Thursday, January 30, 2014

The post-Moody’s blues

Not a lot of talk of government bond yields this week but a quick look at the indicative five-year yield on Irish government bonds calculated here shows that the drop in yields that happen on January 20th (after the Moody’s upgrade) has been almost fully reversed for the bond maturing in October 2018.

Bond Yields 5yr 30-01-14

The yield was around 1.80 per cent on Friday 17th of January and it dropped to close to 1.60 per cent after the Moody’s upgrade.  As can be seen it has been edging back up since then and is now at 1.77 per cent.  Much better than 14 per cent of course.

Tuesday, January 28, 2014

Retail sales (volume) did surge this December

Statements from Retail Excellence Ireland provided some contrasting views of the level of retail sales in December.  On December 24th it was reported that:
Retailers see fall in Christmas trade compared to 2012
while just a few days later a report from another REI statement was published under the following headline:
Retailers see strong start to post-Christmas sales
Unlike December 2012 when they got it all wrong, CSO data released today shows that REI’s take on December 2013 was pretty accurate: consumer purchases increased but they waited until the lower prices in the sales to do so. 
Here is the December 2013 Retail Sales Index excluding the motor trades.
RSI Dec 13
The increase in the volume series is pretty clear and the December reading is now higher than at any point going back to mid-2010, seasonally adjusted.  The value series did increase in December but by a much smaller amount.
If we look at the unadjusted series we can see concentration of retail sales in December of each year.
RSI Unadjusted Dec 2013
In December 2013 the unadjusted volume series was close to the levels seen in 2006 and 2008, though nine percent below the 2007 peak.  The drop in the December readings for the value series was much more pronounced with a clear gap emerging in December 2009.  The value series in December 2013 was 18 percent below the 2007 peak.
December 2013 volume was 5.5 percent higher than the December 2010 trough but the value series only shows a 3.6 percent increase.  We are beginning to buy more but are not having to spend as much doing so.
Returning to adjusted series here are the annual changes excluding the motor trades.
RSI Dec 13 Annual
The annual changes in Q3 were negative but the increases in the latter part of the year pushed them back into positive territory.  It remains to be seen whether the increase in December was a once-off splurge or reflects an emerging frugality fatigue amongst consumers who are going to continue to spend more. 

Friday, January 24, 2014

The Bundesbank versus the ECB

A wide-ranging interview in The Irish Times today with current Bundesbank president, Jens Weidmann, offers the following:

Derek Scally: The euro zone door to debt write-downs, now open, was held closed by ex-ECB president Trichet for Ireland. Does this argument hold water here?

Jens Weidmann: A The Governing Council then was weighing bail-in versus financial stability risks, and its majority concluded that the latter were more relevant under the concrete circumstances. In that debate the Bundesbank has always considered it important to make investors bear the risks of their investment decisions and already then favoured contributions of investors in the event of solvency problems, especially for banks that are to be wound down. Our common goal is to be able in the future to wind down banks without endangering financial stability.

In 2010 Weidmann was head of Economic Policy in the German Chanellor’s Office of Angela Merkel so this view of the Bundesbank was relayed to him at some stage.

We know that at the time of the negotiations surrounding the EU/IMF programme that burden sharing with the €6 billion or so of senior unsecured (and unguaranteed) bonds that remained in Anglo Irish Bank and Irish Nationwide was  “raised” by then Minister for Finance, Brian Lenihan.

The view expressed by Weidmann today differs from that offered by another German official.  In November 2010, Jorg Asmussen  was a deputy finance minister in the German government but in early 2012 he was appointed to the ECB Executive Board and sat on the Governing Council.  He was in Dublin in April 2012 and delivered a speech which included this:

I know that the decisions concerning the repayment of bondholders in the former Anglo Irish Bank have been a source of controversy. Decisions taken by the Irish authorities such as these are not taken lightly. And the consequences of subsequent actions are weighed carefully. It is true that the ECB viewed it as the least damaging course to fully honour the outstanding senior debts of Anglo. However unpopular that may now seem, this assessment was made at a time of extraordinary stresses in financial markets and great uncertainty. Protecting the hard-won gains and credibility from the early successes in 2011 was also a key consideration, to ensure no negative effects spilled-over to other Irish banks or to banks in other European Countries.

When speaking both Weidmann and Asmussen are giving the views of their employer.  At the time of the decision in November 2010 they did not work for the Bundesbank or the ECB.  The views from with their employers at the time (the German government/civil service) would also be interesting.

