PhDs. Once the EU numerical targets for science and technology PhDs hit the jobs markets - who will be their future employers?

Back then I said that the problem is now apparent in the fact that majority of these PhDs find only temporary employment post-degree completion, largely in the form of post-doctoral researchers. These contracts tend to run 2-3 years and are non-pensionable, non-tenure track and are state-subsidized. These contracts do not lead to permanent academic employment in the majority of cases and if the subsidies were to run out, the freshly-minted PhDs have no where to go.

Well, this month I found out that we have a follow-up subsidized employment category for some of these PhDs. Several institutions in Europe now advertise for Senior Post-Doctoral Researchers posts, offering another round of 3-year contracts to bridge the gap between the doctorate and the welfare check for the lucky few who can get it.

In years time, prepare yourselves for a prospect of a friendly dinner at the house of Dady Post-Post-Post Doc Senior, kids with Senior Post-Doc grants in tow and grandchildren with Junior Post-Doc Applications in their rooms, ready for signing by the grant-supporting lead researcher: Mommy Post-Post-Doc Junior.

And lastly - current issue of the Fortune magazine has a story about the plans for converting urban land in Detroit into agricultural land. Given that land in Detroit (within 8-mile Road) sells for USD3,000 per acre, while Iowa's average agricultural land is selling for USD5,000 per acre, the idea makes sense. Of course, here in Ireland we do have Nama-lands. So hanging vegetable gardens off multistory shells in Sandyford anyone? Or pig farms in the abandoned estates in the Midlands? Mushrooms growing in three-bed semis out in the West's Bungalow Blitz Estates? You've never thought D4 stores might supply fresh produce grown hydroponically in the historical and irreplaceable D4 hotels rooms?

Friday, January 15, 2010

Economics: 15/01/2010: Bank levies

Per FT report today, the US administration is likely to impose a levy on the banking sector to recover. Per President Obama, "every dime" owed by the banks to TARP. The levy will aim to raise $90 billion from the 50 largest institutions in the US, including those with foreign operations in the country (a point that raises the issue of unfavourable treatment of the foreign banks which had no access to TARP and yet are expected to pay for it). 60% of the fee is expected to be generated from the top 10 institutions – another strange feature of the plan that skews the burden of the proposal toward larger banks despite the fact that there is no evidence they benefited disproportionately more from TARP funding. The levy – envisioned for 10 years period – is being set at 15 bps of all insured debt other than deposits and will apply to all institutions with assets over $50 billion. Of course the net effect of the levy will be a higher cost of banking for the end customer.

One can rationally expect the EU to follow the US suit and slap more charges on already stretched taxpayers/consumers.

Bashing the banks is a happy past-time for our commentators, politicos and regulators who have been calling for higher levies on the banks. But anyone with economic stability and growth on their mind should really think as to where the money for such levies will be coming at the end.

Irish banks are in no position to pay the Exchequer for any support out of earnings, so it is us – common banks customers and, co-incidentally the taxpayers – who will be tasked with paying DofF the going costs of banks guarantee scheme, Nama and any other levies the Government might impose on the banks.

As one cannot escape this charge on his/her account, it will be an involuntary transfer from the private economy to the state. Care to call it a new tax, then?

Economics 15/01/2010: Negative equity & entrepreneurship

There is an interesting piece of research relating to the issue of negative equity that sheds some light on potentially disastrous effects on the economy from our current crisis in house prices.

First, a quick synopsis of the paper (available here):

“In the absence of any correlation between wealth and entrepreneurial talent, initial net wealth should have an explanatory power in the decision to become an entrepreneur only for households that are financially constrained; its importance should decrease with wealth.”

In other words, if you believe that higher starting wealth does not make for a better entrepreneur further, then only households that have no capacity to borrow – no assets to borrow against – or that have insufficient income to take on the risk of becoming an entrepreneur should be constrained in their pursuit of entrepreneurship by wealth considerations. This means that as household wealth increases, the constraint of wealth on ability to take up entrepreneurship falls.

The paper tests this theoretical predictions for the Italy, showing that: “…household's initial wealth is indeed important in the decision to become an entrepreneur and its effect is lower for the richest households.” (Point 1)

“Furthermore, the effect of net wealth is stronger when legal enforcement of the loan contract is weaker...” Which, of course means that as the regulators, government, or lenders fail to enforce lending contracts, such lax enforcement increases the role that initial wealth plays in constraining entrepreneurship, making it harder for assets-poorer households to pursue business opportunities. (Point 2)

“Finally, conditional on becoming entrepreneurs, initial household wealth does not significantly affect the size of the business.” So that once a person becomes entrepreneur, the levels of their initial asset holdings do not act to determine the rate of their success in business. (Point 3)

“In summary, it seems that imperfections in capital markets can induce people to accumulate assets in order to facilitate the decision to become entrepreneurs.”

And so now, to interpreting these results for Ireland.

Majority of our households rely on house equity to act as their main life-cycle asset. As house equity is being destroyed by the negative equity, two things happen to household financial position:
  1. Net wealth declines directly with increase in negative equity; and
  2. Net future wealth declines directly with the gap between rental value of the property and the mortgage cost (in effect, people in negative equity are paying more for their property than it is worth, thus reducing disposable income available for other savings and investments.

So on the net, the twin effects of negative equity in Ireland have so far (during this crisis) meant that as property prices declined by ca 40-50% already, while rents have fallen over 15%, Irish households worst affected by the negative equity (home buyers in 2006-2007) have seen combined effect of falling wealth to the tune of 49-58%.

That is a serious chunk of wealth being destroyed, implying some adverse effects on future entrepreneurship rates. Since the rates of success in entrepreneurship do not suffer from initial wealth effects, we can assume that entrepreneurs lost due to negative equity are of average type. Which means some serious losses to the economy over the years to come.

But wait, there is more: Point 1 clearly suggests that the adverse impact of negative equity will be felt more by those would be entrepreneurs who come from lower wealth-holding groups of Irish population. No, not exactly the poor (although them as well), but from:
  • Traditionally assets-poor younger households – so Ireland is now foregoing higher future rates of entrepreneurship from younger generations (also, incidentally, most adversely impacted by rising unemployment);
  • Traditionally mortgages-heavy families – so Ireland is now potentially cutting into its business potential when it comes to families, thus adversely impacting future population growth rates as well;
  • Lower middle class would-be-entrepreneurs – so that Irish society is now running a greater risk of reducing social class mobility, as entrepreneurship is often the only ticket out of lower middle class;
  • And yes – the poor would-be-entrepreneurs: people who like many of our best business leaders today came from the poorer family backgrounds.

