Irish trade statistics still looking good, but…

Kevin O’Rourke has drawn our attention on a number of occasions in this blog to the collapse in world trade and its implications for the depth of the recession. Yesterday, the Financial Times reported that the World Trade Organisation was predicting a 9% drop in the volume of world goods trade this year, the largest drop since the second world war. Today, it reported that Japanese exports have halved compared to a year ago.

Against this backdrop, Irish external trade statistics have been remarkably healthy, albeit two caveats are in order. First, although Japan can report its February trade statistics today, the latest trade statistics on the CSO website (last updated 27 February) refer to December 2008. Presumably the January figures should be published in the next few days. Second, we only get monthly trade statistics for merchandise trade, even though the value of services exports is now about 75% of the value of merchandise exports, so the merchandise trade statistics only tell half the story.

The FT on Ireland

The Lex column in today’s print edition of the FT was pretty sniffy about the Irish public finances.  However, it is interesting to read the new contribution by columnist Quentin Peel who does a ‘compare and contrast’ between Ireland and Greece, praising the Irish government for at least trying to face up to its predicament.

A Geithner Plan for Europe

 The lending performance of Irish and other European banks might be improved by the creation of asset management companies to absorb banks’ toxic assets and replace them with cash or near-cash assets.  The types of toxic assets held by banks differ across European countries; they are mostly bad property loans and collateralized-mortgage-based securities.   

There will be a considerable decrease in banks’ accounting book value when it sells toxic assets for cash value since the toxic assets are being carried on the banks’ accounting books for more than their true market value.  The decrease in accounting book value, which will come out of the banks’ book value of equity, has to be modest enough so that the banks are not declared insolvent after the transaction.

The Geithner plan offers a valuable template for Europe in designing a toxic asset transfer scheme. The Geithner plan invites private firms to bid competitively for the toxic assets of US banks. The funding for the bids come from three sources: equity provided by the bidding firm of 3% to 10% of total capital provided, an equal amount of equity funding provided and owned by the US government, and a non-recourse US government loan for the remaining 80-94% of capital provided.  The required yield on the nonrecourse loan will be somewhat underpriced  relative to its risk, so there is some degree of subsidy.  This is necessary to make the plan work; this entire subsidy should in theory accrue to the selling bank and shore up its capital base.  This is the only subsidy in the plan.

Since the US government will own up to 97% of the asset management companies’ assets, there is considerable financial/administrative/legal expertise needed by the government to provide reasonable oversight of these asset transfers and subsequent management of the assets.  This could make such a plan problematic if implemented by Ireland on its own.  Also, it is critically important that there are multiple bidders, competing aggressively against each other in the toxic asset auctions.   Additionally, the nonrecourse loan must come from a government entity borrowing at risk-free rates (and then lending to the asset management company at a higher rate).  It is a clever type of “targeted quantitative easing” (my own term).  Ireland is not in a position to borrow vast sums to purchase the toxic assets of its own banks.  The targeted quantitative easing should come from the sovereign issuer of our currency.

This is a great opportunity for the European Central Bank to play a role as a true regional central bank.  It can easily provide the non-recourse debt in a European version of the Geithner plan.  National governments can be responsible for the matching equity investment, and the ECB can provide the oversight, along with national governments.  Implementing the Geithner plan in Europe would also appease the US government which wants to see some burden sharing by European governments in dealing with the credit-liquidity crisis.

Krugman feels that the Geithner plan, although moving in the right direction, is too weak to be effective. However if the EU joined the US and instituted a very similar plan there might be a positive-feedback effect on confidence and liquidity which could boost the global impact.     

Name a famous Belgian

As I was reading this excellent post by Brad Setser, I found myself thinking of Robert Triffin. And then I followed Setser’s link and found that that governor of the People’s Bank of China was explicitly stating that “The Triffin Dilemma, i.e., the issuing countries of reserve currencies cannot maintain the value of the reserve currencies while providing liquidity to the world, still exists. ”

The Chinese are clearly getting worried, which is an important fact in itself. And what a world we live in, when a Communist central banker can come out so clearly in favour of Bancor!

Now, I guess you could argue that the role of China in the past few years has been much less passive than the Triffin analogy would suggest. Setser obviously thinks so. But it is good to see China putting proposals on the table whose ambition and multilateral orientation are appropriate to the scale of the current crisis. At one level, Zhou seems to be saying “give us some other reserve currency to hold, and the dollar can depreciate as much as it wants.” At another level, there is the proposal to partially pool reserves in the IMF, which would be “more effective in deterring speculation and stabilizing financial markets”. I would be fascinated to hear what people think.

Retirement postponed

The English language has many ugly expressions about the Dutch. Most go back to the 16th and 17th century, when there was intense competition and armed conflict across the North Sea. Dutch Disease is a more recent expression. Having suffered the consequences first-hand, my definition is not the standard textbook one. The crucial elements, to my mind, are a bloated public sector that crowds out the private sector, a nasty external shock that exposes the weaknesses of the economy, and incompetent politicians who make things worse.

For the current predicament of the Irish economy, it may therefore be useful to look at the solutions offered by the Dutch government. Since the early 1980s, there has been a broad political consensus on how to run the economy, and the Dutch economy has fared well as a result. The plan announced last night is not particularly impressive. There are four options to partly restore order to the public finances, but implementing all four would be too much.  Three of the four options are politically tainted for one of the three parties in the governing coalition. In a coalition, all three have to swallow their price or none will. So, only one option will be implemented, and the fiscal balance will be worse than needed.

The one big measure is a clever one, though. The retirement age will be raised from 65 to 67 years. This increases taxes and reduces expenditures. It also means reduced trouble for pension funds, so that contributions (and labour costs) do not have to go up that much. It does of course increase unemployment in the short run, but on balance I would think this is a positive development.