If the Bundesbank had German interests at heart why would it favour imposing losses on creditors in failed Irish bank thereby exposing German banks to possible losses?  The answer is that German banks never really had a huge direct exposure to the ‘covered’ Irish banks and it was close to zero even before the end of 2007 (three years before the above mentioned discussions).  See this research letter from the Central Bank.

Funding Profile

There have been indirect exposure through the operations of German banks based in the UK but it can be clearly seen that by far the greatest source of the massive external funding used by the ‘covered’ banks was London.

Finally, in this question Weidmann hints that the Promissory Note swap might be a concession to compensate for the decision to force the repayment of the €6 billion of Anglo/INBS unsecured senior bonds in November 2010 (emphasis mine).

David Scally: Was a line crossed that has brought the ECB into a position of political dependency?

Jens Weidmann: As you know, I viewed this transaction with great scepticism. At the end of the day, the central bank (of Ireland) largely has the debt on its books and is refinancing it at the main refinancing rate. This transaction is a blurring of monetary and fiscal policy that, from my perspective, risks being perceived as monetary financing. If the impression arises that monetary policy is handling fiscal problems, this would bring central banks into a situation where monetary stability is dominated by fiscal policy. Some might consider the transaction as a kind of a compensation for the Irish support to its banking system, but in my view such transfers should not be the business of central banks.

A 66% haircut on the €6 billion of bonds would have generated around €4 billion of savings which is a possible figure that arises if one tries to estimate the interest savings from the Promissory Note swap.

Monday, January 20, 2014

Bond yields tumble; should we refinance debt?

There was much talk over the weekend that the Moody’s upgrade of Irish government bonds on Friday was merely Moody’s catching up with the market.  If that was the case then it would have been reflected in little or no change on the yield on Irish government bonds this morning.  That has not been the case.  Yields have fallen considerably.  Here is a five-day chart of the five-year yield calculated here.

Bond Yields 5yr 20-01-14

The drop at 8am this morning is pretty apparent.  The reputation of ratings agencies has taken a deserved battering in the past few years but their significance in financial markets seems to have remained.

Any debate about the decision not to go with a Precautionary Credit Line now seems moot.  Although the yields now back the decision the reality is that the PCL was unlikely to be used if it was in place.  Here is chart from an interesting presentation on Portugal.

Debt Maturities 2014-15

Ireland’s debt financing needs over 2014 and 2015 was less than 5 percent of GDP which is much lower than Greece, Portugal, Spain and Italy.  At the end of 2013 Ireland had a cash reserve of around 12 percent of GDP which is enough to cover debt and deficit financing until the first half of 2015.  A PCL would have lasted 12 months before it would expire or require renewing.

Of the 5 percent of GDP debt financing needs for 2014 and 2015 about half has already been covered with the maturity of a bond on the 12th of January.  As shown here the only bond currently in issue that matures over the next two years is a €3.6 billion bond that will need to be paid in February 2015, while the one following that is a €10 billion bond that matures in April 2016.

The debt profile shown by the NTMA shows a large EFSM loan that is set to mature in 2015.

NTMA Debt Profile

The EFSM loans, however, will have their terms extended as agreed by the ECOFIN last June but the actual change will not be determined until closer to the original maturity debt.  As the NTMA note:

EFSM loans are also subject to a seven-year extension that will bring their weighted average maturity from 12.5 years to 19.5  years.  It is not expected that Ireland will have to refinance any of its EFSM loans before 2027. However, the revised maturity dates of individual EFSM loans will only be determined as they approach their original maturity dates.

Ireland’s low refinancing needs have undoubtedly been a factor in the relatively benign move out of the direct funding phase of the EU/IMF programme.  However, given the current level of borrowing rates, it might be better to have slightly more debt to refinance at the current lower rates.  As John Corrigan said on today’s Morning Ireland (reported here):

“each one tenth of one percent of a fall in the interest rate for every billion we borrow represents a saving of about a million per annum.”

Refinancing €10 billion of debt at a one percent lower interest rate would save around €100 million per annum.  The problem with this potential saving is that we don’t have debt to refinance.  We can’t just buy existing debt as that would have to be bought at the current lower yields, i.e. higher prices.  We need existing bonds to mature to benefit from the lower rates.  As we have seen we have less than €4 billion maturing over the next two years. Maybe we should give thought to repaying the EU/IMF loans early.

