Monthly Archives: September 2012

With greater transparency in prices, where now for house prices ? Have your say!

So now that we have some more transparency in the housing price area, with the publication of the property price database, where do people see the average house price going? Will greater transparency via increased volume result in prices going up or will people decide that the market is still a buyers market and bid down? Ill leave this up for the evening… Please direct people to it.

Full Property Price Details Ireland Jan 2010-Sep 2012

Ok, the site ( is awful. But you can download data (in csv). Below is a full download to save the aggravation (in xlsx format) of all property sold in Ireland since 2010 January. File is c 3mb….


The Quantum Mechanics of Irish Debt

This is an extended version of a column published in the irish examiner. The Irish government find themselves on the horns of a dilemma. They, quite properly, seek a write down, from somebody, anybody, of a large part of the banking debt, which has accumulated. At the same time they wish to convince the markets that everything is ticketyboo and, and that any day now we will return to normal funding of the ongoing government deficits via the private debt markets. These two issues cannot be reconciled. What the government are saying is in fact the Irish debt is Schrödinger’s debt. It is both sustainable and unsustainable. In this thought experiment we the people who pay the debts are left in the dark. Economically, we are Wigner’s Friends. It is manageable debt if you are trying to persuade bond investors to buy into the idea that having failed over decades to run the country as a a going concern we have now mended the error of our ways and will be prudent. It is unsustainable if you are in talks with Troika officials and you need them to persuade their government that we are at the brink of penury and revolution. That these meetings take place in a peaceful prosperous country where nary a revolt is on the horizon is unfortunate…

In June of this year the government announced to great fanfare that a decision had been taken, in principle, which would greatly alleviate the Irish debt position. This was, we were told, “seismic”. It came from the 29 June meeting where the phrase “similar cases will be treated equally” was used in relation to ESM dealing with Bank debt. Thus far the evidence is that if it has been a seismic experience It is more an event of Richter scale 2 than of Richter scale of 10. The earthquake off Mayo in early June was scale 4, and nobody really noticed.

Throughout the summer it has been clear that the event that preoccupies the European government is when, rather than if, Spain will be forced into seeking a bailout. As the fourth-largest economy in the Eurozone it is too big to ignore. We on the other hand can be very safely ignored. We have shown over the last four years that we are perfectly willing to acquiesce to every requirement that emanates from the center of Europe, no matter how deleterious this may be to the long-term health of the Irish economy. The Irish negotiating position has been to lie around with a pathetic look on its face hoping someone will take pity on us while we continue to annoy them with various quaint local customs such as having a low rate of corporation tax, paying ourselves over the Euro area median salaries in all sectors, and generally not being good germanofinns.

I have characterized this numerous times as sending out nice well meaning Irish fellas to negotiate with the heirs of Bismarck (who suggested swapping the Irish and Dutch populations, enabling the Dutch to feed the world while we would drown in short order) and Richelieu. Throw in the Finns, a dour doughty lot who don’t back down (they took on the Red army in 1939 and beat them to a standstill, with the world record sniper being Finnish with over 500 confirmed kills) and we are hopelessly outclassed.

At the end of 2012 the national treasury management agency estimated that our national debt will stand at €187 billion. This is 117% of GDP, Just behind Greece and Italy/Potugal. If we accept that there is a large chunk of GDP, which cannot easily be taxed, then the appropriate metric becomes GNP, and the figure then makes Ireland look much closer to Greece than it does to Italy. Of course, the wedge between GDP and GNP is one that we have allowed to grow as a consequence of our reliance on high money low job FDI, and that policy choice of acting as a tax arbitrage location is one that is hard to explain as being a core tenet of economic growth to a German, a Finn or a Dutch official or minister. And lets not even go near the French…

Of our debt two thirds has been accumulated in the old-fashioned budget deficit way. While the debt exploded after 2009 this is not all bank debt. A large part is down to the hole in government spending that had opened up through overreliance on bubble taxes. And it will have to be paid down in the old fashioned way – by reducing spending and increasing taxes. Indeed the deputy governor of the central bank has gone so far as to suggest that we run surpluses to pay down the nominal debt rather than letting it erode through time and inflation. He doesn’t see growth roaring ahead. How this will happen is unclear as every single special interest group are NIMPPs – Not In My Pay Packet. Absent a banking debt mountain we still have a problem. That said, the willing lunacy of the bank guarantee and the Anglo bailout tipped the country from a fiscal problem to a fiscal basket case.

We have poured in in excess of €60 billion into the banking system. We have put in approximately €20 billion into the main banks, which equity is now valued at approximately €8b. The statements recently from Finland , Austria, Netherlands and Germany (FANGs we may call them) makes it very clear that the creditor nations are willing to contemplate the GSM only taking further equity stakes. In other words legacy bank debt is not going to be on the table. We are therefore stuck with this ownership, stuck with the money sunk into the banks, and unlikely to see a rapid return on this money. The largest part of the banking debt that can be put into play relates to the IBRC promissory notes. Every year, on 31 March, the Irish government pay €3.1 billion to IBRC, who pay this onto the central bank, Which then destroys the money . I have consistently been of the opinion that this is political, economic, and indeed in the context of swinging budget adjustments moral lunacy. Successive Irish governments have taken the approach of Mr Micawber, that something will turn up, in relation to this Schrödinger’s debt. Something has turned up, but it’s not a something to our liking. At very best it is likely that this promissory note (which is not government debt, as if it were a government debt then Anglo could have gone to the European Central bank and obtained liquidity rather than having to go through the Irish Central bank) will be replaced by longer dated government debt. This will reduce the annual outflow, but will not reduce the stock of debt. A year ago I suggested that on the return of the Dail the Taoiseach should have stated that we were no longer going to pay this debt. I stand by this. If the Irish government were to tear up the promissory note, is my view that nothing will happen. At least, nothing bad will happen. Both Anglo Irish bank and Irish nationwide building society would become immediately insolvent. This would then force them to be wound up. The central bank of Ireland would either have to sue the government for the repayment of the promissory note or have to accept the loss of it. The consequence of this would be that the €30 billion would remain as created money.

The argument against tearing up the promissory note runs that upon this happening the ECB would cut off all funding to Irish banks. The latest data suggest approximately €60 billion in ECB funding is made available to the Irish covered banks, and some €80 billion to all credit institutions in Ireland. This argument is bunkum. What the ECB would be doing in that context would be punishing a well performing (within the troika program) peripheral country for taking immediate steps to ensure that its sovereign debt is sustainable. It would become clear that no matter what their government did it would not satisfy the monetary uber-Hawks of Frankfurt. It would crystallize the fear that many on the periphery of Europe have, that in the eyes of the core (in reality in the eyes of a toxic blend of populist politicians and frightened faceless bankers in thrall to the ghost of a memory of a supposed consequence of a monetary event in the 1920s) the periphery is dammed if it does and dammed if it doesn’t. I do not believe that the ECB is a suicide cult, which is what it would have to be if it were to in effect force Ireland out of the euro. That is what logical endpoint of cutting off liquidity would be, and no organization willingly engages in an action which will result in its own demise. .

Tumbleweed time in the Irish Stock Exchange

So the Irish Stock Exchange held  a conference  with EI on why companies should consider floating . As Simon Carswell says, its now time for the ISE to think long and hard about what it is it wants to be. One of the problems that bedevils the exchange is that it is no longer fulfilling one of its main roles, that of primary lister. The flow of IPO’s onto the Irish exchange is very poor: In Q2 2012 one exploration companies –Fastnet-  listed.  No companies listed in Q1 2012

A second major function of stock exchanges is to act as a price discovery mechanism. In this too the ISE is not exactly winning. I downloaded from Datastream the list of constituents of the ISEQ, and show below the number of days on which there were recorded zero volume, and the average daily turnover as a % of market capitalization. All data are for the last two years. In reading this bear in mind that the ISE trading mechanism is the Deutsche Bourse Xetra system therefore there are days when that system is open for trade but are holidays in Ireland. Leaving aside then the number of companies that show zero vol on a dozen or so days we see that for a not inconsiderable number of companies there are many many days when nothing happens…. This is hardly an effective way to discover prices for these companies and one wonders what they are doing on a listed exchange. Sure, the IPO proceeds can be put to good use but as an ongoing price discovery mechanism this isn’t working..

Name Zero Vol Percent Av daily To %
AER LINGUS GROUP 14 2.68% 0.10%
ARYZTA (DUB) 14 2.68% 0.04%
C&C GROUP 14 2.68% 0.25%
CRH (DUB) 14 2.68% 0.19%
DCC 14 2.68% 0.19%
DRAGON OIL 14 2.68% 0.02%
ELAN 14 2.68% 0.06%
GRAFTON GROUP 14 2.68% 0.15%
KERRY GROUP ‘A’ 14 2.68% 0.16%
KINGSPAN GROUP 14 2.68% 0.13%
PADDY POWER 14 2.68% 0.25%
RYANAIR HOLDINGS 14 2.68% 0.16%
SMURFIT KAPPA GROUP 14 2.68% 0.29%
UNITED DRUG 14 2.68% 0.16%
ALLIED IRISH BANKS 15 2.87% 0.05%
BANK OF IRELAND 15 2.87% 0.18%
FBD HOLDINGS 15 2.87% 0.18%
GLANBIA 15 2.87% 0.08%
PERMANENT TSB GHG. 17 3.25% 0.22%
IRISH CONT.GP.UNT. 19 3.63% 0.21%
KENMARE RESOURCES 20 3.82% 0.02%
TOTAL PRODUCE (ESM) 20 3.82% 0.12%
FYFFES (ESM) 24 4.59% 0.15%
PROVIDENCE RES. (ESM) 39 7.46% 0.02%
IFG GROUP 50 9.56% 0.13%
ORIGIN ENTERPRISES (ESM) 69 13.19% 0.05%
TVC HOLDINGS (ESM) 118 22.56% 0.12%
DATALEX 137 26.20% 0.16%
PETROCELTIC INTL. (ESM) 154 29.45% 0.00%
CPL RESOURCES (ESM) 158 30.21% 0.13%
ORMONDE MINING (ESM) 163 31.17% 0.03%
DONEGAL CREAMERIES (ESM) 183 34.99% 0.06%
ABBEY (ESM) 193 36.90% 0.08%
AMINEX 245 46.85% 0.01%
ICON 245 46.85% 0.01%
MERRION PHARMS. (ESM) 313 59.85% 0.04%
OVOCA GOLD (ESM) 331 63.29% 0.01%
PRIME ACTIVE CAP. (ESM) 382 73.04% 0.04%
ZAMANO (ESM) 406 77.63% 0.05%
UTV MEDIA (DUB) 450 86.04% 0.00%
CONROY GD.& 0TRES.(ESM) 490 93.69% 0.00%
FIRST DERIVATIVES (ESM) 492 94.07% 0.00%
KARELIAN DIA.RES. (ESM) 506 96.75% 0.00%

Its educational chestnut time again….

Peter Drucker stated What Gets Measured Gets Managed and he is right. This is managerial equivalent of looking for your keys where the light is rather than where the keys may be. Want people to do something? Measure it, reward the metric and then they will achieve. Its a great way to drive performance IF the metric being measured is a sensible one.  Today we see a proposal that is non-sensical. This morning we see that hardy annual, that hoary old chestnut, the creation of one single University of Dublin, pop back up above the sodden ground. In passing, we might note that this is achievable very easily. There is a University of Dublin, the sole constituent college of which is Trinity College. If the government or whomever want a single university I am sure the fellows and board of TCD would look kindly on allowing UCD to come in as  a college, subsuming it into the University.

That is not what this latest incarnation of this zombie theory is about however. Like an ant on a moebus strip the theory comes round, goes away, and so on. According to the Irish Times “The report says a UCD-TCD merger would give the merged college the critical mass and expertise needed to secure a place among the world’s best-ranked universities. At present, Ireland is not represented among the top 100 universities in the prestigious Times Higher Education World Reputation Ranking”  So now we have a metric which is (although about the best in class) flawed and which is undergoing continual improvement (aka change).  For comparison, the THES rankings of world universities in 2011 had TCD at 117 and UCD at 159. These are slippages from the heady heights of the 2009 and 10 period but given the construction of the THES rankings changed this is not strictly comparable.  In any case, why top 100? This is metric shibboleth, cargo cult stuff. Why not top 10, or 120 or 25? Why not top 100 in Europe (oh, hang on we are there already, TCD being 42 and UCD 65 ) . Why Times Higher? Why not one of the many many many other world rankings (see a discussion on the strengths and weaknesses of these in an EU document here) that exist? Why tie our national higher education strategy (hah) to an external metric which has changed in the last two years (To our ‘detriment’) and which will change again .

And it wouldnt even work, absent radical radical surgery. An analysis by Steve Hedley of UCC law school and the aggregator blog 9thlevel Ireland shows this. Steve goes through the data and concludes ” So this merged university would at best be ranked at 104 in the world, along with Delft University of Technology and the University of Montreal – and still just outside the top 100.  On the less optimistic assumption, it comes in at 134, just below the University of Leeds, and some 17 ranks lower than Trinity actually achieved. If ranking is the problem, merger does not solve it.  It may, indeed, make matters worse: losing two world-ranked institutions, in return for a single one which is not guaranteed to do particularly well. Of course, ranking methodologies can and will change – but there is nothing to suggest that these changes will favour Irish institutions.”  So a merger, designed to achieve the aim, would not. In fact it would make things worse.

Heres the bit to annoy everyone in UCD. We already have a world class university in TCD (actually, much of UCD and some spots of others are world class also). Bearing in mind the fact that rankings are fairly pants, if we are determined to use rankings lets see where we might rank in areas. QS produce their own world rankings (where TCD is number 67 and UCD 131) and also produce subject area rankings. These are not schools, but rankings of subject areas, and so a university which does not have a school can have a ranking in an area , such as Accounting and Finance in TCD.  The rankings are a combination of research (citation count in essence) , peer evaluation (where one is asked to think of the top universities in a subject area ) and employer feedback. The weights range from about equal in the engineering areas to mainly academic in English language and 50% research 40% academic for biology. So they make an effort to be balanced although are still blending apples, wombats and feldspar, not even different types of citrus fruits.

So where do TCD/UCD rank?  Here –QS Subject Rankings – see  the 2011 and 2012 subject area rankings. Feel free to make your own mind  , but one thing comes clear : TCD is in most areas “ahead”. If we truly want to improve our “ranking” then we have an in-country benchmark for others to attain. What is it about TCD that allows it to achieve this? To what extent is it replicable? To what extent does this tell us about centers of excellence? Might a policy of determining what as a society (not as  an economy) we wish, then determining what that would cost, then working out how much we can afford and from whom, then creating and incentivising structures in universities to work within these parameters, might that not be  a better aim than determining that we want to be in an arbitrary position on an external metric?

Trying to untangle the kites flying around the Anglo Irish Promissory Note? A guide…

So, the old chestnut (at this stage so old and withered it’s a conker) of floating a bond to replace the anglo Irish bank promissory note has rared its head once again. The report in the times is fair, if the headline is not. the headline is ” 40-year bond could be issued to save State billions on Anglo” , which is untrue. The report states inter alia  “A long-term bond would not, in iteself, cut the total cost of repaying the State’s debt in relation to Anglo, merely postpone them. ” This is correct . The bond will not save us billions. The overwhelming likelihood is that any bond structure will be such that the present value of the bond represents the present value of the promissory notes. While there might be a liquidity boost in the state paying out < 3.1b per annum that is not a solvency boost. We got into this whole sorry mess by confusing solvency and liquidity.

This smoke and mirrors shell game seems to be consequent on a hardening of the teutonic attitude towards us. In fairness to Frau Dr Merkel, the government keep saying everything is grand, grand..We in ireland know that we would say that even if the state was overrun by parasitic wasps armed with hot stingers, but the germans take people at their word. So, it seems that the prospects for a deal on the debt are receding faster than the chances of the Kerry team winning a three-in-a-row.

Lets step back and untangle this – for much more depth go check out the presentations made by my good self, Professor Stephen Kinsella and Professor Karl Whelan to the Oireachtas in February. Here is  a stripped down version of whats going on.

  • Anglo Irish Bank, a private company,  was, is and will be bankrupt, bust, broke, borked… The black sheep of Irish banking its dingleberry Irish Nationwide Building Society was similarly banjacked.  They now live in the zombie called Irish Bank Resolution Corporation, but lets call them Anglo. Or Quanglo, as they also own Quinn Insurance, a smaller black hole…
  • It had bonds which in a fit of yet to be explained magnanimity the then Irish government determined to repay.
  • It created a promissory note (an iou), which it gave to Anglo.
  • We know that this was not real government debt as if it had been then it would have gone to the ECB and got cash. Instead it went to the Central Bank of Ireland, and got…cash. Because that’s what central banks do, they create cash.
  • With the cash Anglo paid off its bondholders, and runs the bank (down we hope)
  • Every year the Irish government gives money to Anglo, who then give that money to the central bank who then in effect destroy it. That way no net money is created. This is because the ECB say so. Apparently although central banks exist to create money, doing so is bad….Apparently.
  • The Irish government either borrows that money from the troika or takes it from its citizens, and instead of doing useful things like giving it to professors of finance or even, god help us, spending on social good, it gives it to Anglo.
  • The plan now is to replace the its-not-government-debt ProNote with a you-betcha-its –governemnt-debt, give that to Anglo, tear up the ProNote, borrow money to repay the debt, give THAT to anglo, who will give it to the central bank who will STILL destroy it.

Clear? Great….


What can the banks realistically do for SME credit?

This Is a version of a column which appears in the Irish examiner, Saturday 14 September 2012

The last few weeks have seen an economic clarity beginning to appear, as the dust of the bank collapse begins to settle. We see at the European level that there is an acceptance of the role Ireland played (willingly or no) in preventing contagion by means of the bank guarantee and the decision (again, willing or no) to obtain a bailout. We see that there are the glimmers of hope that this will be somehow, by someone , at some time d own the road, rewarded by other than a gold star for our copybooks. We see at the macroeconomic level a much greater clarity, with the government grimly setting out to repair the hole in the state finances left by decades of porkbarreling and special interest trough wallowing (its always amusing to hear private sector representatives of industries which made out like bandits on the back of public largesse decrying public sector wages while calling for special extra grants for their unique capitalism) We see at a micro level that the credit allocation and distribution system of the Irish banks is broken. And that is perhaps the most stark problem we face.

Banks are, in essence, simple creatures. They take money, and lend it out. From the profits they make on lending they run their operations and pay a modest sum in interest to the depositors. Sometimes they want to expand faster than the available deposits will aloow and then they themselves borrow money from others and onlend. The credit intermediation system – transforming deposits into loans – is the basic plumbing of modern finance and has been since the middle ages.

Where it gets problematic in Ireland is that we have a threefold crunch on the banks. First, they are obliged to shrink both because they have grown too fast and that in doing so they became a (realized ) threat to the state. Second, they need to rebuild their capital base. Third, they are sitting on large unrealized losses in the form of residential mortgages – some of this is ever deteriorating mortgage lending situation with close to 1/5 of all mortgages now in some degree of trouble. More is the ongoing drain from the losses being sustained on a daily basis from the tracker mortgages (where the mortgage rate is tied to the very low ECB rate while the financing of these is market rate). A third element is the tail of property related loans that were not swept into NAMA. All of these conspire to reduce credit flow. As Irish banks became more and more dependent on foreign bond holders to lend to domestic construction, a dangerous gap opened. The bond holders having been repaid by the generosity of successive governments, the banks are now funded by (slowly increasing) deposits and (slowly decreasing) ECB money.

Credit to households has fallen by over 50b euro, 1/3 of GDP, since its peak in 2008. Credit to non-financial corporations has fallen by 80b. With deposits falling only by 20b or so, the clear evidence is that the collapse in credit is associated with a shrinking back of Irish banks to a much more conservative deposit led banking system. In the very long term this is good, as such a system is less exposed to international credit cycles. But in the short-term it is a source of massive dislocation. And the SME sector is taking a huge hit. IMF reports suggest that the SME sector accounts for some 70% of employment and generates about 50% of GNP. Historically Irish SMEs were not highly leveraged and they have of course reduced their leverage during the crisis. While some of this reflects no doubt a normal prudence, there is also an exogenous forcing, as they find it hard to obtain finance.

The most comprehensive European data are those of the ECB which surveys every 6 months. 17% of Irish SME’s (as opposed to 13% Euro area) were refused (having applied) loan approval. A further 16% did not apply due to possible rejection, the second highest after Greece. Demand conditions do not help with Irish SME’s rating demand for products as the most pressing issue. This is a classic recession SME finance squeeze – as demand falls the quality of available loans demanded falls, rendering banks less likely to lend. Combine this with an absolute credit crunch, as we have with de-levering banks, and we have recipe for throttling the SME sector.

What is also astonishing is that despite the property slump, lending to SME property sector has increased, massively, since 2010 when the Central Bank began to make sectoral breakdowns of SME lending available. Lending to real estate is up 44%, while lending to primary industry and manufacturing is down 12%, transport and logistics is down 54%, to retail and wholesale SMEs down 22% and hotels and restaurants down 44%. Irish banks are supposed to lend nearly 3b to the SME sector this year, but in fact lending is falling. Stripping out the property and finance sectors lending to SME’s has increased by just over 800m in 2012. There is not a hope that the banks will meet the target. Nor can we expect them to when delevering and when faced with an SME sector struggling to find customers. Government can do little on either – the deleverage targets are set in the final instance by the terms of the bailout and the demand for goods is a function in the main of the domestic economy. Facing a government sector going to take billions more out of the economy in the next budget and the one thereafter SME’s seeking credit would be well advised not to expect a favorable response from the bank. Nor should we expect the broken banks to be able to do their job.

The time must be coming soon when a clean look needs to be taken at whether or not the pillar banks are capable of doing the credit allocation role required. If they cannot, as many suspect, then every step to create new clean banks, whether state or private, must be taken. But that will take courage.