03/03/2011: Exchequer sums gone wrong in stockbrokers' calculator?

Amended

I did not want to blog about Exchequer receipts and expenditure, primarily because the information that can be derived from two monthly returns is really not that significant. Q1 returns for March will be much more revealing of any emerging ‘trends’.

But then I came the across note from one of our stockbrokers - perhaps one of the poorest in quality I’ve seen in some time. Let me tackle the spin and errors that were presented as analysis.

“Tax revenues at end-February were €4.84bn, 2.2% higher than the same period in 2010 but €128 behind the government tax projections for this stage of the year.” So far – true.
“The shortfall was concentrated in value added tax receipts which were €120m behind expectations. This weakness raises concerns about the strength of consumer spending in 2011.” This ‘weakness' is 2 months in running – what concerns can be raised on the basis of such a short observation span and given seasonality and lags in payments – is open to doubt, but let's use the note own logic in my response.

“Income tax and corporation tax receipts were €45m and €23m behind but were partly offset by higher than expected excise duties.” Ok again – sticking to the numbers computed for them by the DofF seems to work for these folks.

“Overall tax revenue remains broadly on track to meet the government's targets”. Oh, really? Let’s recap the above: Income tax is 2.237% below target, Vat is 5.894% behind target, Corporate tax is 17.829% behind target. So 1st, 2nd and 4th largest tax heads are behind target appreciably. Tax receipts overall were 2.21% ahead of 2010, but 2.5765% behind the target. If that ‘broadly on target’ performance were to continue through the year, so we will be losing 2.56% off the target every 2 months, cumulative shortfall on target will be 14.5% for the year or a whooping 5,060.5 billion (I am, of course, using the very same logic that led this analyst to draw a conclusion about the VAT receipts above). Some ‘on track’ that is.

And then arrives tour de force - the breakdown of someone's copying abilities:
“Tax measures introduced in Budget 2011 including the new universal social charge had an impact for the first time on the February receipts. Income tax receipts were 25% higher than in the corresponding month of 2010, albeit slightly behind the expected target for this stage of the year.”
Here comes a sticky: income tax receipts were 1,835mln through February 2010, they were 1,967mln through February 2011 – which makes them 7.2175% above yoy not 25%. The most bizarre thing is that the DofF note provides correct (7.2%) figure.

The mystery of 25% was explained to me by the analyst overnight. It was NET February income tax receipt that rose 25% yoy, not the cumulative tax receipts reported by the DofF. Net February 2011 receipts were €980mln as opposed to €784mln in February 2010. Of course, the note did not mention that this 'achievement' was due to the inclusion of the Universal Social Charge into the February 2011 figures. Here is how the DofF itself described the situation:
"PAYE receipts in the month of February amounted to €676 million, some €38 million or 6% up year-on-year. While PAYE receipts in February show the impact of the income tax measures introduced in Budget 2011, they do not include receipts from the USC and therefore allow for a comparable year-on-year analysis to be made."

What's missing in the above is the fact (stated elsewhere by the DofF, but again omitted by the analyst) that 2011 Income Tax Receipts include Health Levy that previously was not counted in the income tax. Here is from the Exchequer note for January 2011:
"The forecast growth rate in tax revenues for the year as a whole is 9.9%. This is driven by two significant factors: (i) The reclassification of health levy receipts, which heretofore had been collected as a Departmental receipt paid directly to the Department of Health & Children, to form part of the new Universal Social Charge, to be collected as part of income tax, and (ii) The large Budget day tax raising package, primarily on income tax, of €1.1 billion."

So 25% figure, while not in itself a bogus one, does not support any sort of a conclusion to be drawn about year on year comparatives, unless we net out health levy equivalent receipts.

However, the conclusion that can and should be drawn (downplayed by the DofF) is that PAYE receipts are growing at 6% and that after a significant shrinking of the tax bands.

Now, let's compare the dynamics of the current structure income tax to-date, cumulative through February 2011 to the target. By end of February 2010 Irish exchequer netted 16.27% of its annual income tax revenue. If the same share is applied to 2011 receipts through February 2011, the annual receipts for 2011 will fall somewhere around 12,087mln or a massive 14.43% below the target set for the year (14,125mln) for the income tax.

Let's, however, recall that January returns did not reflect USC inclusion as the returns related to December 2010 incomes. Correcting for this - take DofF forecast for total income tax measures of €1,100mln in 2011 and take out the share of January-February from these, adding them to the 2-months receipts attained and then extrapolating into the rest of the year. Cumulative income tax shortfall on the target then is 6.22% for the full year 2011 or €879mln. Not good.

So

• comparing likes with likes (2011 structure with 2011 structure) - you get a shortfall,
  
• comparing PAYE to PAYE (2010- v 2011) you get month on month rise of 6%,
• comparing 2-months in 2011 (with health levy in) against 2 months in 2010 (with no health levy in it) gives a rise of 7.2%
• BUT, comparing the analyst's basket of apples and oranges to a basket of apples alone (2011 February income tax with USC in it against a 2010 February income tax absent USC) gives a 25% rise

Of course, the latter can be billed as some sort of a net positive for the Exchequer...

Here is the table of calculations:

02/03/2011: Village Magazine - March edition article

Here is an unedited version of my column in the current edition of the Village magazine

Top legislative/policy priorities for the new Government should focus on addressing the four crises we face – the banking sector renewal, the debt crisis, the need to dramatically reform our economy and the long-term reform of our political and governance systems. The inter-connected nature of these crises implies that some of the reforms undertaken in one of the areas, such as, for example, fiscal adjustments, will have a positive long term effect in other areas, e.g. in stimulating private sector economic growth.

Given the constraints of the space, let me deal here first with the decisions that should take priority for the new Government over 2011 in the areas of banking and finance.

