Archive for November, 2012

Comparative Analysis of Adjustment in the Euro Area

By Philip Lane

Friday, November 30th, 2012

This FT article provides an overview, based on two new studies

- Allianz study here

- Berenberg Bank / Lisbon Council study here

Quarterly National Household Survey

By Seamus Coffey

Thursday, November 29th, 2012

The Q3 2012 QNHS has been released by the CSO.

This is the first release to incorporate the results of Census 2011.  The population estimate used by the CSO at the time of the census was almost 100,000 lower than the figure provided by the census.  An information notice gives the impact this revised population estimate has on the QNHS results.

Output and Value Added by Activity, 2002-2009

By Philip Lane

Thursday, November 29th, 2012

The new CSO report is really striking in terms of the boom and bust dynamics at the sectoral level - it is here.

Blueprint for a deep and genuine economic and monetary union

By Philip Lane

Thursday, November 29th, 2012

The European Commission’s blueprint is here.

Report on SME Credit Demand

By Petra Gerlach

Wednesday, November 28th, 2012

The Department of Finance has published a third Report on the Demand for Credit by SMEs here. The report covers the period April to September 2012. The main findings are that

-  39% of SMEs sought bank finance in the report period, a one percentage point increase from the report half a year ago

-  56% of formal finance applications were approved fully and 4% partially; 19% were declined, and 21% remained pending

- Almost half of all SMEs believe that banks do currently not lend to SMEs in Ireland

7% of SMEs have not applied for credit because of this

- The view that banks do not lend is mainly based on media reports and the experience of business peers, not on own personal experience.

Central Bank: 2012 Macro-Financial Review

By Philip Lane

Wednesday, November 28th, 2012

available here.

Louis Smith R.I.P.

By Cormac Ó Gráda

Tuesday, November 27th, 2012

Word just in of the death of Professor Louis Smith, formerly of UCD.

Students and colleagues will remember Louis with affection and admiration. As a teacher he was bright and enthusiastic: sometimes impenetrable, sometimes absent-minded, but always very engaging.  As a colleague he was obliging and cheerful.

Louis was an able and original commentator on policy issues. He was passionate about agricultural cooperatives and about ‘Europe’.  His early and influential role in the debate about the link with sterling should not be forgotten.

His funeral takes place in Donnybrook church tomorrow at 10 a.m.

Sympathies to his family.  Reminiscences about Louis welcome: ni bheidh a leitheid aris ann, cinnte!

Eurogroup Statement

By Seamus Coffey

Tuesday, November 27th, 2012

The statement from last night’s Eurogroup meeting is here.

The specific measures to be introduced now will attract some attention.

  • A lowering by 100bps in the interest rates on the Greek Loan Facility.
  • A lowering by 10bps in the guarantee paid by Greece for EFSF loans.
  • Term extension and interest deferral on EFSF loans
  • Recycling of SMP profits back to Greece.

Some assistance will also be provided to allow Greece to undertake some form of debt buyback.  More significant is the provision that:

Euro area Member States will consider further measures and assistance,…,in order to ensure that by the end of the IMF programme in 2016, Greece can reach a debt-to-GDP ratio in that year of 175% and in 2020 of 124% of GDP, and in 2022 a debt-to-GDP ratio substantially lower than 110%

The measures announced last night are, on their own, unlikely to push Greek debt down to 124% of GDP by 2020.  Even if the primary surplus set out as being a condition for the above commitment is achieved, the necessary nominal growth rates to reduce the debt ratio to the revised targets may not. 

Further measures will be necessary to ensure Greek debt sustainability, but the announced intention to do so means the odds on a Grexit will be lower after last night.

International Mobility of Central Bank Governors

By Philip Lane

Monday, November 26th, 2012

Report here.

Deleveraging in Ireland

By Philip Lane

Sunday, November 25th, 2012

The FT provides an update here.   (Also more on Franklin Templeton here.) (Also a different dimension to Paddy McKillen here.)

Local Authority Mortgages

By Seamus Coffey

Friday, November 23rd, 2012

One discussion point from the Financial Regulator’s mortgage arrears statistics is the performance of loans in the state-owned banks (AIB/EBS, PTSB & INBS) which between them have about 50% of the owner-occupier residential mortgage market in Ireland.

There is a small additional group of mortgages controlled by the state and these are local authority mortgages which are provided to eligible people who may not be able to get a mortgage from a bank.  These mortgages are are not included in the FR’s arrears statistics.

