Having been a bit tough on the FT yesterday morning, I would like to echo commenter DOMC in drawing attention to a very good article by David Oakley (see here; related piece here). While our attention has naturally been on the Ireland-specific aspects of negotiations over the crisis-resolution mechanisms, the Grand Bargain on the ESM is probably far more significant for our creditworthiness.
David Oakley notes that market conditions are improving for Italy and Spain. This is consistent with the idea of a self-fulfilling equilibrium: if you look like your will need a bailout no one wants to lend to you (and get caught up in a later “bail-in”), and so you end up losing market access and forced into a bailout. This is what seems to be happening to Portugal at the moment; Italy and Spain have been able to stay out of the critical region — at least for now. A problem for Ireland is that improving your fundamentals looks less effective once already in the bailout mechanisms. Can it make sense to have this “black hole” (potentially) spreading from the periphery? Hardly a Grand Bargain.
31 replies on “The Grand Bargain”
You seem to be doing double-shifts on this board 🙂
For this much thanks.
I think what we are seeing is good old-fashioned power politics. Every effort will be made to keep the big vulnerable economies at the edge of the core (Italy and Spain) and a smaller core economy (Belgium) out of the mire. There is an implicit acceptance that this may involve imposing additional burdens on the small peripheral economies (Ireland, Greece and Portugal) so that they will be in the treatment room for a considerable period of time. I expect the so-called bank stress tests will be applied to shift the heat on to the small peripherals so as to avoid the true solvency of banks in this extended core.
From the perspective of the corridors of power in Brussels, Frankfurt, Berlin and Paris a judgement has been made that quarantining the small peripherals is necessary, manageable and achievable. The bond market can push the sovereign yields for these economies as high as they like because they won’t be entering the market for quite some time. But the flip side is that they buy into the contention that the rot has been contained in the small peripherals and continue to grant access to Italy, Spain and Belgium at a reasonable coupon.
The task then, for example in Ireland, is to work at separating the sovereign from the banks – and from any other Irish players seeking access to the international capital market. And to work at structural reforms to grow the domestic economy.
I can’t really see any other way out of this mess. It is a brutal price to pay for sustained misgovernance, but the entire EU (and EZ) project is based on a presumption of reasonably responsible governance by the individual sovereigns. It appears even more brutal when equally misgoverned sovereigns are repreived because of their economic heft (Spain and Italy) or because of their long-standing membership (Italy and Belgium).
When you get rid of all the jargon that media economic commentators like to employ, what it all boils down to in layman’s terms is as follows:
(a) Ireland Inc is totally solvent, as it has now moved into a very hefty balance-of-payments SURPLUS, which every forecaster forecasts is going to grow and grow over the next few years. In this respect, Ireland is different to not only Spain, Portugal and Greece, but also to the U. Kingdom and U. States, all of which remain in hefty balance-of-payments DEFICIT.
(b) The economy is now extremely competitive, with a 12% gain in harmonised price competitiveness against the weighted average of competitor countries (not just the Eurozone since 2007). If residential and commercial property prices are taken into account, the gain in competitiveness is much greater. The excellent property economist, Ronan Lyons, had a piece on his blog last week showing how residential property in Ireland is now the cheapest in the EU by a proverbial mile (link below). This naturally drew an angry response from the Property Pinheads, but it confirms my own personal experience. Another recent survey showed that hotel prices in Ireland are now the cheapest in the EU. While energy prices have come right down to around the EU average. Wages have fallen, while rising in every other country. Productivity has risen (which even IBEC was boasting about the other week), resulting in unit wage costs falling even more dramatically.
(c) As a result of (b), exports are now growing at peak-of-Celtic Tiger rates. As last weeks figures showed, exports ROSE by +9.4% in volume in 2010. In its December 2009 Stability Program, the Department of Finance had forecast that exports would RISE in volume by a miserable +0.5% in 2010, which low growth they attributed to ‘loss of competitiveness’, while in September 2009, both the Central Bank and ESRI had forecast that they would actually FALL in volume in 2010, so great was the ‘loss of competitiveness’. I posted at the time on this site (October 2009, its there if anyone wants to check) that these forecasts were complete nonsense, that the ‘loss of competitiveness’ was greatly exaggerated, and that exports would RISE by +10.0% in 2010. I was wrong. They only ROSE by +9.4%. I was very disappointed and embarassed to be so far out, but nonetheless +9.4% is a hefty RISE. In addition, the trend was increasing as the year progressed. In the second half of 2010, the volume of exports ROSE by +12.0% compared with the second half of 2009. And moving into 2011, the January and February PMIs for both manufacturing and services exports show this acceleration continuing. So, it looks like the RISE in export volumes in 2011 will be even higher than the +9.4% recorded in 2010. Naturally, the utterly useless Central Bank economists have learned nothing from their massive forecasting error for export volume growth in 2010 and, in order to get the stress test loss figure up as high as possible, are forecating that the volume of exports will RISE by a miserable +2.0% in 2010.
