27/10/2013: Ireland v Iceland: Full Deck

Here's the deck for comparatives between Iceland and Ireland. You can click on every slide to enlarge. Enjoy!

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11/10/2013: Euromoney Credit Risk Analysis: Q3 2013

The Euromoney Country Risk survey results are out for Q3 2013 and here is some analysis with a comment from yours truly. As usual, emphasis is mine:

"Some 101 of the 186 countries surveyed have succumbed to lower ECR scores (increased risk) since June, which, with 17 unchanged, leaves just 68 safer, according to the views of global economists and other country-risk experts surveyed during the third quarter."

Core global drivers:

• US federal shutdown & looming debt-ceiling deadline 
• Concerns about monetary tapering, and 
• Europe’s fiscal problems.

"... the shake-out that occurred in the wake of the collapse of Lehman Brothers in September 2008 has still left the majority of sovereigns – some 75% in all – with vastly increased risk levels than before the crisis; in the case of the eurozone periphery - Cyprus, Greece, Ireland, Italy, Portugal and Spain – an astonishing 25 to 50 points each."

Notice that in the above, Euro area shows the highest rate of deterioration of any region, save the CIS, and CIS deterioration is in part driven by links to the Euro area.

Per ECR: "US causing fewer flutters for G10 risk profile than Europe’s problems."

"Within the G10 group of leading industrialized nations, the US is not considered a particularly riskier prospect in spite of its latest political troubles. The world’s biggest economy has slipped to 17th in the rankings, but its score is still higher than at the start of the year."

In the case of Europe, core downward pressure drivers are:

• "The unwillingness to see the euro weaken", 
• "A banking sector still in need of repair",
• "Weak political resolve on budget issues"and 
• "Individual country economic prospects heading in different directions.”

Per ECR: "Indeed, greater concerns are reserved for 21st-placed France, with its fiscal targets missed and the economy remaining sluggish, as well as for Aaa-rated Sweden, in fifth spot, where a moribund economy and a government relaxing fiscal policy with tax cuts ahead of next year’s parliamentary election are gnawing away at the sovereign’s gold-plated creditworthiness."

"Both countries have seen their scores slip the most (by 0.7 points each since June), within a group where Germany is flat-lining as it awaits the formation of a new government..."

"In the European Union, 17 of its now 28 member states are riskier, whether compared with June or since the end of last year..."

"Remarkably, in spite of the recoveries witnessed in some of the bailout countries, notably Ireland and Portugal, the eurozone crisis is continuing to cause ripples, with no fewer than 10 of the 17 member states still succumbing to lower scores during Q3. This comes amid weak economies, excessively high unemployment rates, spikes in political risk, trade-weighted appreciation of the euro, and Greek borrowing concerns re-emerging to keep the region’s worst performer grounded on 34 points."

Notice Ireland's strong position second to Austria in terms of overall gains in the risk scores (lower risk).

"Constantin Gurdgiev, another ECR contributor, based in Dublin, says: “The changes in risk assessments broadly reflect improved sentiment across the euro area, consistent with both improved global growth outlook and internal regional stabilization in the wake of protracted sovereign debt and growth crises.

“[However] structural weaknesses and risks remain, with France presenting significant long-term risk due to the complete absence of serious efforts to reform the labour markets and address a chronic lack of investment in new enterprises formation.

“The US debt-ceiling uncertainty also presents a lower risk to the euro area economies than the longer-term upward pressure on US yields. As benchmark yields for the US and Germany deteriorate into 2014, there will be renewed pressure on funding excessive debt levels across the majority of the euro area economies, most notably for Greece, Italy, Portugal, Spain and Ireland, but also for Belgium and the Netherlands.”"

Apologies for shameless self-promotion... :-)

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11/10/2013: BlackRock Institute survey: N. America & W. Europe: October 2013

BlackRock Investment Institute Economic Cycle survey for North America and Western Europe is out and here are core results (emphasis is mine):

"This month’s North America and Western Europe Economic Cycle Survey presented a positive outlook on global growth, with a net of 65% of 113 economists expecting the global economy will get stronger over the next year. (6% lower than within the September report).

At the 12 month horizon, the positive theme continued with the consensus expecting all economies spanned by the survey to strengthen or remain the same except Sweden. 

