23/6/2012: Iceland makes another early repayment of IMF funds

Iceland makes another early repayment of IMF funds:

22/6/2012: Bilateral Trade with Russia - January-April 2012

After a couple of months, it is time to update the stats for Ireland's bilateral trade with Russia, especially since this week we saw the release of January-April Trade in Goods data.

Exports to Russia (goods only) rose to €189mln in 4 months from January-April 2012, up on €170mln for the same period of 2011. The y/y increase therefore is running at 11.2% for trade with Russia, against -0.62% contraction recorded for our total goods exports. Among 21 geographies other than EU27, bilateral exports to Russia posted 7th highest rate of growth in first four months this year compared to same period 2011.

Meanwhile, Imports from Russia fell from €54mln to €40mln y/y over the first four months of 2012.

As the result, our trade surplus vis a vis Russia rose from €116mln in January-April 2011 to €149mln for the same period of 2012 - a rise of 28.5% y/y (third largest increase among non-EU27 countries).

When compared to the rest of BRICs, Russia is not the only country that is generating trade surpluses for Ireland's exporters. India accounted for just €81mln in exports from Ireland in the first 4 months of 2012, up on €64mln a year ago, but it generated a trade deficit for us of €74mln in 2012 so far, against a deficit of €73mln in the same period of 2011. Brazil imports from Ireland fell from €94mln in January-April 2011 to €91mln in January-April 2012. As the result of this and due to much higher imports from Brazil, Brazil-Irish trade posted a deficit against Ireland of €100mln in January-April 2012 against a surplus of €31mln a year ago. China accounts for a much larger share of our exports, with exports of €757mln in January-April 2012, down on €759mln in the same period of 2011. However, we imported €859mln worth of goods from China in the first four months of 2012 (up on €855mln in 2011), resulting in a trade deficit against Ireland in our bilateral trade with China.

Crucially, Irish trade balance in goods with Russia is much more value-additive than our trade with any other non-EU27 country, save Australia and Switzerland. In the first four months of 2012, our ratio of exports to imports vis-a-vis Russia rose from 3.15:1 a year ago to 4.73:1. Meanwhile, our overall trade in goods imports intensity rose from 1.76:1 in 2011 to 1.81:1 in 2012.

Forecasts for 2012 bilateral trade with Russia based on historical trend and latest changes in volumes is provided below:

22/6/2012: Deleveraging of Households US v UK, Spain

An interesting chart from McKinsey today updating deleveraging process for household debt in the US, Spain, and the UK:

Nothing new here (I have been saying the US is ahead of Europe on deleveraging, if only due to speedier foreclosure actions - which are slowing down due to legal challenges etc). And, unfortunately, the chart is very limited as to the scope of countries represented... but it does show how unrealistic are Spanish current expectations when it comes to how much more debt repayment would have to be generated to even get close to a more benign debt crisis in Sweden in the 1990s.

22/6/2012: One hell of a graphic

Love this graphic via Washington Post:

22/6/2012: Don't rush with that 'Germany Imploding' headline, mate

So the silly season of 'Germany is collapsing' is on again today with the release of the Ifo Index and the subsequent media charade on foot of yesterday's PMIs.

Now, let's take a look at the thesis so beloved by on-line business media hacks. Is Germany really caving in?

Headline Business Climate Index from Ifo:

What do the numbers tell us?

• Headline Business Climate index fell from 106.9 in May to 105.3 in June - a monthly drop of 1.5%. Previous monthly drop was steeper at 2.7%, but 'business media' missed that.
• Year on year, the index is down 7.9% - steeper than back in May when it fell 6.4% y/y.
• 3mo MA is down 1.7% on previous 3mo period and is down 5.9% y/y.
• 6mo MA is at 108.3 same as 12mo MA and the last two months both came in at below that. But the 3mo MA is at 107.4 - and that is probably more significant of an indicator than monthly readings. 
• June reading is the lowest since March 2010 - the headline that many captured in their reports.

