S&P’s Statement on Ireland Post author By John McHale Post date August 6, 2011 Standard and Poor’s view on Ireland via Seamus Coffey: see here. Irish Times report here. Categories In Uncategorized 49 Comments on S&P’s Statement on Ireland ← Boone and Johnson: Europe on the Brink → Morgan Kelly’s Hubert Lecture 49 replies on “S&P’s Statement on Ireland” Hmm…nice little jibe there from Seamus ,trying to predict,…in relation to s and p prdiction (are they trying) of debt Inc Nama at 110% GDP . Seamus, all prediction is an estimation, therefore it’s all an attempt, therefore trying, or did he mean deliberately for their own malicious and opaque reasons forcing data to their own ends trying? Some clarity would be nice. It’s ALS, afair, not just domestic (boo, hiss, paint them green!!!) commentators. For instance, deutsche bank reported here :http://www.finfacts.ie/irishfinancenews/global_economy/article_1022805_printer.shtml , at 120% GDP .. And didn’t we all agree some time ago that GNP was more useful, given the limited number of milk able teats on the fdi mnc cow? So not only does S&P predict a peak 110% debt:GDP (including NAMA which it separately says will account for 18% of debt:GDP) but that we will have “per capita real” GDP growth of 0.3% in 2011 (if it means real GDP, then that’s at the lower end of recent forecasts) and will grow to 2% by 2014 (again the official GDP estimates are 2.5-3% per annum from 2012). But S&P also says “we expect the interest rate on the European Financial Stability Facility (EFSF: foreign currency AAA/Stable/–) portion (€17.7 billion) of Ireland’s €67.5 billion external support package to decrease to about 4.5%, from about 6.0%. We estimate the saving to the Irish government on interest payments will be around €0.9 billion (0.6% of GDP) cumulatively over 2012-2015. The maturities on EFSF loans are also expected to be lengthened as part of the Heads of State agreement. Meanwhile, it is also possible that interest rate reductions will be extended to Ireland’s European Financial Stability Mechanism (€22.5 billion) and bilateral borrowings (€4.8 billion). ” So to be clear S&P’s assessment of the 21 Jul summit is a “cumulative saving” over four years of €0.9bn (that is €225m per annum simple average) and “it is also possible” that reductions be extended elsewhere! Very possible indeed in the case of the UK bilateral arrangement as Waterford/Tipperary man, George Osborne has already confirmed it in writing! No wonder Manuel Barroso slammed the incompleteness and uncertainty of the summit two days ago despite saying it was a credible solution two weeks earlier. No wonder Enda and Lucinda looked completely puzzled on 21 Jul during their post-summit interview in the photocopying room. No wonder economists are scratching their heads at Spain and Italy potentially borrowing at rates well above 3.5% (15 year money). No wonder no-one seems willing to hand over the “technical papers” that underpinned the summit. I think the S&P statement is indeed positive in pointing to competitiveness gains and delivery of the programme. And the projection that the banks won’t need more capital and that we’ll return in 2013 to the debt markets at 6% is positive. And the S&P statement seems to come on the back of other statements this week (eg JCT at the ECB) that Ireland is doing well. Let’s savour these assessments because we haven’t seen many of them in recent times. But will our net debt:GDP excluding the banks and NAMA be a peak of 51% (110% less 18% NAMA less 41% banking). S&P has just gotten these figures wrong. Any chance that the S&P bozos are missing $2 trillion in their sums, just as they were yesterday with the US? Seriously, does Phillip II remind you of anyone? Like someone who whined about anonymous posters for a long long time? @ Jagdip S&P say NET debt/GDP will be 110%, so doesn’t that exclude the banks (but include NAMA) already? Also, it doesn’t say the bank ‘stake’/assets are worth 41%, only that that is the cost of recapitalising them. They are clearly not ‘worth’ €64bn. As Jagdip points out even good news has to be treated cautiously. S&P have apparently accepted that their math did not stack up but insisted that the US downgrade was justified. Makes you wonder about this assessment of Ireland. I suppose being teachers pet for a while can’t do any harm. But not to spoil the party..the warning signs are ominous and the complete dependence on fdi and resulting exports could turn negative very quickly. ‘In our view, Ireland is the most open economy in the euro area, with exports estimated to exceed 105% of GDP and on track to expand an estimated 7% in volume terms this year. In absolute terms, Ireland’s merchandise trade balance, which hit an all-time high of US$48 billion (31% of GDP) in 2010, is the third highest in the euro