23/6/15: Ukraine's Debt Haircuts Saga: One Step Forward, Two Steps Back

Two big setbacks for Ukraine in its bid to cut the overall debt burden and achieve targets mandated by the IMF.

First, Moody issued a note today saying that Ukraine will be in a default if it haircuts principal owed to private creditors. The agency said it believes Ukraine can deliver USD15.3bn in savings without haircuts. Ukraine believes it cannot. IMF backed Ukraine on this, but it is not to IMF to either declare a default even or not. Moody further noted that any moratorium on debt redemptions will have long-term implications for Kiev access to international debt markets.

Second, the IMF has signalled that private debt open to haircuts under Kiev-led negotiations does not include debt owed to Russia which is deemed to be official sector debt. This is not surprising, and analysts have long insisted that this debt cannot be included into private sector haircuts, but Kiev staunchly resisted recognising debt to Russia as official sector debt.

Incidentally, Ukraine debt to Russia is structured as a eurobond and is registered in Ireland, as reported by Bloomberg. The bond is structured as private debt, but Russia subsequently re-declared it as official debt. Re-declaration was somewhat of a positive for Ukraine, because a default on official debt does not trigger automatic default on private debt (the reason why the bond was originally structured as private debt was precisely the threat that a default on it will trigger default on all bonds issued by Ukraine). Ironies abound: IMF is happy to declare Russian debt to be official sector debt, because it takes USD3 billion out of the pool of bonds targeted for haircuts. This implies that for Kiev to achieve USD15.3 billion in savings, Ukraine will most likely need to haircut actual principal outstanding to private sector bond holders - something IMF wants Kiev to do. So here, too, Russian side gain is also Kiev's gain.

Ultimately, in my view, Moscow should write down the entire USD3bn in debt owed by Kiev. Because it would be ethical to do, and because it would help Ukraine. But that point is outside the fine arts of finance, let alone beyond the brutal realities of geopolitics.

More background on both stories: http://www.bloomberg.com/news/articles/2015-06-22/moody-s-backs-creditor-math-in-resisting-ukraine-debt-writedown.

23/6/2015: Hans Werner Sinn: Just Grexit!

Hans Werner Sinn (Ifo) to Greece: "Will ya, just default, for the love of..."

23/6/15: In the parallel Universe of Greece: Strangulation is Cure

Greece has been 'repaired' with an application of yet another plaster to a gaping shark wound.

ECB hiked ELA once again, this time, reportedly, by 'just under' EUR1bn.

The terms of 'repairs' are sketchy for now, but for the economy that shrunk 23% since pre-crisis peak in real terms, we have novel - nay, breakthrough novel - measures to support growth included in the deal:

1. Corporate tax is rising from rather un-competitive 26% to highly uncompetitive 29%
2. Corporate profits in excess of EUR500K/pa are hit with 'solidarity' levy of 12%
3. Personal taxes are up, VAT is up, pensions levies are up, property taxes are up
4. Debt relief is not on the cards, as per Angela Merkel, the 180% GDP debt mountain "...is not an urgent question".

Summary of key financials on the 'deal' is here:

In short, we have an equivalent of economic idiocy here: an economy chocked by too much debt is being given a green light to get more debt. In exchange for this debt, the economy will be chocked some more (by some 2.7% of GDP on full year basis), so that more debt given to it can be rolled over with a pretence of sustainability.

As European leaders celebrate this crowning achievement of statism by replaying the same song for the 5th time whilst hoping for a different result. One has to wonder if there is something fundamentally, deeply, inexplicably wrong with the EU logic.

Or may be, just may be, the Greek 'reforms' are a herald of things to come under the Juncker-proposed, ECB et al approved, new Federalismo 2.0 plan? Why, check the leaks on that one: 

http://www.wsj.com/articles/new-eurozone-plan-calls-for-greater-economic-cohesion-within-currency-bloc-1434919204.