The consensus outlook for the Eurozone was also strong, with 87% of economists expecting the currency-bloc to move to an expansionary phase over next six months. The picture within the bloc was not uniform however, with most respondents expecting only Greece to remain in a recessionary phase and an even mix of economists expecting Portugal and Belgium to be in an expansionary or recessionary phase at the 6 month horizon (and similarly so for Sweden, outside of the currency-bloc). 

With regards to North America, the consensus view was firmly that the USA and Canada are in mid-cycle expansion and are expected to remain so through H2 2013."

Note that this correlates well with my own outlook: http://www.fergco.co/2013/10/9102014-businessinsider-most-important.html

Also note: the above views do not reflect BlackRock own views or advice. 

Two charts as usual:

Note that in the chart above, Ireland now firmly converged with the Euro area. This is a very strong move compared to September survey: http://www.fergco.co/2013/09/1292013-blackrock-institute-survey-n.html And the above is confirmed by the overall comparative expectations forward:

So on the net - good result for Ireland and positive outlook for Euro area as a whole.

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4/10/2013: IMF 11th review of Ireland: Growth Warnings

So IMF released its 11th review of Irish economy under the Extended Arrangement for funding.

Key points:

"Real GDP declined in the first quarter, reflecting a fall in exports and weak domestic demand. Nonetheless, fiscal results remain on track and sovereign and bank bond yields have risen relatively modestly in response to declining global risk  appetite. A range of other economic indicators are more encouraging, suggesting lower but still positive growth in 2013, though uncertainty remains. Growth projections for 2014 are also lowered given weaker prospects for consumption recovery and for trading partner growth."

So weaker than forecast growth conditions… ok… How much weaker?

"Balancing the weak GDP results for the first quarter against a range of more positive indicators, the growth projection for 2013 has been pared back by a ½ percentage point to 0.6 percent y/y, but uncertainties remain." Boom! Ugly stuff, folks. And replace 'but' with 'and' and you will get a double Boom!


"Most importantly, export growth has been cut by 1½ percentage points as data indicate a larger impact from the patent cliff and tepid recoveries in important trading partners. Lower imports dampen the impact on growth." Wait, weren't we told that patent cliff doesn't matter much cause exports are offset by imports etc?

"Domestic demand is expected to be flat, with private consumption still contracting modestly owing to fiscal consolidation and household debt reduction, cushioned by employment growth and low inflation. Fixed investment is expected to expand by some 2 percent given improving business sentiment and the uptick in housing starts, but remains the most volatile GDP component. This projection will need to be further reviewed when Q2 national accounts data become available near end September." We have that Q2 data available now… see here: http://www.fergco.co/2013/09/2092013-domestic-economy-continuing-its.html and it ain't pretty…

More details here: http://www.fergco.co/2013/09/2092013-h1-2013-qna-domestic-economy-vs.html Net: Gross Fixed Capital Formation (basically investment in the economy) is down 9.40% in H1 2013 compared to H1 2012, down 14.09% compared to H1 2011 and down 67.73% compared to H1 2007. The reductions in capital investment jun H1 2013 compared to H1 2007 are ten-fold the size of reductions in current Government spending at EUR17,542 million. For another comparison, reductions in personal expenditure on goods and services by households over the same period is EUR4,757 million.

"Weaker consumption and export growth are expected to dampen the pace of recovery, with growth now penciled in at 1.8 percent in 2014. Export and consumption growth are expected to benefit from a projected rise in trading partner growth with employment growth contributing to incomes and confidence. Although consumption growth is still expected to become modestly positive in 2014, the pick up is weaker because a 1½ percentage point downward revision to household saving in 2012 suggests less room for lower savings given the priority households attach to debt reduction. Public consumption is also expected to be softer than previously anticipated as the full effects of the Haddington Road Agreement feed through in 2014. Export growth in 2014 is scaled back to reflect the possibility that recent weakness could persist."

Per IMF: "Growth firms to 2½ percent in 2015 as external growth rises further and fiscal consolidation eases, but durable recovery hinges on reversing the tide of NPLs." The miracle of 3%+ growth for ever, projected back in 2010-2011 to start in 2013-2014 is now replaced by the miracle of 2.5% growth projected to start in 2015… And the new projections out to 2018 no longer feature a single year of growth expected to rise above 2.5%… but all is still sustainable, just as it was in 2010 and 2011 and 2012 and… And the dream of 2.5% growth will, per IMF, be consistent with a positive output gap of ca 0.3%, which means that that is not the expected long-run real growth rate.

In effect, IMF admits now that Ireland cannot be expected to grow sustainably at the rates in excess of 3% per annum in real terms. Say goodbye to Ireland's 'growth miracle', say hello to Ireland's Belgium decades...


Another kicker: after 2015: "…the recovery continues to rely principally on net exports as domestic demand recovery is expected to be protracted as many households continue to deleverage in the medium term. Resolution of mortgages is not expected provide significant direct support to consumption recovery, as while some households may have a reduction in debt service due under a split mortgage restructuring, they may have previously been temporarily on interest-only terms, while other households may need to adjust consumption to serving their debt even if the debt service due is reduced. Rather it is expected that progress in reducing NPLs and enhancing bank profitability will gradually enhance the terms of banks’ access to market funding and their ability and willingness to lend to less indebted borrowers—which includes the younger cohort of households—unlocking housing market turnover and reducing household uncertainty."

Wow! So the IMF is warning us that things are going to remain tough even after the mortgages crisis 'resolutions'… Not like our Government is listening… And the IMF is telling us that the economy is going to get more polarised and paralysed... where did you hear that? Oh... http://www.fergco.co/2013/08/782013-sunday-times-july-28-2013.html

Employment: long-term unemployment remains a problem (we know that)… and surprisingly: "Facilitating SME examinership could aid resolution of SMEs in arrears, supporting their potential to invest and create jobs." Now, here's the key point: in all this excitement about family homes and repossessions we forgot that roughly 50% of SMEs loans are in arrears… and of the remaining 50%, unknown quantum is at risk… Hm… I wonder how that 'facilitated examinership' going to work for the employment stats and for property markets and mortgages arrears, when examiners go into the SMEs books to uncover potential subsidies to proprietor's income or when examinerships lead to cuts in employment levels?..

So back in 2011, IMF predicted Irish economy to grow 2.4% (GDP) in 2013, 2.9% in 2014 and 3.3% in 2015. This time, IMF is projecting Irish economy to grow 0.6% in 2013, 1.8% in 2014 and 2.5% in 2015. Nominal GDP was supposed to reach EUR182.5 billion by end of 2015 back in 2011 projections and is now forecast to reach EUR178.4 billion… What's being down EUR4.1 billion (one year difference) between friends, or EUR6.5 billion over three years, eh? Especially when all of this is sustainable, right?..

Still, gives us some perspective as to the whole circus going on: we are sticking to EUR3.1 billion fiscal target for 'adjustment' and washing off EUR4.1 billion in growth expectations underpinning 'sustainability' analysis… You'd think this is monkeys with abacus, but no - these are highly paid 'analysts', 'economists' on Government side, state side, sell-side at stockbrokerages and banks, ECB side, EU side, IMF side… And they all sing in unison: all is sustainable, just as they revise continuously their forecasts down and down and down. Which begs a question: at what stage will the sustainability malarky be replaced by the admission of the crisis? Presumably when GDP growth is revised to nil into perpetuity?

I will be updating charts on Irish economy forecasts from the IMF over the next few days, so stay tuned. Before that, I will be blogging more on key topics covered by the IMF review later today, also stay tuned…

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12/9/2013: BlackRock Institute survey: N. America & W. Europe: September 2013

BlackRock Investment Institute released its latest Economic Cycle Survey for North America and Western Europe region for September 2013.

Per summary: "This month’s North America and Western Europe Economic Cycle Survey presented a positive outlook on global growth, with a net of 71% of 119 economists expecting the global economy will get stronger over the next year. (1% higher than within the August report). 

At the 12 month horizon, the positive theme continued with the consensus expecting all economies spanned by the survey to strengthen or remain the same. 

The consensus outlook for the Eurozone continued to improve, where the 6 month forward outlook shifted from 75% to 86% expecting the currency-bloc to move to an expansionary phase. The picture within the bloc was not uniform however, with most respondents expecting Portugal, Greece, Belgium and the Netherlands to remain in a recessionary phase over the next 2 quarters. 

With regards to the US, the consensus view firmly that North America as a whole is in mid-cycle expansion and remaining so through H2 2013."

September improvement for the global outlook was much shallower than a 10 point jump in August. Ditto for Eurozone outlook: this rose from 57% in July to 75% in August to 87% in September. Italy outlook seemed to have improved quite markedly, however.

Note: these views reflect opinions of survey respondents, not that of the BlackRock Investment Institute. Also note: cover of countries is relatively uneven, with some countries being assessed by a relatively small number of experts.

Two charts as usual:

Ireland continues to lead expectations, just as it did in previous 3 months.

In global expectations there were some notable movements in analysts' replies. 6% of analysts expected global economy to get a lot stronger over the next 12 months back in August, and this declined to 2% in the current survey. 69% expected it to get a little stronger in August and this proportion rose to 76% in September. 5% expected the global economy to get a little weaker in the next 12 months back in August, which in September rose to 6%. 

In Ireland's case, in August zero percent of analysts expected the economy to get a lot stronger over the next 12 months and this remained unchanged in September survey. All analysts (100%) expected the Irish economy to get a little stronger over the next 12 months in September survey - same as in August. 57% of analysts expected the economy to be in an early-cycle recovery over the next 6 months back in August, and this fell to 50% for September survey. There was significant rise (from 0% to 17% between August and September surveys) in the proportion of analysts expecting Irish economy to be in mid-cycle expansion over the next 6 months period. The number of analysts expecting the economy to be in a late-recession over the next 6 months dropped from 43% in August to 33% in September.

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6/9/2013: BlackRock Institute survey: North America & Western Europe: August 2013

BlackRock Investment Institute released its latest Economic Cycle Survey for North America and Western Europe region.

Per summary: "This month’s North America and Western Europe Economic Cycle Survey presented an improvement in the outlook for global growth over the next 12 months – the net proportion of respondents with a positive outlook increased to 70% from 60% last month. 

The consensus outlook for the Eurozone was particularly positive, where the 6 month forward outlook shifted from 57% to 75% expecting the currency-bloc to move to an expansionary phase. 

The picture within the bloc was not uniform however, with most respondents expecting Portugal, Greece, Belgium and the Netherlands to remain in a recessionary phase, while the consensus has shifted to expect expansion for France, Spain, Finland and Ireland over the next 2 quarters. An even mix of economists expect Italy to be expansionary or recessionary at the 6 month horizon (and similarly so for Norway, outside of the currency-block). 

With regards to the US, the proportion of respondents expecting recession over the next 6 months remain low, with the consensus view firmly that North America as a whole is in mid-cycle expansion and remaining so through H2 2013."

Note: these views reflect opinions of survey respondents, not that of the BlackRock Investment Institute. Also note: cover of countries is relatively uneven, with some countries being assessed by a relatively small number of experts.

Here are two summary charts:

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9/8/2013: Political Waffle Passing for Learning?

Mr Schulz - the President of the European Parliament - has penned an op-ed that is available here: http://www.linkedin.com/today/post/article/20130809113308-239623471-did-we-really-learn-the-lessons-of-the-crisis?trk=tod-home-art-large_0


My response is as follows:

This article is a trite rehashing of cliches, some of which have served as pre-conditions to the crisis, by a man who is presiding over the institution complicit in creation of the crisis in the first place, as well as in exacerbating the adverse impact of the crisis on the member states of the EU. 

Let me just deal with the first set of Mr Schulz's core hypotheses: 

"Firstly, the invisible hand of the market does not work and needs a robust regulatory framework." 

Given that the Euro area crisis arose from the disastrous mis-management of the monetary union, the statement is absurd and ideologically dogmatic. Markets require proper regulation and are legally-based structures. Mr Schulz seems to fail to understand this and is confusing anarchy with the 'invisible hand' of the markets. European markets have failed, in part, due to wrong regulation (not the lack of regulation) and in part due to the lack of enforcement of existent regulation. Mr Schulz seems to have no idea as to these facts. Institutions that commonly failed to enforce existent regulations and treaties include, among others, the European Commission (allegedly reporting to the EU Parliament, that Mr Schulz presides over) and the European Parliament itself.

The markets failures were, in the case of the 'peripheral' euro states, exacerbated by the inactions and actions of the European authorities, including those by the European Parliament.

"Secondly, politics should gain primacy over markets and labour over capital." 

Primacy of politics over markets (or rather economics) in Europe is exactly what led us into this crisis. 

Political dominance over economic policies design is behind the creation of the monetary union and the expansion of the union to include countries that are not ready for a single currency regime. It is also responsible for the fraudulent ways in which some member states have acceded to the monetary union (e.g. Italy and Greece, where misreporting and financial instrumentation of deficits and debt were rampant and Mr Schulz's institution was amongst those that were aware of these facts, were required to be aware of these facts, and yet were inactive in the face of these facts). Politicization of the markets for Government bonds, for foreign exchange, for credit, for equity, for risk pricing, etc has been responsible for inducing many deep failures in the markets in Europe. For one, this politicization has led to an unsustainable debt accumulation in the private sector and transfer of private debts onto the shoulders of taxpayers. 

I might agree with Mr Schulz on the point of 'labour' supremacy over 'capital'. Alas these are poorly defined concepts in Mr Schulz's case. Labour can mean labour unions (organised labour movement) or labour as human capital (skills, entrepreneurship, creativity, etc) and everything in-between. All of these definitions will contain internal contradictions in incentives, preferences for policies and responses to policies to each other and to the definitions of capital that can be deployed. Mr Schulz fails to define the categories he references, which suggests that his assertions are once again nothing more than populist sloganeering. Mr Schulz seems to have no idea that capital can be physical, technological, financial, intellectual or human. That 'labour' can be complementary to physical and technological capital in which case primacy of labour over technology can be destructive to the objectives of both. Mr Schulz appears to be inhabiting a simplistic universe more corresponding to that inhabited by Marx and Engels in the late 1840s than the one that exists today.

"Thirdly, and most importantly, the economy and politics should return to the values of solidarity, social justice, decency and respect." 

This is both historically incorrect and, frankly put, too rich coming from someone heading a powerful EU institution. 

It is inherently incorrect because a return implies existence of something in the past. European societies never possessed any real sense of 'solidarity' or 'social justice' but historically (and to-date) relied on preservation of the status quo of distribution of wealth within the set confines of the European elites and independent of merit. Thus, Europe never pursued meritocratic systems of wealth and income allocations. And subsequently never developed such systems. What Mr Schulz might mean (and we are reduced here to guessing) is the return to the status quo of interest groups-driven 'social' allocations of resources - a system commonly known as tax (someone else) and spend (on me or my friends). 

It is a rich statement coming from Mr Schulz because he presides over the EU institution that was at least complicit in forcing member states to transfer private sector losses onto taxpayers and failed to structure properly core institutional frameworks of the EU. Whether this complicity involved errors of omission or commission is irrelevant. The outcomes of these errors are Greece today, Cyprus today, Ireland today, and Italy, Spain, Portugal and so on. From this point of view, the perspective of returning to values by the political and economic institutions of Europe would first and foremost involve (require) restructuring of the European institutions from the top. Mr Schulz's job would be on the line in any such process of renewal and return to accountability. 

That, alas, is the nature of leadership: you fail and you are gone. Writing op-eds full of well-meaning waffle is, frankly, not an excuse for the failures of both action and inaction.

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23/7/2013: Ireland is not Greece... and never was...

Resting on one's laurels is a dodgy proposition. However, forgetting one's achievements is of an equally problematic virtue. To balance things up - a good reminder of Ireland's road travelled from the 1960s through 2008 and I have adjusted figures for Greece and Ireland for 2012 levels of GDP per capita based on IMF data.

Source: the original from World Bank, 2012.

Interesting bit - Ireland remains in the 'rich' club as a country that managed an elusive move from middle income economy in the 1960s to high income economy in 2000s and 2010s. Greece dropped out of the same group.

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17/7/2013: Wrong Austerity Compounds the Failures of the Monetary Union

Recent CEPR paper DP9541 (July 2013), titled "Debt Crises and Risk Sharing: The Role of Markets versus Sovereigns" by Sebnem Kalemli-Ozcan, Emiliano Luttini, and Bent E Sørensen (linked here: www.cepr.org/pubs/dps/DP9541.asp) used "a variance decomposition of shocks to GDP", in order to "quantify the role of international factor income, international transfers, and saving in achieving risk sharing during the recent European crisis."

Basic idea of the exercise was that a lack of saving in good times may reduce consumption smoothing in bad times, forcing households to cut back their spending and consumption more dramatically once recession hits.

Under perfect risk sharing, the consumption growth of individual countries should be completely independent from all other factors, conditional on world consumption growth.

The authors of the study "calculate how much of a shock to GDP is absorbed by various components of saving, in particular government saving, and other channels, such as net foreign factor income for the sub-periods 1990-2007, 2008-2009, and 2010." The key finding here is that "overall, risk sharing in the EU was significantly higher during 2008-2009 than it was during the earlier period, but total risk sharing more or less collapsed in 2010." Notably, 2010 is the year when European economies embarked on 'austerity' path, primarily and predominantly expressed (especially in the earlier stages) in tax increases. It is worth noting that there virtually no reductions in public spending during 2009 or 2010 across the EU and even in countries where spending was cut, such as Ireland, much of the reductions came from indirect taxation - e.g. transfers of health spending from public purse to private insurance.

Further, the authors "study how the crisis a affected risk sharing for "PIIGS" countries (Portugal, Ireland, Italy, Greece, and Spain), which were at the center of the sovereign debt crisis, compared to non-PIIGS countries (Austria, Belgium, Denmark, Finland, France, Germany, the Netherlands, Sweden, and the United Kingdom)."

Again, the findings are revealing: "For 1990-2009, risk sharing was mainly due to pro-cyclical government saving but the amount of risk sharing from government saving turned negative in 2010 for the PIIGS countries: government saving increased at the same time as GDP decreased." In other words - this is the exact effect of austerity as practised by the EU periphery.

"For [euro area peripheral] countries our measure of overall risk sharing turns negative because (conditional on world consumption growth) the decline in GDP in 2010 was accompanied by a more than proportional decline in consumption. This mirrors the behavior of emerging economies where government saving typically is counter-cyclical as shown by Kaminsky, Reinhart, and V egh (2005)."

Crucially, the study shows that there is basically no risk-sharing mechanism that operates on the entire euro area level. Even common currency zone - via lower interest rates - does not deliver risk sharing in 2010 and has potentially a very weak effect in 2008-2009 period. Worse, for the euro area peripheral states, euro has been a mechanism that seemed to have removed risk sharing opportunities both in and out of the crisis:

"…although non-PIIGS countries shared a non-negligible amount of risk during 2000{2007 while the PIIGS shared little risk in those years: in the good year 2005, consumption increased faster than GDP leading to "negative risk sharing." In 2008 and 2009 the major amount of GDP risk is shared for non-PIIGS with low consumption growth rates in spite of large drops in GDP, with the amount of risk shared in 2008 over 100 percent (positive consumption growth in spite of negative GDP growth). For the PIIGS, consumption declined very little in 2008 in spite of a large drop in GDP, while the drop in GDP in 2009 clearly led to declining consumption and, in 2010, consumption fell by almost as much as GDP, indicating little risk sharing."

Top line conclusion: once the authors "decompose risk sharing from saving into contributions from government and private saving", data reveals "that fiscal austerity programs played an important role in hindering risk sharing during the sovereign debt crisis."

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13/7/2013: Reuters on Anglo Tapes & Social Awakening in Ireland

Reuters programme on Ireland awakening to the banking and economic mess. Warning: shameless self-promotion (my contributions included).

http://uk.reuters.com/article/video/idUKBRE96B0X620130712?videoId=244195065

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12/7/2013: IMF Report on Malta: A Warning for Ireland

IMF Report on Malta is out, with, as expected, much of attention given to the risks of erosion of the tax advantages that form one of the core drivers for Malta's growth. This, of course, is of interest to other European jurisdictions, including Ireland.

IMF opens the report with a statement that Malta (emphasis in italics is mine) "has maintained macroeconomic stability in the face of a major crisis in Europe. Low reliance on external finance by the government and domestic banks, solid fundamentals, and a sound banking system have contributed to this resilience. However, recent events in Europe have heightened financial stability risks. In the longer term, Malta’s attractiveness as a financial and business location could be adversely affected by regulatory and tax reforms at the European level. "

"The Maltese economy has greatly benefitted from a business-friendly tax regime… Although these gains are hard to quantify, the large increase experienced in financial services [parallels to our IFSC anyone?] and other niche activities [in Malta's case: online gambling. In Ireland's: all IP-linked tax arbitrage, e.g. Google et al] since 2004 are likely related to Malta’s accession to the EU [which means Ireland is hardly unique here], its macroeconomic stability [which Ireland spectacularly does not have], and relatively favorable tax regime [bingo!]. Over the last ten years, more than half of the growth in value added is explained by the growth in financial services, ancillary activities (legal, accounting, and consulting), remote gaming, and ICT [wait, wait… but Dublin?… replace remote gaming with pharma - worse]. These sectors alone account for a quarter of total value added and 12 percent of employment [err… even more in Ireland and growing, again - replace remote gaming with gaming and… worse in the case of Ireland]. It is possible that greater fiscal integration of EU member states and a potential harmonization of tax rates could erode some of these benefits, with consequences on employment, output and fiscal revenues."

The risk is medium in size, medium/low in probability of materialisation and medium term - per IMF:

And thus, the report states that "The authorities were also of the view that an EU-wide tax harmonization would not happen in the short or medium term." However, let me ask you a simple question - how often does the IMF directly and bluntly pointing actual risks to the euro area states? After they have fully materialised, only. Hence, IMF stating the politically-sensitive and structurally important risk is 'medium/low' in likelihood and 'medium' in expected impact is as stern of a warning as one might expect. At any rate, of 6 main risks faced by the Maltese economy, the risk of tax regime changes is ranked joint 3rd with the risk of Protracted period of slower European growth, Significant declines in real estate prices, and ahead of the risk of Global oil shock triggered by geopolitical events.


Why such downplaying of the risks?

"Malta has been an important international banking centre in the past 25 years. A special offshore regime for banks (and other non-bank institutions) was promoted since the late
1980s. Like in several other European jurisdictions (Cyprus, Ireland, Luxembourg, or Switzerland), the main incentives offered to foreign investors at that time included exemptions from various regulations imposed on onshore banks and a favorable fiscal treatment."

How bad?

"The separate offshore supervisory framework was eliminated in 2002. As part of the planned accession into the EU, Malta was required to amend its financial policies to treat local businesses the same as international companies. In the mid-1990s, Malta started abolishing its offshore banking. In 2002, the legal amendments to the Banking Law removed an offshore banking option. Since then, all banks operate under the same regulatory and fiscal frameworks."

Spotting a picture of Dublin's IFSC, yet?..

"However, Malta maintained a substantial tax incentive for attracting foreign investors
in its banking and other businesses. This was achieved through tax refunds based on the
dividends that a local bank distributes to its shareholders. While the headline corporate income tax rate in Malta is 35 percent, the application of a tax refund system positions Malta as the country with one of the lowest effective tax in the EU, which ranges between 0 and 12 percent. The quantum of the tax refund depends on the nature of income and is generally equal to 6/7th of the underlying tax (35 percent), resulting in a 30 percent tax refund of the taxable profits."

Of course, Ireland does not provide such refunds - instead we have a Mega 'Refund' System called Double-Irish.

"In addition, the EU accession in 2004 and the euro adoption in 2008 boosted international banking and non-bank financial sector activities in Malta. Several large banking groups from various countries around the world (Australia, Germany, Saudi Arabia, etc) established their presence in Malta since the mid-2000s. The EU and euro area memberships inspired confidence; the former also allowed non-EU investors an easy access to European markets, while the latter facilitated transactions for EU-based investors. The availability of skilled people and the use of English as the official language also contributed to making Malta an attractive place for doing business by the multinational banks."

You have to laugh reading the above, as you can just replace Malta with Ireland there and nail the regular IDA presentations…

"As a result, the internationally-active banks have become large compared to the size
of the Maltese economy. As of October 2012, there were 13 non-core domestic banks and
8 international banks, with assets of respectively €5.3 billion (80 percent of GDP) and €33.1 billion (500 percent of GDP). The majority of these banks are subsidiaries of EU banks offering a range of services to non-residents that include trade finance, investment banking, and group funding operations."

"Unlike some other EU countries with a big international financial centre (for example,
Cyprus or Ireland), Malta has not experienced any deleveraging pressures in recent years. As a result, measured by the total bank assets to GDP ratio, Malta now ranks higher than Cyprus or Ireland, and is second only to Luxembourg among all EU countries."

Problem, Roger, is that the above statement is pretty much bonkers. Ireland has deleveraged not tax-sensitive international banking sector, but tax incentives-insensitive domestic sector. Cyprus 'deleveraged' deposits. So from the truth-in-analysis point of view, one should look at the compatible assets and liabilities at risk of tax regime changes. And that is much harder, as a large part of Irish internal assets and liabilities is really IFSC, while part of Malta's external assets and liabilities is domestic economy.

All in - the risk is real. This is why IMF (having downplayed it to medium) still posits it as the fifth most significant in overall terms.

Ireland should be seriously concerned.

Note: I wrote about the threats to Ireland from tax policy harmonisation most recently here: http://www.fergco.co/2013/07/272013-sunday-times-june-23-2013-g8-and.html
And I wrote about Malta's tax dilemma and IMF analysis of it before, here: http://www.fergco.co/2013/05/1552013-what-imf-assessment-of-malta.html

Any source

8/6/2013: Euromoney Credit Risk summary for Ireland

Latest results for Euromoney Country Risk survey for Ireland:

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23/4/2013: Updating the cost of banking crisis data

Nice update from the ECB on the cumulated cost of the banking crisis in Europe, now available through 2012. The net effect, summing up all assumed sovereign liabilities relating to the crisis, including contingent liabilities, and subtracting asset values associated with these liabilities are shown (by country) in the chart below:

Note the special place of Ireland in the above.

For the euro area as a whole, net liabilities relating to the crisis back in 2007 stood at EUR 0.00 (EUR36.72 billion for EU27). By the end of 2012 these have risen to EUR 740.15 billion (EUR 734.23 billion for EU27).

Net revenue losses for Government arising from the banking sector rescues, per ECB are:

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16/4/2013: One question, Mr Market, please...

A uncomfortable question:

Faith seems to have no bounds once sentiment shifts. The Market seemed to have maintained confidence in EU's crisis-fighting 'measures' despite the fact that Cyprus case revealed an obvious lack of any real crisis-fighting 'measures' to-date.

The entire periphery-fixing policy tool kit in Europe - now into the sixth year running - still boils down to

1. Rolling out unfulfilled promises (ESM banks-sovereigns break, OMT, a banking union, fiscal policies coordination, fiscal supports for growth - do recall that EU keeps talking about the need to 'support' growth and yet does nothing about providing such supports), 
2. Dogmatic ECB stuck in a rates and money supply policies that neither ease currency and interest rates pressures, nor provide a break from the failed transmission mechanism, and 
3. Internal devaluations of the worst kind (ad hoc loading of debt on economies already carrying too much debt & lack of reforms in the real economy - keep in mind, setting deficit targets ≠ reform). 

So would The Market please run this by me: What HAS changed between Ireland 2008 (the beginning of the euro crisis) and Cyprus 2013 (it's latest iteration) other than the channels by which more debt is being piled onto over-indebted economies hit by crisis?

Well, not much. Yesterday, IMF has issued a statement on Greece (that's right - the second country that was 'repaired' by the EU approach to crisis, ...and then repaired again... and again) claiming that with the fourth round of 'reforms' promised, Greece is now (still?) on a sustainable debt path. Never mind that the 'sustainable debt paths' so far for Greece have meant debt/GDP ratios bounds for sustainability rising from 'under 120%' within Programme 1 to 'under 200%' within Programme 4.

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15/4/2013: About that orchestra on Titanic's deck...

In a telling sign of total disconnect with reality, last week we heard two bizarre comments from the European 'leaders' all made in the context of Dublin Ministerial dealing with Cyprus.

First, "Klaus Regling, managing director of the ESM, told reporters that the fund had had its "most successful week". The statement can on foot of ESM selling EUR10bn worth of new debt in heavily oversubscribed markets. Alas, the said claim was made in the week when ESM became the sole vehicle for handling EU side of the Cyprus 'bailout'. In other words, Regling, like rest of EU 'leaders' measures success by how high he can pile on debt (EUR8bn worth of bonds here, EUR2bn worth of notes there), not by real economic outcomes (which can see Cypriot economy shrinking 15% in one year - some 'success').

However, the weekly prize for detachement from reality goes, as it often does, to Olli 'The Delusional' Rehn - the EU Commissioner for Something-to-do with Economy - who was forced to concede that Cypriot bailout can lead to the island economy shrinking up to 15% in 2013. Never, mind, says Rehn, as "I don't deny that there is uncertainty about the precise figure whether it will 10 percent, 12.5 percent or 15 percent."

Indeed, 'never mind'. You'd think he would make it his job knowing. But, of course, why bother, since 10-12.5-15 percent range clearly might reach into 20-22.5-25 percent range as easily and Mr Rehn wouldn't bat an eyelid. Especially since the host nation's Government - aka Ireland's 'best pupils in the EUssroom' - were there to cheer Mr Rehn in exchange for getting a handful of platitudes from important foreigners. Behold Jeroen Dijsselbloem's claim that Ireland is "a living example that adjustment programmes do work". Cyprus, presumably, will be the EU's roadkill of history... joining Greece and Spain, with Italy and Portugal in the waiting wings.

In short, we are now going verifiably gaga this side of the Atlantic, begging for a comparison with the orchestra that played through Titanic's sinking. Alas, the orchestra, as historian tell, was rather competent one - unlike Messrs Rehn, Regling, et al.

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