Terrific article by Mark Mazower here.
Archive for February, 2013
By Philip LaneThursday, February 28th, 2013
This Munich speech by Mario Draghi is interesting – here.
There is a short article in today’s Financial Times reporting that the forecast for mergers and acquisitions activity in Ireland in 2013 looks strong. It is tied to a report from the law firm William Fry. High M&A activity is statistically a strongly pro-cyclical variate (but I believe normally more of a lagging indicator rather than a leading indicator).
This morning Eurostat published a news release with the 2011 update of the at-risk-of-poverty-or-social-exclusion statistics for children. The figures come from this earlier short report. The data for Ireland is from 2010 and the headline figure for Ireland immediately stands out in this sentence from the release.
In 2011, the highest shares of those aged less than 18 who were at risk of poverty or social exclusion were registered in Bulgaria (52%), Romania (49%), Latvia (44%), Hungary (40%) and Ireland (38% in 2010), and the lowest in Sweden, Denmark and Finland (all 16%), followed by Slovenia (17%), the Netherlands (18%) and Austria (19%).
The next countries with rates lower than Ireland’s are Lithuania (33%), Italy (32%), Spain (31%), Greece (30%) and Poland (30%). The EU average is 27%.
What is measured is persons who are in at least one of the following categories:
- at risk of poverty (below 60% of median equivalised income after transfers), or
- severely materially deprived (cannot afford four items from a list of nine), or
- living in households with very-low work intensity (adults working less than 20% of work potential).
A release a couple of weeks ago from the CSO showed that the at-risk-of-poverty rate for those aged under 18 in Ireland was 18.6% in 2011. The EU27 average for 2011 was 20.6%. As shown above adding the other two categories (material deprivation and work intensity) gives a figure of 27% for the EU27 and 38% for Ireland.
It is a slight difficulty that a revision of the 2010 data for Ireland has meant a delay in the publication of the granular details. The headline category places Ireland as the fifth-worst in the EU and understanding why that is the case is an important question.
Mario Monti has done Europe’s voters a huge service. It would have been easy for him to remain aloof during this election; by standing for election he allowed Italians to directly express their opinion on the EU’s current macroeconomic policy mix. The results are pretty conclusive: current policies have no democratic legitimacy, at least in Italy.
We all remember Jean-Claude Juncker’s statement that “We all know what to do, but we don’t know how to get re-elected once we have done it”. He got it half right: they certainly don’t know how to get re-elected. But it is also clear that they really don’t know what to do about the economy either. And this represents a huge problem for the European project, since by pinning their colours so firmly to the mast of an incoherent and destructive macroeconomic policy mix, Europe’s leaders risk doing huge damage to that project. Indeed, the damage is already occurring.
It would be nice to think that these leaders would take seriously pleas by people like Karl for a saner approach to macroeconomic policy. The evidence since September, however, is that they will sit on their hands unless forced to do otherwise by the markets: the risk of financial crisis, not the reality of peripheral unemployment crises, is what grabs their attention. Another reason to welcome the Italian vote, perhaps.
Update: Paul Krugman has a very similar reaction here.
Reaping the Benefits of Globalisation: What are the Opportunities and Challenges for Europe and Ireland?
This Conference, jointly organised with the European Commission, is an associated event of the Irish Presidency of the Council of the EU. It will present and discuss the main findings of the 2012 edition of the European Competitiveness Report as well as recent related empirical evidence and their implications for industrial and innovation policies in Europe and Ireland. The Conference Programme and more information are available here.
An inquiry into the circumstances surrounding the 2008 banking guarantee is to be held. Judging by the previous inquiries we’ve had, I wouldn’t expect too much in the way of actual action, though previous inquiries (Moriarty, Morris, Mahon, Planning as examples) have produced lots of paper and lawyers’ fees as by products.
What should the scope of this inquiry be? And what would commenters like asked of the people likely to be involved in such an inquiry?
You might have thought that the disastrous but wholly unsurprising eurozone GDP numbers indicate that the bloc is in a bad way, and will continue to be so until the current macroeconomic policy mix is jettisoned.
The current situation can be summarised like this: we have disappointing hard data from the end of last year, some more encouraging soft data in the recent past and growing investor confidence in the future.
Thank goodness for that.
The Commission have released their updated economic forecasts for 2013 and 2014. With an estimated –0.6% contraction in 2012 the eurozone is forecast to contract by a further –0.3% in 2013.