22/6/15: Greece v Great Depression

As every well-baked economist would know, there are many ways to pickle misery. Here's one novel jar from the Bloomberg (http://www.bloomberg.com/news/articles/2015-06-22/greece-is-in-a-worse-spot-than-america-was-in-1933):

The above shows Greek real GDP compared to the U.S.' at the same stage in the Great Depression.

Yeah, I know, Euro with all its promises of stability, prosperity, progress, peace, etc, etc, etc...

22/6/15: IMF Review of Ireland: Part 2: Banks

IMF assessment of Irish banking sector remains pretty darn gloomy, even if the rhetoric has been changing toward more cheerleading, less warning. Here is the core statement:

"Bank health continues to improve, but impaired assets remain high and profitability low. The contraction in the three domestic banks’ interest earning assets continued, albeit at a slower pace in 2014." IN other words, deleveraging is ongoing.

"Nonetheless, operating profitability doubled to 0.8 percent of assets on foot of lower funding costs as well as nonrecurrent gains from asset sales and revaluations (Table 8). Led by the CRE and SME loan books, there was a sizable fall in the stock of nonperforming loans (NPL), by some 19 percent in 2014, although NPLs are still 23 percent of loans." Note, at 23% we are still the second worst performing banking system in the euro area, after Greece.

"This fall, together with rising property prices, allowed significant provision releases while keeping the coverage ratio stable. Profitability after provisions was achieved for the first time since the onset of the crisis. Together with lower risk weighted assets, this lifted the three banks’ aggregate core tier 1 capital ratio by over 1 percentage point, to 14½ percent."

Now, take a look at the chart above: loans volume fell EUR6.5bn y/y (-3.6%), but interest income remained intact at EUR7.9bn. While funding costs fell EUR3.7bn y/y. The result is that the banks squeezed more out of fewer loans both on the margin and in total. Give it a thought: loans should be getting cheaper, but instead banks are getting 'healthier'. At the expense of who? Why, the remaining borrowers. Net trading profits now turned losses in 2014 compared to 2013. Offset by one-off profits.

Deposits also fell in 2014 compared to 2013 as economy set into a 'robust recovery'. It looks like all the jobs creation going around ain't helping savings.

A summary / easier to read table:

Notice, in addition to the above discussion, the Texas Ratio: Non-Performing Loans ratio to Provisions + CT1 capital (higher ratio, higher risk in the system). At 108, things are better now than in 2012-2013, but on average, 2011-2012 Texas ratio was around 104, better than 2014 ratio. And that with 51.7% coverage ratio and with CT1 at 14.5%. Ugh?..

On the other hand, deleveraging helped so far: loan/deposit ratio is now at 108% a major improvement on the past.

Net Stable Funding Ratio (NSFR) - a ratio of longer term funding to longer term liabilities and should be >100% in theory. This is now at 110.5%, first time above 100% - a good sign, reflective of much improved funding conditions for all euro area banks as well as Irish banks' gains.

Liquidity Coverage Ratio (LCR) - monitoring the extent to which banks hold the necessary assets to cover any short-term liquidity shocks (basically, how much in highly liquid assets banks hold) is also rising and is above 100% - another positive for the banks.


Still, the above gains in lending margins - the rate of banks' extraction from the real economy - are not enough for the IMF. "Lending interest rates must enable banks to generate adequate profits to support new lending. While increasing, Irish banks’
operating profitability remains relatively low. Declines in funding costs aided by QE will assist, but there are also drags from the prevalence of tracker mortgages in loan portfolios and from prospects for a prolonged period of low ECB rates. However, with rates on new floating rate mortgages at 4.1 percent at end March, compared with an average of 2.1 percent in the euro area, political pressures to reduce mortgage rates have emerged. The mission stressed the importance of loan pricing adequate to cover credit losses—including the high costs of collateral realization in Ireland—and to build capital needed to transition to fully loaded Basel III requirements in order to avoid impediments to a revival of lending."

