The Irish Economy

Carmen Reinhart and Ken Rogoff have an interesting op-ed in today’s FT: you can read it here.

Frank Convery has a thoughful piece on the reasons for Haiti’s backwardness here.

Trevor Butterworth writes on the Forbes.com website about blogging in Ireland and highlights the role of this blog in the domestic political and financial discourse: you can read it here.

Update: this article is also picked up by The Daily Dish, Andrew Sullivan’s blog at The Atlantic magazine site.

After the leak of emails from the University of East Anglia showed global warming advocates apparently manipulating data and blackballing dissenting voices, now comes perhaps an even bigger scandal. This time, the discovery of serious scientific errors and accusations of conflicts of interests center on what was considered the gold standard of climate science: the Intergovernmental Panel on Climate Change (IPCC) and its chair Rajendra Pachauri.

When the latest IPCC report in 2007 claimed that global warming could lead to the melting of the Himalaya glaciers by 2035 and thus to major water shortages in the region, it generated headlines around the world. The sensationalist prediction now proved to be grossly in error, based entirely on nothing but speculation by one little-known scientist way back in 1999. Astoundingly, Mr. Pachauri’s initial reaction was to deny everything. Claiming that the IPCC does not make mistakes he first viciously attacked people who disagreed, calling the criticism of India’s Environment Minister Jairam Ramesh the stuff of “climate change deniers and school boy science”, before the sheer weight of evidence made him grudgingly admit the error. Another IPCC scientist, Georg Kaser, claims to have realized already in 2006 that the outlandish claim of melting glaciers was wrong, but could not get the IPCC to exclude the mistake from the report. the author, Murari Lal, admitted that “we thought that […] it will impact policy-makers and politicians and encourage them to take some concrete action.” In another example of the IPCC’s substandard scientific process, the panel claimed, based on a paper that was not peer-reviewed, that there has been an upward trend in the damage caused by weather-related disasters. At the same time, it ignored a peer-reviewed paper that showed the opposite, namely that there has been no such trend. Likewise, it failed to listen to reviewers of the IPCC report who had pointed out this error.

That such a large body of work as the IPCC report would contain some errors is unavoidable. But what’s striking in this example is the sheer lack of the most basic standards of scientific review that allowed the glacier and disaster claims to be incorporated. It also illustrates that the IPCC lacks any mechanisms to correct false or contested knowledge.

The whole situation became even more explosive when Richard North, a blogger at http://eureferendum.blogspot.com/, discovered that Mr. Pachauri’s institute, The Energy Research Institute (TERI), has built a sizeable research effort on the Himalayan meltdown claim, collecting large grants based on this IPCC blunder. TERI and Mr. Pachauri are also the beneficiaries of considerable sums from companies with a financial interest in climate policy, such as Pegasus Capital Advisors, Toyota and the Chicago Climate Exchange. Amazingly, it appears that Mr. Pachauri has not broken any IPCC code of conduct for the simple reason that there is no such code of conduct governing conflicts of interest for IPCC participants and leaders.

Mr. Pachauri’s reaction to what has been billed “Climategate” was equally politicized. When the leaked University of East Anglia emails revealed, among other things, the intent of IPCC authors to violate IPCC procedures by selectively excluding peer-review literature, Mr. Pachauri’s initial reaction was also to play down any wrongdoing. Only when the scandal attracted broader media coverage did he agree on an investigation, which he later cancelled though without giving any reason.

All this seems par for the course for an IPCC chair who in recent months has increasingly participated in overt political advocacy, such as when he called on people to eat less meat and on Washington to implement policies that cut U.S. CO2 emissions. Mr. Pachauri also endorsed what appears to be an arbitrary target of 350 parts per million for the atmospheric concentration of greenhouse gases, even though the IPCC itself has offered no such recommendation.

The IPCC has now started the preparations for the next major report, to be released in 2014. It may be advisable to pause for wholesale institutional reform. The IPCC was set up to advise policy makers on climate science with the stated goal to be “policy-relevant and yet policy-neutral, never policy-prescriptive.” Yvo de Boer, the executive secretary of the UN Framework Convention On Climate Change explained on January 21 that “the credibility of climate change policy can only be based on credible science.” The IPCC seeks to meet its rigorous standards of academic integrity through a thorough review process “to ensure an objective and complete assessment of current information.” The IPCC has fallen way short its own standards. An effective climate policy that is acceptable to the public must be based on sound and impartial advice from institutions that do their science sustainably over many decades. Partisan advice will be unpicked, sloppy research will be exposed.

The IPCC cannot continue its work without adopting strong ethical guidelines for its officials. Under normal conflict of interest rules as followed by other leading scientific advisory institutions, Mr. Pachauri would no longer be tolerable as the IPCC’s chairperson. Any proper IPCC reform would also have to include a formal mechanism to correct errors and more transparent procedures for the appointment of key personnel. Apart from adopting new rules, the IPCC won’t be able to regain its credibility without adhering to existing rules regarding the appointment of experts and the review of scientific material. What’s at stake is not just the reputation of the IPCC but the reputation of all of climate science.

