15/1/2014: 2008 Guarantee was "fully justifiable": J-C. Trichet

Yesterday, the former head of the ECB, Jean-Claude Trichet, told the EU Parliament's Committee on Economic and Monetary Affairs that the Irish government had been correct to guarantee the banks in September 2008.

The guarantee, which ended up imposing onto the Irish taxpayers costs of EUR64bn or more (depending on how one calculates the full extent of banking measures applied, and excluding the payments on the Guarantee by the banks) was a "fully justifiable position given the very difficult circumstances [the Irish government] faced".

However, per Mr Trichet, Ireland has issued the Guarantee all on its own, based on the same advice as given to other countries. "The message from the (European) Central Bank to Dublin was the same as the message from the Central Bank to Germany, to Belgium, to France, and we were at the heat of the crisis saying clearly, beware. We know what happens after we had Lehman Brothers."

In fairness to Trichet, as he claimed yesterday, the ECB did warn on numerous occasions that prior to the crisis, there was a growing cost competitiveness gap across the euro area and that fiscal performance was insufficient for a number of countries in the region.

More on the story is here: http://www.irishtimes.com/business/economy/europe/ireland-s-bank-guarantee-was-justifiable-claims-trichet-1.1655216

One way or the other, the Trichet's testimony now opens up room for the Government to put into public domain the content of the controversial letters that Trichet wrote to Minister Lenihan back in 2010 as well as full correspondence between ECB and Irish authorities back in 2008. Let's see what advice was exactly given to Ireland by the ECB on the Guarantee and subsequently.


Update: H/T to Seamus Coffey's: the letters that are yet to be released relate to 2010 exchanges between Mr Trichet and Brian Lenihan.

However, we still do not know as to what exact advice was given to Mr Lenihan by Mr Trichet and the ECB before the Guarantee of 2008. As far as I am aware, back in September 2008 there was no official ECB position on any government issuing guarantees to cover the liabilities in their banking sector. Even after Ireland issued its guarantee, there was no such position publicly formulated. In fact, Irish Government notified the ECB, the Ecofin and the Eurogroup of its decision to guarantee the banks liabilities ex-post issuing the guarantee. It did so at the same time as making the Guarantee public. The closest we know of that the Government came to potentially receiving any wisdom from the ECB of the Guarantee could have been during a phone call between Mr Trichet and Minister Lenihan that took place a week before the Guarantee issuance. As far as I am aware, we do not know the exact contents of this conversation.

14/1/2014: Irish M&A activity in 2013

Irish M&A values rose strongly in 2013, according to the Experian data.

• "Total number of Irish Mergers and Acquisitions and Equity Captial Market deals in 2013 was 254 - a decline of 15.1% from the 299 deals announced in 2012". 
• "The total value of deals for the year, however, increased significantly led by a spike in the number of mega (€1bn plus) deals. Transactions worth €38.590bn were announced in 2013, up by 39.1% from 2012’s €27.734bn worth of deals."
• Core mega-deals were split between pharma manufacturing and financial services
• "The Republic of Ireland represented approximately 2.4% of the total volume of all European transactions in 2013, and accounted for 4.9% of their total value. In 2012, the Republic of Ireland featured in 2.9% of European deals and contributed 3.6% to their total value."
• There were 37 large deals (over €120mln) announced in 2013, up by 32.1% on 2012’s total of 28 transactions; the twelve large deals announced in Q4 represented the busiest quarter in the large deals value segment since Q4 2006. Large deal values were up from €24.687bn in 2012 to €35.846bn in YTD 2013, a rise of 45.2%. The largest announced deal in 2013 was Perrigo Corp’s acquisition of Elan Corporation Plc for US$8.6bn.
• Mid-market (€12-€120mln) deal activity declined; 43 transactions were announced, down by 35.8% from the 67 deals announced in 2012. The aggregate value of mid-market deals fell by 34.4%, from €2.803bn to €1.840bn. Notable mid-market deals in 2013 included Dublin electronic payments business Payzone sell Cardpoint Ltd, to Houston-based Cardtronics Inc. for €119mln.
• The number of small deals (under €12mln fell by 11.1% on 2012’s figures; down from 54 to 48 transactions. The aggregate value of small transactions also fell - by 26.3%, from €243mln to €179mln.
• Largest by sector was - manufacturing. In 2013 accounted for 43.3% of deals; however, deal volumes here were down by 27.1% (from 150 in 2012 to 110 in 2013). 
• Second most active sector: wholesale, retail & repair, activity declined by 41.6%.
• Post and telecommunications sector saw 114% upturn in activity. 
• Social and personal services sector activity rose 76.5%. 
• Research and development sector activity was up 53.3%.  