area, despite Ireland’s position as the twelfth-largest economy in the EU-17’ That’s GUBU. On a GNP basis, we probably wouldn’t even get into the top twenty. GDP is massively inflated by MNC internal accounting, which all hangs on the politically vulnerable Corpo Tax rate. This is an accident waiting to happen. ‘Moreover, the international tradables sector has so far contributed little in the form of new employment to the Irish economy. Nevertheless, the second round impact of the export sector on job creation, domestic incomes, and public finances should not be understated’ We get some billions in corpo tax, which is the payoff for using the sovereign territory. And we get the credit enhancement effect of being seen to have a much more developed and productive economy that we in fact have. According to the latest CBI quarterly report, we have had nearly 20% annual falloff in credit advanced to manufacturing. This is while exports are ‘powering ahead’. The MNC access internal credit channels. As for those supposed second round employment linkages, it would be nice to see some evidence. @ Jagdip You say “But will our net debt:GDP excluding the banks and NAMA be a peak of 51% (110% less 18% NAMA less 41% banking). S&P has just gotten these figures wrong.” This is not an appropriate use of the S&P figures. The 18% and 41% numbers are proportions of 2010 GDP (€156 billion). The 110% number is a proportion of 2014 GDP (S&P forecast not given). We cannot do a simple subtraction of 18% and 41% from 110% because the denominator is not the same. We must also note that S&P are using a net debt so the residual you are calculating likely includes some value for the banks. This would have to be added back in to get a net debt figure exclusive of the banks. It is likely that S&P are estimating the net debt exclusive of the banks would be around 70% give or take a percentage point or three. From S&P: “On the other hand, any failure to meet these fiscal targets or to restore growth of the domestic economy could imply locking-in higher nominal interest rates, which we believe would likely damage debt sustainability.” From: K-man: “Again, this is why you have to pay attention to politics. Straight economics is necessary, but won’t get you to the full reality.” Super-K’s brilliance has nothing to do with maths – it is his political nose. It’s extremely finely tuned to US politics. I think both the above quotes are true. Hands up if you think the guys at S&P have an excellent appreciation of Irish politics. What happens when the low-hanging fruit are gone and there are no more capital projects to stop, if there isn’t a decent gdp bounce? @Jagdip Notwithstanding their admission of a big mistake in their US analysis, I don’t think we can assume they mean “real GDP” when they say “real per capita GDP.” They must be subtracting off projected population growth from real GDP growth. I don’t know what population growth rate they are using; you might have a better sense. Although it is now out of date, the CSO had been projecting an annual population growth rate between 2011 and 2016 of 0.69 percent under their zero migration, low fertility (M0F2) scenario. This was their lowest growth scenario. See Table L of this publication (page 27): http://www.cso.ie/releasespublications/documents/population/2008/poplabfor_2011-2041.pdf In subtracting off 41 percent of GDP to allow for the cost of the banking rescue, I am curious as to what assumptions you are making about the State’s financial assets (including the stakes in the banks). Excluding NAMA assets, the NTMA put total financial assets at €40.6 billion at the end of 2010 (see below). Clearly, the composition as well as the total value has changed with the more recent banking developments, but are you valuing the State’s banking assets at zero when you subtract off the 41 percent? http://www.ntma.ie/Publications/2011/GG_debt_NTMA_info_note.pdf @ grumpy Links are nice for quotes: http://krugman.blogs.nytimes.com/2011/08/05/anti-stimulus-politics/ They had bigger fish to fry than Ireland and did not want anything to get in the way of the American downgrade. I had to laugh when the Fed told them they had got their sums wrong. The US played backgammon with their will we, wont we, default scenarios and they have paid the price and there is much more to come. Two weeks ago Barroso was slating the ratings agencies for being anti European I wonder is he happy now? The NTMA reckons GGD will be 115.8% of GDP at end 2014. Elsewhere they have NPRF investment in the banks of 9.4 bn. If we reckon on another 10bn ish having gone in (from cash balances and being recognised as assets), this is about 20bn or about 10% of 2014 GDP by the NTMA estimate. This would give an NTMA estimate of net debt of about 105%. The S&P estimate of 110% net debt