True Economics

16/2/2012: Some recent press links

2012-02-17T04:29:00.003+14:00

Several links for housekeeping:

My article in the Globe & Mail Economy Lab on Greek deal: Greece: the Jig is Just About Up

And article by Brian Milner from the Globe & Mail main pages quoting me: Setback puts Greece and euro zone in danger

And my comments to the story on irish economy for Finnish newspaper Talous Sanomat

16/02/2012: Spanish & French bonds auction

2012-02-17T00:00:00.000+14:00

Spain's bond auction results:

€2.268bn - 3 year bond, 4% coupon, yield 3.332 against previous auction 2.861% with cover of x 2.2 against previous cover of x1.6.
€0.733bn - 3 year obligacion, 4.4% coupon, yield 2.966 against previous auction 4.984% with cover of x 4.4 against previous cover of x2.4.
€1.073bn - 7.5 year obligacion, 4.3% coupon, yield 4.832 against previous auction 5.352% with cover of x 3.3 against previous cover of x2.1.

Original target for sales €3-4 billion. Raised €4.074 billion - slightly ahead of target, with improved yields and cover. No allocation map to tell how much of take up was due to banks buying.

Dynamics similar to January 19th auction:

€1.3bn - 4 year bond, 4.25% coupon, yield 4.021% against previous auction 3.912% with cover of x 3.2 against previous cover of x1.7.
€2.3bn - 7 year bond, 4.6% coupon, yield 4.541% against previous auction 5.110% with cover of x2 against previous cover of x1.1.
€3.0bn - 10 year bond, 5.85% coupon, yield 5.403% against previous auction 6.975% with cover of x2.2 against previous cover of x1.7.

And French auction results:

€5.025bn - 5 year bond, 1.75% coupon, yield 1.93% with cover of x 1.99
€2.09bn - 2 year bond, 3% coupon, yield 0.89% against previous auction 1.05% with cover of x 2.4 against previous cover of x2.1
€1.34bn - 3 year bond, 2.5% coupon, yield 1.09% with cover of x 3.0

Via @ForexLive

13/2/2012: Now - a Greece comparative that doesn't work in our favor

2012-02-14T11:08:00.004+14:00

Sometimes those 'We are not Greece' comparatives work our way, sometimes (fortunately enough rarely) they take us in the opposite direction. Take a look at the following two charts from DB Research (hat tip to Zero Hedge). Note: you might want to click on the charts to enlarge.

Chart one clearly shows Ireland's impressive performance with low interest rates, bubble-fueled domestic growth. The chart below shows Ireland's disastrous growth performance since the bubble burst. What's the point, you ask? Ok, half of the period of our rapid decline has been the period of exports boom, the period of our growth has been the period of domestic growth. Irish exports have been on the tear since quarter 9 in the second chart. And yet, the miracle is not happening - the exports-led recovery is still not here.

And look at Greece. And Portugal. And Spain. And Italy. And compare to Ireland. Scary? Glance back at chart 1 above and spot the fall we've taken. Some might say as the consolation that we are still ahead of all the PIIGS in actual national income (do keep in mind - the above charts are GDP, not much more adversely impacted GNP). Ok, let's put it in simpler terms: Greece has fallen from the 10th floor to the 5th floor balcony. We have fallen from the 20th floor to the 10th floor roof terrace. We are still five stories above Greece, but, man it has to hurt more.

13/2/2012: Sunday Times 12/2/2012: The perils of long-term unemployment

2012-02-14T07:33:00.000+14:00

This is an unedited version of my article in Sunday Times, 12 February, 2012.

The conflicting nature of the most recent data onunemployment in Ireland paints the picture of an economy bouncing at the bottomof the Great Recession. However, underlying trends in long-term unemploymentrepresent the single greatest threat to our growth potential in years to come.

The latest Live Register figures reflect two months ofconsecutive and robust declines in the numbers drawing unemployment assistance.In December 2011, seasonally-adjusted Live Register dropped 3,600 (the thirdlargest monthly decline since the beginning of the crisis). This was followedby a 3,200 decline in January 2012, marking the fourth biggest downwardadjustment in the series since January 2008. Yet, January 2011 Live Registertotal remains just 2.1% below the peak of 449,200 attained in September 2010.

Since 2009, net emigration form Ireland totalled some 76,400and gross emigration amounted to 236,800 according to CSO. Absent theofficially registered emigration, Irish Live Register would have been closer to522,900 in January 2012. In other words, the Live Register improvements nowconceal, not reveal, the true extent of joblessness and underemployment in thecountry.

In contrast to the Live Register data, more direct evidenceon the job markets conditions is provided by the monthly Purchasing ManagersIndices (PMI) surveys published by NCB Stockbrokers. These make for a ratherdepressing reading. January Services PMI employment conditions registered adeeply contractionary 44.5, exacerbating declines posted in December 2011.January marked the sharpest rate of decline in the services sectors employmentin 21 months. In Manufacturing employment index rose in December to 50.5 beforefalling again to a contractionary 49.5 in January 2012. Manufacturingemployment index is now 4.1% below January 2011, marking the fourth drop in thepast five months.

These are the short-term signs of the labour market thatremains in continued distress. And further deterioration in the underlying jobsand employment dynamics can be expected in the medium term.

Firstly, dramatic increases in the cost of laying offworkers under Budget 2012 are likely to translate into an overall stabilizationof the Live Register figures at a cost of the deterioration in the quality ofjobs (wages and bonuses, and promotional opportunities losses) and hours ofwork as employers will be seeking cuts to their cost bases through lower payand fewer billable hours. Budget 2012 makes it less likely that employers willbe taking on new workers any time soon.

Secondly, the already rampant rise of the long termstructural unemployment will continue unabated. Here Ireland is in the leagueof its own when compared to other European economies. In Q3 2011 our long-termunemployment stood at 8.8% - the third highest in the EU27. Over the periodcovered we have experienced a sharpest increase in long-term unemployment inEurope.

Matters are even worse when it comes to very long-term unemployment – definedas unemployment spells in excess of 24 months. With a rate of 5.4% in Q3 2011we are now the second worst performer in Europe in terms of overall verylong-term unemployment rate, and we are the absolute worst in the EU27 in termsof increases in very long-term unemployment since the beginning of the crisis.

Long-term unemployment exacts tremendous social and economictolls. International research shows that long-term spell out of work leads toreduced life-time earnings (with estimates of up to 20% loss in earnings yearsafter the return to the job market), higher probability of future unemployment(in some studies reaching over 2.3 times higher probability of unemploymentthat average), and rapid and profound deterioration in human capital of theunemployed. These effects also hold for those entering the workforce during theperiods of elevated long-term unemployment, such as the current Irishgraduates.

In today’s environment, rising long-term unemployment inIreland, threatens to reinforce already adverse future trends in productivitygrowth. A study by the European Commission from 2006 has shown that acrossEU27, over the next 25-30 years, ageing workforce will require greater use ofskills-driven productivity growth. The last thing we want is to lose the skillsof the current generations of young workers and students to long-termunemployment.

In terms of timing of the policy responses to the long-termunemployment, therefore, it is critical that we do not delay the necessarystructural reforms.

Most of the research on the policy solutions to this problemis focused on the structural and institutional aspects of the labour markets. Anumber of recent studies from the UK, Italy, and the US, as well as morebroadly-focused studies across the advanced economies show that long durationstrong unemployment protection, and high cost of hiring and laying off workers,along with rigid systems of wage setting can act as structural barriers todealing with the long-term unemployment. This point has been most recentlyflagged in the case of Ireland by the OECD report from June 2011. High minimumwage and strong collective bargaining have been linked to segmentation of thelabour force and increased job instability for the younger and less-skilledworkers. Systemic reforms of social welfare and wages-setting mechanisms are clearlyan extremely painful, but necessary part of the comprehensive solution.

On the enabling side of the policy equation, the focusshould be on enhancing the human capital of the unemployed and incentives forprivate sector jobs creation, not public investment-driven policies.

Immediate labour market measures should be developed for thelong-term younger unemployed. The Government, consistent with the advice fromthe IMF and OECD is pursuing so-called active labour market programmes in thisarea. These are primarily represented by the ‘push’ policies designed to forceyoung people off the unemployment benefits and into state-run trainingprogrammes. According to the Nobel Laureate James Heckman training schemesdesigned to de-list people from the unemployment rosters had zero effect onlabor markets outcomes in the 1990s. More recent research for Europeancountries experiences prior to 2008 confirms the same. In Ireland the realimpact of FAS programmes on long-term unemployment both before and during thecrisis has been negligible.

OECD data very clearly shows that Ireland spends more thanthe Nordic countries as well as high income EU countries on direct jobscreation and state training. In total, Ireland spent 0.87% of GDP or 1.10% ofGNP in 2010 on all active labour markets programmes, compared against 1.06% inthe Nordic countries and 0.70% in the rest of the high income EU states. It isclear that we are simply not getting a good value for money out of thisexpenditure.

Instead of relying on active labour markets programmesalone, Ireland should focus on facilitating formal education access forlong-term unemployed, especially to undergraduate and MSc programmes closelyaligned with business and industry interests and featuring large component of directindustry-related teaching. Retraining grants and supports can be linked withmobility grants to assist mobility of those moving off unemployment benefits.

For the very young at-risk of future unemployment, financialincentives to stay in school can be developed via social welfare systems.

There is strong evidence to support the view that privatesector jobs creation can be assisted through carefully targeted tax breaks anddeferrals. These require extremely close monitoring, strict conditionality andenforcement, while assuring that there is no older workers displacement.Another significant measure would be to suspend minimum wage for all workersunder-25 years of age, but this policy cannot be expected to generatesustainable, higher quality jobs.

Reducing USC rates for self-employed below those for PAYEworkers to reflect the reality of their restricted access to social benefitswould provide some support for early-stage entrepreneurship and skills-basedself-employment.

The last thing the Government should do in the currentenvironment is to use scarce taxpayers cash on direct physical capitalinvestment as such measure would subsidise capital-intensive, notskills-enhancing activities which will cease the minute Government cash driesup once again.

Both the IMF and the OECD provide very clear-cut suggestionsas to the core composition of the structural labor markets reforms based onthree pillars: welfare reforms, labour markets reforms and activation systemsenhancement. Augmenting these with more direct measures to incentivise privatesector jobs creation mentioned above would be a net benefit in combatinglong-term unemployment.

Table: Spending on active labour market programmes, 2010, %of GDP

	Ireland (GDP)	Ireland (GNP)	Nordic Countries	Other OECD Europe	OECD non-Europe
Public employment service and administration	0.18	0.23	0.30	0.17	0.07
Training	0.37	0.47	0.26	0.22	0.09
Direct job creation	0.26	0.33	0.03	0.08	0.05
Other active measures	0.06	0.08	0.46	0.23	0.07
Active Labour Market Programmes, total	0.87	1.10	1.06	0.70	0.28

Source: OECD, Employment Outlook 2011, table 3.2

Box-out:

As the farcical show of Greek negotiations and austeritytalks continued its merry-go-round through this week, the ECB has caused someexcitement by opening up the discussion on allowing some writedowns of theGreek bonds it holds. The EFSF bonds swap would see ECB converting Governmentbonds the Central bank bought in the markets, for higher rated EFSF bonds,writing down its purchase discount, which in the case of Greek bonds standsaround 31% of the face value of debt bought. The move has been gatheringmomentum and driving the bond prices up since the mid-week in a hope it will beextended to other peripheral bonds. Yet, no one in the markets seemed to noticea simple paradox. In order to create any real lasting effect on bond yields,such monetization would require a de facto injection of hundreds of billions incash into the Euro area economy. The upside of this would be further cheapeningof the credit for the peripheral states. The downside will be an even greaterliquidity trap via EFSF and a sharp rise in the future interest rates on Eurodenominated debt of the ordinary households and companies. With 4-4.5% ECBrates on offer and double-digit retail rates on banks loans, ECB would berobbing Paul and Jane to pay off Governments across the EU weakest states. Thiswe now call Europe’s greatest hope for salvation?

12/2/2012: A road map to a cooperative solution for Greek crisis

2012-02-13T11:22:00.002+14:00

Papandreou: 'this is a battle between the markets and democracy'.

Greek political discourse - mirroring the received wisdom of the crowds has been reduced to a blatant, and populist lie.

The battles in Greece today are between democracy and European/ECB dogma of preserving the status quo of existent statist system, of which patronage by the State of some markets participants is just an element. Here's why:

The markets did not impose ANY conditions on Greece - EU/ECB did. The markets simply refuse to be conned any longer into subsidizing the Greek state through cheap credit. This is the basic right of any participant in the markets - to refuse investing or lending to anyone, just as it is the right of any baker to refuse selling bread to someone with no money and no desire to pay on credit.
The markets investors are the injured party - excluding the bottom-fishing hedge funds who bought Greek bonds very recently at hefty discounts. The investors are the only ones who were first deceived by the Greek Governments cooking books and fudging numbers in official statistics. The investors should have known better, but that is not a valid defense of the case against them - they were deceived by fraudulent data reporting by the Greek State (yes, right - politicians, Governments, civil servants). The markets/investors are also the only ones who have to take any writedowns. The ECB and the European Union are taking no writedowns on Greek bonds, and are, in fact, lending Greece 'rescue funds' at a profit.

I am pointing this not to prevent imposition of losses on Greek bonds investors. They deserve to lose and they should lose more than 70-75% of the face value of their investments in Greek bonds.

I am writing this to point that the battle we are facing in Athens today is between people pushed to a breaking point by the policies of the Governments past, and the EU/ECB.

And there is a way out, folks. Here's what should be done:

Impose full losses on Greek bondholders to bring debt/GDP ratio in Greece to 75%. Do same for banks bondholders in Ireland and Spain, and combine these sovereign and banking measures to achieve the same in Portugal and Belgium. Seniority under these arrangements should be as follows: private sector debt holders take the first hit, followed by the public debt holders.
All PIIGS bonds held by the ECB are to be transferred into a separate holding fund. This fund is to run between 2012 and 2021. Bonds are to be held in the fund not at face value, but at purchase value to instantaneously reduce debt overhang in these countries. Note: this imposes no loss on ECB until the fund is wound up.
The ECB Special Fund (outlined in (2) above) is to monitor the conditions of compliance with real (not the currently identified) reforms aiming to restructure PIIGS economies to put them on the path of private sector-driven growth and fiscal sustainability over 10 years horizon.
No coupon payments or principal repayments to be accepted by the ECB on these bonds between 2012 and 2021 to reduce debt overhang drag on the participating economies and improving their fiscal capacity to implement reforms.
The bonds held in the ECB fund are to be automatically written down to zero face value in 2021 as long as the participating country meets conditions of implementing the reforms.

The above proposal will eliminate or severely restrict the problem of moral hazard, as countries participating in the programme will be subject to strict reforms programme implementation. The plan will also reduce the burden of repayment of debt on the countries that do stick to the conditions of the reforms. The plan will also bring, gradually, these countries economies to more competitive institutional, fiscal and regulatory environment. In other words, the proposal contains both the sticks (under items (2), (3) and conditionality) and the carrots (items (4) and (5)).

In other words, the fund, as outlined above, would satisfy core objectives of the crisis resolution framework:

Allow for meaningful change and reforms
Create an incentive to participate actively in reforms for the countries engaged with the fund
Reduce moral hazard problem
Help to establish popular support for reforms by providing real, tangible improvement in the economies ability to sustain reforms

We can't keep fighting battles driven by noble objectives, but based on faulty logic that simply serves the very same elites that have created this crisis. We need to find a cooperative solution to the problems we face.

11/02/2012: Labor Productivity - some cross-EU comparatives

2012-02-12T13:41:00.000+14:00

There has been much of talk about Euro area (and EU27) competitiveness trends recently in the media. Some of the commentary I've seen references the issue of decoupling in competitiveness across EU states. In light of this, I decided to take a look at productivity trends. Using eurostat data, I was able to:

Take eurostat main series for per person aggregate (total) productivity index that sets 2005=100
Rebase the index to Q1 2000=100 and recompute entire set of EU27 countries, plus EA17 and EU27 aggregates
Obtain via (1) and (2) above new set of productivity indices that reflect dynamics in per person productivity since Q1 2000 through Q3 2011
Note: data is seasonally adjusted and I am only reporting countries where data is hours adjusted as well.

Here are the core charts (I added Ireland and EU 27 average in every chart):

So few trends are apparent:

Ireland performs - since the beginning of the crisis extremely well in terms of productivity improvements and levels - much due to the massive destruction of its employment base (I commented on this effect a number of times before). Overall - this is remarkable performance albeit at huge cost.
Spain has posted some significant increases as well, mostly due to destruction of employment - much more so than Ireland.
Italy is performing poorly as does Greece. In fact, Greece is the third worst performer in the entire EU27 in terms of productivity growth since the beginning of the crisis (Q1 2008).
Portugal improvements appear to be largely consistent with the pattern for Spain.
Finland clearly leads the pack (after Ireland) in the group of Small Open Economies (SOEs)
Strong trends in growth in East-Central Europe (ex Hungary and Slovenia)

Now, let's take a look at cumulative growth in productivity since the beginning of the crisis - note: green boxes mark countries that outperform EU27 average by more than 1/2 STDEV, while red boxes mark those countries that underperform the EU27 average by more than 1/2 STDEV:

And similar analysis for cumulative growth in productivity since Q1 2000:

So is there 'decoupling' going on in terms of labor productivity? Not really. Here's what's happening:

Spain shows highest gains in total productivity since Q1 2008 but weak (roughly average) gains since Q1 2000
Ireland shows second highest gains since Q1 2008 and above average (6th highest in EU27) gain since Q1 2000
Slovakia doing spectacularly well, albeit, of course, from low levels, as is Estonia (though not too great during the crisis period)
During the crisis, Belgium, UK, Greece, Hungary, Italy, lux & Sweden all posted below average (more than 1/2 STDEVs) performance
Since Q1 2000, Italy and Lux were the only two statistical underperformers.

