Is Ireland on a path to a second bailout?

This week the International Monetary Fund has been reviewing the state of the Irish bailout on its way to approving a further 950 million Euros of aid. This means that it will have committed some 20.83 billion Euros out of a promised 22.5 billion. So this phase of the support operation is heading to its conclusion and when it does so Ireland will have borrowed some 1548% of its IMF quota. Rather intriguingly Ireland must have transferred funds in the other direction to the IMF at the same time as receiving them as this sum was originally recorded as 2322% of its quota. Rather bizarre don’t you think?

The IMF view on Ireland

The Irish received praise for their policy implementation.

Two and a half years into their program, the Irish authorities maintain steadfast policy implementation

Mind you praising austerity is slightly awkward these days for the IMF as its head Christine Lagarde criticised the United States on the same grounds. However once we get to actual progress the language is much more circumspect.

The Irish economy grew modestly for a second year in 2012 and positive signs are emerging with employment rising just over 1 percent year-on-year in the first quarter of 2013, though the rate of unemployment remains high at 13.7 percent.

Mind you this is by far the best performance of the Euro area bailouts as we watch both Greece and Portugal sucked into an economic version of a black hole. However even the IMF cannot avoid pointing out that troubles remain on the menu.

In the banking sector, just over 25 percent of loans are nonperforming and losses persist, hindering new lending.

Yet economic recovery is not well established and risks to debt sustainability remain….public debt is expected to peak at around 123 percent of GDP this year.

Those banking sector figures are in fact much worse than the (published) Spanish ones about which there is so much media concern. Also if we look at the debt dynamics for Ireland her Gross National Product or GNP matters to and her national debt will be 150% of it using the IMF numbers.

For the public debt situation to peak in 2013 we need to find a familiar feature in the IMF projections.

with growth projected to accelerate from 2014

How has that worked out?

For a little late week light, if somewhat gallows humour I would like us all to jump into Dr.Who’s TARDIS and go back to 2007. The IMF can take up the story.

Directors welcomed the indicators confirming the soundness of the Irish banking system,

Given the Irish economy’s strong fundamentals and the authorities’ commitment to sound policies, Directors expected economic growth to remain robust over the medium term.

The Executive Directors commended Ireland’s continued impressive economic performance,

Not much sign of a crystal ball there!

Still they were not the only ones as Jean Claude Trichet who was then head of the European Central Bank joined in on the 10th of May 2007.

very often, I and my colleagues of the Governing Council are mentioning the Irish economy as a role model in many respects for the euro area.

Monsieur Trichet did turn out to be correct that some Irish data was “very impressive” but not I suspect in the way that he meant it!

So for now let us leave the growth projection of 2.2% for Ireland in 2014 as unsupported by any real evidence.

What about trade?

Here the IMF has come up with some interesting numbers. The first salvo hints at a challenge to what is normally perceived as an Irish strength and success story.

The current account surplus rose to almost 5 percent of GDP, but to a significant extent this reflects firms domiciling in Ireland.

The issue here comes from this.

In recent years, an increasing number of firms appear to have relocated their headquarters to Ireland

These companies do not operate in Ireland as such but the transfers of funds they make to and from their headquarters do impact on the official statistics. Below is a description of what happens.

Their large foreign profits are considered as income inflows, increasing the current account and GNP. But the corresponding outflows are only recorded when these firms pay out dividends to their foreign owners. Hence undistributed profits raise the official current account balance and GNP.

Let me put that into the current account situation and you will see the impact.

The adjusted current account balance shows a much smaller surplus in 2012……the adjusted current account surplus is estimated at 0.8 percent of GNP, some 5.3 percentage points below the official figure

So Ireland may be in a much weaker trade position than it at first appears. This has a knock-on effect on both economic growth and the size of her economy.

His (John FitzGerald) calculations show that undistributed profits accounted for 1.1 percent of GDP in 2009 and rose to 4.3 percent of GDP in 2012. With these earnings stripped out, adjusted GNP fell more than officially recorded in 2009–11 and also grew at a lower rate in 2012. This adjusted GNP path appears to be more consistent with other economic indicators,

This analysis leads to the view that the Irish trade position remains relatively good if we compare it to Greece or Portugal but is much more precarious than previously thought. Also her debt sustainability is weaker if we lower her GNP output numbers.

Just for clarity the IMF have muddied the waters here by using GDP as a benchmark at one point as it is unaffected (the numbers net out). Apologies on their behalf.

Also there is a final irony for Ireland from this analysis.

A final implication of these data is that the large retained earnings of the redomiciled plcs raise Gross National Income – the base on which Irish contributions to the EU Budget are calculated. Thus, while these companies confer no significant benefit on the Irish economy in terms of employment or taxes, they do give rise to a higher EU budgetary contribution.

The Patent Cliff

In the autumn of 2012 the Irish economy was hit by what is called the “Patent Cliff” where a “blockbuster” (anti-cholesterol) drug came off patent and found itself under generic competition. I discussed this back then and here is an update on the effect of this.

