Seamus Coffey: Reasons to be cheerful parts one, two and three

At the risk of setting up Seamus for apoplectic rage in comments, he nicely gathers together much of the recent good news on the Irish economy in an article for the Evening Echo.   The text of the article can be accessed via his excellent Economic Incentives website here.   We still face serious challenges, as Seamus clearly notes, but it is no harm to accentuate the positive every now and then.


This event will take place on October 13th at the Radisson Blu Hotel (Golden Lane, Dublin).  To confirm attendance, email patricia.kearney at

8.45 – 9.00 Opening Remarks

Patrick Honohan, Governor, Central Bank of Ireland

9.00 – 11.15 Session 1: Estimates of house prices and negative equity

Chair: Gregory Connor, NUI Maynooth

Paper 1: Negative equity and regional house prices in the Irish market”

Gerard Kennedy and Tara McIndoe Calder, Central Bank of Ireland

Paper 2: “Who has negative equity? Some insights from loan level micro-data”

David Duffy and Niall O’Hanlon,

Economic & Social Research Institute and Central Statistics Office

Paper 3: “Decomposition of Irish house prices 2000-2010”

Yvonne McCarthy and Kieran McQuinn, Central Bank of Ireland

Discussant: Ronan Lyons, Balliol College and Department of Economics,


Continue reading “Central Bank Conference: “THE IRISH MORTGAGE MARKET IN CONTEXT””

Debt Overhang

Jointly with Martin Brown of St Gallen University, we have written a new World Bank working paper “Debt Overhang in Emerging Europe?“.  (This is a background paper for a forthcoming World Bank report “Golden Growth: Restoring the Lustre of the European Economic Model.”)

While the main focus is on emerging Europe, there is also a fair amount of comparative data for the Euro area periphery; in addition, there is an extensive literature review on debt overhang issues.

Summary: This paper assesses the extent to which debt overhang poses a constraint to economic activity in Emerging Europe, as the region emerges from the recent financial and economic crisis. At the macroeconomic level, it finds that the external imbalance problem for Emerging Europe has been in most cases more one of flows (high current account deficits in the pre-crisis years) rather than large stocks of external debt. A high reliance on equity funding means that net external debt is far lower than net external liabilities. Domestic balance sheets have expanded quite rapidly but sector liabilities remain relatively low compared with advanced economies. With the important exception of Hungary, public debt levels also remain relatively low in Emerging Europe. At the microeconomic level, the potential for debt overhang in the corporate sector is limited to a few countries: Latvia, Lithuania, Estonia, and Slovenia. Due to the low incidence of household debt, hardly any country, except Estonia, seems to face a threat of debt overhang in the household sector. The strong increase in non-performing loans compared with pre-crisis bank profitability suggests that debt overhang in the banking sector is a threat in Ukraine, Latvia, Lithuania, Hungary, Georgia, and Albania. Financial integration of Emerging Europe seems to have contributed to the transmission of the crisis to the region. At the same time, this integration is helping the region in managing the crisis by concerted actions of the major players.

Planes, Trains and Automobiles

I do not have time to fully develop this point but there have been several media reports in recent times on the adverse impact of Ireland’s improved road network on the demand for inter-city air travel and train travel within Ireland.  These reports focus on the negative impact on the suppliers of air and train travel and the requests for increased public funding to upgrade air and train networks to compete.  However, the more direct public-interest interpretation is that part of the payoff to the major investment in the road network is that fewer resources need to be absorbed by providing air and train links where the road network now dominates. (If it turns out that environmentally-optimal road pricing would call for more trains and planes, that is a valid argument. But to justify extra investment just on the basis of losing market share to the road network is not a strong argument in itself.)

Ireland’s economists in the world

I’ve taught myself the black art of web-scraping.

There are many rankings of economists and economics departments. IDEAS/RePEc uses a reasonable method and is kept up to date. It also provides rankings by and of countries. Ireland is now ranked 33rd in the world. Ireland’s economists are thus about as good as its soccer players (ranked 31st).

It wasn’t always thus. IDEAS/RePEc has published country rankings since 2005. Ireland’s position has steadily improved over time, as can be seen from this graph. As a number of economists are planning to emigrate, that trend may reverse.