So unless we go beyond Q1 2000 (the period for which we don't really have coherent comparable data) there is no 'decoupling' going on in labor productivity. There is shallow growth in it on average, but no dramatic 'decoupling'. In other words, much of core Europe is pretty poor in terms of labor productivity growth, while East-Central Europe and Ireland are performing pretty well.

11/02/2012: Globe & Mail 9/02/2012

2012-02-12T12:02:00.000+14:00

Here's the link to my latest article for Economy Lab with Canada's Globe & Mail.

10/2/2012: Two charts for a Friday night pint

2012-02-11T08:41:00.000+14:00

Two charts for some Friday night thinking instead of (or even while) drinking. One courtesy of Lorcan Roche Kelly flagging it on twitter (link here):

No, it's not Nouriel Roubini references that are of import in the above - entertaining as they might be - it's the likely pending reversal in the series that some techies have noticed. Hope you are not too long into the weekend...

Second chart is my own. I took a simple ratio (expressed in %) of General Government Deficit to Structural Deficit to highlight the extent of the spending related to excess over structural imbalances, in other words - to show some pro- and counter-cyclicality. Underlying data came from IMF WEO.

Some points worth noting: US has been running expansionary (in excess of structural) deficits since 2007 and these have peaked in 2009. UK started slightly later - in 2009 and will be running these through the entire forecast period. Here's an interesting thing - for all the austerity claims in the UK, ordinary deficits are expected to run above structural deficits all the way through 2016.

10/2/2012: Few thoughts on the global policy crisis

2012-02-10T23:38:00.000+14:00

What makes me really concerned nowdays is not the ongoing crisis, but the logical and numeric impossibility of the mounting policy "solutions' to the crisis. Here's a quick synopsis. Take a look around the world:

Bank of England repeated QE rounds in the face of £1 trillion+ debt pile is a strategy for growth via debasement of the currency
Fed's continued unrelenting QE is much the same
ECB has been debasing any real connection between banks, real economy and banks profits via uninterrupted injection of cash into banks - giving a license to earn free profits on interest margins while monetizing already excessive Government debts. Real economy, of course, gets hammered by sterilization via reduced real credit flows. The end game - moral hazard of massive proportions in the financial sector across Europe
EU itself is hell-bent on debasing real incomes and wealth of its citizens by implementing the Fiscal Compact as the sole policy tool for dealing with the crisis
Obama Administration is debasing, in contrast with EU, the future generations' wealth and income by continuing to spend Federal dollars like a drunken sailor arriving in a casino
Ireland's Government is actively debasing the entire domestic economy, oblivious to the reality that households and businesses deleveraging is being prevented by banks and Government deleveraging - all for the sake of grand posturing of "We will pay all our debts" variety
Japan is engaged in an active pursuit of debasing Government balancesheet as the debt bubble spreads to Japanese Government bonds - now in negative yields
China is debasing its monetary and fiscal policies to deliver a 'soft landing' to the massive train wreck of its vastly bubble-like property and banking sectors

Close your eyes and think - how will the world be able to reverse out of these disastrous desperate policies in years ahead without completely shutting off growth via high interest rates, destabilized savings-investment links and in the presence of ever-rising public, private and corporate debts? What levels of inflation will be required to 'inflate' out of this mess? What degree of real wealth destruction has to be imposed on the ordinary people to sustain these gambles without a structured, orderly and coordinated restructuring of debts? What asset class and geography hedge can protect you from this avalanche of disastrous policy choices by the Western leaders?

9/2/2012: Interesting chart on Euro area deposits

2012-02-10T10:46:00.001+14:00

Here's an interesting chart from Credit Suisse via zerohedge:

Now, it's not the blue line that worries me and the others (EAP5=Euro Area Periphery states or PIIGS). It's the massive dip in the grey line. Given there's little deleveraging of consumers and corporates in France and Germany and that there is little it terms of concerns for stability of German banks (whether or not this sense of security is justified or not), the chart suggests that deposits are flying out not just in fear of local banks risks, but in fear of the euro risks.

The link to zerohedge post is here.

9/2/2012: What can ECB do?

2012-02-10T06:17:00.001+14:00

In relation to the recent statements from Minister Noonan and Taoiseach Kenny on their expectations that ECB involvement in Greece should be matched by ECB extending assistance to Ireland:

What can ECB provide in relief for Ireland:

1) ECB can do a swap of Irish higher coupon bonds for cheaper EFSF/ESM bonds at current or even reduced (via suitable averaging) market value, saving interest charges and reducing outstanding principal of Irish debt. This will not be a credit event, as the transaction will be purely contained within ECB balancesheet.

2) ECB can give a green light to the Central bank of Ireland not to sterilize ELA returns under the promisory notes, effectively rebating the funds back to the Exchequer.

3) ECB can also consent to restructuring of ELA (partial form of (2) above)

So there are a few things ECB can do, but all will de facto open ECB to a major risk of other countries coming to it with similar demands.

Regardless of the outcome, the Taoiseach and Minister Noonan are correct in demanding ECB step forward with solutions to the problems in Ireland that have been created in the first place by ECB policies of the past.

9/2/2012: Few bothers

2012-02-10T03:37:00.001+14:00

Today's mid-day CDS spreads (courtesy of CMA):

This should bother few sovereigns:

and few banks:

And is likely linked to Greek bailout costs falling on: France, Netherlands, and Finland while doing nothing good to over-indebted Belgium and Italy and leading to a slowdown in Norway and Denmark... while taking a bite out of the balancesheets of few big banks. And that comes on top of markets already expecting the fallout from the Greek deal...

9/2/2012: ECB rate decision

2012-02-10T03:05:00.001+14:00

So we have ECB keeping rates at 1%... which relates to:

1) growth:

So with growth leading indicator stuck for the 4th month in a contraction territory, 1% repo rate is a bit too high, given we are now into the second leg of recession judging by leading indicators.

2) inflation:

So with inflation still anchored well ahead of 2% bound, that 1% repo rate is a bit too low for the ECB mandate, unless the ECB expects rapid de-acceleration of prices.

And in case you wonder, the pull on policy side comes from divergent growth/inflation dynamics:

And thus we have: ECB latest decision is inconsistent with either inflationary or growth signals. You might say that on average, that makes ECB policy balanced. Or you might want to say that this mismatch reflects monetary union internal inconsistency. Or both... take your pick.

8/2/2012: A more pleasant Sovereign arithmetic

2012-02-08T14:21:00.001+14:00

And for a rather more pleasant sovereign arithmetic, here's an interesting table from the Global Macro Monitor (link here) summarizing yoy movements in 5 year CDS:

Frankly speaking, all of this suggest some severe overshooting in CDS and bonds markets on upward yield adjustments over time followed by repricing toward longer term equilibrium. What this doesn't tell us whether we have overshot equilibrium or not... Time will tell.

7/2/2012: An unpleasant risk arithmetic

2012-02-08T04:29:00.000+14:00

Here's the guys Irish authorities trust so much on risk assessment, they contracted them to do banks stress tests - PCARs - back in 2010-2011. Note: this is a statement of fact, not an endorsement by me. The Blackrock folks produce quarterly report on sovereign risks and this the summary chart from the latest one - Q1 2012. Negative numbers refer to higher risks:

So Greece leads, Portugal follows, Egypt and Venezuela are in 3rd and 4th place worldwide of the riskiest nations league and then, in the fifth place is Ireland, followed by Italy. And here's the summary of the euro area ratings:

Yes, bond yields have been improving significantly, including due to both fundamentals and banks liquidity steroids, which is a good news. The bad news, yields have been declining for other countries as well and investors' relative sentiment is not improving as much as the absolute levels of yields declines suggest.

Today, one of the Irish Stuffbrokerages claimed in a note that: "The country’s success in meeting its targets under an EU/IMF bailout without social or political unrest and its export-focused economy has enabled it to dodge the recent Eurozone downgrades by S&P and Fitch and distance itself from fellow bailout recipients Greece and Portugal. " Distancing we might be, but the neighborhood we are lumped into is not changing as the result of this distancing. At least not for now.

Please note, the assessments above are consistent with CMA analysis based on CDS spreads, covered here.

6/2/2012: Fiscal Compact Treaty - Sunday Times 05/02/2012

2012-02-07T11:12:00.000+14:00

This is an unedited version of my Sunday Times article from February 5, 2012.

In medical analogy terms, this week’s Fiscal Pact signed bythe 25 EU Member States, is equivalent to a misdiagnosed patient (the euro areaeconomy) receiving a potent cocktail of misprescribed medicines.

In other words, the Fiscal Pact is neither a necessary, nora sufficient solution to the ongoing crisis of the euro area insolvency.Moreover, it saddles the euro area with a choice of only two equallyunpalatable alternatives. The first choice is compliance with the Pact thatwill lead to a situation whereby a one-policy-fits-all monetary framework willbe coupled with an equally mismatched one-policy-fits-all fiscal framework. Thesecond choice is business as usual, with continued reckless borrowing, internaland external imbalances and ever deepening links between the sovereignfinances, the ECB and the banking sector balancesheets. In other words, thereis a choice of either pushing Euro area down the deflationary,stagnation-inducing deleveraging spiral, or leaving it in the current modusoperandi of reckless borrowing.

Both alternatives are internecine for Ireland, and bothincrease the probability of an eventual collapse of the euro over the next 5-10years.

Suppose the EU member states, opt for the first alternative.As a whole, to comply with the Pact parameters, the Euro area economy will haveto shrink by some €535-540 billion every year between now and 2020 – anequivalent of reducing euro area growth by a massive 3.9% annually. Just forthe purpose of comparison, during the 2009 recession, Euro area experienced areal decline of overall income of 4.25%.

Ireland will be one of the worst impacted economies in thegroup courtesy of our excessively high structural deficits, debt to GDP ratioand cyclical deficits. In 2012, Ireland is forecast to post a structuraldeficit in excess of 5.5% of potential GDP – the highest structural deficit inthe entire Euro area. To cut our structural deficit to 0.5% will requirereducing annual aggregate demand in the economy by some €7-8 billion in today’s terms. Debtreductions over the period envisioned within the pact will take an additional€12 billion annually. For an economy with huge private sector debt overhang,paying some 12% of its GDP annually to adhere to the Fiscal Pact is a heftybill on top of the already massive interest bill on public debt.

Ireland’s fiscal performance under the Fiscal pactconstraints, 2012

Sources: author estimates based on the combination of datafrom the Department of Finance, Budget 2012, IMF World Economic Outlookdatabase, and author own forecasts

Crucially, the idea of the Fiscal Pact as a tool for resolvingthe structural crisis faced by the Euro area is equivalent to doing more of thesame and expecting a different outcome.

The crisis arose because the Euro area combined vastlyheterogeneous and complex economies under a one-policy-fits-all monetaryumbrella. This has meant that no matter what policy the ECB pursued, interestrates and money supply will never be in synch with all economies within theEuro. The modern economic theory suggests that fiscal transfers can act asautomatic stabilizers, correcting for monetary policy disequilibrium.

In European case, this theory is a pipe dream. Firstly,fiscal transfers cannot happen with the same timing as monetary policy changes,especially given the bureaucratic nature of the EU and its institutions’detachment from the member states’ realities. Take one example – Ireland andother euro areas have been experiencing severe unemployment problems since2009. Yet, only this week did the EU wake up to the problem and thus far, thereare no tangible plans for dealing with it. Automatic stabilizer of fiscalpolicy will never be timely and responsive enough to undo damages caused by theunsuitable monetary policy. Secondly, fiscal transfers are an imperfectsubstitute for private sector adjustments to dislocations that monetary policy generates.No need to go beyond the current crisis to see this with aggressive monetarypolicy interventions since 2008 yielding not an ounce of real economic impacton the ground. Which means that the theoretical stabilizers are not really thateffective in stabilizing the economic disruptions caused by monetary policymisfiring. Lastly, neither the current Pact, nor any other institutionalarrangements within the Union provide for any automatic fiscal transfers.

Yet, when it comes to the penalties that apply to memberstates breaching the Pact conditions the new agreement are automatic and verytangible. This imbalance – with the Pact being all stick and no carrot – risksdestabilizing economic systems struggling with shocks.

Take for example a country like Ireland. Suppose ECB policyin the future leads to high interest rates – a scenario consistent with thecurrent monetary policy developments. This would imply that our terms of tradewill deteriorate, reducing our exports and driving our economy into an externaldeficit. Simultaneously, slowdown in the economy will put pressures on ourfiscal balance. This deterioration will not be consistent with a cyclicalrecession, implying that we are likely to simultaneously breach the twindeficits targets under the Fiscal Pact, triggering automatic penalties. Economybrought to its knees by the monetary policy mismatch will be forced to payadditional price through fiscal penalties.

In other words, the Pact is now attempting to create anotherpolicy system that will risk further detaching fiscal policies within the Euroarea from the monetary policy.

When it comes to dealing with the current crisis, the newPact contains no tools for achieving structural reforms required to arrive atsustainable public finances. Paying down the debts and cutting back deficitsrequires simultaneously running surpluses on the Exchequer side and the currentaccount side. In other words, both external and internal surpluses must beachieved simultaneously. As international research shows, the likelihood of anystate moving from long-term external imbalances to a sustainable currentaccount surplus is extremely low.

Matters are worse when it comes to both fiscal and externalbalances. My own research based on the Euro area data shows that during1990-2008, only two euro countries – Finland and Malta – have complied with theFiscal pact criteria more than 50% of the time. The rest of the member states,including Germany and France, have run sustained deficits more than 60% of thetime. Once a euro state found itself stuck in twin current and fiscal deficitsin one decade (the 1990s), transitioning to a twin current account and fiscalsurplus in the next decade (the 2000s) was virtually impossible. For example ofall states in EA17 who were in current account deficit throughout the 1990s,only 2 have managed to achieve current account surpluses during the followingdecade. Only one country that experienced fiscal deficits in the 1990s hasmanaged to generate fiscal surpluses over the following decade. No country hasbeen successful in restoring fiscal and external balances after a decade oftwin deficits.

The Fiscal Pact implies even less flexibility in adoptingstructural reforms necessary to achieve an already highly unlikely economic transitionto the long-term sustainability path for many euro area states, includingIreland.

Consider for example two economies currently in a crisis –Ireland and Portugal. Portugal requires severe and substantial cuts in allpublic spending and then deep reforms in the private sectors of its economy.The country does not need a debt restructuring, but it needs huge capitalinjections to put it onto the path of capital investment convergence with theeuro area average.

In contrast, Ireland needs restructuring of the privatesector debts, deep reforms on the current expenditure side of the Irishexchequer, and more gradual reforms in the private sectors. Ireland has afunctional exports generating economy, it has achieved current accountsurpluses on external side and balance on its Government spending side in thepast. During the adjustment, Ireland needs structural reductions in the currentspending best timed to start concurrently with the pick up in private sectorjobs creation to offset adverse effects of these reforms on the most vulnerable– the unemployed. Ireland also needs to boost its after tax returns to humancapital in the medium term – something that Portugal has no need for at thispoint in time.

There is nothing within the Pact that would facilitateeither Portuguese or Irish economic stabilization and recovery. Neither willthe Pact improve the chances of Spain, Belgium and Italy ever reaching realgrowth paths that imply sustainability of fiscal and external balances. Inshort, the Pact our Government so eagerly subscribed to is at the very best acontinuation of the status quo. At its worst, Ireland and other member statesof the Euro are now participants to a fiscal suicide pact, having previouslysigned up to a monetary straightjacket as well.

Box-out:

Last two weeks marked two significant milestones onIreland’s economic performance front. Despite the adverse newsflow on the realeconomy side, Irish bond yields for 5 year bonds have dipped below 6% mark lastweek for the first time since the beginning of the crisis. This week, spreadson the 5 year Credit Default Swaps (the cost of insuring Irish bonds) also fellbelow 6% mark. For the first time since the crisis began our implied cumulativeprobability of default (CPD) – the probability that the Irish Government willdefault on its debt at some point over the next 5 years has touched 40%, downfrom over 46% at the end of 2011. Although the CPD is a mechanical function ofCDS yields and not a statistical estimate of the true risk of the Governmentdefault, the CPD is an important metric for the markets. The significantdecline in our CDS spreads this week, was prompted by the Irish banks buyinginto longer maturity bonds in the recent NTMA-led bond swap, plus the overallimproving sentiment for sovereign debt in the euro area markets. The lateritself was driven by the artificial forces, such as the ECB extending €497billion to the banks in 3 year money. Nonetheless, our bond yields and CDSspreads declines are starting to show some improvement in overall markets risk-pricingfor the Irish Government debt – a much needed stabilization and a moment ofrespite from the relentless crisis dynamics of the recent past.

6/2/2012: An interesting (non-scientific) poll

2012-02-07T08:51:00.000+14:00

Here's an interesting set of results - note, sample size is small for the duration of this survey to draw any serious conclusions, so don't... but from the top of the results provided, and given this is the official site of the President of the European Parliament, with all the selection biases possible in terms of audience it attracts, the results would be unsettling:

The site for the poll is: http://www.martin-schulz.info/index.php?link=6&bereich=1#

5/2/2012: Irish Consumer Confidence - a bounce in January?

2012-02-06T07:57:00.000+14:00

I have noticed that ESRI and KBC Bank are very enthusiastic about the latest reading for their consumer confidence barometer reading for January 2012. Absent the retail sales data for January, we can only speculate as to what the latest increase means. But here's a somewhat scientific method for doing this.

Chart below shows dynamics in Consumer Confidence index and historical and forecast values for two core retail sales indices. The forecasts are based on trend dynamics for each index from January 2008, accounting for the correlation between Consumer Confidence and specific retail sales index and accounting for the latest reading for Consumer Confidence index.

The chart above shows my own Retail Sector Activity Index with the forecast for January 2012 based on the above estimates shown in the first chart.

