So, I ran an experiment yesterday, thanks for taking part.
I posted two blogposts. One was titled “are you looking forward to 2013”, the other “where is the Irish property market going in 2013”
Both were identical in every way apart from the title, being the usual expanded version of my Irish Examiner Saturday column. Both were published more or less simultaneously.
This is an extended and linked version of a column published in the Irish Examiner on 29 December 2012
So what will the new year bring on the economic front? 2012 can be summarized as having been a holding operation – on the domestic front the government held the line at the budget, losing some along the way but pushing forward in a fairly technocratic manner with a lot of legislative initiatives. True, most of these relate to the financial calamity and were insisted on by the troika but Enda has shown his true abilities as a chairman, able to inch forward with minimal fuss. Internationally the palpable change in attitude of the ECB on its role, if not its ultimate responsibility, has marked the tenure of Draghi. No longer semi passive it is now semi active, and willing to intervene to take the worst heat out of the bond yields. In the USA Obama held his line and his job as the republicans continued to implode and explode at once, spinning into ever more radical sects of economic eschatology, while in Europe the same rhetoric held. Greece sank deeper into social and economic collapse, Italy and Spain rumbled on, and Frau Dr Merkel held her Nein Nein Nein views on , well, anything that might cost German taxpayers a pfenning, trusting in some swabian micawber manner no doubt that somehow this time is different and while swallowing austerity the euro area will continue to purchase german exports. Germany is not immune from the euro area economic woes and indeed they are already preparing for same. It will be interesting to see how the swabian housewife economics plays when germany itself is undergoing austerity. Debt is evil you know and evil must be purged….At home the wretched farce that is Anglo shuffles along, staffed by people on gargantuan salaries who seem to be beyond the control and perhaps interest of the government, and the “begotiations” on the restructuring of the odious debt of Anglo glaciates.
So what will 2013 bring? It is probable that things will continue as they have done so, with a slow grinding deterioration on several levels. The beatings will indeed continue.
First, there seems no prospect whatsoever that Europe (read, Germany) will come to its senses on the required changes to the European experiment to allow the foundations to be laid for a true union. We all know what these are -a banking union, a transfer union and a political union – and have seen the enormous difficulty that the nascent banking union has encountered in getting even onto the taxiway never mind take off. Eurozone growth for 2013 onward is forecast to be negligible, with muted inflation and rising unemployment. The ECB willingness to intervene in the secondary bond markets acts to keep a lid on bond yields, but this is the equivalent of aspirin. It acts to keep the temperature (bond yields) low but does little to solve the underlying problem (too much debt). Expect to hear a lot more about Article 123 in 2013 – this is the article of the Treaty on the Functioning of the Union which prohibits what is known as monetary financing ,the underwriting of government deficits by central banks. Someone will have to pay for the writing down of excessive government debts and the logical (if legally problematic) candidate is the ECB. Absent that we will see more and more greek style social collapses as the costs are passed onto the taxpayer and inevitably hit the poorest hardest.
Domestically and related, the government are facing into a brutal 6 months. Not content with having to manage Europe, including a crack at framing a budget in the face of growing eurohysteria from the UKIP hagridden Cameron, they will find that all the political oxygen is absorbed in a conflagration around abortion. Meanwhile the aftershocks of the “seismic” deal agreed in June, on bank debt, dwindle into background noise, and for Labour these become the first tremors of political oblivion, with the IMF, damned commies that they are, now revealing itself as being demonstrably more concerned about the poor than they are. All indications are that we are being prepped for a deal on the wretched anglo Promissory notes that will be minimal. In order of impact we can reduce the interest rate (pointless as this cycles back to the state anyhow), increase the repayment time or reduce the amount of these that are to be repaid. The latest statement from Kenny suggests a focus on the first two. Expect a deal that is touted as a solution but which merely kicks this can along the road for longer, and while welcome it is not a solution to a debt which is in every sense odious. Meanwhile the domestic economy will shuffle along with unemployment remaining stubbornly high and the prospect of a further brutal budget in 2013.
Finally, the housing market will remain mired. Although selected areas will show some growth, houses and decent apartments in established urban areas for the most part, there is a combination of overhangs that will mute any prospects for rises. First, the transparency given by the property price register empowers bidders to bid low. Knowing that there are downward pressures, why bid more than the last relevant price? Second, the property tax and uncertainty around same acts to reduce slightly the prices. Third, the likely wave of repossessions, mainly of buy to lets but increasingly of family homes will result in increased flows of distressed property. Finally, the reduced incomes of potential purchasers combined with a moribund banking system will make mortgage finance less accessible. All of these together will result in the housing market sinking towards its post bubble low in 2013.
This is an extended and linked version of a column published in the Irish Examiner on 29 December 2012
So what will the new year bring on the economic front? 2012 can be summarized as having been a holding operation – on the domestic front the government held the line at the budget, losing some along the way but pushing forward in a fairly technocratic manner with a lot of legislative initiatives. True, most of these relate to the financial calamity and were insisted on by the troika but Enda has shown his true abilities as a chairman, able to inch forward with minimal fuss. Internationally the palpable change in attitude of the ECB on its role, if not its ultimate responsibility, has marked the tenure of Draghi. No longer semi passive it is now semi active, and willing to intervene to take the worst heat out of the bond yields. In the USA Obama held his line and his job as the republicans continued to implode and explode at once, spinning into ever more radical sects of economic eschatology, while in Europe the same rhetoric held. Greece sank deeper into social and economic collapse, Italy and Spain rumbled on, and Frau Dr Merkel held her Nein Nein Nein views on , well, anything that might cost German taxpayers a pfenning, trusting in some swabian micawber manner no doubt that somehow this time is different and while swallowing austerity the euro area will continue to purchase german exports. Germany is not immune from the euro area economic woes and indeed they are already preparing for same. It will be interesting to see how the swabian housewife economics plays when germany itself is undergoing austerity. Debt is evil you know and evil must be purged….At home the wretched farce that is Anglo shuffles along, staffed by people on gargantuan salaries who seem to be beyond the control and perhaps interest of the government, and the “begotiations” on the restructuring of the odious debt of Anglo glaciates.
So what will 2013 bring? It is probable that things will continue as they have done so, with a slow grinding deterioration on several levels. The beatings will indeed continue.
First, there seems no prospect whatsoever that Europe (read, Germany) will come to its senses on the required changes to the European experiment to allow the foundations to be laid for a true union. We all know what these are -a banking union, a transfer union and a political union – and have seen the enormous difficulty that the nascent banking union has encountered in getting even onto the taxiway never mind take off. Eurozone growth for 2013 onward is forecast to be negligible, with muted inflation and rising unemployment. The ECB willingness to intervene in the secondary bond markets acts to keep a lid on bond yields, but this is the equivalent of aspirin. It acts to keep the temperature (bond yields) low but does little to solve the underlying problem (too much debt). Expect to hear a lot more about Article 123 in 2013 – this is the article of the Treaty on the Functioning of the Union which prohibits what is known as monetary financing ,the underwriting of government deficits by central banks. Someone will have to pay for the writing down of excessive government debts and the logical (if legally problematic) candidate is the ECB. Absent that we will see more and more greek style social collapses as the costs are passed onto the taxpayer and inevitably hit the poorest hardest.
Domestically and related, the government are facing into a brutal 6 months. Not content with having to manage Europe, including a crack at framing a budget in the face of growing eurohysteria from the UKIP hagridden Cameron, they will find that all the political oxygen is absorbed in a conflagration around abortion. Meanwhile the aftershocks of the “seismic” deal agreed in June, on bank debt, dwindle into background noise, and for Labour these become the first tremors of political oblivion, with the IMF, damned commies that they are, now revealing itself as being demonstrably more concerned about the poor than they are. All indications are that we are being prepped for a deal on the wretched anglo Promissory notes that will be minimal. In order of impact we can reduce the interest rate (pointless as this cycles back to the state anyhow), increase the repayment time or reduce the amount of these that are to be repaid. The latest statement from Kenny suggests a focus on the first two. Expect a deal that is touted as a solution but which merely kicks this can along the road for longer, and while welcome it is not a solution to a debt which is in every sense odious. Meanwhile the domestic economy will shuffle along with unemployment remaining stubbornly high and the prospect of a further brutal budget in 2013.
Finally, the housing market will remain mired. Although selected areas will show some growth, houses and decent apartments in established urban areas for the most part, there is a combination of overhangs that will mute any prospects for rises. First, the transparency given by the property price register empowers bidders to bid low. Knowing that there are downward pressures, why bid more than the last relevant price? Second, the property tax and uncertainty around same acts to reduce slightly the prices. Third, the likely wave of repossessions, mainly of buy to lets but increasingly of family homes will result in increased flows of distressed property. Finally, the reduced incomes of potential purchasers combined with a moribund banking system will make mortgage finance less accessible. All of these together will result in the housing market sinking towards its post bubble low in 2013.
So what to do with the Seanad? It now seems certain that there will be referendum on the (very complicated) proposal to reduce the parliament from two to one chambers.
Leaving aside the practicalities of same, and disregarding whether after what promises to be a bruising abortion battle in the first half of the year and the prospect of another stiff budget in late 2013 the coalition really wants to go to the mat on this issue, what are the options for the upper house?
First, there is a widespread view that the Seanad is at best dysfunctional and at worst irrelevant. The most recent poll suggested that by a fairly large majority the electorate would see it as the latter, with 55% suggesting it should go.
Second, the option being put to the people is likey to be a single issue : yes or no to have the seanad retained. But this I might suggest is to oversimplify the issue. From leaving things as they are to complete abolition there is a wide range of options. Reform, which cannot I think come from within the existing structures, should be attempted before abolition.
Lets recap: the seanad can only delay legislation on bills, it can initiate legislation, and it has a most curious makeup. Of the 60 members 6 are elected by the graduates of two of the universities, even though the provision exists to extend this franchise; 11 are direct appointments by the Taoiseach, and 43 are elected by panels. For more details on these see the Seanad website
This brings me to my reform proposals, drawn from nothing much more than 48 years living in the country and watching with amazement the antics of the elected members.
Im sure there are dozens of other good ideas floating about. One of them is not a blanket abolition.
The month of january is named so after Janus, the roman god, who looked both ways at once. In ireland we need a numan that refers to speaking both sides of ones mouth st once. This would be useful for comparing our main centre right parties. As the saying goes, plus ça change, plus c’est la même chose..
Earlier this week I posted that no, we actually did pay the wretched promissory notes on Anglo in 2012.
Since then there has been an interesting reaction from FG supporters mainly, via email tweetefier and on other social media, asserting that no, we didn’t. It’s blackwhite, the ability to swallow and respout any statement the party gives no matter how absurd.
This denial of a reality is scarily reminiscent of the denial of and reaction to those who suggested that, in 2009, Ireland was headed for the precipice.
This shows two things, first, political operatives, of all stripes, especially the grassroots, have an infinite capacity for self delusion and tribal loyalty. second, Orwell was right…
The idea of a meme is that its a concept, a psychological or cultural trait, that propagates Like anything that propegates it can only do so if it is allowed to. Thus we have seen grow up the meme that Ireland did not pay the 3.1b which was due in March 2012 on the Anglo Irish Promissory Note. This is sown by ministers who either do know (so they are telling untruths) or should know (in which case they are not able to read government accounts and thus we might question their fitness to be in high office). It is however fertilized by the unquestioning swallowing of this by the media, print and broadcast, who again either dont know (why then are they questioning on issues wherein they are ignorant) or know but dont care to press (why then are they pretending to be impartial journalists?)
Here are some recent examples
These statements are simply false (with the exception of Varadkar’s comment which seems to see issuance of a bond as being somehow not a payment….one wonders what the conversations round the cabinet table are like). We paid. In full. This has been explained succinctly in a letter to the Irish Times and more fully in a blogpost by Constantin Gurdgiev. It was explained quite fully back in April by Karl Whelan.
Here it is again : NAMA (us) gave IBRC (us) the money which IBRC gave to the Central Bank (us). Meanwhile, Bank of Ireland (35% of which is us) lent this money on a one year basis to IBRC which lent it to NAMA. In March 2013 not only do we need to pay the 3.1b to the Central Bank but Bank of Ireland need to either extend that loan or it needs to be repaid.
The Anglo note was repaid in 2012. To say otherwise is to deceive oneself or to try to deceive others. Ministers need to stop doing so and the media need to stop facilitating this delusion. Oh, and someone needs to ask Minister Noonan to correct his (no doubt inadvertent) misleading of the Dail.
Update
a) As Karl Whelan notes the key facts are : did IBRC get 3.1b? Was that used to extinguish ELA? Answer to both is yes. The mechanics of what arm of the state did what when is of technical interest only.
This is an expanded version of an OpEd in the Irish Examiner published 15 December 2012
The new banking union proposals that are now emerging from the wreckage of the European economy are to be given a (very) cautious welcome. Without going the whole Naomi Klein “shock doctrine” route, its very clear that once again this is a win for (mainly german) banking interests. They for one have not wasted a good crisis, unlike our hapless crew of permanent and transitory governments. Banks have walked away scot free, in essence, from the calamitous decisions they have made. In Ireland, faced with a government as weak as water they essentially bluffed and buffaloed a hapless crew of inepts into socialising the losses. Anybody who think that senior bank management have learned their lesson of humility need only look at the truculent faces when the elected representatives dare question their remuneration.
A banking union required three essential elements: a common supervisor, a common system of deposit insurance or assurance, and a common method to resolve problems. What we have here is the first, and its as good a place to start as any. But without the others its a onelegged stool. The power in European banking has now shifted decisively to Frankfurt – already building an new towerblock (for a cost of over a billion euro…) the ECB will soon need more space. As presently proposed the effect of the new regulator will be to shift regulatory control of AIB, IBRC and BOI to Frankfurt. What exactly that will mean for the newly beefed up regulators office in Dame Street (the beefing up requiring that it move to the IBRC shell – very apt) is unclear. Will staff move to Frankfurt or more probably will it be a remote operation?
Two issues emergent from this require us here to think long and hard. These are the future funding of SMEs and the future of those vile promissory notes
On SME funding the Irish banks are in a bind. They need to continue to delever, and the only way to do that is to progressively increase the deposit base (costly) and/or reduce outstanding loans. In particular, reducing loans will be done while also shifting the balance of loans away from riskier towards less risky ventures. Lending to SME’s is inherently more risky than to more established sectors and ventures. The easiest venture at present is to obtain cheap money from the ECB and purchase Irish government bonds, a carry trade as it is known, reaping a handsome profit for the banks and incrementally driving up the price and down the yield on these bonds yielding a handsome political dividend for the government. Evidence from the ECB biannual survey on access to finance that along with Greece Irish SME’s are the most likely to be discouraged from applying for credit. Although only around 10%, this is unfortunate – discouraged borrowers may be borrowers that have excellent prospects but feel that there is no point seeking a loan. Since March 2010, when the data series begins, excluding property and financial services related lending, lending to the SME sector has fallen by 24%, while in the overall economy it has fallen by 22%. Within the SME sector lending to property and financial services related activity has risen by 30%. Its hard to see how this is justified given the job creation engine that the SME sector can be. As banks regulatory oversight moves more and more remote it is likely that the existing centralization of lending decisions at HQ will intensify. It is reasonable to assume that local managers of banks are more likely to be at least approachable by local SMEs seeking finance. If we wish to reduce discouragement in applicants we need to be very nimble in negotiating the parameters of this new regulatory regime. It’s a good job we have a history of nimble wily negotiators with the ECB….
The creation of the new regulatory framework was a quid pro quo for the establishement of the new ESM lending framework. This will lend to banks for new capital needs, finally breaking the linkage between the soverrign and the banking sector. However, this is of little use to Ireland. We have invested 24b in the pillar banks and 30b via the wretched promissory note in IBRC. The proposal on the table will not give us any relief on these. The government in march 2012 engaged in a complex shell game to avoid payment of the note but this was for a one year basis. Despite this can kicking they continue to claim that they have avoided repayment, which is simply untrue. Thus a solution to the deferred 3.1b and the regular 3.1b needs to be found before march. All indications are that this will involve a restructuring of the repayment schedule, to reduce the amount of money destroyed from 3.1b to perhaps 1b per annum. That anyone outside a lunatic asylum would consider it acceptable for a state so broke that it is cutting respite care to carers to destroy a billion euro shows how degraded our political debate has become. After Minister Rabbit stated that we would not pay in March I asked the Central Bank, the ECB and the government for a statement. Despite being the ultimate loser in any refusal to pay the Bank declined to comment. The ECB reiterated the statement by its president that it was Frankfurts way all the way, while the government press office reiterated that we hadn’t paid in 2012 and were seeking a deal. None of these give any hope that a meaningful reduction in the outstanding debt, as opposed to some restructuring of the payment schedule, is in the offing. That wont prevent the government from touting some form of interest reduction or extension of the repayment schedule as a triumph. But it should.
Earlier this week I was at a seminar in London organized by the London Bullion Market Association. I and some others spoke.
Slides, and soon I understand, podcasts, of the event are available here and comments are welcome.
The Central Bank has brought out the latest figures on mortgage arrears and they are not pretty. Lets look at the private home mortgages – As of september 17% of all mortgages are in arrears, that is 135k out of 760k. By value it is 15%. Those over 90 days in arrears, those who are rapidly slipping into total default mode is 86k. As a % of total numbers in arrears the over 90 days is now 63% of the total , compared to 40% in september 2009.
This is horrific. When will it end? If there is any comfort to be taken it is that the rate of increase in arrears has moderated, with a blip in the last quarter. See the chart below
If we look at the last 4 quarters the quarter-quarter change in the % of mortgages in arrears (either in total or over 90 days) has moderated by about 8% per quarter. If we take the dynamics of the last 4-5 quarters and project them forward we will see the total number of mortgages in arrears peaking only in December 2014 – two full years ahead – at 23% of all mortgage holders. How long it would take to start to fall is anyones guess….
So – with two more austerity budgets to go, with the number of mortgage holders whose credit history is shot heading for north of 20%, it will be quite some time yet before any corners are turned. While we must sort out the national government finances the mortgage crisis cannot be let fester. What odds the government taking bold radical steps to solve this?
This is a version of a column in the Irish Examiner 6 December 2012
So now we know. The budget, like Enda Kenny and Eamonn Gilmore, is cautious, careful, technocratic and minimalist in terms of its aims. It is a holding operation, designed to do the minimum – the minimum in terms of adhering to the needs of the troika, the minimum in terms of some red (actually dyed) meat to the labour backbenchers, the minimum in terms of a signal to the markets that the government will cautiously and incrementally remain cautiously incremental in its exercise of the very limited autonomy. The government is safe, in all senses, and remains focused on external perception, ignoring in its massive majority the internal dynamics of society and the Irish economy.
For all the sound and fury it is dull. It is a dull throbbing pain for all of us, enlightened by occasional flashes of acute discomfort. A budget that keeps low corporation tax and hits the elderly , the sick, children and the poor is hardly one that bears the hallmarks of a government with a socialist party involved.
The parameters of the budget were set in advance and the government has moved within but not beyod these parameters. And that is a pity because even within these parameters they had considerable movement potential. In fact they have almost total freedom, so long as the broad shape – in terms of hitting debt/gdp ratios and deficit targets – is maintained. It is simply not the case that the Troika required us to increase motor tax, introduce a particular form (or indeed any) property tax etc. These were agreed but the actual Memorandum of Understanding (the new name for Bunreacht na h-Eireann) states “Government may, in consultation with the staff of the European Commission, the IMF, and the ECB, substitute one or more of the above measures with others of equally good quality”. So the ball lay in their court, but instead of adopting innovative and equitable approaches they played the safe tired game we saw.
What they did do will please the financial markets – uncertainty is the enemy of government bond yields, the seemingly sole metric of merit for the government. While these have decreased that is on the back of a wall of ECB money hitting the markets, who have then engaged in a carry trade whereby they borrow cheap ECB money and invest it in high yielding government bonds, obtaining in this a further subsidy from the taxpayer. Paradoxically the safe cautious nature of the budget will depress yields and thus increment the pressure on the Irish banks by reducing this profit flow, and they will make this up by further squeezing the customer base.
A further complication for the banks is around the housing tax. The plan, to somehow tax property, is at basis a good one. However, the approach used smacks of another desperate attempt to stave off the slow erosion of value. In essence the Irish banks are still very badly exposed to domestic property. The deleveraging they have undertaken has exacerbated that. The housing tax contains an administrative sting in the tail – the freezing of value and the revenue guidance. First, the revenue will take the value as of 2013 as the basis for tax through 2016. In essence this is going to mean that any falls in house values will be of no benefit to homeowners in terms of tax. Yes, this prevents penalizing of home improvements, but the reality is that the effect will be to have people being taxed in 2016 on an inflated basis. Second, the valuation of the home will be the touchpaper for a firestorm of problems. In essence the revenue will say your house is worth X. And its up to you to show that its worth less than X. You can of course employ a valuer, but the cost of this valuation is liable to be more than the incremental cost of the tax. So people will simply give in and pay the revenue basis, that is the plan. We have a basis in VRT where the revenue value cars on import at a level which is fantastically at variance with the reality of actual market values – and always in excess. There is every incentive and every likelihood for the state to overvalue homes. The uncertainty in terms of home values is not good for certainty in the housing market and therefore not good for the banks. And that is not good for the taxpayer, as we are still shackled to the banks
Brian M. Lucey 