World Bank: The Impact of Economics Blogs

This new World Bank Policy Research working paper looks at the impact of economics blogs

Summary: There is a proliferation of economics blogs, with increasing numbers of economists attracting large numbers of readers, yet little is known about the impact of this new medium. Using a variety of experimental and non-experimental techniques, this study quantifies some of their effects. First, links from blogs cause a striking increase in the number of abstract views and downloads of economics papers. Second, blogging raises the profile of the blogger (and his or her institution) and boosts their reputation above economists with similar publication records. Finally, a blog can transform attitudes about some of the topics it covers.

EFSF and the European Banking System

Around the time of the EU/IMF deal for Ireland, Patrick Honohan advocated that it would be more effective if the financial risks associated with fixing the Irish banking system could be shared across the European system, rather than just making ‘plain vanilla’ official loans to the Irish government.

In her Jackson Hole remarks, Christine Lagarde agrees:

Second, banks need urgent recapitalization. They must be strong enough to withstand the risks of sovereigns and weak growth. This is key to cutting the chains of contagion. If it is not addressed, we could easily see the further spread of economic weakness to core countries, or even a debilitating liquidity crisis. The most efficient solution would be mandatory substantial recapitalization—seeking private resources first, but using public funds if necessary. One option would be to mobilize EFSF or other European-wide funding to recapitalize banks directly, which would avoid placing even greater burdens on vulnerable sovereigns.

Today’s FT lead article also makes the same point  – but where the EFSF would guarantee funding lines for banks, rather than inject capital.

Mortgage Arrears: June 2011

The latest quarterly report on mortgage arrears from the Central Bank is available here. The report shows the fastest increase yet in the fraction of mortgages that are more than 90 days in arrears. This fraction rose from 6.3 percent in March to 7.2 percent in June, compared with increases of about six tenths of a percentage point in the previous quarters.

55,763 mortgage accounts have been in arrears for more than 90 days, of which 40,040 are in arrears over 180 days. In addition, 69,837 mortgages have been restructured with 39,395 mortgages that have been restructured but which are classified as performing and not in arrears and 30,442 again in arrears. These figures raise questions about whether the type of light restructurings that the Irish banks have been applying to distressed mortgages are sufficient to deal with the problem.

Bank losses and mortgage debt forgiveness

The Sunday newspapers certainly show the debate about mortgage debt forgiveness is gathering steam.    Although policy in this area reflects a complex balancing of social and economic factors, an unavoidable aspect is the potential trade off between costs of any additional induced bank losses and the benefits debt forgiveness.  

Just two quick (related) points.   First, central to the argument for debt forgiveness is that banks have already made provisions for substantial mortgage debt-related losses.    I don’t think Greg Connor’s point in an earlier thread about the weak connection between existing accounting-determined write-downs and the case for forgiving debt has received the attention it deserves. 

This mixing up of accounting loss appraisal and debt forgiveness confuses an honest attempt to guess at likely losses (loss appraisal) with a completely separate activity which is trying to recover as much as is reasonably possible (debt management). Mixing up these two activities in this way would destroy the objectivity of bank accounting standards. It goes against every principle of accounting objectivity if accountants giving an honest appraisal of likely losses generate a change in bank cash flows. How could a bank accounting system by expected to be objective about loss appraisal in that case? Very bad notion.

Second, the concept of the debt Laffer curve is a useful tool for thinking about the potential trade off.   If we are to the right of the peak of the curve, so that reducing the debt actually increases the expected value of repayment, then the case for forgiveness is strong – indeed banks would not need much prompting.    This is most likely to be the case where banks would suffer large losses if borrowers walk away or if the bank pursues repossession.    The current regime of impossible bankruptcy/full recourse/extensive forbearance would appear to make it unlikely we are to the right of the peak.    I would be interested in people’s views. 

Jackson Hole Papers: Achieving Maximum Long-Run Growth

The agenda for this year’s symposium extends far beyond short-term issues. The papers available so far include:

  • Dani Rodrik on Convergence
  • Esther Duflo on Balancing growth with equity: The view from Development
  • Stephen Cecchetti et al on The Real Effects of Debt
  • Katherine Baicker and Amitabh Chandra on Aspirin, Angioplasty and Proton Beam Therapy: The Economics of Smarter Health Care Spending

Are Windfalls a Curse?

The main good news story in Ireland is that Shamrock Rovers have qualified for the group stages of the Europa League (the first time an Irish club has done so since the mid 1960s).   This means a large cash windfall for the club.  There is a large economics and political science literature documenting how windfalls can leave recipients worse off due to adverse changes in behaviour – the club faces an institutional/organisational challenge to make sure it is ‘Norwegian’ in its husbanding of the windfall.

Economists and the Media

Richard Tol has raised some interesting issues about the interaction between economists and the media. One point he makes is how much of the supposed expert commentary in the media is from people who have limited expertise. That’s not too controversial and I think is true of media throughout the world.

As I read it, however, Richard is also making another point related specifically to academics. This point is that only those who are experts in a particular area, as signified by their contributions to academic publications, should discuss this area with the media.

On balance, I don’t see much merit in this argument.

I’d make the following points:

First, while it is true that an economist with more frontier research contributions is (other things being equal) more likely to be smart and on top of their subject area, it is also true that the majority of economic policy issues that are discussed in the media do not relate these frontier debates.

For example, based on my publications in leading journals, I could bore for Ireland on the merits of the New Keynesian Phillips curve or the link between consumption spending and asset prices. However, the media aren’t too interested. Instead, they often ask me to discuss issues that a very good command of undergraduate or master’s level economics would allow a person to explain. In most cases, it does not take a frontier-economics level of expertise to answer the questions about bank balance sheets or fiscal policy that the media are often interested in.

This point probably holds particularly well for my specialised research area of macroeconomics but I think it holds pretty broadly across various subfields. For example, I think it’s now pretty well known that Richard Tol has published a large number of academic papers in the area of environmental economics. However, when economists, including Richard, appear in the Irish media to discuss environmental policy issues, in the vast majority of cases they are making points about taxes to curb externalities or pricing to match costs of services with costs of provision – points that I recall from second year undergraduate microeconomics.

To summarise, a smart economist without any frontier research publications in a particular area is perfectly capable of making useful points about a whole range of issues.

Second, when arguing that an academic should decline invitations to discuss anything other than issues they have published papers on, it’s worth keeping in mind the alternative the public will get to hear if the academic says no. Whatever Richard thinks about Irish academics, there is a large number of financial journalists and stockbrocker economists whose job is to say yes when asked to appear on these shows (in the case of the latter, they often appear to promote a particular interest group’s point of view).

In many cases, an academic that agrees to discuss an issue on which they have not published a paper is doing so because they have an opinion on the issue based on their expertise and because they are fairly sure that the alternative is that the public get to hear something from a journalist with very little background at all in economics or someone promoting a vested interest.

Third, Richard reckons that “The typical listener to the radio or watcher of the TV assumes that because someone is a professor and speaking on the topic, (s)he must be an expert.” Well, maybe that’s true in Holland but it sure isn’t true here. If you think everyone in Ireland thinks I’m an expert on issues I prognosticate on, I recommend reading the comments on this blog. Appearing with the title “Professor” is nice but if you can’t make cogent logical arguments, then the public won’t necessarily buy what you are saying.

Finally, I’d note that there is very little financial compensation for appearing on Irish TV and radio shows (fees are somewhere between very low, e.g. €50, and zero) and, from conversations with colleagues, I believe the majority of reasonably well known economists say no most of the time when asked to appear on these shows. I believe that those Irish academics who appear on TV and radio to discuss economic policy issues are largely doing so because they believe they have a useful contribution to make and that their state-paid salary places an obligation on them to make a useful contribution to debates about public policy.

Morgan Kelly on the Size Distribution of Irish Mortgages

Morgan has a new working paper titled “A Note on the Size Distribution of Irish Mortgages”.  From the conclusions

Our analysis here has shown that instead of 10,000 million plus mortgages, there were probably fewer than 2,000 and these were mostly for investment rather than own home mortgages. However, looking at the 11,000 largest mortgages from the bubble peak of 2006-08, we find that the total is €9 billion. We do not know how many people held more than one mortgage, but it does not seem implausible that the total indebtedness of the 10,000 people with the largest mortgage debt is in the region of €10 billion.

Morgan uses statistical methods to estimate the number of mortgages valued at over €1 million because the Department of the Environment do not make these data available.

While the question of how many mortgages there are over €1 million is not particularly important, it might be worthwhile for the Central Bank or CSO to make available more detailed figures on the size distribution of mortgages. As there are quite a few banks in the Irish mortgage market, the usual argument about confidentiality hardly applies as an issue when releasing aggregate figures.

Bond Yields

I am surprised at the absence of any discussion here of recent developments in the soverign debt market.

Irish bond yields peaked in mid-July, when the 10-year yield reached 14.0% and the 2-year 23.0%.

Today the 10-yield has fallen to 8.9% and the 2-year yield is down to 8.5%.

Meanwhile, the Greek 10-year yield is now at a new peak of 18.3%, while the Portuguese 10-year yield is 11.1%.

Celebrity economists (take two)

Garret FitzGerald coined the term celebrity economist. I defined “celebrity” as the ratio of media exposure to peer recognition (here and here), which is really a measure of “excess celebrity”. We are still working on the academic paper to support this. One of the minor findings is that one of my worst PhD alumni returned to his home country to become a media sensation and a cherished policy analyst.

Experts play an important role when democracies make difficult decisions. They help to select the policy options that are considered, and help to shape the public opinion about the desirability of these options. The Irish economy would always have gone through a rough period, but bad advice has made things worse than they could have been.

It is therefore important to recognize who has expertise and who has not. FitzGerald’s contended, rightly, that some of the people whose advice was followed were, in fact, not particularly competent in the area concerned.

For the public at large, it is hard to tell a charlatan from an expert. Indeed, Twitters reveals that the hesitant talk of one of Ireland’s top economists is interpreted by many as a sign of ignorance (whereas in fact he thinks before he says something); while the fluent speech of one of the more frequent commentators is typically seen as a sign of competence (whereas in fact his self-confidence is matched only by his ignorance). Journalists should know better, but rarely take the time to find a real expert — and entertainment value is important too.

And it’s not just expertise that matters, it’s appropriate expertise. I may be the world’s 163rd best economist, but I can only claim expertise in matters energy, environment and climate and certainly not on all details in each sub-field — and I therefore refuse media appearances on banking, pensions, growth, art, termites, cardiovascular disorders, volcanoes, … (examples of actual interview requests) The typical listener to the radio or watcher of the TV assumes that because someone is a professor and speaking on the topic, (s)he must be an expert. If only.

While most economists in Ireland show exemplary behavior in their dealings with public and policy makers, there are a few who seem to think that the quantity of media appearances is more important than the quality. They should reconsider.

Government Accounts

The monthly Exchequer Account publications tend to get more attention than they deserve because of the frequency of their release.  Although the Exchequer Account is useful, it is a somewhat distorted view of the overall fiscal situation.  On the revenue side it excludes PRSI and Motor Tax, among others, while the expenditure side is based around the largely meaningless concept of “net expenditure”.

The Exchequer Account gives the misleading impression that the government “spends €50 billion and brings in €30 billion”.  We can get a truer, but less timely, insight into the fiscal situation from the CSO’s National Income and Expenditure Accounts which were published a few weeks ago for 2010. 

Here we focus on Table 21:  Receipts and Expenditure of Central and Local Government.  Tables 22 to 29 provide further details of the aggregate figures provided here.

First, here is government expenditure since 2006.  Item 246: Redemption of Securities and Loan Repayments is excluded from the extract reproduced below.

Grants to Enterprises includes €4,000 million to Anglo Irish Bank in 2009 and  €31,575 million of Promissory Notes issued to Anglo, INBS and EBS in 2010.  These are the only items directly related to the banking bailout in the table.  If these are excluded total expenditure was €71,737 million in 2009 and €69,947 million in 2010. 

Government expenditure in 2010, excluding the banks, was 44.8% of GDP and 54.6% of GNP.

Second, here is government revenue.  Item 236: Borrowings is excluded in this instance.

Government revenue in 2010 was 32.8% of GDP and 39.9% of GNP

Since running close to a balanced budget in 2007, expenditure has increased from €68 billion to €70 billion while revenue has fallen from €67 billion to €51 billion.

In 2010, there was an overall deficit of €18.8 billion.  This is expected to fall to around €15 billion this year.  It has been revealed that a “three-year plan” will be published in the autumn giving outline details of how this will be brought down to €5 billion by 2015.

On the expenditure side the largest items are transfer payments and public sector pay.  The capital budget has already been cut by one-half.  The deteriorations on the taxation side are well known as these are  not clouded by the archaic accounting practices used to generate the Exchequer Account.  

The “low-lying fruit” has been picked and the time for the “heavy lifting” is approaching.

Managing Credit Booms

Emerging European countries also experienced credit booms during the pre-crisis period but have largely avoided severe banking crises.  The World Bank has commissioned a number of studies to look at financial regulation and macroeconomic policy in these countries, with the first wave of papers now released:

Macroprudential regulation of credit booms and busts : the experience of the National Bank of the Republic of Macedonia

Credit growth and financial stability in the Czech Republic

Macroprudential regulation of credit booms and busts — the case of Croatia

Financial-stability challenges in European emerging-market countries

Banking flows and financial crisis — financial interconnectedness and basel III effects