So things are not great. But are the schloss walls caving in? Look at the historical chart above. Current reading. Current 3mo MA is 107.4 - well ahead of historical average of 100.8 and crisis-period average of 103.2.

Next, take a look at the components of the index:

• Business Situation sub-index actually improved in June to 113.9 from 113.6 in May. So last m/m move was +0.5% against previous m/m move of -3.6%. Y/y comparatives are less pleasant: June 2012 y/y index fell 7.5% against May 2012 y/y fall of 6.7%. 3mo MA fell 1.8% on previous and 5.7% y/y. 
• Overall Business Situation sub-index remain weak - marking second lowest reading since August 2010. And it is below 12mo MA of 117.0 and 6mo MA at 116.0 both in level terms and in 3mo MA terms. Still, the sub-index is well ahead of 101.7 historical average and 107.1 crisis-period average.
• Business Expectations sub-index fell 3.6% m/m in June to 97.3 compounding the fall of 1.8% in May. Y/y sub-index is down 8.3% in June after -6.0% drop in May. 3mo MA is down 1.7% on previous and down 6.2% on same period in 2011.
• At 100.3 3moMA is now below 6moMA at 101.2 but is identical to 12mo MA at 100.3. The 3moMA for the sub-index is basically tracing the historical average of 100.2 and is only slightly ahead of the crisis-period average of 99.7.
• Sub-index is now at the lowest point since October 2011.
• But I wouldn't read too much into expectations sub-index, which tends to reflect the mood of the day, rather than act as a true leading indicator.

So overall, things are weak. The weakness is not accelerating in m/m terms, but is accelerating in y/y terms. Short-term averages are performing in line with June trends. Not a happy place, but not quite Armageddon either.

21/6/2012: IMF Article IV on euro Area: a massive miss, but loads of passion

So having penned the G20 response to the euro area crisis (see post here) last night, tonight, IMF decided to issue another missive on the topic (here). Which makes you wonder if the IMF has become so frustrated with the euro area's lack of real leadership, it has now resorted to the tactic known as blanket bombing the EU with gloomy assessments.

Here are some interesting extracts [comments and emphasis are mine]:

"Downward spirals between sovereigns, banks, and the real economy are stronger than ever. 

As concerns about banks’ solvency have increased—because of large sovereign exposures and weak growth prospects in many parts of the euro area—the effectiveness of liquidity operations has diminished. [It is clear that the IMF is seeing the entire euro area response policy as a set of liquidity supply measures, rather than solvency and structural reforms set of measures.]

Sovereigns, in turn, are struggling to backstop weak banks on their own. Absent collective mechanisms to break these adverse feedback loops, the crisis has spilled across euro area countries. Contagion from further intensification of the crisis—including acute stress in funding markets and tensions involving systemically-important banks—would be sizeable globally. And spillovers to neighboring EU economies would be particularly large. 

A more determined and forceful collective response is needed."

So far so good. In the nutshell, the IMF is saying that the euro crisis is now threatening the EU itself. In other words, were some nut eurosceptic to invent a tool for undermining the EU, he couldn't have done much better than inventing the current euro zone.

So what are the IMF proposals for the euro area more forceful collective response? Why, of course it is integrate more and grow.

"Completing EMU: Banking and Fiscal Union to Support Integration

A strong commitment toward a robust and complete monetary union would help restore faith in the viability of EMU. This should encompass a credible path to a banking union and greater fiscal integration, with better governance and more risk sharing. However, achieving this goal will take time and hence requires a clear timeline, with concrete intermediate actions to set the guide posts and anchor public expectations."

Err... Mr IMF, I have a question: suppose we have a banking union. Which means all banks will be regulated under singular umbrella. Note - this does not mean having a proper regime for shutting down currently insolvent banks, nor does it mean a unified system of banks assets workout. It means, however, joint deposits protection scheme. Good thing, deposits protection. Confidence improving. Alas, last time I checked, Greek banks are sick because of the sick sovereign, bonds of which they hold & of the sick economy. Spanish and Irish banks are sick because they made bad loans. In all cases so far, banks are sick not because they lack regulatory unification, and not because they lack deposits protection, but because they have bad assets. How can a banks union make these assets any better?

