Sunday, March 27, 2011

27/03/2011: Annual GDP and GNP - few lessons to be learned

I haven't had time to update QNA numbers on the blog, but here's a nice preview charts of analysis to come.

First annual GDP and GNP:
When I often say that over the last 3 years we've lost a war, I mean it: relative to peak 2007 levels, our real GDP is down 12%, our GNP is down 16%. Our 2010 GNP clocked the level of 2003-2004 average, erasing 7 years of growth. Our GDP is now at the level of 2004-2005.

What about the composition of our GDP and GNP?

The above is just a snapshot. Here are headline figures:
  • Agriculture, forestry & fishing sector output in constant prices is now 10% down on 2007 (remember - we were supposedly having a boom in this sector in 2010 according to the various CAP-dependent quangoes, and still the preliminary output came out at a miserly €3,328 million - the lowest in 8 years).
  • Industry had a better year, with output rising to €48,111 million, up on €45,841 million in 2009, but still 7% down on 2007.
  • Building & construction sector shrunk 58% on 2007 levels, posting output worth just €5,754 million in 2010, down on €8,433 million in already abysmal 2009.
  • Distribution, Transport and Communications sector shrunk 13% in 2010 relative to 2007. 2010 sector output was €21,509 million against 2009 level of €21,845 million.
  • Other services have fared better than other sectors, posting a decline of 6% on 2007 levels. In 2010 the sector brought into this economy €71,828 million against €73,823 million recorded in 2009.
  • Public Administration and Defence - the sector that has been allegedly (per our Government and Unions claims) hit very hard by the austerity has managed to "contribute" €6,243 million in 2010 - slightly down on €6,416 million in real euros in 2009. Relative to peak 2007 levels, Public Administration and Defence "contribution" to our GDP/GNP has fallen by a whooping ZERO percent. That's right - zero percent. In 2007 the 'sector' posted GDP contribution of €6,266 million.
  • Taxes, net of subsidies, have fallen 31% in 2010 relative to 2007 and 'contributed' just €16,027 million in 2010 compared to €16,807 million in 2009. Tax hikes are working marvels for the Government, then. Keep on the course, Captain!
  • Net Factor Income from the Rest of the World has increased steadily from 2007 levels, posting an outflow of -€29,313 million in 2010, up on outflow of -€28,184 in 2009 and a massive 31% above 2007 levels. These outflows represent the GDP/GNP gap that has expanded from 15.17% local minimum in 2006 to 21.67% today.
Now, let's take a look at percentage contributions to GDP and GNP from each line of QNA:
So while economy shrunk, Public Administration and Defence grew in overall importance as a share of GDP.

Saturday, March 19, 2011

19/03/2011: Retail sales & Consumer confidence



In the previous post I suggested that the latest inflation figures do not bode well for 'growth-linked inflation, but signal instead the worst kind of inflation - inflation that is driven by either imports or regulatory factors. Here's more evidence - consumer confidence and retail sales figures:
Larger markers in the above chart show February values - clearly, no sign of demand drivers for price increases anywhere in sight here. Same holds for consumer confidence as a driver.

19/03/2011: CPI update for February 2011

Some belated data charts updates. Irish CPI:
The chart above shows the uptick in February CPI (up 0.9%mom and 2.2% yoy) and HICP (up 0.9% mom and 0.9% yoy).

Annualized rates below:
Should we read this as a welcome catch up of prices due to demand changes or due to factory gates tightness? Not really. Take a look at components:

Housing, Water, Electricity, Gas & Other Fuels up +9.5% yoy, Miscellaneous Goods & Services +4.8%, Health +4.1% and Transport +3.5%. Deflation continued in Clothing & Footwear -4.6%, Education -2.9% and Furnishings, Household Equipment& Routine Household Maintenance -2.6%.

Food & Non-Alcoholic Beverages prices were up +0.7% mom and +1.2% yoy to February 2011. This compares to deflation of -8.0% yoy in February 2010. Mom, food prices increased by 0.7% while non-alcoholic beverages prices increased by 2.0%. So we know it wasn't the commodities prices inflation that drove our food prices. Especially since commodities-linked prices of bread&cereals deflated by -3.8%, other milk products -0.9%, other cereals -0.7%, cheese -0.6% and margarine & low fat spreads -0.5%, while butter rose +3.8%, preserves by +15.3%, as sweets and chocolate fell 1.3%. And so on... all over the place, really.