At the end of 2011 there was €1,425 million outstanding on these loans which is around 1.25% of the total (see page 64 of the 2011 HFA Annual Report).   A breakdown of the amount by local authority at the end of 2010 is in Appendix Six on page 39 of this audit report.

There are around 22,550 local authority mortgages giving an average balance of around €60,000.  The interest rate charged on these loans is currently 2.75%.

At the end of Q2 2012, 6,280 (28%) of these loans were in arrears of 90 days or more.  This compares to 11% for mortgages in financial institutions.  The pattern of local authority mortgage arrears in 2010 and 2011 can be seen here.

The aggregate balance on the loans in arrears was €204 million in Q3 2011. In 2011, the amount collected at the end of the year as a percentage of the amount due was 71% (see slide 13) but this includes accrued arrears at the start of the year. Excluding accrued arrears, there was a shortfall of around €9.3 million on the repayments of around €100 million due in 2011.

At the end of 2011 the total arrears owing on local authority mortgages was around €33 million.  The shortfall has to be made up by the local authorities to meet their repayment commitments to the Housing Finance Agency who provide the finance for the loans.  Appendix Five on page 37 shows the collection rates of housing loan repayments by local authority in 2010.

The Department of the Environment has produced A Guide of Local Authorities – Dealing With Mortgage Arrears which outlines the steps that should be taken when a mortgage falls into arrears.  Page 15 has a definition of an “unsustainable mortgage”.

A loan may be deemed unsustainable if the full interest is not serviceable on a long term basis.  Short term arrangements may allow for partial payments on loans, even where the full interest is not being met, for a period of up to 36 months cumulatively. If the  balance on the loan is increasing rather than remaining static or decreasing, after a period of incremental short term extensions exceeding 36 months, then the loan appears to be underperforming and might be considered unsustainable.

This is put in terms of the balance increasing which is a better measure of mortgage distress than account arrears.

Some debt issues

By Seamus Coffey

Wednesday, November 21st, 2012

The past week or so has seen a bit of a bounce in debt issuing from Ireland.   The NTMA’s 3-month Treasury Bill programme has almost become routine.  The results of last week’s auction saw a bid-to-cover ratio of more than four and a yield of 0.55%.

The semi-state utilities engaged in longer-term issues with bids for ESB’s 7-year bond covering the €500 million offered last week 12 times while Bord Gais’s €500 million 5-year bond issued today was covered 13 times.

Also last week, Bank of Ireland issued a €1 billion covered bond on offers of €2.5 billion after initially announcing that they would be seeking €0.5 billion.  The bond was given a Baa3 rating by Moody’s, one notch above the Ba1 non-investment-grade rating assigned by Moody’s to the bonds of the Irish government.

Both Moody’s and Fitch issued statements about Irish government bonds last week (covered here) with the only minor change being a change in outlook by Fitch from negative to stable.  Today, there were some largish price moves in Irish government bonds, particularly at the long end. 

The daily report from the Irish Stock Exchange (archived copy) shows that the price of all bar one of the bonds from 2017 on rose by at least 0.8%, with both the 2020 bonds rising by more than 1.0%.  The yield curve has a fairly standard shape and all the yields out to 2025 are below 5%.  The five-year yield from the October 2017 bond is around 3.1%.

Interpret these issues as you wish.

Globalisation and Industrial Competitiveness

By Iulia Siedschlag

Tuesday, November 20th, 2012

The European Competitiveness Report 2012 provides empirical evidence about industrial competitiveness in the post-crisis recession in Ireland and the other EU countries as well as EU’s neighbouring countries. A presentation of the report can be found here.

Some Trends in Employment

By Seamus Coffey

Monday, November 19th, 2012

The 1.783 million people working in Ireland can be crudely broken into the following three categories:

  • Private-sector employees (1,112,000)
  • Self-employed (290,000)
  • Public-sector (including semi-states) employees (381,000)

Of the self-employed, 88,000 have employees (who are included in the first category).  Within the public sector, there are 330,000 employees in the public service and 51,000 employees in the semi-state bodies.  A breakdown of employees by category which are full-time and part-time would be useful but is not available.

These figures are taken from the most recent release of Quarterly National Household Survey (QNHS) , though the employee figures used in Table A3 of the release are actually based on the results of the Earnings and Labour Costs Survey (ELCS).

Graphs showing the trend of the three categories since 2008 (the start of the ELCS dataset) are below the fold.

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Banking Union: Ireland vs. Nevada, an illustration of the importance of an integrated banking system

By Philip Lane

Monday, November 19th, 2012

Daniel Gros compares Ireland and Nevada here.