Here's a question IMF might want to ask: if Irish banks are already charging almost double the rates charged by other banks, while enjoying lower costs of funding and falling impairments, then why is Irish banks profitability a concern? And more pertinently, how is hiking effective rates charged in this economy going to help the banks with legacy loans, especially those that are currently marginally performing and only need a slight nudge to slip into arrears? And another question, if Irish banks charge double the rates of other banks, what is holding these other banks coming into the Irish market? Finally, how on earth charging even higher rates will support 'revival of lending'?

Ah, yes, question, questions… not many answers. But, per IMF, everything is happy in the banking sector in Ireland. Just a bit more blood-letting from the borrowers (distressed - via arrears resolutions tightening, performing - via higher interest charges) and there will be a boom. One wonders - a boom in what, exactly? Insolvencies?

22/6/15: IMF Review of Ireland: Part 1: Growth & Fiscal Space

IMF published conclusions of its Third Post-Program Monitoring Discussions with Ireland.

The report starts with strong positives:

"Ireland’s strong economic recovery is continuing in 2015, following robust growth of 4.8 percent in 2014. A range of high frequency indicators point to an extension of the solid recovery momentum into 2015, with growth increasingly driven by domestic demand as well as exports. Job creation continued with employment growth of 2.2 percent year-on-year in the first quarter of 2015, bringing the unemployment rate down to 9.8 percent in May."

Actually, based on EH data from CSO, employment growth was even stronger: 2.67% y/y in 1Q 2015 (see here: http://trueeconomics.blogspot.ie/2015/06/20615-irish-employment-by-sector-latest.html). The survey data is slightly different from the QNHS data.

"Tax revenues rose 11 percent year-on-year during the first five months of 2015, while spending remained within budget profiles, so the fiscal deficit for 2015 is expected to be 2.3 percent of GDP, outperforming the budget targets."

"Banks’ health has improved, but operating profitability remains weak and, despite the recent progress in the resolution of mortgages in arrears, 17.1 percent of mortgages have been in arrears for over 90 days, and of these, almost 60 percent have been in arrears for over 2 years."

All so far known, all so far predictable.

Here is what IMF thinks in terms of forward outlook.

On Fiscal side: "The deficit is likely to come in well below budget again in 2015. This welcome progress should be locked by avoiding any repeat of past spending overruns. The deficit reduction projected for 2016 is too modest considering Ireland’s high public debt and strong growth, making it critical that revenue outperformance— which appears likely— be saved as the authorities intend."

Wait, Spring Statement by the Government clearly does not suggest 'saving' of revenue outperformance as intended policy objective. If anything, spending these 'savings' is on the cards. So a bit more from the IMF:

"Medium-term spending pressures related to demographics and public investment indicate a need to build revenues and it is critical that any unwinding of savings in public sector wages be gradual. Tax reforms should be focused on areas most supportive of job creation and productivity while protecting progress achieved in base broadening."

Again, this does not bode well with the Spring Statement intentions to unwind, over two years, reductions in public sector earnings costs, and reducing tax burden at the lower end of the tax base. Whether these measures are right or wrong, IMF seems to ignore them in their analysis, as if they are not being planned.

And slightly adding depth: "Staff estimates that improvement in the primary balance in structural terms is modest in 2016, at about ¼ percent of GDP, as the reduction in the overall deficit partly reflects an expected decline in the interest bill and a narrowing of the output gap." In other words, efforts / pain are over. We are cruising into improved performance on inertia. IMF does not exactly like that: "A stronger adjustment, of at least a ½ percent of GDP, would also be appropriate in 2016 in view of Ireland’s high public debt and strong growth, implying an overall deficit target of about 1.5 percent of GDP. However, it appears most likely that revenues will exceed official projections, which are for tax revenue growth before measures that is significantly below nominal GDP growth, and also given that revenue outperformance has underpinned Ireland’s track record of over delivering on fiscal targets for a number of years." Wait, what? Not spending cuts drove Irish effort? Revenue outperformance? Aka - taxes and indirect taxes and hidden charges.

