2008 CSO agricultural output and income data disappoint

The CSO recently published its advance estimate for output, input and income in agriculture. Despite world prices for food hitting record highs in the early part of this year, the CSO estimates that GVA at basic prices fell by 17 per cent and that the operating surplus generated in the sector fell by 13 per cent in 2008.

The main reason is that, although agricultural output prices have risen by 20 per cent since the beginning of 2007, input prices driven by higher energy prices have risen even faster. As a result, Irish farmers have experienced a sharp deterioration in their terms of trade from its recent peak in September 2007. Output prices relative to input prices fell by 20 per cent between September 2007 and October 2008.

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Gross value added at basic prices in primary agriculture is estimated to amount to €1,579.6 million in 2008. When interest on borrowing, wages to farm workers, land rental payments and capital depreciation are netted out, the amount left to remunerate farmers for their own labour, land and capital input is the princely sum of … -€186 million! (if you want to do the calculation yourselves, the raw data is provided in the CSO release).

Fortunately, farmers don’t depend on the market for their income (even the supported EU market in which , thanks to the Common Agricultural Policy, they can sell beef and dairy products for up to 75 per cent higher than third country competitors). Thanks to direct payments (which amounted to €1,995 million last year and will top the €2 billion mark this year because of the introduction of a new Suckler Cow Welfare Scheme), farm incomes will remain in positive territory. While some of these payments reflect the role of farming in producing valued public goods, their distribution across farmers is hardly equitable and their future in the light of the 2013 EU budget debate is hardly secure.

Dealing with a problem bank

This post draws attention to two recent examples of best current practice for dealing with a problem bank that is not indispensable to the economy.

Key lessons: no need for capital injections if the bank is not going to survive; no protection for unguaranteed subordinated debt holders.  In a nutshell, the problem bank is wound up; the guaranteed depositors transferred to a strong bank.

While it is now clear that Lehman Brothers was too large and complex a bank to be wound up, this is not true of many other banks. Indeed, even since Lehmans a number of quite large banks have been intervened.  The cases of Washington Mutual and Bradford and Bingley are instructive for any authorities faced with a problem bank whose continued operation is not vital to the economy.

These banks were seen by the authorities as having no viable future, and as not being indispensible to the economy.  Their continuing business was transferred to other banks.  Government only injected sufficient funds to cover insured depositors: no new capital was needed as the rump banks were gradually being wound up.  Holders of uninsured and unguaranteed subordinated debt and preference shares faced heavy losses (they had been earning higher interest in recognition of default risk).

More detail:

On September 25th, 2008, Washington Mutual, one of the largest banks in the US, was intervened by Federal Authorities.  Its insured deposits and mortgage book was sold to the bigger bank JP Morgan Chase.  Retail customers were able to continue access their accounts the following morning and in the same old branches, but now owned by JPM.  Little or nothing was left to pay WaMu’s $22.6bn in unsecured debt, let alone the shareholders.  See: www.fdic.gov/bank/individual/failed/wamu.html

On September 29th, 2008, Bradford and Bingley, a large UK mortgage lender, was intervened by the British Authorities.  All of the deposits were transferred to Abbey National and depositors had continued access to their funds through the B&B branches, now operated by Abbey.  Mortgage holders continued to make debt service payments to B&B, now owned by the Government.  Subordinated debt holders will lose much of their investment.  See: www.hm-treasury.gov.uk/press_97_08.htm

Banking Crises: An Equal Opportunity Menace

Carmen Reinhart and Ken Rogoff have released a new cross-country empirical study “Banking Crises: An Equal Opportunity Menace“.   Their analysis shows that the average fiscal impact of a banking crisis is to increase the level of public debt by 86 percent, such that the public debt nearly doubles.  They also show that the typical duration of a housing bust is 4-6 years.

Such cross-country averages are useful benchmarks and it is useful to think about the reasons why the current Irish crisis might deviate from such patterns.

Update: Reinhart and Rogoff have also just released a much shorter companion paper “The Aftermath of Financial Crises”  [to be presented at the January AEA meetings in San Francisco].

Building Ireland’s Smart Economy

The Irish government’s economic recovery plan can be found here. This report has a wide-ranging agenda.

For university-based economists, the following section is especially interesting, since it may represent an important shift in the government’s approach to funding research:

“The creation of more concentrated research-intensive excellence will enhance the country’s reputation internationally and its ability to attract top-level researchers and will underline Ireland’s intentions in terms of the development of the Smart Economy.  It will also enhance the international exposure of Irish
universities and institutes of technology.”
(page 75)

New Irish data releases

A busy day for CSO releases.   The quarterly national accounts are published here, while the BOP data are here. In addition, the CSO released the 2006-2007 data for services trade, which can found here.

A striking feature of the data is the wide divergence between GNP and GDP for Ireland, with the most worrying data point being the 0.9 percent decline in GNP during the 3rd quarter (corresponding to an approximately 3.6 percent contraction at an annualised rate).   The widening of the current account deficit, despite the slowdown, signals the external competitiveness problem.