18 replies on “The Dynamics of the Net External Position: Slides and Paper”
I am not expert in technical economic matters, by any means. However, from my perspective, the to challenge is devise measures of such flows within a currency union so that action can be taken before it is too late, if any levers exist to take such action. It is very difficult to put things back after the event.
Not sure how much light the slides shone on the questions:
What is the debt burden of the €125 bn GNP Irish economy? 350%; 500%?
What is the external debt burden of the economy?
180% is considered sustainable… so how do we square that with the current debt burden?
A few months ago it was revealed that US bank holding companies were window-dressing quarter end data that is submitted to the Fed.
IFSC period end data should be treated with caution.
Where the more than $1trn US MNCs hold overseas is located for most of a month may differ from its location on the last day of a month.
Many thanks for these slides, but I think many of us here will have to wait for the paper before we even begin to get our heads around this important piece of research.
@ Philip
Your message would seem to be that there has been a severe deterioration in Ireland’s net international investment position in past 5 years. The deterioration in the net asset position goes far beyond that which is warranted by the current account balance.
You say we have now become one of the top external debtors in the world. This change is due to changes in the ‘net other’ category, which are attributable to ‘valuation effects’ and ‘adjustments’, including measurement effects. Available data do not permit the separation of these factors.
Lets face it. The size of the flows in the IFSC, and the inter-linkage of IFSC and non-IFSC activity, was always going to make the analysis of Ireland’s NIIP impossible. It’s not the ultimate ownership of the foreign assets and liabilities which is invisible. It’s their ownership, period, which the IFSC structure is designed, among other things, to conceal.
The IFSC is a casino, which operates beyond the control of its host country government, and provides a platform for the usual capital-extracting leveraged plays. Together with the growth of FDI, the IFSC has copper-fastened the structure of a dual economy.
Ireland is an ex-colony, which has only broken the link with sterling in recent years. The risks posed by the IFSC to the domestic economy ought to have been obvious to every economist in the country, but it is only after the financial house has gone up in flames that the issue receives any serious attention.
The Financial Regulator isn’t going to look too closely into these issues, because that would embarrass the government, CB and DoF. The Troika wouldn’t like it either, as it would take the focus off austerity.
Concealment of financial sector malfeasance and can-kicking is the only game in town. The ‘official sector’ isn’t going to turn over any stones unless it is forced to, so any enquiries are going to have to be driven by civil society actors, such as your good self.
In other words :you do not know what is going on.Lots of work on dubious data.Garbage in,garbage out.
@ Overseas Commentator
That is the point of my paper: to show that the net external position data for Ireland are quite uncertain, so those investors and international policy officials that routinely and uncritically use that number as a benchmark indicator should think again.
Re slides, surely we out perform Hungary and Bulgaria in the top ten?
@Philip Lane
I am glad we share the same scepticism, sorry for my aggressive tone.
[…] Lane is on the case. As I understand his slides (I can haz paper, please?), Ireland was both a large borrower and a […]
Paul krugman asked for this paper on his blog
Surely the size of the Securitization market and thus the number of CLOs and CDOs in Ireland skews these numbers.
I know that we often think of the securitizations as being part of the IFSC but the IFSC also includes things like Depfa which we can better understand, and even the likes of Ormond Quay make some sense in that we can see the impact on the originator bank but most securitization vehicles are in a black hole.
US bank, UK PE house, whoever packages up securities into an Irish Ltd and issues notes which may or may not be quoted. No one regulates it, no one owns it (baring a little charitable trust) and if you do it right it doesn’t necessarily show up on any ones balance sheet.
Nothing to do with Ireland baring a few advisers fees and thruppance ha’penny of tax but it distorts all Irish data.
Yet since 2007/08 it is the value of the assets backing the CDOs which have plunged which is why I think, if possible, they need to be a separate category within the IFSC because at least some of that IFSC category is made up of regulated and visible entities that make more sense to a traditional analysis.
Krugman: Ireland was a leveraged Hedge Fund which invested it’s foreign lend money in foreign country’s. I think Depfa needed 4 or 5 bn Euro every day to short term financing their long term investments. Where was the irish bank regulator or was it the responsibilty of the german Bafin?