So the good boy in the back of the classroom needs to get slightly better: "The commitment of the Irish authorities to comply with their obligations under the Stability and Growth Pact, including the Expenditure Benchmark, means that revenue outperformance in 2016 and later years will not be used to fund additional expenditure; the need for a change from the past procyclical pattern of spending the revenues available was a key lesson drawn from the crisis that is firmly embedded in their new fiscal policy framework."

Yeah, that in the year pre-election? Are they mad, or something?

Just in case anyone has any illusions on what the Fund thinks about the forthcoming injections of pain relief planned by the Government, here it is, slightly hidden in the lengthy discourse about longer-term risks. "Looking to the medium term, sizable adjustment challenges indicate a need to build revenues while the limited fiscal space should be used to support durable growth. The authorities’ expenditure projections account for demographic pressures as growing cohorts of both young and old increase demands for education and health services. …Staff recommended that the authorities consider steps to raise revenues to help address these pressures…"

More revenue to be raised. And yet the Government aims to cut taxes. Oh dear...


Back to the positives: IMF upgraded its growth projections for short-term forecasts:

"Compared with the 2015 Article IV consultation concluded in late March, growth projected for 2015 is revised up to almost 4 percent from 3½ percent, with a more modest increase in 2016." 2016 growth is now projected to be at 3.3% from 3.0% projected at the end of March 2015. 2017 growth forecast was lifted from 2.7% in March to 2.8% now. However, 2018 forest was balanced down to 2.5% now from 2.6% in March report.

Back in March, private consumption was expected to grow 1.5% in 2015, 1.6% in 2016, 2.0% in 2017. This is now revised up to 1.6% in 2015, 1.9% in 2016, with 2017 remaining at 2.0%.

However, IMF revised down its projections for gross fixed investment growth. In March report, the Fund forecast investment to grow 9.5% in 2015, 7.5% in 2016 and 6.0% in 2017. This time around, IMF expects investment growth of 9.2% in 2015, 7.3% in 2016 and 5.5% in 2017.

Interestingly, IMF also introduced some modest upgrades to Irish net exports, though it noted that given exceptionally high rates of growth in goods exports in recent months, even the upgraded forecast might be too pessimistic.

However, with all said and done, the IMF still produces a slightly cautious medium-term outlook: "Staff’s medium-term outlook is little changed from that in the 2015 Article IV consultation, with medium-term growth on the order of 2½ percent being similar to the 3 percent projected by the Irish authorities in their recent Stability Programme Update (SPU)." Which means that, in basic terms, Irish official forecasts are probably within error margin of the IMF forecasts, but are a bit more optimistic, nonetheless.

Quite interestingly, IMF finds no substantive risks to the downside for Ireland, going effectively through motions referencing Greece and domestic debt overhang. Even interest rates sensitivity of the massive debt pile we carry deserves not to be cited as a major concern.

22/6/15: Of Nama and Cromwell via GAA

A nuclear commentary on Nama from GAA (of all places): http://www.independent.ie/sport/gaelic-games/gaelic-football/colm-orourke-nama-overseeing-greatest-plundering-of-irelands-land-assets-since-cromwell-31317345.html

Expect a token handout from Nama to GAA next...

22/6/15: Another Adrenaline Injection by Dr. ECB

Yesterday, I noted that Greece is now on a daily drip of liquidity injections by ECB via ELA (http://trueeconomics.blogspot.ie/2015/06/21615-ecb-ela-for-greece-welcome-to.html) and so here we have the latest. Per reports, ECB hiked Greek ELA today to EUR87.8 billion.