Here's what is clear from the above exercise. Assuming the Consumer Confidence index reading for January is to be trusted (see below on that), we can expect:

Index of retail sales value to rise 7.4% qoq and 6.3% mom to the level of 101.8 or 4.1% ahead of where the index reading was 12 months ago. This would put the value index at the levels not seen since July 2009.
Volume index of retail sales can be expected to rise 5.4% qoq and 3.4% mom. The index reading would reach 104.3 which is 2.6% ahead of where it was 12 months ago and the level not seen since April 2010.
Of course, Consumer Confidence index now stands at 56.6 up on 49.2 in December 2011.
My Retail Sector Activity Index, consistent with the current reading in the Consumer Confidence index would be around 110.5 - the level that is 1.6% ahead of where it was 3 months ago, 7.4% ahead of the previous month reading and 6.4% ahead of where the index stood 12 months ago. This reading - were it to materialise - will bring my index to the levels unseen since July 2010.

All of this, of course, is rather academic. The problem with the ESRI Consumer Confidence is that it has only weak relationship with both the Value Index of Retail Sales and the Volume Index of Retail Sales, as the charts below illustrates. Please note: this does not mean in any way that Consumer Confidence Index contains little relevant information, just that it is, in itself, a very weak predictor of the retail sales activity.

I wouldn't be holding my breath waiting for a big Retail Sales bounce in January-February this year.

5/2/2012: Irish Labour Productivity - some latest trends

2012-02-06T06:13:00.000+14:00

Chart of the Week, folks, comes courtesy of the ECB database on labour productivity. It contains the full set of productivity indices for Ireland by sector, reported on the basis of productivity per person employed. And it speaks volumes of the myths we hear in the media.

So the Chart of the Week is:

Now, what does it tell us? (And please, no protests - I am decomposing the above chart into some interesting trends using as illustrations more charts).

Irish productivity - overall, across all sectors - has been rising during the crisis
Although as I pointed out so many times, much of this rise in Ireland's overall productivity is due to jobs destruction in retail, construction and other sectors, not to some intrinsic rises in real productivity. Jobs destruction concentrated in less productive sector helps overall total productivity. Despite the fact that it causes massive unemployment and other problems. See chart below for evidence on this.

Another interesting feature of the data is the rapid, continuous decline in productivity in the broadly-defined public sector, arrested around Q3 2010 and now running basically flat. But historically, public sector productivity has contributed negatively to overall productivity performance of the economy.

Overall, so far, our labour productivity is 5.2% ahead of the EA17 and 4.7% ahead of EU27 in Q3 2011. Year on year, EA 17 labour productivity is up 1.04%, EU27 is up 1.34% and Irish total labour productivity is up 2.28%. This is a strong performance for Ireland, compared to EU and EA averages. As already mentioned above, Construction sector productivity declined in Q3 2011 some 15.2% yoy and productivity in Information & Communication sector fell 8.15% yoy. Productivity grew in Financial and Insurance Activities sector by 3.11%, in Agriculture and associated sub-sectors by a very impressive 24.8% (although this is largely due to higher commodities prices and exchange rates effects, as well as continued robust inflows of CAP money into Ireland). In Public Administration and the rest of the public sector sub-sectors, productivity grew 2.6% year on year in Q3 2011.

And to summarize the emerging new (crisis-period post Q1 2008) trends, here is a chart plotting correlations between productivity index performance for Ireland overall, against EU27, EA17 and specific sectors of the economy:

3/2/2012: De Kaufman Door 2

2012-02-04T12:53:00.000+14:00

Another set of interesting survey results from the Kaufman Econ Bloggers Outlook Q1 2012:

John Cochrane asked: should the eurozone become: 1) a currency union without fiscal union, allowing

sovereign default; 2) a currency union with strong fiscal union; or 3) Broken up

(no euro) into national currencies or smaller units?

So let's set aside the political feasibility of each option, in the first-best economics world:

Euro as a currency union without fiscal union, allowing sovereign default is an option for 22% of the respondents.
Euro as a currency union with strong fiscal union is preferred by 27% of respondents
No euro with national currencies returning or smaller sub-blocks emerging is favored by 51% of respondents

There are, really, only 2 surprises in the above:

Relatively large number of economists who believe that sovereign defaults can be sustained in a currency union with no automatic transfers specified (I presume that many could have simply thought that transfer systems can be established either under an EU Commission umbrella or via ECB) and
Only 51% of the respondents recognize that there is, under current institutional set up, no real chance of managing an economically effective functional monetary union. And that there is no need to do this either.

3/2/2012: De Kaufman Door 1

2012-02-04T11:27:00.001+14:00

Kaufman Foundation - a research centre for studying entrepreneurship - runs quarterly reports on the panel of economics bloggers. These reports contain some brilliant insights into the cutting edge policies as well as some reaffirmations of orthodoxies.

Here's the one I liked in the current Q1 2012 issue:

So let's run through these in the context of the latest conceptual reforms ideas floating in the Irish education system:

Voucher system - 76% of bloggers are in favor and 11% opposing (remember - these responses come from the Left, Right, Libertarian, professional, academic etc economists). In Ireland, of course the idea of parental choice is anathema to the Department of Education and the rest of the crowd that is setting the education agenda.
Charter schools (characterized by greater independence, more parental engagement in all aspects of schooling etc) - 74% of bloggers agree, 11% disagree. In Ireland - calls to shut down independent schools abound and new non-state schools are having problems getting teachers funds.
Teacher choice - 59% in favor, 19% opposed - less decisive vote, but the idea would be a total 'No go' for Ireland.
Flexibility for principals - 9% opposed, 81% in favor. Not the flavor of the month for the DofE or the rest of the education policy pack.
Higher teacher pay overall gets 10% opposition and 53% support, but merit pay for teachers idea gets 9% opposition and 74% support. Which of course will never ever take hold in Ireland.
Transparency for value-added gets 8% opposition and 71% support. Do note the emerging clear theme - accountability and independence are valued, merit to be rewarded... oh, no, these are not happening here in Ireland.
Higher standards - 30% oppose, 33% support because, presumably, it is hard to really define or trust 'standards'.
Greater federal involvement gets support from 12% of respondents and is opposed by 59%, while less federal involvement gets support from 57% and opposition from 18%. Well, now, I am not exactly an education specialist, but I did notice as of late that Irish debate about the secondary education has distinctly taken an anti-private schools turn. And there are pretty powerful voices here calling for nationalization of secondary education. Hmmm...

Of course, the above policy options are not exhaustive nor comprehensive. And yes, there are big differences between the US and Irish systems. But it is pretty clear to me that the above preferences expressed by US economics bloggers for more transparency, more accountability, more independence in the education system run diametrically counter to the prevailing ideology surrounding education reforms in Ireland today.

3/2/2012: Big Bad Speculators & Little Red Riding Hoods

2012-02-04T05:01:00.001+14:00

That "Gotcha..." moment, you know... speaking last night at a round table discussion on the future of Europe, I was confronted with a question from the audience and a fellow panelist remarks in the same vein that, roughly speaking, attributed the entire current crisis in Europe to the derivatives markets and speculative investment. More than that, the same were blamed for everything from the environmental disasters to increases in commodity prices. Some parts of the Left just love the idea of finding a "capitalist" (even arch-capitalist - aka speculative) root to every problem - the "Gotcha..." thingy of pseudo intellectualist disdain for facts as much as for 'speculators' and 'markets'.

This of course does not mean that financial instrumentation, speculation or other forces of the financial markets did not contribute to the crisis, but it is a distinct claim from the one made by those proposing that they caused the crisis single-handedly.

By sheer accident, looking through some old research papers, I came across this study from the ECB: Lombardi, Marco J. and Van Robays, Ine, Do Financial Investors Destabilize the Oil Price? (May 20, 2011). ECB Working Paper No. 1346. Available at SSRN: http://ssrn.com/abstract=1847503

The study looks into the large oil price fluctuations that were observed in the recent years. In particular, the study considers the role of financial activities in the determination of oil prices.

Per study (emphasis is mine):

"The oil futures market has indeed become increasingly liquid, and the activity of agents that do not deal with physical oil, the so-called non-commercials, has greatly increased. This led some to hypothesize that inflows of financial investors in the futures market may have pushed oil prices above the level warranted by fundamental forces of supply and demand, whereas others argue that the impact of financial activity on the oil spot market is negligible or non-existent beyond the very short term."

The paper studies "the importance of financial activity in determining the spot price of oil relative to the role of oil market fundamentals", using a sign-restricted structural VAR model. The model allows the study authors to separate financial activities into two types: stabilizing and destabilizing. This is achieved by postulating a model that links "the oil spot market to the futures market through a no-arbitrage condition", so that:

Destabilizing financial shock is identified as one that creates "a deviation from the no-arbitrage condition, thereby ...driving oil futures prices away from the levels justified by oil market fundamentals.
Stabilizing financial activity is defined as "driven by changes in oil supply and demand-side fundamentals".

In addition, the econometric framework adopted in the study allows to identify four different types of oil shocks:

an oil supply shock
an oil demand shock driven by economic activity
an oil-specific demand shock which captures changes in oil demand other than those caused by economic activity, and
a destabilizing financial shock (such as a spike in speculative activity).

The results suggest that

Financial activity in the futures market can significantly affect oil prices in the spot market, although only in the short run.
The destabilizing financial shock (speculation) only explains about 10 percent of the total variability in oil prices.
Shocks to fundamentals "are clearly more important over our sample. Indeed, looking at specific points in time, the gradual run-up in oil prices between 2002 and the summer of 2008 was mainly driven by a series of stronger-than-expected oil demand shocks on the back of booming economic activity, in combination with an increasingly tight oil supply from mid 2004 on. Strong demand-side growth together with stagnating supply were also the main driving factors behind the surge in oil prices in 2007-mid 2008, and the drop in oil prices in the second half of 2008 can be mainly explained by a substantial fallback in economic activity following the financial crisis and the associated decline in global oil demand. Since the beginning of 2009, rising oil demand on the back of a recovering global economy also drove most of the recovery in oil prices."

However, the study did find that financial investors "did cause oil prices to significantly diverge from the level justified by oil supply and demand at specific points in time. In general, inefficient financial activity in the futures market pushed oil prices about 15 percent above the level justified by (current and expected) oil fundamentals over the period 2000-mid 2008, when the volume of crude oil derivatives traded on NYMEX quintupled. Particularly in 2007-2008, destabilizing financial shocks aggravated the volatility present in the oil market and caused oil prices to respectively over- and undershoot their fundamental values by significant amounts, although oil fundamentals clearly remain more important."

So some speculation is harmful to fundamentals-determined pricing, although the study does not consider the potential benefits from speculation-induced greater liquidity in the markets (which was not the core objective of the study to begin with), but largely, 5-fold increase in speculative activity accounts for just 10 percent of prices variability.

3/2/2012: Ireland's Jobs Creation & Destruction data

2012-02-03T22:59:00.001+14:00

CSO recently published its analysis of the labour market looking into jobs creation and destruction in the economy - a new study, currently in the 'experimental' stage and a very welcome addition to CSO tools, in my view.

Here's the core data:

Per charts (source for the chart is CSO):

Job creation has increased slightly from 9% in 2009 to 12% in 2010
Job destruction has fallen significantly from 28% in 2009 to 18% in 2010
Net job creation (job creation less job destruction) remained negative at – 6% in 2010

Note to CSO - a table with data would be good - or at least labeling of values in the chart. And do please continue with this analysis.

2/2/2012: US Mint Sales for January - signaling return to fundamentals-driven demand?

2012-02-03T12:19:00.000+14:00

January data is out for US Mint sales and time to update my semi-regular analysis. Here's the note. I am putting a disclaimer below - so the Irish stuffbrokers' community that somehow gets their facts wrong when no one is around to correct them breaths easier. Everything you read below is my personal opinion informed by my analysis of the official data from the US Mint.

January data from the US Mint on sales of gold coinspresents an interesting picture, both in terms of seasonality and overalldemand for the asset class.

Some background to start with.

Gold prices have beenmoving sideways with some relatively moderate volatility in recent months.Between August 2011 - the monthly peak in US Dollar-quoted price and January2012, price has fallen 4.55%, but in the last month, monthly move was 10.82%and year on year prices are up 30.4%. Crisis-period average price is now atUSD1,154/oz and the standard deviation in prices is around 337 against thehistorical (1987-present) standard deviation of 330. In 2011 standard deviationfor monthly prices stood at (small sample-adjusted) 144, well below historicalvolatility, due to a relatively established trend through August 2011. However,prices returned to elevated volatility in August 2011-January 2012.

These price dynamics would normally suggest risingcaution and buyer demand reductions over time. And to some extent, this sub-trendwas traceable in the data for US Mint sales in some recent months too. Forexample, unadjusted for seasonal variation, August 2011 sales of Mint coinspeaked at 112,000 oz with relatively moderate 0.67 oz/coin sold gold content.By November 2011, sales slowed down to a relative trickle of 41,000 oz at 0.71oz/coin sold. December sales came in at 65,000 oz with gold content on averageof 1 oz per coin sold. Much media hullabaloo ensued with calls for catastrophicfall off in demand, the renewed claims that a gold bubble is now in action andthe decline is coinage sales as evidence of that.

In reality, there was very little surprising in thesales trends overall.

Chart 1 below shows US Mint sales in terms of thenumber of coins sold. Care to spot any dramatic bubble-formation orbubble-deflation here? Not really. There is a gentle historical upward trendsince January 1987. There is volatility around that trend in 2010 and far lessof it in 2011. There is seasonality around the trend with Q1 sales uplifts inJanuary, some Christmas season buying supports in early Q4 etc. There is also aslightly elevated sub-trend starting from early 2009 and continuing throughtoday. More interestingly, the sub-trend is mean-reverting (heading down) whichis - dynamically-speaking stabilizing, rather than 'bubble-expanding' or'bubble-deflating'.

Chart 1

Source: US Mint and author own analysis

Now, January sales are strong in the historicalcontext and within the sub-trend since 2009. January 2012 sales of US Mint coinscame in at 127,000 oz with relatively low 0.50 oz/coin sales. So coinage salesin terms of oz weight are 95.4% up on December, but 4.9% down on January 2011.For comparison, 2011 average monthly sales were 83,292 and crisis-periodaverage monthly sales were 94,745 all at least 0.5 standard deviations belowJanuary 2012 sales. As chart above clearly shows, sales are now well ahead ofhistorical averages and above 6 months moving average.

However, as chart below shows, sales in January werewell below the trend line for average coin weight for sold coins: oz per coinsold is down 50.5% mom and down 43.1% year on year. Significantly, smallercoins were sold in January this year than in 2011. 2011 average oz/coin soldwas 1.0 and the latest sales are closer to 0.59 oz/coin historical average.

Chart 2

Source: Author own data and analysis based onunderlying data from the US Mint

There is no panic in the overall trends in demand forcoins when set against the price changes, with negative general trend incorrelations between demand and gold price established in mid-2009 continuingunabated, as shown in Chart 3

CHART 3

Source: US Mint, World Gold Council and author ownanalysis

However, when we look closer at the 12 months rollingcorrelations and 24 months rolling correlations, the picture that emerges forJanuary is consistent with gentle negative correlation that has been presentsince the beginning of 2011. See Chart 4 below. January 2012 12mo rollingcorrelation between gold price and volume of gold sold via US Mint coins is+0.02, having reverted to the positive from -0.42 in December 2011. This is thefirst positive (albeit extremely low) monthly 12mo rolling correlation readingsince July 2010. 24 mo rolling correlation in January 2012 stood at benign-0.30, slightly up on -0.34 in December 2012. Again, resilience if present inthe longer term series and at shorter horizon there are no huge surpriseseither. Of course, in general, one can make a case, based on the recent data,that investors are simply turning back to the specific instrument after goldprice corrected sufficiently enough. In this light, latest US Mint data wouldbe consistent with fundamentals-supported firming of demand. But crucially,there is no evidence of either panic buying or selling.

CHART 4

Source: Author own analysis based on the data from USMint

Lastly, let's take a look at seasonally-neutrallike-for-like January sales. Chart below shows data for January sales,suppressing the huge spike at 1999. Clearly, sales are booming in terms ofcoins numbers sold. But recall that coins sold in January 2012 are smaller ingold content, so overall gold sold via US Mint coinage is marginally down onJanuary 2011, making January 2012 sales the fourth highest on record.

CHART 5

Source: Author own analysis based on the data from USMint

The Table below shows summary of US Mint coins sales for 3 monthsNovember-January covering holidays periods sales, including the Chinese NewYear sales. While January 2012 period shows healthy sales across all threeparameters, there is still no sign of any panic buying by small retailinvestors anywhere in sight here. Sales are ticking nicely, in 2011 and 2012,well ahead of 2001-2008 levels (confirming lack of evidence that sustained price appreciation over the last 18 months has provided a signal to dampen retail demand), but behind 2009-2010 spikes (further supporting the view that2011-2012 dynamics are those of potential moderation in the precautionary andflight-to-safety motives for demand, and more buying on long-term goldfundamentals).

TABLE: US Mint sales – 3 months through January

Source: Author own analysis based on the data from USMint

Welcome back to ‘normalcy’ in US Mint sales.

Disclaimer:

1) I am a non-executive member of the GoldCore Investment Committee
2) I am a Director and Head of Research with St.Columbanus AG, where we do not invest in any specific individual commodity
3) I am long gold in fixed amount over at least the last 5 years with my allocation being extremely moderate. I hold no assets linked to gold mining or processing companies.
4) I have done and am continuing doing academic work on gold as an asset class, but also on other asset classes. You can see my research on my ssrn page the link to which is provided on this blog front page.

5) Yes, you can find points (1)-(3) disclosed properly and permanently on my public profiles.

6) I receive no compensation for anything that appears on this blog. Never did and not planning to start now either. Everything your read here is my own personal opinion and not the opinion of any of my employers, current, past or future.

2/2/2012: Exchequer non-returns from January

2012-02-03T11:20:00.000+14:00

Exchequer returns pose no surprise - and none were expected, given this is just January - so no point of updating the detailed data sets.

Some top figures.