Internationally:
"Europe saw a slight reduction in transaction volume in 2013 (from 10,500 to 10,476 deals), but an upturn in deal value, from €754.7bn in 2012 to €786bn, an increase of 4.1%."

"North American deal volumes were down by 28.7% (from 8,283 deals in 2012 to 5,908 in 2013), but the aggregate value of transactions was up by 1.3% year-on-year, to €939.7bn. North America returned strong activity in its manufacturing and information technology sectors in 2013."

"Asia-Pacific region ...volume was down 25.2% (from 8,822 deals in 2012 to 6,602 in 2013), without the associated increase in value recorded in the US and Europe (total deal value slumped from €616.9bn in 2012 to €385.6bn in 2013)."

See more on the subject here: http://www.experian.co.uk/assets/consumer-information/white-papers/corpfin/cf-monthly-review-dec-2013.pdf

A chart to illustrate:

14/1/2014: DG ECFIN latest long-range forecasts for euro area, 2014-2023

Some interesting, although abysmal, forecasts from DG ECFIN on euro area's growth prospects out through 2023. Original paper is linked here.

Few charts of note with my comments:

Total factor productivity growth in Euro area... three regimes: decline in 1970s, gradual and shallow recovery in 1980s-1990s, collapse in 2000s and early 2010s, and now expected shallow recovery to below 1% trend in 2015-2023... In brief - abysmal...

Subsequently, steady decline in TFP relative to the US, from levels already below those in the US in 1995 (ca 85% of the US levels back then) to some 25% lower than the US into 2023... Meanwhile, physical capital share is declining less dramatically and is remaining close to that found in the US... which implies that we are witnessing in the case of the euro area increasing relative physical capital intensity of production compared to tech and human capital intensity?..

Notice how the crisis effects on output growth are 'permanent' - through 2023 forecasts, the euro area is not expected to regain the rate of growth in output, let alone the levels of output consistent with pre-crisis trends. That is ca 15 years of 'lost decade' (obviously subject to forecast uncertainty) and a gap of ca 20% of GDP... and this gap will remain beyond 2023 (unless one to dream up a scenario of a discrete jump in GDP of ca 20% comes 2024...)

 Now onto US-euro area comparatives. These speak for themselves.

Ugly prospects for the euro area, to put it mildly.

And a summary of that conclusion:

13/1/2014: Seeking MEPs support for legacy debt resolution?

Today, Irish Times is covering the intention of the Minister Noonan to seek support for a retrospective debt deal for Ireland from the EU MEPs. Here's the full article: http://www.irishtimes.com/news/politics/noonan-to-seek-meps-support-for-debt-relief-over-banks-1.1652911

Couple of thoughts in relation to this intention:

1. This is the 7th year since the ill-fated banks guarantee that started the process of transfer of banking sector losses away from (some) investors in the banks (majority of unsecured and all secured and senior bondholders)  to the taxpayers. This, it appears, is the first instance in which the Irish Government is officially attempting to enlist support for the retroactive resolution of these transfers from the EU MEPs. Why? The Ireland Says No campaign of ordinary citizens and residents of the state have requested such assistance in a number of meetings with the MEPs. People like myself, whenever asked to brief the MEPs on the issues relating to the banking crisis have done so on a number of occasions. Irish Government, it seems, is only now coming around to a realisation that having MEPs support can be of value in addressing the problem? Why? I spoke to the ECON committee members some 6-8 months ago and asked them to support Ireland's efforts. Why is the Irish Government only now officially attempting to do the same?
2. Per article: "The argument that Ireland’s significantly high debt to GDP ratio of almost 120 per cent means that it needs further debt relief has emerged in recent months as a key strand of the Government’s campaign to secure support on legacy bank debt." Why? Sustainability of our debt has been , allegedly, tested by the Department of Finance, by the Central Bank, the Troika etc, and yet none of these entities and organisations ever once voiced any serious concern with sustainability of debt. How can the same Government that continues to claim that everything is sustainable, that Ireland is in a recovery, that we will repay every red cent of our debts etc etc etc now turn around and credibly claim that "it needs further debt relief"? What has changed "in recent months" to alter Government position? Did Government alter its position?
3. In June 2012, Irish Government announced that it has reached - claiming its own effort to credit - a 'seismic deal'. There were no qualifiers used, no caution given, no room for 'may be it won't happen' doubts allowed. The deal was the deal and that was it: Ireland was to get retroactive debt relief. Since June 2012, this 'seismic' deal was thrown like a proverbial banana peel into every gathering of voices doubting the Government achievement or debt sustainability dogma. And now, is Minister Noonan finally admitting there is no deal? Because if the deal is just a matter of time - an 'when' not an 'if' - and has only to wait until the SSM comes into force, then why does Minister Noonan need the MEPs support?

Lastly, as the readers know, this blog position has been that Ireland's total economic debt levels (household, Government and non-financial corporate, combined) are not sustainable. Non-sustainability  of debt in the context of my arguments always involved the view that Ireland is facing a choice: either fund current levels of debt and face long term structural collapse of growth in this economy, or we will need to restructure our debts. In terms of restructuring our debts, I have consistently suggested that the best target would be banks liabilities. The opposing side in the argument always put forward the planned/projected declines in debt/GDP ratio starting with 2014 as a sign of debt sustainability. the cost of such 'reductions' in debt liabilities on the economy (growth and investment effects) and society (health, psychological costs, social costs etc) never phased those who argued that the debt is sustainable. The Government has expended significant effort attempting to argue against the view that our debt is not sustainable. Is the same Government now directly agreeing with the positions they disputed? Are they really saying that we are facing a risk to our debt sustainability?

Setting aside the above issues, if Minister Noonan is indeed committed to seeking MEPs support for a retroactive debt relief for Ireland in relation to the debts related to our banking crisis, I am happy to help in any way I can. it's been long (too long) overdue.

12/1/2014: Icelandic Banks Crisis: Failure to Enforce?

A detailed account of the Icelandic crisis and the failure of regulatory enforcement (not necessarily of regulatory easing) in propelling risky behaviour by the banks: http://www.voxeu.org/article/gambling-resurrection-iceland

11/1/2014: WLASze: Weekend Links on Arts, Sciences & zero economics

This is WLASze: Weekend Links on Arts, Sciences and zero economics… enjoy.


Amazing collection of photographs from Hong Kong by Alex Ogle, AFP. http://blogs.afp.com/correspondent/?post/Hong-Kong-squared%3A-Instagramming-a-region

His Instagram page is here: http://instagram.com/alex_ogleOne

Ogle's photographs document one of the most diverse cities in the world. And diversity is best measured by language differences, the only metric that is relatively free from the problem of identification. Here's an interesting study mapping lexicological distances between European languages:
http://elms.wordpress.com/2008/03/04/lexical-distance-among-languages-of-europe/
Sadly, the mapping is incomplete, including some relatively large (by the visual taxonomy) languages, such as Friulan (300,000+ users).


A promising exhibition coming to Project Arts Centre: http://projectartscentre.ie/event/eva-kotatkova/ February-April 2014 featuring joint collaboration between Eva Kotátková and Dominik Lang. The exhibition is preceded by a solo show at the Cube by Eva Kotátková starting from January 23rd.

Here's an example of Kotátková's conceptualism at work:

And here's an example of Dominik Lang's work: Sleeping City, 2011 installation from Czech and Slovak Republic Pavillion, 54th Venice Biennale

Recent North American Big Freeze storm has generated loads of hoax photographs and mis-labeled and mis-dated reprints of past photographs. But some real images are truly stunning. Here are some examples, from Chicago: http://galleries.apps.chicagotribune.com/chi-140108-otherworldly-cold-weather-chicago-pictures/
Taking us from stunning…

… to ugly…

… to outright frightening…

While on the theme of cold and winter, interesting photography - both techniques used and compositional approaches - from Maroesjka Lavigne
http://www.maroesjkalavigne.be/fotografie/island/

Cold is hardly a descriptor for the series of Picasso's linocuts, representing all plate stages, acquired by by the  British Museum. The set covers both finished prints and artist's proofs for his "Still Life under the Lamp" (image next) and "Jacqueline Reading", with both linocuts created in 1962 when Picasso was 80. The real value of the set is that is shows all stages of linocuts evolution from the first state - an occasion so rare that no other museum in world currently has in its collection a complete set. There are nine progressive sets of states for the "Still Life under the Lamp" alone and four proofs of "Jacqueline Reading".