This seems particularly worthwhile for IMF loans.  These have an average interest rate of around 4.2 percent (almost one percentage point over the current ten-year yield).  Ireland has accessed €22.5 billion of loans from the IMF.  This will amortise in different tranches from 2015 to 2023.

So why not pay off the relatively higher cost IMF loans with the relatively cheaper funding now available from sovereign debt markets?  The problem with this is that one condition of the overall €67.5 billion funding package is that any early repayments must be split in proportion across all the lenders.  The IMF provided one-third of the overall funding.

So if we wished to repay €10 billion of IMF loans then a further €20 billion would have to be repaid to the EU lenders (EFSF, EFSM and UK, Danish and Swedish bilaterals).  Repaying the high-interest, relatively short maturity IMF loans makes financial sense.  Repaying the low-interest, very long maturity EU loans currently does not make financial sense.

Repaying IMF loans early is sometimes used as a positive indication for post-bailout countries. Iceland has done so.  Interest rates are now at levels that mean Ireland would gain financially and reputationally from doing so.  The structure of our EU/IMF funding package means it is unlikely to happen but if bond yields were to continue to tumble…

Thursday, January 9, 2014

The slow improvement in the Public Finances

The successful issue by the NTMA of another 10-year bond is a further small step to normality for our public finances.  They are a long way from being under control but the ability to raise €3.75 billion over 10 years at 3.5 percent indicated that decision makers in government bond markets think they are under control (or at least that they will be).

Getting a handle on Ireland’s public finances is not easy.  There are a plethora of sources and a variety of measures.  There are cash-based and accruals-based accounts.  There is the cross-over and subsidisation of central and local government.  There is the difference between voted and non-voted expenditure.  There is the difference between net and gross expenditure.  There are sinking fund contributions and appropriations in aid.  With all those in mind the following table may be comprehensible!  Click to enlarge.

The Public Finances

A fuller spreadsheet with some constituent components of the revenue and expenditure items is available here.  Note though that composition changes have affected some of the items.  For example, on the revenue side, the Health Levy, a departmental receipt for Health, was replaced by the Universal Social Charge and now appears under Income Tax.  On the expenditure side, FÁS, or equivalent, was transferred from Enterprise to Education.  These changes don’t affect the overall totals shown above.

Some comments on the above table are provided above the fold but offers little that we do not already know.  It is little more than a thought-straightening exercise. 

Wednesday, January 8, 2014

Retail Sales tick upwards

Today’s release of the November Retail Sales Index has some reasonably positive news (which was also seen in EU data released by Eurostat earlier). Excluding motor trades Irish retail sales edged higher in November, though the effect was stronger for volume than for value.

RSI Nov 13

The annual changes also improved with the volume series showing a 1.6 percent increase from a 1.8 percent decrease in October, though it must be remembered that some of the recent volatility in these is down to comparisons being with 2012 at a time when the “digital switchover’ led to an increase in electrical goods sales.

RSI Nov 13 Annual

Of course, it the December figures that really matter.  Last year, Retail Excellence Ireland claimed that the run up to Christmas 2012 was "the best in five years”.  This was not reflected in the subsequent CSO data.

This year, REI were more muted in their analysis of the pre-Christmas spree but they were back on message fairly quickly declaring that St. Stephen’s Day was the start of the “biggest sales success since Christmas 2008.”  Whatever the official figures from the CSO reveal about December REI can claim to have seen it coming.

Monday, January 6, 2014

Inflow into State Savings Schemes continues

Ireland may have run into funding difficulties elsewhere over the past few years by the State Savings Schemes run by the NTMA continue to attract a large net inflow of funds.

State Savings Net Flows

During the ‘boom’ years there was never more than a net inflow of a couple of hundred million into the State Savings Schemes and at the end in 2007 there was even a small net outflow.  However, since then the money has flowed in with average net inflows over the past six years of almost €2 billion.  The 2013 net inflow was €2.028 billion. 

These receipts have seen the total amount in the schemes soar from €4 billion in 2007 to almost €16 billion (10% of GDP) at the end of 2013.

State Savings Total

The amounts in these schemes form part of the General Government Debt and now make up around 8 percent of the overall GGB.  We just have the total net inflow across all the schemes for in 2013 but the NTMA 2012 Annual Report gives a breakdown by scheme as it stood 12 months ago.