Housing, Water, Electricity, Gas & Other Fuels costs increased by 0.5% mom and by 9.5% yoy. There was a decrease of 10.6% yoy to February 2010. Mom, prices rose for liquid fuels (i.e.
home heating oil) +2.7%, materials for maintenance & repair of dwelling +1.5%, rents +1.0% and bottled gas +0.5%. A price decrease was recorded for mortgage interest -0.1%. But wait, yoy rents rose 0% and mortgage interest rose 20.3%. Clearly, credit crunch is raging for homeowners. One of the core remaining construction-related sub-sectors still standing is maintenance & repair of dwelling. This was down 0.1% yoy in terms of materials, but a significant -5.5% in terms of services - so work wages are down, but inputs on materials side is basically flat. Materials were up 1.5% mom and services were flat in February 2011. Given we import much of the former and retain domestically much of the latter, the news of overall monthly inflation in this category is really not good for Irish economy. We got the wrong end of inflation, folks - inflation that undermines our real incomes without supporting new jobs!

Electricity, gas and other fuels were up 10.5% yoy as a category, electricity up 3.2%, natural gas double that at 6.4%, liquid gas up 37.3% yoy. Again, wrong inflation for growth and much of it is due to changes in taxation structures, state companies surcharges and so on.

Health is a standout in the above chart. Down 0.6% mom but up 4.1% yoy. No need to explain why the cost of hospital services rose 11.5% - say 'Thanks' to our semi-state insurance company policies and the Budget, but not for the insurance prices increases - those are in the Miscellaneous Goods & Services where health insurance rose a massive 17.6% yoy and 14.4% mom.

Now - my exclusive - as usual, the breakdown of inflation by state v private sectors:
Or cumulative Rip-Off Government Policies effects:
Yet another legacy of the Social Partnership folks - as the Big Domestic Business (aka semi-states), State Quangonoids and Unions - the Real Golden Circle - take another bite at the economy's pie. The real economy is still on the edge of continued deflation (+0.1% mom), while the surreal Social Partnership-controlled economy is roaring ahead with 1.04% mom inflation, to 2011 fat bonuses. Happy times, as Borat would put it.

19/03/2011: Updated probabilities of default

Updated probabilities of default and spreads on Irish bonds. As usual, a preventative disclaimer - this is just simple mathematical estimate - what the numbers say. No comment to be added.
Cumulative spreads tell us how much more we are expected to pay for our borrowings over Germany's cost of fiscal deficit financing, over the period of bond maturity. 85% more for 10 years borrowing currently.

Thursday, March 17, 2011

17/03/2011: 20 years ago

Twenty years ago, 70% of the Soviet citizens freely - with no physical coercion, no vote rigging (although with psychological pre-conditioning/anchoring), in a virtually spontaneous referendum voted to keep a reformed USSR. Ten months later, the USSR was no more. However, the vote only counted in 9 out of 15 republics as a number of republics have decided not to take part in the referendum.

Saturday, March 12, 2011

12/03/2011: Updated probabilities of default


Weekly close data-based estimates of the probability of default on Irish sovereign bonds, based on yields. Note: these are mathematical estimates based on what the markets price in. All complaints should be addressed to the markets.

Marked in black bold are probabilities in excess of 40% (or statistically indistinguishable to 40%) - the benchmark that in the CDS markets considered to be crisis levels of probability of default.

Most of the risk is now concentrated, based on spreads in 3-year horizon, while in absolute terms the markets perceive risk peaking at or before 5 year horizon.

Sunday, March 6, 2011

06/03/2011: The Programme for Government - Part 1

Here are some of my comments (notice - not criticisms, by comments - these are thoughts in progress) on the FG-Labor Programme for Government. Off the top, I think there are some very good objectives outlined in the document, but...

The current post covers pages 2-7 and the subsequent posts will be dealing with other sections.

