Here is a quick update of a previous post which compared the movements of the Consumer Price Indices for Ireland the UK since January 2007.
As would be expected the pattern has not changed much though the Irish CPI has being edging upwards since the start of the year. Since January 2007 the Irish CPI has risen 4.1%, which is also the same rise since January 2010. The UK CPI has risen 15.8% since January 2007 and is up 6.3% since January 2010.
TweetI am just including these two measures in a single post and am not suggesting a direct causal relationship between them.
The May Consumer Price Index release from the CSO shows that the rate of annual inflation fell from 3.2% in April to 2.7% in May. However once we strip out mortgage costs and energy prices our measure of core inflation hardly moved with a recorded drop from 0.66% to 0.61%.
We can see that excluding mortgage interest, which is being pushed up as banks raise their standard variable rates, and energy prices, which is rose because of excise duties and the externally determined price of oil, that prices across most of the economy are, on average, relatively stable.
The measure of core inflation used here accounts for around 85% of the total index so those who are suffering from rising prices are
So somebody who has a standard variable rate mortgage and drives a lot is facing significant price increases compared to 12 months ago. Outside of these particular cases the average inflation rate is quite low with the other 85% of the index rising only 0.6% on the year.
This week also say the release of the May update of the ESRI/KBC Consumer Sentiment Index. The index rose from 57.9 in April to 59.4 in April. This seems to be based on future expectations where the sub-index rose by 8.5 points on the month rather than current conditions where the sub-index fell by 8.8 points on the month.
At 59.4, the index is now significantly above the local minimum of 44.4 recorded in December 2010 in the aftermath of the EU/IMF intervention and the global minimum of 39.6 in July 2008 with the pace of economic decline was at its most severe. The consumer sentiment index is showing improvement but it is from very low levels and the overall outlook remains gloomy.
TweetFor those who can’t wait, the answer to this question is that 50% of it comes through the State.
In a previous post we looked at the rapid reduction in liabilities in the household sector which has seen the total amount of household loans fall from €203 billion in Q4 2008 to €186 billion in Q4 2010. Household liabilities fell by an average of €3 billion a quarter in 2010.
This post is based on an interest point that was raised in the comments (HT: Dreaded_Estate). The question was:
What percentage of the economy do you think is being paid by the public and private sector?
There is a brief answer in the comments to the original post and we largely reproduce it here with some minor additions.
Unfortunately we cannot answer this question with 2010 data as the Non-Financial Institutional Sector Accounts won’t be published again by the CSO until October. Instead we use 2009 data but the changes are unlikely to have been of major significance. We examined the 2009 household accounts when they were released and the numbers here are from that post.
In 2009, households had a net disposable income of €89.6 billion. Of this €81 billion was used for consumption. The represents money that was saved and used to either build up deposits or pay down loans.
The accounts show that in 2009 total household wages were €72.8 billion. Separate figures from the Department of Finance show that the public sector pay bill was around €18 billion so about a quarter of wage income in Ireland comes from the public sector. It is likely that around one-third of this would have been paid in income taxes and social contributions, thus public sector pay contributed around €12 billion of the €90 billion of household disposable income.
The State also provided €26.4 billion of tax-free social benefits which directly added to household disposable income. There was also a public sector pensions bill of around €1.8 billion which would be partially taxed. It is likely that the State provided around €40 billion of disposable income in either wages, pensions or direct payments to households.
It is also true that some self-employed and private wage income actually comes from the State through State contracts and other processes. It is very difficult to estimate how much this might be. In 2009 the government spend €9.3 billion on goods and services and both central and local government spent €6.3 billion on capital expenditure. It is likely that a significant portion of this expenditure further added to household disposable income through one means or another.
All told, it is probably that a low estimate is that somewhere around €45 billion or 50% of 2009 net household disposable income came either directly or indirectly from the State.
In relation to the original post on the payment of household loans it is impossible to say how much of the €6 billion reduction in 2009 or €12 billion reduction in 2010 was made from disposable income that came from the State but it is sure to be something above zero.
There is of course a circular flow element to the above analysis with a good share of the disposable income provided by the State returning through consumption taxes. Here is a breakdown of the 2009 total government expenditure.
This is a much longer update of a previous post on mortgage debt forgiveness. There is an earlier post here which led to an appearance as yet another talking head on the television. (There is short report at the start and yours truly butts in from 8:30 on).
This post covers a number of themes:
As this suggests there is quite a lot to this post but I hope it can contribute a little to what should be a very important debate in Ireland. Recently we have been transfixed by the projected levels of public debt we might have but we cannot forget the actual levels of private debt we do have, particularly of households.