NTMA State Savings Products

At the end of 2012 the total in State Savings Schemes was €13.8 billion.  The table above includes “Deposits Accounts” which are the monies placed on deposit with the Post Office Savings Bank (POSB) which are managed by the NTMA.  We do not know what happened to these deposits in 2013 but if they stayed steady the equivalent table for End-2013 will show a total of €18.3 billion (given the €2 billion increase for the NTMA’s schemes).

Before Christmas the NTMA announced a reduction in the interest paid on its products and the rates on new issues of the savings bonds/certs are now almost all below 2 percent.  For Prize Bonds the amount distributed is now equal to 1.6 percent of the balance.  The interest paid on Post Offices savings is not 0.5 percent.

This funding, which wasn’t taken as given at the start of the EU/IMF programme in late 2010, is one reason the NTMA have been able to accumulate a large cash reserve at the conclusion of the EU/IMF funding.  Over the past three years a net €5.5 billion has flowed into the NTMA’s schemes (excluding POSB deposits).  The total cash reserve stood at around €20 billion at the end of the year, excluding the €3.7 billion of Housing Finance Agency notes held by the NTMA.

NTMA Cash Resources

A question sometimes arises as to what the NTMA is doing with this cash mountain.  Usually, it is kept in the Exchequer Account with the Central Bank but as can be seen above the balance between the money in the Exchequer Account and the row labelled Other has reversed.  Over the past 12 months the amount in the Exchequer Account has declined by €10.8 billion while the amount in Other accounts has increased by almost the same amount.

The money has been moved out of the Exchequer Account and put on deposit with the ‘Covered’ Banks (AIB/EBS, BOI and PTSB). [They are no longer ‘covered’ by a guarantee but we’ll stick with the nomenclature.]

Government Deposits in Covered Banks

The spike in 2011 was because the money used to recapitalise the banks after the PCAR exercise was briefly put into the banks as deposits before the recapitalisation was completed.  In general, we can see that government deposits in the banks have been around €3 billion but that this rose rapidly in the early part of 2013 and now approaches €15 billion.  These deposits are a nice, though somewhat artificial, fillip to the deposit figures of the ‘covered’ banks.

It is possible that one reason why there is €16 billion of money in the State Savings Schemes is a reluctance of people to put money on deposit with our delinquent banks while the banks themselves have frequently complained about the rates offered by the NTMA.  One could argue that the NTMA have given the deposits to the banks anyway!

Debt Charts and Tax Arbitrage

Charts like the following appear fairly regularly.


The latest occurrence was on the website of The Wall Street Journal.  There is nothing wrong with the chart.  It is 100 percent accurate in what it represents.  The problem is in how it is subsequently used and interpreted, particularly in Irish media.  And as if to keep the record intact the chart appeared in the Sunday papers to declare us to be “the most delinquent of European debtors”.

The constituent components of the figures for Ireland in the chart above are:


DEBT, €bn





Non-Financial Corporate









Ireland has a massive debt problem but the real impact on “us” needs to be understood.   The figures for the Household and Government sectors are not in dispute.  The scale and problems associated with each are fairly well understood even if resolving them is still some way off.

What remains is the massive figure for business debt.  Do Irish businesses have €330 billion in debt?  Well, businesses in Ireland do, but not necessarily Irish businesses.  We have looked at this in more detail before and here is a chart worth reproducing:

NFC Debt and GDP[3]

At the zenith of the boom in 2007, non-financial corporate debt was around €200 billion.  The banking sector seized up around then but NFC debt surged to close to €350 billion.  As the previous post explored much of this was down to the treasury activities of MNCs with operations in Ireland.

What were the MNCs doing?  They were trying to get money out of Ireland.  MNCs have been able to create “double non-taxation” on their profits using hybrid loan instruments. 

In this arrangement a MNC subsidiary in Ireland will be financed by a parent elsewhere using an intra-company loan.  The Irish subsidiary will be charged “arms-length” interest for this loan.  Naturally, the interest paid will be allowed as a deduction in Ireland to taxable income as loan interest is a legitimate business expense.  The double non-taxation arises when the MNC originates the loan from a country that does not tax the interest income from the loan (in many cases the loan will be classified by the originator such that the income received is a dividend – this is the “hybrid” instrument).  The expense generates a deduction in Ireland and the income is a tax exempt dividend distribution in the destination country.