“The Parties to the Government recognise that there is a growing danger of the State’s debt burden becoming unsustainable and that measures to safeguard debt sustainability must be urgently explored.” Page 5.

[The problem, of course, is that the debt burden is not becoming unsustainable, it is already unsustainable. In other words, the core objective is significantly misplaced in the PfG 2011. Instead of dealing with the core issue of excessive debt, the PfG 2011 is attempting to address the ‘unsustainable rate of growth in debt’.

Imagine achieving such a objective in full and arresting growth in debt. The level of debt of ca €220bn already accumulated by the state in direct and quasi-direct forms will exert interest repayment pressure of ca €12-13 billion per annum depending on financing arrangements achieved. That implies that ca 30% of the tax revenues will be driven into simple maintenance of interest on the debt. Paying this debt down to 60% of GDP over, say, 10 years horizon will cost additional €9 billion per annum in principal repayments (assuming 3% average annual rate of growth through 2021). That means a massive €21-22bn will be outflowing annually from the state revenue to maintain the path to debt reduction consistent with the EU targets over 10 year horizon.

What does this translate into in terms of our tax revenue. If the Government were to achieve the tax revenues of 35% of GDP (roughly consistent with the current plans), in 2011 or debt servicing and repayment plan would swallow 37.5-39.3% of our total tax revenues, declining gradually to 27.1-28.4% of total tax revenues by 2021. Again, these numbers assume 3% pa growth on average through 2021.]

“We will seek a reduced interest rate as part of a credible re-commitment to reducing Government deficits to ensure sustainability of our public finances.” Page 6. [See comment above]

“…we will defer further recapitalisation of the banks until the solvency stress tests are complete and known to the new Government.” [This is fully correct – the process of recapitalization of the banks should start with the full assessment of the capital requirements]

"As an interim measure, we will seek to replace emergency lending to our banks with medium-term, affordable, official financing ...” [I wonder what this means...]

“We will end further asset transfers to NAMA, which are unlikely to improve market confidence in either the banks or the State.” [This is a good starting point, but a much deeper review of NAMA, and, in the end, a full roll-back of NAMA will be required. The PfG 2011 does not reach that deep.]

“We will ensure that an adequate pool of credit is available to fund small and medium-sized businesses in the real economy during the re-structuring and down-sizing programme.” [Where is this pool of credit come from? Who will administer the new lending? How will the new lending be priced? None of these questions are answered neither in principal, nor in sufficient operational detail.]

“The Government accepts that enabling provisions in legislation may be necessary to extend the scope of bank liability restructuring to include unsecured, unguaranteed senior bonds.” [Again, a vaguely phrased, but correct principle.]

“We will create an integrated decision making structure among all relevant State Departments and Agencies to replace the current fragmented approach of State bodies in dealing with the financial crisis.” [This is a good idea, but I cannot understand how a new body can override the independent decision-making across CBofI, NTMA, NAMA and DofF.]

“The new Government will re-structure bank boards and replace directors who presided over failed lending practices. We will ensure that the regulator has sufficient powers of pre-approval of bank directors and senior executives. To expedite this change-over we will openly construct a pool of globally experienced financial services managers and directors to be inserted into key executive and non-executive positions in banks receiving taxpayer support.” Page 7.

[Excellent idea, much need and all, but… (1) How will the Government deal with those directors and executives who should be replaced, while their contracts remain running? Fire them? Breach contracts? (2) What does the ‘pool’ mean? You can’t secure people to ‘stand by’ as a part of the pool while waiting for an appointment – you either will have to pay them to be in the pool, or you will need to hire them in immediately.]

“We will insist on the highest standards of transparency in the operation of NAMA, on reduction in the costs associated with the operation of NAMA, and that decision-making in NAMA does not delay the restoration of the Irish property market.” [Another excellent objective, but again, this raises more questions than it answers. NAMA legislation sets out NAMA as non-transparent, secretive and completely arms-length entity. This was also, in part, conditioned by the funding structure of NAMA. Breaking this structure implies full contagion from NAMA operations and funding to the Exchequer. The implication is that the quasi-Governmental debt might become fully sovereign debt. As far as the NAMA effect on the property market goes, in order to prevent NAMA from continuing to induce market uncertainty, the Government will need to reverse NAMA and force the banks to manage their own exposures. Some immediate sales of properties will be required.]

“Once the banking sector has been restored and is functioning effectively, we will introduce a bank levy based on the size of a bank’s liabilities (other than shareholder capital).” [This is a major problem. (1) A bank levy cannot be set against any new banks or banks that are not covered by State recapitalizations, otherwise no new entries will take place into the Irish market, and the existent non-State dependent banks will exit the market. (2) Any such levy will be in effect another tax on ordinary users of banks services, as in the reduced competition in the market, the banks will be able to pass the full cost of the levy onto their customers. In other words, such a levy will be a tax under a different name.]

“We will establish a Strategic Investment Bank” [Which again raises the issue of fair competition in the market for those banks which currently operate without Government subsidies and/or any potential new entrants. It also raises a huge number of questions as to the nature of the SI Bank, its management, strategy, funding, operations etc.]

“We recognise the important role of Credit Unions as a volunteer co-operative movement and the distinction between them and other types of financial institutions. In Government, we will establish a Commission to review the future of the credit union movement and make recommendations in relation to the most effective regulatory structure for Credit Unions, taking into account their not-for-profit mandate, their volunteer ethos and community focus, while paying due regard to the need to fully protect depositors savings and financial stability.” [A good idea, but might be coming dangerously close to the politicized alteration of both the regulatory regime in financial services and the Credit Unions industry itself.]

“We support the future development of the IFSC as a source of future employment growth, subject to appropriate regulation. We will establish a taskforce on the future of the financial services sector to maximise employment opportunities in financial services for staff leaving employment as a result of downsizing.” [Again, a good idea, but the devil is in the detail. There are plenty of task forces dealing with the future of IFSC and delivering very little on the cost of running these. How will the new task force be different?]

06/03/2011: Kauffman survey of economics bloggers

Kauffman Foundation - non-partisan US-based research think tank studying the issues of entrepreneurship. It describes itself as: "dedicated to the idea that entrepreneurship and innovation drive economic growth". The foundation released their quarterly survey results for Q1 2011 on the opinions and policy positions held by the US-based top economics bloggers.

You can access the survey paper from here and believe me - IT IS WORTH READING!

Here are the highlights:
  • The survey was conducted in mid-January 2011 by soliciting input from top economics bloggers as ranked by Palgrave’s Econolog.net.
  • Economics bloggers are less pessimistic in their outlook on the U.S. economy than they were at the end of 2010, though 77% believe overall conditions are mixed, facing recession, or in recession.
  • "For an economy in which growth is the norm, 31% of respondents think that the U.S. economy is worse than official statistics indicate, and only 10% believe it is better".
  • When asked to describe the economy using five adjectives, "uncertain” remains the most frequently used term.
  • "Although the panel is largely non-partisan, a 3:1 majority of top economics bloggers believe the government is too involved in the economy."
  • The top policy recommendation is for the government to “reduce regulatory burdens and fees on new firm formation” and “approve trade agreements with South Korea, Colombia, and Panama,” with 92% support. So free trade and lesser burden on business formation. "Promoting entrepreneurship is a consensus agenda among policymakers".
  • Only 32% agree with a policy of “subsidizing new firm formation with targeted spending and tax benefits,” with 68% disagreeing (24% strongly).
  • The alternative option to “reduce regulatory burdens and fees on new firm formation” is favored by 92% of respondents.
  • "Rather than recommending that the government get more involved in helping entrepreneurs, top economics bloggers recommend it simply do less to hinder them."
Now some most excitingly interesting charts:

First: how balanced / non-partisan the panel is:
Oh, sorry, yes, Americans do have some serious talent amongst the bloggers and they tend to come from all 3 sides of economics thinking: Left, Right and purely objective 'quantifiers'.

Another one for us, Europeans. Remember the hoopla surrounding the high-sounding principles, but bad economics (yes, the Congressional Budget Office analysis has proven it to be 'bad economics') of the Obama Healthcare bill? Here's the verdict of the economists:
Ouch: 55% say "Repeal" the beast, 71% say "Don't tax the benefits".