Points 2 & 3 go straight to NAMA. As NAMA in effect simply means a bailout clause for bankers, it undermines enforceability of lending contracts – for bankers directly, for developers indirectly via NAMA holiday clauses, and for households also indirectly via political manipulation of lending going on behind the scenes. Which means that overall, Ireland is moving, thanks to NAMA, toward a society where entrepreneurship will be even more polarized into the domain of the better-off. Yet another obstruction on that social mobility ladder that business ownership entails.

So here you go, to all those (like some of our economics commentators) who say that negative equity only matters when people want to move, I’d say – read real evidence, folks.

Monday, January 11, 2010

Economics 11/01/2010: Manufacturing Activity Sliding

Once again, spot on with the general trend toward renewed deterioration in Q4, industrial production posted a 9.1% decline in November 2009. Per CSO: “The seasonally adjusted volume of industrial production for Manufacturing Industries for the three month period September to November 2009 was 3.1% lower than in the preceding three month period.” Monthly change was -9.1% as well in November, for Manufacturing Industries as contrasted with 1.6% decline in October. In all industries, November decline was 8%, compared with October monthly decline of 1.4%.

The sectors contributing most to the change in November were: Computer, electronic and optical products (-36.1%) and Food products (-12.5%). The “Modern” Sector, comprising a number of high-technology and chemical sectors, showed an annual decrease in production for November 2009 of 3.7% while a decrease of 17.7% was recorded in the “Traditional” Sector. In seasonally adjusted terms, the picture was slightly less poor: Modern Sectors declined 10.5% in monthly terms, marking second consecutive monthly decrease (the index fell 5.8% back in October 2009), while Traditional sectors fell 2.2% in November, after registering an increase of 5.5% in October. The series are obviously volatile – analysis of volatility is to follow later (grading times for both UCD & TCD) – but all signs point to a renewed deterioration taking hold.

Economics 11/01/2010: One voice of reason...

On a note continuing yesterday's post - someone (hat tip to Patrick) brought to my attention Dolmen's note on the prospects for 2010, which I personally found to be of an excellent quality. The strategy is backed by serious arguments linked up with fundamentals, unlike the stuff coming out of some other stockbrokers here. The note is available here, but a couple of highlights are below:
"With stronger growth in economies such as the US and Europe compared to Ireland, 2010 will provide a good opportunity for Irish investors to increase the international diversification in their portfolios." You bet. For anyone wearing Green Jersey, my suggestion would be to look no further than IMF forecasts for growth (I plan to publish a comparative note on Ireland v Small Open Economies later this week).

Dolmen guys forecast US economy to grow at 3.5% in terms of GDP, a forecast that - despite having some risks to the downside - is reasonable in my view. Eurozone, held back by 'weaker economies' of Spain and Italy is expected to expand by 1.50%, the UK - by 1.30%, and Ireland, hmmm... Dolmen think +0.25%, my feeling +/-0.5% in GDP and up to -1.25% in GNP terms. Good luck to anyone who believes Irish equities are oversold on these comparatives. To me - they are overbought!

Dolmen predicate their Irish forecast as follows: "Ireland should see a reversal of the two years of negative GDP in 2010. The move away from negative growth will be welcome, but we estimate a slight increase of 0.25% in GDP for next year. The last three budgets have taken 7.4% of GDP out of the economy and with a further 1.8% to follow next year, there remains considerable challenges facing our economy." Correct.

But look beyond the Budget 2011 - Nama will remove some €4-5 billion annually through its operations, stalling the entire property market (due to increased uncertainty concerning supply of commercial and residential properties to the market) and doing nothing to restart credit cycle in the economy (don't take my word on this - look at the banks chiefs' statements).

Unemployment will continue to rise until second half of 2010, when massive scale withdrawals from the labour force and substantial emigration from Ireland will start reducing (artificially) the numbers unemployed. Numbers in employment will not rise, save for the wasteful state-subsidised 'jobs creation'. This means precautionary savings will stay with us, and deleveraging will remain anemic for consumers.

Corporate profitability will remain subdued - Dolmen expect 0.5% deflation in Ireland for 2010, as compared with 2% inflation in the US and the UK and 1.1% inflation for the Eurozone as a whole. Good luck to those stockbrokers who think profitability can be rebuilt with falling prices.

Interest rates gap will close up with US rates expected to rise to 0.75-1% by the end of 2010 from 0% currently, UK rates exected to increase from 0.5% in december 2009 to 1% in 2010, while the Eurozone rates are expected to stagnate at 1%. Now, I personally think the ECB will hike to 1.25-1.50 by the end of 2010. This is significant as far as FX rates for the euro are concerned. If the gap closes, euro will devalue somewhat against the sterling and the USD, implying some boost to exports. But if the gap remains where it is today (roughly), there is little momentum, bar for differences in the growth rates, to devalue the euro.

US and UK bond yields will push away - slightly - from the Eurozone averages, implying that demand for dollar and sterling will be weker (and add to this a bit of the moderation in demand for US Treasuries from China and the BRICs in general). Again, this restricts the scope for euro devaluation.

Dolmen make a call on the USD and sterling vis-a-vis the euro, but I am not that comfortable doing the same.

On Irish property markets: "In Ireland, the problems facing the commercial property sector have not improved. When compared to other Euro-Zone cities, Dublin property yields increased the most in Q3. Vacancy rates are also the highest in the sample of Euro-Zone cities... Any improvement in the sector is dependent on the outcome of NAMA and with the possibility that a number of properties may come to the market in the next year, together with the large level of unoccupied offices, the outlook for Irish commercial property looks bleak for 2010." Dead right!

Lastly, if you want to see what I mean by weaker earnings outlook for Ireland Inc on the back of our weak economy - see the end of Dolmen's note with yeild estimates for Irish equities. Marvelous - this does really support the idea of 10% growth for property markets and 100% increase in banks shares that Bloxham chief has predicted for us. I wouldn't hold my breath for that kind of a ride...

Sunday, January 10, 2010

Economics 10/01/2010: A desperate state of economic analysis

This week has been marked by some remarkable statements on the prospects for Irish economy in 2010 that simply cannot be ignored.

Firstly, yesterday, Irish Times (here) decided to devote substantial space to the musing of one of the stock brokerage houses. Bloxham's chief came out to tell us that things are going to be brilliant in 2010: 10% growth in house prices and commercial real estate valuation, and ca 100% increase in banks shares prices to €3 per share for BofI and AIB. So:
  1. Pramit Ghose thinks that there is little to Irish economy other than demand for property and banks shares. The implication of this is that the only way that prosperity and growth will be achieved once again in Ireland is through another construction and lending boom. Have our stockbrokers learned anything new from the crisis? Doesn't look like it.
  2. Mr Ghose also seem to have little time for the fundamentals of Irish consumers and domestic economy. Massively heavy debts loaded onto Ireland Inc don't matter for growth to him. Neither are sky-high marginal taxation and the prospect for more tax hikes in Budget 2011, nor even high unemployment mar his optimism.
Banks shares will rise, you see, because investors will become optimistic. Optimistic about what, Mr Ghose? Low profitability of our zombie banks? Their over-stretched customers who cannot be squeezed for higher margins without triggering massive defaults? High default rates on already stressed loans and high proportion of negative equity mortgages on the books? Exporting sectors suffering from the lack of credit and overvalued currency? The reversion of the interest rate curve upward due to expected ECB policy changes and margins rebuilding efforts by the banks? Double-digit deficits on the Exchequer side?

All in, Mr Ghose thinks that the banks shares might reach €3 per share sometime in 2010. He might be wrong, he might be right. I have no prediction on a specific price target. But here is a thought:

The two banks need some €5-6 billion in capital post Nama. At €3 per share two banks market cap will be around €4.5 billion. So with recapitalization - whether by the state or by the international dupes (oh, sorry - investors) - the market value of the two banks will be €9.5-10.5 billion or close to their 2006-2007 valuations. What sort of expectations curve does Mr Ghose have to get there?

A glimpse into his thinking can be provided by his July 22, 2008 note reproduced below:
You judge the merits of this prediction for yourself, but here are the facts
85-142% wrong?

Oh, and do note that in his July 2008 note, Mr Ghose doesn't do any better in historical analysis either. He completely failed to take into the account real (as in inflation-adjusted) returns to equities. If that little inconvenient fact is considered, the '2/3rds of the 1996 price offer' paid on Mr Ghose's family house 8 years after the crisis would represent just 33-40% of the 1996 offer real price. Markets did come back for Thailand, but once inflation (see IMF) is factored in, Mr Ghose's analysis yields a real loss on the 1996 offer of 50%! Ouch...

Mr Ghose's Chief Economist seems to have little time for Mr Ghose's optimism for 2010. Writing an intro to Daft Report this week he states (here): "in overall terms, I would expect house prices to drop another 10-15% on average this year, with Dublin again seeing the biggest decline [now, Mr Ghose thinks prime real estate will lead in growth, which means Dublin]. ...Looking further ahead, I expect house prices to be higher on average in 2011 than in 2010, and should rise on a five-year view as the labour market returns to normal. That said, the level of any increase in house prices over the next few years is likely to be only in single digits, with three factors - the banks' adoption of a more cautious stance to lending than in the 'Celtic Tiger' era, the return of interest rates to 'normal' and the possible introduction of a property tax for 'principal' homes of residence - all weighing negatively on the market."

The second comment, courtesy of today's Sunday Tribune (page 1, Business), comes from Prof John Fitzgerald of ESRI. After largely staying off the topic of Nama and banks recapitalization for the entire duration of the public debate, Prof Fitzgerald decided to offer an opinion on Ireland's 'financial rescue'.

Now that the stakes in the game are low, credit must be claimed for the future 'I too was critical' position, should things go spectacularly wrong on the Nama side.

Prof Fitzgerald thinks that state-injected funds into INBS and Anglo are totally worthless and will be lost. Who could have thought such a radical thingy!?

Some 4 months ago I provided my estimates showing the demand for recapitalization post-Nama totaling €9.7-12.4 billion (here and here). Having spent the entire 2009-long debate on Nama on the sidelines, Ireland's ESRI macroeconomics chief is now telling us that €10-12 billion will be required to complete recapitalization of the banks. This, according to the Tribune is news!

I am delighted to know that Prof Fitzgerald belatedly decided to agree with myself, Brian Lucey, Karl Whelan, Peter Mathews and Ronan Lyons. One only wishes that next time a matter of economic urgency, like Nama, comes up for a public discussion, he joins the debate when it matters - not four months after the fact.

Friday, January 8, 2010

Economics 08/01/2010: Live Register

Here we go, folks – as predicted, right on the minute. Live Register is up again to new historic highs. Seasonally adjusted number of new unemployment claimants rose 3,300 in December, just as the country was ‘enjoying’ what the media and the politicians were heralding as a ‘buoyant’ Christmas sales season. Now, recall the ‘moderation’ and ‘improvements’ (per our Government claims) in the past, namely – October 2009, when the Live Register declined 3,000 for the first time since March 2007. December increase has more than offset that, and it comes on 900 new claimants added back in November.

New Live Register record is now at 426,700 – 1,200 above September 2009 previous record of 425,500. Unemployment is now at 12.5% (up from 12.4% a month ago), with lower participation rate and emigration – two factors driving people out of the labour force and thus out of unemployment count (as if those who have no jobs and are not looking for one are any better off than those who are officially unemployed) are the only thing that keeps the unemployment rate hitting 13% now. The estimated unemployment rate has thus risen from 8.5% a year ago to 12.5% today – a 4 percentage points rise in 12 months.

The trend suggests that we are likely to reach 13.3-13.7% unemployment this year, with the median probability forecast of 13.5%.

The monthly increase in the seasonally adjusted series consisted of an increase of 2,900 males and 500 females – suggesting that the latest jobs losses are not coming out of retail and services sectors. 800 additions came from under 25 year olds, suggesting once again that the core employment sectors and age categories are being hit this time around – just as in the latest QNHS results for Q3 2009 which showed that industrial / manufacturing jobs are now leading other sectors in terms of jobs losses. 2,700 seasonally adjusted jobs losses were in over 25-years of age categories.

One added point. We tend to look at the seasonally adjusted series, which tell us more about comparative dynamics of the time series. But in level terms, seasonally unadjusted Live Register now stands at 423,595, up a massive 10,090 in one month or 133,577 in 12 months since the end of December 2008 (+46.1%). This compares with an increase of 119,642 (+70.2%) in 2008. Of course, 46.1% sounds like a better deal than 70.2% - which in parlance of our stockbrokers, banks and Government analysts usually means a ‘moderation in the rate of increase’ or ‘bottoming out’ of the trend. Alas, the numbers are much more grave than the percentage change terms imply. In absolute terms, measured in average weekly increases recorded in the month, December was the seventh worst month in 2009 (+2,523 average weekly increase).

Finally, the CSO release also provides an insight as to just how tricky computations of unemployment are. CSO highlights two programmes whereby taxpayers pay unemployed individuals to either continue their work or to engage in other activities. These individuals, still in receipt of state aid are then removed from the unemployment roster. The two programmes that yield this type of treatment are Short-Term Enterprise Allowance scheme (since May 2009 paying workers out of the JB system to engage in self-employment) and work Placement Programme (since August 2009 engaging workers in 6-months long from the social welfare rosters to undertake unspecified ‘employment’). CSO states the numbers of such ‘employed’ individuals who are not otherwise accounted for on the Live Register to be at 3,785 at the end of September 2009, the latest date for which the figures are available. Given that this number increased by roughly 2,500 since October 2008, it is safe to assume that average monthly additions to the programmes stand at around 200. This, in turn implies that some 4,600 people are currently ‘employed’ with the use of these state funds that are not included in the Live Register, bringing the real number of claimants in Ireland to over 430,000 in seasonally adjusted terms.

Thursday, January 7, 2010

Economics 07/01/2010: NTMA's end of year results

Here is an interesting one: NTMA published their End Year review. Per statement (page 3 top): “The National Pensions Reserve Fund Discretionary Investment Portfolio (the Fund excluding the preference shares in Bank of Ireland and Allied Irish Banks held on the direction of the Minister for Finance) earned a return of 20.9 per cent in 2009. Since the Fund’s inception in 2001, the Investment Portfolio has delivered an annualised return of 2.6 per cent per annum. Including the bank preference shares and related warrants, which are held at cost and zero respectively, the Fund recorded a return of 11.6 per cent in 2009. At 31 December 2009 the total Fund’s value stood at €22.3 billion.”

If the state were to invest €7 billion it gave AIB and BofI for their preference shares in the Discretionary Fund, the returns on these investments would have been roughly €1.463 billion in 2009. Instead, we got zilch in risk-adjusted returns.

Ok, one would say that ‘investing’ in AIB and BofI is a sensible undertaking as the banks are market-determining entities for ISE. Nope, wrong. Page 4 of release states: “As a result, the Investment Portfolio had an elevated level of quoted equity investment of 80 per cent following completion of the recapitalisation in May compared with 57 per cent before the preference share investments were made. The Fund took advantage of the strong equity market rally to reduce its absolute risk and exposure to the equity markets through phased equity sales of €2.7 billion through the remainder of the year. The Investment Portfolio’s exposure to the quoted equity markets had been reduced to 63 per cent by year end.”

So as the result of AIB & BofI ‘investments’, NPRF is now more heavily geared toward equities as a class. Full stop. Now, give this a thought. We have a Pension fund with 63% exposure to equities that has been forced to sell equity on the basis of the need to re-gear toward banks shares in the economy where banks are the weakest point… Aggressive high risk investment strategy. What’s next? A highly geared derivative undertaking with taxpayers money? Ooops – we already got one, called NAMA SPV.

Back to page 3 stuff: “During 2009 the Minister for Finance directed the Fund to invest €7 billion in preference shares issued by Bank of Ireland and Allied Irish Banks for the purposes of recapitalising these institutions. The terms of the deal, which was negotiated by the NTMA, include a non-cumulative fixed dividend of 8 per cent on the preference shares and warrants which give an option to purchase up to 25 per cent of the enlarged ordinary share capital of each bank following exercise of the warrants. The dividends payable on the preference shares are not recognised or accrued by the Fund until declaration by the bank concerned. These investments were funded by €4 billion from the Fund’s own resources and by €3 billion from a frontloading of the Exchequer contributions to the Fund for 2009 and 2010.”

Two points here:
  1. 2009 thus saw a direct transfer of €3 billion to NPRF from the economy that has contracted by 10.5% (GNP). Since NPRF is a de facto piggy bank for public sector pensions only, this type of fiscal management, of course, has no precedent. It is equivalent to taking from the strained middle classes (taxpayers) to award future pay for public employees.
  2. This reminds us as to just how outrageously overpriced the preference shares we bought were. AIB and BofI preference shares yielding 8%? Remember – these two banks have balancesheets weaker than those of the main UK banks. Yet, at the same time we were signing off on 8% return, the UK banks bonds were yielding 12-15%. What’s the opportunity cost of such a sweetheart deal for the banks from taxpayers’ perspective? 7% yield foregone, or in 2009 terms - €490 million.

Add the two bolded numbers: €1.953 billion is the opportunity cost to the taxpayers of the AIB and BofI capital injection in foregone earnings. This is more than double the amount of savings generated by the Exchequer through public sector wage ‘cuts’ in 2010 Budget.

Another interesting thingy – page 4: “NAMA will acquire loans with a nominal value of approximately €80 billion”. Hold on, folks – was it €77 billion or €80 billion? Or should we take it from the NTMA that +/-€3 billion in taxpayers funds exposure is simply pittance that can be rounded off? What’s next? February 2010 numbers rising to €85 billion, then to €90 billion by March? Why not just state ‘we’ll buy anything they throw at us’ and close off this Cossack Dance with the numbers?

Pages 5 (end) and 6 provide a small, but interesting insight into operational efficiencies of the State Claims Agency: “There has been a substantial decline in employer and public liability claim volumes associated with incidents that have occurred since the SCA was established. Since 2002 the number of employer liability claims has fallen by 71 per cent and the number of public liability claims has fallen by 19 per cent. The total number of active employer and public liability claims has fallen by 35 per cent in 2009 compared with 2008.”

Sounds like good news? All claims are down since 2002 and in particular between 2008 and 2009. Happy times? Not really: “During 2009 the SCA paid out a total of €64 million against all classes of claims. This compares with a total of €53 million in 2008.” So let me run this by you – cases numbers are down 35%, but payouts are up 20.8%! I guess the gravity of injuries in the public sector rose dramatically during the year.