Meanwhile, there are rumours of a 'deal' being agreed, albeit only 'in principle'. Draghi is meeting Tsipras later today and we will also have an emergency summit. So a beehive of activities all over the shop.

21/6/15: ECB ELA for Greece: Welcome to a Daily Drip of 'Solvency'

Two days ago, I speculated on ECB's motives for drip-feeding ELA liquidity provisions to Greek banks (http://trueeconomics.blogspot.ie/2015/06/1962015-greek-ela-and-ecb-whats.html). And I have noted consistently that ELA is now running against available liquidity cushion, meaning Greek banks are now simultaneously, skirting close to ELA limits in terms of

• Eligible collateral, and
• ELA funds available to cover deposits outflows.

So, not surprisingly, two links come up today:

1. Ekathimerini reports that Greek banks have enough ELA-supported liquidity to sustain capital outflows through Monday only: http://www.ekathimerini.com/4dcgi/_w_articles_wsite2_1_20/06/2015_551285 as on the day of EUR1.8 bn ELA extension approved by the ECB< Greek banks bled EUR1.7 billion in deposits, bringing week's total to EUR4.2 billion in outflows, and
2. Reuters report that the ECB has been all along planning to review/upgrade ELA after Monday emergency summit: http://www.reuters.com/article/2015/06/19/us-eurozone-greece-pm-idUSKBN0OZ0DP20150619

Thing is, Greek banks are now solvent solely down to an almost daily drip-feeding of liquidity by the ECB. Which, sort of, shows up the entire charade of the dysfunctional euro system: the pretence of monetary and financial systems stability is being sustained by not just extraordinary measures, but by an ICU-like mechanics of assuring that a patient is not pronounced dead too soon...

21/6/15: BankCheck Report into Anglo / IBRC Overcharging

So here, as promised, the full BankCheck report on Anglo/IBRC overcharging. I provide no comment. You can click on each individual frame to enlarge.

20/6/15: Irish Employment by Sector: Latest Data

Here are the latest stats for Irish employment across sectors, based on the EHECS Earnings Hours and Employment Costs Survey Quarterly reported by CSO:

Overall, there were 1,574,800 people employed across all sectors of economy in 1Q 2015, which represents an increase of 2.67% y/y. In 4Q 2014 y/y rise was 2.33%. Current level of employment is 9.9% below 1Q 2008, but since 1Q 2011 (during the tenure of current Government) the economy added some 59,700 jobs - a rate of jobs creation of 14,925 per annum. The rate of jobs creation did accelerate in the last twelve months: between 1Q 2013 and Q1 2014, the economy added 26,800 jobs and between 1Q 2014 and 1Q 2015 it added 41,000 jobs. Nonetheless, compared to 1Q 2008 there were 192,400 fewer workers in the economy at the end of 1Q 2015.

Here is the summary of changes (%) between 2008 average (do note this), 1Q 2014 and 1Q 2015 by sector:

Our 'smart' and 'knowledge' economy currently operates at employment levels in Information & Communication sector of some 59,800 (quite low, surprisingly, given the hype about the sector growth). And this represents an increase of only 1,800 (+3.1%) y/y, and a drop on 1Q 2008 levels of 5,000 jobs. Another category of 'smart'/'knowledge' workers is Professional, scientific and technical activities. Here things are even worse. Total level of employment in this category at the end of 1Q 2015 stood at 79,000, which represents a drop of 5,100 y/y (-6.1%) and a decline of 2,600 on 1Q 2008.

This dovetails with the evidence on STEM-related employment presented here: http://trueeconomics.blogspot.ie/2015/06/20615-stem-to-bull-time-to-rethink.html

Overall, only two areas of activity have managed to post higher 1Q 2015 employment levels than 1Q 2015: Education (+3,900) as well as Human Health and Social Work (+19,000).

20/6/15: Danske Outlook & Forecast for Ukraine

Danske Bank outlook and forecast for Ukraine: