Ireland’s four-year plan struggles to win credibility as the IMF loses its direction just as its role in the world increases

After the equity market falls of the day before world equity markets rallied strongly yesterday making their two-day move look a little like the rhyme about the Grand Old Duke of York. The US Dow Jones Industrial Average equity index rallied some 150 points to 11,187 (interestingly virtually the same level as my pre FOMC meeting benchmark) and the German Dax equity index surged by 118 points or 1.75%. Both of these were influenced by good economic news of which more later. It was pleasing to see some better news in a week dominated by the travails of the peripheral members of the Euro zone.

Checking the benchmarks from November 3rd or FOMC day

Back on the day when the US central bank announced its new Quantitative Easing programme or QE2 I established some market benchmarks so that over time one had a measure of how it was working. Let us take a look at them.

The Dow Jones Industrial Average closed at 11,188 which was up 64 points……….. In terms of government bond yields then the ten-year yields 2.57% and the thirty-year yields some 3.91%. Moving onto currencies then the trade-weighted US dollar index stands at 76.68. Another possible benchmark is the gold price which has a front month futures price of US $1354.

Having established that the Dow Jones is at virtually the same level as back then we see that the next three benchmarks have moved unfavourably. The ten-year government bond yield closed last night at 2.91% which is up 0.24% and the thirty year closed at 4.29% which is up 0.38% and the US dollar exchange rate index is at 79.7 which is up 3.02. The gold price has risen to US $1371 per troy ounce.


I found these numbers intriguing. If we consider what QE2 was supposed to achieve then its supporters would start with higher asset prices and lower longer-term interest rates. However we have higher longer-term interest rates and equity prices are virtually unchanged. This is not a good return on a policy which has begun. The one asset that has gone up is gold and you can argue this as a success or a failure. The success route is to argue that its price has risen due to expectations of higher inflation (which is a FOMC objective), the failure route is to argue it has risen due to fear and uncertainty.

I used to work with a colleague who wondered about a day that would involve authorities losing control over long-term interest rates. It is a shame he left financial markets as there are signs that this is exactly what may be happening and I would like to talk to him about it! Apart from the obvious issue for the United States this will ripple around the world and is a background move that will hit those currently already struggling with such issues, the peripheral Euro zone nations, the hardest.

US Economic data: Improved unemployment initial claims

Much of the rally in US equity markets yesterday was caused by this announcement from the US Department of Labor.

In the week ending Nov. 20, the advance figure for seasonally adjusted initial claims was 407,000, a decrease of 34,000 from the previous week’s revised figure of 441,000. The 4-week moving average was 436,000, a decrease of 7,500 from the previous week’s revised average of 443,500.

If we look at the headline figure we see a considerable improvement on the figures for the last few months and this led to immediate hopes of further improvements. Also if we try to get a little perspective the four-week moving average improved by 7500, indeed it has now fallen to its lowest level since August 2008.

If one wants a cautionary note then you might wonder if a week adjusted to allow for the  Thanksgiving holiday might prove to be unreliable. If you looked at the unadjusted data which rose by 52,490 to 462,027 you might be a little more concerned but equity markets chose to ignore this. They also ignored the fact that the Census Bureau produced more worrying information on the state of the US housing market.

Sales of new single-family houses in October 2010 were at a seasonally adjusted annual rate of 283,000,This is 8.1 percent (±16.1%)* below the revised September rate of 308,000 and is 28.5 percent (±12.6%) below the October 2009 estimate of 396,000. 

Also the median house price fell to US $194,000 which is the lowest since December 2007. So there are troubling signs still in the US housing market.

Europe and the  German economic locomotive

After purchasing manager indices which were overall reasonably strong earlier in the week we got more good news from the German IFO index yesterday. The overall  Euro-zone November PMIs had exceeded the expectations for them with manufacturing accelerating to 55.5 from 54.6 while services rose to 55.2 from 53.3. Then the German IFO rose from 107.7 to 109.3 and in case you are wondering it is a business climate indicator.