Lastly, Appendix 1 lists bond issues for 2009. This is a nice summary of the fine work being done by the NTMA in placing our debt (although most of it has gone to the banks to be rolled into ECB). But the worrying thing is the time profile of these bonds. €14.53 billion of the bonds issued this year will mature (and will be rolled over) during or before 2014 - the deadline for our compliance with the Stability & Growth Pact ceilings on deficit and debt. Such a large amount, coming already on top of the billions in short/medium-term debt issued in 2008 doesn't do much to support markets confidence in Ireland actually delivering on 2014 commitment...

Tuesday, January 5, 2010

Economics 05/01/2010: Exchequer tale of excesses amidst the hardship

New Exchequer figures clearly show that the crisis is not over!

Before the updated charts, from the first reading of the figures, it is patently obvious that
  • while the expenditure side of the Exchequer balance remains barely on target - only 0.5% below the supplementary Budget 2009 estimates (with current expenditure running 0.6% below April 2009 budgeted levels, while capital spending running 0.3% ahead);
  • the receipts side continues downward trend: despite an improvement in the shortfall registered in November 2009, December figures still represent the second worst month in 2009.
Further per more detailed breakdown, on the current expenditure side, Community, Rural & Gaeltacht (+0.3% relative to target), Finance (+3.3% on target), and Justice (+1.5% on target) were the three non-social welfare or health-related departments that managed to overspend their targets.

Now, charts to illustrate:
Relative to April 2009 targets, the chart above shows the shortfalls for receipts by main headings. Corporation tax is ahead the forecast - say thank you to MNCs booking more transfer pricing through Ireland this year to reduce their tax liabilities - but this position is still below 5% at the year end.

CGT is shorting the target again after improvement in November. Capital acquisition tax is down for the second month running. Customs show very shallow upturn - most likely due to motor imports flowing to restock for New Year and some replenishment of supplies on alcohol, tobacco and food for Christmas season end.

Year-on-year changes: corpo tax has fallen precipitously and is staying relatively flat now. Total tax is barely up relative to 2008 dynamics, but still below 2008 levels by double digit percentage - it was down 20.8% in November and now improved to down to 19% in December - in yoy terms - the second worst performance in the H2 2009 (it was down massive 21% in May).
In addition to the above trends, VAT down 20.60% yoy in December - an improvement on -20.80% performance in November and the sixth consecutive month of improvements , Income tax flat relative to November - the latter reflecting the lack of end-of-year bonuses. The former shows extremely weak retail sales dynamic. Stamps & CGT - two investment related taxes are obviously improved. After a 26-30% rallies in S&P, European, UK and Irish stock markets - any wonder?

Next, Exchequer deficit - still wider than annual average, though slightly better than in November. The gap between end-2008 borrowing position and today is €6bn - more Bonds! and Pints! for Q1 2010, then.
Deficit in 2009 relative to 2008:Not a pretty sight - December marks second worst month of 2009 in terms of deficit performance compared to 2008. The big question in this picture is whether this does mark some sort of a return to falling deficits? Well, not really - look at the picture above the last one. There was a seasonal improvement in November - due to the inflow of self-employment receipts for 2008 and estimates for 2009, but it was much weaker in 2009 than in 2008 in part due to the exhaustion of the severance packages, in part due to further jobs destruction for contractors. Apart from this, in October 2009 cumulative deficit was €11.7 billion greater than that registered in October 2008. In December 2009, the same figure was €11.9 billion. I wouldn't call this an improvement or an upturn.

Now, expenditure v receipts dynamics for 2009 and 2008:Pretty obvious stuff here. Vertical distance between 2 solid lines is deficit in 2009, vertical distance between two dashed lines is 2008 deficit. Any improvement would require for the solid lines to move closer to dashed ones.

Slight catching up with 2008 in terms of spending in the last month of the year is still not enough to bring spending down to 2008 level. All in (capital and current spending added), the Exchequer burned through an impressive €60 billion in 2009 - up from hardly insignificant €55.7 billion in 2008. But on receipts side, no improvement is visible. Actually matters are getting worse, with total 2009 receipts (capital and current) adding to less than €35.3bn while 2008 receipts came in at €43.1 billion.

Total tax receipts are now at €33.4 billion. Now, that is - oh miracle! - bang on with Budget 2010 estimate. DofF also predicted a General Gov Balance of €25.261 billion and it came in at €24.641 billion, or €620 million short of the 'forecast'.

Are we supposed to be impressed? Not really - these 'forecasts' were made less than a month ahead of the Christmas break. When one looks back -
  • in April 2009DofF forecast a deficit of €20.35 billion. My forecast was €23.35-24.225 billion (see here)
  • in February 2009 (here) DofF projected "budgeted expenditure to be in the region of €49bn and receipts in the region of €37.7bn" and deficit of €17.98bn. My forecast then suggested that exchequer tax receipts will add up to €33.6bn for 2009 for a General Gov deficit of €23bn.
Now, I do not have a massive forecasting department staffed with highly paid civil servants and tea/coffee/biscuits deliveries twice daily. I am not even being paid to do any forecasting at all. Per DofF own staffing review, the forecasting powers unleashed by the department on the economy are costing taxpayers a mint.

Their and my error margins for 2009 Deficit estimates are:
  • Dof F: 17.4% miss in April and 27.03% miss in February;
  • my: 1.69% miss in April and 6.65% miss in February.
But you do not have to be an Einstein to see that things are not improving, folks. The is no pulse and the patient has flat-lined. Full stop. Have April Budget been successful in delivering stabilisation of the budgetary dynamic? Not really. Stabilization would imply that we would trend along with the 2008 dynamics of the deficit starting with May 2009. Chart below shows this not to be the case:
Overall, some observers have argued that there is a substantial improvement on Budget 2010 targets. Well, of course there was. The problem here is that one cannot willingly adopt targets that suit one argument. April 2009 set the benchmarks to deliver and by these benchmarks, 2009 turned out to be worse than projected on revenue side. 3.9% worse or cool €1.357 billion - more than double the net savings announced from public sector pay adjustments in Budget 2010.

PS: Amidst all this talk from banks and brokerage economists about 'improving' Exchequer outlook based on 'too pessimistic DofF projections', my fear is that the Government is being prepped by the DofF (via severe overshooting in the Budget 2010 forecasts) to claw back on some of the cuts planned for 2011. In other words, the DofF might be readying to make a call in the beginning of H2 2010 to cull the cuts if returns shows 'improvements' on its own excessively pessimistic forecast targets. Then again, they might be not pessimistic enough...