to GDP therefore represents a downgrade to the debt position of Ireland. No? @hogan I am surprised you don’t view “cash” as an asset. @hoganmahew The S&P estimate of 110% includes all NAMA debt obligations still outstanding in 2014. The NTMA figures do not include NAMA. Excluding NAMA, S&P put the 2014 net debt at 97% – below the NTMA figure you give. It is hard to compare the implied net debt estimate of the NTMA and the estimate provided by S&P yesterday because we don’t know what they actually subtracted to reach the net debt figure. Given S&P’s chequered history, with failings as recent as yesterday…why should we trust them ? That I understand their detailed models and back-end research is their true product that they sell. So this means it is ponly subject to private, partial analysis and oversight. I’d suggest that rather than natter on about regulating them, Europe might better call their bluff. Remind the world that the ratings agencies were sloppy spoofers, and suggest for a period that they fully publish everything for some markets. Working models, commentary assumptions etc. And then, from Glasnost, we will all be much the richer and wiser. If S&P actually have a useful, quality product …then surely they will comply Credible piece but is anybody out there questioning the goal of increased efficiency which is financial terms is more & more leverage. When we reduce our fiscal debt relative to credit we increase leverage – this reduces redundancy & our ability to buttress economic shocks. The extreme autistic open economy meme is a dead end in my opinion – probably ending when we hit this brick wall of the CBs making at incredible speed. Economists are not asking what economies are for ? , this is extremely disturbing in my opinion – especially given the conclusive proof of capital destruction that we have witnessed certainly over the past 30 years. Extreme efficiency in nature is a evolutionary dead end – its not much different in the financial ecosystem. But because globalism is now so specialised with no other part of the globe that can illustrate the intense contradictions and flaws withen our financial architecture we will continue to engage in this self flagellation until we cannot. Why must the physical economy be bended towards artifical manipulated financial indices ? Why are not economists banging down the door at this absurdity. Bretton Woods and its successors are now mutant cannibals running around the woods chopping the heads off bigger & bigger countries. Where is the constructive activity & dreams amongest this destruction ? When this super 1980s period is over what do we do then ? , well I think we won’t have the ability to do much as all capital will be a squandered in a pointless effort to increase efficiency to give towards the financial industry and its subsequent consumption. The dreams of the practical leftists and not the absurd liberal / feminist leftists have been extracted from the ether of financial dialogue. We are going to become poorer because strangely we want it so. This is a very very strange time. Success as defined by the financial industry is not success – it is a epic failure of guts & imagination. @John On the “per capita real GDP” growth, you may well be right. Is it not, though, an odd metric to use, which requires quite some interpretation so that you can compare it with other projections? On the net cost (gross recapitalisation less residual value) of the banks , yes indeed there is a point there if that’s what S&P meant by net. God willing, there will be some residual value in Bank of Ireland at least, and indeed AIB and ILP. However S&P seem to be showing the gross cost of NAMA (NAMA debt without any account for NAMA assets) as part of their net GDP, so while I agree with you, S&P certainly seems to be using a gross number for NAMA, and my assumption was that they were using the gross recap as the bank cost. @Seamus Thanks for reply and I note that you have a couple of excellent posts on the S&P assessment yesterday at http://economic-incentives.blogspot.com/2011/08/bond-yields-fall-and-s-are-happy.html I’d agree with you that in 2013 (not 2014) the peak debt:GDP will be based on a GDP that will have grown in nominal as well as real terms from 2010. And that 2010 is the year from which the 18% NAMA gross cost of €30bn is calculated and the 41% bank recap cost and if you were to relate NAMA and the bank cost to 2013 GDP then they would be less than 18% and 41% respectively. Not sure you’d get to 70% but will look at this more closely tomorrow. @Eoin I think the 110% does include both NAMA and the banks. But if you look at Seamus’ analysis, S&P display %s of GDP which is a little confusing (NAMA and banks are based on 2010 GDP and debt:GDP on 2013 GDP). @Eoin I tend to agree with Seamus that the