Quarterly National Household Survey for 2010:Q1

The latest QNHS figures have been released. They show the unemployment rate in the first quarter declining from 13.3% in 2009:Q4 to 12.9% in 2010:Q1. This will lead to a downward revision to the monthly Live Register based standardised unemployment rates, which had previously averaged 13.4%.

When the previous QNHS was released, I had expressed concern that the monthly Live Register figures may have started to underestimate true unemployment as expiry of eligibility for benefits saw people still seeking work falling off the Live Register. These figures show that this doesn’t seem to be a set pattern. The Live Register figures would have implied a small increase in the unemployment rate rather than a decrease.

A factor that is perhaps going in the other direction from the issue of benefit eligibility is that the QNHS measure of labour force participation continues to decline. It fell another three tenths in 2010:Q1 to stand at 61.2 percent, down from a peak of 64.6 percent in 2007:Q3. Over that period, male participation has fallen from 74.3 percent to 69.4 percent, while female participation has fallen from 55 percent to 53.2 percent. These declines in participation have been largely concentrated among the under 25s and the over 60s.

If some of these people deemed to be out of the labour force by the QNHS questions are still collecting unemployment benefits, then the Live Register measure will overstate unemployment as measured on the ILO basis.

The composition of unemployment is starting to become more skewed towards the long-term unemployed. In 2010:Q1, there were 112,600 long-term unemployed out of 275,000 unemployed in total. This compares with 49,100 long-term unemployed during the same quarter a year earlier when the total was 222,800.

NTMA Bond Issue: Yields Up Sharply

Amid all the coverage of the banking reports and the other ongoing political stories, very little coverage has been devoted to the fact that the bond markets are again turning less and less positive about Irish sovereign debt.

Today’s NTMA bond auction (press release here) saw it borrowing €1.5 billion, equally split between a bond maturing in 2016 and a bond maturing in 2018. The NTMA press release stresses the fact that the auctions had bids of three times the amount offered. However, look at the yields. As the RTE website points out “The average yield on the 2016 bond rose to 4.521% from 3.663% at the last comparable auction in April and the 2018 bond had a yield of 5.088% from 4.55% last August.”

On the secondary market, the yield on ten year bonds has now given up most of the large decline that occurred after the May 9 announcement of the EU stabilisation fund. In fact, the FT are reporting that, as of yesterday, the spread over bunds stood at 281 basis points, relative to 319 basis points on Friday May 7, and yields are up another 20 or so basis points so far today.

What’s odd, of course, as Paul Krugman has been pointing out is that these developments have not stopped the constant references, both here and abroad, to how well regarded Ireland is by participants in international financial markets. 

To be fair, I think there are a few cross-currents here that go beyond the essential point that Krugman is trying to make. I would echo Krugman’s concerns about the effects of imposing fiscal austerity too soon. The budget deficit for the Eurozone as a whole is projected to be 6.6 percent of GDP this year, so to my mind the need for generalised fiscal contraction today is overstated in light of the weakness of the Euro area economy. However, the bond market’s attitude to Ireland’s position is such that the Irish government has little choice but to adopt an austerity program, a point that Krugman has conceded before.

Furthermore, I’m sure that financial market participants are impressed by the fiscal retrenchment obtained so far. But, at the end of the day, the bond yields give us their judgment on the sustainability of our situation and it’s a thumbs down. The high yields being imposed on us reflect the scale of the initial hole we dug for ourselves as well as policies that maximized the cost to the state of the banking crisis.

European Parliament Briefing Papers: June 2010

The latest Monetary Dialogue briefing papers for the European Parliament’s Committee on Economic and Monetary Affairs are available here (click on 21.6.10). These papers are provided to help the MEPs on the committee prepare for their June 21 meeting with President Trichet, which promises to be an interesting one. My paper is titled “The Euro, the ECB and the Sovereign Debt Crisis”.  All the papers focus on different aspects of the European sovereign debt issue.

‘Regulation in the Age of Crisis’

An international and interdisciplinary conference on regulatory governance is being held at UCD next week, 17-19 June, under the auspices of the European Consortium of Political Research Standing Group on Regulatory Governance. There will be more than 200 papers presented. Streams include 8 panels on regulation and the financial crisis, and also streams on regulating for sustainability, the politics of regulation, the governance of risk and technology regulation, non-state regulation and regulating network industries. A variety of disciplines are represented, including political science, socio-legal studies, business and economics. The programme, including details of registration, is available on the conference website. The conference papers are being uploaded to this site also and are freely available.


Paul Krugman has a post this morning pointing out that in a standard Mundell-Fleming model, a fiscal contraction in Europe will have a negative effect on its trading partners in a floating rate environment: it not only lowers total European demand, but also leads to a weakening euro. Now, the latter effect is driven by lower European interest rates, and as Krugman acknowledges this channel won’t be working in a textbook manner in a world where European interest rates are almost (if not quite) at the zero bound; but the euro is indeed weakening as we speak, and Americans are getting worried.