(d) As a result of (d), and notwithstanding the fact that consumer spending is flat, the economy is clearly growing quite rapidly again. Every business survey shows this. And last week came confirmation with the GNP figures. GNP has now RISEN for 3 successive quaters. It ROSE by +0.5% in Q2, by +1.5% in Q3, and by +2.0% in Q4, resulting in a cumulative RISE of +4.0% between Q1 and Q4. It would probably have been +5.0% but for the arctic weather in December. These are the figures for GNP, which every economist, in particular McWilliams, Kelly, Gugdiev, are on record as saying repeatedly are the ones that matter. They can hardly flip-flop now and say that the GNP figures don’t matter. This export-driven GNP growth is resulting in a very large fall in redundancies, a very large rise in vacancies, and the stabilisation or even very slight fall in the live register numbers. It may even be resulting in falling net emigration, if the recent QNHS population figures from the CSO are accurate (although I won’t linger too much on these, as ESRI are claiming that they are not accurate and we will have to wait until the census to see which of the CSO or ESRI are correct).
(e) Ireland is extremely politically and socially stable. The election results confirm that. TweedleFF lost out to TweedleFG. Quelle difference? Not exactly the revolution that the UCD Department of Sociology was hoping for? There was no lurch to extreme parties of the far right or far left. There have been ro riots, no strikes. It was London that was littered with broken glass on Saturday night, not Dublin. The number of days lost to strikes in Ireland in Q4 2010 was 27 (link below). Not 27 thousand, not 27 million, but 27. In France, the corresponding figure was 46 million. What this means is as follows: the GNP growth allready occurring makes it very likely that government budget targets will be achieved – but, in the unlikely event that they are not, the government will simply lop another couple of per cent off spending, and the public will accept it with little protest.
(f) Going back to Ireland’s IMF/EU borrowing, the GNP growth allready occurring, as shown by last week’s figures, explodes the myth that this imposes such a burden on the Irish economy that it can not grow, GNP growth of +4-5% in nine months is not to sneezed at. The corresponding UK figure was +1% growth. But, there is an additional point. As indicated in (a), Ireland is in balance-of-payments SURPLUS. That means it is accumulating assets faster than it is accumulating debt. Government borrowing is being exceeded by private sector saving. In a simpler world (not necessarily a better world, although that is a matter of opinion), the private sector in Ireland would simply lend to the government, just as was the case in the mid-70s and mid-80s when the budget deficit was similarily high, and as happens still in most other countries. The government would still make the same expenditure cuts and tax increases to reduce the deficit, but meantime the private sector in Ireland would fund the deficit. As I said, that would be a simpler world (not necessarily a better world). As is well known, this is not happening (thanks to the McWilliams/Kelly/Gurgdiev effect), and Ireland’s private sector is unwilling to lend to the government. Ireland’s savings are being invested abroad. I am just stating this as fact. I am not being judgemental about it. As a result, the government is having to fund the deficit, pending its reduction, by borrowing from the IMF/EU. But, as Gerry Adams once said of the IRA, Ireland’s savings haven’t gone away, y’know. Ireland’s savings are still there, they are simply being invested abroad, rather than being loaned to the Irish government. These investments are earning a return. That return has to be set against the interest repayments Ireland is making to the IMF/EU. If it earns a return greater than the IMF/EU interest rate, Ireland actually profits on the deal. Last week’s figures showed that this may well be happening. The profit flows moved in a favourable directions. Profits flowing back to Ireland rose faster than profits (including interest repayments) flowing out of Ireland. Whether or not this continues, the key point is that, as Ireland Inc is now in balance-of-payments surplus, the IMF/EU borrowing is not being used to finance Ireland Inc’s consumption, but Ireland Inc’s investment abroad. How good the deal is will depend on how good that investment abroad turns out to be and what return in profit flows to the Irish economy it will bring.
Coming back to John McHale’s point, it can be summarised as follows.
(a) All the fundamentals of the Irish economy are improving (balance-of-payments, competitiveness, relative price levels, exports, GNP growth, productivity, wage costs, political and social stability, net profit flows, redundancies, vacancies).
(b) We are deriving no benefit from this in financial markets because the media in Ireland and the numerous blog sites are currently dominated by politically-motivated, half-baked-revolution-seeking, half-mad quacks, who are arguing for Ireland to default, not because it is neccessary (the above figures show it is not), not because it would be beneficial (the above figures show it would not), but simply because it would advance their political agenda. They want to be in a position where they can say “Ah look, Ireland has defaulted, shows the whole system is corrupt, shows FF and FG are rotten, shows we need a complete break with the past and the total overthrow of the entire political edifice. Let’s have a revolution.” That is their agenda. It has nothing to do with economics.