EU/IMF ‘bailout’ package: the new Government will be forced, willingly or not, to renegotiate the terms of the original agreement. Given the level of debt carried by this economy courtesy of the previous Government commitments, the question of the need for such a revision of the ‘deal’ is no longer a valid one. Instead, the real question we face is what path to a ‘default’ or debt restructuring do we take and resolving this issue should be the top of our Government agenda.

Overall, there are three possible scenarios that the new Government can face in this respect.

The first one – the scenario of exogenously imposed resolution – implies that the impetus for altering the terms of the original November 2010 agreement can come from the EU itself under the auspices of the broader EFSF reforms. Under this scenario, expected eagerly by many pro-status quo or ‘do nothing’ advocates, the EU is likely to marginally reduce the cost of the EFSF funding to, say 5% from the current 5.83% and potentially extend the duration of the loans (up to 20-30 years), while creating a ‘flexibility fund’ which will make additional funding available to Ireland post-2013, but at higher rates of interest incorporating any future increases in the ECB core policy rate. In exchange for such a ‘rescue from previous rescue’ package, Ireland will be asked to accept the need for enhanced fiscal coordination– re: tax harmonization.

The second path is of structured and orderly ‘default’ involving banks debts. Under such a scenario, Irish Government should first prepare significant buffers for dealing with the funding failure in the currently insolvent banks. Since not all of our Government-guaranteed banks are insolvent, this means that the damage limitation is relatively better contained than the current full exposure scenario. In fact, an orderly restructuring will require replacing the blanket Guarantee with the one that covers fully only the deposits held in the Irish banks. This will significantly reduce taxpayers’ future exposure to the banking sector.

At the moment, the entire banking system in Ireland holds €168.3bn in deposits. However, not all of these are held in the 6 covered banks. In addition, of the above deposits, €10.5bn is held under the termed contracts with maturity in excess of 2 years. Roughly, only ca €100bn of domestic deposits are held by the Irish banks and is subject to a withdrawal demand within the next 2 years. This means that to underwrite these deposits, the Government will need a funding buffer of ca €30-50bn over the next 2 years (providing a 30-50% cover). This buffer can be provided by a combination of new currency issuance by the CBofI, NPRF funds and a stand by facility from the IMF not exceeding €5-15bn. A far cry from what the Government, alongside the EU and IMF, are planning to burn already.

Of course, the scenario means that we will need to effectively radically reduce our banks exposure to their largest lender – the ECB. This can be done by restructuring the share of Irish banks debt held by the ECB and the CBofI into a combination of a 10 year loan at a fixed interest rate of 0.5% and a haircut of, say, 40%, in effect reducing the risk of future rollovers, while cutting the overall burden of repayment and the cost of financing. Along with it, the EU/IMF should also agree to a restructuring of the €67.5bn loan extended under the November 2010 agreement into, for example, a €35bn perpetual loan at 3% pa interest rate and a €30bn loan extended for 10 years at 1.5-2% pa interest. The key in both deals should be to achieve not only a reduction in the cost of financing the quasi-Governmental (banks) and Government debt, but also cutting the overall level of gross debt assumed.

The worst-case scenario would arise if the markets were to force Ireland into a disorderly default. In this case, the markets will execute a massive sell-off of Irish Government debt preceded by a complete collapse of the secondary markets in banks debts. This will leave the ECB with some €185 billion worth of Irish banks debts that will have virtually no real market value and an unknown (but sizeable) volume of Irish Government debt which will be selling at a 20-30% discount on the face value. Both, the sovereign bonds and the banks debt markets will cease. Overnight and demand deposits will be frozen and the country will find itself in the situation where the Central Bank will have to monetize the very same costs of the orderly restructuring scenario, plus the disruptive costs of a bank run at the same time. Instead of holding the buffers of cash and committed funds it might not have to draw down in full, the ECB system will end up in a situation where all cash will have to be delivered as soon as technically possible.

It is clear that a prudent Government action should be from day one to prepare for the second, less disruptive scenario.

Following the entry into the resolution process of the banks debts, the Government should swiftly address the banks balancesheets problems. Here, the actions should follow the Swedish model and start with the abandonment of the misguided Nama-based approach. The Government should order the six banks to supply – by the end of June – a full accounting of the loans they hold, with clear indication as to the riskiness of these loans with respect of the probability of their repayment, the quality of the underlying collateral and titles. By the end of August 2011, the Government should complete detailed evaluation of this information by an independent panel of economic, property, lending and finance experts. Parallel to this, the Government should set an exact target for banks bondholders writedowns to offset at least in part loans losses in the banks. All bonds repayments and interest payouts for banks debts due for 2011 should be suspended. The balance on the expected losses net of the funds recoverable from bondholders should be financed by the purchase of the direct equity in the banks by the Government at a price for banks shares at the time of the publication of the assessment exercise. The time-frame for such closing of the balancesheet gaps should be set for no later than November 2011.

Nama loans that belonged to the banks should be valued as banks’ own in the above exercise and following the completion of the valuations, Nama should be shut and loans transferred back to the banks for management.

Subsequent deep reforms of the banks strategies and operations should be scheduled for the first quarter 2012.

Parallel to this, the Government should submit to the Dail no later than June 2011 a full draft bill dealing with reforms of our personal bankruptcy codes. These reforms should at the very least:

Make past and future loans for the purchase of personal residence non-recourse against the person of the borrower and his/her future income and assets;
Reduce the period of bankruptcy restrictions to just 2 years and complete removal of the bankruptcy history from credit history after 5 years of continued financial probity performance; Replace a blanket ban on companies directorships for individuals in bankruptcy with a restriction on their holding such directorships subject to satisfactory financial probity conduct during the bankruptcy period;
Restrict applicability of the Loan-to-Value ratio covenants in forcing the liquidation of the existent loans where the borrower continues to pay at least 75% of the interest on the mortgage.

The new bankruptcy laws should come into force as soon as possible and prior to that, the Government should impose a requirement that no state-guaranteed institution can bring new bankruptcy proceedings against homeowners.

Lastly, the Government should act swiftly to put in place an independent expert panel consisting of independent economists, financial analysts and banking experts that will function as a check on the Government decisions in the area of banking and financial services reforms. The panel should be required to provide quarterly reports and testimonies to the Dail which will be made public. The panel will have the powers to propose specific measures to the Government, to request and receive any information from the banks and financial services provider (subject to upholding the required confidentiality clauses) and question any bank official. The panel remit will only cover those institutions in which the Government holds at least a 35% stake and those that are covered by the State guarantee.

Of course, the above measures will help addressing a large share of our debt problem, effectively reducing the Government and banks’ debts, while alleviating the burden of personal debt for mortgage holders. However, other changes will have to take place in the areas of economic, fiscal and political reforms. These proposals will be outlined in a follow up article, so stay tuned.

02/03/2011: Irish Daily Mail - February 28

Here is an unedited version of my article for Irish Daily Mail for February 28, 2011.

The hardest thing in the General Election 2011 for Fine Gael and Labor is yet to come. After Sunday rest and celebrations this week will start for both parties with a political wrangle over positions of power. This too will be the easy part.

However, comes the week of March 7^th, the entire weight of the ongoing crisis will fall on the shoulders of Mr Kenny and his colleagues. There is no rulebook the new Government can consult in these times of need. Old policies, having comprehensively failed to stabilize our banking system, will be of no use. In fact, some – like Nama and the extended guarantee – will have to be unwound or scrapped altogether and fast. New policies touched upon during the campaign – like ‘renegotiation’ of the EU/IMF loans – will be just a side-show to the escalating crisis.

The problem is that, largely unseen by us, the banking crisis continues to rage. We’ve heard about the perils of ATMs running out of cash should we ‘unilaterally burn the banks bondholders’. Alas, our banks are now running ATMs on the back of IOUs they issue to themselves. In other words, every time we dine out or buy a newspaper, we are spending cash that Irish banks have borrowed from the ECB or the Central Bank of Ireland against the collateral that is only worth anything because the taxpayers promised to repay the loans. You might think that your Laser card is a debit card – taking money you own from your account. Courtesy of our bust banking system, it really is a credit card with the debt being spread across the entire economy.

Tens of billions of new debt have been created over the last few months through this ‘backdoor’ borrowing. And the new Government will have to stop this merry-go-round before the taxpayers, and with them the entire economy, collapse under the weight of this debt.

On top of this, there is a new instalment in the series of horror shows looming on the horizon, as AIB is set to report its 2010 results in days to come. For AIB is most likely to reveal this time around that it is not that much better off, when it comes to lending and investment books quality, than Anglo and INBS. AIB spent last three years in active denial of the extent of its impairments. Now, it will have to start airing its dirty laundry. Again, the Government will have to react to put some active policy buffers between the markets – easily spooked by the zombie giant rearing its head – and the bank.

Add to that much anticipated Prudential Capital Assessment Review (PCAR) – the new set of ‘stress tests’ on Irish banks balancesheets – and you have some seriously disastrous newsflow that the Government is heading into. To be credible, the PCAR will have to be really honest. We already had a number of previous reviews that spectacularly failed to reveal the truth about banks, including the ones carried out by the EU which gave AIB and Bank of Ireland their clean bills of health just before AIB was nationalized and Bank of Ireland required new financial wizardry from the Government to avoid the same fate. An honest PCAR expected next month will most likely send AIB into a tailspin.

Last, but not least, the Government will be facing the EU negotiations relating to the Franco-German push to ‘reform’ EU-wide macroeconomic stability rules. During these talks, our fiscal position will come under renewed scrutiny by the very same EU Commission and ECB who have already voiced concerns that the Government 4 year plan for restoring order to our public finances is a castle built of sand. Should the EU take a keen interest in our economic assumptions and forecasts, the Government might be forced to either increase the ‘savings’ planned for 2011-2014 by, possibly, as much as €5-6 billion, or sacrifice something else in return. No prizes if you guessed that it will be our corporate tax rates.

Here is an example. We all heard about unrealistically high assumptions on economic growth that underlie our recovery plans. Over the last couple of weeks, things have gone from bad to worse. For example, Government plan, supported in principle by Fine Gael, assumed oil price inflation of just 10.4% in 2011. Alas, since plan’s publication, oil prices have risen on average by over 20% already. Every 10% increase in oil price in Ireland translates into roughly 0.5% cut in our GDP growth. So if the Budget 2011 projected expected growth of 1.75% in GDP over this year, all signs to-date suggest that in reality we will be lucky if we can get 0.5% (0.1% for larger and less oil-dependent economies, like Germany). And this means that in year 2011 alone, to keep up with the 4 year plan, the Government might need to find additional ‘savings’ of some €200 million net.

So forget the 5 points plans. The new Government will have to get off to a fast start on drawing up the realistic plans for dealing with the crises we faced. Comes Monday week, the honeymoon will be over for Fine Gael and Labor.

02/03/2011: Irish Mail article - February 23

Here is an unedited version of my Irish Daily Mail article from February 23, 2011.

With the new Government standing to inherit a ca 10% deficit this year and a prospect of the sovereign debt in excess of €240 billion by the end of 2013, Friday elections will deliver only one certain outcome – our next Toiseach will most likely enjoy the shortest honeymoon with the voters in the history of the state. Given all the opinion polls, Enda Kenny will be redecorating the offices occupied previously by Brian Cowen. Fresh ‘IOU’ forms with Fine Gael’s insignia and new Taoiseach name will be gracing the desk. The change, alas, risks stopping there.

On a serious note, given the gravity of our economic and financial situation, it is virtually certain that the new Government will have to abandon, at least for the next 24 months, all of its 5-point plans. Fighting forest fires sweeping across our banking landscape will, once again take priority. No matter who wins in these elections, our State Guaranteed (and mostly State-owned) banks will continue to print own bonds (also State-Guaranteed) to roll over €9.7 billion of the older paper maturing this year. No matter what parties will end up forming the Government, deposits flight will go on, powered over, under the un-blinking eyes of the Financial Regulator and the Central Bank, by more borrowing. In the mean time, state finances will continue flopping along the ‘road to recovery’ like a deflated tyre.

By the end of 2013, the state will run out of the EU/IMF funds and own cash (aka NPRF), so forget whatever promises you heard throughout the current campaign about ‘stimulating growth’ and ‘improving competitiveness’. In the mean time, with the blessing of the Croke Park agreement, the public sector reforms will continue in the pages of newspapers, but not on the ground. All signs suggest that by the end of this year, the EU will face a severe banking crisis of its own, which will further exacerbate our local problems and will risk derailing our exports – the only bright spot on otherwise leaden horizon.

All of this suggests that the new Government will have to go into yet another crisis management exercise and this time around possibly without a safety cushion of the EU. The radical, unthinkable today, solutions will have to be considered. This is why the current elections are unlikely to give us much of a relief from the disasters of the last three years.

The only real uncertainty worth considering in the context of the Friday vote, therefore, is that of the new emerging power of the independents. Should the outcome of the vote this week return, as forecast, some 20 independent TDs, Ireland will be on a road to formation of at least two new parties, each with popular votes close to the combined votes of PDs and Greens, averaged over the last 4 elections. A combination of such robust support for independent alternatives to the 4 main parties and continued and amplifying economic crisis will then set the stage for a watershed change in the next elections. That date, in my estimates, is now no more than 18-21 months away.

02/02/2011: Credit and Deposits of Irish residents: January 2011

Let's get back to the credit stats released yesterday by the CBofI. This is the second post (earlier post - here - focused on foreign depositors flight), so let's update the core charts and review some monthly changes in the data.

Credit side:

• Irish households credit contracted mom by €948mln in January 2011 (a drop of 0.73%) against a monthly contraction of 5.29% in December 2010 - so deleveraging has slowed down
• Year on year, Irish households total outstanding debt fell to €129,370 mln in January 2011 or yoy decline of €10,392mln (7.44%) while in December yoy decline was 6.97%.
• Irish household's outstanding mortgages amounted to €99,289mln, down in January by €289mln (-0.29%) against a monthly drop of 7.05% in December 2010
• Year on year, mortgages were down 9.78% (or €10,766mln) in January against a yoy decline of 9.65% in December 2010.
• Non-financial corporations outstanding debts amounted to €92,652mln in January up 0.1% mom (+€90mln), but down 35.67% yoy (-€51,363mln).
• Total private sector credit fell 0.57% (-€1,908mln) mom in January (December 2010 saw mom decline of 0.98%) and fell 10.6% yoy (-€39,427mln) in January (December 2010 saw yoy decline of 10.73%).

So on credit side by category:
And growth rates:

Next, deposits for Irish residents (remember - non-resident deposits were highlighted in the previous post linked at the top):

• Total private deposits down 0.82% mom (-€1,387 mln) in January and yoy down 9.05% (-€16,613 mln). Steep. Deposits were down 2.24% mom in December 2010 (8.41% yoy).
• Households deposits contracted 0.7% mom in January (-€663mln) and 5.56% yoy (-€5,531mln). There go our 'savings rates', folks. In December 2010, yoy drop was 4.57% so things are accelerating downward. Month on month deposits were down 0.71% in December 2010.
• Non-financial corporations deposits rose 0.12% (VAT carry overs and seasonal receipts and payments, especially for MNCs being most likely drivers) month on month (+€41mln), but were down 16.57% yoy (-€6,670mln). In December 2010 corporate deposits were down 4.93% mom and 17.42% yoy.
  

Now, let's consider the degree of leverage we carry in this economy:
As charts above show:

• Leverage rose 0.26% mom and fell 1.7% yoy in January 2011 across the entire economy. In December, leverage rose 0.51% mom and fell 3.44% yoy
• Overall leverage trend is up and currently this economy is leverage 199.32%
  
• For households, leverage fell 0.03% mom and 1.99% yoy in January 2011, having fallen 0.04% mom and 2.79% in December 2010. So deleveraginng is slowing down
• Currently Irish households are leveraged 137.69%
• Non-financial corporations leverage was formidable 275.93% in January, down 0.02% on December 2010 and 1.99% on January 2010. In December 2010 corporate leverage was down 0.04% mom and 2.79% yoy. So deleveraging is slowing down for corporates as well.

Deposits composition by maturity:
Clearly, longer maturity has fallen off the cliff and a slight bounce in longer maturities this month follows a catastrophic drop off in months before. This cliff is a clear indication that households are moving cash into shorter maturities - either to withdraw deposits all together or as a form of short term precautionary savings. So:

• Overnight deposits were down -0.9% (-€788mln) mom and -4.42% yoy (-€3,998mln) in January
• Deposits with maturity up to 3 months were down -1.26% (-€197mln) mom and -6.16% (-€1,011mln) yoy in January 2011
• Deposits with maturity up to 2 years were up 1.15% (+€780mln) mom and down -16.67% (-13,374mln) yoy.

Finally, credit cards debt fell 1.84% mom (€53.48mln) and -5.8% (-€175.81mln) yoy in January 2011. Good news for one of the most expensive forms of debt.

02/03/2011: Live Register February 2011

Live register for February is out today and makes for some interesting reading.

Headline figures are mildly encouraging. In February 2011 there were 444,299 people on the Live Register an increase of 7,343 (+1.7%) yoy. This compares with an increase of 5,741 (+1.3%) in the year to January 2011 and an increase of 84,503 (+24.0%) in the year to February 2010.