debt:GDP of 110% includes both the bank cost and NAMA. @John McHale “I am surprised you don’t view “cash” as an asset.” I’m surprised you think that there will be oodles of cash still sitting in bank accounts waiting for the government to spend it in 2014. @Seamus Coffey “It is hard to compare the implied net debt estimate of the NTMA and the estimate provided by S&P yesterday because we don’t know what they actually subtracted to reach the net debt figure.” It’s a fair cop. I had missed S&P including NAMA figures. Nonetheless, 97% + 10% gives, by my maths, 107%, still above the NTMA 105.8% net debt figure… Still, though, we don’t have any projections as to what the state’s stake in the banks will be worth in 2014. Clearly not as much as the 61bn that AIB is ‘worth’ today, but what is a reasonable figure to put on it? As per Seamus’ quotes from S&P, there are a couple of inconsistencies. “We expect real domestic demand will continue to decline until 2013 and could be further depressed as the European Central Bank (ECB) embarks on a monetary policy tightening cycle. At end-2010, 86% of Irish residential mortgages carried flexible interest rates. Meanwhile, external demand could also weaken. ” versus “We expect Ireland’s marginal funding costs at this time  to have declined to rates of around 6% or lower, a level that in our view would not put the government’s debt dynamics at risk.” I presume they are talking about benchmark (10-year) bonds? And ECB rate at ‘normal’ rate of, say, 4%? In which case it is a little optimistic to be talking about Ireland paying only a 2% premium to ECB. No? “Standard & Poor’s projects that Ireland’s real per capita GDP will increase by 0.3% during 2011, driven exclusively by net exports and accelerating toward 2.0% by 2014. ” Per capita GDP is a really weird metric. Unless you are expecting a whack of emigration… We seem to be a long way behind ‘real’ time on this blog. Hordes of PRGuys are working like bugg1iry this weekend (including me sadly … got to do a one pager for a Board meeting on Monday that really needs to be about eight pages) – even old hacks who have been out of work for ages are picking up short term contracts yesterday/today to help write for/influence friends still working at big media outlets. This is not the usual ‘cut and paste’ jobs that old hacks normally do. There is a massive PR assault about to take place, under the guise of a ‘co-ordinated response’ from central banks/governments on Sunday night/Monday morning. Be warned. They are spending a huge amount of money on ‘communications’ this weekend, on both sides of the Atlantic. I have honestly never seen the like of it. I am not kidding. Big stuff going down. Can anyone thing of any interpretation of the EU summit which would suggest EFSF money was to cost us 4.5% rather than 3.5%. Here’s what the summit “memorandum” said 2 weeks ago “We will provide EFSF loans at lending rates equivalent to those of the Balance of Payments facility (currently approx. 3.5%), close to, without going below, the EFSF funding cost” Here’s what S&P says “we expect the interest rate on the European Financial Stability Facility (EFSF: foreign currency AAA/Stable/–) portion (€17.7 billion) of Ireland’s €67.5 billion external support package to decrease to about 4.5%, from about 6.0%.” Hello? Is there anyone there? Or has everyone gone to (or come to!) Kilkenny for “a rare opportunity to hear, and question, one of our most forthright commentators” http://www.kilkennyarts.ie/events/details/hubert-butler-lecture-professor-morgan-kelly/ Only Dorks Jagdip Ask him how he can square his defecit circle for me ? @Hogan ““We expect Ireland’s marginal funding costs at this time  to have declined to rates of around 6% or lower, a level that in our view would not put the government’s debt dynamics at risk.” I presume they are talking about benchmark (10-year) bonds? And ECB rate at ‘normal’ rate of, say, 4%? In which case it is a little optimistic to be talking about Ireland paying only a 2% premium to ECB. No?” They should be factoring in the yield curve here. You can argue that 10y yields are actually (generally) more predictable than base rates because investors assume that the central bank “has credibility” (do say that out loud with a French accent) and will adjust rates so 10y remains reasonably unchanged no matter what base does. You can have 10y lower than overnight – like when the central bank are stamping out temporary inflation. I am not sure they will get back to 4% by 2013. They (S&P) are probably doing a rabbit in headlights job and kind of assuming not much difference in sovereign bond markets from where they are now – except that everyone will have agreed Ireland is not really a default risk, so the yield comes back in. We are all aware that the traditional “out” is