Boris Builds a Bridge

In a competitive field yesterday’s bridge across the English Channel, proposed in a solo run by foreign secretary Boris Johnson, must rank as the zaniest piece of headline-hunting since the Brexit referendum. The occasion was the visit to Britain of French president Emmanuel Macron, to meet Theresa May rather than Boris. May and Macron agreed an Anglo-French committee to consider future, but unspecified, collaborative projects, just the ticket to fill out an otherwise thin official communique from the two leaders. How to upstage?

The Boris Bridge worked a treat, reported deadpan as a news story by the BBC, prominent in the Daily Mail and the front-page lead in the Telegraph. The Express was able to offer a real scoop:

‘Emmanuel Macron has jumped at the chance of building a giant bridge linking the UK and the EU after Boris Johnson floated the idea during meetings yesterday, it has been revealed.’

Revealed to the Express only. Denials that the bridge is on any official agenda were duly issued on both sides of the channel and the wretched FT, read mainly by foreigners, did not mention the story at all.

A day later the BBC and the newspaper websites finally got round to phoning a few engineers, some of whom were unsporting enough to mention the last two great Anglo-French collaborations, Concorde, cost over-run 450%, and the channel tunnel, a snip at just 80% over budget.

The British media, including the BBC, have done an appalling job in covering the continuing Brexit circus.

On Dividing Large Numbers by Other Large Numbers

Conservative backbench MP Jacob Rees-Mogg, welcoming today’s Economists for Free Trade report predicting a bright post-Brexit future for the UK economy, remarked that the loss of the UK’s £9 billion per annum net contribution to the budget would render the EU ‘effectively insolvent’, according to the Guardian.

They should therefore be threatened with immediate suspension of the UK’s payments, forcing the EU to do a deal. Nine billion divided by the EU-27 population of 450 million works out at £20 per capita per annum.

Mr. Rees-Mogg has been described as a possible future leader of the Conservative party and has performed strongly in straw polls of party activists.

Is it OK if I lie down for a while?

The UK’s Brexit Bill and the European Investment Bank

The annex to the EU-27 negotiating position released yesterday in Brussels states clearly that the UK will be departing the European Investment Bank, in which it is a 16.1% shareholder.

The UK will expect to be credited with the value of these shares when the exit bill comes to be totted up. How much are they worth?

According to the latest accounts the EIB had net worth of €66.2 billion at end 2016, and has been posting annual profits around €2.7 billion. By Brexit Day (March 29th 2019) the UK share of net worth should be at least €11 billion, not a small amount in the context of the row about money which has already commenced.

There are complications: the EIB retains all earnings and does not pay dividends, so owning shares has not been much fun. But as a result it has a CET1 ratio of 26.4 and leverage under 9, as well as a AAA credit rating, high liquidity and ECB access. This will be the last European bank to go bust.

There is very substantial uncalled capital, in the UK’s case €35.7 billion. This is in effect an option against the shareholders and hence a contingent liability. However there seems to be very low likelihood that this capital will ever be called. If it were called from all shareholders leverage would drop towards 2!

When the UK is ejected, who buys the shares? It could most conveniently be the EIB itself, from reserves. The bank looks to be over-capitalised. Numerous other angles will arise – the EIB shares are a substantial item and have been overlooked.

GDP Carry-over Carry-on

If the economy expands through a new year by, say, 1% each quarter from the previous Q4 number, the growth rate on an annual basis will be about 4%, right?
Wrong. It depends on the intra-year pattern the year before. If the previous year saw quarterly improvements, with the Q4 figure ahead of the year’s average, a flat performance in the new year will yield apparent year-on-year growth, even though the economy is not expanding.
The seasonally adjusted GDP numbers for 2016 were released on March 9th, also and not coincidentally the data cut-off for the ESRI forecast of year-on-year growth in 2017 of 3.8%. Subsequent forecasts from the Central Bank and the Department of Finance came in at 3.5% and 4.3% respectively.
The sum of seasonally adjusted GDP for the four quarters of 2016, according to the CSO, came to €256.3 billion. But the Q4 number was 26% of the annual total at €66.6 bn. A flat performance from Q4 through each quarter of 2017 would yield an annual growth rate of 4%. So the ESRI projection is consistent with no improvement, indeed a slight decline, from Q4 last year. The CB projection implies a bigger decline, the DoF a tiny increase. All three sets of projections were heralded in the press coverage as signalling continued economic expansion through 2017.
The problem is the so-called ‘carry-over’ effect – Joe Durkan has been on about this for aeons. The CSO has been publishing quarterly macro data for over twenty years. Perhaps it is time for forecasts to be done on the same basis.
For the record, if you expect GDP to grow 1% per quarter from the Q4 2016 base through 2017, the year-on-year growth rate will be 6.6%. If the forecasters feel the Q4 figure was odd, and that there will be a dip for Q1 2017, better to say so.

Supply Curves Explained

Numberless ‘experts’ have misunderstood the government’s mortgage deposit subsidy. It’s all about the supply elasticity, as Michael Noonan helpfully explained to the Irish Examiner on Tuesday.

“The economists are saying we should have concentrated on the supply side. When there’s a demand for something, it leads to increased supply. If we can give deposits to people there will be an increased supply. The [building] industry will move to supply the extra demand.

To give you an example: When it was done previously, the first [car] scrappage scheme was introduced by Ruairi Quinn back in the 1990s. The theory then was the motor-car business was on the flat of its back — no cars being sold. So, with the scrappage scheme, people were given money and that money expressed itself in demand for new cars and a lot of new cars were sold. So, when there is demand backed by cash, supply responds and that’s the theory of it.”

So you whistle up some guy in Germany and he ships over 100,000 houses, at yesterday’s price.

Why didn’t I think of this ? Does Philip Lane read the Examiner?

The Dog Ate My Wind-Farm

The Irish Times relates this morning an Oxford Mail report of a lucky escape for a corporate financier formerly employed with Barclays and Lehman Brothers. Michael Chase-Sarver copped a four-month prison sentence from Judge Eccles at Oxford Crown Court. He had been prosecuted for perverting the course of justice in attempting to avoid a speeding conviction.
He called a witness from Derry who testified that Mr. Chase-Sarver was the promoter of a wind-farm project in Donegal which would cost €1 billion, occupy 35,000 acres and employ 300 people. The judge suspended the sentence, citing the risk to the 300 jobs.
Neither Donegal County Council nor An Bord Pleanala are aware of this project according to local media.
This is surprising. The average cost of 1 MW of wind capacity is about €2m, so the billion Euro tab would equate to around 500MW, the largest generation facility to be built in Ireland since Moneypoint in the mid-1980s. At 35,000 acres the site (70 acres per MW sounds about right) would occupy 3% of the land area of Donegal, a large county. The witness from Derry, a co-investor in the mystery project, claims that agreement has been reached with 100 very discreet farmers.
Ireland already has about 2,500 MW of intermittent wind capacity. Peak demand is about 5,000 and total capacity about 10,000, of which 7000 is dispatchable. Wind gets priority when available and a price guarantee, or compensation if ‘constrained off’. Further additions of intermittent generation, from wind or solar, will add to the subsidy costs and strand more gas-fired assets, many of which belong to the government.

The EBA Stress Tests: What’s the News Value?

The Irish banks, AIB and Bank of Ireland, show up poorly on the stress test of 51 European banks (33 in the Eurozone) released Friday night. The methodology is explained on the EBA website. Briefly, there has not been a review of each bank by a team of EBA inspectors as is implied by some of the media coverage – RTE’s bulletin referred to an ‘examination’. It is a mechanical exercise based on the ‘static’ 2015 balance sheet, as published, with no adjustment for the plausibility of provisions but also with no credit for retained earnings post 2015. The ‘stress’ is essentially a GDP downturn from 2016 through 2018 resulting in a depletion of capital adequacy as against the end-2015 balance sheet number.

The scale of the depletion reflects the extent of the assumed downturn. The essential reason for the sharper loss of capital adequacy for the Irish banks is that the downturn assumed for Ireland is greater. Against a baseline, the cumulative adverse GDP shock for the main Eurozone countries included is as follows:

Belgium -7.6
Germany -6.6
Ireland -10.4
Spain -6.7
France -5.6
Italy -5.9
Lux -8.2
Neth -8.4
Austria -7.6
Finland -8.3

The adverse shock assumed for Ireland is the largest and 3.2% above the average for the others shown. There are some other factors but the EBA release makes it clear that these numbers are the main driver of the projected capital depletion. The basis for the large Irish shock is a calibration against the experience over 2008 to 2011 when the downturn in Ireland was more severe than elsewhere.

The EBA may have sacrificed plausibility to uniformity of treatment – the exercise is in any event an input into a further phase called SREP, the supervisory review and evaluation process, rather than a definitive assessment of bank capital adequacy. The Irish banks, and numerous others, may of course need to generate or raise more capital but the relative worsening in their position flows from the assumptions employed and not from any ‘news’ uncovered by the EBA sleuths.