On average, industrial production of chemicals (most of which are pharmaceutical products) has fallen by around 10 percent since August 2012, with chemicals exports declining by a similar amount.

This is quite a reversal on what had been happening as this has become a major part of the Celtic Tiger image.

At present, chemicals constitute around 60 percent of merchandise exports, an increase of almost 15 percentage points since 2005. These exports have proven to be a-cyclical, growing on average by around 7 percent annually even during the recession years of 2008–10.

The official view repeated by the IMF is that these developments are not a big deal for the Irish economy. I find the position to be more troubling. As the numbers below show Irish industrial production has recovered from the shock of last autumn.

On an annual basis production for April 2013 increased by 1.5% when compared with April 2012

However I wonder how many more such shocks it could withstand.

Car Registrations

This series has continued its decline as shown below.

The total number of all new vehicles licensed during May 2013 was 9,070 compared with 9,895 during the same month in 2012 – a decrease of 8.3%.

This of course is something of a European trend from which the UK seems oddly immune.

Comment

The analysis above shows that there are challenges ahead for the Irish economy. Even the IMF has only given a lukewarm approval of the state of play before singing along what appears to be its forecasting anthem from D:Ream.

Things can only get better
Can only get better

However a contrasting impression has been given by today’s figures from the Central Bank of Ireland on mortgage arrears. Of a total mortgage book of some 110 billion Euros it reports that 25.4 billion Euros worth were in arrears as of the end of March. Of this  a chilling 5.35 billion Euros worth of mortgages are more than two years in arrears. No wonder there is little sign of an expansion in bank lending in Ireland with a particular credit squeeze on smaller businesses being reported.

If we take these developments and look forwards there is another factor to add in. This is that the austerity programme is about to kick in more harshly. This years fiscal or budget deficit is at 7.5% of GDP forecast to be similar to that of 2012 but 2014′s is planned to be only 4.4% and 2015′s only 2.2%. So quite a tightening is on its way and we know from the experience of Portugal and Greece what that implies.

As the original bailout is nearly over it leaves me with the thought that Ireland may well need another one.

This entry was posted in Banks, Euro zone Crisis, General Economics, Quantitative Easing and Extraordinary Monetary Measures and tagged , , . Bookmark the permalink.
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  • pavlaki

    Shaun, A much more realistic appraisal of the Irish situation than is often the case. I am off to Ireland for 3 weeks in a couple of weeks time and it will be interesting to hear what the reality is on the ground. I have many friends there involved in business, restaurants, guest houses, finance and several who are now unemployed as well as a couple of farmers. A pretty good cross section of the economy. I suspect that their view of the economy will be much closer to your’s than the Eurocrats blather.

  • Mike from Enfield

    Shaun,

    On the subject of the IMF’s malfunctioning crystal balls: are their projections presented along with reasoned arguments to justify them or is it a case of ‘trust me I’m an economist’? Given their proven inability to learn from past errors, it would be useful if the methods themselves were subject to scrutiny and falsification, rather than merely the outcomes.

    I’ve recently been reading Daniel Kahnemann’s book about predictions, with particular reference to finance and economics*. It seems that when dealing with uncertain, unpredictable landscapes such as economics that experts are indeed very slightly better than non-experts…but on average both are far worse than a monkey rolling a dice. Too many details to go into here but one of the issues seems to be that rather than concentrating on objective ‘base rates’, we tend to subconsciously substitute a difficult question (‘what will happen to the economy in 2 years time?’) for an easy one such as ‘Is the country’s leadership committed and determined?’. Maybe they should invest in a copy.

    *(DK won a Nobel prize for, of all things, Economics but don’t let that put you off).

  • Mike from Enfield

    I think you are right. Even back when the whole crisis was unfolding the Irish public seemed to have far more idea of what was going on than their British counterparts. I can remember hearing of Irish workers punching the air when told they were getting a 30% pay cut rather than redundancy!

  • Anonymous

    Hi Shaun,

    I don’t have hard numbers to support this, but I believe UK cars have become cheaper if priced in EURO currency since 2008, as sterling dropped heavily but car sterling prices didn’t increase 25%. RHD cars are now cheaper than similar spec/age LHD cars. This has reversed from 2003.

    Irish buy new RHD cars priced in euro, and there should be bargain secondhand RHD cars available in the UK. The UK is a much bigger market hence a few second hand cars exported to Ireland doesn’t move our market much.

  • Anonymous

    So bailouts have a 100% failure rate. I think I can safely say that no amount of subsidies could have made British Leyland profitable – I’d suggest the banks of this decade are similar. Many are zombies only kept going by ever more subsidy and the only sensible solution is to let the insolvent banks sink.

  • Justathought

    Hi Shaun,

    Are you sure that it could be another “bail out”? I hope I am wrong… it seems to me that a “bail in” might be at stake. What about the pension funds suffering another drop in value cleverly organise and disguise
    but nonetheless a bail in…???

  • Irish John
  • Anonymous

    Hello, Shaun. Thank you for a very interesting post.