to inflate the overhanging debt away. When JCT goes on about “credibility” he is attempting to prevent at possibility of a sort of quantum flip in investor psychology where this option starts to get discounted in rates. If this were to happen people would soon appraise themselves that 6% used to be a very ambitiously low yield – even with zero default risk in the price. @ Grumpy/Hogan Current market pricing has ECB around 2% at end 2013.. @ PR Guy I concur. Reckon we’ll have coordinated policy response from the central banks, including China, next week. @PR Guy They are already out in force in the good old USA. Seems to be a solid line in QE3 emerging. But if El Erian is right..you ain’t seen nothing yet…… “It is hard to imagine that, having downgraded the US, S&P will not follow suit on at least one of the other members of the dwindling club of sovereign AAAs. If this were to materialise and involve a country like France, for example, it could complicate the already fragile efforts by Europe to rescue countries in its periphery.” @PRguy: I do hope they are planning some sensible policy responses, as well as a PR initiative! @Ceterisparibus Haven’t picked up anything on the wires as yet of another AAA downgrade in the offing. Will pipe up if I do. I was interested though in the raids on ratings agencies in Italy during the week. I wondered what they (the Italian government/ECB) were trying to find out. @grumpy “If this were to happen people would soon appraise themselves that 6% used to be a very ambitiously low yield – even with zero default risk in the price.” Yup. As I see it, stable inflation at 2% is an anomaly. We will see either a large deflationary move followed by low inflation (Japan) or a period of higher inflation. If we see deflation, the Irish government will not be in a position to borrow on current policies (inability or unwillingness to pass on deflation through government spending). If we see inflation, yields will be higher than 6% (cycle lows in a normal market). There is a rather sketchy effort to reconcile S&P’s 2014 net debt projection of 97% of GDP with other forecasts of our 2014 debt here. Morgan says €240bn by 2014 http://www.rte.ie/news/2011/0806/kellym.html @ Frank Galton The “feel good factor” did not last long. A healthy dose of reality from Morgan sure spoils the party. I wonder where he gets the extra 30/40b for banks from…is it the nameless one or is Wilbur set to lose the proverbials. I see he is down about 33 m so far in BOI. @KevinOr PRGuy To some extent they seem to think policy is PR and PR is policy. They have basically been saying that the market just doesn’t understand (very much in tune with comical Bini’s line that by definition a country following an agreed programme cannot be thought to have any possibility of defaulting) and that the yields on Italian and Spanish debt cannot be rationally justified. It is likely their thought processes will incline towards “saving the market from its own foolishness” – ie attempting to prop up prices to provide time for reflection (and to cobble together a loose agreement in principle for a 2 trillion bailout facility). A lot of these guys genuinely think that their own belief in this policy or that policy is of far more worth than the combined money-weighted opinion of all investors on the planet. Currently they have attached themselves to the belief that austerity is the key answer. The fact that it is possibly worse than pointless without meaningful reform – and that in many countries that is not politically realistic – is too inconvenient to be considered properly, and the herd instinct will keep them stuck to that approach until they are forced to latch onto some other belief. @Frank, ceteris The thing about Morgans is that because they are so few and far between, they get an exemtpion from the usual product testing regimes that the volume car manufacturers are expected to satisfy. @ Seamas As Dreaded Estate has flagged on your own blog, the denominator is as big a problem as the numerator. ‘Mr Kelly predicted it would be another decade at least before Ireland’s economy will recover. He said the recent spending deal in the US was ‘catastrophic’ and ‘as the US goes under that will hit Ireland very, very badly’. Morgan is looking at reality. Ireland’s growth potential is dependent, not just on footloose MNCs, but on a particular subset of MNCs, those from the US. We are nearer to Boston than Berlin on that score. That home jurisdiction of the MNCs has just had a sovereign ratings downgrade. If that downgrading continues, as it may very well do, funding costs of US corporates will rise. Meanwhile politicians on both sides of the Atlantic are taking aim at our cozy corpo tax regime. The threatened global double dip would put the tin lid on it. If the MNC enclave