Good news, IMF says: "The proposed EU framework for harmonized national bank resolution processes is a necessary first step. But it needs to go further. ...A common bank resolution authority is also needed. It should be backed by a common resolution fund to ensure burden sharing and to limit fiscal costs. These efforts should be supported by a common supervisory and macro-prudential framework to forestall further financial fragmentation. While a banking union is desirable at the EU27 level, it is critical for the euro 17."

Bad news: there are absolutely no proposals even discussed yet to cover banks resolution mechanism. IMF is exceptionally silent on what should be done to achieve such 'resolution' and EU has shown no willingness to allow shutting down of a single bank. Thus, common resolution mechanism in the IMF parlance means preciously little, but in the EU vocabulary it means simply 'burden sharing'. In other words, 'banks resolution' mechanism is more about shafting bad banks debt onto all of the euro zone collectively. While this might help individual countries, e.g. Ireland, it does nothing to change the reality that euro area combined Government debt is going to be 90% of GDP this year alone. In other words, relabeling, for example, Irish banks debt an EA17 debt, instead of the Irish Government debt, will not achieve any net improvement in terms of breaking the links between banks and sovereigns (the sovereign here, thus becomes EA17 instead of national) and it will do absolutely nothing to restore functioning banking in EA17. 

My suggestion would be for IMF to be more forthright and tell exactly what this 'resolution mechanism' should look like.

IMF goes on with lofty dreamin: 

"More fiscal integration, with risk sharing supported by stronger governance, can reduce the tendency for economic shocks in one country to imperil the euro area as a whole. Ultimately, this could mean sufficiently large resources at the center, matched by proper democratic controls and oversight, to help insure budget shortfalls at the national level. Getting to this endpoint will take time. But the process can start with a commitment to a broad-based dialogue about what a fuller fiscal union would imply for the sovereignty of member states and the accountability of the center. This should deliver a schedule for discussion, decision, and implementation."

Wait, aside from the desirability of such a solution (which is open to a debate), the IMF says that the solution will take time. Lots of time. And yet, this is supposed to be a response to the ongoing acute crisis? Or does IMF honestly believe that 'a commitment to a broad-based dialogue' will do anything to compensate for the fact that euro area peripheral states are currently insolvent? How? By telling the markets that they are 'broadly-speaking talking to each other'?

I do note that the IMF is clearly stressing the need for democratic systems reforms in line with integration. I wonder, however, what they have in mind, exactly. Are they saying EU is currently not democratic enough? After all, if EU is democratic, then 'proper democratic controls and oversight' would exist already and would simply need to be deployed to a new structure...

The IMF also offers an interesting insight into its perception of the euro bonds ideas: 

"Introduction of a limited form of common debt, with appropriate governance safeguards, can provide an intermediate step towards fiscal integration and risk sharing. Such debt securities could, at first, be restricted to shorter maturities and small size and be conditional on more centralized control (e.g., limited to countries that deliver on policy commitments; veto powers over national deficits; pledging of national tax revenues). Common bonds/bills financing could, for example, be used to provide the backstops for the common frameworks within the banking union."

Interesting, isn't it? On one hand, IMF foresees limited common debt issuance. On the other it foresees this common debt being used to 'backstop ... banking union'. Now, wait - I thought banking union backstop would have to be enough to deal with current acute problems in Greece, Ireland, Portugal, Spain and Italy. That would be what? €300 billion? €500 billion? And that would have to be 'cheaper' and 'more stable' source of funding than ECB already provides. So it cannot be 'limited' and it cannot be 'short-term' (LTROs are already €1 trillion-large and 3-years long and they are not working).

In short, I see loads of frustration from the IMF side, but no real tangible solutions to the euro are crisis.