On a seasonally adjusted basis there was a decrease of 1,700 on the Live Register in 2011. M decrease of 5,800 was recorded in January 2011.

Overall the Live Register has now fallen by 10,000 on a seasonally adjusted basis since its peak in August/September 2010.

Let's update some charts:
To put the LR changes into perspective, consider weekly average changes:
and monthly averages:
Live Register-implied unemployment rate (pretty good measure of unemployment) is now at 13.5% - same as in January:
Now to some numbers in more detail:

• Year on year January 2011 saw increase in LR of 19,300. This has fallen back to 17,800 in February;
• In percentage terms, yoy change in LR in January was +4.522%, which eased to +4.150% in February
• For 25+ year olds, January LR increased by 10,000 year on year (+2.879%), while February increase was 11,300 (+3.272%) - so things are getting better here, but by only 600 mom
  
• For <25 year olds, January 2011 saw a decrease in numbers of 3,400 (-3.908%) yoy, but February decrease was 2,600 yoy (or -3.055%) - an improvement mom of 1,100
  
• Casual and part-time employment increased 5,770 in February (yoy) or +7.277% against an increase of 6,369 in January (+8.286%) - or mom increase of 1,827 (more people taking part time and casual work than the seasonally adjusted drop in overall LR)
• Non-nationals accounted for 79,162 of the total LR count against nationals with 365,137. So non-nationals count increased 635 month on month in February, while nationals saw an increase of 987.
• Non-nationals LR signees numbers fell 2,868 yoy in January (-3.524%) and by 2,104 (-2.589%) in February
• Nationals signees numbers increased 8,609 yoy in in January and 9,447 in February
• The above points on nationals v non-nationals signees imply rather rampant emigration or outflow from the labour force of non-nationals.

All of the decrease in the seasonally adjusted series over the last six months has been recorded for males.

One core problem has been the increasing duration on LR. Month on month, February saw an increase of 2,413 males and 858 females (total of 3,271) of signees on the LR for a year or longer. This contrasts with decreases of 2,610 males and and increase of 961 females with duration under 1 year. This suggests that the unemployment is, predictably, sticky for earlier LR signees.

Finally, separate figures released today by the Dept of Enterprise, Trade & Innovation show that notified redundancies were down 44% year on year in February. In addition, as reported earlier, PMIs for Manufacturing have signaled for the third month running that employers are starting to add jobs in the sector. These two developments suggest that barring some significant shocks, LR is now stabilizing and possibly reverting to a shallow downward trend. This trend, however, still appears to be driven by exits and emigration, rather than jobs creation.

02/03/2011: CB data - Total deposits

In the next few posts I will be covering the data released yesterday by the Central Bank.

Here are two telling charts rarely seen side by side:
Let's spell out some numbers:

• Total deposits from non-residents fell 36.35% year on year in January 2011 (€190.88bn) and 3.71% mom (€12.685bn)
• Private sector deposits from non-residents fell 22.89% yoy (€22.888bn) or 0.79% mom (€0.616bn)
• Total private sector deposits from Irish residents declined 9.05% yoy (€16.613bn) and 0.82% (€1.6387bn) mom
• No media outlet to my knowledge told us just how much distrust in our financial system do foreigners have
  

01/03/2011: Manufacturing PMIs

From NCB Manufacturing PMI report:

“Manufacturing production increased at the third fastest pace in the history of the survey, which began in May 1998. According to respondents, higher output mainly reflected strong new order growth.

Total new business rose at the sharpest pace in more than eleven years in February. New export orders expanded at the second-steepest rate in the series history, with the EU and Asia highlighted as sources of growth.

The second consecutive accumulation of backlogs of work was solid, and the fastest in the history of the series, in line with strong new order growth.

Employment growth hit a four-and-a-half year high in February as firms raised staffing levels in response to higher workloads. Job creation has now been recorded in each of the past three months.

Input cost inflation accelerated for the second month running to the steepest since July 2008. Higher prices for raw materials was the main factor behind increased input costs, with fuel and steel mentioned in particular.

As input prices rose, Irish manufacturers increased their charges accordingly. Furthermore, the marked inflation of output prices was the sharpest in four years.

Purchasing activity increased at the fastest pace since December 1999 in February, in line with rising production requirements. Anecdotal evidence suggested that suppliers had struggled to cope with rising demand for inputs, resulting in delivery delays.

Lead times lengthened markedly again over the month.

Despite a near-record rise in purchasing, preproduction inventories decreased modestly as inputs were consumed by production. Stocks of finished goods also declined in February, albeit only marginally. Panellists reported that post-production inventories were utilised to partly satisfy the sharp rise in new orders."

Nothing to add to this – across the board, strong performance and most encouragingly, expansion in employment prospects is holding over time and even getting stronger.

Perhaps one suggestion going forward - can the folks from NCB get us a breakdown of MNCs led activities from domestic respondents going forward.

Now, updated charts:

28/02/2011: Retail sales for January

Headline stuff: the volume of retail sales (i.e. excluding price effects) increased by 4.6% in January 2011 when compared with January 2010 and there was a monthly decrease of 3.8%. Now, wait, that sounds good?

Not really. Let’s take another shot at that statement: volume of retail sales was up 4.6% yoy in January 2011, but it was down 3.8% on December 2010. In fact, it was down for the third month running, having declined 0.6% in November, then 1.9% in December and now 3.8% in January. The rate of decline is accelerating so far. And at a massive speed: x3 times in November-December and at x2 times in December-January. (Mrs G is putting that bubbly back in the fridge right now).

But what about the value of sales? Remember – CSO likes volume indices cause they tell you how much physical stuff was shifted through the stores. But let’s not forget that retail sales jobs and businesses depend not on volume, but on value of stuff being sold. Exactly the same picture here as in the case of volume. Value of retail sales was up 4.0% on January 2010, but it was down for the third month running (-1.5%) in monthly terms.

Let me toss in another factoid here. December sales were extremely poor in 2010, but not so much in 2009. In fact, December 2010 value of sales was down 4.0% on December 2009. So the rush post-Christmas into sales was much shallower in 2010 than in 2011. Hence, the current ‘boom in retail sales’ announced today by CSO is nothing more than a compensatory run onto the post-Christmas sales racks. (Mrs G is now putting away the celebratory bottle of Sprite back into the fridge).

And one more point – the value of sales index has been artificially boosted by rampant price inflation in several categories of sales where prices are state-controlled or subject to commodities price inflation (see below).

Now to updated charts:
You can see what I meant by the spin above and below (notice the divergence of monthly and annual rates of change):
And just in case you want to see it: relative to peak retail sales are still declining
Faster rate of decline in the volume, of course, is due to rising prices (as mentioned above).

Now to ex-motors sales (or core sales):
Ok, now, if Motor Trades are excluded, the volume of retail sales decreased by 1.2% in January 2011 when compared with January 2010, while there was a monthly increase of 2.7%. Value of sales rose mom 2.6% although year on year there was a decline of 1%. Both value and volume of core sales broke two months declines in November and December. And this is good news. Relative to peak, value of sales is now at 82.21% (up from 80.10% in December 2010) and volume of sales is at 86.5% (up from 84.19% in December 2010). Last time value of sales was at this level was in June 2010 and volume – in November.
And take a look at the detailed sub-categories of sales:

• Motor trades - -4.2% in value and -3.5% in volume, so either we are buying cheaper and cheaper cars (in fewer numbers) or prices are falling faster than sales;
• Department stores down 12% in volume (mom) and 12.3% in value - symmetric drop-off as sales prices continued through the month;
• Fuel - volume of sales is up 0.9% mom (down 1.4% yoy), but value of sales is up 2.8% mom and 10.4% yoy - as mentioned above - inflation, folks is biting;
• Non-food business excluding motors, fuel and bars - now, here's the real retail sector story: -0.6% mom and -4.0% yoy in value of sales, and -0.9% mom and -1.5% yoy in volume - deflation and shrinking sales means recession continues.
• Of course, our massive newsflow has boosted Books, Newspapers and Stationery category - +4.9% mom in January in value and +2.7% mom in volume;
• Lastly, in tune with the nation watching Vincent Brown and other current affairs programmes, we've invested heavily in furniture and lightning - up 9.5% mom in value and 9.3% in volume
  

28/02/2011: Ireland v Iceland: Economy, part 2

In the previous post I covered some of the macroeconomic differences between Ireland and Iceland. One core conclusion that can be drawn from the previous post is that while Ireland retains stronger longer-term economic foundations based on historical performance, these foundations are not sufficient for us to achieve better performance than Iceland in the current crisis.

One might wonder what is the reason for this. Let’s recap how both countries have arrived into the current situation.

Both Ireland and Iceland have experienced rapid collapse of their asset markets (in both, there was a property bubble and a general financial services bubble, albeit Iceland had much smaller property sector than Ireland and in another crucial difference, Iceland had IFS bubble, while Ireland experienced a domestic financial services implosion). Hence, both economies started from roughly speaking similar conditions.

The crucial difference between the two can be found in the responses to the crisis. Iceland defaulted on its banks liabilities, writing them off the country economy’s balancesheet. Ireland took the entire banking sector liabilities and loaded it onto the shoulders of its economy.

This story can be traced through the fiscal positions comparatives.
Chart above shows that the two countries have run significantly different fiscal policies through the crisis, with Government revenues deteriorating much more sharply during the early stages of the crisis in Iceland than in Ireland. From the peak of 47.671% in 2007, Iceland’s government revenues fell to 39.447% of GDP in 2010 and are expected to reach the lowest point of 38.464% of GDP in 2011. In the mean time, Ireland’s government revenue fell from 35.83% of GDP in 2007 to 34.423% in 2009 and then rose to 35.362% in 2010. Ex-ante, this suggests that Irish Government balance should be more benign than that of Iceland.

The above conclusion is supported by the data on Government expenditure above. Both countries peaked in terms of their Government spending in 2009 (Iceland at 52.09% of GDP) and 2010 (Ireland at 53.03% of GDP). But in terms of starting points, Iceland was in a much worse shape than Ireland with total expenditure in 2007 at 42.27% of GDP as opposed to Ireland with 35.78%.

However, the ex-ante expected deeper deterioration in fiscal positions for Iceland turns out to be incorrect.

As the chart above clearly shows, Iceland’s public net borrowing requirements were much more benign and are expected to be much shorter lived, than those of Ireland. In 2007 Ireland’s net lending stood at 0.051% of GDP, while Iceland posted a lending surplus of 5.402%. In 2009 Iceland hit the rock bottom in terms of its Government borrowings at 12.644% of GDP. But Ireland kept on going: from the net Government borrowing of 14.613% in 2009, we fell to 17.667% in 2010. By 2015 Iceland is expected to enjoy three years of surplus and its forecast government net lending in 2015 is set at 2.757%. Over the same time, Ireland will remain firmly in net borrower hole, with 2015 net government borrowing expected at 5.153% of GDP.

Much of this gap between Ireland and Iceland is accounted for by the liabilities assumed by the Irish state from its banking sector. Stripping out Government interest bill – again massively overextended by the banking sector rescue funding, primary net lending/deficits of the two governments are shown in the chart below.


Now, let’s take a look at the overall public debt levels. First the IMF data
It does appear that Irish Exchequer, despite having run smaller surpluses in 2004-2007 and despite having suffered much deeper crisis in the banking and own balancesheets is going to end up holding less debt than Iceland. This, however, does not reflect the quasi-Governmental debt, which relates to banks rescue packages and which in Ireland adds to at least 25% of GDP ion today’s terms while in Iceland the same debt adds up to nothing courtesy of their decision to default on banks liabilities.

The chart below corrects for this omission.
In fact in its recent assessment of the Irish economy prospects for recovery, the IMF stated that they expect Irish Government debt to GDP ratio peaking at over 120% and in the case of an adverse economic growth scenario – reaching possibly 150% of GDP.

Finally, here are the summaries of data from the IMF comparing two economies performance.

First - period averages:
And finally - starting year spot values:

27/02/2011: Ireland v Iceland: Economy, part 1

This is the first post of two dealing with comparatives between Irish and Icelandic economies during the ongoing crises. The post was motivated by a number of recent articles in Irish press presenting Irish situation in terms of the allegedly stronger crisis performance than Iceland, as well as Paul Krugman's response to these (here). This post will deal with real economy comparatives, while the second post will deal with fiscal performance relatives.

Both economies experienced deep crises in 2008-2010: Icelandic economy contracted to 90.41% of 2007 levels by the end of 2010, while Irish economy declined to 92.13%. Per IMF Q4 2010 forecasts, Icelandic economy is likely to reach 103.12% of its 2007 level GDP by 2015 while Irish economy is expected to reach 106.10%. However, latest revisions to 2011 forecasts (but not yet to 2011-2015 period) suggest that this advantage of the Irish economy over Icelandic economy is unlikely to hold.

In terms of real GDP per capita Icelandic economy contracted to 88.64% of 2007 levels by the end of 2010, while Irish economy declined to 91.08%. Per IMF Q4 2010 forecasts, Icelandic economy is likely to reach 98.05% of its 2007 level GDP by 2015 while Irish economy is expected to reach 106.10%. Again, latest revisions to 2011 forecasts (but not yet to 2011-2015 period) suggest that this advantage of the Irish economy over Icelandic economy is unlikely to hold in the next IMF database updates.

In terms of GDP based on purchasing-power-parity (PPP) per capita, Current international dollars, Irish economy has contracted by 10.25% in 2010 relative to 2007, while Icelandic economy declined by 7.75% - much less. Why? This result is especially worrisome, given that over the same period Irish economy experienced deep deflation (see below), while Icelandic currency was devalued substantially. Thus, Irish purchasing power should have risen, while Icelandic purchasing power should have fallen. And yet, real purchasing power of Icelandic income earners held up better than that of Irish counterparts.
In projections through 2015, the IMF expect that per capita, PPP-adjusted GDP in Iceland will reach 10% above 2007 levels, while in Ireland it will reach 7.58% above 2007 level. This, once again, means that the IMF expect Icelandic income earners to fare better than their Irish counterparts.

The same is reflected in the gap between GDP per capita in Ireland and Iceland. This gap stood at 3,487.63 in favour of Ireland in 2007. By 2009 it fell to 832.61 and by 2010 rose to 2,135.11 still below 2007 levels. According to IMF projections, the gap is expected to be 2,788.53 by the end of 2015. Notice that the average gap between 2008 and 2015 will remain below its historical average levels for 2000-2007. This confirms that much of the underperformance in terms of absolute real GDP per capita discussed above is due to (1) historical trends and (2) price differentials between the two countries.

What about economic performance in the two countries relative to the global economy? Chart below shows the shares of each economy in total global GDP. In 2007, Iceland accounted for 0.019% of the world GDP, while Ireland accounted for 0.268%. By 2010 these shares were 0.016% and 0.237 respectively. The decline in Iceland was 15.79% and in Ireland 16.55%. So Iceland outperformed Ireland here.

By 2015 IMF expects Icelandic economy’s weight in the global economy to be 0.015% - a decline of 21.05% on 2007. For Ireland the same forecasts imply 0.215% weight in the global economy and a decline on 2007 of 24.30%. Again, Iceland is expected to outperform Ireland into 2015 in these relative (to global economy performance) terms.

Comparatives with Iceland aside, however, Irish economy is expected to reach, by 2015, virtually identical level of global economy share as it enjoyed between 1996 and 1997, in effect erasing the entire period of some 20 years worth of economic growth.

As I mentioned before, Ireland clearly showing real deflation trend during the crisis, which is not the case for Iceland (in part, Icelandic inflation reflects devaluation of its currency).
It is worth noting that moderation in Icelandic economy inflation has been dramatic and highly orderly since 2008-2009 peak. This shows that the economy is expected to be adjusting through its post-default and post-devaluation period in an orderly fashion. In contrast, Irish deflation during the crisis has been pronounced and persistent.

Now on to unemployment. It is clear that Irish unemployment is running at the rates more than 50% above those in Iceland. By the end of 2015, IMF forecasts Irish unemployment to be 9.5% and Icelandic unemployment to be 3.12% or more than 3 times lower than that in Ireland.
Again, note the dynamics of expected adjustments to peak unemployment in the two countries. IMF clearly forecasts unemployment to decline in Iceland at a much faster rate than in Ireland. Given that icelandic unemployment declines are more likely to arise from jobs creation, rather than emigration, while Irish unemployment declines are robustly influenced by rampant outward migration of displaced workers, these dynamics also reflect the deeply-troubled nature of the Irish economic crisis, when compared with that of Iceland.

Which, in turn, shows that more likely than not, stronger Irish performance in GDP growth terms above is really driven by the MNCs and their transfer pricing, rather than real economic activity at the domestic economy. Lest I be accused of voicing anti-MNC sentiments - we do live in a society where saying factual things can get us labeled anything totally unrelated to the factual evidence presented - MNCs activities are great. All I am suggesting is that counting on them to carry us out of our real economy collapse (unemployment, shrinking employment, declining real disposable incomes etc) might be a bit naive.

Although IMF provides no forecasts for employment numbers after 2011, we can use population statistics and employment numbers through 2011 to compare two countries in terms of employment rates as percent of total population. In 2007 51.76% of Icelanders were in employment – a percentage that declined to 45.20 in 2010 and is expected to fall to 45.09% in 2011. In Ireland, 2007 employment rate was 48.93%, and this has fallen to 41.18% in 2010 and is expected to be 41.33% in 2011.
Again, in terms of employment rates Ireland is far behind Iceland – a sign that although out workers might be more productive (with a large share of this productivity accounted for by the transfer pricing by the MNCs), we tend to have smaller share of people working.

Do notice that the Icelandic economy performance in terms of employment takes place against the backdrop of having younger population than Iceland. Over the period of time covered, Iceland showed relatively stable rate of employment, while Ireland posted dramatic increases in employment rates during its growth period. This means that our current performance in terms of employment rates cuts against our demographic trends, while that of Iceland is in line with their demographic structures. In other words, one could have expected a decline in Icelandic employment rates even absent the crisis, while we should have expected continued increase in Irish employment rates absent the crisis.

In terms of external trade, both countries have improved their chronic current account deficits throughout the crisis. However, the great exporting nation of Ireland have seen much more shallower improvements than those found in Iceland. Krugman makes exactly this point in his article (linked above), but he considers net exports instead of the current account.
Chart above shows that between 2007 and 2010, Icelandic current account deficits fell from 16.29% of GDP to 0.91%. The Icelandic current account deficits are expected to continue declining through 2015, reaching forecast 0.38% of GDP by 2015. In Ireland, 2007-2010 decline was from 5.24% to 2.73%, while by 2015 the current account deficit is expected to fall to 1.24%.

The reason I prefer using the current account is because of several reasons:

1. As I have argued in a different post (here), current account can be used as a metric of our ability to repay debt out of trade surpluses, once we account for transfers abroad to pay dividends and profits on earnings by the foreign investors into Ireland, including the MNCs, take in our own investors earnings from abroad etc
2. Current account does not mask the extent of transfer pricing on our net exports
3. Current account also links to Government debt costs and thus lends itself naturally to the second post to follow
   

As we show in the next post, much of the reason for better external economic balance performance of Iceland is due to lower transfers from Government to the foreign bondholders, s Icelandic debt is expected to perform much better through the entire crisis. This means Icelandic current account is going to be relatively stronger than Irish one, as Ireland is expected to lose increasingly larger share of its economy to payments to foreign debt holders in years to come.

Next post will cover Government/fiscal policy performance of the two countries.

19/02/2011: Paying down our debt out of Exports

Let's do a quick exercise. Suppose we take our current account - defined as the sum of the balance of trade (exports minus imports of goods and services), net factor income (such as interest and dividends) and net transfer payments (such as foreign aid and remitted profits). Suppose every year we use the current account balance solely for the purpose of repaying our Government debt. How long will it take us to do so.

Let us start with some notes on methodology.

Our current account is in deficit - since 2000, there was only one year - 2003 - when we had a surplus in the current account (charts below), which really means our external trade was not enough to generate a surplus to the economy. So let us assume that the we can reverse this 180 degrees and that the deficits posted in 2009-2010, plus those projected by the IMF to occur in 2011-2015 are all diverted to pay our Government debt.
Notice - this is impossibly optimistic, as our Government does not own current account, but suppose, for the sake of this exercise that it can fully capture net profits transfers abroad and cut the foreign aid to zero, plus divert all interest payments on own debt and private external debts to repayment of the principal on own debt.

Secondly, assume that only Government debt is taken into the account (in other words, we assume away Nama debt, some of the quasi-sovereign financing of the banks resolutions, and all and any potential future banks and spending demands in excess of the EU/IMF assumptions, as well as all future bonds redemptions - the latter assumed to have a zero net effect at roll-over, so no added costs, no higher interest rates, etc).

In other words, here is what we are paying down in this exercise:

Now, suppose we take current account balances for 2009-2015 (projected by IMF) as the starting point. The reason for this choice of years is that they omit fall-off in our exports in 2008 and also the bubble years of 2004-2007 when our current account imbalances were absurdly large due to excessive outward investment and consumption of imports.

Next, assume:

• We deal with present value of the debts
  
• We apply an average 3% annual growth rate to repayments we make (current account transfers grow 3% on average per annum)
  
• Currency effects are removed (so we use flat USD1.33/Euro FX rate throughout)

So here is the result:
And the conclusion is: if Ireland diverts ALL of its net current account (2009-2015 IMF projections taken at 3% average growth rate forward) to pay down Gov debt, it will take us until 2064 to reach 2007 level of official (ex-Nama+banks) Government debt.

Note: incidentally - the charts tell couple of interesting side-points based on our historical debt path:

The Government told us that we are not in the 1980s - as we had much higher levels of debt then. Ok, the figure above shows that as of 2010 - we ARE back in the 1980s: 2011 debt will equal as a share of GDP that attained in 1989. According to IMF database, our debt has peaked at 109.241% of GDP back in 1987. It is projected to be 104.7% in 2013. Not that much off the peak.

But, of course, in the 1980s there was no quasi-Governmental debt - the debt of Nama, some of the banks recapitalization measures and the debts that still might arise post-2013 from the Government banks Guarantees and resolution schemes. If we add Nama's 31bn worth of debt issued, this alone will push our 2011 debt levels to 121.8% of GDP and factoring in coupon rate on these, but 2015 our Official Gov Debt + Nama will stand (using IMF projections again) at 124.8% of GDP - well in excess of the peak 1980s levels of indebtedness.

Secondly, despite what any of us might think about the Celtic Tiger years, the Government never paid down the old debt, it simply was deflated by rising GDP. Which suggests that even during the Celtic Tiger boom years - our exporting economy was NOT capable of paying down actual debt levels.