shrinks, and the public sector shrinks as directed externally, whither Irish GDP ? @ grumpy +1 At the time of the Great Plague (14th c I think), all sorts of rituals were enacted without effect. It took ages to put the finger on the rats. Looks like not much has changed over the centuries 🙂 Reality check ‘Given the feedback loop between our recession indicators and the SP500 with the former taking the latter as an input there is clearly now a real risk of a recession in the US and on my casual calculation it is well above 50%’ http://clausvistesen.squarespace.com/ This is ECRIs’ Lakshman on the nasty impact of shocks in a slowdown, which argument seems relevant to the recent panic over Italian debt. http://www.businesscycle.com/news/press/2260?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+EcriNews+%28ECRI+News%29 @Grumpy A good example of what you say in the last paragraph of your earlier post is the statements by Ollie Rehn that the Greek debt pile is sustainable. The entire world of investors have determined that it is not. I cannot understand how he can utter such nonsense when he must know that he is damaging his own credibility and that of the EU. Whatever schemes he and his officials dream up next week will obviously be examined by investors in light of this flawed thinking. @Kevin O’Rourke “I do hope they are planning some sensible policy responses, as well as a PR initiative!” Your “avin a larf ain’tcha mate?” as some of my English clients in the city would say (the ones who didn’t go to Eton)! On a more serious note, they probably will but some are more limited (politically) than others. @Kevin O’Rourke “I do hope they are planning some sensible policy responses, as well as a PR initiative!” Your “avin a larf ain’tcha mate?” as some of my English clients in the city would say (the ones who didn’t go to Eton)! On a more serious note, they probably will but some are more limited (politically) than others…. @ grumpy and paul quigley Cor, cracking posts from grumpy “So that notable deeds should not perish with time, and be lost from the memory of future generations, I, seeing these many ills, and that the whole world encompassed by evil, waiting among the dead for death to come, have committed to writing what I have truly heard and examined; and so that the writing does not perish with the writer, or the work fail with the workman, I leave parchment for continuing the work, in case anyone should still be alive in the future and any son of Adam can escape this pestilence and continue the work thus begun.” John Clyn, monk in Kilkenny, leaving a blank page so that this work could be carried on after his all too inevitable end in the Black Death, 1349. More European fiscal union anyone? Taps turned on to create inflation and inflate away all that debt? What will they do next? It’s political..what do merkel and sarko want? What’s costlier to their reputation, seeing more straisns on the euro pushing it closer to a breakup nobody wants or can see how to do, or towards greater ,buiter type, fiscal quasi union? I’m thinking, hoping also, the latter @ If the MNC enclave shrinks, and the public sector shrinks as directed externally, whither Irish GDP? Indeed, Paul. I think at least you will remember a little debate before Christmas last year (sparked by Dominique Jean-Raymond in a “gentle” reference our CT rate). There was high dudgeon for a while when I “gently” pointed out that there was some logic in our low rate being seen as fiscal dumping. Much of this is now somewhat secondary to the now “Europeanised” ( shortly to be “globalised”) crisis we’re all facing. However, I guess some comfort can be taken in the knowledge that a secret task force has been beavering away on the the main, strategic challenge I attempted to flag way back in those halcyon days of late last year, the need for a radically new enterprise/”industrial” strategy for Ireland. Task force findings, recommendations and crisis) action plan due shortly, n’est pas? @ Richard Unless we start sinking beneath the Atlantic, that task will never be a secondary one, but we can’t do it without fundamentally re-evaluating our cherished social order. That’s really frightening and painful. The left hate it as much as the right, and heels are dug in all over the place. As Churchill said, we’ll do the right thing when everything else has been tried. I see S&P are twisting the knife. Saying there’s a 1 in 3 chance the US will be downgraded again! At this rate, Ireland will end up with a better rating than Uncle Sam before too long! Not much white smoke around this evening… so far. I saw a link to this blog article about S&P on Krugman’s NYT page: http://economicsofcontempt.blogspot.com/2011/08/on-s-downgrades-and-idiots.html It’s entertaining reading, at the very least. Comments are closed.