LINK: http://krugman.blogs.nytimes.com/
@Mr. Lane
Would it be fair to say that the ECB and the EU/IMF have provided the most recent inflows? Or to put it another way, without ECB repo, the outgoing figure would be worse? Or is that liability included?
Where does ICB ELA sit on this? I presume it counts as an outflow because the money paid over to the banks has left the country?
And the incoming EU/IMF money counts as ‘investment’? (As does any debt taken on before the ‘bailout’.
Anyway, thank you for that – it’s interesting to see what capital flight looks like…
Philip’s work there is to be highly commended.
There are already huge changes afoot in the derivatives market and hopefully the rules governing, plus incorporation of eg financial clearing houses to regulate/investigate traffic through institutions such as the IFSC, will hasten more regulation.
@ philip
Having seen your paper now, via Kurgman’s blog, I’ll join with Colm Brazel in commending you. Your conclusion is nonethelss stark.
‘Such an internationally-leveraged position is extremely vulnerable to a global decline in asset prices, since the value of foreign equities and foreign property falls but the value of foreign debt liabilities remains largely unchanged. Accordingly, the limited current account deficits for Ireland during the pre-crisis period represented an incomplete picture of Ireland’s engagement with the international capital markets, since the net flows were smaller than
the gross flows, with Ireland taking on a riskier investment profile by borrowing abroad to fund the acquisition of foreign equities and foreign property assets’
In other words, there are additional, and as yet unquantified, risks to our domestic financial sector arising from IFSC-related contagion. These dynamics will amplfiy the efects of an EZ blow-up should it occur. Flashing red for the Regulator and the DoF.
On the gist of greyness, as distinct from the detail …..
… unenlightened investors can be mighty profitable. As Ferdinand Pecora, the Depression-era prosecutor, is supposed to have said of the events leading to the Wall Street crash of 1929: Pitch darkness was among the bankers’ stoutest allies.
18 replies on “The Dynamics of the Net External Position: Slides and Paper”
I am not expert in technical economic matters, by any means. However, from my perspective, the to challenge is devise measures of such flows within a currency union so that action can be taken before it is too late, if any levers exist to take such action. It is very difficult to put things back after the event.
Not sure how much light the slides shone on the questions:
What is the debt burden of the €125 bn GNP Irish economy? 350%; 500%?
What is the external debt burden of the economy?
180% is considered sustainable… so how do we square that with the current debt burden?
A few months ago it was revealed that US bank holding companies were window-dressing quarter end data that is submitted to the Fed.
IFSC period end data should be treated with caution.
Where the more than $1trn US MNCs hold overseas is located for most of a month may differ from its location on the last day of a month.
Many thanks for these slides, but I think many of us here will have to wait for the paper before we even begin to get our heads around this important piece of research.
@ Philip
Your message would seem to be that there has been a severe deterioration in Ireland’s net international investment position in past 5 years. The deterioration in the net asset position goes far beyond that which is warranted by the current account balance.
You say we have now become one of the top external debtors in the world. This change is due to changes in the ‘net other’ category, which are attributable to ‘valuation effects’ and ‘adjustments’, including measurement effects. Available data do not permit the separation of these factors.
Lets face it. The size of the flows in the IFSC, and the inter-linkage of IFSC and non-IFSC activity, was always going to make the analysis of Ireland’s NIIP impossible. It’s not the ultimate ownership of the foreign assets and liabilities which is invisible. It’s their ownership, period, which the IFSC structure is designed, among other things, to conceal.
The IFSC is a casino, which operates beyond the control of its host country government, and provides a platform for the usual capital-extracting leveraged plays. Together with the growth of FDI, the IFSC has copper-fastened the structure of a dual economy.
Ireland is an ex-colony, which has only broken the link with sterling in recent years. The risks posed by the IFSC to the domestic economy ought to have been obvious to every economist in the country, but it is only after the financial house has gone up in flames that the issue receives any serious attention.
The Financial Regulator isn’t going to look too closely into these issues, because that would embarrass the government, CB and DoF. The Troika wouldn’t like it either, as it would take the focus off austerity.
Concealment of financial sector malfeasance and can-kicking is the only game in town. The ‘official sector’ isn’t going to turn over any stones unless it is forced to, so any enquiries are going to have to be driven by civil society actors, such as your good self.