Monday, January 4, 2010

Economics 04/01/2010: Daily points

Minister Brian Lenihan's statement today - available here - deserves reading. Irrespective of one's disagreements with his policies, Brian Lenihan deserves our best wishes for speediest and fullest recovery and his family deserve our praise for the way they handled the public aspects of such a very private matter. Minister's statement today only re-enforces the sense of dignity and respect which he has projected to the entire nation at this time of a serious threat to his health. Let us hope that his treatment, that begins this week, will be swift and fully effective and that he will be as comfortable in the process of treatment as possible.

Now, onto few interesting issues I cam across in today's press:

A rather humorous mention of Ireland in a Kenyan newspaper (here).

A quote from the Economist reproduced in the paper:
"If we are to generate the sort of sustained and genuine boom that will deliver Vision 2030, we must move away from outdated practices. We must imagine success beyond beacons and title deeds. We must understand that we live in a world where success now comes from the contents of your head, not the soil on which you stand. We must make banks and financial institutions the handmaidens of development, not the brides. We must invest in knowledge, innovation and science. ...Our future lies in making and doing things better than others, not in building a cheap-credit economy in which property is the key asset. Let us learn that lesson before we find ourselves sharing a bad Irish joke."

Here is an interesting observation: over the weekend, Mr Cowen stated that the Government has no intention to help resolve the problem of negative equity. This is exactly the 'bad Irish joke' that the Business Daily Africa is talking about. Negative equity undermines returns to human capital by locking people in specific locations regardless of whether they can obtain a job suited to their qualifications or not. Thus, negative equity acts to undermine:
  • incentives for skills acquisition, upskilling and mobility;
  • returns to human capital investments to individuals and the economy at large; and
  • the potential rate of growth for our economy.
Sadly, Mr Cowen does not seem to understand that this threat is far more severe and harder to deal with than the threats to our banks. One can replace Irish banks or sell them to the highest bidders. One can replace liquidity from the bond holders with alternative sources of financing. All within 2-3 years if not earlier.

But one cannot reverse long term structural unemployment that will be the outcome of the negative equity - often, even after generations pass.

There is an interesting essay on Seeking Alpha (here) discussing some evidence that the 2000s was a lost decade in the US and that this trend is going to continue into the new decade. The second chart, plotting real S&P500 against payroll population ratio to total population is a telling one.

The EU Observer (here) has a story on the French courts striking down the new Carbon Tax as imposing an arbitrarily unfair burden on consumers, while letting industry off the hook. Is there a case for Ireland's courts to protect consumers? Tall order. In the case of the Irish CO2 tax, we, consumers, will pay the full load through:
  1. paying directly at the pump and through VRT, and
  2. paying indirectly through energy charges set by regulators for semi-state monopolies running our energy sector,
  3. through higher charges at the airports and on public transport, also set by unaccountable regulators, and
  4. at a later date - through incineration surcharges that will be inevitable given the conditions of the contract between the Poolbeg operators and Dublin City.
Here is a telling quote: "Socialist Party grandee Segolene Royal cheered the ruling, calling the law 'ecologically ineffective and socially unjust.' The Greens for their part back the principle of a carbon tax but welcomed the ruling, believing Mr Sarkozy's version of such a tax inegalitarian."

It wouldn't be the job of the Irish Green Party to make sure that our own carbon tax is effective, egalitarian and socially just. But what about the economic logic? Ireland spent 2009 solidly in pursuit of improved cost competitiveness as businesses and the Government cut employment costs. Now, we just managed to hike up the cost of doing business in this country and reduce our ability to accept lower wages by raising a new tax. Anyone to notice a grand contradiction?

Saturday, January 2, 2010

Economics 02/01/2010: Irish Economy 2010

In the spirit of a fellow economist who posted his published views on 2010 prognosis for Ireland Inc, here is my take on the future, as published in the current edition of Business & Finance magazine. Note: this is an unedited version.

With the Budget 2010 behind us, January beacons as the month that will make or break our hopes for seeing a recovery next year.

Despite all Government pronouncements, the real issues faced by this country in 2009 reached much deeper than the three Super Challenges of the year. Neither Lisbon, nor Nama (until it is finalised) and especially not Budget 2010 will have as lasting an impact on this economy as the job never taken up – the nitty-gritty of managing our economic freefall.

Throughout 2009, our leadership has resorted to the management strategy known as the ‘sandwich’ technique. This involves delivering the requisite bad news sandwiched between quasi-plausible platitudes. Thus, throughout 2009 the Government has sought to soften the news with some ‘positive thinking’ sloganeering and move from one blockbuster campaign to another. In the mean time, taxation burden explosion and general sense of uncertainty have weighted heavily on our economic psyche.

The Budget 2010 speech by Minister Lenihan, peppered with pronouncements of the ending of the recession and exhortations that ‘The worst is now over’ continued the trend. With such modus operandi, deep and necessary reforms simply cannot take place. And predictably they did not take place.

Instead of admitting that unemployment is here to stay and that it will be our younger workers who will be on the dole the longest, Brian Cowen and his side-kicks applied selective filters pronouncing the imminent end of the recession back in May 2009. Bottoming out claims stretched into June, followed by a promise of a ‘positive growth’ quarter before Christmas.

What the country needed most – exports credits and currency risk supports, tax cuts to stimulate jobs creation and a reform of the banking sector to allow deleveraging of the households croaking under the mountain of debts – never took place. Not once have we heard of the need to stimulate entrepreneurship. Not once in the entire year have we been offered a vision to attract new start up companies into Ireland.

Instead, the country received a hefty dose of PR-speak on ‘knowledge economy’ while mothballing new investment in ICT, IT and venture capital funding. Money not spent on real economy went right over the heads of tens of thousands unemployed workers straight to the white elephant of Fas training schemes.

The problem is that amidst this marketing blitz from the Government, the real numbers suggest that the country is far from reaching the bottom of a recession and that we are heading into the period of protracted stagnation with growth bouncing along a flat trend line.

Take the Exchequer returns. A year ago, Exchequer revenue stood at €41 billion. This year the figure has fallen to €34.6 billion – down almost 15.5% in 12 months. Next year, things will ‘stabilize’ at around €34.25 billion, which will remain largely intact into 2012.

