Deposits in Irish Banks: A Bank Run?

The release each month by the Central Bank of the Money, Credit and Banking Statistics has seen a shift in interest from the surge in private sector credit that occurred during the false Celtic Tiger phase to the rapid decline in deposits in Irish banks.

Here is a graph of the attention-grabbing trend.  Deposits in banks have been declining since early 2009 but there has been a marked acceleration in this fall since August 2010, with deposits falling by €200 billion in that time.

This measure of total deposits includes all credit institutions operating in Ireland, thus banks operating in the IFSC will be included even though they may have very limited links to the Irish economy.  The Central Bank allows us to break down the above total into domestic credit institutions and other credit institutions.  See this document which lists all credit institutions operating in Ireland.

When we break down deposits into those with domestic banks and those with non-domestic or other banks we see that the €200 billion drop since August has been pretty evenly split between the two groups.  Domestic banks have seen deposits drop by €95 billion since August.  We will have a closer look at the exit of this €95 billion.

Here we get a breakdown of the origin of the deposits.  It is evident that the fall in the deposit base of domestic banks is because of a huge withdrawal of deposits from rest of the world residents.  Since August these deposits have fallen from €193 billion to €121 billion.  As London is outside the eurozone it is likely that a lot of the deposits classified as rest of the world originated from here.

Deposits from Irish residents were largely static up to October, but in November and December there was a drop of €11 billion with deposits falling from €303 billion to €292 billion.  Like deposits from rest of the world residents, deposits from other Eurozone residents have been shown a steady decline since August and fell from €29 billion to €16 billion in the last five months of the year.

Deposits from Irish residents in domestic residents are down, but we know that the Irish savings rate is in excess of 10%.  Where are the existing and new deposits going?  If we look at a breakdown similar to the above for ‘other’ banks operating in Ireland we start to get an insight.

While both other Eurozone and rest of the world residents have been reducing their deposits in other credit institutions operating in Ireland, the last month of the year saw a fairly dramatic jump in deposits in this banks by Irish residents.  In December alone these deposits jumped from €35 billion to €54 billion.  This €19 billion increase in deposits by Irish residents in other banks is greater than the €11 billion decrease in deposits in domestic banks.

Although deposits from all sources are declining it is clear that deposits from rest of the world residents make up the bulk of the fall.  Since August these are down by €118 billion and the main withdrawer of funds have been monetary financial institutions who have taken out €99 billion since August and likely reflects Irish banks difficulties in obtaining funds from wholesale money markets.  This graph is for all credit institutions operating in Ireland. 

Here is a similar graph from deposits from Other Eurozone residents.  The series had been moving relatively steadily until October where there was a €78 billion drop in deposits from monetary financial institutions (more money market troubles?) and a €48 billion rise in deposits from general government (up from essentially nothing).  Since them monetary financial institutions have been remarkably stable and general government deposits have fallen back to €19 billion.

Of course, as we said above, most of the Eurozone deposits are held in non-domestic banks.  Of the €152  billion  of deposits that originated in the Eurozone only €16 billion was placed with domestic banks and this is down from the level of €29 billion recorded back in August.

Finally, we look at the breakdown of deposits from Irish residents. First up, households.

[Note the the break in the series in January 2009 is as a result of Credit Unions been added to the Central Bank’s banking statistics.  There is no other significance to this.]

For virtually the first 11 months of the year, deposits by Irish households were declining.  This largest fall was in November (down nearly €3 billion) but this was reversed in December which saw a €1 billion increase in deposits and likely placed in non-domestic banks.

Turning to the other categories of deposits from Irish residents.  All of these declined in December.

Virtually all measures of deposits in Irish banks have been falling in recent months.  Here is what has been filling some of the the gap.

And the Irish Central Bank has been doing its bit as well.  At a time when the policy is to make Irish banks smaller by reducing their asset base (loan books) here are the assets of the Irish Central Bank.

Since the start of 2008 the assets of the Central Bank have risen almost four fold.  Most of this increase can be attributed to two categories, though the surge in the  funds used under Main Refinancing Operations reflects the increased contribution by the Eurosystem of central banks rather than any unilateral action by the Central Bank of Ireland.