As for what the new government should do, I suggest:
(a) Declare emphatically that there will be no default.
(b) To gain credibility in this position, highlight the points made in (a) to (f) above far more emphatically than either they or their predecessors have done so far. For this, they need to realise that the election is over.
(c) To gain further credibility in this position, appoint John McHale to Alan Ahearn’s role in the previous government, as he has consistently and convincingly argued against the default nuts.
(d) Default on the contract of employment with any economist in the public sector who advocates default.
Blind Biddy wants to know if you respond to Novenas? She reckons from your aura that you might be The 2nd Coming of St. John, and since her discovery of the power of the bazooka, she has given up on St. Jude, and is seeking alternative directions for her investments in divine intervention.
Just a tiny point for clarification.
“Central Bank economists have learned nothing from their massive forecasting error for export volume growth in 2010 and, in order to get the stress test loss figure up as high as possible, are forecating that the volume of exports will RISE by a miserable +2.0% in 2010.”
Should that be ‘2011’ at the end of the sentence?
Its true our Current Account is improving (and we have lots of good things going for us), but you should take a look at Michael Burke’s analysis.
Due to the outflow of deposits from the banks, expensive deposits are being replaced with ‘cheaper’ ECB/Irish Central Bank emergency funding. So there is less of an interest rate outflow for the net factor income from abroad.
This also explains the GDP/GNP divergence, which I was puzzled by before reading his explanation.
Of course the national accounts don’t include the hidden cost of the ECB funding (such as the need to repay non-guaranteed bank bonds, and the restriction on our fiscal policy).
So the debt overhang is still an issue. But default can be avoided if the ECB gives some cheap long term funding to the banks and we write-off the non-guaranteed debt. If we were simply to continue with the old EU/IMF deal I think default is definitely a possibility within 3 years.
Should that be ‘2011′ at the end of the sentence?
Very well spotted for so early in the morning, Gavin.
Yes, it should be 2011.
Blind Biddy wants to know if you respond to Novenas?
I’m Ulster Prod. We don’t actually do Novenas. But, I am sympathetic to the motivation of those who do.
I don’t think that explanation for the rise in GNP stacks up at all. Looking at the BoP data the outflow of “other investment income”, which includes interest, actually rose near the end of 2010. It was a drop in the outflow of “reinvested earnings” from “direct equity investment” that caused the decline in the outflow of factor income. See more here.
@ John McHale
I think the attached link to the summary on Voxeu of the Professor Sinn, proposal which is largely reflected in the Grand Bargain, may provide helpful insights.
The charts are really quite startling. What they confirm for me is the phenomenon of the herd instinct of markets. In short, the markets are simply returning to the situation that existed prior to the introduction of the euro in relation to risk assessment in the sovereign bond markets. (The huge beneficiary is Germany in terms of the cost of borrowing).
The economic analysis of commentators such as Martin Wolf and Wolfgang Munchau is impeccable and highly informative. I find myself nodding in agreement and then, like a Chinese meal, I am left with a sense of dissatisfaction. It has only recently struck me that what may be the problem is the fact that the commentators in question have placed the fulcrum on the political and economic lever at the wrong point. The peripheral economies do not have the leverage they imagine they have and are not central, as their very name suggests, to the concerns of the major economies.The latter are sticking closely to nurse (Helga) and the markets cannot ignore this.
And, of course, the herd instinct plays its usual role. It is not that the market players think that the fundamentals of German banks, for the sake of argument, have improved but that they collectively have come to an understanding that the present sovereign risk premiums may be about right.
While waiting for the balloon to go up on D (for debt)-day, as I have just heard Joe Costello describe it, I wonder if the technically skilled bloggers on this site might not consider turning their thoughts to the real challenge; that of the necessary restructuring of the Irish economy. Pension reform is, in my view, the “Open Sesame ..” as any discussion makes unavoidable detailed consideration of all issues relating to the achievement of an egalitarian and productive society. The Swedish example is the one to follow except, maybe, the level of taxation. But an equilibrium can be found at a less intrusive state level.
Arher Beesley in today’s Irish Times further explores an anvenue I’m interested in.
“European reluctance to contemplate burning senior bondholders is grounded in deep anxiety that such burden-sharing would undermine confidence in other weakened euro zone lenders, whose investors presumed heretofore that they would not be touched.”
It’s a very complex area, as we are often reminded here.
One of the pieces of complexity is how certain positions are viewed morally or imagistically, and therefore how kindly or not the strangers feel disposed Ireland.
In this case if little Ireland, and thus ordinary citizens, takes on the burden of UGSD for the sake of our fellow European neighbours (who secretly know the edifice is shaky), the we are acting a bit like Hercules in his attempt to hold up the sky (the financial architecture of Europe), while mighty Atlas is away. I think we need explicit recognition of this in the first place, and further discussion as to what the quid pro quo for that is, if it is the way the state wishes to proceed.