2009 Exchequer returns were artificially inflated by two major factors: transfer pricing by multinationals and redundancy payments that were made in late 2008-early 2009. These factors are unlikely to replay in 2010, because our MNCs will be heading into a new investment cycle elsewhere, with much lower incentives to push transfer pricing through Ireland, while the redundancy payments for the next wave of layoffs will be much slimmer. This suggests that some €1 billion worth of income tax and circa €110 million worth of corporate tax receipts factored into the latest Department of Finance projections are not going to materialise.

And this is before we account for the expected declines in 2009 self-employment tax revenues. Over 2009 VAT receipts fell to €10,368 million, down 20.5%. But retail sales contracted by 15% in value. This suggests that up to a quarter of the decrease in VAT payments came from somewhere else, namely – from the depressed business activity. Doing a simple back of envelope calculation suggests that VAT-related activity has fallen some €15bn (roughly in line with our GNP declines), implying the associated decline in corporate tax revenue of some €150-200 million into 2010.

Table below shows estimated 2010 balance sheet for the Government post-Budget 2010. Assuming the Government delivers planned €4 billion in cuts, the Exchequer deficit in 2010 is likely to be in the region of 10.4% (by Department of Finance estimates, adjusting for net savings) and 14.5% (using my projections). And my scenario assumes that only €4 billion worth of expected 2010 banks recapitalization funding will come directly from the Exchequer, with some €5.7-8.4 billion in additional funds financed through new Nama bonds. Department of Finance naively assumes no new recapitalization demands from the banks during 2010.
These figures compound the crisis of 2009. In other words, while the Exchequer deficit might be indeed stabilising in size in 2010, new debt burden is growing. Far from being closer to solvency, we are getting deeper into dependency of borrowing to maintain our public spending.

By various estimates, structural deficit was between 8% and 9% of 2009 GDP. Given that raising tax burden on current net contributors to the Exchequer is simply not feasible, correcting for this will require reducing our public expenditure by some €10-12 billion more in 2010-2011. Every year we delay the remaining adjustment will cost us additional €500 million in financing costs, shaving off 0.3% of our annual GDP. None of this is factored into Department of Finance projections.

As bad as things might be on the deficit front, at the very least we have an idea as to what measures must be taken to address the problem. Things are more complicated when it comes to unemployment. The latest data for Live Register shows that the number of those claiming jobless benefits is again on the rise, following a decline in October 2009. The rate of increases is much slower than in Q1 2009, but this is neither here nor there for two reasons.

First, our army of unemployed is growing much faster than the Live Register suggests because at least 3,800 people are currently due to rejoin Live Register from seasonal part time employment, while 30,300 people on Fas’ full-time training and community employment schemes have little chance of getting a real job any time soon. Factor these in and Live Register-implied unemployment rises to 13.5%, or just 42,535 shy of the half a million mark.

Second, the real unemployment, as opposed to the statistical measure, has already reached this level due to the fact that we are seeing increases in long term unemployment translating into social welfare dependency. The more the Government talks about cutting unemployment benefits, the greater will be the incentives for moving off unemployment to welfare.

And our welfare trap is a potent one. In a note published a week before Budget day, Department of Finance provided an estimate of the replacement rates for various types of welfare recipients in Ireland. Under Department assumptions (which covered rent relief, child benefit, main benefit and some additional payments), majority of categories of welfare recipients received benefits in excess of 60% of the average industrial earnings which currently stands at €33,634 per annum. Once costs of child care and health subsidies are added, all but two categories of recipients earned more than 70% of the average industrial earnings and three categories in excess of 100%. If you also recognise that working today requires payment for transport and food – the two costs vastly lower for those on the dole, all categories of social welfare recipients examined by the Department of Finance earn more than 70% of the average industrial earnings.

It is a simple mathematical conclusion that every person moving from Live Register to the generous embrace of social welfare adds to the financial woes of the state. Budget 2010 has done nothing to address this problem in real terms, while it did strengthen the incentives for transitioning to the dole from unemployment benefits by imposing a shallower cut to social welfare than to jobs seekers allowance.

All in, we can expect this process to continue working through the labour markets in 2010 as well, with employment falling toward 1,750,000-1,800,000 mark and unemployment rising officially to 13.5-14% - the rise arrested by outward migration, transitions to welfare and artificial Fas programmes ‘jobs’ supports.

The risks to the economy are to the downside with the biggest threat of another unemployment spike in Q1 2010 coming from the battered retail and business services sectors. From cars showrooms to Christmas sales counters, Irish retail sector is holding on to a hope of a half-decent holiday sales season. Should this fail to materialise, a wave of layoffs is going to take place in early 2010 as businesses shut doors for good unable to withstand another 11 months of decimated revenues.

The prospect of rising interest rates hangs over the services sector as a double edged sword.

On one hand, inversion of the interest rate curve upward will spell rising cost of doing business as higher borrowing costs will outpace any rise in ECB benchmark rate. In addition, margins rebuilding and high demand for capital will also imply rises in rates charged by the banks regardless of what ECB might do in 2010.

But in addition to borrowing costs, the retail and broader services sector will also be witnessing deeper retrenchment of consumers who will face the need to maintain high precautionary savings at the time of rising mortgages costs and real effective tax rates.

Over the last 11 months, retail sales have fallen by 26.5% in volume, excluding price adjustments. Another 10% or so contraction in demand will see wholesale and retail sectors shrinking by roughly half from 140,000 employees in Q4 2008 to ca 70,000 in Q4 2010.

And the yin-and-yang Budget is not helping this either. While excise duties on alcohol have been brought down and Vat increase of 2009 was clawed back, the increases in transport costs due to carbon levy will eat up any stimulus that could have been theoretically delivered by other measures.

All of the major economic indicators are therefore continuing to point South with little real evidence that the economy is going to return to robust growth any time soon. If confirmed, further slowdown in 2010 will mean that Irish economy will be traveling down recessionary curve for some 30-33 months by the time the Minister for Finance gets to the next round of public sector expenditure cuts. Lacking any serious policies aiming to get us out of this mess, this is a bleak prospect we will have to look forward to in 2010.

Yet, as our exporters experience shows Ireland Inc is more than capable of turning around. What such a prospect needs today is exactly what this column has advocated since July 2008. A rapid and significant cut in our deficits by ca €10 billion in 2010, followed by redirecting Nama-bound cash to deleveraging household budgets, re-capitalization of the banks through equity purchase to guarantee a capital investment and deleveraging stimulus to the tune of €40-45 billion in 2010. Redirecting existent targeted tax relief to a general cut in employer PRSI and income tax levies with a revenue-neutral effect completes the picture.

We need real reforms. Power costs, water rates, local authority charges and other state-induced costs must be cut by 25-40% through consolidation of local authorities and forceful changes to the way our power utilities operate. Airports levies and charges must be slashed to stimulate travel and to alleviate pressure on our middle classes who are straining under the weight of the state burden.

Short of getting down and dirty with far-reaching reforms, Government sloganeering about ‘taking the pain’ will be about as effective as showing reruns of the ER to a heart attack patient.

Economics 02/01/2010: Comparing banking systems

Based on the latest available data from ECB (through 2008, unfortunately), the following three tables provide relative performance analysis of Irish banking system against its main peers.

In all three sets of comparisons I have:
  • included only countries with some proximity (trade / investment / market structure) to Ireland;
  • computed some additional (combined) variables using ECB data (group averages and categories totals etc);
  • ranked all countries on subsets of criteria shown in each table, so that increasing scores in each case reflect worsening of the rank position; and
  • identified in shaded cells the instances where other countries (and/or group average) show poorer performance than Ireland in specific category.
The first table above shows indicators for profitability & efficiency. Here performance rank is computed by assigning the best performing country the score of 1 and the worst performing one the score of 10. There 11 scoring categories in line with the main parameters.

Irish banking system overall comes out as the fourth worst performing in the sample of countries, with significant gap to the group average in terms of sources of income (less stable in the case of Ireland) and total income as a share of assets. Note a very poor performance in net interest income and net fees / commissions - both of these indicators of income will have to be increased in the near future, leading to higher interest charges and fees for retail and corporate clients.

On expenditure side, Irish banks performed above the average, clearly showing that even in the end of 2008 there was virtually no room for improving the margins through further spending cuts. (One caveat - the expenditure side is measured relative to the assets base, so further writedowns on assets in 2009 would have pushed the expenditure performance metric deeper into negative territory). Apart from some layoffs and wages cuts, the sector in Ireland has no choice but to go after income side of the profit margin equation in order to rebuild margins.

On profitability side, provisions & impairments figure is below the average reflecting a clear lack of realism on behalf of the banks. This, in turn, translated into artificially inflated profits, that fell insignificantly short of the group average. However, the relative underperformance of the Irish banking sector was clearly visible in the distribution of returns on equity with most of our banks performing in the lower tier of the group.

The next table shows balancesheets comparatives:Using the same approach as before, I computed rank scores for the countries (note, I omitted countries with no data observations from the sample). Once again, Irish banks come out as below average performers in the group, ranked fourth from the bottom.

Other interesting features of the data:
  • On liabilities side - deposits from CBs - or can we call it dependency on CBs liquidity to prop up deposit base is hefty?
  • Total equity as share of asset base is low.
  • Issued capital was low, while reserves are seemingly ok. Issued capital and reserves combined are below average. Ditto for tangible equity.
  • On liquidity side, low dependency on interbank market in 2008 really shows the extent to which Irish banks were not being able to access private liquidity pools. So funding base stability was weak.
Last table deals with capital adequacy. Once again, Irish banking sector posted a lackluster performance.

Mid-range solvency ratio and Tier 1 ratio in the environment of artificially depressed / unrealistic writedowns and over-inflated assets base is worrisome as are total own funds. Securitization weighted heavily under standardized approach, but this was not captured under the internal approach. Average risk-weight for credit risk were high and total capital requirements for operational risks were the lowest in the group.

Little insight can be gained from operational exposures, as these are obscured by the non-Irish IFSC operations, but corporate exposure and retail exposures combined to a hefty 105% for risk-weighted assets, compared to 91% for the group average. The last two lines - overall solvency ratios are telling. Group average is 12.36%. For Ireland: 91% of all assets were held by the institutions with less than 12% in terms of solvency ratio.

The main conclusions from the tables are:
  • Irish banks were too slow to recognise impairments;
  • Irish banks profitability is below par, while efficiency is relative robust (with the risk to the downside due to inflated value of assets);
  • Risk reserves and equity are poor in comparison to other countries, although this does not appear to be a function of regulatory-set reserves; and
  • Margins rebuilding on the banks side will have to take place at the expense of retail and corporate clients.
Given the lags in the data and in our banks' willingness to face reality of the risks carried on their books, it will probably take well into 2010 (waiting for Nama to become fully operational) for the banks to start in earnest rebuilding their capital and margins positions. Which means that we will not know the true state of our banking sector fundamentals until mid 2011, when the data will be available to cover 2010.

The risk, of course, is that before then, the banks will squeeze all domestic liquidity out of the Irish economy, while the ECB begins to restrict inflow of external liquidity to the system. If that happens, Nama losses and budget deficits will take the second seat to the wave of insolvencies that will hit our country.

Of course, as usual, we have no road map for addressing such risks. Remember - even despite all banking heads insisting publicly that post-Nama there will be no increase in credit flows to SMEs / corporates / households, our Government continues to claim that Nama will be a 'liquidity event' restoring flow of credit to economy.

I will leave you with the following quote:

"Most of this lending is policy-directed with an implicit government guarantee. Despite ...closed factories in *** resulting from the global financial crisis, and hundreds of empty office buildings, retail centres and hotels that are not meeting their debt service payments, banks are still not foreclosing on these properties nor calling the loans due.

The banks prefer to rollover or extend the loans to avoid having to report an increase in non-performing loans. It is not uncommon for *** banks to extend a loan for as much as one year without interest payments if the lender “believes” the ultimate recovery value of the assets will be greater than the outstanding principal and interest. However, it is nearly impossible for a bank to value an empty office building, in a market with a reported vacancy rate nearing 40 per cent ...and declining rents."

The article goes on to argue that for *** this scenario of banks unwilling to recognize losses is risking a derailment of the country progression to the top of the world economic order. The *** is, of course, China. And the article was published here.

But it might have been written about Ireland, where the banks' belief in the ultimate recovery value is nothing more than a punt on selling the distressed rubbish assets to Nama for the price that even at a 30% haircut will reflect an overpayment on their true value of up to 30-40%.

What will Nama do to these assets and how willing it might be to shut down insolvent operations? More willing than the completely reluctant Irish banks? I doubt it.

So where does this leave us at in the beginning of 2010? A Japanese-styled zombie economy scenario for 2010-2025? I hope I am wrong!