What a difference a year makes

We need to cut costs and increase productivity to pay the mounting debt. It is disconcerting that Ireland dropped from being the 22nd most competitive economy in 2009 to the 29th in 2010, according to the World Economic Forum.

People pay attention to the overall indicator and rank, but the subindicators tell the real story. There are no surprises, really, but it is a sobering read.

Here are some the negative trends:

*Public trust of politicians: 37 to 65

— higher numbers are worse, as countries are ranked from 1 to 139

*Wastefulness of government spending: 45 to 93

*Burden of government regulation: 61 to 87

*Efficiency of legal framework: 22 to 27

*Government deficit: 55 to 130

*Savings rate: 75 to 119

*Government debt: 51 to 112

*Intensity of local competition: 39 to 51

*Time required to start a business: 24 to 45

*Brain drain: 10 to 19

*Financing through local equity market: 51 to 105

*Ease of access to loans: 19 to 117

*Soundness of banks: 9 to 139 (bottom of the pile)

*Regulation of security exchanges: 16 to 90

*Capacity for innovation: 26 to 31

*Government procurement of advanced tech: 43 to 75

There are positive trends too:

*Quality of infrastructure (6 indices, all up)

*Inflation: 48 to 3

*Interest rate: 63 to 11 (I guess the data are older than a few weeks)

*Pay and productivity: 76 to 56

Ireland is still the best place in the world if you worry about malaria. The judiciary is still strong. And foreign investors are still treated well.

All in a Day, a Guest Post by Ciaran O’Hagan

Ciaran O’Hagan is head of rates research at Société Générale in Paris

Risk aversion has picked up in Europe over the past weeks. The debate over the fiscal and banking outlooks in Ireland needs to be placed in this context. While Irish credit is under pressure, it is also against a backdrop that favours risk aversion.

The flavour of Wednesday’s press alone gives a good idea of the headwinds facing any country wanting to grow itself out quickly from public debt. 

The ECB’s chief economist, Mr Stark, is warning of a slowdown in growth,  Meanwhile the Bundesbank’s Weber is cautioning that the global financial crisis is not yet over and setbacks in financial markets cannot be ruled out.  Behind this talk is of course the cautioning of governments that they need to show long-term commitment towards fiscal consolidation, or else brave the consequences.

Unfortunately several governments are non-existent. Belgium’s mediators warn there will be no announcement in relation to a new government this week, and there is no quick progress in the Netherlands either. Italy’s finance minister affirmed that there’s no autumn emergency. In France, the unions are trying to complicate very necessary – if still modest – pension reforms.

Even what should just be simple procedure is becoming problematic. Comments from the ECB, as reported by government sources in Berlin, suggest ongoing frustration with the IMF over how to deal with the challenges posed by Greece. And Eurostat is reported as saying it is frustrated as it can’t get all the Greek documentation on debt that it wants.

Moreover in Brussels, we have the overriding impression of cacophony from the latest Ecofin and Eurogroup meetings. We had the spectacle of head of the Commission, Mr Barroso, calling on the governments to reform. That absence of reform leads to titles in the press Wednesday like “Europe is Acting as Though it Wants to be Left Behind” (the WSJ) and “Realisation has dawned that sovereign credits cannot survive unless banks are recapitalised (the FT).

Even in AAA land, we read titles like “German banks are in reality the Achilles’ heel of the European banking system” (FT). The Bundesbank’s Weber affirmed that higher capital requirements for banks won’t curb economic growth. However even Mr Weber would probably agree that without strong banks, there will be no robust recovery. Unfortunately Europe won’t allow banks fail, and yet at the same time, many governments treat them as taxable cash cows and excuses for a lame recovery.

Last but not least, Mr Lenihan, the Irish finance minister, extended the guarantee for deposits at domestic banks and laid out plans for the dénouement of Anglo. These were necessary actions. However they unfortunately raise the contingent liability for the Irish state still further.

All this is just in a day’s news. It provides an unfortunate backdrop for any country wanting to grow itself out of public debt quickly. Ireland’s growth rate is probably more elastic than most with respect to global prospects. Unfortunately fiscal consolidation elsewhere in Europe over 2011 and beyond faces strong headwinds. That is helping make investors ever more averse to taking on risk, even among sovereigns, traditionally regarded as among the strongest of all credits.

Anglo Announcement: A Multiple Systems Failure

Anglo Irish Bank’s failure has become the single most costly fiscal problem in the history of the Irish Republic. The citizens of this state should at least expect to see evidence that the problem is now being managed in a competent manner and to be clearly informed about what is going on. Today’s announcement is a failure on so many levels that I can honestly say that, even by the low standards that have been set up to now by this government in its handling of the banking crisis, I fear we may have reached a new nadir.

Three issues are worth pointing out:

Communications Meltdown: The Department of Finance released a minimalist statement this afternoon on its website. However, much of the media discussion of today’s announcement has revolved around an FAQ document which, as of now (almost 11PM) the Department has not seen fit to release to the Irish public. On this site, we have been able to read the FAQ because anonymous commenter Eoin received it and posted it here (Thanks Eoin, much appreciated). I don’t think I’m giving away any secrets in saying that Eoin received this document because he works for a financial institution. Think for a moment about this as a communications strategy: Guys who work for banks get to read the answers to key questions but the taxpayers who have bankrolled this disaster don’t. For sheer tin ear, the Department officials deserve to be sent for three months compulsory service at the Terry Prone School for fake sincerity.

Mixed Messages to Depositors: The only, and really I mean this, the only advantage of the Good Bank\Bad Bank split was that it could reassure depositors that their deposits were going to be attached to a fully capitalised, fully functioning bank. Preventing a deposit flight from the bank is in everyone’s interest. That their deposits would not be attached to a fully functioning bank was clear from the DoF’s statement, which established that New Bank would not be making loans. However, the statement tried to reassure that “Depositors with the Funding Bank will be completely insulated from the future performance of the rest of the current Anglo Irish Bank loan book.” However, the FAQ (thanks again Eoin) informed us that

It is anticipated that the Asset Recovery bank will be funded by the Funding bank. Funding will be provided by the Funding Bank from normal sources. As the Recovery Bank reduces in size its funding requirements will also reduce.

In other words, if you have a deposit with Funding Bank, that bank’s assets are loans to the Asset Recovery bank, which (word has it) is insolvent. A statement that the deposits were being transferred to, for instance, Irish Life and Permanent (backed by NAMA bonds or other Anglo financial assets) might have been reassuring to depositers. Today’s messages to depositors were mixed and not reassuring.

Drawing a Line Under It/Message to Sovereign Bond Market: The sovereign bond market is crying out for some sign that we’ve got a final credible figure for the cost of Anglo Irish Bank. What did we get today? Assurances that more technical work would be done to figure out how much capital would be needed. Almost two years after Brian Lenihan talked about “going deep into the banks”, a year and a half since we were told that NAMA would provide clarity about losses and help us move on, over a year since new supposedly highly qualified management were put in place to preside over the bank, we’re being told that we need more time to look at the books? Give us a break.

Note that I haven’t even discussed any of our old bugbear issues of risk-sharing with bond holders (Lenihan indicated today that unguaranteed senior bond holder would be looked after.) The point is that even when judged against what the government wants to achieve, today’s announcement can only be judged as a complete failure.

Anglo Split Announcement

The statement from the Department of Finance is here.

A quick reaction. That the new bank isn’t making lending is a good thing. The bank didn’t have the capacity to transform itself into a small business lender or the other proposals that the management were floating. It will presumably need less money to be capitalised as a pure deposit-funding bank.  However, nothing in this statement about the bad bank gives us any reason to think that Anglo will cost the taxpayer less than the projections that have been floating around. That it is still going to be “a licensed regulated bank” (unlike, I believe, the Northern Rock equivalent) could be interpreted as a sign that all bondholders will get their money back, though that may be over-reading this (pretty minimal) statement.

INBS and the ECB

Today’s story about INBS issuing €4 billion in government-guaranteed debt effectively to itself (i.e. issuing it, then keeping it on the balance sheet to use for repo with the ECB) seems a bit strange. Indeed, normally the ECB doesn’t allow this kind of thing.  Page 39 of its eligible collateral documentation contains the following guideline:

Irrespective of the fact that a marketable or nonmarketable asset fulfills all eligibility criteria, a counterparty may not submit as collateral any asset issued or guaranteed by itself or by any other entity with which it has close links.

The INBS issue seems to be ok, however, because of the following qualification:

The above provision on close links does not apply to: (a) close links between the counterparty and the public authorities of EEA countries or in the case where a debt instrument is guaranteed by a public sector entity which has the right to levy taxes.

So the government guarantee appears to be what allows INBS to do this.