Richard Tol, Economic and Social Research Institute, Dublin and Vrije Universiteit, Amsterdam
Roger Pielke Jr, University of Colorado at Boulder
Hans von Storch, GKSS Research Institute and Hamburg University
This piece was copy-edited by Daniel Schwammenthal

See also
http://www.spiegel.de/international/world/0,1518,673944,00.html
http://www.spiegel.de/wissenschaft/natur/0,1518,673765,00.html
http://www.nrc.nl/opinie/article2467237.ece/VN-klimaatpanel_moet_drastisch_hervormen
http://www.spiegel.de/spiegel/0,1518,673779,00.html
http://rogerpielkejr.blogspot.com/2010/01/tol-pielke-and-von-storch-in-der.html
http://rogerpielkejr.blogspot.com/2010/01/der-spiegel-on-ipcc-and-disasters.html
http://klimazwiebel.blogspot.com/2010/01/save-ipcc.html

UPDATE:
Lal’s quote was copied from here: http://www.dailymail.co.uk/news/article-1245636/Glacier-scientists-says-knew-data-verified.html
He now claims he never said that: http://www.sciencenews.org/view/generic/id/55682/title/Indian_climatologist_disputes_charges_over_Himalayan_projection
David Rose says he did: http://dotearth.blogs.nytimes.com/2010/01/19/heat-over-faulty-un-view-of-asian-ice/

FURTHER UPDATE:
Pachauri explains himself here: http://www.sciencemag.org/cgi/content/full/327/5965/510/DC1

My earlier post on Standard and Poor’s neglected to mention their comments on Anglo Irish Bank. The key passage is as follows:

Anglo has submitted a restructuring plan to the EC as a consequence of the state aid it has received from the Irish government. It has been reported that the management is proposing that Anglo is split up into a good bank and a bad bank. We anticipate that, if such a plan is approved by the EC, capital instruments such as lower Tier 2 may be left in the bad bank. Other options reportedly considered in the plan are liquidation and an orderly wind-down. Anglo’s plan is yet to be approved by the EC; we understand approval may occur in the first half of 2010.

I’d guess that these lower Tier 2 instruments (i.e. subordinated bonds) left in the Anglo “bad bank” (not to be confused with NAMA …) would end up being pretty worthless.

The S&P downgrades make for depressing reading. I really don’t want to beat the drum again about the government over-promising in relation to what the establishment of a NAMA could deliver. Still, it’s interesting to note that the basic problems afflicting the Irish banks—loan losses, weak operating income and concerns that the banks will be undercapitalised—are pretty much the same as they were this time last year.

This isn’t to say that a NAMA vehicle shouldn’t have been part of the solution: I advocated prior to Peter Bacon’s report that an asset management agency should be part of a comprehensive solution. At this point, it will be interesting to see in the end how different an outcome we get from the one I proposed last Spring and if it’s not so different, whether the government’s policy in the interim period will be seen as the dithering of officials in denial or an inspired period of delay to allow some breathing space to deal with the problem.

One shift in my thinking since last Spring is that the size of loan losses is now clearly large enough to warrant putting the banks through a resolution process and negotiating with bondholders prior to using state funds to recapitalise. In particular, it is worth noting that the covered banks have about €10 billion in outstanding subordinated bonds (€8 billion of which is accounted for by AIB and BoI).

Without doubt, our usual Bond friendly commenters will tell us that any subordinated bondholders losing money would lead to financial ruination for every Irish man, woman and child. However, given that the European Commission has been taking a hardline stance on the idea of state funds being used to compensate subordinated bondholders (see here and here) it is hard to see how this position can really be justified on practical or moral grounds.

Standard and Poor’s have again downgraded the Irish banks. The Irish Times story about this is here. The S&P Press releases are here (need to sign up but it’s free.) The reasons for the downgrade of AIB are summarised as follows:

“The negative outlook reflects our view that the quantum and timing of equity raised through recapitalization may not be sufficient to support an ‘A-’  rating, combined with our expectation of significant losses from the remaining loan book and weak operating income as a result of the challenging economic environment,” said Ms. Curtin.

Negative rating action could occur if we consider that AIB’s recapitalization plans for 2010 are insufficient to adequately recapitalize the bank by our measures or are unlikely to be fully executed in 2010. Negative rating action could also occur if earnings pressures exceed our base-case expectations. The outlook could be revised to stable if there was reduced uncertainty regarding AIB’s ability to restore its capital position to an adequate level in the near term, and greater clarity on the strategic direction of the bank and scope of restructuring.

In relation to Bank of Ireland, the press release states:

“The rating action reflects our opinion of BOI’s prospects in light of our updated view on economic and industry risk in the bank’s core markets, together with our expectations regarding future credit losses,” said Standard & Poor’s credit analyst Giles Edwards.

It also factors in our view of the likely impact of its participation in Ireland’s National Asset Management Agency (NAMA) and associated restructuring and capital raising. We have lowered the ratings due to our view that the environment will remain challenging over the medium term and BOI’s financial profile will be weaker than we had previously expected, with capital expected to be only adequate by our measures and the bank continuing to make losses through 2011. 

S&P’s concerns about future loan losses and capital adequacy of both the major Irish banks are likely to be shared by many potential private equity investors.

Denis O’Brien recently seemed annoyed at the sight of academic economists blogging and twittering. I am not sure what he would make of the potential emergence of a new trend, academic economists rapping. The link below is to perhaps the first viral economics rap-song, describing the differences of opinion between Hayekian and Keynesian approaches to recession recovery. One of the authors is Russ Roberts, one of the people behind Econtalk podcasts, which are among the best resources for economics on the web. It is actually quite good but does raise the question of where all this might go. “NAMA: The Musical” would be up there for me.

link here

The IMF has raised its growth projections for 2010 and 2011. Although the fastest-growing countries are in the emerging markets group, the upward revisions in the growth forecasts for the euro area, US and UK are also quite substantial (relative to priors): you can get more details here.

The FT website carries this explanation of the ‘rescue scenario’ if Greece were unable to fund its liabilities.