Blind Biddy: Ulster Prod or Black Prod ‘sall the same to me – I’ll lite the candles – shur aren’t we all Dissenters now? St John TheOptimist – pray for us – St John TheOptimist – hear us – St John TheOptimist – intercede with the ECB ferUS – St John TheOptimst – just give me one shot at &&^%%%$$$$$****
Old habits die hard – I’m outa here (-;
@ Gavin Kostick
There is no quid pro quo. We voluntarily borrowed the money and the law, both in terms of the markets and the legalities, requires that we pay it back. This holds true between states and at all levels of society. Of course, we can try and abscond, and our creditors may decide to do a deal to dissuade us from doing so, but the decision is entirely in their hands.
The penny, quite amazingly, does not yet seem to have dropped in the ranks of the new government which is a much bigger concern than the fact that is has not done so for many in the blogosphere.
P.S. No need to come back with the argument that it was the banks that borrowed the money. They did not paper the walls with it but dispersed it among willing Irish borrowers. And the decision to guarantee our banks was made by an Irish government and other governments cannot be expected to pay for it (despite the moralising of the FT, the motivation for which makes me wonder).
As usual you are assiduous and expansive in highlighting those factors that augur well for increased economic prosperity. That is to your credit – and gladdens the hearts of many in these parts. But you are equally adept at down-playing or ignoring those factors that restrict or damage economic performance. Perhaps you believe that there is excessive focus on the negatives and you see your role as providing some balance.
But you do yourself a disservice when you allege that those who highlight deficiencies in political and economic governance (and argue for reform) are part of a conspiracy to subvert the democratic process. There is no conspiracy of the nature and scale you allege. But there are many people who highlight the implications of the failure to develop the competing centre/right-of-centre and centre/left-of-centre blocs that are found in most mature, well-governed democracies.
In developed societies and economies the fundamental debate is about the role of the state. Those who are on the right generally favour less government (though the Neocom tendency is not averse to big government projecting economic, military and political power internationally); those on the left favour more government. Competing blocs of this nature with alternating periods of governance generally advance those policies that secure a democratic plurality while curtailing or reversing any excesses of their predecessors.
You are perfectly entitled to disagree, but there are many of us (both from the left, centre and right) who would argue that the political factional alignment (derived from a Civil War that by accident and design fomented these factions) combined with excessive executive dominance have contibuted much to the current debacle and requires reform. Villifying those of us who argue for these reforms is neither necessary nor helpful.
I politely disagree with your analysis, but rather than getting bogged down:
On the specific only:
“And the decision to guarantee our banks was made by an Irish government and other governments cannot be expected to pay for it.”
In this case, I’m talking about the bank debts not covered by the guarantee. I disagree with your position that governments must at all times put tax-payers money in to cover the private debts in banks based in their jurisdctions. The IT article gives examples, and again discusses the complexity of the issue.
I’m saying that if the Irish government does stand over the UGSD to the detriment of the state’s financial position and the well-being of its citizens, then it is indeed providing a service to Europe (in not exposing the fagility of the financial markets), and where a service is provided then some form of return can be expected.
It’s not a magic bullet, or without tricky outcomes, but it’s a way of looking at things.
Reinhart and Rogoff say in a current paper that the scale of the bank debt buildup in Ireland and Iceland prior to the crisis, is in their view without parallel in the long history of financial crises – – 800 years in their celebrated book.
Looking back at the bubble years, the JTOs of that distant era were able to also conjure up sunny eternal scenarios with the help of ostensibly impressive FDI sector data.
Governor Patrick Honohan, Nov 2010: “With the structural shift towards high-productivity sectors during the 1990s and again since 2007, unit labour costs tend to fall even if wage costs for any individual firm or industry are increasing. Because of this shifting composition effect, as has been well-known for decades, but is routinely forgotten by superficial analysts, unit labour costs are a false friend in judging competitiveness developments for Ireland.”
It is well to remember that direct employment in the internationally tradeable goods and services sectors (FDI + local) is back at 1997 levels when the workforce was 25% smaller.
Italy is still very much a cash economy. Lots of very large tin boxes under beds. Weak democratic controls, fraud and brazen tax evasion. Public expenditure is a different matter. Italy is not Germany.
Re: a domestic grand bargain
While driving I caught Pat Kenny in conversation with Arthur Beesley on the radio. Pat was pushing a domestic ‘grand bargain’ proposal, one which I have touched on several times here, viz. orderly domestic debt default arrangements. Rather than the state via the ECB/IMF pour money top down into the banks to compensate for mortgage defaults, why not strike a bargain with distressed mortgage holders by giving each one a subsidy (Pat referred to a ‘grant’) to pay off their mortgage in most part if not in whole – certainly where the family home is at stake. The subsidy would go directly to the relevant institution. A kind of bottom up strategy. In principle, the net sums should be equivalent, no? The mortgage default which is factored into the stress test is caught in time at the citizen end of the contract rather than the institutional one which has been the preferred conservative approach. Less social distress and more money in circulation. Obviously this is a simple model and layers of complexity and refinement can be added, e.g. repaying any subsidy, heading off abuse, free riding, banding the subsidy, link to income, etc.
I am not that bothered by the moral hazard argument or the prospect of those in debt benefiting from those not in debt or in less debt. It is happening anyway via welfare. The economy in bailout mode has gone way beyond the point where that might stir my ire. I note in Michael Hennigan’s once again excellent post that FDI related workforce is back to much earlier levels and investment is down and has been falling for several years. Unless personal debt in the form of mortgages becomes ‘manageable’ – to recycle a term – I find it hard to see how sustainable recovery will come about. It may also present an opportunity to reduce wages and get a revised ‘Croke Park’ in place.
@ Seamus Coffey
So basically are you suggesting that MNCs are not repatriating as much profits as before?
Actually forget that last comment
Sinn is a great man for the ‘rules’ (as is Angela) – yet Ireland and Spain generally stuck to the rules [3 breaks to Fr/De at 6 each]
… dodgy-dodgy capital flows are another matter …. difficult to get Sinn and others in De to address this one … could be deeply cultural: De and other NornEU zwingliites – man is baad, moral hazard baaader, no debt forgiveness, burn in hell: hibernian & iberian lapsed catlicites – man is flawed, all is forgiven, what a gift, party on in heaven, send the cheque to the ECB and the zwingliites …
@ Gavin Kostick
I am afraid that you are missing my point. All the arguments you advance are perfectly legitimate. What I am saying is that they butter no bread as far as our creditors are concerned. In the case of the bank debts not covered by guarantee, our replacement creditor – the ECB – does not agree with the approach mooted.
The one asset that the Irish side could have brought to the table was a reinforced commitment to the measures required under the MoU. The new government, negotiating a joint programme in a world that no longer exists, did precisely the opposite. (Reversing decision on minimum wage, abolishing prescription fee etc. etc.).
The one motivation our creditors can have to negotiate is to improve our capacity to repay i.e. to avoid a forced default. The idea that a threatened voluntary default (i.e. not to pay at all) could be helpful in the negotiations is not credible and is ultimately damaging to the country.
@ David O’Donnell
I was not really drawing attention to the beliefs of Professor Sinn. They interest me no more than those of anyone else on this blog. What I did find striking was the graph in relation to bond spreads which clearly indicate that they are going back to normal i.e. to the situation that applied before the introduction of the euro. In short, the markets have woken up to the fact that their blind assumption that the euro had made sovereign risk equal across the euroarea was no more than that; blind belief.
I’ve listened to Sinn – simply passing on a slightly tongue in cheek opinion (one which has some fuzzy merit imho – but have neither time nor resources to figure it out) … no reflection on your comment – a useful link …
Re the graphs returning to pre-euro_EMU nationals: markets simply following the present EZ logic, which is deeply structurally and politically flawed. EuroBonds are needed, and a further level of internal EZ control of financial flows across nationals … and an EZ wide restructuring of entire EZ financial system. ESM won’t do this job … and we don’t know where it’s going at the mo … ECB needs a new mandate ….. but no appetite for such moves by either Angie (wounded politically) or Nicky (fatally wounded politically as he tries to do a Maggie Malvinas in N Africa; he’s history if not yet) – and both for tactical political reasons setting on the Hibernians as a useful distraction from the state of their own financial systems – buys them time … we’re simply ‘collateral damage’ small, expendable, and control_able …. Where are our WMDs?
I was going to start with the duty of care owed by the community to the boy with his finger in the dyke, but I think McWilliams has had that one.
Just to show willing with regard to grasping points, my understanding is that you think it is the enormity of the monies provided that gives the ECB the whip hand in dictating how the state should proceed. Therefore we should leave off talking about UGSD as a dead duck.
I’ll have one last quick go and then leave it for now, as I’m sure this will run and run in various guises.
Whilst the opinion of the ECB is extremely important, and various committee members thereof have spoken out, as far as I know the ECB has yet to make an ‘ex cathedra’ statement on the subject. Also the ECB is not the only game in town, we should keep talking to the IMF (who have been in to look at the programme for government), and who clearly have different ideas.
The approach I’m following, is to force the ECB into making such a ‘thou shalt not’ statement or draw back. I would be very interested discover whether it turns out that this eventuality has been covered in an invisible side-letter, in which case we would at least know that, whether it is implicit through a series of conversations, in which case the state would have to look at the standings of those conversations, or it is simply that as a major creditor the ECB feels it has the power to dictate to the government.
“The one motivation our creditors can have to negotiate is to improve our capacity to repay”. Perhaps we are not so far apart in this. I’m saying that after the stress tests, which may alter everything again, ‘our’ ie the State’s capacity to repay under the terms of the MoU is likely to be much reduced because the money set aside for the banks is that much larger, and therefore, to meet our commitments to the ECB/IMF/ESRF there will have to be burden sharing.
And underneath all of the above, I am still arguing about perception, and that is, if Ireland chooses to continue to make decisions in favour of the European financial system over her own self interest, then this should be visible and acknowledged. So: in spite of the harm done to our finances, we are going to pay private losses, in order that the financial archictecture of Europe is not undermined.
‘The one asset that the Irish side could have brought to the table was a reinforced commitment to the measures required under the MoU. The new government, negotiating a joint programme in a world that no longer exists, did precisely the opposite’
That seems correct. The new government is not yet, and may not ever, be willing to face the opprobrium that would result from imposing a creditors’ regime on their electorate. The popular perception is that the proposed arrangement turns Ireland into one vast encumbered estate.
Whatever the merits of fiscal rectitude, such a scenario has inevitable historical echoes and will elicit the traditional resistance. The legitimacy of the decision to isses the blanket guarantee will be called into serious question, and various forms of resistance/evasion are likely to arise.
In the short term, we can anticipate a sharp tightening of the contingencies under which the bailout funds are disbursed. If the troika are as clear in their objectives as you maintain, the financial equivalent of a no-fly zone will have to be imposed on broad areas of government spending. The next review meeting should be fun.
@ Paul Quigley
I do not believe that Irish people at an individual level will react quite in the way that you suggest. They are far too sensible. An example would be the tenacity with which they hang on to their tracker mortgages and their clear grasp of the financial realities that, if they have to pay off their mortgages in full, so must everybody else. Also the manner in which they are paying down debt and the realism with which they deal with their individual job situations (as the emigration figures unfortunately prove).
The stay-at-home vested interests, and the politicians who think they are doing their patriotic duty by defending them, are another matter. The battle has barely begun. I would give a lot to be a fly on the wall at the first review meeting.
@ Gavin Kostick
The Irish boy does not have his finger in the dyke except in the fevered imaginations of some economic commentators whose day will depart as quickly as it has come.
The view from the ECB, hot off the presses!
For the record, I am in favour of rooting out vested interests, whether they stay at home or not.
I hesitate to use the word ‘sensible’ in Ireland today. We are dealing with after effects of a bubble, in which all prudence was cast to the winds. The leading lights of our society entirely lost the run of themselves, so it’s no wonder that Joe and Jane Citizen became disoriented.
Not so long ago, the received wisdom or ‘financial reality’ was that you should load up as much debt as you could get. Saving was for sticks-in-the-mud. All of sudden everyone is running the other way. Pay it all down folks.
Lets’ face it. Many people are knackered from running the debt up in the first place. The thought of paying it off in a deflationary environment is mind numbing. Property as ball and chain is not property as we imagined it.
Notwithstanding the rigour of our bankruptcy laws, it seems likely that some mortgage default will come gradually to be seen as a morally justifiable and econmically necessary corrrective to the vagaries of financial markets. That will be a head scratcher for the government, and the troika.
‘It goes without saying that implementing the necessary reforms not only benefits the countries concerned, but is also an obligation for all governments so as to ensure that their economies function smoothly within our monetary union’
Naturlich. It’s all obvious really, from where Stark is standing. It’s funny, though, that he didn’t speak up before the credit bubble.
@Rory O’Farrell, Seamus Coffey
There is no doubt that MNC profits outflows have fallen in recent quarters. The question is why? Seamus Coffey may well have hit the nail bang on the head in his blog comment.
The actual net profits outflow in each quarter of 2009 and 2010 are:
2009 Q1: -7.300bn
2009 Q2: -7,532bn
2009 Q3: -7,436bn
2009 Q4: -6,138bn
2010 Q1: -8,349bn (1,049bn more than in Q1 2009)
2010 Q2: -8,114bn (582bn more than in Q1 2009)
2010 Q3: -7,765bn (329bn more than in Q1 2009)
2010 Q4: -4,847bn (1,291bn less than in Q1 2009)
So, quarter-by-quarter, the flow was decreasing through 2010 as compared with 2009. It is this that accounts for the improvement in GNP relative to GDP in the later quarters of 2010.
As I said, the question is why?
One possibility is that it is just random volatility due to differences in timing of the repatriation of profits. If that is the expanation, the GNP performance in the later quarters of 2010 isn’t as good as it appears. In that eventuality, then there could quite easily be a large increase in the net profits outflow in the next quarter, thereby reducing the growth in GNP, regardless of how GDP does. That is the pessimistic scenario.