There is broader point here. In a Mundell-Fleming world, with floating exchange rates, fiscal expansion is good for one’s trading partners: it involves a positive externality. Whenever you have positive externalities, there is a risk that not enough of whatever produces those externalities will be provided. Thus, in 2009, when fiscal policy was on the agenda, an important role of international coordination was to ensure that nations not try to free ride off each other’s stimulus packages. Cooperation was relatively easy to sustain: the world economy faced a clear and present danger, and nations benefitted from each other’s programmes.

In 2010 things look very different. Fiscal policy has gone into reverse in several countries, and so the focus will presumably shift to monetary and currency policy. But while fiscal stimulus helps a county’s trading partners, currency depreciation hurts them. (More generally, in a Mundell-Fleming floating rate world, expansionary monetary policy in one country hurts other countries — though again the fact that interest rates are almost at zero complicates the analysis.) So, we have moved from a world where macroeconomic policy involved positive spillovers to one where it is likely to involve negative spillovers — a much more ‘beggar-thy-neighbour’ world.

Expect lots of protectionist rhetoric in the months ahead.

ECB Bond Purchases Falling Off

The ECB has released its latest weekly financial statement, the only source of public information in relation to what’s happening with its sovereign bond purchase program.

It is notable that the program has purchased smaller amounts with each passing week: €16.3 billion during the week ended May 14, €10.4 billion during the week ended May 21, €8.8 billion during the week ended May 28 and €4.9 billion during the week ended June 4. We know that some members of the Governing Council would like the program to end quickly. At this rate of decline, it will be over in a couple of weeks.

EU Finance Ministers Statements

Here‘s the text of the agreement on budgetary policies put together by the EU finance ministers yesterday. It seems pretty weak, with little by way of new concrete initiatives. It’s full of aspirations to reduce deficits. The new element that might have been expected in relation to an increased role for the European Commission is restricted to the following statement:

Ministers are committed to fully and strictly implement the surveillance framework defined by the SGP and to contribute actively to the Task Force set up by the President of the European Council, which will consider ways to strengthen the fiscal surveillance framework as well as the surveillance of competitiveness developments in the euro area.

A Task Force that’s going to “consider” things doesn’t sound like much to get excited about.

Here‘s the statement tasking the European Commission with running the €440 billion Special Purpose Vehicle. (You have to love how there’s a Special Purpose Vehicle at the scene of every economic disaster these days.)

€74 Billion in Guaranteed Bank Debt Maturing Before October

Last week, I provided calculations from annual reports showing that at the end of 2009, the banks covered by the State guarantee owed €71 billion in various types of bank debt (bonds, commercial paper, interbank loans) that matured before the end of the year (the reports did not provide information on how much matured prior to expiry of the guarantee at the end of September.)

The Department of Finance have now provided figures as of the end of April on how much covered debt expires before October. In a written answer to a question from Joan Burton, the Department have stated that €74.2 billion in bank debt expires before the end of October, €57.8 billion of this being senior debt and €16.4 being interbank deposits.

ECB Sovereign Bond Purchase Program

It’s hard to fully assess at this point the relative importance for the reduction in Irish government bond spreads of the €750 billion bailout fund committed to by the EU and IMF versus the ECB’s decision to purchase sovereign bonds on the secondary market.  However, the ECB’s presence or withdrawal from the secondary bond market may prove very important in relation to Ireland’s ability to keep issuing primary debt and staying out of the hands of an EU-IMF deal.

So, three weeks in, what do we know now about this program? A bit more than a few weeks ago but not as much as I’d like.  This speech from President Trichet appears to be the most comprehensive discussion of the rationale for the program.

Continue reading “ECB Sovereign Bond Purchase Program”

The Impact on the Exchequer

Ok, I promise this is the last time I’ll write about promissory notes for a while.

Pat McArdle, still keen to minimise the link between the cost of bank bailouts and our fiscal problems, writes:

That is not to say that large subventions to the banks were not needed – more than €10 billion has gone into Anglo alone. However, the Minister has been quite clever in the way this has been done. He has issued promissory notes which deliver the capital bang upfront but will be drawn down piecemeal over the next 10-15 years. As a result, the exchequer has had to raise only €200 million to capitalise the banks this year.

And also:

Nama, too, has been structured to minimise the impact on the exchequer. Though it is likely to pay over €40 billion for the assets bought from the banks, this will not be in the form of cash and so will not have to be funded in the markets.

I find it funny that the issuing of promissory notes is now regularly described as, like NAMA bonds, a stroke of genius on the part of the Department of Finance: Last year, advocates of NAMA often told us that overpaying for assets was the best way to recapitalise the banks because if we didn’t do it that way we’d have go out and get “real money” by borrowing on the sovereign debt market, i.e. that banks couldn’t be recapitalised with promissory notes. 