In other words :you do not know what is going on.Lots of work on dubious data.Garbage in,garbage out.
@ Overseas Commentator
That is the point of my paper: to show that the net external position data for Ireland are quite uncertain, so those investors and international policy officials that routinely and uncritically use that number as a benchmark indicator should think again.
http://www.indexmundi.com/g/r.aspx?c=ei&v=143
Re slides, surely we out perform Hungary and Bulgaria in the top ten?
@Philip Lane
I am glad we share the same scepticism, sorry for my aggressive tone.
[…] Lane is on the case. As I understand his slides (I can haz paper, please?), Ireland was both a large borrower and a […]
Paul krugman asked for this paper on his blog
Surely the size of the Securitization market and thus the number of CLOs and CDOs in Ireland skews these numbers.
I know that we often think of the securitizations as being part of the IFSC but the IFSC also includes things like Depfa which we can better understand, and even the likes of Ormond Quay make some sense in that we can see the impact on the originator bank but most securitization vehicles are in a black hole.
US bank, UK PE house, whoever packages up securities into an Irish Ltd and issues notes which may or may not be quoted. No one regulates it, no one owns it (baring a little charitable trust) and if you do it right it doesn’t necessarily show up on any ones balance sheet.
Nothing to do with Ireland baring a few advisers fees and thruppance ha’penny of tax but it distorts all Irish data.
Yet since 2007/08 it is the value of the assets backing the CDOs which have plunged which is why I think, if possible, they need to be a separate category within the IFSC because at least some of that IFSC category is made up of regulated and visible entities that make more sense to a traditional analysis.
Krugman: Ireland was a leveraged Hedge Fund which invested it’s foreign lend money in foreign country’s. I think Depfa needed 4 or 5 bn Euro every day to short term financing their long term investments. Where was the irish bank regulator or was it the responsibilty of the german Bafin?
LINK: http://krugman.blogs.nytimes.com/
@Mr. Lane
Would it be fair to say that the ECB and the EU/IMF have provided the most recent inflows? Or to put it another way, without ECB repo, the outgoing figure would be worse? Or is that liability included?
Where does ICB ELA sit on this? I presume it counts as an outflow because the money paid over to the banks has left the country?
And the incoming EU/IMF money counts as ‘investment’? (As does any debt taken on before the ‘bailout’.
Anyway, thank you for that – it’s interesting to see what capital flight looks like…
Philip’s work there is to be highly commended.
There are already huge changes afoot in the derivatives market and hopefully the rules governing, plus incorporation of eg financial clearing houses to regulate/investigate traffic through institutions such as the IFSC, will hasten more regulation.
http://www.cftc.gov/LawRegulation/DoddFrankAct/index.htm
@ philip
Having seen your paper now, via Kurgman’s blog, I’ll join with Colm Brazel in commending you. Your conclusion is nonethelss stark.
‘Such an internationally-leveraged position is extremely vulnerable to a global decline in asset prices, since the value of foreign equities and foreign property falls but the value of foreign debt liabilities remains largely unchanged. Accordingly, the limited current account deficits for Ireland during the pre-crisis period represented an incomplete picture of Ireland’s engagement with the international capital markets, since the net flows were smaller than
the gross flows, with Ireland taking on a riskier investment profile by borrowing abroad to fund the acquisition of foreign equities and foreign property assets’
In other words, there are additional, and as yet unquantified, risks to our domestic financial sector arising from IFSC-related contagion. These dynamics will amplfiy the efects of an EZ blow-up should it occur. Flashing red for the Regulator and the DoF.
On the gist of greyness, as distinct from the detail …..
… unenlightened investors can be mighty profitable. As Ferdinand Pecora, the Depression-era prosecutor, is supposed to have said of the events leading to the Wall Street crash of 1929: Pitch darkness was among the bankers’ stoutest allies.
http://www.nytimes.com/2011/11/27/business/slipping-backward-on-transparency-for-swaps.html?_r=1&ref=business
More from New York
http://www.irishcentral.com/news/Suffering-of-Irish-people-outrageous-says-NY-Times-Paul-Krugman–134583318.html