Adjustment in the euro zone: More and more and not enough

By Philip Lane

Monday, November 19th, 2012

The Economist has a special briefing on how adjustment is proceeding inside the euro area - it is here.

Bond investor takes big punt on Ireland

By Philip Lane

Monday, November 19th, 2012

The FT provides an update on Franklin Templeton’s strategy here.

Renewing the ELG

By John McHale

Sunday, November 18th, 2012

The Sunday Business Post’s Money section has an article on the possibility of not renewing the Eligible Liabilities Guarantee (ELG) when it expires at the end of the year.   (A FAQ on the guarantee is available here.)   The article focuses on arguments made by Wilbur Ross for not renewing the guarantee. 

Ross, who owns 7.7 percent of Ireland’s only privately-controlled bank and sits on its Board, told The Sunday Business Post that the extended liabilities guarantee (ELG) was “severely impeding the recovery of the banks” because of its high cost and should be scrapped.

“There is no reason for [the] government to extend the ELG,” he said.   “Ending [it] will be viewed favourably by the markets as a major step toward the normalisation of Ireland’s financial system and will facilitate the sovereign’s access to international credit markets.”

Ross said that the low interest rate environment, combined with the high cost of the ELG, which will cost Bank of Ireland €400 million this year, was keeping the banking system from returning to profitability.

An aspect worth considering is that, even if the explicit guarantee is not renewed, past experience suggests that the liabilities in question will be implicitly guaranteed at zero cost to an 85 percent privately owned bank.

Ireland lifts eurozone debt crisis gloom

By Philip Lane

Friday, November 16th, 2012

The FT provides an overview of the situation here.

The Swords is mightier

By Richard Tol

Friday, November 16th, 2012

The saga of Pat Swords v The World continues to unfold. Not content with having the UN-ECE Compliance Committee of the Aarhus Convention declare that EU renewables policy violates procedural obligations with regard to sound policy making, Pat has now sought, and found, a legal review of the Irish implementation of that policy, specifically, the National Renewable Energy Action Plan and the REFIT scheme. The case will be before the High Court on January 15.

To be continued.

ECB: Inflation differentials in the euro area during the last decade

By Philip Lane

Friday, November 16th, 2012

The November monthly bulletin features this article.

Ratings Outlooks

By Seamus Coffey

Wednesday, November 14th, 2012

While of no real significance there have been statements today from both Fitch and Moody’s which merit at least a reading.

First out were Moody’s with their annual credit report.  The press release is here.  There is no ratings or outlook action with this report but in a phone interview with a company analyst it is reported that he said the company is monitoring its negative outlook on Ireland.  Moody’s also removed an explicit PSI warning. 

Today’s release was not going to change Ireland’s rating with Moody’s which is Ba1 (‘junk’ status) with negative outlook.  Paddy Power are offering a “novelty bet" on Ireland’s credit rating with Moody’s.  As recently as August the odds were 9/1 that there would be a ratings improvement by the end of the year.  In my opinion a ratings improvement from Moody’s remains unlikely but the odds on it are now in to even money.

This evening Fitch did announce a ratings action with the negative outlook on Irish sovereign bonds improved to stable.  Their statement is here.  Ireland is at BBB+ with Fitch, three notches above ‘junk’ status.  The revision of the outlook is because they judge “that the risks surrounding the adjustment path have narrowed and become more balanced”.

The statement also says that it is not their expectation that there will be “a substantial cut in the public debt through an EU agreement to share the burden on legacy costs of bank recapitalisation”.

Medium Term Fiscal Statement

By Seamus Coffey

Wednesday, November 14th, 2012

The MTFS from the Department of Finance can be read here.

Paul Hunt on rent-seeking and regulation in gas and power

By Richard Tol

Wednesday, November 14th, 2012

Paul’s talk at the DEW in Galway is now available. It is worth a read for all interested in energy markets, and for all who argue, wrongly, that regulatory reform is not a priority for stimulating economic growth.

Paul got limited coverage in the media: Independent; Times

Debating the “Default Option”

By John McHale

Wednesday, November 14th, 2012

As linked to by Philip below, Ashoka Mody reignites debate on the default option.   His views must be taken seriously given his vast experience on economic crises.   But it is important to put his proposals in context.   They are largely aimed at European policy makers.   A large private/official-sector debt write off, followed by a commitment to provide necessary funding support as countries moved in a phased way to the low debt/balanced budget model common for states in the US, could well be a route out of the current crisis.