TweetThe release during the week of the addendum to the stress tests allows us to consider the total amount of loans losses that have been accounted for in the banking system.
First we consider the losses that the banks incurred on the transfer of their developer loans books to the National Asset Management Agency (NAMA). We have been directed to a useful summary table on page 54 (pdf) of the Nyberg Report (I thank namawinelake for the pointer to this table).
As a result of the €72.3 billion of NAMA transfers up to December 2010 the banks were forced to crystallise €41.8 billion of losses on these loans. Next we turn to the expected losses on the loans that remained on the banks’ balance sheets after the NAMA transfers. This table combines data from the original stress test document which covered AIB, BOI, EBS and IL&P and this week’s addendum which dealt with Anglo and INBS.
The figures for Anglo are a little confusing and unfortunately we are not given the same detail as provided for the other banks. The analysis for Anglo was merely a check on the PwC analysis undertaken last September. There are a number of loss rates given for Anglo but the addendum states that “[t]he loss rate used by CBI in the capital assessment in September 2010 was 33.6%.” There is also a figure of 46.7% which is listed as “Central Bank additional conservatism to stress Sept 2010” but I’m not sure what was done with this figure so we’ll stick to the 33.6% projection.
The stress tests on the four live banks also allow for €13.2 billion of losses on the run-off and disposal of non-core assets. This will be the deleveraging of €72.6 billion of (mainly foreign) loans. Although a €13.2 billion loss is allowed for the banks, BlackRock estimate that the lifetime loss on these loans will be €3.0 billion. We will use this as our measure of loan losses.
There are also losses other than the NAMA transfers that had been allowed for by the end of December 2010. The stress test documents show that the four banks had stock provisions of €9.9 billion accounted for at that time.
All told, the total amount of loan losses accounted for is now €107.6 billion and is pretty much aligned to the most conservative of loss projections made during the crisis.
Will the banks have enough money to be able to absorb these losses? Remember that about half of these losses are projected losses from the adverse scenario of the stress tests. These may or may not materialise.
There are four sources of funds available to absorb these losses:
The Nyberg Report shows that the covered banks had about €25 billion of equity capital in 2007. This is been eliminated. Over the period 2007 to 2010 the banks generated about €5 billion of operating profits and BlackRock forecast that under the adverse scenario the four banks in the original stress tests will generate €4 billion of operating profit in the period from 2011 to 2014.
Junior bondholders have already taken about €10 billion of haircuts. There is little actual evidence of this but his is Dail statement on the day of the stress test announcements, Michael Noonan said:
It is acknowledged by all that a large part of the €46.3 billion already invested by the State in the banks will not be recovered, but the State has not borne the full burden of the collapse. Approximately €60 billion of private equity value in Irish banks has also been destroyed since early 2007, much of it held by ordinary Irish citizens. Subordinated bondholders have also already contributed approximately €10 billion to the cost of the bailout.
The most recent round of haircuts junior bondholders are expected to raise another €4 billion. The €20 billion contribution of the State to the €24 billion recapitalisation will bring the State’s support to the banks up to €66 billion.
All told, there have been contributions of €114 billion to our delinquent banks. If the projected losses of €108 billion materialised this would not leave the banks in a very strong position and they would only have €6 billion of capital remaining.
One thing to note here is that the €53 billion of loan losses projected from the stress tests are “lifetime” loan losses. In fact, of the €40 billion of lifetime losses that the BlackRock adverse scenario projects for AIB, BOI, EBS and IL&P, €28 billion of these losses are expected to materialise in the period after 2013 and as it states in the stress test document:
Besides, any such losses are spread over a quarter century, allowing a lot of time for provisions to be set aside out of normal profits in what would then be a recovered and downsized banking system operating in a non-stressed situation.
This may not be ideal but it does mean that the banks will be in better capital position over the next three years than was indicated above. It is assumed then that the operating profits the banks will earn after 2013 will be sufficient to absorb the provisions for the losses that occur after 2013.
I think it is pretty clear that we appear to have finally fully grasped the severity of the banking collapse we face. There has now been recognition of €108 billion of loan losses in the system. Half of this is a projection and we must wait until the true extent of the crisis is revealed but there are few suggestions that it will be higher than this.
To cover these losses, €114 billion of funds have been provided by shareholders, junior bondholders and the State. If all the projected losses occurred immediately the banks would be in a precarious state but because they will be spread out over the next 15 years (though heavily concentrated over the next three years) the capital position of the banks does look like it can be stabilised.
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