Now more goodies for us, Europeans - how do the US economists rank performance of the ECB?
No "A" marks for ECB, Average mark is solid "D". Only US Congress and the Wall Street score less than the Euro-guardian.

Fascinating results!

Saturday, March 5, 2011

05/03/2011: Our economic meltdown

Our latest paper on Irish economic meltdown (forthcoming in the refereed economics journal Panoeconomicus) is available on ssrn web page for downloads:

Gurdgiev, Constantin, Lucey, Brian M., Mac an Bhaird, Ciaran and Roche-Kelly, Lorcan, The Irish Economy: Three Strikes and You’Re Out? (March 3, 2011) - download here.

Friday, March 4, 2011

04/03/2011: Default probabilities

Some people were asking me recently to give an estimate of the sovereign default probabilities for Ireland based on bonds yields. Here are two tables providing an answer -
  1. The first table covers yesterday close yields on generic IRL bonds by maturity
  2. The second estimates probability of default, using, as risk-free rates German yields on comparable paper

Basically, there is a 90% chance of a default (20% haircut) within 10 years and 15% chance of such an event within the year.

The estimates are very much approximate as we use only yields.

Thursday, March 3, 2011

03/03/2011: IMF quota goes up, Ireland's rate goes down, but at a cost

Good news, sort of... we gave IMF some €500mln and they reduced out interest bill on their loan by some €220mln... (hat tip to Lorcan for this quick summary). Here are the details of this AIB-esque transaction:

The ad hoc quota increases under the Quota and Voice Reforms of the International Monetary Fund (IMF), (agreed back in 2008), include a 50 percent increase in Ireland’s IMF funding quota (along with 53 other countries around the world)
.

So we now have 30 days to pay for that quota increase
.

Once paid up, Ireland’s quota at the IMF will increase from SDR 838.4 million to SDR 1,257.6 million or SDR 419.2 million = €477 million. That’s the bad news – we gotta come up with cash
.

But, the good news is that with the new higher quota, “Ireland’s access to Fund resources under the Extended Fund Facility arrangement is reduced to 1,548 percent of quota, compared with 2,322 percent originally”. Note – countries shouldn’t really borrow at more than 300% of the quotas, but Ireland’s ‘bailout’ was at a massive 7.5 times that rate
.

The new quota, therefore, “reduces the share of Ireland’s credit that is subject to surcharges, which are due on amounts in excess of 300 percent of quota. Based on the current SDR interest rate of 0.43 percent, the average lending interest rate at the peak level of access under the arrangement will be 3.04 percent on credit outstanding less than three years (down from 3.17 percent), and 3.85 percent on credit outstanding longer than three years (down from 4.04 percent). This reduction in average interest rate is the result of the implementation of existing Fund policies under the agreed increase in quotas and not of a change in policy.
"

So basically we have 13bps shaved off our loans with IMF which will save us 13bps on €22.5bn loan (3-year facility) or €29.25 million in annual interest rate. Excitement, folks, is never ending… even Lorcan was wrong on this one - we are to pay 477 million to save (over 3 years) the grand total of 87.75 million
.

And there’s more to come: “The proposed quota increase under the 14th General Review of Quotas, which is expected to be effective by the time of the 2012 IMF-World Bank Annual Meetings, includes a further 174.3 percent increase in Ireland’s quota to SDR 3,449.9 million. This would tend to further reduce the average lending rate when it comes into effect.


Can’t wait… we can borrow that money from IMF as well, to pay IMF to increase the quota, so as to save a penny on a million?..

Granted, this was agreed ages ago, but...

Here's the note:

03/03/2011: Banks & debt crisis

Amended below

This was made public late last night and has serious implications for the Irish banks. If you recall, last summer the EU conducted a similar exercise that resulted in a complete failure to:
  1. Identify the banks that required intervention (subsequent the tests, within two months time, AIB and Bank of Ireland required state capital interventions and within 4 months Ireland was in receipt of EU/IMF funds);
  2. Identify cross- banks risks and the potential for contagion from banks to banks and from banks to the sovereigns; and
  3. Identify second order effects of contagion from rising Government yields and deteriorating sovereign ratings to the banks balancesheets
So now, we shall try again. This time around, just as before the first tests, Irish authorities are also conducting PCAR assessments of the balancesheets. And this time around, these assessments will be at risk of the EU-wide evaluations.

Here is the announcement on the forthcoming EU tests:

"EBA Unveils Timeline and Details on EU-wide Stress-tests

"This afternoon the European Banking Authority held its second meeting of the Board of Supervisors of the 27 constituent members of the EBA. One of the primary items on the agenda was the agreement and specification of details pertaining to the upcoming EU-wide stress-tests.

Here are the main facts:
  • The official launch date of the exercise is the 4 March - that's right - as in tomorrow!!!
  • The exercise follow the same basic formula as before, i.e. a baseline macro-economic and an adverse scenario, to test for solvency of banks, but it is unclear whether it will be restricted to the balance sheets alone, or will consider the impact on the off-balance sheet assets as well;
  • Publication of the list of banks to be tested, plus the macro-economic scenarios, will take place on 18 March;
  • EBA continues to liaise with relevant bodies such as the ECB and ESRB to finalise the methodology to be used in April;
  • "Vigorous" peer review and results in June.
The main items that stand out is the much greater degree of transparency of the various steps and structures of the tests, but ominous sign is the lack of detail on what results will be released. A spokesperson for the EBA re-iterated that the main developments as compared to the last stress-tests include "more disclosure of the key steps.... and that there will be a vigorous peer review". Again, there is no explicit identification as to what will be released under disclosures other than what will be leaked anyway - the core testing scenarios parameters and assumptions, plus headline results on specific banks.

Finally, the need to have effective "remedial backstops" in place is part of an on-going discussion with the ESRB and national authorities to ensure that the necessary resources are in place should there be any need to re-capitalise banks. It appears this is still an open question, although the EBA did not rule out the possibility of European funding (EFSF, presumably) being used in a case where a national Exchequer cannot afford to re-capitalise its banks. EBA cited the example of the Irish case and EFSF funds, but clearly, there is no progression envisioned beyond 'cure loans with more loans' solutions.

EBA does appear be doing all it can (given opposition from the EU Governments to transparent and rigorous assessments) to make these tests definitive, credible and part of the comprehensive answer to providing macro-financial stability in the EU.

The link to the EBA announcement is here.

It should be interesting to see how PCAR-II comes out against the EBA tests. That duel of tests will be a backdrop to either establishing credibility of one or the other, or possibly none, but hardly both, as either PCAR-II leads EBA tests into recognizing the reality of our collapsed banking system, or it does not.


And on a related issue of banks, here's a link to the full interview with Professor Barry Eichengreen on the issue of sick European banking system. Few quotes:
  • Europe "must stop attempting to combat the crisis in Greece and Ireland by forcing these countries to pile more debt onto their existing debts by saddling them with overpriced loans." Note that the Der Spiegel journo actually fails to understand what Eichengreen is saying here, for the journalist then launches into a next question: "But at the same time, Europe is stifling any chance of growth in Greece and Ireland by forcing them to comply with harsh austerity measures. Is there any way this strategy can actually add up?" Like the rest of Europe, he does not comprehend the reality of what we are facing. It's not the austerity that is going to kill us, it's the DEBT!
  • Eichengreen's response is to attempt once again to stress the very same point: "Essentially, all Germany and France want to achieve with these measures is to protect their own banks from collapsing. ...there is no way around rescheduling Greece's debt -- and that will also involve the banks. For this to happen, there is only one solution: Europe needs to strengthen its banks! Greece lived beyond its means, but in Ireland and Spain it is the banks that are the problem. The euro crisis is first and foremost a banking crisis." Read - it's the banks DEBT crisis!
  • Der Spiegel's cool 'I am European, so Government spending is all that matters to me' dude again misses the mark launching back into Government spending question. And Eichengreen - after a pause - gives it a third try: "Europe's banks are in far greater danger than people realize. Most people now understand that last year's stress tests ... were a token gesture and lacked realistic scenarios. ...what would put my mind at rest more would be if the responsibility for carrying out the [new] stress tests went to the European Commission. National regulators are too susceptible to pressure from the regulated."
Enjoy the read.

But for those more inclined to read some much more really serious stuff, look no further than to
the latest Reinhart-Rogoff work on debt crisis: A DECADE OF DEBT, Carmen M. Reinhart and Kenneth S. Rogoff, NBER WORKING PAPER SERIES 16827 from February 2011 (no point to link it, as it is password protected). Here are the excerpts:

Starting from the top, the authors say (all emphasis is mine): "there is important new material here including the discussion of how World I and Great Depression debt were largely resolved through outright default and restructuring, whereas World War II debts were often resolved through financial repression [in other words through capital controls, forced expropriation of savings via taxation and soft force-induced diversion of domestic investment to financing of the Government liabilities - in effect, a form of expropriating pension funds etc]. We argue there that financial repression is likely to play a big role in the exit strategy from the current buildup. We also highlight here the extraordinary external debt levels of Ireland and Iceland compared to all historical norms in our data base."

Another quote: "For the countries with systemic financial crises and/or sovereign debt problems (Greece, Iceland, Ireland, Portugal, Spain, the United Kingdom, and the United States), average debt levels are up by about 134 percent, surpassing by a sizable margin the three year 86 percent benchmark that Reinhart and Rogoff, 2009, find for earlier deep post-war financial crises. The larger debt buildups in Iceland and Ireland are importantly associated with not only the sheer magnitude of the recessions/depressions in those countries but also with the scale of the bank debt buildup prior to the crisis—which is, as far as these authors are aware—without parallel in the long history of financial crises." And here's a chart from the paper:

Now, average increase in the crisis was 36%. In pre-2008 history of all modern financial crises, the financial crisis saw increases on average of 86%. In the current crisis, Ireland experienced and increase of Government debt of ca 320% (Reinhart-Rogoff estimate is 220% through 2009, but with our 2010 'inputs' - we are now closer to 320%)! And this was just Government's official debt. Quasi-official debts add to more than that. In other words, by historical standards - ca 86% would classify us as being serious bust, 320% (or even 220%) would classify as having been financially vaporized!

Puts into perspective the official Ireland's blabber about 'we can manage this debt'.

But if we need more, Reinhart & Rogoff oblige: "After more than three years since the onset of the crisis, banking sectors remain riddled with high debts (of which a sizable share are nonperforming) and low levels of capitalization, while household sector have significant exposures to a depressed real estate market. Under such conditions, the migration of private debts to the public sector and central bank balance sheets are likely to continue, especially in the prevalent environment of indiscriminate, massive, bailouts." So what the authors are saying here is that:
  • There has been no resolution to the crisis after 3 years of drastic measures;
  • The only outcome of the current approach is private debt (banks) continuation to move onto Government balancesheet, until
  • The proverbial sh&&t hits the fan:
"The sharp run-up in public sector debt will likely prove one of the most enduring legacies of the 2007-2009 financial crises... We examine the experience of forty four countries spanning up to two centuries of data on central government debt, inflation and growth. Our main finding is that... high debt/GDP levels (90 percent and above) are associated with notably lower growth outcomes. ..Seldom do countries "grow" their way out of debts.

"...As countries hit debt intolerance ceilings, market interest rates can begin to rise quite suddenly, forcing painful adjustment [guess what's awaiting Ireland when - with current 10% mortgages stress levels - this happens?].

"For many if not most advanced countries, dismissing debt concerns at this time is tantamount to ignoring the proverbial elephant in the room. So is pretending that no restructuring will be necessary. It may not be called restructuring, so as not to offend the sensitivities of governments that want to pretend to find an advanced economy solution for an emerging market style sovereign debt crisis. As in other debt crises resolution episodes, debt buybacks and debt-equity swaps are a part of the restructuring landscape. ...The process where debts are being "placed" at below market interest rates in pension funds and other more captive domestic financial institutions is already under way in several countries in Europe [and recall the cheerleaders for this in Ireland were... the pension funds themselves].

Central banks on both sides of the Atlantic have become even bigger players in purchases of government debt, possibly for the indefinite future."

Pretty tough words...