The problem is that this option is not on offer.   In these circumstances, the more a default option is kept on the table as a possible future choice, the harder it will be to regain creditworthiness.   Who would want to buy Irish bonds now if they stand a significant prospect of facing write-downs on their investments in the future?    To the extent that expectations of default remain high, the concern is that it would be less than the orderly/supported model described by Ashoka.   The evidence from past defaults is that they come with large output costs.   The fear of the crisis entering a new virulent phase would undermine confidence and growth in the present, making it harder to stabilise the vicious feedback loops between the banking, fiscal and real sectors. 

An implication is that it is important to move decisively in one direction or the other.   Either get on with the type of solution proposed in the article or take the default option off the table to the maximum extent possible.   With the first option not actually available, the Irish government have moved in the second direction – with reasonably good results in terms of the restoration of creditworthiness.    This option can only work with a strengthened institutional structure for EMU – Patrick Honohan’s euro 2.0.    A core component must be a strengthened lender of last resort for sovereigns backed by fiscal rules that limit risk and moral hazard.   The ECB’s OMT programme – however rationalised by the ECB itself – is an important step in this direction, but more needs to be done.

Time for euro zone to revisit debt default option

By Philip Lane

Wednesday, November 14th, 2012

Princeton’s Ashoka Mody (former mission chief for Ireland at IMF) has an op-ed in the Irish Times - it is here.

A Visual Representation of the MIP

By Seamus Coffey

Tuesday, November 13th, 2012

Economonitor have put together some charts using the EU’s new Macroeconomic Imbalance Procedure which was introduced as part of last year’s ‘Six Pack’.  The charts are a little busy but the relative imbalances across the 11 economies covered are pretty clear.

 

Individual charts are produced for each of the countries.

It is not clear what impact the MIP will have.  Following the first alert mechanism report issued in February, in-depth reviews were issued for 12 countries over the summer (‘programme’ countries are excluded from the MIP).  The country reviews are at the bottom of this page

The conclusion of the reviews for Belgium, Bulgaria, Denmark,  Finland, Sweden and the UK was:

This in-depth review concludes that [country] is experiencing macroeconomic imbalances, which are not excessive but need to be addressed.

For France, Italy, Hungary and Slovenia the conclusion was:

This in-depth review concludes that [country] is experiencing serious macroeconomic imbalances, which are not excessive but need to be addressed.

While for Spain and Cyprus the conclusion was:

This in-depth review concludes that [country] is experiencing very serious macroeconomic imbalances, which are not excessive but need to be urgently addressed.

In no case was a formal Excessive Imbalance Procedure initiated so there is no example to indicate how this will look in practice.  Of course, 21 Member States remain subject to an Excessive Deficit Procedure.  Earlier this year Karl Whelan wrote a useful paper discussing, among other things, the imbalance scorecard devised for the MIP.

Address by Governor Patrick Honohan to the David Hume Institute and the Scottish Institute for Research in Economics, Edinburgh

By Philip Lane

Tuesday, November 13th, 2012

Text and slides available here.

Some insights from the ISAs

By Seamus Coffey

Monday, November 12th, 2012

Last week’s release of the 2011 Institutional Sector Accounts has not attracted much attention.  The thread on it only generated one (seemingly misplaced) reply.  The addition this year of consolidated tabled for the financial accounts is useful and gives this table of debt liabilities for the household, government and NFC sectors.

The impact of netting out intra-sectoral balances is small on the household and government sectors.  The consolidation nets out about €45 billion of (domestic intra-company) liabilities in the NFC sector.  All liabilities of the NFC sector with the rest of the world are still included so there is still a significant impact of MNCs in the 168% of GDP figure given for the sector.

One notable feature of the loan liabilities of the household sector is the decline that has occurred in the past three years.

In 2011, the net financial wealth of the household sector increased by €3 billion to €120 billion, driven mainly by the reduction in liabilities.  The increases in the debts of the government sector go without saying. 

The non-financial accounts are equally useful.  The government accounts give a cash-based view of the general government sector which is more complete in scope than the Exchequer Accounts.  The general government accounts used for the EDP are accrual-based.

Below the fold are the current accounts of the general government sector since 2007.  The value of output figure used is based on the inputs used rather than prices as most government output is non-market.

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Box 1.5: Stand-Alone PDF and Data Spreadsheet

By Philip Lane

Sunday, November 11th, 2012

The European Commission has now released a stand-alone PDF of Box 1.5 - it is here.

It has also put the dataset online - it is here.