One of the most hotly debated topics in the Euro crisis has been the position of Ireland which for some has been a poster boy (girl), and for others is an example of what Euro style austerity inflicts on an economy. My argument is that she has elements of both simultaneously and as 2013 has seen several developments on this front already it is time to look at her again.
Yesterday there was more good news for her from her government bond market. You may recall that she enacted a bond swap last summer which extended the term of some of her debt, well she has now gone one stage further.
The NTMA today raised €2.5 billion through the sale by way of syndicated tap of its Treasury Bond 2017. The funds were raised at yield of 3.316 per cent.
So she is the first of the countries in the Euro area peripheral crisis to return to bond markets in this manner. Also if you look at the yield she was able to fund herself at a level that if repeated would make her look potentially solvent. According to her National Treasury Management Agency some 87% of the issue was bought by overseas investors which adds to the good news. I would imagine Paul Krugman is rather embarrassed at this point.
Underlying all this has been the improvement in the Irish government bond market where yields fell substantially in 2012. Some are taking this as the equivalent of “Happy Christmas War Is Over” and suggesting that Ireland could leave the troika plan this year. They seem to have forgotten that the bond market improvement was driven at least in part by the European Central Bank’s proposal for Official Monetary Transactions or OMTs which Ireland is now more likely to qualify for. So you could argue that Ireland entering the OMT programme is now just as likely.
Ireland’s economy is doing far less well
If we take a look here we see that a worrying situation has continued to develop.
Production for Manufacturing Industries for November 2012 was 2.1% lower than in October 2012.On an annual basis production for November 2012 decreased by 6.8% when compared with November 2011.
I have discussed before the impact of various drugs produced in Ireland finding that their patents have expired and that accordingly output and indeed profits falls. The recent effect has been I think from this happening to the anti-cholestrol drug crestor and after that we have seen this.
The seasonally adjusted volume of industrial production for Manufacturing Industries for the quarter period September 2012 to November 2012 was 14.4% lower than in the preceding quarter
This phase has represented quite a sea change and let me explain why with reference to the underlying level of production. Back in August industrial production was 113.1 where 2005=100 which made her look very different to the other Euro area peripheral nations. However November’s 98.1 makes her look much less different,particularly if we look forwards and anticipate the effect of other drug patents expiring.
There is not a lot of scope for optimism here either in the latest numbers.
The volume of retail sales (i.e. excluding price effects) decreased by 1.1% in November 2012 when compared with October 2012 while there was an annual decrease of 0.5%.
If we did deeper for the underlying situation then where 2005=100 November in Ireland was at 92.9. So weak but much better than the calamity inflicted on this area in Greece.
What about her banks?
According to the Irish Times the Taiosearch is off to Brussels to claim that Allied Irish Bank and Bank of Ireland are live banks and are not dead. There is an excellent response in the comments to this.
‘Our banks aren’t dead’, so says Enda. No, they have been kept on life support courtesy of the Irish taxpayer and like any good parasite are now cannibalising their host.
The Irish taxpayer via her National Pension Reserve Fund has taken a hard pounding particularly in the case of Bank of Ireland. After paying 5 billion Euros for a 15% stake they watched Wilbur Ross and his associates pay 1.1 billion Euros for a 35% stake!
Perhaps the most revealing part of all this is the fact that they seem to have stopped claiming on behalf of Anglo-Irish Bank so the potential gains from Euro area funds have halved to around 14 billion Euros.
What about the housing market?
The Irish housing market will have a big part to play in the future of Ireland’s banks and the ratings agency Fitch waded into the debate yesterday. They expect another 20% fall in Irish house prices which as they have already fallen 50% or so since their peak will take them to 60% below. Also just as worryingly for Ireland’s banks Fitch expects a typical “pool” of mortgages to have a 21% default rate which is twice the rate for similarly troubled Spain. We do know that as of the third quarter of 2012 the number of Irish mortgages either defaulted on or at risk of default had risen by 22% over the previous year to 181,000 and an increase on this has to do more damage to the Irish banking sector.
One interesting aspect of the Fitch report was that in general it expected mortgage interest rates to rise in 2013 and wider afield than just Ireland as for example other Euro area nations and the UK were included in this.
Ireland’s debt burden
As of the second quarter of 2012 Ireland national debt was 111.5% of her economic output as measured by her Gross Domestic Product compared to 101.5% a year earlier. So rising quickly and this ignores the fact that this includes the output of foreign companies many of whom are there for the low corporate taxes. If we use Gross National Product which excludes them entirely we get to 131% as a ratio. So if we go in the middle -not very company would leave if she raised corporate taxes- she is at a very uncomfortable 121% and rising? Why uncomfortable? This is because the International Monetary Fund set 120% as a threshold when looking at Greece’s situation.
With little or no economic growth in the offing such numbers are likely to be under further pressure in 2013 and maybe beyond.
So we see that weak retail sales and very weak industrial production numbers are acting as a brake on the Irish economy. Added to this is the austerity programme planned by her government which will have an impact in 2013 but a much more severe one in 2014 where general government expenditure is planned to be cut from 43.5 billion Euros to 40.8 billion. And 2013′s bite is more than it looks as more extra money is forecast to be spent on debt interest meaning that less will be available for other purposes.
We therefore have to ask why financial markets are apparently looking at her so favourably? In my opinion two main factors are at play here. Firstly any substantial yield is hard to find these days and secondly Ireland is being supported by her Euro area colleagues, the IMF and the UK. In addition she is being backstopped by the European Central Bank as well as the Central Bank of Ireland. So an opportunity in what looks an ever more rigged game.
However I wonder before this is over whether new investors might end up like Snoopy from the Peanuts column who would lie on top of his kennel saying.
When? When? When? Will I ever learn?