Ireland is set to be the third fastest growing eurozone country with the 1.1% growth forecast behind only Estonia (3.0%) and Malta (1.5%). This is not a reflection of any strong performance in Ireland’s case. Inflation for the eurozone at 1.8% is “close to but below 2%” though.
The public balance for the eurozone is forecast to fall from -3.5% of GDP last year to –2.8% of GDP this year. No eurozone country is expected to run a surplus and at –7.3% of GDP Ireland will have the largest public deficit in the eurozone (the UK at –7.4% of GDP is expected to have the largest deficit in the EU27).
By Philip LaneThursday, February 21st, 2013
The SMP data have been released – here. ECB holds euro 14.2 billion of Irish bonds (at face value).
Dealing with Private Debt Distress in the Wake of the European Financial Crisis A Review of the Economics and Legal Toolbox
By Philip LaneThursday, February 21st, 2013
New IMF WP here.
By David MaddenThursday, February 21st, 2013
Those of you interested in long run trends in income inequality in Ireland might like to take a look at this piece from the magazine “Significance”. It uses the difference between incomes of the top 10% less the incomes of the top 1% as its summary measure for inequality. It takes a pure time series approach and suggests that for the last 40 years or so there is a 12 year cycle in inequality with a very slight upward trend.
Warning: As John McHale might put it, it is “wonkish”!
On behalf of the EUROFRAME group of research institutes, the ESRI today published a report entitled “Economic Assessment of the Euro Area”.
Among the findings contained in the report are the following:
· As a result of relatively weak external demand, continuing financial uncertainty and the contractionary stance of fiscal policy, output fell in the Euro Area in 2012 (-0.5 per cent). Over the course of 2012 there was a slowdown in some key economies, which were previously contributing much of the growth. This slowdown has carryover effects into 2013.
· Even though we anticipate a recovery in confidence in some major economies over the course of this year, the outcome for the Euro Area as a whole is still likely to be a further limited fall in GDP in 2013 of 0.3 per cent. Weak external demand will not be enough to compensate for the fall in domestic demand.
· For 2014, a recovery in domestic demand should see a return to significant growth in GDP of around 1.3 per cent. However, this forecast must be considered in the light of the continuing vulnerability to financial shocks of a number of the Euro Area member states.
· This vulnerability of countries in financial distress is being addressed through a continuing major fiscal adjustment. However, the fiscal adjustment under way across other members of the Area is also having a substantial negative effect on growth, particularly in the crisis countries. Without this fiscal adjustment the Euro Area would be looking to growth this year at around 1½ per cent and next year at approximately 2 per cent.
Strategic arrears denotes the amount of funds voluntarily not paid on mortgages by homeowners and buy-to-let investors who have the ability to meet the payments but choose not to do so. The available funds are spent on current (non-necessity) consumption or redirected elsewhere, outside the control of the mortgage-holding bank. Distressed arrears are the “can’t pay” component of mortgage arrears and strategic arrears are the “won’t pay” component. (more…)
The statement from the Minister for Finance is here.
By Philip LaneTuesday, February 19th, 2013
The WSJ carries an insightful Q+A with the Polish central bank governor here.
By Richard TolTuesday, February 19th, 2013
The recently signed Memorandum of Understanding between Ireland and the UK on wind power has led to excited talk of tens of thousands of new jobs and billions in tax revenue and expert earnings. How realistic is that?
The Memorandum itself is silent on the implications of the deal. Pat Rabbitte and Ed Davey agreed to negotiate a treaty under the Renewables Directive. There are targets for renewables for all Member States of the European Union. Some countries will easily meet these targets, but most won’t. Under the Renewables Directive, Member States with a renewables surplus can sell this to the highest bidder or to an exclusive buyer.
Ireland may have more wind power than it needs. Ministers Rabbitte and Davey intend to enter into an exclusive agreement. This is obviously attractive to the UK. It is not obvious why Ireland would want this, rather than let the Brits compete against the French and the Poles. The first contours of the plan emerged shortly after the UK offered soft loans to bail-out Ireland’s public debt.
The UK cannot meet its renewables obligations. It cannot ignore these targets because the coalition is fragile enough and relations with Brussels already tense. Great Britain has plenty of wind, but people have effectively used the planning system to stop the erection of new wind turbines. So, the plan is to build turbines across the Irish Sea and transmit the power via a dedicated grid to England and Wales.
The Midlands are the leading candidate to build these new turbines. The plan is therefore known as Bogtec, after a similar plan involved the Sahara called Desertec. New wind capacity may amount to 5,000 MW. The current installed capacity is 1,700 MW.
Long distance power transmission is expensive. The East-West Interconnector cost 600 million euro. It has a capacity of 500 MW. Similar interconnectors elsewhere cost 200-300 million euro. Assuming that the Brits will not pay for gold-plating, the bill for the undersea cables alone would be 2-3 billion euro.
The delayed new North-South Interconnector will have a capacity of 400 MW. People are already up in arms against the planned pylons. Transmission from the Midlands to the sea will need 12 times as many pylons.
The potential benefits of Bogtec for Ireland are unclear. The more optimistic estimates aim to impress voters and politicians. Wind power does not generate a lot of employment. Estimates often ignore the jobs lost in thermal power generation, and the jobs destroyed by dearer electricity and higher taxes. There certainly are jobs in “sandwiches and concrete” as Pat Rabbitte put it. The more attractive jobs, however, are in manufacturing and in designing new turbines. There is overcapacity in wind turbine manufacturing, so companies would hesitate to build a new plant in Dublin Port – even if Ireland would suddenly discover its talent for mechanical engineering.
Export earnings depend on the selling price. The REFIT tariff in England and Wales is 25 c/KWh for small suppliers. The retail price of electricity is only 18 c/KWh, the wholesale price 6 c/KWh. If Irish wind farmers are paid the wholesale price minus the cost of transmission (2 c/KWh), revenue will be around €0.5 billion per year. Higher revenues will be at the mercy of the generosity of British subsidies.
If manufacturing jobs are in Denmark and revenues low, the government will not see much tax revenue. No royalties are paid on wind. Bogtec does not appear to be a great deal for Ireland.
Wind farms have real costs. They can spoil the landscape, affect wildlife, and disturb people living nearby. Do the benefits outweigh the costs?
There is not much information on Bogtec. The government has yet to publish an impact assessment, but it protests only meekly against the fantastical claims put forward by companies hoping for subsidies. Evidence is not the strongest point in Ireland’s energy policy. Paul Hunt has shown that energy policy in Ireland is run for the benefit of the state-owned energy companies and their workers, Minister Rabbitte disagreed. Mr Hunt’s analysis is based on data. Mr Rabbitte promised data, but has yet to deliver.
People that could be affected by the new turbines fear that planning regulations will not protect them. Indeed, Bogtec exploits the difference in planning between England and Ireland. The UN has ruled that Ireland’s National Renewable Energy Action Plan violates international planning standards. The High Court has agreed to hear this case in March.
Bogtec is a good deal for Britain.* Is it a good deal for Ireland too? We need to know before we proceed. Why is an exclusive deal with the UK better than selling to the highest bidder? Is Bogtec related to the bail-out? Will the Irish government or state-owned companies invest money in Bogtec? What is the expected rate of return? What if UK subsidies are less generous? Will planning properly protect households? In the past, the Irish government repeated sleepwalked into a bad deal. It is time to kick that habit.
* Well, it is a good deal for Britain given the corner it has painted itself into. Without political constraints, the best solution would be to ditch the Large Combustion Directive and replace coal with gas over a 15 year period or so.
By Philip LaneMonday, February 18th, 2013
This is an interesting blog entry by LBS – here.
By Philip LaneMonday, February 18th, 2013
Eamon Quinn reports in this WSJ article here.
Teams of economists have detected traces of bank-debt DNA in samples of Irish sovereign debt in portfolios all over Europe. Genuine Irish sovereign debt is believed safe for humans but bank debt is toxic. The economists believe that as much as 30% of all Irish sovereign debt is not genuine. The source of the contamination appears to be a premises in Frankfurt, Germany. The contamination dates from 2010, when a sovereign debt knackering plant was run from the premises by a Monsieur Trichet, a French national. It is alleged that he gathered up large quantities of toxic bank debt and mixed it up with genuine sovereign debt in the middle of the night, when nobody was looking.
There is no licensing or supervision of sovereign debt knackerers at European level and it is understood that the Frankfurt plant was staffed by people with no previous experience in the trade. Genuine debt from several other European countries was processed through the Frankfurt plant in 2010 and 2011 and may also have been infected. The plant, which claims to be the only sovereign debt processing facility in Europe, is now run by a Signor Draghi, an Italian. Monsieur Trichet has retired from sovereign debt knackering and has commenced a new career in the aviation business.
The Irish Department of Finance has been seeking to return the infected sovereign debt to the Frankfurt plant with a view to removing the toxic component. They are afraid that retailers might remove the sovereign debt from their shelves. Signor Draghi has promised to do his best, but one of his assistants, Herr Weidmann, a German, believes that the toxic bank debt is harmless, and that anyway nobody will notice. He is refusing to operate the decontamination equipment.
By Philip LaneFriday, February 15th, 2013
The ECB Monthly Bulletin has a useful review article here.
By Philip LaneFriday, February 15th, 2013
Meanwhile, to delink weak sovereigns from future residual banking sector risks, it will be important to undertake as soon as possible direct recapitalization of frail domestically systemic banks by the European Stability Mechanism (ESM). Failing, non-systemic banks should be wound down at least cost, and frail, domestically systemic banks should be resuscitated by shareholders, creditors, the sovereign, and the ESM.
ESM and crisis resolution. To be clear, the core purpose of ESM recapitalization of domestically systemic banks undergoing restructuring must be to remove the residual risk from the balance sheet of a sovereign whose finances are already strained. Unviable, non-systemic banks should be wound down at least cost; and systemic banks should be resuscitated by shareholders, creditors, the sovereign, and the ESM as the quintessential patient, deep-pocket investor. By delinking the sovereign from future unexpected losses on bank balance sheets, ESM direct recapitalization would remove future tail risks from the sovereign balance sheet; by ensuring that the banks have an owner of unquestioned financial strength, it would improve bank funding conditions. Thus, the ESM would attack the sovereign-bank link from both sides. In all cases, ESM involvement should be conditional upon a determination of systemic risk, which could be as basic as a finding that the bank is too large for the sovereign alone to wind up, given the state of public finances. A robust mechanism for the systemic risk determination will be critical (Box 4).
C. ESM direct recapitalization
44. Purpose. Mobilizing the ESM direct bank recapitalization tool in a forceful and timely manner is critical to developing a path out of the current crisis, and would complement other measures such as the ECB’s Outright Monetary Transactions. Recapitalization of frail, domestically- systemic banks in the euro area, including some migration to the ESM of existing public support to such banks, can help break the vicious circle between banks and sovereigns, reduce financial fragmentation, repair monetary transmission, prepare for banking union and, thus, help complete the economic and monetary union. To be sure, failing non-systemic banks should be resolved at least cost to national resolution funds and taxpayers. Equally, systemic banks benefiting from ESM support will need effective supervision and reform to be returned to full viability and private ownership, with state aid rules mandating formal restructuring plans. In some cases, the sovereign itself may need an adjustment program, providing an enabling environment for asset price recovery.
45. Approach. The mobilization of the ESM direct recapitalization tool should ensure frail, domestically systemic banks have adequate capital, access to funding at reasonable cost, and positive profits—in short, a viable business model. To this end, asset valuations are critical, as are the roles of shareholders, creditors, and the domestic sovereign in bearing costs.
- In principle, there would be significant advantages to breaking the vicious bank-sovereign circle if all capital needed to ensure a systemic bank was adequately capitalized was ultimately provided by a central fiscal authority. This would especially be the case if the scenario were to play out in a small jurisdiction, and even more so if it also had to internalize spillovers to others (that might result, e.g., if external creditors did not share in losses, for fear of triggering wider problems). More generally, pooling risk would provide protection ex ante to all, as any country could in theory find itself in a similar position in the future.
- In practice, although the Treaty establishing the ESM provides for the possibility of losses, such losses are not expected in its financial operations, including bank recapitalization. As a bank investor, the expectation is that the ESM must be careful to take balanced risk positions. It likely could not provide capital that a patient investor would not expect to recover over time. Thus, capital needed to bring a systemic bank out of insolvency (i.e., to bring it from negative to nonnegative equity) would in the first instance need to be provided by shareholders and creditors, and then by the national government, with any remaining shortfall covered by the ESM. Fortunately, there are unlikely to be large, insolvent banks currently in most economies.
- A balanced approach would prudently internalize the benefits of ESM capital support by looking ahead over a time horizon sufficiently long to realize the benefits. As a patient, deep-pocket investor, the ESM should take a long-term perspective in its investment decisions, cognizant that gross upfront crisis outlays tend to dwarf ultimate costs net of recoveries/capital gains and, in many instances, generate positive financial returns.
- Asset valuation. The implications for asset valuation, which determine the size of recapitalization needs as well as the investors’ up/downside risk, are twofold. First, asset values should be neither too high (which would imply mutualization through the back door)
could be given to allowing the ESM to set up and own AMCs. Possible roles for the ECB in supporting AMC operations could also be considered (although concerns regarding the prohibition on monetary financing may also be raised). ECB funding, if possible under its statute, would help smooth over time the warehousing and disposal of hard-to-value and hard-to-sell assets. An alternative would be for the ECB to support AMC operations indirectly by accepting ESM- guaranteed AMC bonds issued to banks in Eurosystem refinancing operations.
A BANKING UNION FOR THE EURO AREA
INTERNATIONAL MONETARY FUND 25
A BANKING UNION FOR THE EURO AREA
nor too low (in which case, the private sector could simply buy the assets, and there would be limited benefit to having an official investor). Second, because the ESM is a patient investor willing to give the banks the necessary time to restructure, assets should be priced at values that give due consideration of the positive effect of recapitalization on asset values. This includes not just the direct positive effect of recapitalization (including more favorable funding costs) and recovery, but also the removal of tail-risk events (see next bullet).
- Risk sharing. As a patient, deep-pocket investor, the ESM provides assurance to creditors that, in the event of a negative surprise, potential future capital needs can be met. In other words, while the ESM would not take on expected losses, it would shoulder the risk of unexpected losses going forward. This approach is in line with efficient risk sharing, wherein the patient investor bears the residual risk. In this regard, it should be noted that, conditional upon the ESM standing ready to take material losses in a downside scenario, the ESM would be unlikely to actually incur those losses, because the investment would minimize the risk of the adverse scenario occurring.
- No first loss guarantees. ESM investments should not benefit from loss protection provided by the sovereign. Such approaches would preserve sovereign-bank links, undermining the purpose of ESM direct recapitalization. But there should be safeguards for the ESM (e.g., built into the sales contract) against domestic policies that could directly harm the viability or profitability of the recipient banks (e.g., onerous taxes ex post or stiff resolution levies).
- Exit strategy. There should be incentives for an early ESM exit and private investor entry. The timing would be built around the EU-approved restructuring plans. Mandatory sunset clauses should be avoided as they could affect negotiating power ahead of the deadline.
- Adequate resources. Direct equity injections into banks could absorb significant amounts of ESM capital. It would be important to ensure that the ESM has adequate capital to not only allay any investor concerns about ESM credit quality, and thereby limit any rating implications, but also play its potential role of a common backstop for bank recapitalization.
46. Legacy assets. This term has been very controversial, reflecting concerns that creditor countries could be expected to put capital into unviable banks. This is not what is being suggested above. Rather, losses on impaired ―legacy‖ assets should be recognized through upfront provisioning and proper (long-term/post-crisis) valuation. It is not recommended that all impaired assets be segregated from the bank prior to ESM direct recapitalization and placed into recovery vehicles ultimately backed by the national taxpayer; such an approach would greatly reduce the effectiveness of the tool in addressing bank-sovereign links. Rather, bank health should be restored with shareholders, including the sovereign, bearing the expected loss of past excesses by being subjected to an independent valuation exercise consistent with the shared commitment to restore full viability after the restructuring period.
47. Further support. To further support balance sheet clean up, certain classes of legacy assets could be transferred to asset run-off vehicles such as asset management companies (AMCs) under ESM ownership. Expected losses would remain with the sovereign, given the terms of the foregoing recapitalization. But to limit further contingent fiscal liabilities and harness efficiencies, consideration
26 INTERNATIONAL MONETARY FUND
Agreement on burden sharing and ESM direct recapitalization must also not be delayed, lest the costs of the crisis keep mounting.
The CSO have published the headline figures for the 2011 SILC as well as revised figures for the 2010 SILC which can be found in the release.
There will be some interest in the revision of the 2010 figures but as the data by income decile will be published at a later date we are still unsure of the specific impact the revisions will have on this graph. The reason for the revision is given as:
In 2010 changes had been made to the processing of the data which resulted in an incorrect treatment in some cases of tax, income and pension contributions. This became clear when unusual trends in certain categories between 2010 and 2011 were further analysed.
On income inequality the revisions of the overall figures for 2010 include:
- Gini Coefficient: from 33.9 to 31.6
- Quintile Share: from 5.5 to 4.9
- At-risk-of-poverty rate: from 15.8% to 14.7%
These are all significant changes. The reported figures for 2011 indicate a drop in the Gino coefficient to 31.1 but a rise in the at-risk-of-poverty rate to 16.0%.