15/9/2012: A handy IMF map for Budget 2013?

The elephant in the room (at 9% of GDP or 11% of GNP, with pensions - at 10.6% GDP or 13 of GNP, that's right more than one euro in eight) - courtesy of the IMF:

15/9/2012: Russia to revamp SWF structure

According to the report in the Euromoney ( http://www.euromoney.com/Article/3087655/Category/4298/ChannelPage/0/Russias-new-SWF-seeks-bond-and-equity-exposure.html?copyrightInfo=true) Russia will launch a new state-owned investment agency in 2013 "to invest the country’s oil wealth in global financial markets, finance minister Anton Siluanov tells Euromoney in an exclusive interview."

The new Federal Financial Agency (FFA) will have investment mandate to cover "a more diverse range of domestic and international securities, including bonds and equities for the first time, under an investment strategy similar in part to that employed by the Norwegian sovereign wealth fund (SWF)". Anton Siluyanov, Russian finance minister said the FFA "will be managed by investment professionals and will be free from government intervention".

The fund will have under management assets of $150 billion-worth of investment funds in Russia’s existent Reserve Fund and the National Welfare Fund. These are currently managed from the Central Bank.

The net positive here is that the fund will be free to invest in domestic non-state owned enterprises - a significant opportunity for deepening Russian capital markets. It also can provide some new support for corporate debt issuance inside Russia. To-date Russian SWFs were primarily invested in foreign sovereign bonds. New allocation, according to Siluyanov, can be closer to 15%-20% equities.

15/9/2012: Derivatives v Banks Lending and Economic Growth

A recent by Becchetti, Leonardo and Ciampoli, Nicola, What is New in the Finance-Growth Nexus: OTC Derivatives, Bank Assets and Growth (July 20, 2012). CEIS Working Paper No. 243 (Available at SSRN: http://ssrn.com/abstract=2114072) covers the issue of "finance-growth nexus before and around the global financial crisis using for the first time OTC derivative data in growth estimates."

According to the authors, data shows "that bank assets contribute… negatively [to economic growth], while OTC derivative positively or insignificantly with a much smaller effect in magnitude. At the same time the impact of the crisis is captured by a very strong negative effect of year dummies around the event."

The study lists various positive and negative channels for feedback from the derivatives to growth and establishes the net effect of these channels.

"Our main finding is therefore the identification of three empirical channels: a first positive and weak link between OTC trading and economic growth, a second negative and significant link between aggregate bank credit and economic growth (larger in magnitude than the first) and the negative impact of the global financial crises in the last years of our sample period. The first channel is likely to capture wealth and efficiency effects embedded in derivatives hedging properties. An overall evaluation of the role of derivatives on growth deserves however further attention. If the negative impact of bank credit, and definitely more so, the overall negative effect of the financial crisis have to be related to the negative properties of derivatives (increase of interconnectedness and systemic risk) the net impact of the latter may turn out to be negative at least in the current regulatory framework."

15/9/2012: In life things are a bit like in art

The best illustration of the current Presidential Campaign in the US is this painting by Mark Tansey:

Depicting Sherlock Holmes and Professor Moriarty in a deadly struggle at the edge of the precipice. One articulate and sophisticated villain v one cool dude who delivers over the fiscal cliff. Ah, one would hope we can distinguish which one is which: is Holmes = Romney or Obama? Never mind, the truth is - it's the cliff that dominates the whole set up.

15/9/2012: Brazil soaks bank bondholders

H/T to Ed - here's Brazil shutting down one medium-sized insolvent bank (link) and triggering the largets corporate bonds default in Latin America since 2002.

According to the report, ATMs still are functioning in Brazil. 

And a lovely quote from the Irish Government advising HSBC (alas via their Brazil division):

“It is quite healthy to have this kind of reminder every once in awhile that doesn’t pose a systemic threat,” said Pedro Bastos, chief executive officer of HSBC Global Asset Management in Brazil, in a phone interview from Sao Paulo. “It’s an important reminder that risk and return need to be in line with the investor’s profile.”

And lest we think Brazil's CB is not 'reckless' enough (in Irish counterparts parlance), Brazilian authorities are investigating fraud allegations - something that Irish authorities are not too keen on doing.

Obviously, there will be likely costs associated with the decision, namely, funding costs for the country medium sized banks might rise (they will most certainly rise in the short term, but it is the medium term that anyone should be concerned with as Central Banks can provide the bridge for the shorter term funding).

15/9/2012: Irish Services Activity July 2012

Recent release of the monthly Services sectors activity index for Ireland highlights the stabilizing nature of the current activity in the economy, since the end of Q1 2012. Here are some details:

Overall seasonally-adjusted monthly services activity rose 1.2% in July 2012 m/m and was up 7.8% y/y. Index 3mo MA through July is at 104.9 ahead of the 3mo MA through  March 2012 (101.6) and well ahead of 98.9 reading in 3mo to July 2011. Year on year increase of 7.8% is the strongest since November 2010. (Note: index is being compiled only since October 2010, so trend comparatives are against weak position. Index is set at 100=2009).

Here's the chart summarizing index levels and y/y growth rates:

By-sector activity:

• Wholesale and Retail Trade (+3.4% m/m and +8.0% y/y), 
• Business Services (+2.5% m/m and 3.1% y/y), 
• Accommodation and Food Service Activities (+1.2% m/m and no change y/y) and 
• Information and Communication (+0.1% m/m and +16.3 y/y) 
• Transportation and Storage (-3.5% m/m and 8.0% y/y), and 
• Other Services (-2.2% m/m and +0.9% y/y).

Chart to illustrate:

3mo MA through July 2012 are also encouraging:

• Wholesale & Retail Trade at 109.7, up on 107.8 3 months ago and on 103.4 a year ago
• Information & Communications at 112.9 well ahead of 109.4 in 3mo through April and on 99.6 recorded in 3 months through July 2011
• Business Services at 103.3, strongly up on 98.4 in 3 months through April, but unchanged y/y
• Transportation & Storage at 109.0, up on 104.0 in 3mo through April 2012 and on 98.2 a year ago
• Accommodation and Food remain the lagging sector despite Government efforts to stimulate it at 89.0 in 3mo average through July 2012 slightly up on 87.1 in 3mo through April 2012 and down on 90.3 in 3mo through July 2011.
• Other Services are also relatively flat, but with a slight upside at 74.3 in 3mo through July 2012 compared against previous 3mo average of 72.4 and 3mo through July 2011 average of 72.8.

Overall, some good news here and a continuation on the trend highlighted a month ago.