Whilst these are surveys they seem to be telling the same good story for the German economy which also tallies with its growth experience for the year so far. However I do not know about you but the minute I hear of German growth it reminds me that in other parts of Europe there is slow or no growth and we are back to thoughts of a two or even three speed Europe which has eyes looking at the peripheral Euro zone nations again.

Ireland and her four-year plan

Some sections of the media have treated this announcement as something new but please remember that a month ago we were told that there would be a 15 billion Euro adjustment over four years and I discussed this on October 27th. So this was about how it is going to be achieved rather than how much. Let us look at the details that were revealed.

This package will comprise ⅔ expenditure and 1/3rd revenue measures….6 billion will be front-loaded in 2011…..Deficit will be reduced to 9.1% of GDP in 2011. Debt to GDP ratio will peak at 102% in 2013 and will fall to 100% by 2014.

So if we start with this we are on the edge of credibility with the majority of the package expected to come from further expenditure reductions in a country which has already had cuts of around 15 billion Euros in the past two years. We then see that the cuts will be front loaded and to put the 6 billion Euros expected in 2011 another way it is over 3.5% of GDP and over 4.5% of GNP of adjustment in one year. However the plan then goes onto what  if I return to putting economics to music reminds me of the song “Fantasy” by Earth Wind and Fire. You see whilst this extraordinary adjustment is going on we will see.

The Plan projects that real GDP will grow 2.75% on average over the 2011– 2014 period……90,000 (net) new jobs will be created over the period 2012-2014……..Unemployment will fall to below 10% by 2014.

So if 2011 growth conforms to the average after the 3.5% of GDP adjustment we are expecting the rest of the economy to grow by over 6%. This is of course at a time when one of the previous drivers of Celtic Tiger economic growth,easy credit, will be noticeable by its absence.

Whilst they are themselves suffering from low or no credibility the detail of economic reports from the ratings agencies can be quite good. So let us look at what Standard and Poors expected for economic growth in Ireland from their report of earlier this week.

Standard & Poor’s now expects close to zero nominal GDP growth for 2011 and 2012. We do not envisage GDP exceeding 2% a year in real terms before 2013.


One of the biggest criticisms of the behaviour of the current Irish administration is that it has been prone to cronyism and favouring the wealthy including those who have contributed to Ireland’s economic woes. You might accordingly have expected to see cuts in government ministerial pay and expenses as Mr.Cowen and his ministers are very well paid in international terms but there are none. You might have expected a change to the Croke Park Agreement which protected the positions of the higher echelons of the Irish civil service allowing some for example to retire on very favourable terms but the “adverse economic conditions” clause has not been activated making me wonder exactly what would be considered adverse economic conditions! To talk of a ten percent pay cut for new public servants to my mind deliberately misses the point that there will be very few new public servants if any.

Indeed if we look at the fact that the minimum wage is going to be cut by one Euro per hour and the fact that Value Added Tax will rise from 21% to 22% in 2013 and to 23% in 2014 you see measures which are somewhat regressive and affect the poor disproportionately. Not quite the UK mantra of “We are all in this together” is it? So to add to the theoretical problem of fixing debt with more debt we apparently solve cronyism by favouring one cronies. I think that for this Irish administration the correct song is “Go” by Moby. However fortunately some sort of democracy may intervene as there is a by-election in Ireland today and voters in one part of her at least have the opportunity to use the ballot box.

Market Impact

This was very poor as already high Irish long-term interest rates went even higher. Her ten-year government bond yield surged to 8.79% and the index of all of her government bonds fell to 81.5 from the previous days 83.3. Today there has been further bad news from the London Clearing House.

The margin required for positions of Irish government bonds will consequently be an additional 45% of net positions over the standard margin rate.

If I may consider the international implications of this then holders of Portuguese government bonds must be starting to wonder if they will suffer from increased margin requirements too as her ten-year government bond yields closed at 7.13% yesterday.

The Irish National Pension Fund

The Irish government announced yesterday that this institution will in future be allowed to purchase Irish government debt. As it has assets of around 25 billion Euros you might have expected this to provide a boost. However around 11 billion Euros have been committed to the bailout of Allied Irish Bank and Bank of Ireland. Indeed as it is underwriting the current planned issue by Allied Irish its risk is rising as Allied’s share price falls. Last time I checked it was at 34 cents per share which is not good news if you are underwriting at 50 cents per share!

So Ireland’s pensioners face an even rockier future as their government desperately employs any resource it can in order to try to bail out its failures. In case you were wondering its original objective was to invest internationally to get the highest return so again we can see that promises are not being kept.

The International Monetary Fund

I have argued in the past that the role of this institution has fundamentally changed. In Ireland’s four-year plan there is a confession to this.

The current account of the balance of payments will record a small surplus in 2011.

So it is not intervening to help solve a balance of payments problem which was its original (and in my opinion proper) role.I discussed this issue in an article back on the 8th of June. Its role has been expanded due to political influence and indeed its current leader is a politician. There have been suggestions from the UK Coalition government that David Milliband would be a good replacement as leader. This confuses me as it appears to suggest that losing a leadership election makes a career politician more suitable for a role in an area where I do not remember him making any intervention at all. Please correct me if I am wrong. Apart from anything else would it not represent a reward for failure at an election? Does this not question one of the fundamental points of being a democracy?


5 thoughts on “Ireland’s four-year plan struggles to win credibility as the IMF loses its direction just as its role in the world increases

  1. IMF yes i agree with you failed politician so let’s put him into the IMF , it would be mad and bad part of the current story is surely that we need less political influence on economic decisions and that they should listen to the professionals with humility

    • We need more political influence!

      Where financial interests make unfettered decisions we have a form of fascism.

      It goes without saying that the politicians should have full accountability to the electorate including a requirement for the well being of that electorate to be the overriding purpose of government. It will follow that finance and industry will still flourish but that the emphasis will be different.

  2. unfortunatly I feel the Irish will be asked to vote several times as the first time obvioulsy they will choose wrong …..

    the Irish people really do need to discuss with themselves who their politicians are working for – because its not them!


  3. I just wanted to add a couple of thoughts about the effectiveness of QE2.

    If I understand correctly, the yardsticks you are using to measure the effectiveness of QE2 are:-

    1. raising stock prices (DJIA) – no change.
    but you could argue that they would’ve fallen otherwise, plus there was
    anticipation of QE2 and markets moved in advance

    2. reducing long dated treasury yields – 10yr and 30yr yields have risen.
    purchases (and most of the US government’s debt!) turned out to be at the
    shorter end of the curve though

    3. – devaluing the $ to help rebalancing – US dollar index risen slightly.
    again, you could argue that the dollar fell in anticipation of QE2, and
    furthermore, the € is in the middle of a crisis now (note that we have
    ~1.3$/€ now as opposed to ~1.2$/€ in the middle of the Greek crisis)

    So to me, it seems QE2 has had effects: whether you think these will prove to be beneficial or not is another matter of course.

    • Hi Graeme
      Thanks for the comment. The point I was trying to make was if we take the benchmarks I set then from the date of the meeting until now the results are patchy to say the least. You are entirely correct to say that there were market movements before the meeting and as I have argued this myself in relation to exchange rates I can hardly disagree! However they are more difficult to quantify.
      I was thinking as I wrote the section about what I imagined Ben Bernake might have been expecting when he launched the QE2 for these benchmarks and should have made that bit clearer. I suspect he was hoping for more. Also a supporter of QE policies in the UK Adam Posen has in the past set criteria for post-announcement movements.
      As markets ebb and flow the situation may be significantly better or worse in a weeks time…

      However one thing I do wish to emphasise is the change in US government bond yields. I did not mention shorter-dated bonds as I had not set a benchmark for them but their yields have risen since too and includidng where the purchases are targetted. The 5 year yield was at 1.16% the night before and is now 1.57%. For a while the yield on the 5 year did fall and may just have touched 1% briefly but since then it has been rising. I realise that the mainstream media once they have some data on such things move on but the impression they have left is now misleading.

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