On tax receipts:

Income tax revenues are up at €1,260mln in January 2012 over €987mln in January 2011 as USC kicks in full tilt this year.
VAT is at +3% yoy to €1,725mln in part boosted by small gains in sales over Christmas period in terms of volumes.
Corporation tax is up to €271mln from €72mln a year ago, but €250mln of this was due to delayed receipts from December 2011, so in reality, Corpo is down on 2011.

None of the above are really significant as timing might have been a factor in all of these. It will take through March to see the real changes in the underlying numbers.

Exchequer deficit is at €393.7mln down from €483.2mln a year ago. So now, deduct that €250mln from the receipts side and you get Exchequer deficit at €643.7mln or some €160mln ahead of January 2011. Not pretty, eh?

Of course, as I said above, there is no point of doing any analysis on returns for just one month, so take the above comment with a huge grain of salt.

2/2/2012: Sunday Times 29/01/2012 - irish property bust

2012-02-03T03:06:00.000+14:00

This is an edited version of my Sunday Times article from January 29, 2012.

In a recent Annual Demographia International HousingAffordability Survey of 325 major metropolitan areas in Australia, Canada, HongKong, Ireland, United Kingdom and the United States, Dublin was ranked 10th inthe world in terms of house prices affordability. The core conjecture putforward in the survey is that Dublin market is characterized by the ratio ofthe median house price divided by gross [before tax] annual median householdincome of around 3.4, a ratio consistent in international methodology withmoderately unaffordable housing environments.

Keep in mind, the above multiple, assuming the medianhousehold income reflects current unemployment rates and labour force changes,puts median price of a house in Dublin today at around €175,000 – quite a bitoff the €195,000 average price implied by the latest CSO statistics. But nevermind the numbers, there are even bigger problems with the survey conclusions.

While international rankings do serve some purpose, on theground they mean absolutely nothing, contributing only a momentary feel-goodsensation for the embattled real estate agents. In the real world, the veryconcept of ‘affordability’ in the Irish property market is an irrelevantarchaism of the era passed when flipping ever more expensive real estate wascalled wealth creation.

What matters today and in years ahead are the householdexpectations about the future disposable after-tax incomes in terms of thesecurity and actual levels of earnings, stability of policies relating tohousehold taxation, plus the demographic dynamics. None of these offer muchhope for the medium-term (3-5 years) future when it comes to property prices.

Household earnings are continuing to decline in real terms(adjusting for inflation) in line with the economy. The CSO-reported averageweekly earnings fell 1.2% year on year in Q3 2011 once consumer inflation istake out. But the average earnings changes conceal two other trends in theworkforce that have material impact on the demand for property.

Firstly, reported earnings are artificially inflated becausethe workforce on average is becoming older. Here’s how this works. Youngerworkers and employees with shorter job tenure also tend to be lower-paid, andare cheaper to lay off. Thus, the rise in unemployment, alongside with thedeclines in overall workforce participation, act to increase average earningsreported. This explains why, for example, average weekly earnings inconstruction sector rose 2.5% in Q3 2011 year on year, while employment in thesame sector fell 4.1% over the same period. This means that fewer potentialfirst-time buyers of property are having jobs, and at the same time as theexistent workers are not enjoying real increases in earnings that would allowthem to trade up in the property markets.

Secondly, the real world, rising costs across the consumerexpenditure basket, further reducing purchasing power of households, iscompounded by the composition of these costs. One of the largest categories inhousehold consumption basket for those in the market to purchase a home ismortgage interest. This cost is divorced, in the case of Ireland, from thedemand and supply forces in the property markets and is influenced instead bythe credit market conditions. In other words, the 14.1% increase in mortgageinterest costs in the 12 months through December 2011, once weighted by therelative importance of this line of expenditure in total consumption is likelyto translate into a 2-3% deterioration in the total after-tax disposable incomeof the average household that represents potential purchaser of residentialproperty.

And then there are effects of tax policies on disposableincome. One simple fact illustrates the change in households’ ability to financepurchases of property in recent years: between 2007 and 2011 the overall burdenof state taxation has shifted dramatically onto the shoulders of ordinaryhouseholds. In 2007, approximately 46% of total tax collected in the state camedirectly out of the household incomes and expenditures. In 2011 the same numberwas 58%.

The above factors reference the current levels of income,cost of living and tax changes and have a direct impact on demand for propertyin terms of real affordability. In addition, however, the uncertain nature offuture economic and fiscal environments in Ireland represents additional set offorces that keep the property market on the downward trajectory. For example,in Q3 2011 there were a total of 116,900 fewer people in employment in Irelandcompared to Q3 2009. However, of these, 113,700 came from under 34 years of agecohort. Unemployment rate for this category of workers, comprising majority ofwould-be house buyers, is now 20.4% and still rising, not falling. Given thelong-term nature of much of our current unemployment, no one in the countryexpects employment and income growth to bring these workers back into theproperty markets for at least 3 years or longer. Without them coming back, onlythose who are trading down into the later age of retirement are currentlyselling, plus those who find themselves in a financial distress.

Tax uncertainty further compounds the problem of risksrelating to unemployment and future expected incomes. Government projectionsthat in 2013-2015 fiscal adjustments will involve raising taxes by €3.1 billionagainst achieving current spending savings of €4.9 billion are rightly seen aslargely incredulous, given the poor record in cutting current spending to-date.Thus, in addition to already draconian pre-announced tax hikes, Irishhouseholds rationally expect at least a significant share of so-called currentexpenditure ‘cuts’ to be passed onto households via indirect taxation and costof living increases.

In short, there is absolutely no catalysts in theforeseeable future for property markets reversing their precipitous trajectory.No matter what ‘affordability’ ranking Irish property markets achieve, thedemand for property is not going to grow.

This, of course, brings us to the projections for thenear-term future. The latest CSO data for the Residential Property Price Indexreleased this week shows that nationwide, property prices were down 16.7% inDecember 2011 compared against December 2010. Linked to the peak prices asrecorded by the now defunct PTSB-ESRI Index, the latest CSO figures imply thatnationally, residential property prices have fallen from the peak of €313,998in February 2007 to ca €166,000 today (down 47% on peak). In Dublin, peak-levelaverage prices of €431,016 – recorded back in April 2007 – are now down toclose to €195,000 (almost 55% off peak).

Using monthly trends for the last 4 years, and adjusting forquarterly changes in average earnings and unemployment, we can expect theresidential property price index to fall 11-12% across all properties in 2012.Houses nationwide are forecast to fall in price some 12-14% - broadly in linewith last year’s declines, while apartments are expected to fall 11-12% year onyear in 2012, slightly moderating the 16.4% annual fall in 2011.

More crucially, even once the bottom is reached, which,assuming no further material deterioration in the economy, can happen in H22012 to H1 2013, the recovery will be L-shaped with at least 2-3 years ofproperty prices bouncing along the flat trendline at the bottom of the pricecorrection. After that, return toward longer-term equilibrium will requireanother 1-2 years. Assuming no new recessions or crises between now and then,by 2015-2016 we will be back at the levels of prices recorded in 2010-2011.Between now and then, there will be plenty more reports about improvingaffordability of housing in Ireland and articles about the proverbial foreigninvestors kicking tyres around South Dublin realtors’ offices.

Chart: Residential Property Price Index, end of Decemberfigures, January 2005=100

Source: CSO and author own forecast

Box-out:

Ireland’s latest shenanigans in the theatre of absurd is thefabled ‘return to the bond markets’ with this week’s swap of the 2 year 4.0%coupon Government bond for a 4.5% coupon 3-year bond. The NTMA move means wewill be paying more for the privilege to somewhat reduce the overall massivedebt pile maturing in 2014, just when the current Troika ‘bailout’ runs out. Soin effect, this week’s swap is a de fact admission by the state that Irelandhas a snowball’s chance in hell raising the funding required to roll over evenexistent debt in 2014 through the markets. Which, of course, is an improvementon the constant droning from our political leaders about Ireland ‘not needing asecond bailout’. Of course, as far as our ‘return to the markets’ goes – no newdebt has been issued, no new cost of financing the state deficits has beenestablished in this swap. The whole event is a bit of a clock made out of jelly– little on substance, massive on PR, and laughable from the functionalityperspective.

2/2/2012: Euro area credit supply remained constrained in Q4 2011

2012-02-02T22:43:00.001+14:00

ECB's Bank Lending Survey (BLS) for January 2012 is out, showing dramatic failure of the December 2011 LTRO to kick start supply of credit to the real economy.

According to the BLS, credit standards by euro area banks tightened in the fourth quarter of 2011 on:

loans to non-financial corporations (35% of euro area banks report tighter lending to NFCs in net terms, up from 16% in the preceding quarter),
loans to households for house purchase (29% of the euro area banks reporting net tightening of lending to households, up from 18% in the preceding quarter), and
loans for consumer credit (13%, up from 10% in the preceding quarter).

Looking ahead, euro area banks "expect a further net tightening of credit standards, albeit at a slower pace than in the fourth quarter of 2011" in Q1 2012. There is no easing of lending conditions on the horizon.

Overall rise in the net tightening of credit standards was caused by:

"the adverse combination of a weakening economic outlook" and
"the euro area sovereign debt crisis, which continued to undermine the banking sector’s financial position",
In addition, "increased market scrutiny of bank solvency risks inQ4 2011 is likely to have exacerbated banks’ funding difficulties."

Euro area banks also reported a net decline in the demand for loans to NFCs in Q4 2011, albeit at a slower pace than in the previous quarter (-5% in net terms, compared with -8% in Q3 2011).

Banks indicated a sharp fall in the financing needs of firms for their fixed investment.

The net demand for loans to households declined further in Q4 2011, "broadly in line with previous expectations and with actual figures quoted in the previous survey round (-27% in the last quarter of 2011, compared with -24% in Q3 2011 for loans for house purchase, and -16% in the last quarter of 2011, compared with -15% in the third quarter for consumer credit).

For Q1 2012 banks expect a sizeable drop in the net demand for housing loans, while the decline in net demand for consumer credit is expected to remain in the same range.

Despite a massive LTRO in December 2011, "euro area banks reported a slight easing of access to wholesale funding in the last quarter of 2011, compared with replies from the previous survey,
although still a large number of euro area banks (in net terms) continued to report significant
difficulties. ... Looking ahead, banks across the euro area overall expect some improvement in access to wholesale market funding in the next quarter, potentially reflecting the anticipated effectiveness of non-standard measures taken by the ECB."

Banks also indicated that "sovereign market tensions led to a substantial deterioration of their funding conditions through balance sheet and liquidity management constraints, as well as through other, more indirect, channels. Banks also reported that vulnerabilities to risks stemming from the sovereign crisis have significantly contributed to the tightening of credit standards, although some parts of the banking system were in a position to shield their lending policies from the impact of the crisis."

"...On the impact of new regulatory requirements on banks’ lending policies, banks’ replies point
to a further adjustment of risk-weighted assets and capital positions during the second half of 2011, to a larger extent than in the first half of the year and more than envisaged in July 2011. The same
applies for the impact of regulation on the net tightening of credit standards. In the coming months
banks indicate a further intensification of balance sheet adjustments and related constraints on the
bank lending channel."

30/1/2012: Irish Long-term Unemployment Saga

2012-01-31T09:42:00.000+14:00

Unemployment figures, by age - distinguish youth and adult unemployment - have been preoccupying many analysts in recent weeks. Loads of media attention has been paid - internationally, if not in Ireland - to the plight of youth unemployment. In the next several posts, I will take a closer look at the data for EU27, including Ireland. All of the data comes courtesy of the Eurostat and covers the latest available period Q3 2011.

First, let's take a look at long term unemployment (defined as unemployment spell of 12 months or more) and very long-term unemployment (defined as 24 months or more).

Table below summarizes the data:

As you can see, we are not exactly a good performer. Prior to the crisis, Irish long-term unemployment averaged just 1.4% of the active age population - 23rd lowest in the group of EU27 plus Norway. In Q3 2011 our long-term unemployment stood at 8.8% - the third highest in the sample of 28 states. Over the period covered we have experienced an increase in long-term unemployment of 7.4 percentage points - the steepest rise in the EU27+Norway.

Matters are even worse when it comes to very long-term unemployment, where our rate has moved from 0.7% average for Q3 readings pre-crisis to 5.4% in Q3 2011 - an increase of 4.7 percentage points. Only Slovakia (6.0%) is worse performer than Ireland in terms of overall very long-term unemployment rate and we are the absolute worst in the EU27 + Norway group in terms of increase in very long-term unemployment.

Here is a chart to illustrate some of the above:

\Broken down by gender:

Long-term unemployment rates for men and women:

Ireland used to rank 22 in the EU 27+Norway in the size of its long-term unemployment pool amongst the males prior to the crisis. By Q3 2011 we had the highest rate of male long-term unemployment. We fared much better in terms of long-term female unemployment, moving from the lowest unemployment in the sample of countries prior to the crisis to 9th highest position. However, in both male and female long-term unemployment, Ireland experienced the largest and second largest, respectively, increases during the crisis.

Things are even worse for Irish very long-term unemployed figures. Prior to the crisis, very long term unemployment amongst Irish males averaged 1.0% (22nd highest in the EU27+Norway). In Q3 2011 that number rose to 7.5% (the highest in the EU27+Norway). This increase was the largest in the sample of countries over the period.

Very long-term unemployment amongst the females in Ireland averaged just 0.4% in pre-crisis period - third lowest in the EU27+Norway sample. In Q3 2011 this rose to 2.4% - 10th highest reading in the sample. Ireland's rate of increase in female very long-term unemployment was the fastest in the EU27 + Norway group of countries.

In the next post we will take a look at the unemployment figures by age.

30/1/2012: Dublin gets horrific ranking on economy

2012-01-31T07:25:00.001+14:00

Dubious distinction for Dublin - identified as the World's 4th Worst-Performing City (see link here): and here are the snapshots of our 'neighborhood' in the rankings:

Source: http://www.businessinsider.com/the-10-worst-performing-cities-in-the-world-2012-1#

Between, I am puzzled by the pic selected for Dublin. Can't think of where it was taken...

30/1/2012: Fake Doctors Treating Fake Disease in Greece

2012-01-31T01:44:00.001+14:00

There are many 'expert' voices in the media saying Greece should exit the Euro zone in order to return to growth. This, as I commented earlier today, is a gross oversimplification of the reality.

There is simply no evidence whatsoever that Greece can grow on its own any faster or more sustainably than it did within the Euro. In fact, the evidence presented below shows that the only period during the last 30 years in which Greece was able to somewhat marginally close the gap in growth between itself and the Advanced Economies group is the period immediately following its accession to the Euro.

It is a fallacy of 'alternative expectations' to believe Greece will be enabled to grow its economy under post-euro devaluation beyond achieving a 1-2 years-long 'bounce'. Analysts who expect Greece to recover on the back of exiting the euro & devaluing are deluding themselves for two major reasons:

Greece has no fundamentals for growth & its debt overhang will remain, unless it defaults hard. Even with a default, removing debt overhang is not going to deliver growth to Greece beyond simple mechanical post-depression bounce, as Greece lacks all fundamentals for growth - institutional, cultural and historical.
However, with a hard default option, post-Euro, Greece will not be able to borrow & absent Government spending Greece has no capacity to grow. This is clearly shown in the charts below which highlight that in 23 out of the last 29 years, Greece has managed to achieve growth only with accompanying fiscal imbalances.

In summary, Greece never once had any fundamentals to grow on its own without massive subsidies either via loose monetary policy or overinflated expectations relating to the country accession to the European common structures. Greece is not about to get real growth-driving fundamentals within or outside the euro area.

In short, all those talking about 'Greece must exit euro zone to achieve growth' are nothing more than fake doctors treating a patient who himself is faking a disease. Greece's problem is not the Euro. It's problem is Greece itself.

Here are the charts proving the point.

Fiscal imbalances:

Structural failure:

External insolvency:

Rotten growth fundamentals:

And lastly, rotten growth record

QED.

28/1/2012: Spin of 'great investment destinations' - Malta

2012-01-29T10:40:00.002+14:00

For 'Malta is a great investment destination' crowd. Here is a quick stats summary based on IMF WEO:

So let’s summarize the above:

Malta is poor, has moderate inflation, which is of course consistent with low growth. Malta’s exports ofgoods and services are growing very slowly – if it is such a great tradinglocation, can someone explain this? Malta performs well in unemployment terms,but this conceals the fact that Malta’s population is either too old or tooyoung or too long unemployed to actually count as being in the workforce.Hence, Malta is second worst performer in the euro area in terms of actualemployment rates.

Malta’s public finances are in line with majority of otherAccession States, so it is doing decently well (though not spectacularly) in termsof Government deficit and structural balance. It is not exactly a stellarperformer when it comes to Government debt, but it is extremely poor performerwhen it comes to external balance – current account. Which, of course, is theexact opposite of the evidence required to support the premise that Malta is asuccess in terms of attracting foreign investment, or being a great destinationto trade from.

You can tell, I hate spin!

28/1/2012: Eurocoin for January 2012

2012-01-29T00:43:00.000+14:00

The latest leading indicator for euro area growth -Eurocoin - for January continues to signal recessionary dynamics, albeit at moderating rates of decline.

January Eurocoin rose to -0.14 from -0.20 in December 2011. Here are some charts:

Eurocoin is now in the negative territory for four consecutive months. 3mo MA is at -0.18, 6mo MA at -0.07, crossing into negative for the first time since the last recession. In January 2011 the indicator stood at +0.48. Quarterly rate of growth is now at -0.17 implying annualized contraction of -0.56%.

There is now, due to persistent negative reading, more consistency in eurocoin and ECB repo rate, but inflation-growth remain unbalanced when it comes to applying Taylor rule to ECB rate policy.

All in, the rates decision based on the leading indicator performance should be to stay put and await more significant moderation on inflation side. Mild bout of inflationary recession is still on the cards for the euro area for Q1.

26/1/2012: Rip-off Ireland - Sunday Times, 22 January 2012

2012-01-27T05:56:00.000+14:00

This is an edited version of my Sunday Times column from January 22, 2012.

Back in 2004, with much fanfare, Fine Gael launched itsripoff.ie campaign that highlighted a large number of cases wherepolicy-related or regulated price structures and practices have resulted in ourcost of living falling well out of line with other Euro area economies. In2009, Fine Gael launched a policy paper that was supposed to end Rip-offculture, including in state controlled sectors, once and for all.

Fast-forward to today. Since elections, having abandoned itspro-consumer agenda, Fine Gael has done marvellously in playing a ‘responsible’possum to Irish vested interests.

According to the CSO, year on year, consumer prices inIreland rose 2.5% through December 2011. Therange of these price changes across sectors, however, was dramatic.

Clothing and footware prices were up0.4% in 12 months through December,Furnishings, Household Equipment and Routine Household Maintenance prices fell1.9%, Recreation and Culture deflated by 0.6%and Restaurants and Hotels costs fell 0.9%. Health costs rose 2.6%, Transportby 1.6%, Education by 8.9%.

Majority of these price hikes have nothing to do withprivate firms ‘profiteering’. Per Purchasing Manager Indices, tracking thechanges in input and output prices for goods and services, Irish firms and MNCshave experienced sustained shrinking of the profit margins since the beginningof the crisis, as consistent with deflation. Instead, the largest priceincreases, and ever expanding profit margins, took place in the sectors that,in the past, Fine Gael have correctly identified as being state-controlledparts of the Rip-off Ireland.

Food and non-alcoholic beverages prices are up just 5.9% inthe last 10 years, cumulatively. State-controlled Tobacco prices are up 69.6%and Alcohol 21.6%. Housing, Water, Electricity, Gas and Other Fuels – singlelargest category of consumer spending – is up 64.4% on December 2001, with 90%increase in Energy Products costs, 63.3% increase in Utilities and LocalCharges, and 99.1% increase in Mortgage Interest costs. In the last five years,Rents have fallen 8%, while Mortgage Interest rose 11.3% despite the fact thatECB rates have dropped 2.5 percentage points over the period. Electricityprices are up 28.3% in 5 years and 11.5% in the last year alone, despite thefact that natural gas prices – the main generation source for Irish electricity– have declined worldwide.

While Fine Gael cannot be blamed for the full extent ofprice hikes since 2001 or 2006, the current Government bears responsibility forfailing to address state-controlled inflation since taking the office.

The above sectors are indirectly controlled by the state viaregulation, state ownership of banks and enterprises, and indirect taxmeasures. But what about those costs more directly set by the Government?

Health costs are up 56.5% on December 2001, Education is up81.5%. In Health, the core drivers of inflation havebeen Hospital Services (up 40.2% since December 2001 and 9.8% in 2011), Dental Services (up 20.6% in 5 years, butdown 0.3% in the last 12 months). Meanwhile, prescribed drugs prices are down11.3% on 2006 and 4% in the last 12 months. Health insurance costs are up 75.7%and 22.9% since December 2006 and in the last 12months, respectively. This in a country with younger population and well-establishedtrends in terms of demand for healthcare. In contrast, vehicles insurance –privately provided and similar in predictability of total claims risks –inflation since December 2006 amounts to just 9% and0.9% in the last 12 months.

Same story of the state-led rip-off is replicated in theTransport sector. Here, overall costs are up 9.3% in the last 5 years, but busfares are up four times as much. Privately controlled costs of buying vehicleshave declined 15.4%, while state-set motor tax rose 14.3%. Ditto inCommunications, where telecoms services costs are up 5.8% in the last 5 years,but postal services up double that.

In two sub-sectors of education where the Government hasleast power to influence prices – Primary Education and Other education andtraining – inflation is the lowest. The highest price increases are in thethird level education, with prices up 50.1% in just 5 years (13.4% in last 12months alone).

The above clearly shows that the Government and thesemi-state bodies and enterprises it owns, along with the banks are at theheart of the extortion racket that is our cost of living. Over the recentyears, rapid deflation in prices and costs in the private economy has beenoffset by the rampant inflation in prices and costs in the state-controlled andregulated sectors. In majority of cases, this inflation was directly benefitingstate and semi-state employment, management and Government coffers. In allcases, the costs were directly impacting Irish consumers who are left with nomeaningful choice, but to comply with the pricing structures set in themarkets.

CHARTS:

Sources: CSO database and author own calculations

Meanwhile, Budget 2012 clearly shows that the Government ishell-bent on extracting ever-higher rents out of consumers through taxes andcharges.

For example, the Government has introduced increasedmortgage interest relief that amounts to €52 million in help for mostindebted-households. But the very same Government refuses to intervene in thebanks’ internecine policies of shifting the burden of losses from trackers ontothe adjustable rate mortgagees. The households that the Government finds in theneed of increased mortgage interest relief will be liable for the new HouseholdCharge. And, if Minister Noonan has his way, mortgagees who default on theirloans will pass into outright debt slavery to the banks.

There are more direct inflation-linked or inflation-raisingtaxes, such as VAT. Increase in the VAT rate simultaneously pushes up theoverall tax component of all goods and services sold in the state that aretaxable at the higher rate (an increase in inflation of some 9.5% for thoseitems) and increases the costs of all goods and services that are dependent onintermediate inputs. Excise tax on tobacco comes against the RevenueCommissioners’ analysis showing that tobacco taxes have reached, even beforeBudget 2012 measures are factored in, the point where higher taxes harmreceipts and fuel black markets. And Carbon Tax quadrupling from €5 per ton to€20 per ton has been responsible for some 2% rise in inflation in fuel andrelated activities. Motor tax increases, accounting for double the share in anaverage household expenditure that accrues to bus fares, are going to directlydrive up the cost of transport.

Increases in State charges for hospital beds are expected toraise the cost of healthcare for middle class patients by some €268 million infull year terms. Health insurance levy hike further compounds this inflationarygrab-and-run approach to policy. Secondary education ‘savings’ are likely tosee parents being forced to cover much of the gap in funding out of their ownpockets. Third level measures, while relatively modest in size, will compoundmassive inflation already accumulated in the sector over the last 5 years.

By the metrics of the Budget 2012, the current Governmentdidn’t just mothball its pre-election ideas on reducing the reach of theState-sponsored Rip-off Ireland, it has actively moved to embrace the cost-of-livingincreases through indirect taxation and encouraging avarice of the semi-statecommercial bodies and dominant near-monopolies. All of which means that thepath to economic recovery we continue upon is the path of deflationary spiralin private sector economy, with mounting unemployment and businessesinsolvencies, offset by the unabated cost increases when it comes to the meagreservices the State does supply or control.

Box-out:

Following an almost 11% month on month decline in tradesurplus in October, Irish exporters have posted a record-breaking return tohealth in November, bucking all expectations. The market consensus was for theIrish trade surplus (merchandise trade only) to decline marginally to ca €3.4billion in November. Instead, the trade surplus rose – on seasonally adjustedbasis – to €4.31 billion – the highest on record. In 11 months throughNovember, cumulative merchandise trade surpluses now amount to €40.53 billionor 1.6% ahead of the same period in 2010. As before, the core drivers of tradesurplus were exports increases in Organic Chemicals, and Medical andPharmaceutical products, while indigenous exports rose significantly during thelast year in Dairy products category. The latest data highlights the resilienceof the Ireland-based MNCs’ exporting capabilities, providing continued contrastto the majority of our counterparts in the Euro area ‘periphery’ who have beenposting dramatic slowdowns in exports and deepening trade deficits since thebeginning of Q4 2011.

26/1/2012: IMF's latest statement on Greece

2012-01-26T14:55:00.001+14:00

Here's an interesting statement:

Given widespread press speculation and rumors regarding IMF views, the following can be attributed to an IMF spokesman, William Murray:

"To ensure debt sustainability for Greece, it is essential that a new program be supported by a combination of private sector involvement and official sector support that will bring debt to 120 percent of GDP by 2020. The Fund has no view on the relative contribution of private sector involvement and official sector support in achieving this target. In line with this view, the IMF has not asked the ECB to play any specific role."

So IMF is making a pre-emptive announcement of 'neutrality' on the issue of the day - who'll be blamed when Greek PSI talks eventually end up in the courts and Greek debt/GDP ratio shoots past 150% mark.

And here's IMF own December 2011 report on Greece (available here)"

Page 13:
"The previous July 21 financing package [agreed for Greece] would not work. Public debt would peak at 187 percent of GDP in 2013 and fall to 152 percent of GDP by 2020. Net external debt would peak at 128 percent of GDP in 2012 and fall to 96 percent of GDP by 2020. These already weak downward trajectories would not be robust to shocks.

The precise outcome of the PSI exercise has an important bearing on public debt dynamics and how robust any improvement would be (the external debt sustainability analysis shows a similar pattern):

With near-universal participation in a debt exchange targeting a 50 percent face value haircut and offering a low coupon, and European support at an interest rate of about 4 percent, debt could be brought to 120 percent of GDP by 2020 (the maximum level considered sustainable for a market access country). The trajectory would also be less susceptible to shocks (including to the official sector funding cost), although a longer period of time would be required to bring debt-to-GDP below 120.
However, with low participation in the debt exchange and a significant amount of hold outs to be amortized with European support—a real risk under a purely voluntary approach (i.e., an approach not involving any measures to induce higher participation levels)—debt could stick above 145 percent of GDP in 2020. Moreover, the trajectory would no longer be robust to the usual range of shocks.

Thus, securing a sustainable debt position will depend on whether PSI negotiations deliver the targeted €100 billion in debt reduction, in particular on the ability of the features of the exchange to deliver near-universal participation."

So in other words, why issue pre-emptive statements now? Because a month ago IMF has already washed its hands on Greece, basically saying that, 'look, if all goes really well, things might get to sustainable scenario (assuming Greece delivers on all structural reforms and privatizations and there are no slippages in growth and external balances, etc), but we don;t quite believe they will...'

25/1/2012: Return to the Bond Markets

2012-01-26T07:16:00.002+14:00

According to the report in FT Alphaville (link here) Ireland has 'returned' to the bond markets by carrying out a swap of a 4% coupon 2014-maturing bond for a 4.5% coupon 2015-maturing bond. This reduces 2014 outgoings on redemption of maturing bonds and forces more maturity into 2015, which has more benign profile. But the switch comes at a price - the coupon is up 12.5% on previous.

In effect, if this is less of an Ireland's 'return to the bond markets', more of Eddie 'The Eagle' Return to the Olympics type of an event. Much pomp (official announcements and Government statements to follow), no circumstance (Ireland still cannot fund itself outside the Troika agreement), and even less real substance (avoiding a total blowout in 2014 is now clearly an objective for policy measures). But hey, let it be a much needed 'green jerseying' distraction, as FT Alphaville suggests, to the gruesome reality of Ireland torching another €1.25 billion worth of taxpayers' funds on that pyre called IBRC/Anglo.

24/1/2012: Residential property prices - 2011 highlights

2012-01-25T05:35:00.000+14:00

Latest Residential Property Price Index (RPPI) from CSO posts another monthly decline in the price series and marks deep drops in the property prices in 2011. Here are top of the line figures - end of year readings:

And updated Nama valuations referencing:

So to summarize (note - there will be more detailed analysis of this data coming up in later posts):

All properties index is now 31.1% below January 2005 levels
Houses are now down 28.3% below January 2005 levels
Apartments are now down 46.5% below January 2005 levels
Dublin all properties are now down 39.3% below January 2005 levels
Rates of decline (monthly) are greater than 1.5% (12mo average) for 3 months in a row for all properties and for houses.

24/1/2012: Europe's Latest Non-Leadership on ESM/EFSF

2012-01-24T22:38:00.000+14:00

Another heated non-debate is sweeping Europe. In the latest round of bizarre, outright Kafkaesque rhetorical contortions, European leaders are now engaged in a heated discussion on the 'enlargement' of ESM. Alas, the whole thing is clearly heading for the same outcome as Europe's previous rounds of 'solutions'. Here's why.

Recently, as reported in German press (here) Angela Merkel started to yield on the idea that the 'permanent' ESM fund should be increased from €500 billion to closer to €1 trillion by, among other things, allowing for concurrent running of existent €250 billion EFSF facility and the setting up of the new ESM.

Sadly, this 'solution' is really a complete red herring, despite all the hopes the EU is pinning onto it. In fact, it so much of a fake, the markets are simply likely to laugh their way through it.

The EFSF is designed to run out of time in the end of 2013. ESM is designed to start the earliest in mid-2012. Which means that even in theory, combined ESM/EFSF can last not much longer than 12 months. In practice, however, even this is not going to happen.

Firstly, EFSF is becoming increasingly funded through short term debt issuance and this means that as we hit 2013, the rate of EFSF paper maturing is going to accelerate. To roll this into longer-dated paper will require more than just re-writing the statutes of the EFSF. It will require EFSF raising funding at the same time as ESM is raising funding. The likelihood of this being a successful market funding strategy is zero.

Secondly, ESM capital basis of (meagre) €80 billion is not going to be fully invested on the initiation of the fund. Which means ESM even in theory is not going to come out on day 1 and borrow full €500 billion capacity. In practice, it can't be expected to raise even 1/4 of that in the first year of operations.

Which means that even running concurrently, EFSF+ESM duo will not constitute a fund with anything close to €750 billion capacity. And this means that European leadership is clearly in line for winning the Global Non-Leadership Prize again this year. IMF, insisting on the concurrent running of EFSF/ESM as well, is going to be a runner up.

23/1/2012: Extreme Events

2012-01-24T01:35:00.000+14:00

Going through 2 charts and mapping the big themes of the ongoing crises, one has to be in awe of the volatility. Here are the maps of extreme (3-Sigma-plus) events with 'directionality' reflected:

Lovely, aren't they? But the trick in the above is: we are not at the decay stage of volatility on the sovereigns re-pricing stage. This, to me, suggests that once the sovereign crisis re-pricing draws to conclusion (whenever that might happen - isa different story), there will be the need for finding that 'new normal' (reversion-to-the-trend target) for the markets valuations overall. And that is the whole new game, dependent less on the previous equilibrium that should have followed the Great Bursting period, but more on the future risks and trends in post-debt economies. Which, itself, really depends on whether any given market can sustain growth without endless supports (implicit and explicit) from the Government borrowings.

Just thought I'd throw few thoughts out there...

22/1/2012: An update to Euribor risk premium post

2012-01-23T12:19:00.000+14:00

On the foot of the previous post, I recomputed risk premia for 3 maturities: 12, 9 and 6 months euribor. Here's the chart:

And some top of the line numbers:

To compare against rates dynamics:

22/1/2012: What do interbank lending rates tell us about risk valuations?

2012-01-23T09:29:00.000+14:00

Here is an interesting set of charts for euribor:

Notice that as maturity span shortens, there is an increasingly rapid decline in the rates in recent month. This, of course, is a reflection of two forces acting simultaneously - the ECB LTRO and the rate drop in December. You can see this here in the context of 12 months euribor plot for end-of-month (and end of last week for January 2012):

Sounds good? Indeed, the short-term end of liquidity curve improved dramatically, but... here's a trick - the long-term end of the curve is not improving as much as (1) the repo rate supports, and (2) LTRO (3 year facility) should lead it to. To see this - here's a chart:

And the above term premium is rising despite the risk premium falling:

Note: the last chart above is not seasonally adjusted and, with exception for 2010, euribor rates tend to fall seasonally in January compared to December.

In fact, current risk premia are well above the long-term relations and at more extreme end of the spectrum than during the previous months:

The above suggests to me that what we are observing in the liquidity markets is a combination of some improvement due to ECB's LTRO move (substitution along maturity curve) and the (very) incomplete pass through of ECB rate change to funding markets. There appears to be no evidence in risk reduction anywhere in sight.

22/1/2012: 'Markets are crazy', says market economy Ireland

2012-01-22T23:28:00.000+14:00

So we used to have an 'Innovation Island' here that was run by the Deputy PM who confused Einstein with Darwin. She was directly in charge of Innovation policies.

Now we have a 'Competitive Market Economy' that 'Is Open for Business', as we constantly remind our potential foreign investors (domestic investors we have simply taxed into oblivion already and are even expropriating their wealth through Minister Noonan's 'levy' on pensions), run by the Minister responsible for the following statements (source here HT to @brianmlucey for flashing this one out):

"Michael Noonan, Ireland's finance minister, criticised the involvement of private creditors in the [Greek PSI] talks, arguing that it had made the crisis worse. Mr Noonan told the German newspaper Sueddeutsche Zeitung it had been a "fatal" mistake to involve the private creditors and this had "driven the markets crazy". He said that markets would only calm when they were convinced that eurozone countries were making serious efforts to solve their debt problems."

So, 'markets are crazy' and proper risk sharing with private investors in the case of insolvency is a 'fatal mistake'.

Does Minister Noonan believe in slavery? Because if he doesn't then there is no alternative in the case of Greek crisis resolution options to PSI. Of course, Minister Noonan believes in slavery - the modern variety of it - slavery that subjugates those who do not emigrate from Ireland to decades of involuntary repayment of privately accumulated debts they did not contract to accumulate. Minister Noonan has no problem with the Government of Ireland simply undertaking all private debts of a private insolvent banks and forcing ordinary people - not shareholders or lenders to these banks who were paid to take the risks in the first place - to repay them. Just like that. Without any consent: "Give us your money, granny, or else!"

But there's more to the statement above, which shows Minister Noonan in an equally unpleasant light. You see, Minister Noonan swears by the wisdom of the IMF and the ECB and the European 'partners' when it comes to his domestic policies. He did so officially earlier this week when he used Troika endorsement of Ireland's 'progress' in the programme as the reflection of their support for his policies. Yet, it is the very same Troika he so blindly follows into Ireland's economic oblivion which deemed Greek debt levels unsustainable - aka non repayable even were the modern day debt slavery terms (as imposed in Ireland) deployed in Greece as well.

So, for all our Irish concerns about the sanity of the Troika 'solutions' for Ireland, there's an even greater concern that should be preoccupying our minds - concerns for the positions taken by our own national leaders. And for all those would-be foreign investors into Ireland - please remember, you are about to invest in the economy run by those who think that 'markets are crazy' and contracts for risk pricing are 'fatal mistakes'.

PS: Never mind, Minister Noonan's only plan for Ireland is to attempt, asap, borrowing in the 'crazy' markets to finance his 'sane' fiscal management strategies.

20/1/2012: Non-News from a Road to the Second Bailout

2012-01-21T10:57:00.000+14:00

This story in the Irish Times yesterday clearly requires a comment. So here it goes.

Here's the best time-line and explanation as to Minister Noonan's 'efforts' to secure 'savings' on the Promissory Notes.

Now, consider the following from the Irish Times today:

"We think there’s a less expensive way of doing [restructuring of the Promissory Notes] by financialengineering, and we’re not talking about private-sector involvement orrestructuring,” said Mr Noonan in Berlin "...it is about pointing out to the troika that there are difficulties andthat it could be less expensive – and everyone still gets their money.”

"A senior German official said Berlin could envisage extra programmefunding being used for the Irish banking sector not currently earmarkedfor this purpose."

The above might mean many things:

Ireland still has some funds due under the original 'bailout' that were earmarked for banking measures, but were not yet used in the last recapitalizations round in July 2011. This will not in itself constitute any new measures materially impacting Ireland's Government debt projections. It will not constitute a second bailout (as the funds are already earmarked under the first bailout), but by reducing funding available for fiscal and other banking requirements it will increase the probability of such a bailout in the future.
Ireland can be allowed to borrow more from the EFSF/ESM, swapping the Notes for marginally cheaper funding. This too will not constitute any material impact on Ireland's Government debt projections. But it will constitue a second bailout.

Neither option involves any possibility for 'private sector involvement' and at any rate, Minister Noonan's reference to PSI is a red herring - there can be no PSI in relation to the Promissory Notes as these do not involve private investors or lenders at all.

However, both (1) and (2) have material impact in terms of Ireland requiring a second bailout - both increase materially the probability of such an eventuality.

Lastly, there is a catch. The problem of capital adequacy, highlighted by Minister Noonan, means that 'financial engineering' can only involve temporary relief in terms of payments timing, not material relief in terms of NPV of the debt assumed by the state under the Promissory Notes. We will be allowed to borrow more time. At a cost of longer loans, and more repayments in the end. Which, of course, does nothing to achieve sustainability of the 'solution' from the point of view of us, taxpayers, who Minister Noonan expects to pay for all of this. But it probably does give him a chance of holding a 'triumphant' pressie announcing some sort of a 'deal'.

So in the nutshell, the Irish Times story is... errr... a non-story. A sort of traditional Spin that comes out of the Government every time they are caught... errr... fantacising the reality. As NamaWineLake put is so excellently:
"...it has been four months since Minister Noonan’s meeting with the ECB and others in Wroclaw where he, to use his own words “had a ball to kick around” and has proposals. It is two months since Enda Kenny discussed the matter with Angela Merkel. It is more than two months since Minister Noonan said that “technical discussions” were ongoing. And yet the Troika yesterday downplayed any progress in the matter saying that Minister Noonan had merely “requested discussions”."

Or maybe, just speculating here, Minister Noonan is bringing up the Promissory Notes once again this week because next week we are about to repay another tranche of Anglo bonds? Last month, around the time of the repayment, there was much-a-do-about-nothing going on in referencing the very same Promissory Notes?

However, there is, in the end, something openly honest about Minister Noonan's windy trip down the 'Imagine the Superhero, ya Villain' lane.

"[Minister Noonan] said he hoped that the ECB would extend its programme oflow-interest loans beyond next month to improve euro zone bankliquidity in the hope it would stimulate the market in longer-termsovereign debt papers."

Point 1: LTRO-2 was already announced, so Minister Noonan is either uninformed, or pretends to be uninformed to posit himself as a a heroic 'rescuer' proposing a real 'solution'.

Point 2: Minister Noonan clearly shows that his sole concern is how to raise more debt for Ireland. Not how to balance the books (in which case he shouldn't need banks to pawn their assets as ECB to buy Government bonds with this fake cash), or reform the economy (in which case growth would resume and the State shall not require the said scheme, again) and not with restoring functional banking system to health (since functional healthy banking system lends to the real economy, not to Minister Noonan).

At last, truth revealed?

20/1/2012: Deputy Peter Mathews v Minister Noonan

2012-01-21T07:32:00.001+14:00

Here are some extracts from an excellent contribution by Peter Mathews TD (FG) from yesterday's topical debates in the Dail (full record available here). This was comprehensively overlooked in the media reporting which focused solely on the non-event (save for Vincent Browne's questions) of the Torika 'approving' Ireland's 'progress'. My comments in italics.

Deputy Peter Mathews:
NextWednesday, 25 January, is the due date for the redemption of a bond issuedoriginally by Anglo Irish Bank Corporation, now the Irish Bank ResolutionCorporation.
We are at animportant financial crossroads in the history of our country. Anglo Irish Bank has been insolvent andsupported by financial engineering, promissory notes and the emergencyliquidity assistance of the European Central Bank and funds from our CentralBank. The debt that lies embeddedin what was Anglo Irish Bank was not created by the citizens of this country. It has been meted out onto their backsby a mixture of incompetence and mismeasurement over a certain period under thepast Administration.
We are at a moral crossroads. We should bring to the attention of thecreditors holding the bond the facts that the bank is insolvent and that, ineffect, it is not a case of our not wanting to pay but of our not being able todo so...

Consider the debt of €1.25billion. The attention of thecreditors will be in sharp focus because the banking system, the Irish-ownedbanks, are in debt to the ECB and our Central Bank at a level of approximately €150billion. It is the forbearance andtolerance of citizens that keeps the financial edifice and engineering of theeurozone and the greater financial system of the developed world in place. We have been doing considerable work,facing enormous challenges. Through the great work of the Minister for Finance, Deputy Noonan, andthe Taoiseach, we are bearing the load of trying to bring about a fiscaladjustment in line with the troika agreement signed in November 2010. All that work is important and must bedone but the legacy debt is outside the responsibility of the people of thisState.

One and a quarter billion euro isalmost half the budget [measures] introduced in December. It is eight times the sum that will be raised from thehousehold charge and twice that which will be raised by the VAT increase. The debt crisis in Ireland and othercountries cannot be solved by adding more debt... Loading more debt on thiscountry to pay legacy debt is like suggesting a drink problem can be solved byanother whisky.

Minister for Finance (DeputyMichael Noonan):

I thank Deputy Mathews for raising this veryimportant issue. The repayment ofthe bond in question is an obligation of the bank and will be repaid by thebank. It is important to be clearthat it is the bank and not the Exchequer which will meet this obligation. [Need anyone point the following to the Minister, that the 'bank' has no own assets or capital over and above that which has been committed to it by the State and that the Promissory Notes are being financed by the Exchequer?]

The Government has committed toensuring that there is no forced or coerced involvement by the private sectorburden sharing on Irish senior bank paper or Irish sovereign debt without the agreementof the ECB. This commitment hasbeen agreed with our external partners and is the basis on which Ireland'sfuture financing strategy is built. While the cost to the Irish taxpayer has been and will remainsignificant, the Government clearly recognises the need to work as part of theeurozone in order to ensure a return to the funding markets in the future. The only EU state where private sectorinvolvement will apply is Greece.

The following was agreedby all 27 member states at the euro summit last October:

15. As far as our generalapproach to private sector involvement in the euro area is concerned, wereiterate our decision taken on 21 July 2011 that Greece requires anexceptional and unique solution.

16. All other euro areaMember States solemnly reaffirm their inflexible determination to honor fullytheir own individual sovereign signature and all their commitments tosustainable fiscal conditions and structural reforms. The euro area Heads of State or Government fully supportthis determination as the credibility of all their sovereign signatures is adecisive element for ensuring financial stability in the euro area as a whole.

This was agreed by theHeads of State and Government at their meeting in October, and Ireland wasincluded in the 27 states that agreed to it. [Minister Noonan fails to note here that it was on insistence of his own Taoiseach that article 15 does not include Irish banking sector resolution-related debts. And he deflects the arguments made by Deputy Mathews on feasibility of repaying these debts.]

It is not correct to state that onlytaxpayers have borne the burden of rescuing the Irish banks. Holders of equity in the banks havebeen effectively wiped out in burden sharing while holders of subordinated debthave incurred a €15.5 billion share of the burden to date, including €5.6billion since this Government took office less than a year ago. [Again, Minister Noonan is dis-ingenious in his comments. Equity holders and bond holders are contractually in line for these losses. Taxpayers are not. In effect, Minister suggests that there is some sort of equivalence between treating harshly contracted parties to an undertaking and treating harshly an innocent by-stander. There is no such equivalence.]

To impose burden sharing on seniorbondholders, or to postpone the repayment of this bond at this point in time,is not in Ireland's best interest. What is in the Irish people's best interest is that we regain ourfinancial independence and that we place ourselves in a position to re-enterthe financial markets at the earliest possible date... We do not need to scupper our recovery,scupper the goodwill generated or alienate our partners by taking unilateralaction which in the medium to long term will prove wholly counterproductive. [This is an outright conjecture by the Minister that is unfounded in fact. It is not in the interest of the Irish people to simply regain access to financial markets. It is only of such interest if we can regain it at a lower cost than alternative funding provided. Furthermore, his statement assumes that not repaying Anglo bondholders will cause the detrimental impact on 'goodwill' and the 'financial markets'. This remains to be tested and proven.]

If we were to postpone or suspendpayments to creditors of IBRC, this would have a significant impact on both thebank and, ultimately, the State. The senior debt, unsecured as it is, is an obligation of the bank. If the bank does not meet such anobligation, it would lead to a default and, following that, most likelyinsolvency. Insolvency wouldresult in a very significant increase in the cost to the State to resolve theIBRC. [What cost? The Minister scaremongers the public, but cannot name a single tangible expected cost. Why is the interest of the bank aligned with the interest of the State, Minister?] ... Further, the financial market's view of Ireland as a place to dobusiness or invest would be seriously undermined. [Is Minister Noonan seriously suggesting that Ireland's reputation as a place to do business or invest dependent so critically on a bust bank with worst history of speculative decision-making ability to repay its insolvent borrowings? Would IDA confirm they are directly referencing Irish taxpayers willingness to cover private sector losses in any undertaking, no matter how risky, as some sort of the 'investment promotion' positive for Ireland? Can Minister Noonan confirm that he has done the analysis of the effects that bonds repayments by Anglo, and the resultant increases in the sovereign debt have on sustainability of our Government's reputation in the bond markets? Does he not know/ understand that any investor looking at his statements will immediately price into their valuation of Government bonds the possibility that the Irish Government can at will, out of the blue simply hike its own debt pile in the future to suit some other risky private sector fiasco? What does that risk alone do to our 'reputation'?]

Deputy Peter Mathews:

While I willnot get into a long debate, Greece will be the beneficiary of at least a 60%write-down of its debt obligations. The Greeks got the attention of their creditors by going out in thestreets and having riots and by people being killed. We have knuckled down to correcting a fiscal imbalance and,at the same time, we have stayed silent. We have been straitjacketed by the legacy debt. Our loan losses in the banking systemwere €100 billion. While I knowthe shareholders and some of the subordinated bondholders suffered, theremaining losses were in the banks without being declared. The ECB stepped in to redeembondholders to date, which was a mistake. We are compounding the mistake by going along the same route now.

We have got to be honest about it andopen up the discussion. We are notdefaulting; we are opening a discussion. I made the point that we cannot pay. I use the word "we" euphemistically orcollectively in regard to the bank and the State. We cannot pay because of the guarantee that extends over thebank. It is a case of us liftingthe telephone and asking, "Can we have your attention, please?" We cannot pay and we want to open adiscussion and explain to exactly how the creditor liabilities of our bankingsystem remain, and how they should be written down. There is further writing down to do. We have a €60 billion to €75 billion ofwrite-down to organise and negotiate.

To use an analogy, we have asteeplechase race with about four miles to go. We have big jumps ahead. Normally, a steeplechase horse will start with about 12stone on its back. Ireland'slegacy debt of private debt, non-financial corporate debt and national debt whenit peaks out at €120 billion is the equivalent of 24 stone on the back. It is not a possible race to run.

Deputy Michael Noonan:

I do notdisagree with Deputy Mathews' analysis. However, we are in a situation which we inherited from our predecessors,who entered into solemn and legally enforceable commitments in respect of AngloIrish Bank, as it was then. Ofcourse, Deputy Mathews is correct that we should do everything possible toreduce the debt burden on the taxpayers of Ireland and to enhance Ireland'scapacity to repay its debts. Weare working on that and making some progress. [So that's it, folks. The Last Refuge of the Scoundrel = the arguments the Minister puts forward for expropriating personal property and income through higher taxation and reduced services for which we paid and continue to pay is: We are where we are. This alone should be very re-assuring to the future investors here.]

20/1/2012: A view from ECB's airconditioned halls

2012-01-21T04:03:00.000+14:00

I am sure you are all aware of this, but here is a chart on the euro area monetary aggregates:

Do you spot much of drama here? No? How about a snapshot?

No prizes for guessing an answer: there is no drama in monetary policy path chosen by the ECB through the entire period of August 2007-present. None. Which, of course, is surprising, as outside the euro monetary policymakers halls, there was and still is plenty of drama - from banks liquidity crunches, to sovereign debt crises, to sovereign deficits crises, to recessions and double-dips, to unemployment rising, to banks assets valuations crisis, to inflation falling out of sync with FX valuations, to sovereign credit crunches, to socialization of banks losses... and so on. All of the above should have an effect on a monetary policy. Some in less interventionist fashion (but with at least an ex post correlation to the aggregates), and some with more interventionist fashion (with monetary policy being a major tool for dealing with them).

Alas, all is calm, trend(y)-like in the well airconditioned offices of ECB.

20/1/2012: A Question for Keynesianistas

2012-01-21T00:28:00.001+14:00

Keynes remarked that:

"The theory of economics does not furnish a body of settled conclusions immediately applicable to policy. It is a method rather than a doctrine, an apparatus of the mind, a technique for thinking, which helps the possessor to draw correct conclusions."

Sounds plausible.

A question to Keinesianistas, then: Why on earth would you argue that for every recession in every country, there is only one solution that is fully anchored in one Aggregate Demand identity? And that - irrespective of the nature of the path an economy takes into a recession or its underlying causes, irrespective of the economic conditions at the onset of the recession?

19/1/2012: December Inflation - State's Fingerprints all Over the Crime Scene

2012-01-20T06:23:00.000+14:00

There will be a much more detailed analysis of the state-sanctioned rip-off that is revealed in the latest data from CSO on Irish consumer prices in my sunday Times article this weekend, so stay tuned for that, but here are some numbers from today's release.

First off - changes yoy for 2010 and 2011:

And next, cumulated changes in prices for 2007-2011 period:

Lighter blue are categories that have either full or significant share of prices set or influenced directly by Government policies.

One thing to note: mortgage interest costs which, per CSO data have fallen 10.7% in 2007-2011. Of course, this conceals the fact that since the Irish State took over most of the Irish banking sector, in 2010-2011, mortgage interest costs are up cumulated 28.11%. Over the same period of time, ECB rates have moved from 1.0% in January 2010-March 2011, to 1.25% in April-June 2011, to 1.50% in July-October 2011, to 1.25% in November and 1.0% back in December 2011. In other words, the average rate has gone DOWN from 1.23% in 12 months pre-January 2010 to 1.13% in 24 months since then. And yet, mortgage interest keeps on climbing... up whooping 20.4% in 2011 alone.

Yet another useful comparative that is concealed by the above data is that while mortgage interest costs might be down 11.7% on December 2007, they are up 7.7% on December 2006. Now, in December 2006, ECB rate was 3.5% or 2.5 percentage points above where it was in December 2011.

So let's take a look at slightly longer horizons. Chart below show cumulated price changes between December 2001 and present and December 2006 and present also courtesy of the good folks of CSO.

Again, the same story - the higher the price increases, the more likely we are dealing with directly regulated or state owned enterprises-dominated or state-controlled sector.

More detailed analysis in my forthcoming Sunday Times piece this week.

19/01/2012: One Question, please...

2012-01-20T04:37:00.000+14:00

In the spirit of asking our Troika overlords questions around the time of their serial reviews of Ireland's Programme, here's mine:
"Given that since the previous review, Irish economy has posted

A full quarter of GDP & GNP contraction
Missed targets on fiscal side covered up by vague reforms papers publications and capital spending cuts, plus 'temporary' tax measures
Rampant tax increases & state costs rises, covered up by deflation in the private sector economy
Stuck sky-high unemployment, with massive contractions in labour force and emigration
Another botched 'austerity' budget with hope-for revenue measures substituted for reforms of spending
Repayment of billions in bust banks bonds
Continued lack of recovery in its banking sector

What part of (1)-(7) above constitutes 'successful completion' of the review?"

19/01/2012: Quarterly data on complete trade balance: Q3 2011

2012-01-20T01:29:00.000+14:00

While we are on trade data (see previous post on November 2011 merchandise trade stats here), let's also update full trade stats for QNA results for Q3 2011. This covers all trade - merchandise and services, so it paints a full picture of our trade balance.

Chart below shows quarterly trade stats for Ireland. Per latest QNA:

Exports of goods and services fell from €41.945bn in Q2 2011 to €41.186bn in Q3 2011, a decline of 1.81%. This comes after a qoq rise of 4.34% in Q1-Q2 2011 period. Year on year, Q2 2011 saw exports rise 3.78% and Q3 saw an increase of 1.91%.
Despite the slowdown, Q3 results was still the second best quarterly exports performance on record.
Imports of goods and services shrunk in Q3 2011 to €31.6bn, down 5.45% qoq, which comes on foot of a 3.06% rise qoq in Q2 2011. Year on year, imports were up 3.3% in Q2 2011 and are down just 0.29% in Q3 2011.
This means the trade balance has reached another historical high at €9.586bn in Q3 2011. The trade surplus was up 9.66% in qoq terms and 5.69% in yoy terms in Q2 2011 and it rose 12.49% qoq and 9.89% yoy in Q3 2011.

