EC Autumn 2013 Review

This post was written by Seamus Coffey

The latest European Commission staff review of the EU/IMF programme is here.

UPDATE: Here is one chart from the review.  There are many others.

25 Responses to “EC Autumn 2013 Review”

  1. Gavin Kostick Says:

    I’ve obviously been on the blog too long as I’m starting to enjoy the look of a nice chart.

    Continuing on the ‘not Iceland’ theme, here’s the Central Bank of Iceland’s figures. Chart on P.11 of Troika document shows banking blowout was very similar.

    http://www.cb.is/publications-news-and-speeches/publications/economic-indicators/

    And latest:

    http://www.cb.is/library/Skr%C3%A1arsafn—EN/Economic-Indicators/EI-2013/EI_October%202013.pdf

    Hmm, let’s see now, at a glance, Iceland:

    Inflation spikes to 18% but is now handily around 4%, the new normal?
    Imports and exports part company at first, imports down, exports up before roughly rejoining.
    Real exchange rate plummets then stabilises.
    Unemployment spikes from 1% to 9% and falls to 4-5%, trending down (long term unemployed 2%).
    Net Emigration spikes in first year and a bit of crisis then returns to level, then just about net immigration.
    Massive holes open up in the public finance, but balance seems more or less restored.
    General Government debt tops out at 100% GDP.
    Bond market returned to (if that’s a good thing), 2010.
    Various interest rates given but clustering around 5-6%, with rick premia on Icelandic treasury about 1% over 5 year Euro credit spread.
    GDP above 0 since 2011.

  2. Shay Begorrah Says:

    @Gavin Kostick

    Thank God our membership of the Eurozone and commitment to the credibility of the financial sector stopped us from becoming Iceland, eh? Why this weekend we will be exiting the bailout with only a piffling 70 billion or so to pay back to the creditor countries, 25% youth unemployment (of our remaining youth) and growth strangling ordoliberal fiscal orthodoxy embedded in our constitution. A close escape from the burdens of sovereignty and low unemployment there! Phew.

    Another way in which Ireland is superior to poor benighted Iceland is that we refuse to subject our senior bankers to the vagaries of the criminal justice system.

    Icelandic bank pair jailed for five years

    Bankers are decent law aware, if not abiding, people like us, not like benefit scroungers or pigeon eaters or the poor (who are not starving and therefore hardly qualify as poor anyway).

    Thank God reason prevailed in Ireland and we buckled under and did our bit for the banks and EMU. Well done to everyone in the establishment, particularly in the economics community, who persuaded us not to do anything radical.

  3. grumpy Says:

    Those not used to following sovereign bond markets, and who haven’t now got bored with them, should maybe study that chart carefully.

    So far as spreads are concerned, it tells you why there is no appetite to sell off Irish bonds.

    Remember, as a bond investor, you have almost no interest in the economic upside for an issuer - except to the extent that it would further reduce risk of default, or perceptions of same being reflected in yields. Your interest is more akin to that of someone selling a put option in the country (to open).

    Once it doesn’t look like you might default, bond investors largely loose interest in the details of what you are doing.

    The market is convinced that the dark blue line is quite unlikely. The view is that GDP downgrades will result in a light blue line response by the Irish government.

    Most investors think that the dark blue scenario is the only one they need to price in to spreads. Some think the light blue scenario might not work out as planned.

    The market spread really is a reflection of how likely the dark blue scenario is, plus a small addition for the possibility of the much more likely ‘further fiscal measures’ being more self-defeating than assumed.

    I really doubt that when journalists or politicians use expressions like “the markets now have confidence in Ireland” they really understand the asymmetric nature of bond investors’ interest.

  4. gadge Says:

    The failure to make any “genuine progress” on the Legal Services Bill is a disgrace. The government continues to pay individual lawyers fees of 300k to 400k per annum, and there is no meaningful tendering process in place.

  5. David O'Donnell Says:

    Converting to GNP, I see a path-dependent path to nowhere.

  6. David O'Donnell Says:

    Tmro can be confusing - rem the expressions on the faces of Megan Greene, Colm McCarthy and Michael Taft in Primetime as Johnnie Fitzgerald staked his claim to a bench position in the green jersey stakes - priceless!

  7. MickeyHickey Says:

    The sentence that looms as the most important of them all in my eyes is “Unemployment has declined while the banking sector has more recently started to address in earnest the large stock of non-performing loans.”

    We are on the open market and we are now “starting to address in earnest” the elephant that started it all. Where has that elephant been hiding from the DoF and CBI since 2009.

    Are there now delusions that high EZ growth and higher inflation in Ireland will pull down the value of the “large stock of non-performing loans” relative to GDP and Gov’t revenue.

  8. Joseph Ryan Says:

    What was the EC staff baseline for debt/gdp back in 2010, when the took over?
    They were the experts!

    John Fitzgerald is right to suggest building 20000 houses.
    Is it better to see rents rise even further and the resultant rental increase being used to pay down private debt, and transfer wealth fom tenants to landlords., or is it better to build houses, built by employing people, and keep the benefit of reduced rents in the pockets of people who work for a living.
    Well done, John Fitzgerald.

  9. MickeyHickey Says:

    How we yearn for the durty thurties.

    By Nicholas Crafts, Professor of Economics and Economic History at the University of Warwick and CEPR. Originally published at VoxEU

    http://www.voxeu.org/article/eurozone-if-only-it-were-1930s

  10. Paul W Says:

    @Grumpy
    Interesting as always. Do the investors understand GDP versus GNP in the Irish equation? If GDP rules the roost, are they mis pricing the risk?

  11. Paul W Says:

    @Seamus
    The diagram squares with the IMF diagram (top page 12) from December 2012. However, the forward view is clearly very different? Who is right?

    http://www.imf.org/external/pubs/ft/scr/2012/cr12336.pdf

  12. MickeyHickey Says:

    In Italy the Pitchfork (Forcani) protests reach the major Northern cities. These are farmers and truck drivers not youths which means it could get very serious and extremely difficult to control. Shoot a few of them and the country will be paralysed.

    Brussels and Frankfurt is about to get the wake up call that cannot be ignored.

    http://www.affaritaliani.it/cronache/forconi-ferro-faremo-un-presidio-permanente-e-niente-marcia.html

    http://www.lastampa.it/2013/12/13/italia/cronache/ecco-lidentikit-del-forcone-in-rete-un-trentaseienne-cresciuto-al-sud-che-mischia-i-posse-e-almirante-iOuM0w2VcrB3wmyOpzsqLJ/pagina.html

  13. MickeyHickey Says:

    Eric Chaney AXA Group, Head of Research
    Blue Book
    Information rich global. pdf.

    http://www.axa-im.com/en/eric-chaney-blue-book/-/news/ec-blue-book-november-2013/41825838/maximized/oSE5?redirect=http%3A%2F%2Fwww.axa-im.com%2Fen%2Feric-chaney-blue-book%3Fp_p_id%3D101_INSTANCE_oSE5%26p_p_lifecycle%3D0%26p_p_state%3Dnormal%26p_p_mode%3Dview%26p_p_col_id%3Dcentercol%26p_p_col_pos%3D2%26p_p_col_count%3D3

  14. Seamus Coffey Says:

    @ Joseph,

    RE: The EC Basline Debt Projection at the start of the programme.

    The first EC Review was Spring 2011. The projection in that was the 2014 Debt/GDP would be 119% (page 35). The figure in the current review is 121%.

    There have changes in the composition of the debt (and cash balances which could be offset are far higher now) but in overall terms the figures are the same.

    @ Paul W

    RE: Differences with the IMF

    I’m not sure I see too many. Both have fairly conservative baseline scenarios with the debt ratio falling to 110% of GDP by 2018. They do include different stress scenarios based on contingent liability shocks, lower growth, fiscal slippage etc. but have the base scenarios that are very similar.

  15. seafoid Says:

    @Mickey
    There is more of that pitchfork stuff happening in Brittany over a plan to impose a tax on heavy goods traffic.

  16. OMF Says:

    I seem to recall charts very similar to this were trotted out three or four years ago. Yet here we are at 200 billion plus in debt. I think the only question remaining is, not when this will implode, but how high it will go before this happens.

    And who’s paying for all this?

  17. Paul W Says:

    @OMF
    Point taken…..again, we were told a couple of years ago that Ireland’s debt GDP would top out at 120pc…..however, as long as the crs keep the interest rates low, one can probably stretch things a good bit further.

  18. seafoid Says:

    Anyone hazard a guess as to how long it’ll take the debt to fall below 60%? 100% + will be verra expensive if interest rates rise from the floor.

  19. Paul W Says:

    The assumption of course is that low interest rates will continue to be the norm. However, it remains to be seen if the markets will play ball.

  20. Joseph Ryan Says:

    @Seamus

    “The first EC Review was Spring 2011. The projection in that was the 2014 Debt/GDP would be 119% (page 35). The figure in the current review is 121%.”

    So, we are within a few % points of where our betters planned us to be!
    [To give credit, it was not bad in forecasting terms to be that close after three years. The reduction of the penal interest rates from 'moral hazard heights' would also have helped. ]

    But I find it interesting that adherence to 60% SGP target, came a poor second with the planners, when set against their wish to have private banking debts paid from the public purse. It was no contest.

  21. Paul W Says:

    How real?

    http://www.irishtimes.com/business/economy/ibec-predicts-2-8-economic-growth-next-year-1.1628881

    Some of the numerics we are seeing post-troika are already somewhat ‘fantastic’…..is this Irish spin?

    Having said that, there is an increase in economic activity in Dublin in particular…….packed pubs and restaurants, etc.

  22. Gavin Kostick Says:

    @ Joseph Ryan

    “The first EC Review was Spring 2011. The projection in that was the 2014 Debt/GDP would be 119% (page 35). The figure in the current review is 121%.”

    A way to look at that is that the debt ratio aimed at from the start was the most possible the Irish sovereign could/would pay without defaulting.

  23. paul quigley Says:

    It’s true. Things are really hopping in Dublin 2. The mere Irish are still outside the Pale though.

  24. Marc E. Says:

    Anybody else find that chart a bit worrying? Growth projections tend to be overoptimistic and if that’s how it turns out then it’s pretty obvious the government will see no other solution to high public debt than even more austerity.

  25. michael burke Says:

    Strange to relate but the staff assessment shows the deficit increasing by 1.8% of GDP by 2015 (to 4.8% from 3%) if GDP growth is 1% lower (p.60, just above the chart shown).

    This looks like a general multiplier of 1.8:1.

    But that cannot be true, as everyone knows multipliers have been banished from Ireland.

Leave a Reply