Back in November the EU announced efforts to clampdown on such double non-taxation arrangements.  Under the proposals the income will not be tax exempt in the destination country. [These proposals will not change Irish tax law as we do not have a dividend exemption that allows these hybrid-loan mismatches.]

Here is the outflow from Ireland of Direct Investment Income: Income from Debt in the Balance of Payments Annual Series:

Direct Investment Income - Income on Debt

The years don’t exactly match up but it can be seen that there has been a massive jump in the outflow of Income on Debt for Direct Investment Income.  The outgoing payments are now almost €5 billion a year.  Once again the tax arbitrage strategies of MNCs of skewing Irish macro data.

So how much debt do “Irish” non-financial corporates have? The turmoil in the banking system means that we really don’t know.  What we do know is the lending of banks in Ireland to businesses in Ireland peaked at €175 billion in early 2008.  Of this, around €115 billion was to property, construction, development and other real-estate activities with around €60 billion to companies outside the construction sector (though a lot of this was also property related).

Thus, €175 billion gives something approaching the extent of NFC debt of Irish companies.  There have been lots of changes since 2008.  Some banks have left the market, some banks have folded and lots of loans have been transferred to NAMA.  How much of the €115 billion property-related debt still exists six years later?  How much of it will actually be repaid? 

The non-payment of huge amounts of NFC debt has added significantly to the government debt.  A large part of the €40 billion loss made by the NAMA banks when their loans were transferred to NAMA was covered by the government.  We can expect that the NFC sector won’t be repaying that much of that.  At best we can hope that the €30 billion or so paid by NAMA will be recouped.

Losses by non-NAMA banks on development loans will be substantial as well, maybe up to €20 billion.  The €60 billion lent to non-property related sectors has decreased by around €20 billion in the past six years as lending by the banks has contracted.  Conservatively, we could knock €80 billion off the peak lending to NFCs to get the current figure.

Here is a stab at end-2013 debt figures for the three sectors (estimated GDP: €165 billion)


DEBT, €bn





Non-Financial Corporate*









* Figure reflects “Irish” NFC debt of €40 billion lending to non-property-related sectors and property loans net of loss on NAMA transfers (these losses have already been counted in the gross debt of the Government sector) and similar losses outside the NAMA banks .

It’s a massive mountain of debt but not as unique as the opening chart above would suggest.  A total debt of 285% of GDP would be mid-table in the chart.

Wednesday, January 1, 2014

Minister Calls for Rent Controls

The front page of the first Irish Examiner of 2014 led with calls from Housing Minister Jan O’Sullivan for the introduction of rent controls. Click to enlarge.

irish_examiner.750 (1)

The article is here.  It is not clear what type of rent controls might be examined but some mechanism linked to the CPI is alluded to with Jan O’Sullivan quoted as saying:

“There is a general problem on the cost of private renting. We should look at examples in other countries where rents are related to increases in consumer price indexes, where rents can’t be increased more than the cost of living increases.”

We can get data from the CSO on actual rents paid by tenants to private landlords back to the start of 2003.  This item has a weight of 4.35 percent in the overall index which naturally enough is also available from that time.  Here is what both series look like indexed to 100 in January 2003.

Rents versus the CPI

Compared to the start of 2003 the overall CPI is now around 20 percent higher.  Actual rents paid by tenants to private landlords have been rising recently (the annual increase is currently 8.2 percent) but the index is at the same level it was at in January 2003.

Private rents have shown periods of rises and falls over the past 11 years.  Most notable was the 25 percent drop from the first quarter of 2008 to the first quarter of 2010.  The Q3 2013 Daft Report on the Rental Market records similar patterns to those shown above on a regional basis (though only has data from the beginning of 2006).

In the chart above the two series are set equal to each other in January 2003.  They got there by different means but the two series were again almost equal to each other at the end of 2007.  Since then they have diverged significantly but are showing signs of converging again though it would take a further 20 percent increase in private rents from where they are now for the rent index to again equal the CPI (assuming it was unchanged).

There may be calls for rent controls now when rents are rising faster than the CPI but would a counter-factual with rent controls in place have seen rents fall by 25 percent in two years when the overall CPI fell by less than 8 percent over the same period?  Will rent controls be effective only on the way up and not on the way down?

Finally, here is a chart comparing private and local authority rents (again with both set equal to 100 in January 2003).

Private versus LA Rents