The Irish Economy

It is not the first time but the estimated 10-year yield on Irish government bonds has again fallen below 3 per cent.  Here is a snap-shot of the yield curve this morning from this site.

The reasons for these historically low rates can be bounced around but it would be more useful if we could actually take advantage of them.  Ireland has an enormous public debt but the structure of it is such that very little is close to maturing and in need of rolling over.  In the EZ17 Ireland has a very low refinancing need (Latvia is excluded).

At the end of December the blended interest rate on the €22.5 billion of IMF loans that Ireland has accessed was 4.16 per cent.  These loans have a weighted average life of 7.3 years.  The above table gives an indicative rate of under 2 per cent for Irish government debt of equivalent maturity.  Two per cent of €22.5 billion is €450 million.

Replacing the official IMF loans with private funding seems attractive but the IMF loans cannot be repaid early without also triggering early repayment clauses in the €45 billion of EFSM, EFSF and bilateral loans from EU countries.  The details of these clauses are in this PQ answer.

Compared to the IMF loans, the EU loans have lower interest rates and much longer maturities.  Repaying them early would not be prudent given the uncertainties and possible unknowns that remain.  However, raising money now for loans which begin amortising next year anyway would only raise the funding target of the NTMA to the average EU levels (in GDP terms) as shown in the chart.  On the other hand it is not clear what impact such an action would have on interest rates but a significant impact would seem unlikely.

There are reasons on several sides for keeping the IMF as part of the ongoing Troika supervision of Ireland but are there €450 million worth of them?

The CSO have published the Q4 2013 update of the IIP data.

These are important data but, as with many macro aggregates on the Irish economy, establishing meaningful trends can be difficult.  In the data the totals look enormous but the IFSC sector has foreign assets of €2,390 billion and foreign liabilities of €2,394 billion for a net external liability of just €4 billion.  It is possible to generate some ridiculously large external debt figures for Ireland by including the liabilities of the IFSC but they are wholly matched by foreign assets.

The net international investment position of the non-IFSC sector improved significantly in the final quarter of 2013, moving from –€172 billion to –€150 billion.  This measure troughed in Q4 2011 at -€196 billion.  The bulk of the –€150 billion arises from the –€116 billion net IIP of the government sector.

The net IIP of the non-IFSC sector began to improve in 2012 though obviously the position of the government sector continued to deteriorate.  However, this  was more than offset by the improvement in the net IIP of the Central Bank which fell from –€101 billion at the end of 2011 to –€37 billion now (these are the liabilities to the ESCB including TARGET2 balances).  Most of this improvement occurred in 2012.

In the most recent quarter there was a €6 billion improvement in the net IIP of the non-financial corporate sector, from –€87 billion to –€81 billion.  However, on this the release notes the following:

With the relocation of a number of group headquarters to Ireland, foreign assets of Non-Financial Companies increased by €47.5bn and foreign liabilities increased by €41.4bn resulting in a decrease of €6.1bn in the net liability to €81.2bn

Thus, all of the quarterly improvement for the sector (and half of the total quarterly improvement for the non-IFSC sector) is as a result of company re-domiciling.  To the extent that these companies have retained earnings on their balance sheets this is also likely to have impacted GNP figures for the same quarter.

Ireland’s Gross External Debt was largely unchanged at €1,604 billion, with 70 per cent of this arising from the foreign debt-instrument liabilities of the IFSC sector.  The Net External Debt after subtracting foreign assets in debt instruments was –€696 billion (i.e. an asset position). 

Removing the impact of the IFSC, the Net External Debt of the non-IFSC sector at the end of 2013 was a liability position of €92 billion.  This was €146 billion at the end of 2012 and €182 billion at the end of 2011.  Again, the improvement in 2012 was due to improvements in the Central Bank position but this did not continue into 2013.  The 2013 improvement in Net External Debt can mainly be attributed a jump in debt instrument assets under the heading “debt liabilities to affiliated enterprises”. These debt instrument assets show an increase of €30 billion over the year, all of which happened in Q4.  Again this can be attributed to the re-domiciling of firms.

As a result of the impact of the IFSC sector looking at the overall totals for Ireland is largely meaningless.  There has been some improvement in the stripped-out results for the non-IFSC sector but, recently at least, much of that can be attributed to boardroom decisions.

A friend just told me the very sad news that Barbara Solow passed away in February.

She wrote a classic book on Ireland, The Land Question and the Irish Economy, which has a good claim to being the first major cliometric work on Ireland — if by cliometric you mean economic history that is strongly informed by economic theory, and systematically uses data to back up the arguments being made. In more recent years she did terrific work on plantation slavery, which was very influential and certainly made a big impression on me. The last time I saw her was at a conference which she organised in Oxford a couple of years ago to commemorate Eric Williams, and she was as impressive as ever.

I can’t claim to have known her very well, but she was always very nice to me when I was a young Irish economic historian in Boston. She had a wonderful dry sense of humour, and produced one of the great acknowledgment footnotes of all time. Her death is a major loss for the profession, and my heart goes out to her family.

Readers of the blog may be interested in a Vox piece by Tony Atkinson and Salvatore Morelli on the Chartbook of Economic Inequality. It provides a summary of changes in inequality for 25 countries (alas not including Ireland) over a 100 year period.  If you follow the links you can get the data on an Excel basis or in chart format.  The vox link is here  http://www.voxeu.org/article/chartbook-economic-inequality.

The OECD’s unit working on the Base Erosion and Profit Shifting (BEPS) project have been releasing documents based on the points in the Action Plan published last year.  The full set is here.

Yesterday, a discussion document for Action Point 1: Taxing the Digital Economy was published.  It is a very wide-ranging document.  One of the notable suggestions are the proposals to allow/force the greater taxation of companies selling digital products in their “market jurisdictions”.  This primarily arises from the ability of such companies to circumvent the existing rules on permanent establishment because of the intangible nature of the product.

The proposal is not a move to formulary apportionment. The document puts forward proposals to alter the existing source principle of corporation tax to try and ensure that more/some of the profits earned by these companies are attributed to the country of their customers using changes to PE rules.  Other proposals include the new concept of a “virtual” permanent establishment, the creation of a withholding tax on digital transactions and the use of consumption tax options.

There is a lot in the document and some extracts summarising the problems the OECD group are trying to tackle in this area are below the fold.  Whether there will be any effective solutions by the end of the process remains to be seen.

Read the rest of this entry »

The 2012 release of the Annual Business Survey of Economic Impact is available here.

The coverage is obviously not as broad as the various equivalent figures provided by the CSO.  The Forfás survey is limited to “client” companies with ten employees or more but a benefit of the survey is that the indicators surveyed are decomposed by company ownership.

On the 28th of March at the Aviva conference centre, a conference looking at what’s next for Ireland will take place in the context of Ireland’s new economic governance rules. The programme is here. The conference is organised by the European Commission and the Dublin Chamber of Commerce.

I have blogged before on the potential applications of behavioural economics to public policy in Ireland. A lot of attention has been given to policies that change individual behaviour in potentially welfare promoting directions (See Tim Harford’s summary of this in the FT). An interesting question is the implications of moving to a model of consumers with bounded rationality and self-control for regulation and competition policy. A number of recent documents in the UK and US are relevant for this.

This excellent FCA occasional paper examines the potential implications of behavioural economics for financial regulation. It should be noted that “nudging” is a subset of the policies that might follow behavioural market tests. Many of the potential policies discussed in this document are hard interventions rather than soft nudges. They also extend across regulators. For example, on page 45 they outline recent moves by Ofcom to ban autorenewal of internet contracts and OFT to ban certain types of gym membership contracts.

In some senses a more radical document by Barr, Mullainathan and Shafir from 2008 outlines a new approach to consumer regulation based partly on the notion of “sticky defaults” whereby firms would be required to default people into the most desirable option based on their characteristics and only move them if they make choices following being provided with clear information. Such models are discussed in relation to two markets fraught with behavioural bias and consumer exploitation, namely credit cards and mortgages. The document also sets out proposals for changing the incentives of brokers.

Far from the collection of isolated “nudges” that forms much of the public debate around behavioural economics, what has unfolded in recent years is a body of theoretical and empirical work that simply gives better predictions and foundations for regulation than what preceded. There are clearly many insights in this literature that have implications for Irish regulators and are worth debating further.

Examples of the applied questions raised by the recent literature include:

Should credit card variable and teaser rates be banned or at least taken out of the regular offers made to consumers?

Should mortgage providers be forced to disclose better deals available to their customers?

Should pay-day lenders be granted full access to the Irish market? If so, how do you regulate them?

Should autoenrolment proceed in Ireland, what provisions should be put in place so that companies do not exploit naïve consumers by charging fees well in excess of regular rates?

Do behavioural biases prevent annuities markets from functioning optimally?

Clearly, many of the above questions are more than just empirical questions or issues of economic theory. They also relate to political issues and wider issues of freedom of choice. Policies such as pension autoenrolment have proved quite popular as they are, in some sense, a win-win in encouraging savings among non-traditional savers and providing extra customers for financial providers. However many of the above policies are likely to be far more contested by interest groups and it will be good to have an open debate on their merits.

Notes:

A reading list from my research blog here.

A short blogpost I prepared summarising the FCA document with some other readings on regulatory and consumer exploitation issues.

Pete Lunn at ESRI has written about policy implications in a number of documents (see recent OECD review paper here).

… and use USC instead. Reported by The Irish Times here.  The full text of Tom Healy’s address is here.

I got the chance to read this book over the last few days - it is definitely a “must read” and a major achievement.  The Free Exchange blog is running a “book club” for this book - the various entries are here.

A G20 priority for this year is to identify policies that can boost global growth. One priority area is to address barriers to the financing of infrastructure projects.  The Reserve Bank of Australia’s annual conference was dedicated to this theme: the papers (including my own contribution) are available here.

This week’s edition of the Economist also has an article on this topic here.

Paper by Yvonne McCarthy and Kieran McQuinn on “attenuation bias” (i.e. tendency to underestimate) in recall of house prices.

A memo prepared in November 2008 by Merrill Lynch in advising the then government on the developing banking crisis has been released following an FOI request from Sinn Féin.  The 45-page memo is here.

Some government statements issued around time include:

• 30.11.08: Announcement in relation to Covered Institutions
• 14.12.08: Statement by the Government on the Recapitalisation of Credit Institutions
• 21.12.08: Government Announcement on Recapitalisation
• 15.01.09: Statement on Nationalisation of Anglo Irish Bank

It is an interesting read but has anything been unearthed aside from further evidence that the scale of the banking bust was massively underestimated?

IFAC is recruiting.

Details here.

Pascal Saint-Amans restates the OECD intention to tackle double non-taxation in this follow-up piece to the taxation of MNCs in the Australian Financial Review.

“The current rules legally facilitate the location of the profit in non-tax jurisdictions. In other words you can develop schemes that can put your intangibles in Singapore or Switzerland or Luxembourg while there is no activity there. You can deduct your expenses in Australia. You can put your intangibles in Singapore – where it is not taxed. You can lend money to your subsidiaries across the world so that you can erase profit in all these countries because there is excessive interest, then you locate a treasury centre in Ireland for there is no tax either. At the end of the day there is no tax anywhere.”

This New York Times article discusses a recent letter signed by over 500 economists arguing against the proposed increases in minimum wages in the US.

The fact that the letter itself was initiated by a party with a vested interest has generated discussion online. I will leave people to make their own minds up on that.

More interesting is why so many economists have a firm belief that minimum wage increases are a bad thing. Aside from the toy models we present to students to introduce economic principles, where is the firm empirical evidence that would lead over 500 professionals to sign their name to something like this?

As this 1982 NBER survey shows, pretty much nothing was known empirically about the employment impact of minimum wages up to that stage despite a substantial body of theoretical work. A body of empirical work that followed generally has found no effects or even positive employment effects. The most famous paper directly estimating minimum wage effects on unemployment is this Card and Krueger AER paper that finds positive employment effects. It has been cited over 1400 times and debated over and again. Another highly cited UK study finds no adverse employment effects.

There is no credible empirical study documenting increases in unemployment following changes in minimum wage legislation. Nor are there credible empirical studies linking temporal and spatial variation in unemployment to minimum wage legislation. Simply type “minimum wages unemployment” into google scholar and sample the papers from peer-reviewed journals that come up. You will find some papers showing that minimum wage effects on unemployment result from highly stylised theoretical models but no papers in high-level peer reviewed journals showing a clear negative aggregate employment effect. Please feel free to link to some credible empirical evidence in the comments if you think I am overdoing the case. Here, for example, is a meta-analysis of UK studies finding no employment effect. With the empirical literature in mind, another group of economists have signed a letter in support of minimum wage increases.

Obviously people outside of economics will cite this as another case of economists not being able to agree. But the difference is the second group can point to empirical evidence. It is baffling as to where the first group derive their confidence from.

Morgan’s latest Op-Ed is here, following his UCD lecture linked to by Seamus here.

I have been waiting for someone else to post on the national accounts data for 2013, available here, but no-one has yet, and it deserves a thread.

Real GDP, which as we know is mis-measured as a result of transfer pricing, declined 0.3% in 2013. Real GNP, which we learned last year has its problems too, was up by 3.4%. Nominal GDP rose by just 0.1%, which is not good for the debt to GDP ratio. Nominal GNP rose by 4%.

I guess that a marketing problem the government faces is that if it plays up the GNP numbers too much as being clearly superior, which I suppose we still believe they are (?), someone out there may start dividing our debt by GNP.

Here.

The readership may be interested in my new paper: here.

FMC Seminar: Fear and Loathing in the Housing Market: Evidence from Search Query Data

Speaker: Dr. Stuart A. Gabriel (Professor of Finance at UCLA & FMC2 Collaborator)

Date: Wednesday, March 12th 2014 at 6:00 PM (All are welcome to attend free of charge)

Location: Clarion Hotel, Excise Walk, IFSC , Dublin

For further details and to register please visit the seminar webpage. http://fmc-cluster.org/index.php?option=com_content&view=article&id=224
Refreshments will be available from 5.30pm. For catering purposes please register.

Summary:
In this presentation Professor Gabriel will outline a Big Data approach to determining levels of housing distress. Using Google search data the presentation will document a broad-based and real-time index (the Housing Distress Index (HDI)) of housing distress. The presentation will detail the characteristics of the HDI, how it compares to other indicators of housing distress, and its predictive power in determining the extent of housing distress.

Patrick Honohan’s Cunningham Medal Lecture at the RIA is here.

A couple of charts and commentary from recent Macro Financial Reviews published by the Central Bank on non-property SME/corporate lending in Ireland.

Macro Financial Review 2013:1

Irish SMEs and non-financial firms are operating under considerable macro-financial headwinds.  Overall, the sector accounts for 19 per cent of the domestic banks’ aggregate loan book. The value of impaired loans stood at €10.8 billion in December 2012, representing 25 per cent of the SME/corporate loan book, up from 21 per cent of the book at the end of 2011.

Macro Financial Review 2013:2

The exposure of the domestic banks to SME/corporate and CRE portfolios is also substantial, representing 19 per cent and 18 per cent of the domestic banks’ aggregate loan book, respectively. Impairment rates are noticeably higher than residential mortgage portfolios. The latest data indicate that impaired SME/corporate loans have risen from 24 per cent in 2012 Q2 to 27 per cent in 2013 Q3 while CRE NPLs went from 51 per cent to 61 per cent over the same period.

If loans, classified as “watch upper” and “watch lower” by domestic banks are included with impaired loans, the percentage of “vulnerable” SME/Corporate loans in 2013 Q3 rises to 45 per cent while the equivalent figure for CRE is 78 per cent.

New economics blog from Atif Mian and Amir Sufi here.

Simon Nixon writes in the WSJ here.

The Irish Times today, page 2:

$36m

Amount Apple paid in Irish taxes between 2004 and 2008, despite the 12.5% rate meaning they have paid in the region of $890m

Editorial: Apple’s lucrative tax loophole

…figures obtained by The Irish Times show that between 2004 and 2008 the consumer electronics giant reduced its Irish tax bill by over €850 million…

Yes, because the profits of a US company selling products designed in the US, manufactured in China and sold to customers in Australia actually should be taxed in Ireland (only we’re not sure whether it is in $ or €).

Prof. Morgan Kelly at the UCD Economics Society.

• Part 1: Presentation
• Part 2: Q&A Session

Applications are sought from candidates interested in pursuing a PhD in energy economics in Trinity College Dublin.   Areas of interest include topics on energy in the fields of behavioural economics, industrial organisation, finance and microeconomics.   This PhD project is sponsored by Science Foundation Ireland and funding covers PhD stipend and fees for four years plus a travel and equipment budget.  Teaching opportunities may also be available.  Interested PhD candidates must hold a masters in Economics (with content similar to the MSc in Economics offered by the TCD Economics Dept).  Interested applicants should send their CV to Eleanor Denny (dennye at tcd.ie) by 31st March 2014.

Yesterday, the EC published the results of the in-depth reviews under the Macroeconomic Imbalance Procedure.  The conclusion for Ireland is that there are “imbalances that require specific monitoring and decisive policy action”.

The MIP has been around for a couple of years but it is still far from clear that it has delivered anything.  One thing we do get are documents which compile and illustrate a very broad range of data on the Member States.  Yesterday these included the in-depth review of Ireland which has 65 graphs to peruse, but with little to be learned.

Speeches: José Manuel Barroso and Eamon Gilmore.