The core driver for the dramatic gains in trade balance for goods and services was a substantial decline in trade deficit on services side. This can be best seen from annualized figures, shown below:

Based on Q3 data, we can expect:

Total annual exports to rise to €164.75bn in 2011, up 4.48% on €157.67bn in 2010
Total annual imports to increase 3.95% yoy to €132.953bn, and
Total trade surplus to rise 6.55% yoy to €31.72bn
Of the above €1.95bn improvement in the annual expected trade surplus is likely to come from a €1.66bn improvement (reduction) in the annual trade deficit in services which is expected tos shrink to €11.99bn in 2011.

19/1/2012: Irish External Trade data - November 2011

2012-01-19T23:33:00.001+14:00

Latest trade stats for Ireland are out - covering preliminary figures for November - and... it's another record trade surplus. I recently wrote about this issue for PressEurop (link here) and for Globe & Mail (link here).

But the latest data from Ireland's external trade side is truly impressive. Until that is, you dig slightly below the surface... where some strange things are starting to pop up.

Let's take it from the top.

On seasonally adjusted basis,

Irish merchandise imports in November stood at €3,706mln, a decline of 5.97% mom that comes on foot of a previous monthly rise of 2.68%. Imports are up 4.91% year on year and relative to 2009 they are up 0.21%. In the 11 months from January 2011, imports are up 6.46% on same period in 2010.
Imports increases are, of course, closely linked to increases in exports - as MNCs import much of their inputs into production from abroad. I shall cover this in a second, so keep this in mind.
Irish merchandise exports rose in November to €8,016mln - an uplift of 4.58% mom on the foot of the previous month decline of 4.32%. Year on year exports are up 8.83% and relative to November 2009 they are up 23.22%. In the 11 months through November, cumulative exports rose 4.09% relative to the same period 2010.

As the result, trade balance (again, referencing just merchandise trade) rose 15.74% mom (after contracting 10.75% in October, mom) to an all-time record of €4,310mln. The trade surplus is now 12.44 ahead of November 2010 and 53.5% ahead of same period 2009. In the first 11 months of 2011 trade balance rose 1.61% on the same period of 2010.
The last observation in the previous bullet point is not a strong reason to cheer. Remember, comparable rise in 2009-2010 period was 8.77% or some 5.5 times faster than in 2011.

Updating annualized trade stats based on 11 months performance, we can expect imports to come at ca €48.46bn - up 5.82% yoy reversing average annual rate of decline of 9.85% achieved in 2007-2010 period. Exports are likely to post another record year, consistent with my predictions before, at €92.25bn - up 3.36% yoy and well behind the Government-projected rate of over 5%. Trade surplus (for merchandise trade) is likely to reach a record €43.78bn some 0.75% ahead of 2010 result - an increase that would pale in comparison with 10.6% rise in annual surplus in 2010 yoy and well below the average 19.62% increase achieved over 2007-2010 period.

So what is going on, folks? Why are we seeing record surpluses, against fairly impressive exports and growing imports? The answer can be found in two stats. The first one, relates to terms of trade, and the second one relates to transfer pricing. let's take a look, shall, we?

CSO reports terms of trade data with 1 month lag, so we do not have November results yet, but we do have october figures.

As you can see from the above chart, terms of trade improved (downward movement in series) in october for Irish exporters. And this improvement is rather dramatic both in the short-term and in the long-run. However, as the chart below shows, the improvement in terms of trade in October 2011 relative to October 2010 was not fully utilized by the exporters (we are below the long term relationship, implying that for current levels of terms of trade, our exports should be higher than they are).

What did, however, take place is a massive jump - to a record high - in overall ratio of exports to imports in merchandise trade (chart below). In more layman's terms, all of a sudden, in November, Irish exporters needed less imported materials to supply more of exports. Hmmm... Has the chemicals component of Viagra pill change? Not really. Has the value of this component become cheaper for Irish operations of the respective MNC? No. In fact it became more expensive as the euro weakened against other currencies and terms of trade improved. So what did happen?

Take another look:

What the above suggests is that Ireland-based MNCs are:

Drawing down inventories to boost exports - something they would do were they planning for a slowdown in December and onward;
Pushing up the component of exports value that is transfer pricing, thus boosting their profit side - something that will eventually show up in wider GDP/GNP gap;
Both of the above.

This is not exactly the stuff the dreams of 'exports-led recovery' should be made of, but for now, let us rejoice that at least in one area we have really strong performance in this economy. Afterall, better that than nothing.

16/1/2012: Summary of S&P move and more

2012-01-17T00:16:00.000+14:00

In the wake of the S&P action it is a good idea to put side-by-side some ratings on euro area countries. here are S&P ratings before and after downgrade along with CMA ratings and CDS data for Q1 2009 beginning of the crisis) and Q4 2011.

Per S&P: "...the agreement [between euro zone member states in December 2011 attempting to address the crisis] is predicated on only a partial recognition of the source of the crisis: that the current financial turmoil stems primarily from fiscal profligacy at the periphery of the eurozone. In our view, however, the financial problems facing the eurozone are as much a consequence of rising external imbalances and divergences in competitiveness between the eurozone's core and the so-called "periphery". As such, we believe that a reform process based on a pillar of fiscal austerity alone risks becoming self-defeating, as domestic demand falls in line with consumers' rising concerns about job security and disposable incomes, eroding national tax revenues."

In other words, it's growth, stupid. And herein lies the main problem for Europe. While EU might - if forced hard enough - jump onto a more sustainable fiscal spending path (cut deficits and structural deficits) - the EU has absolutely no record of creating pro-growth conditions or environments. In fact, in a bizarre response to the S&P moves:

France is discussing an increase in VAT as the means for stimulating productivity growth, while
Austria is planning wealth taxes and increase in retirement age as its response to economic growth challenge.

Now, where do you start in dealing with this lunatic asylum?

16/1/2012: Irish Bailout Redux - Sunday Times 15/01/2012

2012-01-16T22:16:00.000+14:00

Several articles in the press yesterday on why Ireland will require / need a second 'bailout' - here's an excellent piece from Namawinelake and here's a piece from Colm McCarthy.

This is an unedited version of my Sunday Times (January 15, 2012) article on the same topic.

In May 2011, as Greece was slidingtoward the second bailout, I conjectured that within 24 months, Ireland andPortugal will both require additional bailout packages as well. This week, myprediction has been echoed by the Chief Economist of the Citi, William Buiter.

According to Buiter, the costs ofborrowing in the markets are currently prohibitive and the expiration of the€67.5 billion loans deal with the Torika, scheduled for 2014 will see Irelandonce again unable to borrow to cover remaining deficits and refinancingmaturing bonds. Ireland should secure additional funding as a back up, to avoidseeking it later “in a state of near panic”.

Buiter’s suggestion represents nothingmore than a prudent planning-ahead exercise. In addition to Buiter’s originalrationale for securing new lending, Ireland is facing significant fiscal andeconomic challenges that will make it nearly impossible for the State tofinance its fiscal adjustment path through private borrowing in 2014-2016.

Speaking to the RTE, Buiter said thatalthough Ireland’s situation was different from that of Greece, the economyremains under severe stress from banking sector bailouts. Addressing thisstress should involve restructuring of the promissory notes issued by the stateto IBRC, as the Government was hoping to do in recent months. But it alsorequires anchoring our longer-term fiscal adjustment path to predictable andstable sources of funding at a cost that can be carried by the weakenedeconomy.

The Government will do well to listen tothese early warnings to avoid repeating mistakes of their predecessors.

On November 18, 2011, Carlo Cottarelli,IMF Director of Fiscal Affairs Department gave a presentation in the LondonSchool of Economics, titled Challenges of Budgetary and Financial Crises inEurope. In it, Mr Cottarelli provided threeimportant insights into the expected dynamics for debt and deficits that havematerial impact on Ireland.

Firstly, he showed that to achieve the‘golden rule’ debt to GDP ratio of 60% of GDP by 2030, Ireland will be requiredto run extremely high primary surpluses in years to come. Only Greece and Japanwill have to shoulder greater pain than us over the next 19 years to get publicdebt overhang down to a safety level.

Secondly, amongst all PIIGS, Ireland hasthe highest proportion of outstanding public debt held by non-residents (84%),implying the highest cost of restructuring such debt. The runner up is Greecewith 65%. In general, bond yields are positively correlated with the proportionof debt held by non-residents.

Thirdly, Cottarelli presented a modelestimating the relationship between the observed bond yields and the underlyingmacroeconomic and fiscal fundamentals that looked at 31 countries. This modelcan be recalibrated to see what yields on Irish debt can be consistent withmarket funding under IMF growth projections for Ireland. Using headline IMFforecasts from December 2011, 2014-2016 yields for Ireland are expected torange between 4.7% and 6.5%. Incorporating some downside risks to growth andother macroeconomic parameters, Irish yields can be expected to range between5.3% and 7.0%.

Even in 5.5-6% average yields range,financing Irish bonds rollovers in the market in 2014-2016 will beprohibitively costly as at the above yields, Ireland's debt dynamics will nolonger be consistent with the rates of decline in debt/GDP ratio planned forunder the Troika agreement. This, in turn, means that the markets will beunlikely to provide financing in volumes, sufficient to cover debt rollovers.Thus, Ireland will either require new bridging loans from the Troika or willhave to extract even greater primary surpluses out of the economy, divertingmore funds to cover debt repayments and risking derailing any recovery we mightsee by then.

What Butier statement this week does notconsider, however, are the potential downside risks to the Irish fiscalstability projections. These risks are material and can be broadly divided intoexternal and internal.

Per external risks, the latest CMAGlobal Sovereign Risk Report for Q4 2011, released this week, shows Ireland asthe 6^th riskiest country in the world with estimated probability ofsovereign default of 46.4% and credit ratings of ccc+. Despite stableperformance of our bonds in Q4 2011, CMA credit ratings for Ireland havedeteriorated, compared to Q3 2011. And, our 5 year mid-point CDS spreads arenow at around 747 bps – more than seven times ahead of Germany. This highlightsthe effect of a moderate slowdown in euro zone growth on our bonds performance.

Even absent the above risks, Irish debtdynamics can be significantly improved by significantly extending preferentialinterest rates obtained under the Troika agreement to cover post-2014 rolloversand adjustments. Based on IMF projections from December 2011, such a move cansecure savings of some €9 billion or almost 5% of our forecast 2016 GDP inyears 2014-2016 alone (see chart).

CHART

Chart source: IMF Country Report11/356, December 2011 and author own calculations

Looking into the next 5 years, there isa risk of significant increase in inflationary pressures once the growthmomentum returns to the Euro area. A rise in the bund rates can also take placedue to deterioration in the German fiscal position or due to Germany assuminggreater role in the risk-sharing arrangements within the euro area. Lastly,German and all other bonds yields can also rise when risk-on switch takes placein post-recessionary period, drawing significant amounts of liquidity out ofthe global bond markets. All of these will adversely impact German bunds, butalso Irish bonds.

On the domestic front, we should be providing a precautionary cover forthe risk of a more protracted slowdown in the Irish economy especially ifaccompanied by sticky unemployment. The risk of deterioration in Irish primarybalances due to structural slowdown in the rate of growth in Irish exports(potentially due to strengthening of the euro in 2013-2016 period orsignificant adverse effect of the patent cliff on pharma exports) is anotherone worth considering well before it materializes. Lastly, there is theever-growing risk that the markets will simply refuse to fund the vastrollovers of debt which is currently being increasingly warehoused outside thenormal markets in the vaults of the Central Banks and on the books of theTroika.

Overall, Ireland should form a multi-pronged strategic approach tofiscal debt adjustment. Recognizing future risks, the Government shouldaggressively pursue the agenda of restructuring the promissory notes issued tothe IBRC with an aim of driving down notes yield down to ECB repo rate and push for ECB acceptance of burden sharing imposition on IBRC bondholdersto reduce the principal amount of the promissory notes. Pursuit of longer-termobjective of forcing the ECB to accept a writedown on the banks debtsaccumulated through the Emergency Liquidity Assistance lines at the CentralBank of Ireland is another key policy target. Lastly, Ireland needs to securesignificant lines of credit with the EU at preferential rates for post-2014period with longer-term maturity than currently envisaged under the Troikadeal.

Given the general conditions across theEurozone today, the last priority should be pursued as early as possible. Inother words, there’s no better time to do the right things than now.

Box-out:

The latest EU-wide statistics for Retailsales for November 2011 released this week present an interesting reading.Retail sector turnover index, taking into account adjustments for working days,shows Irish retail activity has contracted by 0.4% in November 2011 year onyear. Overall activity is now down 5.2% on same period 2008, but is up 7.9% on2005. For all the Irish retail sector woes, here’s an interesting comparative.Euro area retail sales turnover is now down 2.5% year on year and 1.6% on 2005.In terms of overall contraction in turnover, Ireland is ranked 15^thin EU27 in terms of the rate of contraction relative to November 2010 andNovember 2008 and 12^th in terms of contraction relative to 2005. Notexactly a catastrophic decline. Once set against significant losses in retailsector employment since 2008, these numbers suggest that to a large extent jobslosses in the sector were driven by lack of efficiencies in the sector at thepeak of the Celtic Tiger, as well as by declines in revenues.

15/1/2012: Research Update - January 2012

2012-01-16T08:43:00.004+14:00

Research update for January 2012:

Two new papers added to my ssrn page:

http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1985617 and
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1985618

Two papers now published (since last update):

http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1881444 and
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1919792

Five papers in various working stages:

Tsallis Entropy: Does the Market Size Matter? with G. Hearte
Review of core properties of gold as financial diversification instrument, with Brian M. Lucey and Fearghal O'Connor
Tobin Tax: Literature Review, with Brian M. Lucey
Modeling the Risks of Large House Price Falls: International Evidence, with Caoimhe Proud-Murphy, and
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1940481

14/1/2012: Irish banking crisis - on a road to nowhere

2012-01-15T12:03:00.001+14:00

This is an unedited version of my Sunday Times article from January 8, 2012.

In the theoretical world of Irish banking reforms, 2012 issupposed to be the halfway marker for delivering on structural change. Almost ayear into the process, banks are yet to meet close to 70% of their totaldeleveraging targets, SMEs are yet to see any improvements in credit supply,households are yet to be offered any supports to reduce their unsustainabledebt burdens, longer-term strategic plans reflective of the banks new businessmodels, now approved by the EU not once, but twice are yet to be operationalized,and funding models are yet to be transitioned off the ECB dependency.

In the period since publication of the banking sectorreforms proposals, total banks core and non-core assets disposals are runningat some €14 billion of the €70 billion to be achieved by the end of 2013. Eventhis lacklustre performance was heavily concentrated in the first nine monthsof 2011, when few of Irish banks competitors were engaging in similar assetssales.

Since then, things have changed. Plans by the euro areabanking institutions, already announced in Q4, suggest that some €775 billionworth of euro area banks’ assets will come up for sale in 2012. That is morethan 8.5 times the volumes of assets disposals achieved in 2011. And 2012 isjust the tip of the proverbial iceberg. According to the Morgan Stanleyresearch, 2012-2013 can see some €1.5-2.5 trillion worth of banks assetshitting the markets. With 2012 starting with clear ‘risk-off’ signals from thesovereign bond markets and banks equities valuations, the near term future forIrish banks deleveraging plans can be described as bleak at best.

Further ahead, the process of rebuilding capital buffers, inboth quantity and quality, can take core euro zone banks a good part of currentdecade to achieve. In this context, Irish banks deleveraging targets aregrossly off the mark when it comes to timing and recovery rates expectations.

Progress achieved to-date leaves at least €35-40 billion innew assets disposals to be completed in 2012 – two-and-a-half times the rate of2011. The two Pillars of Irish banking alongside the IL&P are now facing animpossible dilemma: either the banks meet their regulatory targets by the endof 2013, which will require deeper haircuts on assets and thus highercrystallized losses, or the 2013 deleveraging deadline is bust. In other words,Irish banks have a choice to make between having to potentially go to theGovernment for more capital or suffer a reputational cost of delaying, if notderailing altogether, the reforms timetable.

This is already reflected in the negative outlook and lowerratings given by S&P to AIB last month. The rating agency stressed theirexpectation of the slowdown in assets deleveraging in 2012 as one key rationalefor the latest downgrades. Post-recapitalization in July, AIB core Tier 1regulatory capital ratios stood at a massive 22%, the fact much lauded by theIrish authorities. However, per S&P “AIB’s capital ratio… will be between5.5% ad 6.5% by 2013” due to materially “higher risk weights [on] capital,estimated deleveraging costs, as well as further capital erosion from the corebusiness”.

Bank of Ireland finds itself in a better position, but,unlike AIB, it has much smaller capital reserves to call upon in the case ofshortfall on July 2011 recapitalization funds.

Another area of concern for Irish banking sector relates tofunding. Central Bank stress tests (PCAR) carried out in March 2011 assumedthat by the end of 2013 Irish banking institutions will be funded on commercialterms. This too is subject to significant uncertainty as euro area banks entera period of rapid bonds roll-overs in 2012-2014. Overall, the sector will faceca €700 billion of bonds maturing in 2012 and total senior debt maturing in2012-2014 amounts to close to €2.2 trillion once ECB’s latest 3-year long termrefinancing facility is factored in. For comparison, in 11 months throughNovember 2011, euro area banks have managed to raise less than €350 billion incapital instruments, and various senior bonds. Again, international environmentdoes not provide any grounds for optimism about Irish banks ability to decouplethemselves from the ECB supply of funds.

In the short run, Irish Pillar Banks dependency on centralbanks’ funding is a net subsidy to their bottom line, as central banks creditlines come at a fraction of the expected cost of raising funds in themarketplace. This makes it possible for the banks to sustain theirextend-and-pretend approach toward retail borrowers.