Both sets are on the show in Room 90 at The British Museum through 6 May 2014. More information here: http://www.britishmuseum.org/about_us/news_and_press/press_releases/2014/picasso_linocuts.aspx

11/1/2014: Individualism v Collectivism: Dynamic Effects of Culture on Innovation & Growth

A few years old, but very good paper: "Culture, Institutions and the Wealth of Nations" by Gorodnichenko, Yuriy and Roland, Gérard (September 2010, NBER Working Paper No. w16368: http://ssrn.com/abstract=1678911)

Based on an endogenous growth model with cultural variable the paper "predicts that more individualism leads to more innovation because of the social rewards associated with innovation in an individualist culture. This cultural effect may offset the negative effects of bad institutions on growth. Collectivism leads to efficiency gains relative to individualism, but these gains are static, unlike the dynamic effect of individualism on growth through innovation."

Empirical findings: "Using genetic data as instruments for culture we provide strong evidence of a causal effect of individualism on income per worker and total factor productivity as well as on innovation. The baseline genetic markers we use are interpreted as proxies for cultural transmission but others have a direct effect on individualism and collectivism, in line with recent advances in biology and neuro-science."

And robustness checks: "The effect of culture on long-run growth remains very robust even after controlling for the effect of institutions and other factors. We also provide evidence of a two-way causal effect between culture and institutions."

11/1/2014: Trueeconomics cited in Expresso

Trueeconomics cited in today's Expresso article on euro area peripheral bonds:
http://expresso.sapo.pt/grecia-e-portugal-lideram-descida-dos-juros-da-divida=f850116.

11/1/2014: Don't mention the 'D' word in the Eurozone, yet...

Bloomberg this week published a note analysing the GDP performance of the euro area countries during the Great Depression and the Great Recession: http://www.bloomberg.com/news/2014-01-06/europe-s-prospects-looked-better-in-1930s.html. The unpleasant assessment largely draws on the voxeu. org note here: http://www.voxeu.org/article/eurozone-if-only-it-were-1930s.

Perhaps the most important (forward-looking) statement is that in the current environment "complying with the EU's debt-sustainability rules will entail severe and indefinite budget stringency, clouding the prospects for growth still further". This references the EU Fiscal Compact and 2+6 Packs legislation.

And on a related note, something I am covering in the forthcoming Sunday Times column tomorrow (italics in the text are mine and bold emphasis added):

"What are the fiscal lessons? First, avoid deflation ... at all costs. ... Beyond that, the options in theory would seem to be financial repression, debt forgiveness, debt restructuring and outright default. Financial repression, the time-honored remedy, would seem to be out of bounds... and EU governments aren't yet ready to contemplate the alternatives [debt forgiveness, restructuring and defaults]. At some point, they will have to. In the 1930s, the situation didn't look so hopeless."

But why would the default word creep into the above equation?

Update: and another economist calling for debt restructuring/default denouement: http://www.voxeu.org/article/why-fiscal-sustainability-matters#.UtJWBR7i-nh.gmail
I know, I know - everything has been fixed now, so no need to panic...

11/1/2014: US Jobs Losses & Some Bad Omens for Europe...

Via @calculatedrisk blog, we have an updated chart comparing jobs destruction in the US for the Great Recession against the previous downturns (post-WWII):

I noted before that in addition to highlighting the severity of the Great Recession, this chart also shows that since 1981, downturns in the US have been marked by ever-extending duration of periods of jobs losses recovery.

Another worthy note is to point out that the US economy is now in 71st month of jobs levels below pre-crisis peak, which means that the US has already clocked almost 6 years of jobs losses. On current trend, it will be around 8-9 more months before the US fully recovers to the pre-crisis jobs levels. Given labour force and demographic changes during the crisis, and given pre-crisis long-term trends in jobs creation now foregone due to the crisis, the US is unlikely to regain the pre-crisis trend levels of employment any time in the next 5 years if not longer. That's the so-called 'lost decade' extending to more like 12 years or beyond.