    I would be interested in knowing your views on the moratorium on fracking declared by the Irish government in April, until the Irish Environmental Protection Agency has completed a report on the practice. This is likely to take two years. n

    Here in Canada, the provinces control the resources, and while fracking is proceeding vigorously in Alberta, the Quebec government, which probably only has modest frackable reserves anyway, has declared a moratorium on
    the practice.

    I know there are dangers involved in fracking, but if the economic situation in Ireland is really so grim, it does seem strange that the Irish government would suspend fracking operations a couple of months ago, and that they seem in no hurry to receive a report on whether they might start up again.

  • forbin

    hello shaun,

    would it be really a 2nd bail out ? what about all the other ” interventions” ?

    Also I suspect it will be called something different , as others have mentioned ” bail-in” is the new term !

    so for all of the EU plans for growth , Ireland , the first , still hasn’t turned the corner , and they had something going for them. I wonder about their pension pots – that was raided on vain hopes of “growth”……

    Not so much “things can only get better” more of ” ‘er we go , er we go, er we go! ” as the plane plummets to the ground……

    Forbin

  • Anonymous

    Hi Mike

    Daniel Kahnemann’s views are interesting and I would add a further sub-plot where “experts” in a profession/industry like economics are prone to clustering around a consensus which is invariably backwards-looking rather than forwards-looking.

    As to the IMF in the credit crunch era it has consistently taken the “things can only get better” route to forecasting. Mostly the growth fairy involves the export fairy too as shown below.

    “In the medium term, the baseline scenario is for gradual recovery in growth, to about 2 percent in 2014 and 2¾ percent thereafter. A key driver of the pickup expected in 2014 is the projected recovery in Ireland‘s trading partners—with growth projected to rise from 0.5 percent in 2013 to 1.7 percent in 2014—enabling overall export growth to strengthen further, and also bolstering domestic incomes, employment, and confidence.”

    You may spot that these forecasts of recovery become rather self-fulfilling on this road…

  • Anonymous

    Hi ExpatInBG

    That is an interesting point which explains a quirk in the numbers which I did not fully understand. There is evidence of this in the car registration numbers via imported cars.

    In 2013 to May Ireland has imported 19,510 cars up from 16,165 last year. So it looks as though some new and used car buying is taking place in the UK as you say.

    Overall the total numbers are still falling from 84,378 last year to 80.154 this but the rate of fall is cut. What we still do not know is a concept of value though as to the split of new to use cars…

  • Anonymous

    Hi Guest and welcome to my part of the blogosphere

    Thanks for the link. How unemployment is (miss) measured is a concept that has risen back to prominence in the credit crunch era as discussion of participation rates (US), part-time working(UK) has arisen.

    Actually the Irish Indy seems unaware that it is defining underemployment or what the US calls U-6. Mind you we should not perhaps be too harsh as the IMF itself made the same mistake.

    “Moreover, if discouraged workers and involuntary part-time workers
    were included, overall unemployment would have remained above 24 percent.”

  • Anonymous

    Hi Justathought

    The Irish National Pension Reserve Fund was a good idea and was considered to be a sovereign wealth fund. Unfortunately much of it has already been deployed and wasted..

    So if a “bail-in” happens it is more likely to be depositors taking the strain I thin.

  • Anonymous

    Hi Forbin

    I have followed the IMF view that the bailout has comprised this “an economic program supported by a three-year, arrangement under the Extended Fund Facility (EFF),” so if you like everything has gone under one umbrella.

    As it all started on December 16th 2010 they will soon have to admit something that I argued from the beginning which is that this is not a three-year programme. In fact as I wrote in the post above 2014 and 2015 look like being tough years and could yet be the toughest of them all.

  • Anonymous

    Hi Shaun,

    Sorry it’s off topic, but we’ve got major protests in Sofia in regards to corruption within Stanishev’s new government. Particularly galling was the appointment of a totally unqualified but very rich person to be the head of state security. The French were reported to have complained that they wouldn’t share NATO intel, as they could not trust the new minister.

    Strangely the BBC and much of the European press seems to have caught the “Turkish disease” and are failing to report these protests.

  • Noo 2 Economics

    “Particularly galling was the appointment of a totally unqualified but very rich person to be the head of state security”.

    I could draw similarities with a certain ex towel refolder currently residing at No 11 Downing Street.

  • Anonymous

    As much as you may hate Osborne, there is no comparison between alleged incompetence and blatant corruption.

    Has a major NATO ally declared Osborne a risk to their national security ? DEFINITELY NOT

    Has a major newspaper reported Osborne has mafia connections ? Not that I recall.

  • Anonymous

    On the topic of incompetence, who sold the gold reserves dirt cheap ?

    Who borrowed madly during a boom ?

  • Anonymous

    http://www.novinite.com/view_news.php?id=151486

    Here is the US ambassador’s official comment. “The Jan / Feb protests were about economic stagnation and the current protests are stirred by discontent of the functioning of the political system”