However, in the longer term, reliance on this fundingrepresents major risks of maturity mismatch and sudden liquidity stops. Thelatest data clearly shows that the major risk of Irish banking sector becomingfully dependent on ECB as the core source of funding is now a reality.Reductions in the emergency liquidity assistance loans extended by the CentralBank of Ireland are now matched by increases in ECB lending to these banks. Arecent research paper from the New York Federal Reserve shows that Irish bankscontinue to account for the largest proportion of all loans extended by the ECBto the banking systems of the euro area ‘periphery’.

Lacking functional banking sector, in turn, puts a boot intoGovernment’s plans to use reforms as the vehicle for reversing credit supplycontraction that has been running uninterrupted since 2008.

Another major risk inherent in the Irish banks’ funding andcapital dependencies on Central Banks and the Government is the risk thathaving delayed for years the necessary processes of restructuring householddebts, the banks can find themselves in the dire need of calling in thenegative equity loans. This can happen if the Irish banking sector were to beleft lingering in its quasi-transformed shape when ECB decides to pull the plugon extraordinary liquidity supply measures it deployed. While such a prospectmight be 2-3 years away, it is only a matter of time before this threat becomesa reality and the very possibility of such eventuality should breath fear intothe ranks of Ireland’s politicians.

As the current reforms stand, the sector will not be able toprovide significant protection against the ECB policies reversal, even if theCentral Bank-planned reforms are completed on time. The reason for this issimple. Our twin Pillar banks will be facing – over 2013-2018 – a rising tideof mortgages defaults and voluntary property surrenders, as well as continuedmounting corporate loans losses as the economy undergoes a lengthy and painfuldebt overhang correction, consistent with the historical evidence of similarbalance sheet recession.

While the capital for writing these assets down might havebeen at least in part supplied under PCAR 2011, the banks have no means ofmanaging any added risks that might emerge alongside the mortgages defaults,such as, for example, the risk of their cost of funding rising from the current1 percent under the ECB mandate to, say, 6 or 7 percent that private marketsmight charge.

For all the plans for banking reforms proclaimed for 2012 bythe Central Bank and the Government, in all likelihood, this year is going tosee more mounting corporate and household loans writedowns, amidst thecontinuation of the extend-and-pretend policies by the banks. The longer thisprocess of delaying losses realization continues, the less viable the remainingbanks assets become. And with them, the lower will be the credit supplied intothe real economy already starved of investment and funding.

Box-out:

Irish banking sector structure envisioned under theGovernment reforms plans will not be conducive to an orderly deleveraging ofthe real economy and simultaneous repairing of the banks balance sheets.Sectoral concentration, in part driven directly by the Government dictate, inpart by the massive subsidies provided to insolvent domestic banks, will see acolluding AIB & BOFI duopoly running circles around the regulators,supervisors and politicians.

How serious is this threat of the duopoly-induced marketsdistortions in post-reform Irish banking? Serious enough for the latest EUCommission statement on Bank of Ireland restructuring plans to devotesignificant space to outlining high-level set of subsidies that the Irishauthorities are planning jointly with ECB.

No one as of yet noticed the irony of these latestamendments to the Government plans for the banking sector reforms: to undo thedamaging effects of state subsidies to the incumbents, the EU and theGovernment will offer more subsidies to the potential newcomers. Such approachto policy would be comical, were it not designed explicitly to evade the realsolution to the banking sector collapse in this country – a wholesalerestructuring of the sector, that would have used insolvent banks’ performingassets as the basis for endowing new banking institutions to serve thiseconomy.

13/1/2012: Irish Household Income and Consumption: Q3 2011

2012-01-14T07:13:00.000+14:00

The latest data on disposable income (Institutional Accounts) from CSO presents the picture of real recession ravaging Irish economy. Here are the core details from Q3 2011 - the quarter when Irish economy tanked once again in terms of aggregate GDP and GNP.

Gross disposable income of Irish households in Q3 2011 amounted to €21,761 million - a decline of 4% yoy and a drop of 4.3% qoq.
By use of disposable income (separate database proving longer historical series), gross disposable income of households dropped 3.8% yoy and 4.2% qoq.
Final consumption has declined 3.8% yoy and 2.5% qoq.
Gross savings of the households fell 3.9% yoy and 11.6% qoq

Using Q1-Q3 2011 data we can compute expected annualized series for 2011, which are shown in chart below. In annualized terms:

2011 is forecast to see gross disposable income of Irish households drop 2.9% yoy on 2010 and reach -14.2% cumulative fall on the peak at 2008
Final household consumption expenditure is set to fall 2.7% yoy and 16.2% on peak at 2008
Gross household savings is expected to fall 4% yoy and 17% on the peak in 2009

Of course, in the above, Gross household savings includes repayments of debts, which is reflected in the fact that since the beginning of the crisis, our savings were rising, just as out incomes tanked.

13/1/2012: EU27 External Trade - Greece falling out of trade picture

2012-01-14T01:45:00.000+14:00

As German lawmakers are putting pressure on the parties in the PSI negotiations in Greece with calls for Greece to exit the Euro to devalue and regain competitiveness have some serious basis in real economic performance of the country.

Today's data on trade balance across EU27 clearly shows that Greece is unable to sustain serious debt repayments under the current arrangements. Here are the details:

The first estimate for November 2011 euro area (EA17) trade surplus came in at €6.9 bn surplus, against the deficit of -€2.3 bn in November 2010. October 2011 trade balance was +€1.0 bn, against a surplus of +€3.1 bn in October 2010.

In November 2011 compared with October 2011, seasonally adjusted exports rose by 3.9%, while imports remained unchanged.

The first estimate for the November 2011 extra-EU27 posted trade deficit of -€7.2 bn, compared with a deficit of -€16.8 bn in November 2010. In October 2011 the trade balance extra-EU27 was -€11.2 bn, compared with -€9.5 bn in October 2010.

In November 2011 compared with October 2011, extra-EU27 seasonally adjusted exports rose by 2.8%, while imports fell by 0.6%.

EU27 detailed results for January to October 2011:

The EU27 deficit for energy increased significantly (-€317.5 bn in January-October 2011 compared with -€246.4 bn in January-October 2010)
Trade surplus for manufactured goods rose to +€198.9 bn compared with +€136.4 bn in the same period of 2010.
The highest increases were recorded for EU27 exports to Russia (+28%), Turkey (+23%), China (+21%) and India (+20%), and for imports from Russia (+26%), Norway (+21%), Brazil and India (both +20%).
The EU27 trade surplus increased slightly with the USA (+€60.8 bn in January-October 2011 compared with +€60.1 bn in January-October 2010) and more significantly with Switzerland (+€24.1 bn compared with +€16.6 bn) and Turkey (+€21.3 bn compared with +€14.7 bn).
The EU27 trade deficit fell with China (-€132.2 bn compared with -€139.8 bn), Japan (-€16.1 bn compared with -€18.3 bn) and South Korea (-€3.9 bn compared with -€9.6 bn), but increased with Russia (-€76.0 bn compared with -€61.1 bn) and Norway (-€38.7 bn compared with -€29.8 bn).
Concerning the total trade of Member States, the largest surplus was observed in Germany (+€129.2 bn in January-October 2011), followed by Ireland and the Netherlands (both +€35.9 bn) and Belgium (+€10.1 bn). The United Kingdom (-€98.2 bn) registered the largest deficit, followed by France (-€72.5 bn), Spain (-€40.1 bn), Italy (-€24.2 bn), Greece (-€16.9 bn), Portugal (-€13.3 bn) and Poland (-€12.0 bn).

Some charts:

The charts above clearly show that:

Of all PIIGS, Ireland is the only country showing capacity to generate significant trade surpluses, with Irish merchandise trade surplus of €2.5bn in November being the second highest in EU 27 in absolute terms and the highest in terms relative to GDP. Exactly the same is true for Irish trade surplus recorded in October. Irish trade surplus in November was almost as large as the combined surpluses of all other countries with positive trade balance, ex-Germany (€2.9bn).
In November 2011 Ireland posted the third fastest rate of mom growth in exports in EU27 (+8.3%), the effect compounded by the 9.4% drop (4th deepest in EU27) in imports.
In contrast, Greece posted a 14.4% contraction in its exports in November 2011 compared to October 2011 - the largest drop of all countries in EU27. Greek trade balance in October stood at a deficit €0.1 billion and in November 2011 this widened to €0.2 billion.

So in terms of trade, Ireland is not Greece, and Greece is not showing any signs of ability to sustain internal debt adjustment within the euro structure.

13/1/2012: The need for political reforms

2012-01-14T00:13:00.000+14:00

An interesting paper from the World Bank (linked here), by Torgler, Benno, titled "Tax Morale and Compliance: Review ofEvidence and Case Studies for Europe" (December 1, 2011). World Bank PolicyResearch Working Paper Series, 2011 (World Bank Policy research Working Paper 5922) presents an overview of the literature on tax morale and tax compliance. Perhaps unsurprisingly, it finds that accountability, democratic governance, efficient and transparent legal structures, and crucially, "trust within the society" are important in enforcing tax compliance and tax morale.

Which offers an interesting point for observation: in 2011, trust in Irishsystem of government as measured by the Edelman Trust Barometer stood at 20%, against theaverage of 52% for 23 countries surveyed in the report, making Ireland thelowest ranked country in the study.

But things are even worse than the above number suggests:

Ireland ranks lowest 23rd in terms of average trust measures across four institutions of government, media, business and NGOs
The above result is driven by: high trust in NGOs at 53%, although this is still below global trust in NGOs at 61%, high trust in business at 46% against global trust in business at 56%, low trust in media at 38% and abysmally low trust in government.

So may be, just may be, folks, in order to improve our fiscal performance we need deep political and leadership changes at least as much as tax increases and spending cuts? Perhaps, one of the problems with Irish fiscal crisis response to date is that the current Government and its predecessor are not doing enough to make Ireland's elites more accountable, more transparent, and better governed? There's an old Russian saying that every fish rots from the head (although Chinese, British and other nations claim the origin of this phrase as well).

12/1/2012: Q4 2011 Sovereign Bonds performance

2012-01-13T22:15:00.000+14:00

Four charts covering Q4 2011 sovereign bonds (CDS) performance:

Data sourced from CMA Global Sovereign Risk Report Q4 2011

12/1/2012: Q4 2011 Sovereign Bonds Report

2012-01-13T07:01:00.000+14:00

CMA released their Quarterly Global Sovereign Risk Report Q4 2011 which makes for an interesting reading. Here are some highlights:

"The Eurozone debt situation continued throughout Q4, with the region widening 9% overall. A bail out of Dexia at the beginning of the quarter was followed by continued concerns on Italy’s debt in November and risk of an S&P downgrade of the entire Eurozone in December.

"Nearly all global CDS prices widened during November’s volatile period, clearly indicating the significance of Western Europe to the global economy and the importance of finding a permanent resolution to the debt crisis.

Italy’s austerity measures failed to move the market tighter in Q3, and the spread widened to a high of 595bp in-mid November. This prompted the end of the Bersculoni era, a new president [obviously, they mean PM] and a new set of austerity measures aimed at reducing the 2 trillion dollars of debt and 120% debt-to-GDP ratio. Implied FX devaluation from a default in Italy is around 17% according to CMA DatavisionTM Quantos.
Spain and Belgium’s charts were a mirror image of Italy’s.
Ireland remained relatively stable throughout the quarter, perhaps indicating a balance between a well capitalised banking sector and IMF concerns about the prospects for growth in exports to Europe."
Greece was the worst performer worldwide (see tables below charts), while Portugal outperformed Ireland

Charts:

Summary of 10 highest and lowest risk sovereigns:

So despite our 'gains' in the bond markets, Ireland moved into 6th highest risk position in Q4 2011 from 7th in Q3 2011.

And amongst the safest bond issuers there are just 2 euro zone countries: Finland and Germany (an improvement on Q3 2011 where only Finland was there).

Here's the summary of our performance since Q1 2009.

11/1/2012: Great Moderation or Great Delusion

2012-01-12T12:49:00.003+14:00

A recent (December 2011) paper published by CEPR offers a very interesting analysis of the macroeconomic risks propagation in the current crisis. The paper, titled Great Moderation or Great Mistake: Can rising confidence in low macro-risk explain the boom in asset prices? (CEPR DP 8700) by Tobias Broer and Afroditi Kero looks at the evidence on whether the period of Great Moderation in macroeconomic volatility during the period from the mid-1980s (the decline in macroeconomic volatility that is unprecedented in modern history) had an associated impact on the rise of asset prices that accompanied this period, setting the stage for the ongoing crash.

In recent literature, this rise in asset prices, and the crash that followed, have both been attributed to "overconfidence in a benign macroeconomic environment of low volatility" or to excessively optimistic expectations of investors that the lengthy period of macroeconomic stability and upward trending is the 'new normal'.

The study introduced learning about the persistence of volatility regimes in a standard asset pricing model of investor decision making. "It shows that the fall in US macroeconomic volatility since the mid-1980s only leads to a relatively small increase in asset prices when investors have full information about the highly persistent, but not permanent, nature of low volatility regimes." In other words, in the rational expectations setting with no errors in judgement and perfect foresight (investors are aware that volatility reductions are temporary), there is no bubble forming.

However, when investors "infer the persistence of low volatility from empirical evidence" (in other words when knowledge is imperfect and there is a probabilistic scenario under which the moderation can be permanent, then "Bayesian learning can deliver a strong rise in asset prices by up to 80%. Moreover, the end of the low volatility period leads to a strong and sudden crash in prices."

Specifically, calibrated model generates pre-collapse rise in asset prices of 77% and overvaluation of assets by 79% over the case of no learning. The subsequent collapse of asset prices is 84% in the case of imperfect information learning.

A pretty nice result!

11/01/2012: Risk-off or 'Grab that Straw, Man'?

2012-01-12T09:40:00.000+14:00

Another day, another historical marker falls under the weight of the euro area mess:

US Treasury auctioned off USD21bn of 10 year notes today achieving the yield of 1.90% - lowest on record for an auction. Cover was 3.19 times the offering, slightly ahead of 3.15 average for previous four 10 year notes auctions. Direct bidders demand was up to 17.4% of sales against the average 10%. 10 year secondary markets yields sliped to 1.91% from 1.97% pre-auction.

Here's the IMF illustration (all charts below are from Cottarelli November 2011 presentation) of the evolution of holdings of US debt:

Which, funnily enough, is pretty diversified when compared to that found in Europe:

But the US yields are, of course, purely irrational:

Then, again, not as irrational as those found in Japan:

Altogether elsewhere, vast... German bund auction - 5 year, €4 billion - attracted cover of 2.24 and the average yield of 0.9%. That is well below inflation - however measured - and even below expected inflation, accounting for the potential slowdown. In other words, investors are now so scared, they are paying German government money to store their cash. In the secondary markets, German 1 year bonds turned negative yield back at the end of November, for the first time in history. German 10-years are currently trading in the 1.87% yield territory. According to FT, 10 year bund yields fell from 3.49% in April 2011 to a low of 1.67% in September last year.

Risk-off raging as EU vacillates... or rather, as its leaders consider how to by-pass Belgian General strike that has derailed their January 30 summit.

Nice one, folks. The insolvent Rome burns, the leaders are having summits galore and the unions are demanding more insolvency, while country output shrinks due to striking.

We are no longer in risk-aversion or even loss-aversion world, we are in a grab-anything-that-might-float world.

10/1/2012: Entrepreneurship and Chaos

2012-01-11T08:48:00.000+14:00

In a slight departure from macroeconomic focus of the blog, here are two links to, in my view, pivotal articles on business and entrepreneurship. Pivotal not because they provide the answers, but because they raise questions I suspect will be the most important ones in years to come.

So enjoy:
http://www.inc.com/eric-schurenberg/the-best-definition-of-entepreneurship.html
and
http://www.fastcompany.com/magazine/162/generation-flux-future-of-business

And I would be interested in your views on these as well.

9/1/2012: Week opener: Merkozy continuing to ignore Greek realities

2012-01-09T22:19:00.000+14:00

Today's meeting between Sarkozy and Merkel is being framed in the context of continued pressures across the euro area (see report on the meeting here). More ominously - within the context of the euro area leadership duet ignoring the latests warning signs for Greece.

Per Der Spiegel report, IMF has changed its analysis of the Greek rescue package agreed in July 2011 in-line with IMF changes in forecasts for Greek economy in the latest programme review in December 2011. Specifically, IMF lowered its forecast for growth from -3% to -6% GDP.

Der Spiegel cites IMF internal memo in claiming that the Fund is viewing existent Greek programme (including to 50% 'voluntary' haircut on Greek bonds currently under negotiations) as insufficient to stabilize the Greek economy and fiscal situation. The Fund is, reportedly, considering 3 possible options to alleviate the latest set of growth pressures:

New austerity measures for Athens - a measure that in my view will only exacerbate immediate pressures on Greece and will lead to dangerous destabilization of political situation in the country, leading to even more second order adverse effects on growth (e.g. prolonged strikes and rioting);
Deeper haircuts on Greek debt held by private institutions - in my opinion this will lead to more contagion from Greece to euro area banks and sovereigns and should be, instead complemented by writedowns of Greek debt held by the ECB, to match existent private sector arrangements;
Increase in the euro zone bailout funds - in my view, this measure is currently outside the feasibility envelope for Europe and, if attempted, will lead to increased cost of euro area borrowing and have a knock on effect of higher cost of lending to countries currently in the Troika programme. It is also important to note that the EFSF head Klaus Regling is aiming to raise EFSF guarantees to foreign investors to 30%, thus reducing the leverage ratio from 4-5 times to 3 times. This will lower EFSF's theoretical borrowing capacity even further.

The IMF note reports are effectively matched by the statement from the senior Germany Finance Ministry adviser made Saturday, who tole the Greek press that a 50% haircut on Greek debt will not be enough to restore sustainability to Greek fiscal dynamics.

In effect, three of out three IMF 'options' cited will exacerbate the crisis, not resolve it. And there is no Option 4 on the books.