The surge since August can clearly be seen and this is the money that has been used to fund the outflow of deposits.  The notable category is Other Assets which is money the Central Bank has been ‘printing’  since Irish banks have seen huge reductions in their deposits from other financial institutions in the EU and the rest of the world. I hope we get it back.

€6 Billion From A Wealth Tax? Not with these sums

Only a dope could have this hope.

One suggestion from the United Left Alliance is that €6 billion can be raised annually from a 5% wealth tax.  This proposal has no grounding in reality and is populist poppycock.

The figure of €6 billion is attributed to analysis by an old friend, Tom O’Connor.  The article which contains the analysis can be read here: Wealthy Irish have €121bn and should be taxed more.  Here is the only accurate calculation of this loony proposal from the ULA: 5% of €121 billion is €6.05 billion.  The rest is nonsense.

Let’s start with Mr O’Connor’s “analysis” where the conclusion that “33,000 millionaires hold €121 billion”.  The numbers used come from the 2006 report by Bank of Ireland Asset Management on The Wealth of The Nation.  You can read this short report here. 

Much of the basis for the proposition comes from the numbers in this table from page 13 which the report admits are “very approximate estimates”.

From here things get messy.  Tom O’Connor, in his piece, starts with

Firstly, the report estimated that there were 330 individuals whose wealth well exceeded €30m. If we take a very conservative estimate of each holding €40m, then the collective wealth of these 330 individuals was €13.2bn

The report also stated that there were 3,000 millionaires whose wealth ranged from €5m-€30m. Taking the midpoint value of €18m, this means that that these 3,000 individuals held €54bn in wealth. The remaining 29,670 millionaires held between €1m-€5m each. If we take the midpoint here of €3m, then these 29,670 millionaires were worth €89bn in total.

Of course the figures in the table are 330, 2,970 and 29,700 and not the 330, 3,000 and 29,670 used by Mr O’Connor but that is not his worst crime.  Extrapolating the total wealth from the crude figures given in the table is difficult (impossible?) but why should we let the facts get in the way of a good story.   In Mr O’Connor’s article we are told that the wealth of these 33,000 millionaires in 2006 was €156.21 billion.

The smallest part of this comes from the 330 people with a net worth of €30 million or more.  An average figure of €40 million is plucked for these people giving the total of €13.2 billion.  We have no basis to argue against this figure as it is a pure guess.  The other two categories can be scrutinised in a little more detail.

It is clear that the shape of the distribution of wealth has little influence on this analysis.  Amazingly, for the groups with net worth of between €1 and €5 million and between €5 and €30 million the midpoints are used to provide an average.  Only if the distribution of wealth were uniform would this be appropriate.  The figures themselves show how skewed the distribution of wealth is.  There are estimated to be 10 times more millionaires in the €4 million range from €1 to €5 million than in the €25 million range from €5 to €30 million.

The distribution of wealth is a hugely skewed distribution and there is no way that the mean value of a group of people within a particular range will be the midpoint of that range.  The mean value will undoubtedly be closer the the lower end of the range.  The figures of €18 million and €3 million chosen above are nonsense.  The total of €156.21 billion is nonsense.

The next bold move is to translate this 2006 figure to a 2010 equivalent.  Cue Tom:

Fortunately, we can update the 2006 figures to check this out: the original report tells us  that these millionaires held 71% of their wealth in property; 3% in bonds; 10% in cash and 16% in equities. The breakdown of the original €156bn is thus: €112.4bn in property; €15.5bn in cash; €4.7bn in bonds and €23.4bn in equities.

Unfortunately the report tells us nothing of the sort.  The breakdown provided above is in the report but refers to ALL households and not the 33,000 millionaires.  See top of page 9 of the report.  And actually the proportion of assets held in property in 2006 was 72% (not 71%) and in equities was 15% (not 16%).  The figures in brackets are the ones used by Tom O’Connor but they what they were estimated to be in 2005 and had changed for 2006.

It is likely that the asset mix of millionaires is substantially different to the asset mix of the entire population.  It does not take too much work to find the report confirm this (page 12).

The focus on the asset base excluding residential property of the top 1% of the population is because residential property is only a small component of their overall assets.

We can be fairly sure that a “small component” is somewhat lower than 72%, or 71% or whatever makey-uppy figure you want to use.   How is it plausible for someone to suggest that nearly three-quarters of the wealth of Ireland’s millionaires is attributable solely to property?

Anyway using these erroneous proportions and some estimated value changes since 2006 we get the following conclusions.

There is an asterisk beside the 2010 property assets total as a 33% drop from the suggested 2006 figure of €112.5 billion would actually bring this to €75 billion.  But who’s worrying about two and a half billion.  Now even, these assumed changes in values are way off.  Property values are down by more than 33% and somebody should tell Sean Quinn that Ireland’s 33,000 millionaires have lost a total of €1.5 billion since 2006.  I think he managed twice that all on his own (though it was through CFDs rather than equities) and surely our millionaires took a bit of a hit as part of the huge drop in equity in the banks which must be around €40 billion or so. 

That aside, the fact remains that this total net worth figure of €121 billion for Ireland 33,000 supposed millionaires is nonsense.  Even if the weights are appropriate (they are not), the value changes used are also pretty weak (and net worth does include residential property unlike the claim made in the O’Connor article).

Actually, I’m not quite sure why he went to all this trouble.  Maybe, it was to try to give some legitimacy to the analysis but this clearly did not work.  However, there is a figure that is frequently quoted in the Bank of Ireland report (see pages 1, 2, 12, 13 and 14) and it is that:

The asset base (excluding residential property) of the top 1% of the population increased from €86 billion in 2005 to €100 billion last year, an increase of 16%.

Wouldn’t it have been so much easier to say this rather than go through all the rubbish above.  So 1% of the population had €100 billion of assets in 2006.  This €100 billion figure looks a little to much like trying get a nice round attention-grabbing number.  These is little basis for this (or in fact any of the numbers in the Bank of Ireland report) and it is largely based on guesswork with little or no reference to actual data.

If this supposed €100 billion of assets from 2006 had just stayed still, the proposed 5% wealth tax would yield €5 billion.  Of course wealth does not stay still and would have shown significant declines since 2006.  I can’t say by what amount but it would reduce the yield on this proposed tax.   A 20% reduction (plausible?) would bring the yield down to €4 billion.  So another €2 billion gap needs to be filled from the €6 billion they claim it would yield.

Anyway, at €100 billion, a 5% tax would yield €5 billion in the first year.  If there was zero growth in values, the next year there would only be €95 billion in assets to tax.  This means we would be down to a yield of €4.75 billion.  After 10 years in this zero growth scenario there would be just €63 billion of the €100 billion assets left and the wealth tax would be yielding €3.1 billion a year.   The only way to keep revenue stable would be to keep increasing the rate.

Of course, the wealth isn’t just going to stay around here to be eroded down to nothing.  Wealth does not stay still and this applies to location as well as value.  A 5% wealth tax would mean assets in Ireland would need to generate 5% to just to hold their value.  Any positive inflation would require a higher rate to hold their real value and then they would need to match the equivalent return from investing elsewhere to make it worthwhile to keep the asset in Ireland.  This suggests that double-digit asset growth is needed (every year!) in order to avoid wide scale capital flight from Ireland.

A 5% wealth tax on a tiny proportion of the population might make for good electioneering but it makes for bad economics.  But then we knew that before we started.  And to be fair to Tom O’Connor his piece is an argument for a 1% wealth tax which is a plausible suggestion.  It is the loony left who made the jump to 5%.

January Exchequer Returns

The first Exchequer Returns of the year have been released by the Department of Finance.  Here are the key documents.

• Exchequer Statement
• Analysis of Tax Receipts
• Analysis of Net Voted Expenditure
• Information Note from the Department

You can find a comparison of the performance of tax receipts for the eight tax headings for January 2010 and 2011 in the Analysis of Tax Receipts document linked above.  Here is a table that goes back to 2007.

Although the annual comparison is positive (+€57 million or +1.9%) if we look over a longer time frame we can see the scale of the collapse in Irish tax revenues (-€1,614 million or –34.0% since 2007).

