Archive for September, 2010

Ireland vs Iceland

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Thursday, September 30th, 2010

There were a couple of mentions of Iceland on tonight’s Prime Time. One chap in a vox pop said they were living off food parcels while we were drinking pints. Brian Lenihan stressed that defaulting on seniors would lead to a fate worse than (paying back) debt, namely what Iceland has experienced.

So out of curiosity I went to the OECD’s statistical website to see what the quarterly accounts of the two countries have to say on the subject. I looked up the stats for quarterly GDP, seasonally adjusted, volume index, expenditure approach.

The relative declines of the two economies depend on the quarter you start from. Ireland peaked in 2007:4. Relative to that quarter, Ireland’s GDP in 2010:2 had declined by 13.4%. Iceland’s had declined by 11.8%.

But, to be fair to Ireland, you might also want to compare movements since the Icelandic peak, in 2007:3. Relative to that date, Iceland’s GDP in 2010:2 was down by 16.3%, while Ireland’s was down by 10.5%.

There is a twist in the tail, however. As we all know, GNP and GDP are very different in Ireland (and our GDP data have traditionally been regarded as unreliable because of transfer pricing). Taking Irish figures for GNP (seasonally adjusted, constant market prices) from www.cso.ie, you find that between 2007:3 and 2010:2, Ireland’s GNP fell by 17.0%, slightly more than the decline in Icelandic GDP during the same period.

If you are of the view that we should only be interested in developments since 2008:4, then the declines since then are: Iceland (GDP): 11.6%; Ireland (GNP): 9.9%.

And of course, if you regard GNP as the more reliable indicator in the Irish context, then it is important to note that Irish GNP has been continuously declining since this crisis started. Call me old-fashioned, but I am one of those fuddy duddy types who thinks in order for a recovery to count as a recovery, GNP should actually stop falling. Once again, Iceland and Ireland are not quite as different as the Minister made out during his interview.

As for unemployment, according to the OECD the harmonised unemployment rate for Iceland in 2010:2 was 6.8%. Our rate in July 2010 was 13.6%. I actually think that unemployment is important.

The Minister got very agitated about people suggesting that Irish taxpayers should not in fact pay back senior bondholders everything our rotten banks owed them. An increasing number of these rabble rousers are foreign, it should be noted. For example, the Roubini crowd said today that “we think it unconscionable that bondholders are protected at the expense of taxpayers”. There have been many such sentiments expressed in the international media in the last while. But the bogeyman used to shoot down any such suggestions when they are made in Ireland is invariably Iceland.

It is not such a slam dunk argument as the Government appears to think.

The Economist on Ireland

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Thursday, September 30th, 2010

The Economist’s reflections on today’s announcements are to be found here.

Argument for an Election Growing?

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Thursday, September 30th, 2010

Today’s banking announcements were marketed as bring finality to the banking crisis but that was always unlikely. The final costs and implications of the crisis still depend on stuff that happens in the future which, word has it, can be tricky to predict. Jagdip has an as-always excellent discussion of the various loose ends here. I think the point that AIB and BoI’s non-NAMA loan books have not been subjected to the same stress tests as Anglo’s is an important point and one that could come back to haunt us again.

On the fiscal front, Minister Lenihan’s announcement of a new four year plan is welcome. Though the official statement didn’t say this, the Minister’s said during his press conference this morning that the plan would detail both expenditure cutting and revenue raising measures which would make it a more credible plan.

That said, the effect of multi-year plan in convincing the bond markets that we are on the road to sustainability will be severely limited by the fact that the government will have at most two budgets, and far more likely one, before the next election.

With the government having taken the decision to stay away from the sovereign bond market until January, there is a strong argument in favour of calling an election to take place in November.  Each of the political parties could be given 3 weeks to prepare their own multi-year budget proposals, followed by a 3 week election campaign, giving a new government another four weeks to negotiate a program for government and introduce a December budget.

This course of action would have the following advantages.

1. Because we are on a temporary break from the bond market, the movements in bond spreads that would take place during the campaign would be essentially irrelevant. All that would matter at the end of the day would be the budget and multi-year plan implemented by the new government.

2. The multi-year plan would be seen by the outside world as having political legitimacy. The question of whether the government had a mandate to introduce unpopular measures would disappear. And despite regular claims from journalists that the opposition are irresponsible and have no policies, both Fine Gael and Labour did produce plans last year detailing how they would implement a €4 billion adjustment. Likewise, I would have little doubt that they would be forced to provide multi-year plans to match the government’s and that the election debate would be dominated by the comparison of these plans.

3. The difficult decisions in the upcoming budget would be taken by a new government, most likely with a large majority and not worrying about elections for another five years. Difficult decisions like the introduction of a property tax could be taken without concerns about discontented backbenchers and with the knowledge that the economic situation will look better in 2015.

I’m sure in writing this I’ll get the usual flak from the usual sources, claiming I’m putting this argument purely because I’m a Labour supporter or a Blueshirt or something or other. In truth, I have no affiliations or loyalty to any political party. I just think that there are a number of objective arguments for calling an election now.  If the government puts together a concrete multi-year fiscal plan and runs an election campaign on the basis of it, they will have done a considerable service to the country.

Will It Hurt? Macroeconomic Effects of Fiscal Consolidation

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Thursday, September 30th, 2010

The IMF has released the October 2010 World Economic Outlook. Chapter 3 studies the effects of fiscal consolidations on economic activity.

Smart, smarter, smartest

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Thursday, September 30th, 2010

Another day, another committee. Forfas has established a high-level group to identify research priorities for Ireland. The group’s composition suggests that its recommendations will be demand-driven. Research is no good, however, unless it is top class. Ireland should research those things at which it can beat the world — and import all other knowledge.

Batt O’Keeffe reminds us that economic growth and job creation are driven by technological progress but forgets that this is true in the medium- to long-term. In the short-term, other factors are more important, as reported earlier by John McManus. Ronnie O’Toole adds that it is all good and well to focus on the export sector, but that the domestic sector urgently needs to be smartened up too — through regulatory reform rather than by spending money we don’t have.

Cuddly Lenihan

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Thursday, September 30th, 2010

The BBC has been leading its bulletins this morning on the latest statement by Minister Lenihan.  He gave an extensive interview on the influential Today  programme on Radio 4.  Listeners can make their own assessment of its tone by listening to it at http://news.bbc.co.uk/today/hi/today/newsid_9047000/9047087.stm

You might be alarmed to learn that the BBC headlines the interview on its website as “Lenihan: Ireland ‘can’t print money’”.  Is the Minister restarting his midnight visits to Dave McWilliams gaff?

Banking Statement by Minister of Finance

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Thursday, September 30th, 2010

The statement by Brian Lenihan is here.

Anglo Irish Bank Capital Costs and Review of Capital Requirements for Irish Banks

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Thursday, September 30th, 2010

The Central Bank statement is below, while the detailed statement on Anglo-Irish is here and the detailed statement on capital requirements for Irish banks is here.

The Central Bank today (Thursday 30 September) published its assessment of the capital requirements resulting from the recently announced restructuring of Anglo Irish Bank.

In addition, the Central Bank has published the outcome of its review of the capital requirements of those Irish banks subject to the Prudential Capital Assessment Review (PCAR) exercise, in light of the estimated remaining haircuts to be applied by NAMA.

Anglo Irish Bank Restructuring

The Central Bank has assessed the injection of capital needed to meet minimum regulatory requirements under both a base, or central, scenario, taking account of expected losses, and under a severe hypothetical stress scenario.

This assessment has been applied to both the proposed Funding Bank and the Asset Recovery Bank that will be created. The total capital required for both institutions under the base, or expected loss, scenario is €29.3billion.

Under the stress scenario, in the event that unexpected additional losses are incurred, the Central Bank estimates that an additional €5 billion of capital could potentially be required.

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The Central Bank Commission

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Wednesday, September 29th, 2010

The Minister for Finance has appointed the non-executive members of the new Central Bank Commission. The press release is below:

The Minister for Finance, Mr Brian Lenihan, TD, has today appointed five members to the Central Bank Commission with effect from Friday, 1 October.

As provided for in legislation, the terms of office of the first appointees will vary in length in order to ensure that future vacancies on the Commission will be staggered. The appointees and their terms of office are as follows:

Professor John Fitzgerald (5 years)
Mr. Max Watson (5 years)
Mr. Michael Soden (4 years)
Mr. Des Geraghty (4 years)
Professor Blanaid Clarke (3 years)

They will join the ex-officio members: Professor Patrick Honohan (Governor), Mr. Matthew Elderfield (Head of Financial Regulation), Mr. Tony Grimes (Head of Central Banking) and Mr. Kevin Cardiff (Secretary General of the Department of Finance) on the Central Bank Commission.

The Minister said:
“These appointments to the Central Bank Commission will bring a wealth and diversity of talent and experience to the Commission and represents a very significant step in the reform process.”

Business and Finance Article on Tax

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Wednesday, September 29th, 2010

Following on from last weekend’s discussion of tax issues prompted by Garret Fitzgerald’s column here‘s an article I wrote on reforming our tax system for the current edition of Business and Finance (Admittedly, I wrote the piece prior to finding out about the omertà code of silence on writing about low taxation. Hopefully, I won’t get mugged on the way home.)

One point that I raise is whether the proposed Universal Social Contribution (USC) is a good idea. In addition to the question of the fairness of raising tax rates on our poorest workers, this proposal may affect work incentives and contribute to rising structural unemployment. An alternative would be raise the standard rate (yes, I’d prefer a flat tax) or to provide a credit against the USC that can get clawed back as incomes rise.

September Live Register

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Wednesday, September 29th, 2010

The September Live Register figures show a decline of 5,400 on a seasonally adjusted basis. The seasonally adjusted unemployment rate declined from 13.8 percent in August to 13.7 percent in September. The average unemployment rate for the third quarter was 13.73 percent compared with 13.2 percent in the second quarter.

The DB Pensions Crisis

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Wednesday, September 29th, 2010

The Irish Times carries an important op-ed by Michael Walsh of Mercer on the crisis in the defined-benefit pension system.  Compared to the fiscal, banking and employment crises, the DB pensions crisis is largely below the radar — but still hugely important.  

The focus of the article is on the need for policies to ease pressures on sponsoring businesses, and to prevent the more radical response of winding up existing schemes.  Of course, the proposals have potentially huge implications for a key component of the wealth of many Irish workers.  Unfortunately – but perhaps inevitably in an 850 word article – the actual reforms being proposed are less than clear.  I hope the diverse readership of this blog can provide some clarifications and perspective. 

There are two proposals:

First:

The Society of Actuaries and the Irish Association of Pension Funds have put a proposal to government to address this issue. It would involve insurers being allowed to sell, and pension schemes being allowed to buy, a new kind of annuity. These so-called sovereign annuities would be directly linked to Irish government bonds. They would therefore be much cheaper than conventional annuities. This would increase the chances that pension schemes can continue to operate and make good current funding deficits over time.

How exactly would these sovereign annuities work?  That they lead to cheaper annuities immediately suggests a reduction in the present discounted value of the expected benefit stream – that is, a loss in wealth. 

And second:

Our proposal at Mercer is that pension schemes that wind up be permitted to pay lump sums to pensioners instead of buying annuities. The lump sum would be the capital value of the person’s pension calculated on a prescribed basis. The calculation would allow for current life expectancy and expected future mortality improvements together with a specified long-term rate of interest or a rate linked to average euro-zone bond yields. Pensioners could then put the money in an Approved Retirement Fund from which income could be drawn down. Alternatively, they could use the money to buy an annuity, although if this is done at the current time it would likely be for a lower amount than their previous income from the pension scheme.

The proposal as written comes across as relatively painless.  But as Michael says, the devil is in the details.   What exactly is the “prescribed basis”?   Again, there is a presumption that any reduction is the contingent liability of the sponsor is also a reduction in the contingent asset of the member.

Michael Walsh may well be right that, all things considered, such reforms are warranted.  But the stakes for many individuals are such that a public debate is crucial, notwithstanding the complexity of the issues involved. 

O’Toole on Lenihan on Economists and the Media

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Wednesday, September 29th, 2010

I had decided last weekend to ignore Brian Lenihan’s comments about Irish economists being a cosy cartel unwilling to debate each other. We’d been here before: Recall Lenihan’s “national mediocrity” moment in which he implied that pro-NAMA academic economists were too scared of people like me come out and admit their views in public. And frankly, I’m more inclined to believe the Minister is engaged in PR spin with this kind of thing rather than expressing his true opinion.

However, I must point towards Fintan O’Toole’s discussion of Lenihan’s speech because whatever about being accused of being part of our national mediocrity or being part of a cosy cartel aimed at suppressing debate, I do feel compelled to clarify that I do not work for Trinity College Dublin but for Ireland’s leading Economics department, the UCD School of Economics. ;-)

After the floods = before the floods

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Wednesday, September 29th, 2010

Last winter saw some of the most dramatic floods in Ireland’s history. The rainy season is about to start. Will we see half the country under water again? We don’t know what the weather will be like. We do know, however, that everything else is much the same as last year.

It takes time to build or reinforce flood defenses. Monies have been allocated to the OPW to do that, and we’ll see the results in years to come. Other matters should take less time, but our dear leaders have been otherwise occupied.

An Oireachtas committee concluded that too many agencies were part-responsible for flood management. They still are. The same committee argue that a single minister should be in charge in case of an emergency. He is still not. Last winter, it was not clear who should call in the army and when. It still is not.

One of last year’s problems was that there was no early warning system. There is still no national one at either floodmaps or flooding, and the county councils do not seem to have put anything in place either. Hydrometric data are still incomplete and out of date. Last year, ESB filled up its reservoirs just before the rainy season. Did they do so again? The latest data I could find on the river Lee are from 2008, and do not cover the reservoirs.

The ESB is still in charge of these reservoirs. In last year’s panic over potential dam failure, the dam operators did not warn the people in Cork. Do the authorities now have automatic access to data on water levels and releases? If they do, they have kept silent about it.

So, Ireland is still as vulnerable to flooding as it was a year ago. Let’s hope it won’t rain as much.

Trading and Investing in a Smart Economy

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Tuesday, September 28th, 2010

The government’s latest strategy document is Trading and Investing in a Smart Economy. Apparently, the strategy is going to create 150,000 jobs directly and a similar number indirectly. Sounds good, though how exactly it’s going to achieve that was a bit unclear to me. Admittedly, my persual of the document was a bit brief as I’m suffering from glossy strategy brochure burnout.

Environmental regulation and enforcement

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Tuesday, September 28th, 2010

Two weeks ago, the Irish Times reported that MoneyPoint regularly breached its IPPC license but failed to inform the EPA. I was waiting for a follow-up article, like “Plant Closed, Chief Engineer Jailed, Company Fined”, but then I realized that I’m in Ireland still.

If a coal-fired boiler runs in steady state, it emits little more than water vapour (white smoke) and carbon dioxide (invisible). However, if it is starting up or winding down, combustion is incomplete and smoke turns black. Black smoke contains a mix of chemicals which not only twist your tongue but also cause respiratory problems, cancer, degenerative diseases, and other mayhem. Such emissions are therefore strictly regulated, and rightly so.

The report and the lack of follow-up is disconcerting for a number of reasons. First, the ESB knew but did not tell the EPA. Second, the EPA got into action after complaints by locals. This does not help against nightly emissions or invisible ones. Third, there were two more incidents after the ESB was audited (and presumably warned) by the EPA. Fourth, there is no sign of remedial or punitive action.

(There is a side issue. Power plants should not do this. The boilers are either in much worse condition than their age suggests, or the engineers in charge are not doing their job as they should.)

Regulation is only as strong as its enforcement. For a plant the size of MoneyPoint, the EPA (and the public) should be able to monitor emissions in real time. We should not rely on voluntary disclosure or complaints. The EPA should have the right to intervene in the running of the plant, and shut it down if necessary. The owners and operators of the plant do not have the right incentives.

IPPC licenses were put in place to please Brussels, but they in fact protect our health and environment.

Luas needs joined-up thinking

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Tuesday, September 28th, 2010

A guest post by Donal Ó Brolcáin

The property-induced economic crisis has given us an opportunity to scrap Metro North and the proposed Dart Interconnector, and instead expand the Luas system in Dublin. Within the next few weeks, the Railway Procurement Agency (RPA) will open the Luas Green line extension to Cherrywood. This includes two fully equipped stations that will not be used. Recently, Iarnrod Eireann said it will not open a newly built station on the Kildare line. In both cases, the reason is that expected property development did not take place.

Metro North and the Interconnector are also predicated on development assumptions that no longer hold. Meanwhile, the government has dropped plans to link the two existing Luas lines for passenger services. This perpetuates the folly of the decision made in 1998 to build two separate Luas lines.

To meet the aims of government transport policy - to ensure the provision of a well-functioning, integrated public transport system that enhances competitiveness and contributes to social cohesion - I propose an integrated Luas, which would create an on-street loop around the central business district; access Dublin airport from all parts of the network, including a link to Dart; and fill the transport void in north Dublin with three Luas lines, all on the surface and cheaper per kilometre than Metro North.

Luas cannot be a network without integrating the Green and Red lines. This means a full interchange at the O’Connell Street-Abbey Street junction. This is no more radical a suggestion than the RPA-Iarnrod Eireann proposal to uproot St Stephen’s Green as part of their plans for two lines (Metro North, Dart Interconnector) underneath that part of Dublin.

Integrating the Green and Red lines needs two tracks on-street from Stephen’s Green to Broadstone, as RPA proposes. It would transfer to the unused line that joins the Western line (Maynooth, with the new Dunboyne line) at Broombridge.

Last Friday, An Bord Pleanála was due to hold a preliminary hearing on RPA’s application to build another Luas line, one that will not connect the existing lines for passenger services. The plan includes a bridge across the Liffey, joining Marlborough Street and Hawkins Street. This is silly, as it ignores the Samuel Beckett bridge, designed to take Luas vehicles. Why build yet another bridge that does not extend the Luas catchment area? Such a proposal goes against the notion of cost-effective improvement of public transport in the built-up parts of the capital.

The Docklands loop that I am proposing would use the Samuel Beckett bridge to integrate this new city quarter. Running on-street, it would connect the catchment areas of the Green line (Sandyford- Cherrywood) to the docklands, linking up the newly opened National Conference Centre, O2, Busaras, Connolly station and the Abbey theatre. It would connect the Red line (Tallaght-O2) to the south docklands, allowing easier access to the Grand Canal theatre, Shelbourne Park, the Aviva stadium, the Eye and Ear Hospital and National Concert Hall. It would require a new Dart interchange at Barrow Street on the southside, complementing Connolly Station on the northside.

The North Dublin loop would start from the joined-up Luas lines in O’Connell Street, run up Dorset Street, Drumcondra, Whitehall, Collins Avenue/DCU to Ballymun, onto the airport and back through Finglas to join the extended Green line at Broombridge. The airport can be linked to the Dart at Clongriffin, with a Luas line taking in Coolock, Beaumont Hospital and the North Fringe. That would put Dublin airport on a loop connecting it to the central business district from two directions. The airport can be also linked to the Dart at Clongriffin, with a Luas line taking in Coolock, Beaumont Hospital and the North Fringe.

Our governing classes love grand gestures, usually involving the feuding public-sector baronies of CIE companies, the RPA, National Roads Authority, local authorities, government departments and the newly created National Transport Authority. They refuse to learn from the mistakes made when railways were first built in Ireland.

Spin, hype and bluster cannot disguise the fact that quiet competence is missing. Dublin needs an integrated Luas network to show the “joined-up thinking” of which we have heard so much, and to get us out of the crisis caused by reliance on property development.

This article appeared in the Sunday Times of September 26.

Europe Needs a Permanent Bailout Fund

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Monday, September 27th, 2010

so writes a group of European academics and former policy officials in this FT op-ed.

Robert Peston on the Irish Economy

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Monday, September 27th, 2010

Peston reports on his interview with Brian Lenihan in this piece.

While it is an interesting piece, a regrettable feature of the article is that he cites the BIS aggregate number to capture the level of international bank exposure to Ireland without fully explaining the limited relevance of this number, in view of the high degree of ‘offshore banking’ that has nothing to do with the local economy.

Self-Fulfilling Crises: Lessons from 1992/93

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Monday, September 27th, 2010

A number of media commentators have drawn a comparison between the present debt crisis and the ERM crisis of 1992/93.  Then, the authorities assured markets there would be no devaluation; but the high interest rates needed to defend the peg against sceptical currency traders proved too painful and the government eventually succumbed.   Today, sceptical markets are demanding a high risk premium to hold Irish bonds.   There is concern that the pain of high interest rates and their impact on debt dynamics will, once again, make market expectations self fulfilling. 

I believe it is a mistake to take this comparison too far.   The combination of long average maturity, liquid reserves, and the back-ups of the NPRF/EFSF make a forced default in the short to medium run unlikely.   Moreover, a cost-benefit calculation for sovereign default for a country that clearly has the capacity to repay suggests a voluntary default is also unlikely.   (more…)

Irrational Bond Markets

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Saturday, September 25th, 2010

The post hoc attribution of market movements to specific events is always a bit speculative. But Thursday’s release of weak Q2 national accounts (Economy Shrinks Shock!) was headlined in Irish and international media and appears to have unsettled the secondary market in Irish government bonds. The 10-year closed around 6.65 on Friday, the worst close of the crisis to date and cue panic stations.

This makes sense if

(i) The prospective growth rate in 2011 and later is critical for fiscal sustanability, which is reasonable, and

(ii) A sensible person would have revised their expectations on the basis of Thursday’s release, which I think is not reasonable at all.

So far as I know, there have been just three technical studies of the Irish quarterly data since the CSO commenced publication in 1997 and which are relevant to this discussion.

In this paper, the conclusion here is that the Irish quarterly GDP and GNP numbers are very volatile, and considerably more so than is the case in other OECD countries, including smaller ones.

This study concludes that the seasonal adjustment procedure used by CSO is (probably) not the best, and that this can make a difference, in the sense that an alternative, and preferable, procedure can give results which sometimes alter the qoq % changes quite a lot.

The final study shows that revisions to the first-shot estimates, while no greater than elsewhere, can be substantial.

The economy sank like a stone through 2008 and 2009. The last three qoq % changes in real GNP, using the CSO’s seasonal adjustment, were -1.9, then -1.2 and just -0.3 for the most recent Q2 number. Using the alternative (indirect) seasonal adjustment, the most recent number was -0.1. A reasonable headline in either case would have been ‘Economy Now Flat’.

The reason for the Shrinking! headlines was the GDP numbers. The last three qoq changes read -2.5, +2.2 and -1.2. These are the qoq changes, not annualised. At seasonally adjusted annual rates (saar) the decline in real output in Q4 was -9.6%. It then grew at a saar of +9.1% in Q1 of 2010, relapsing to a saar of -4.7 in Q2. If you really believe this, maybe you could make it as a bond dealer.

The gyrations in the quarterly numbers are just not credible. Various people including Garret FitzGerald and Robbie Kelleher have speculated that real output measurement in the MNC sector is mainly responsible for the extreme volatility. There may be a bit of informal smoothing practiced by other countries too.

Forecasts of GDP growth for 2011 seem to be mostly in the 2% to 3% range. My point is not that these forecasts are likely or plausible. The point is this: given what we know about the behaviour of the Irish quarterly macro aggregates, whatever your figure was on Wednesday, there was no good reason for changing it on Thursday morning.

Service Interruption

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Saturday, September 25th, 2010

The hosting company for this site is planning some maintenance: there will be a 30 minute interruption sometime between 8pm tonight and 6am tomorrow morning.  You may need to make alternative plans for your Saturday evening!

Low Tax Levels

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Saturday, September 25th, 2010

Garret Fitzgerald writes on the Irish tax system in today’s Irish Times: the article is here.

Geothermal energy in Ireland

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Friday, September 24th, 2010

GT Energy has applied for permission for a deep geothermal power plant in South Dublin. This has attracted some media attention (here, here, here) and Paul Cunningham cast me in my standard naysayer/party-pooper role.

The media attention is overblown. The project is small. It is only an application for planning permission. The legal framework for exploiting these resources has yet to be designed. Subsidies for geothermal power are zero at present.

The cost of geothermal energy depends, to a large extent, on the depth of the hole that needs to be drilled to get to the heat below our feet. In Iceland, Mother Nature nicely brings the hot water to the surface. GT Energy plans to drill 4 kilometers deep in South Dublin.

Unfortunately, Ireland is at a geological disadvantage in this regard (although mercifully free of volcanoes by the same token). As shown on this map (peer-reviewed version here, but in B&W and behind a pay wall), you’d need to drill deeper in Ireland than elsewhere in Europe to get to the hot stuff.

Therefore, if GT Energy can get this to work at a profit in Ireland, they’d be best advised to apply the technology elsewhere and make buckets of money. I will not invest in their company, but others are free to try their luck.

Peter Sutherland on the Irish Economy

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Friday, September 24th, 2010

The text of Peter Sutherland’s speech to the Institute of Directors is below:

Notwithstanding the successful auction of €1.5bn of government debt on Tuesday, there is no doubt that in recent weeks (and in particular in the last two weeks), Ireland’s position in the debt markets has deteriorated markedly and the sale came at a high cost. This has been the consequence of a number of factors. Some of these are objective facts about the dire state of our public finances. Others are the result of market perceptions. It is hardly surprising at present that there is an air of fatalism consistently nurtured by negativism but it is surely not in our character to give in to this. We can and will get out of this mess if we have the will to do so.

Let me say a word first about market perceptions. We seem to have a remarkable capacity to damage our public image abroad. The prevailing and understandable sense of depression in Ireland is made worse by a media often seemingly intent on presenting the worst perspective on current events. The recent Barclay’s analyst report, which was wrongly presented by some in the Irish press as being far more negative than it actually was, is a case in point. You may say, “Well so what? Those professionally concerned with our credit worthiness surely do not decide their approaches on the basis of second hand commentary on an analysts report?” Well, yes and no. The national media reaction is taken seriously and market reactions are often instantaneous.

It is time that we separated two big issues, the underlying budget deficit and the bank crisis. The first of these presents a very challenging issue but it can be dealt with if we have the collective will to do so. The collective will can only result from an understanding of the facts. We are running a revenue to spending gap of circa €20 billion p.a. and simply cannot continue to do so. As Willem Buiter, formerly of the London School of Economics, said this week, the cost of borrowing is becoming unsustainable. Our national debt is accumulating still at an alarming rate as a result of government spending but is being obscured as an issue in public debate by the constant and intense focus on the nature and effects of the banking crisis. Terrible though these are, they are identifiable and should be considered separately.

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Clouds Over Dublin Soon To Break Up

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Friday, September 24th, 2010

This is the view of Michael Vaknin of Goldman Sachs Global ECS Markets Research:

Irish bonds have substantially underperformed the rest of EMU periphery.
A heavy pipeline of Irish bank debt rolling off soon brings back memories of the Greek turmoil.
But we believe risks are overpriced, as several backstops are in place:
The banks can increase funding through the ECB liquidity programs.
And the ECB could intervene again in ‘dysfunctional’ sovereign markets.
More fundamentally, we argue that Ireland’s issue is liquidity, not solvency…
…Hence if the EFSF is activated, spreads would likely fall significantly.
Watch for signs of ECB intervention and banks’ reduced issuance to cement the case for ‘long’ Ireland.

Do Academics Only Work 15 Hours a Week?

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Friday, September 24th, 2010

This is a touch on the navel-gazing side but, at the same time, since everyone seems to agree that having high-quality universities is an important element in future economic growth, it seems worthwhile explaining how academics actually work.

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Heckman Policy Website

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Thursday, September 23rd, 2010

James Heckman’s work on human capital investment has been prolific over the last number of years and has major implications for a wide range of policy areas. His papers are rarely easy reading, drawing from detailed structural econometric models that he has developed over several years with colleagues. A new website outlines his basic ideas in short and accessible videos and documents (h/t Colm Harmon who is one of a number of colleagues in UCD working on this area in Ireland). This is as close as it gets to a clear answer to a major question in Economics and is essential for any policy people who read this blog across fields such as health, education, social policy, criminal justice and a range of other fields. Heckman has emphasised rigorously designed and evaluated early childhood interventions that promote a broad range of skills and personal development.

Reform of the Euro Area

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Thursday, September 23rd, 2010

The will be much EU-level discussion of economic governance reforms in the next couple of months. This week’s issue of The Economist provides a briefing and an editorial on the topic.

Robert Merton: Hamilton Lecture (October 15)

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Thursday, September 23rd, 2010

Robert Merton will give the RIA Hamilton Lecture on October 15 at TCD on the topic

Observations on Mathematical Finance in the Practice of Finance

The event is free but you need to book a spot: the details are here.