It is certainly true that promissory notes and NAMA bonds do not require going to the sovereign bond market to borrow the money. However, this stuff is debt and the people who have been worried about our ability to pay back all our debts (and they seem to getting worried againare well aware that we are accumulating extra debts in the form of promissory notes and NAMA bonds. In this sense, they have the exact same “impact on the exchequer” as regular borrowing.

Note, however, that the promissory note route will put more pressure on the Irish state to come up with money for the banks in the coming years than would a normal debt issuance. €10 billion in ten-year bond issuance requires forking over interest of about €500 million a year over the next ten years before the full amount has to paid off on maturity, hopefully via issuing another ten year bond. An interest-free promissory note for €10 billion would require average payments of €1 billion a year over the same period.

At the end of the day, debt is debt and those who lend to us aren’t easily fooled. I’d prefer to let history judge exactly how clever this debt issuance has been.

The Lisbon Agenda: An Assessment

The CPB has come a long way since it was founded, as the Central Planning Bureau, by Jan Tinbergen shortly after WW2. Besides giving solicited and unsolicited advice to the Netherlands Government — polite but frank — it is acquiring a similar role in Europe. Their latest publication is bafflingly in Dutch, but relevant to anyone in Europe. It is an assessment of the Lisbon Agenda.

At the beginning of the decade, European politicians promised all sorts of wonderful stuff for 2010. The CPB report wonders what came of that, comparing progress in the period 1990-2000 to the period 2000-2010.

Here’s a summary:

-Income per capita (Geary-Khamis): Economic growth in EU15 was slower after 2000 than before; ditto for Ireland; US and Australia show same pattern, but economic growth accelerated after 2000 in China, South Korea, Japan and New Zealand

-Labour participation (share population 15-65): Increase in EU15 was slower post 2000; ditto for Ireland

-R&D expenditures (share GDP): Increase in EU15 was slower post 2000; ditto for Ireland; US increase before 2000 but decline after 2000; China decline before 2000 but sharp increase after 2000; Japan and South Korea small increase before 2000 and sharp increase after 2000

+Education expenditure (share GDP): Fell in EU15 before 2000, rose after 2000; ditto for Ireland; US and China increase before and after 2000; Japan increase before 2000 but decrease after 2000

+Domestic waste (kg/cap): Rose in EU15 before 2000, fell after 2000; rose in Ireland before 2000, rose very rapidly after 2000

+Particulate matter (load): Rose in EU15 before 2000, fell after 2000; fell in Ireland before and after 2000

-Carbon dioxide (kg/cap): Fell in EU15 before 2000, stationary after 2000; rose in Ireland before 2000, fell after 2000; US, Canada, New Zealand increase before 2000 and decrease after 2000; China decrease before 2000, virtually no change since 2000; Japan increase before and after 2000

-Trust in peope: Fell in EU15 before 2000, stationary after 2000; ditto for Ireland; US, Canada, South Korea fell before 2000, rose afterwards; Japan rose before 2000, fell after 2000

+Corruption: Increased in EU15 before 2000, stationary after 2000; increased in Ireland before and after 2000; increased in US before and after 2000; increased in China before 2000 but fell after 2000; decreased in Japan before 2000 but rose after 2000

-Poverty (share of population under poverty line, before transfers): Fell in EU15 before 2000, rose after 2000; ditto for Ireland

-Poverty (share of population under poverty line, after transfers): Fell in EU15 before 2000, rose after 2000; rose in Ireland before 2000, fell after 2000

-Children in jobless families (share of population 0-17): Fell in EU15 before 2000, fell slightly after 2000; fell in Ireland before 2000, rose after 2000

That’s 8 negatives and 4 positives for EU15, and 8 negatives and 4 positives for Ireland (albeit different positives and negatives).

May Exchequer Returns

The exchequer returns for May are in. Here‘s a (new?) webpage with all the Exchequer statements for the year. I’ve heard the report described as good news because it means revenues are only 1.2% below target. That said, these revenues are 10.4% down on the same time last year. Also, revenues were only 0.1% below target at the end of April. Let’s hope we don’t have too many more months of this kind of good news.

May Unemployment up to 13.7%

This is disappointing news. The latest Live Register-based measure of the standardised unemployment rate is up to 13.7% having stayed flat at 13.4% over the previous few months. What worries me about these figures is that the Live Register may be underestimating the true trend. The last QNHS figures, for the fourth quarter of last year, showed a jump in unemployment even though the Live Register figures for that period had been flat.

Honohan Interview with Bloomberg

There were some media stories over the past few days with selected quotes from an interview Patrick Honohan gave to Bloomberg. Dara Doyle from Bloomberg kindly sent me the full text of the interview and since it doesn’t seem to be elsewhere (or at least anywhere I could find) and contains a lot of interesting material, I’m posting it below the fold.

Continue reading “Honohan Interview with Bloomberg”