As could be expected a lot of this fall is due to the virtual disappearance of revenues from our the largely property-dependent transaction taxes (Stamp Duty, CGT and CAT) which have fallen from a combined total of €556 million in 2007 to a paltry €66 million in 2011.  However, this only accounts for one-third of the fall in tax revenue.

Although Income Tax continued to show annual declines in 2011, it is ‘only’ €120 million (but still 10.8%) down on the 2007 level.  The bulk of the drop in January Tax revenues is accounted for by our consumption taxes (VAT and Excise Duty).  These brought in €2,798 million in 2007, but only raised €1,955.   This €843 million fall (or 30.0%) in these two tax heads accounts for more than half of the total drop seen in January tax receipts since 2007.

The 39.7% drop in Excise Duty revenues has come in the face of increases on duties on fuels via the Carbon Tax in two recent budgets (though there was an offsetting reduction in duties on alcohol).  Our VAT rates have remained unchanged, receipts are down 28.2%.  This is likely driven by the grounding of the construction sector to a virtual standstill and a reduction (as well as a reorientation) of consumer spending.

Thankfully, in January we do not get the charade of having the real tax returns compared to the artificial forecasts of the Department of Finance.  Expect this to resume in February as today also saw the release of the Profile of Tax Revenues for 2011 which provides details of the monthly and cumulative expected receipts across the eight tax heads.

Here is a simple comparison of the cumulative total tax revenue forecasts for 2011 to the 2010 performance.

Even with the changes announced in the recent budget tax revenues in the early part of 2011 are expected to be very similar to those seen in 2010.  It is only from July onwards that any improvement is forecast.  [The DoF forecast does not seem to account for the change in the ‘Pay and File’ deadline that went through with the recent Finance Bill (Act?).]

On the expenditure site is it noteworthy that Current Expenditure continues to rise (up €24.4 million to €3,722.1 million this year from €3,697.8 million last year.  As a result of the reorganisation of Government Departments last March it is hard to identify the source of this increase and given the smoke and mirrors of the Irish system of public finances the DoF Information Note attributes this increase in expenditure “to the reclassification of health levy receipts”.  Expenditure is up because receipts have been reclassified. Huh?  More on this here.

Capital expenditure is down €220.8 million but the bulk of this is due to a fall in capital receipts to the Exchequer from EU Agriculture programmes and an associated drop in capital payments.

On the non-voted side the stand-out figure is the huge drop in interest payments which fell from €311 for January 2010 to €32 million.  Has someone done a stellar job in renegotiating the EU/IMF interest rate?  Of course not, and with our increased borrowings or debt service costs must surely be higher than 12 months ago.  What has actually happened is that debt interest in the early part of the year is been paid for from something called the Capital Services Redemption Account (no, me  neither).  Unlike the Exchequer Account, this CSRA does not need a monthly return published so we will be in the dark on our debt interest costs for a while and annual comparisons will be difficult though we do know that this source will fund €600 million of debt interest.

Overall, the Exchequer Account shows a lower deficit of €483 million for January 2011 compared to €778 million in 2010.  However, of this €295 million we can immediately account for €228 million due to the re-categorisation of debt servicing costs.  And if debt interest costs are higher than last year (which they undoubtedly are) it is probable that all of this €295 million ‘improvement’ is eliminated.

Retail Sales plunge

The first estimates of the December Retail Sales Index have just been released by the CSO.  The seasonally adjusted series show that December was not a good month for retailers.  Here is the index excluding motor trades which make up 8.1% of the December index.

The December falls were the steepest seen since October 2009 and the annual rate of change has once again become firmly rooted in negative territory.  Unless there is a major turnaround in the next few months this annual comparison will remain negative as retail sales experience a short-lived “turning the corner” bounce in the first four months of 2010.  When compared to these the annual drops in the early months of 2011 could be of the order of 5% or more.

Finally, the monthly changes show that for the volume index December recorded a greater drop than anything over the previous two years.  The value index fell but not by the same amount.  Is frugality fatigue hitting consumers?

The “road to recovery” is proving to be a little slippery.

The Computer Services Sector in Ireland

After our analysis of the largest merchandise export sector (chemicals at 60% of the total) we will now consider Ireland’s largest services export sector. According to the most recent Balance of Payments data, Computer Services now account for close to 40% of our total service exports.

You can find some analysis of the official CSO data here.  The CSO data is great for the quantities but is lacking information on the impact.  To this end we have turned to the Annual Business Survey of Economic Impact from Forfás, which by value covers about 85% of our total exports (and the missing proportion is largely tourism and travel).

Here’s a run through our Computer Services sector using this data.  And like the Chemicals sector we start with the same conclusion.  Exports have increased (particularly since 2005) but direct expenditure in the Irish economy hasn’t budged.

Since 2003 exports of computer services have grown by 76.8% from €27.9 billion to €47.4 billion.  During this period direct expenditure in the Irish economy has fallen by 13.1% from €11.5 billion to €10.0 billion.

Like the Chemicals sector, Computer Services are dominated by foreign-owned firms which in 2009 accounted for 98.2% of exports in the sector.

As expected most of the contribution to the Irish economy comes from the foreign-owned sector, but this is down on the levels seen in 2001-2003 period.

The computer services sector does buy nearly €7 billion of materials a year, but the vast bulk of this comes from abroad.

Not surprisingly, these companies buy a lot of services, but unlike the Chemicals sector where only 6.4% of services are bought from Irish sources, in the Computer Services sector the purchase of Irish services makes up 41.7% of the total.  In fact, across the companies in the survey purchases of Irish services totalled €13.6 billion in 2009.  At €6.4 billion purchases from the Computer Services sector made up 47.3% of the total.

We can get some information about the purchases of these Irish services by looking at a breakdown of the type of companies buying the services.

Over half of the purchases of Irish services are by Computer Programming companies.  Computer Consultancy companies purchase the bulk of the remainder with the than 5% bought by Facilities Management companies.

Although the purchases of Irish materials and services by these companies has declined from peaks seen nearly a decade, payroll expenses have risen.

Total payroll expenses rose from €2.1 billion in 2000 to just under €3.0 billion in 2009, with most of this rise coming from foreign-owned companies.  However, this has not been because of an increase in employment.  Again we have the situation of a sector with booming exports offering no employment growth.

[Forfás do not directly provide the employment numbers.  These figures are derived from the Total Sales and Average Sales per Employee figures and are cross checked against Total Payroll and Average Payroll per Employee figures.]

Total employment was 52,800 in 2000 and had FALLEN to 49,700 in 2009.  This 5.8% drop in employment took place during the same period when exports rose by 80%.  Thus the increased payroll costs are due to increases in the costs per employee.

Average payroll costs in the computer services sector was €62,400 and unlike the Chemicals sector the cost for Irish- and Foreign-owned companies were largely the same.

What isn’t the same is the added value per employee.  There was always a gap between Irish and Foreign-owned firms but beginning in 2005, this gap has ballooned.  In 2009, foreign-owned firms had an average added value per employee of €745,000, dwarfing €104,000 added value per employee in Irish-owned firms

Here is a breakdown of added value by company type.  Can you spot the series break??

Those Computer Facilities Management workers sure are productive!!  Looking at a breakdown of exports by the type of company.

We see that, while all categories are growing, most of the growth in computer services exports is attributable to Computer Facilities Management (again with a huge jump after 2005).  This sector must be contributing hugely to the economy.  Let’s see.

Where’s the jump? Initially I thought that this graph was wrong but unless the original Forfás data is right then this is what has happened.  The the Computer Facilities Management sector exports have increased from €1.8 billion in 2000 to €16.2 billion in 2009.  This is an increase of nearly 800%.

At the same time the direct expenditure by companies in this sector (i.e. their contribution to the economy) has gone from €733 million to €810 million, a rise of 10%.  Maybe it’s worth putting these two lines on the same graph.

And  what about employment in this sector that is clearly driving our “export-led growth”?

A sector that has seen exports rise by nearly €12 billion since 2005 (our total exports were €145 billion in 2009) has seen employment FALL from 11,000 in 2005 to 7,600 in 2009.

Sometimes I’m sorry I ask myself these questions.

The Chemical and Pharmaceutical Sector in Ireland

The CSO released the November External Trade statistics earlier today and we will consider them in due course.  The dominant category of our merchandise exports is the Chemicals and Related Products category which now accounts for nearly 60% of goods exports from Ireland.  We will use the Annual Business Survey of Economic Impact from Forfás to examine the size and contribution of the Chemicals Sector to the Irish Economy.

First up is the key graph – exports in the chemical sector and the level of direct expenditure (payroll, goods and services purchases) in the Irish economy.  Mind the gap!

In the ten years from 2000 to 2009 chemical exports, in the Forfás sample, increased from €18.2 billion to €37.7 billion, an increase of 107%.  Over the same period the direct contribution from this sector to the Irish economy from €2.1 billion to €3.1 billion, an increase of 48%.  As a percent of exports of the direct expenditure from this sector in the Irish economy is just 8.2%.  Exports can soar in this sector (and they have) but there will be little impact felt on the ground of this “export-led growth”.

Now we will work through the sector in a little more detail.  First up total sales.  There is an Irish Chemicals sector there I promise. Look closely.  Sales in 2009 from Irish-owned companies at €412 million make up just over 1% of the €39.7 billion total sales in the sector.

In fact, looking at sales is a little redundant as exports make up 96% of sales, though this figure is 57% for Irish owned companies.  The only a negligible difference between the total sales graph above and the total exports graphs below.

Although Irish firms only make up 1% of sales they do manage to contribute 7% of the direct expenditure in the Irish economy from this sector (€235 million versus €3,113 million).

Of course, there is no way Chemicals companies in Ireland can generate nearly €40 billion of sales from just €3.1 billion of inputs.  They do spend much more than than but the vast majority of it comes from abroad.  First, let’s look at materials.

Only 6.4% of the €7.6 billion of materials purchased in 2009 came from Irish suppliers.  The pattern of services purchases is not much different.

It may seem strange in a manufacturing industry that over 50% more is spend on service inputs than materials inputs but that is to forget that the most expensive input into the production of a pharmaceutical product is the cost of the patent.  Import expenditure on patent royalties has been soaring in recent years.

These companies have been using more materials and more services in the period that has seen exports rise by more than 100%.  But have they employed more workers? Erm, no.

In the period of this huge increase in exports total employment in the sector has fallen by 1,100 from 24,500 to 23,400, with most of this drop occurring in foreign owned companies.  Although Irish companies generate only 1% of sales they do provide just over 10% of the employment (2,400 versus 21,000).

The numbers might be falling but total payroll has been rising and in 2009 was up almost 60% on the 200 level – up from €1 billion to €1.6 billion.

Falling employment numbers and rising payroll costs must mean that payroll costs per employee are rising and indeed they are, particularly in the foreign-owned sector.  According to the Forfás data, the average payroll cost across all exporting manufacturing sectors was €49,800 in 2009.  The sector that ranked highest was the chemicals sector with an average payroll cost of €68,300.

But don’t feeling sorry for these chemical companies.  In the foreign-owned sector where average payroll costs are €71,200 the value added per employee (as defined by Forfás) is a staggering €934,700.  Now that’s productivity.

All that aside, the key issue remains.  Our export figures may provide the arithmetic for growth but it is likely that an “export-led growth” strategy will make little inroads into our unemployment crisis given that, over the last ten years, our most important trade export category has seen exports rise by over 100% and employment has fallen!

The Chemicals and Pharmaceutical category accounts for nearly 60% of our exports and these are generated by just 1% of the workforce.

Comparing CPIs

Here is just a quick comparison of the overall consumer price indices in Ireland and the UK since the start of 2007.

Over the four-year period shown in the graph above the CPI in the UK has risen by 13.2%, with an equivalent rise in Ireland of only 2.0%.  This is substantial difference, and as we can see it is the last two years that has seen this inflation wedge emerge.

In 2007 the Irish CPI rose by 4.8% compared to 2.9% in the UK.  In 2008 the UK CPI rose by 3.8% with the CPI rise in Ireland moderating to 1.6% and by December 2008 the two indices with base of January 2007 were equal.  Over the past two years the CPI in the UK has risen by a further 7.5%, while in Ireland over the same timeframe the CPI has fallen by 2.1%.

It would be interesting to compare the main determinants of the two indices and the graph above does not account for any price differential that may have existed in January 2007.  However, the picture is clear and any price gap that did exist is being reduced.