However, another more optimistic possibility is that it is not random volatility, but instead related to changes, whether permanent or temporary, in the way that MNCs in Ireland bring a return in the investment to their parent companies (mostly in the US). I’d imagine that this can be done in a number of ways: (a) MNCs in Ireland pay their parent companies royalties and for other business services (b) bottom-line profits. If (a) increases, then (b) will decrease. If (a) decreases, then (b) will increase. As Seamus Coffey indicated in his blog, item (a) was indeed increasing in the later quarters of 2010.
The debit item for royalties and other business services combined in the balance-of-payments accounts (ie the imports of these services) in each quarter of 2009 and 2010 are:
2009 Q1: -13,622bn
2009 Q2: -14,168bn
2009 Q3: -12,146bn
2009 Q4: -14,818bn
2010 Q1: -13,824bn (202bn more than in Q1 2009)
2010 Q2: -15,658bn (1,490bn more than in Q1 2009)
2010 Q3: -14,738bn (2,592bn more than in Q1 2009)
2010 Q4: -17,436bn (2,618bn more than in Q1 2009)
So, quarter-by-quarter, this flow was increasing through 2010 as compared with 2009, the exact opposite of the way the net profits ouflow was behaving.
I simply do not know for certain which of the two possibilities I have given as the explanation for the decreasing net profits outflow: ((a) random volatility or (b) linked to the increasing outflow on royalties and other business services) will turn out to be the correct one. But, if it is (b), then that means that it is the GNP figures which most accurately reflect the trend of economic activity in the later quarters of 2010. In that eventuality, the GDP figures would have beeen artificially reduced by the increase in imports by MNCs in Ireland of royalties and other business services from their parent companies (the CSO did refer to a decrease in net exports among MNCs), but this effect would then have been cancelled out in the GNP figures by the corresponding reduction in the net profits ouflow. We will need more than three quarters to be certain, of course, but the fact that this trend has occurred for three quarters in a row makes it more likely that this is the explantion and that the cumulative 4% rise in GNP in those three quarters is an accurate reflection of how the economy was performing in those three quarters.
Oops, I should have but Q1 2009, Q2 2009, Q3 2009, Q4 2009 in my tables comparing the 2010 quarters with the 2009 quarters, instead of putting Q1 2009 for all four of them. I was intending to compare each quarter of 2010 with the corresponding quarter of 2009.
I was certainly not referring to you or criticising you. From what I read, you want a program of reform of the institutions of government. I have no quarrel with that. I have not suggested, and have never read in any of your posts, that you want a revolution, or the economy to crash or Ireland to default as a way of achieving that revolution. But, many do, both here and in the media, and have said so.
There is another important aspect of last week’s GDP figures that hasn’t received much comment. Perhaps Seamus Coffey could get his teeth into it in his blog, as he certainly seems very competent at analysing economic statistics. As far as I can make out, this is not related (or not much) to the net profits outflow figures that have been allready discussed on his blog and in some posts above.
The aspect that I have in mind is the unprecedented gap between the CIF figures for exports and the FOB figures in Q4 2010. The merchandise exports figures that are published each month (the next ones are due tomorrow) are on a CIF basis. But, in the GDP figures, they are on a FOB basis. The FOB figures are always less than the CIF figures, but usually by a relatively fixed percentage (4%, 5%, 6% – in that region).
These are the figures for Irelands’s merchandise exports, on both CIF and FOB basis, each quarter between Q1 2005 and Q4 2010. The figures are not seasonally-adjusted in either case, so are directly comparable. The CIF figures are from the monthly merchandise trade figures. The FOB figures are from the GDP and balance-of-payments figures. After each pair, I have calculated the FOB figure as a percentage of the CIF figure.
2005 Q1: CIF: 20,596.2bn – FOB: 19,500bn – %age: 94.7
2005 Q2: CIF: 22,194.3bn – FOB: 21,159bn – %age: 95.3
2005 Q3: CIF: 21,242.7bn – FOB: 20,161bn – %age: 94.9
2005 Q4: CIF: 22,699.2bn – FOB: 22,170bn – %age: 97.7
2006 Q1: CIF: 21,480.4bn – FOB: 20,393bn – %age: 94.9
2006 Q2: CIF: 21,585.9bn – FOB: 20,822bn – %age: 96.5
2006 Q3: CIF: 21,322.0bn – FOB: 20,474bn – %age: 96.0
2006 Q4: CIF: 22,383.7bn – FOB: 20,926bn – %age: 93.5
2007 Q1: CIF: 22,646.2bn – FOB: 20,992bn – %age: 92.7
2007 Q2: CIF: 22,924.8bn – FOB: 21,592bn – %age: 94.2
2007 Q3: CIF: 21,615.1bn – FOB: 20,053bn – %age: 92.8
2007 Q4: CIF: 22,039.9bn – FOB: 21,442bn – %age: 97.3
2008 Q1: CIF: 21,482.7bn – FOB: 20,019bn – %age: 93.2
2008 Q2: CIF: 21,762.0bn – FOB: 20,293bn – %age: 93.2
2008 Q3: CIF: 21,224.1bn – FOB: 19,666bn – %age: 92.7
2008 Q4: CIF: 21,925.7bn – FOB: 21,059bn – %age: 96.0
2009 Q1: CIF: 21,966.2bn – FOB: 20,331bn – %age: 92.6
2009 Q2: CIF: 22,133.5bn – FOB: 20,358bn – %age: 92.0
2009 Q3: CIF: 20,741.4bn – FOB: 18,408bn – %age: 88.8
2009 Q4: CIF: 13,397.8bn – FOB: 17,929bn – %age: 92.4
2010 Q1: CIF: 21,561.0bn – FOB: 20,477bn – %age: 95.0
2010 Q2: CIF: 22,722.9bn – FOB: 21,756bn – %age: 95.5
2010 Q3: CIF: 22,617.1bn – FOB: 21,592bn – %age: 95.5
2010 Q4: CIF: 23,090.4bn – FOB: 20,037bn – %age: 86.8
AS the quarterly figures show, the FOB to CIF ratio is normally around 94%, 95% something of that order. Sometimes a little above, sometimes a little below, but fairly steady. That is what one would expect, because, as far as I know, the way the FOB figures are calculated from the CIF figures in most countries is by applying a more or less fixed ratio to the raw CIF figures for each destination and category of exports. However, for Q4 2010, the FOB to CIF ratio has been reduced by the CSO to an unprecedented 86.8%.
The reason volume GDP fell in Q4 (but not volume GNP) is because the volume of merchandise exports supposedly fell in Q4. However, this was only on the FOB basis. On the CIF basis, from the monthly merchandise trade figures, we allready knew that the volume of merchandise exports increased in Q4 by around 4%, If the FOB figures had maintained their normal 94%, 95% ratio to the CIF figures, or even fallen to a very low 92%, 93% ratio, volume GDP would have risen significantly in Q4, instead of falling by 1.6%, and volume GNP would have increased by even more than the 2% figure the CSO gave. It was only the unprecedented fall in the FOB to CIF ratio to 86.8% that caused the volume GDP fall and limited the volume GNP rise to 2%.
I can only speculate as to the reaons why the CSO reduced the FOB to CIF ratio to 86.8% in Q4 2010. I am not suggesting for a moment that they did anything wrong, but it looks very freakish and will almost certainly be reversed in coming quarters.
One possibility is that it was reduced to compensate for being over-estimated on the high side in Q1 to Q3 2010. In those quarters, it was 95.0%, 95.5%, and 95.5% respectively, which is higher than in recent years. If that is the explanation, then it is quite likely that the quarterly GDP figures will beventually be revised. The total GDP figure for 2010 wouldn’t change much under this scenario, but the quarterly figures would, with the GDP figures for Q1, Q2 and Q3 being revised down, and the GDP figure for Q4 being revised up. This would bring the quarterly GDP trend for 2010 much more into line with the GNP trend (which shows GNP troughing in Q1 2010, then rising by 4% by Q4 2010).
Another possibility is that it is weather-related. There is a timing difference between the CIF and FOB figures, related to differences in time between when merchandise enters its port of departure in the exporting country and its departure from that country. It is possible that the artic weather in December affected the FOB figure, but not the CIF figure. If that is the explanation, there should be a big rebound in the FOB figures in Q1 2011 to match the growth we allready know (from the monthly trade figures) has occurred in the CIF figures.
However, this is just speculation. It might be some totally different reason that I haven’t thought of. Perhaps Seamus Coffey has more insight than I do. There does seem to be a general consensus in the media (e.g. Dan O’Brien said as much in the Irish Times) that the FOB figure for merchandise exports in Q4 will be revised up to bring it more into line with the CIF figure.
I may be talking to myself in such an old thread but the point made in the previous comment has little significance.
The CSO use the export numbers from the BoP when compiling the GDP figrues for the QNA. They do not use the External Trade statistics.
The External Trade data measure the value of goods that leave the country. The BoP data measure the amount of money that enters the country for those goods.
Per information provided by the CSO, if goods leave the country but there is no change of ownership (exchange of money) they do no enter the BoP and hence do not enter the GDP figure. All movements of goods out of the country, regardless of ownership changes, are included in the External Trade statistics. So while the value of the goods that left the country rose the amount of money that came in for those goods fell. GDP accounts for the flows of money.
With 10 companies accounting for 34% of total Irish exports in 2009 it is not surprising that such swings can occur. A change in just one or two of these companies can have a big effect. I don’t think we’ll be seeing any revision of the export numbers because of changes in the ratios outlined above.