And the US is in a much better shape than Europe... which is on aggregate is in much better shape than the 'peripherals'... 

10/1/2014: Ifo forecast for Euro area economic growth Q1-Q2 2014

German Ifo institute published its projections for euro area economic outlook for 2014. Here are the details:

• "As projected, GDP in the Eurozone expanded by a meagre 0.1% in Q3 2013, as export growth fell sharply."
• "Economic activity is expected to accelerate modestly over the forecast horizon (+0.2% in Q4 2013, +0.2% in Q1 2014 and +0.3% in Q2 2014) with a gradual shift in growth engines from external to domestic demand."
• "Continued tight fiscal policy in many member states together with persistent labour-market slack conducing to a stagnant real disposable income will lead to limited private consumption growth."
• "Investment is forecast to increase thanks to the gradual acceleration in activity and the need to renew production capacity after a marked phase of adjustment."
• Under the assumptions that the oil price stabilizes at USD 110 per barrel and that the euro/dollar exchange rate fluctuates around 1.36, headline inflation is expected to remain well below 2% (0.9% in Q1 2014 and 1.1% in Q2 2014)."
• "The major upside risk to this scenario is a stronger than expected investment growth, led by improved access to credit."
• "A stagnation in private consumption triggered by continued labour market weakness and weaker external demand in emerging economies are key downside risks."

Full details available here: http://www.cesifo-group.de/ifoHome/facts/Forecasts/Euro-zone-Economic-Outlook/Archive/2014/eeo-20140110

Some charts.

First, for unimpressive growth outlook for the recovery forward, compared to the past, both pre-crisis and 2010-2011 period:

Summary of forecasts:

Inflation outlook, as a bonus offering the reflection on just how poorly the monetary policy in the euro area been performing: remember the ECB mandate is to keep inflation at below but close to 2%...

Core inflation above is matching the target solely in 2007-2008, off-target or close to being off-target in parts of 2006 and 2012, significantly off-target in H2 2009-Q1 2011 and Q2 2013-on. ECB updated forecasts for inflation are at 1.4 percent in 2013, 1.1 percent in 2014 and 1.3 percent in 2015, which means ECB is expecting inflation to miss its target for the next 2 years at least.

Here's a chart of the latest survey indicators for economic conditions in the euro area - current and forward looking from the Ifo network and the EU Commission:

10/1/2014: Irish Industrial Production & Turnover: November 2013

Production for Manufacturing Industries for November 2013 in Ireland was up 13.0% on October 2013 and on an annual basis production increased by 15.9%. Turnover rose 1.2% in November 2013 when compared with October 2013 and an annual basis turnover increased by 0.7% when compared with November 2012.

These are big numbers. Which is good news. But they come with huge volatility in the series overall, so better comparative is on 3mo rolling basis. Here things are less pleasant:
- The seasonally adjusted volume of industrial production for Manufacturing Industries for the three months September 2013 to November 2013 was 0.1% higher than in the preceding quarter.
- Year on year All Industries production indices for 3 months period through November were still up robustly by 7.3%
- Turnover was 0.2% lower.

Per CSO: "The “Modern” Sector, comprising a number of high-technology and chemical sectors, showed a monthly increase in production for November 2013 of 13.4%. There was a monthly increase of 0.4% in the “Traditional” Sector."

Good news here is that y/y figures for production are up on a 3mo basis. Chemical and pharmaceuticals sector posted 21% rise. Basic metals a gain of 23.9%. But Food products fell 0.3% and Beverages fell 8.3%. Also, Computer, electronic, optical and electrical equipment production shrunk 16.2%.

Poor news came on q/q dynamics side. For September-November 2013, compared to 3 months period through August 2013, Capital goods production was down 3.6%, Intermediate goods production was up just 0.2%, Consumer goods production fell 1.0% with Durable Consumer Goods output down 30.4% and Non-durable Consumer Goods up 4.8%.

Full details here: http://www.cso.ie/en/media/csoie/releasespublications/documents/industry/2013/prodturn_oct2013.pdf

Summary: