11/3/15: IMF Approves Bailout 3.0 for Ukraine

IMF statement on Ukraine:

Backgrounders: http://trueeconomics.blogspot.ie/2015/02/18215-imf-package-for-ukraine-some.html and here: https://www.imf.org/external/np/sec/pr/2015/pr1550.htm

Key points to the above: IMF came through just-in-time after seeing Ukraine going down to the last USD 4.5 billion in reserves and only barely enough time to pay the loans due to be repaid to... IMF. In a sense, IMF decision avoids the risk of IMF engineering the most pesky form of sovereign default known to the humanity: a default on IMF debt. Congratulations, IMF.

The hope-filled IMF statement is worth reading, but apparently, Ms. Lagarde sees Minsk 2 agreements as "largely holding for now". Which is consistent with some reports but most certainly is at odds with the UK, US and Nato views.

Another part worth noting is IMF's continued insistence that Ukraine's economic collapse is just a temporary 'balance of payments' problem. And in line with delirium, IMF is lauding the Ukrainian authorities for allowing "the exchange rate to adjust", as if Kiev had not thrown every last bit of meagre reserves and every possible bit of capital controls at defending the exchange rate in a futile attempt to prevent such 'adjustment'.

That said, let us hope that Ukrainian economy is indeed provided some much needed support through this package and that the reforms, penned into the agreement, do not lead another Maidan.

18/2/15: IMF Package for Ukraine: Some Pesky Macros

Ukraine package of funding from the IMF and other lenders remains still largely unspecified, but it is worth recapping what we do know and what we don't.

Total package is USD40 billion. Of which, USD17.5 billion will come from the IMF and USD22.5 billion will come from the EU. The US seemed to have avoided being drawn into the financial singularity they helped (directly or not) to create.

We have no idea as to the distribution of the USD22.5 billion across the individual EU states, but it is pretty safe to assume that countries like Greece won't be too keen contributing. Cyprus probably as well. Ireland, Portugal, Spain, Italy - all struggling with debts of their own also need this new 'commitment' like a hole in the head. Belgium might cheerfully pony up (with distinctly Belgian cheer that is genuinely overwhelming to those in Belgium). But what about the countries like the Baltics and those of the Southern EU? Does Bulgaria have spare hundreds of million floating around? Hungary clearly can't expect much of good will from Kiev, given its tango with Moscow, so it is not exactly likely to cheer on the funding plans… Who will? Austria and Germany and France, though France is never too keen on parting with cash, unless it gets more cash in return through some other doors. In Poland, farmers are protesting about EUR100 million that the country lent to Ukraine. Wait till they get the bill for their share of the USD22.5 billion coming due.

Recall that in April 2014, IMF has already provided USD17 billion to Ukraine and has paid up USD4.5 billion to-date. In addition, Ukraine received USD2 billion in credit guarantees (not even funds) from the US, EUR1.8 billion in funding from the EU and another EUR1.6 billion in pre-April loans from the same source. Germany sent bilateral EUR500 million and Poland sent EUR100 million, with Japan lending USD300 million.

Here's a kicker. With all this 'help' Ukrainian debt/GDP ratio is racing beyond sustainability bounds. Under pre-February 'deal' scenario, IMF expected Ukrainian debt to peak at USD109 billion in 2017. Now, with the new 'deal' we are looking at debt (assuming no write down in a major restructuring) reaching for USD149 billion through 2018 and continuing to head North from there.

An added problem is the exchange rate which determines both the debt/GDP ratio and the debt burden.

Charts below show the absolute level of external debt (in current USD billions) and the debt/GDP ratios under the new 'deal' as opposed to previous programme. The second chart also shows the effects of further devaluation in Hryvna against the USD on debt/GDP ratios. It is worth noting that the IMF current assumption on Hryvna/USD is for 2014 rate of 11.30 and for 2015 of 12.91. Both are utterly unrealistic, given where Hryvna is trading now - at close to 26 to USD. (Note, just for comparative purposes, if Ruble were to hit the rates of decline that Hryvna has experienced between January 2014 and now, it would be trading at RUB/USD87, not RUB/USD61.20. Yet, all of us heard in the mainstream media about Ruble crisis, but there is virtually no reporting of the Hryvna crisis).

Now, keep in mind the latest macro figures from Ukraine are horrific.

Q3 2014 final GDP print came in at a y/y drop of 5.3%, accelerating final GDP decline of 5.1% in Q2 2014. Now, we know that things went even worse in Q4 2014, with some analysts (e.g. Danske) forecasting a decline in GDP of 14% y/y in Q4 2014. 2015 is expected to be a 'walk in the park' compared to that with FY projected GDP drop of around 8.5% for a third straight year!

Country Forex ratings are down at CCC- with negative outlook (S&P). These are a couple of months old. Still, no one in the rantings agencies is rushing to deal with any new data to revise these. Russia, for comparison, is rated BB+ with negative outlook and has been hammered by downgrades by the agencies seemingly racing to join that coveted 'Get Vlad!' club. Is kicking the Russian economy just a plat du jour when the agencies are trying to prove objectivity in analysis after all those ABS/MBS misfires of the last 15 years?

Also, note, the above debt figures, bad as they might be, are assuming that Ukraine's USD3 billion debt to Russia is repaid when it matures in September 2015. So far, Russia showed no indication it is willing to restructure this debt. But this debt alone is now (coupon attached) ca 50% of the entire Forex reserves held by Ukraine that amount to USD6.5 billion. Which means it will possibly have to be extended - raising the above debt profiles even higher. Or IMF dosh will have to go to pay it down. Assuming there is IMF dosh… September is a far, far away.

Meanwhile, you never hear much about Ukrainian external debt redemptions (aside from Government ones), while Russian debt redemptions (backed by ca USD370 billion worth of reserves) are at the forefront of the 'default' rumour mill. Ukrainian official forex reserves shrunk by roughly 62% in 14 months from January 2014. Russian ones are down 28.3% over the same period. But, you read of a reserves crisis in Russia, whilst you never hear much about the reserves crisis in Ukraine.

Inflation is now hitting 28.5% in January - double the Russian rate. And that is before full increases in energy prices are factored in per IMF 'reforms'. Ukraine, so far has gone through roughly 1/5 to 1/4 of these in 2014. More to come.

The point of the above comparatives between Russian and Ukrainian economies is not to argue that Russia is in an easy spot (it is not - there are structural and crisis-linked problems all over the shop), nor to argue that Ukrainian situation is somehow altering the geopolitical crisis developments in favour of Russia (it does not: Ukraine needs peace and respect for its territorial integrity and democracy, with or without economic reforms). The point is that the situation in the Ukrainian economy is so grave, that lending Kiev money cannot be an answer to the problems of stabilising the economy and getting economic recovery on a sustainable footing.

With all of this, the IMF 'plan' begs two questions:

1. Least important: Where's the European money coming from?
2. More important: Why would anyone lend funds to a country with fundamentals that make Greece look like Norway?
3. Most important: How on earth can this be a sustainable package for the country that really needs at least 50% of the total funding in the form of grants, not loans? That needs real investment, not debt? That needs serious reconstruction and such deep reforms, it should reasonably be given a decade to put them in place, not 4 years that IMF is prepared to hold off on repayment of debts owed to it under the new programme?

Note: here is the debt/GDP chart adjusting for the latest current and forward (12 months) exchange rates under the same scenarios as above, as opposed to the IMF dreamt up 2014 and 2015 estimates from back October 2014:

Do note in the above - declines in debt/GDP ratio in 2016-2018 are simply a technical carry over from the IMF assumptions on growth and exchange rates. Not a 'hard' forecast.

5/2/15: IMF and Ukraine: 'Scaling Back' Risk Is Real

Generally, I rarely comment directly on Ukrainian economy as was explained before on this blog. But the latest set of news is certainly falling into the category of 'big time news'.

As I noted before, IMF were in Kiev since mid-January and were going over the Ukrainian Government request for switching lending to Ukraine into a different facility (see http://trueeconomics.blogspot.ie/2015/01/2112015-ukraine-requests-extended-fund.html). In January, IMF head, Christine Lagarde gave an interview to Le Monde, saying that no partner of the IMF can participate in a funding programme when some 20% of the Ukrainian economy remains impacted by the conflict in the East.

So far, under stand by arrangements, IMF committed USD17 billion in funding for Ukraine, of which Kiev already received disbursements of USD3.2 billion in May 2014 and USD1.4 billion in September. Under stand-by arrangements, funding is provided for up to two years, so in 2015, Ukraine must redeem USD1.42 billion in IMF funding and some USD9.6 billion more in maturing government debt. Of this, more than USD4 billion is due in Q1 2015. Meanwhile, currency and gold reserves of Ukraine are down to USD7.5 billion - below debt maturity levels for 2015.

Now, IMF is reportedly (see here: http://www.bloomberg.com/news/articles/2015-02-05/ukraine-allows-hryvnia-free-float-raises-key-rate-to-19-5-) "is seeking to limit its share of the aid burden in discussions on an expanded bailout for Ukraine, according to two people with knowledge of the institution’s stance, as a military conflict pushes the sovereign closer to default."

Note: IMF limiting new funding share to 2/3rds will mean that of USD15 billion that Ukraine wants to get over the next 2 years, USD5 billion will have to come from 'other' sources. If IMF were to restrict its total share to 2/3rds of all bailout money, then in the new funding, the non-IMF share will be USD4 billion. One might think that the funds can be provided by the EU - keen on partnership with Kiev. But EU talks a lot, yet delivers little. In 2014, EU Commission President, Barroso stated that the EU is willing to commit EUR11 billion to fund Ukraine over 2 years. So far, EU delivered only EUR1.4 billion in 2014 and committed to provide EUR1.8 billion in 2015. EBRD and EIB promised Ukraine EUR6.5-8 billion in funding, but delivered only EUR2.2 billion so far. Germany promised and delivered EUR1.6 billion to Ukraine in 2014 and in January this year committed to provide further EUR500 million.

The point is that absent IMF funding an entirely new programme, it is impossible to see how Ukraine can continue servicing and redeeming existent debts and cover current deficit that is expected to hit double digits in 2015. On the other hand, IMF is aware of this reality as well as of the lack of will in Europe and the US to fund Ukraine. Worse, stung by the 'partnership' with EU in funding euro area crisis-hit countries, the IMF is itching to cut back its engagements with difficult partners. Meanwhile, Ukraine has - completely understandable - difficulties pushing through IMF-mandated reforms. And to add to the complexity of the situation, the EU and US are nursing major differences in their respective objectives when it comes to what the two players want to see emerging from the current crisis.

In my view, Ukraine is now being played in the game of geopolitical chess by all sides, with the IMF struggling to remain independent (even pro-forma). The tragedy of all of this is that Ukraine is being prevented, by a combination of poor funders cooperation and ongoing conflict in the East, from actually engaging in reforming its economy, politics and society. My sympathies on this mess are with Ukraine and President Poroshenko - they got the short ends of all sticks.

Note: In my opinion, Ukraine needs a much more structured package of supports, including larger loans, on more benign terms, and grants, and over a longer horizon. In effect, it needs a Marshall Plan.

23/1/2015: Russian Economy Growth Downgrades

On top of downgrades by the rating agencies, Russia also got downgraded by the host of international agencies - in terms of country growth prospects for 2015-2016. The IMF downgrade took 2015-2016 forecast for growth of 0.5% and 1.5% for 2015 and 2016 respectively published in October 2014 down to a contraction of -3.0% in 2015 and -1.0% in 2016. The Fund estimates 2014 GDP growth of 0.6% for the full year and Q4 2014 growth of zero percent compared to Q4 2013. Not bad for the economy going though a massive, multi-dimensional crisis. But a poor outlook for 2015-2016. IMF estimates are based on assumed oil price (full-year average weighted of 3 spot prices) at below USD60 but above USD55 (see http://blog-imfdirect.imf.org/2014/12/22/seven-questions-about-the-recent-oil-price-slump/), so closer to USD57.

The World Bank outlook, released on January 14th is a bit less gloomy when it comes to 2016. Per World Bank, "sustained low oil prices will weaken activity in exporting countries. For example, the Russian economy is projected to contract by 2.9 percent in 2015, getting barely back into positive territory in 2016 with growth expected at 0.1 percent." World Bank oil price assumption is USD66 per bbl.

EBRD notes that "Geopolitical risks from the Ukraine/Russia crisis remain significant, although they are contained for the time being." According to the bank, "Russia is projected to slip into recession, with GDP contracting by close to 5 per cent."  On more detailed assessment, EBRD says that: "In Russia, lower oil prices have compounded the effect of deep-seated structural problems, increased uncertainty and low investor confidence, along with the increasing impact of economic sanctions imposed since March 2014. In the first three quarters of 2014 investment continued to decline, consumption growth decelerated to below 1 per cent, and imports dropped by 6 per cent in real terms. Capital outflows more than doubled to an estimated US$ 151 billion in 2014. As a result, the rouble has lost almost half of its value in 2014 vis-à-vis the US dollar and Russia lost about a quarter of its international reserves, ending the year at around US$ 380 billion (including the less liquid National Welfare Fund). Markets were particularly shaken in late November/early December 2014, and the central bank had to raise its policy rate to 17 per cent to stem pressure on the currency. The government provided additional capital to a number of banks, temporarily relaxed certain prudential requirements for banks, and introduced measures to increase the supply on the foreign exchange markets by state-owned companies and put in place additional incentives for de-offshorisation."

An interesting footnote to the analysis is covering remittances from Russia. "Remittances from Russia to Central Asia and the EEC continued to decline (see Chart below). Partial data for the fourth quarter in 2014 suggest that the decline is likely to have accelerated in recent months, entering two-digit percentage rate territory, as the Russian economy weakened and the sharp drop in the value of the rouble reduced the US dollar (and also local currency) value of the remitted earnings. Lower remittances inflows will affect consumption adversely and likely add to downward pressures on a number of currencies in EEC and Central Asia, which also face reduced export demand and investment flows from Russia."

Crucially, EBRD forecasts also reflect downgrades on September 2014 outlook. EBRD now estimates 2014 growth to be at 0.4% (more gloomy than IMF estimate and down on 9.6% estimate at the end of Q3 2014), with a contraction of 4.8% in 2015, which represents a downgrade of 4.6 percentage points from September forecast. EBRD oil price assumption is around USD57-59 per bbl.

Chart below summarises unemployment trend 2013-2014:

21/1/2015: Ukraine Requests Extended Fund Facility from the IMF

So Ukraine made a (formal?) request for change in the IMF lending programme:

Of all places... in Davos. And Ms Lagarde is dead-pan sure that an agreement to proceed will follow from the IMF Executive Board... not that anyone could doubt that it will, but it might be a better tone not to jump ahead.

The quantum of funding requested is not known, but we already know that Ukraine's own estimates were USD15 billion back in November 2014. Since then, things did not improve, so the same figure is probably closer to USD18 billion. And I suspect that Ukraine will need at least USD20-25 billion over 2015-2017, even under rather positive assumptions.

I do hope they get a good rate on all this borrowing, as loans do require interest payments and principal repayments.

21/1/2015: Global Trade Indicators Flashing Red

Two very interesting charts reflecting upon the same macroeconomic reality: world trade is slowing down. Big time…

First, IMF revisions of the global trade growth rates forecasts for 2015 - now at their lowest in 12 months (chart courtesy of the @zerohedge):

And next, Baltic Dry Index series printing 753,000 currently, a level consistent with depths of 2009 crisis and 2012-2013 slump (chart courtesy of @Schuldensuehner) :

All in, the above highlights the powerless nature of large scale advanced economies' QE measures when it comes to reigniting global demand.

20/1/2015: IMF Global Growth Outlook 2015-2016: Europe Slips, U.S. Powers Away

My analysis of the IMF update to the World Economic Outlook is now available on Learn Signal blog: http://blog.learnsignal.com/?p=148

5/1/2015: IMF on Debt Relief for Greece: Repeating the Repeats

Much of talk nowadays from the European leaders on Greek debt situation and the link to political crisis in the country. Some conversations are about lack of potential contagion from Grexit, other conversations are about the right of the Greeks to decide on their next Government, whilst all conversations contain references to the new Government having to abide by the previous commitments. Which is fine. Except, what about the European partners commitments? Specifically one commitment - relating to further debt relief for the country?

Here is 2013 IMF assessment of the Greek situation (emphasis in italics is mine):

"47. The program continues to satisfy the substantive criteria for exceptional access but with little to no margin. Delays in the implementation of structural reforms raise concerns about the capacity of the authorities to implement the program in a difficult political environment. …The continued commitment of euro area member states to support Greece, including by providing additional official financing to fill future financing gaps and through further debt relief as necessary, is an essential part of meeting the criteria."

And then:

"48. …The program is fully financed through July 2014, but a projected financing gap will open up in August 2014. Thus, under staff’s current projections, additional financing will need to be identified by the time of the fifth review, to keep the program fully financed on a 12-month forward basis. The Eurogroup has initiated discussions on how to eliminate the projected financing gaps. In this regard, the Eurogroup’s commitment in February and November 2012 to provide adequate support to Greece during the life of the program and beyond, provided that Greece fully complies with the program, is particularly important."

For some more on debt relief:

"55. As noted in the third review staff report, debt sustainability concerns continue to remain a risk. …The commitment of Greece’s European partners to provide debt relief as needed to keep debt on the programmed path remains, therefore, a critical part of the program. But the programmed path entails still very high debt well into the next decade, leaving Greece accident prone for an extended period. Should debt sustainability concerns prove to be weighing on investor sentiments even with the framework for debt relief now in place, European partners should consider providing relief that would entail a faster reduction in debt than currently programmed."

And

"56. …The program remains subject to numerous risks, mainly from the worsening of the macro outlook combined with a further deterioration in banking sector assets (feeding back to the real economy), difficulties with the implementation of ambitious fiscal policy and administrative changes, and—above all—failure once again to ensure a reinvigoration of structural reforms in the face of strong resistance from vested interests. Absent a critical mass of structural reforms that would transform the investment climate, the growth outlook—and, therefore, crucially the assumptions regarding financing needs for the rest of the program period and the debt path—would not materialize. Externally, closing financing gaps and delivering on the commitment to reduce debt will be a test of European support."

And in Box 4, Criterion 2:
" …In light of the commitments from euro area member states to provide additional debt relief as necessary, the baseline debt trajectory is sustainable in the medium-term but subject to significant risks."

Link to the above: http://www.imf.org/external/pubs/ft/scr/2013/cr13241.pdf


But there are more statements from the IMF on the issue of debt relief for Greece.

Take for example Transcript of a Press Briefing by William Murray, Deputy Spokesman, International Monetary Fund, from September 11, 2014 (http://www.imf.org/external/np/tr/2014/tr091114.htm):

"QUESTIONER: You told us many times from this podium that the issue of the Greek debt will be discussed at the sixth review. As I understand this, it's going to begin at the end of the month. The Euro Group said on Monday that the debate will begin after the sixth review. What we want to hear is that are the discussions about the financing of the Greek program and about the debt, still proceeding on an orderly way as you told us before many times? And what is your plan or your strategy for the Greek debt? Is there an option of those talks between you and the Europeans? Are the Europeans onboard to discuss this big problem for Greece?

MR. MURRAY: ...I do want to remind you and others what we have said all along. There is an agreed framework in place for ensuring debt sustainability with Greece's European partners agreeing to provide any additional debt relief as needed to help bring Greece's debt down to 124 percent of GDP by 2020. And to substantially below 110 percent of GDP by 2022 as long as Greece continues to deliver on its program commitments."

Now, IMF estimates debt/GDP ratio for Greece to be at 170% of GDP. Which means that over the next 5 years, the programme will have to deliver debt.GDP ratio reduction of a massive 50 percentage points. How on earth can this be achieved without debt relief is anyone's guess.

And more: Interview by Greece’s newspaper Ethnos with IMF Mission Chief for Greece, Poul Thomsen, published in Ethnos, June 15, 2014 (http://www.imf.org/external/np/vc/2014/061514.htm):

"QUESTION: You talk constantly about the commitment of Europeans regarding the financing needs of Greece and Greek debt relief. If Europeans do not show the determination needed or the courage to take bold decisions, like last time, what is the IMF planning to do?

ANSWER: We are confident that the European partners will deliver on their commitments. Do you believe that Greece's debt is now sustainable or do you believe that the situation needs new and drastic interventions? Are European commitments to contribute to debt relief enough for the IMF? What could the potential tools for debt relief be? The agreed framework is credible, provided that Greece and its European partners deliver on their promises. For Greece, this means continuing to advance reforms and achieving and maintaining a fiscal primary surplus of 4.5 percent of GDP. For the European partners, this means providing additional debt relief, if required, to keep debt on the programmed path. Thus, if adhered to, the framework will make the debt sustainable."

So 4.5% primary surplus over 5 years - even if achieved, will deliver somewhere in the neighbourhood of 1/2 of the required debt adjustment. The rest, presumably, will have to be achieved via economic growth, which will have to be running, on average, at 4% per annum to provide for the adjustment planned. And, thus, do tell me if the above any realistic, let alone probabilistically plausible.

In its 5th (most recent) assessment of the Greek situation, IMF reiterated (paragraph 49) that "The continued commitment of euro area member states to support Greece, including by providing additional official financing to fill future financing and through further debt relief as necessary, is an essential part of meeting the criteria" for debt sustainability. (see http://www.imf.org/external/pubs/ft/scr/2014/cr14151.pdf)

And it also carries Greek authorities expectation of the European funders agreement to further debt relief: "The program is fully financed through the next twelve months. Firm commitments are also in place thereafter from our euro area partners to provide adequate support during the program period and beyond, provided that we comply fully with the requirements and objectives of the program. In this regard, we remain on track to receive the first phase of conditional debt relief from our European partners, as described in the Eurogroup statements of November 27 and December 13, 2012." (page 71)

The same was stated in May 2014 Letter of Intent, Memorandum of Economic and Financial Policies, and Technical Memorandum of Understanding from the Greek authorities (see: http://www.imf.org/external/np/loi/2014/grc/051414.pdf). On foot of the IMF press conference statement on same (see: http://www.imf.org/external/np/tr/2014/tr050814.htm).

And so on, to no end and… no closure from the European partners…

4/1/2015: "Betting on Ukraine" - Project Syndicate

I have been trying to reduce my commentary on Ukraine to a minimum for a number of reasons, including the viciousness of the 'Maidan lobby' and the fact that Ukraine is not a part of my specialisation.

However, occasionally, I do come across good and interesting commentary on the subject. Here is one example: http://www.project-syndicate.org/commentary/european-union-ukraine-reform-by-andres-velasco-2014-12.

To add to the above: the USD15 billion additional funding required, as reported to be estimated by the IMF, will also not be sufficient. Ukraine will require double that to address investment gap. USD15 billion estimate only covers the short-term fiscal gap.

Note: I called from the very start of the crisis for a Marshall Plan for the Ukraine, and suggested that for it to be more effective it should include Russian participation in funding and economic engagement. Funding Ukraine via standard IMF loans (shorter maturity instruments designed to address immediate liquidity crises) is simply useless. The country needs decade-long reforms and these reforms will have to be accompanied by investment and growth for them to be acceptable politically and socially. Such funding can only be supplied by a structured long-term lending programme. One additional caveat to this is that funding sources must be distinguished from funding administration. Given extreme politicisation of Ukrainian situation, neither Russia, nor the EU or the US can be left to administer actual funding programme. Hence, the task should be given to an World Bank or IMF-run administration mechanism that includes direct presence at the Board level of funders.

14/12/2014: IMF (Emergency) Mission to Kiev

Given economic / fiscal position of Ukraine (see http://trueeconomics.blogspot.ie/2014/12/10122014-ukraine-greece-cds-flash-red.html) it is unsurprising that the IMF has dispatched a 'rapid response' team out to Kiev. Here's the IMF official statement on the visit:

Not to over-interpret the above, it suggests that the IMF is considering seriously further 'assistance' to Ukraine and that such a commitment will be based not so much on the progress of structural reforms to-date, but on the progress of the promises of reforms in the future.

Of course, it is hard to imagine Ukrainian authorities unrolling any big and binding reforms in the current climate and given short span of life of the new Rada to-date, so don't take the above comment as sarcasm - Ukraine needs assistance now and the promise of reforms is real, in my opinion. The only problem is that any assistance via IMF will be short-term (3 years or so) and will be in the form of debt, while what Ukraine really needs is longer-term funding and in a form of a Marshall Plan (even if in debt form, at least on terms of near-zero cost of funding and flexible maturity). Sadly, such preferential funding is unlikely to come...

21/11/2014: The Latest Troika Report: Risks, No Buffers, Lots of Hope

The Troika did it bit… flew into Dublin on the 17th and flew out of here today. And left this as a present for all of us to enjoy…

Summary of their statement with my comments (outside quotes).

"Ireland has enjoyed a year beyond all reasonable expectations following the completion of its EU‑IMF supported program. Growth has accelerated to be highest in the euro area, job creation has continued, bond yields are at historic lows, and the fiscal deficit will again be below target. Ireland’s resolute implementation of steady and measured fiscal adjustment has been critical to this success."

Good news all… albeit no mention on the effect of ESA2010 accounting rules on our deficit and debt 'performance', but still, let's bask in some sunshine, for what follows is less sunny.

"Ireland should stick with this proven approach. Why? Growth prospects in coming years are still very uncertain... Current highly favorable international financial conditions may not last as major central banks begin to shift their stance and geopolitical risks can evolve rapidly. A sound fiscal position is a critical buffer in these circumstances."

Hold on there. So there are risks. And these risks included the dreaded prospect of rising interest rates. And our risk buffers are not up to meeting them. Too bad the Government has promised giveaways already for Budget 2016.

IMF goes on: "Ireland’s economic recovery is currently strong, yet major uncertainties remain." Major uncertainties?… "The sharp rebound in 2014 is led by exports and investment and is increasingly supported by consumer spending. …The mission estimates growth at just over 4 percent in 2014, yet there are significant uncertainties owing to the large contribution of offshore manufacturing to exports. Growth is projected to ease to about 3 percent in 2015 but the range of forecasts is wide, in part reflecting risks to growth in Euro Area trading partners and to international financial conditions." Oh dear. What this means is that growth is here, but much of it is based on:

1. MNCs exports, and
2. Hoped-for domestic recovery yet to materialise in any substantial form.

And what about those pesky "financial conditions"? Well, they are allegedly "...highly favorable and lending may be picking up from subdued levels. ...yet nonperforming loans (NPLs) remain very high. Lending has been weak, in part reflecting firms’ reliance on retained earnings, but mortgage loans have recently picked up in the context of sharply rising housing prices driven by job gains, declining household uncertainties, and a weak construction supply response."

House prices driven by jobs gains? Presumably in D2/D4/D6 where the 'middle Ireland' is bidding over 500K for 3-beds. Some jobs creation boost. With the "financial conditions" being fine, except in the real economy, where they are bad, we are back in the 'things are so bad, they must improve sometime' growthology.

Key kicker is Fiscal Policy - something that Government directly controls. Here's IMF on that:
"...a budget deficit that may be over 4 percent of GDP in 2014 remains too large to put Ireland’s high debt firmly on a downward path. Moving to a balanced budget over time would also buttress Ireland’s highly open economy against the broad range of shocks to which it is exposed."

Wait, this is straight from the Fiscal Council textbook (and do note - they are going to wade in with their 'views-to-be-ignored' next week). But it is worse than the Fiscal Council 'below 3% target' - this is about balanced budget aka 'zero % target'.

"The mission estimates that Budget 2015 generates an adjustment of about ½ percent of GDP in structural terms. A somewhat faster pace of improvement would have been preferable in view of relatively strong near-term growth prospects. Hence, any revenue over-performance or additional interest savings should be used to lower the deficit in 2015."

But Budget 2015 was billed by the Government as 'sustaining the recovery' effort. Not so much, says the IMF in the above. Rather looks like 'gambling on the continued recovery' effort to me.

"In the medium term, ... the authorities’ strategy to reach balance centers on fiscal restraint as set out in the expenditure ceilings and in the Comprehensive Expenditure report 2015‑2017. The mission estimates that this entails annual structural adjustment of ¾ percent of GDP over 2016–18, which avoids undue drag on growth. Such a steady approach to consolidation will help cushion shocks and result in faster progress to balance if medium-term growth is stronger than expected, and vice versa. Fully utilizing asset disposals, notably of the banks, to hasten debt reduction will reduce interest expenses, thereby containing the cumulative consolidation required."

In other words, you thought austerity is gone? Well, think again:

1. The above says there is more needed, albeit at marginal levels, and
2. The above assumes no slippage on 'savings' achieved to-date. Which is going to be very very hard to maintain as public sector agreements of the past come to renegotiations just at the time when political cycle favours giveaways to powerful interests.

Risks to the above also include, as IMF notes "…age-related demands for public services are rising and other expenditure pressures may emerge after prolonged restraint. Further reforms will be needed to generate savings while protecting public services and investment, and progress in containing the wage bill must be preserved." I flagged the rapid rise in retired numbers in recent analysis of the QNHS data. It now looks like the IMF is concerned we are swapping spending on unemployment supports for spending on early retirement schemes for public workers.

Another perennial headache is mortgages arrears. Much of policy expanded on this and the progress is questionable at best. IMF view is:  "Banks report good progress on workouts in relation to the CBI’s targets. The low rate of redefaults to date is welcome [I wonder if the low rates of re-default are 38% rate of actual redefaults reported by the CBofI in whauch case the Troika shows some humour here], yet some cures with smaller debt service reductions may not prove to be lasting, requiring banks to better target solutions. With about half of arrears cases under legal proceedings, it is important that these proceedings, together with active follow-up by the banks, are effective in motivating borrowers to reengage in a timely manner to reach restructuring solutions where feasible. Substantial unfinished mortgage resolution work requires continued supervisory targets for coming years, with due attention to reversing the continued rise of buy-to-let loans in arrears."

So the crisis has not gone away. And the evidence on quality of resolutions is dubious. But the IMF solution is - hammer more the borrowers, even though hammering them today might backfire tomorrow. I wonder if rational expectations form a part of the IMF economics team heads?

Problem number two: arrears in SMEs loans. "Implementation of lasting solutions for distressed commercial loans is also essential. Corporate, SME, and commercial real estate loans comprise the largest share of NPLs. Supervision should ensure that banks are either encouraging appropriate progress by distressed borrowers in the execution of workout plans or are making timely loan disposals."

Basically, this says "We've given up. Nothing seems to work, so just bankrupt the lot or sell the toxic stuff for someone else to bankrupt the lot". Not good. Not good at all.

Patrick Honohan got a ringing endorsement for his efforts to cool off the property lending (that is nowhere to be seen… which is sort of like evading icebergs in the middle of the Gulf of Mexico):
"New residential mortgage lending rules proposed by the CBI are a welcome step… The introduction of loan-to-value and loan-to-income ceilings will increase the resilience of both the banking and household sectors to financial shocks…"

And the last bit - the fabled Structural Reforms. Here, IMF remains true to its previous commitments of not producing any new thinking. Just keep raising the ghosts of the past, that is construction and employment activation.

"A stronger construction supply response is needed to help contain pressures on housing prices and rents. Housing completions remain low despite a 42 percent rise in Dublin house prices from their trough, which is also contributing to rising rents. A range of factors are impeding an adequate supply response by the construction sector, potentially hindering a renewal of migration inflows. Timely implementation of the government’s Construction 2020 initiatives is therefore important. In particular, the introduction of use-it-or-lose-it planning permissions together with vacant site levies could usefully help counter reluctance to develop properties owing to expectations of further price appreciation."

This is, frankly, a loony bin of policy proposals. The market is utterly dysfunctional - funding is hard to get, land is overpriced, supply of land is effectively controlled by Nama and vultures. Construction costs are sky high due to Government own 'reforms' from the past. And the IMF is offering to make things even more costly for development? Are they for real?

On employment activation: "Efforts to strengthen employment and training services should continue.  High levels of youth and long-term unemployment pose downside risks to employment and hence to growth in the medium term. Steady progress on engaging with long-term unemployed persons is being made and the private sector provision of employment services is expected to start in the second half of 2015. The establishment of regional Education and Training Boards that will collaborate with Intreo offices to facilitate referrals of jobseekers to training is welcome. Ensuring that these new frameworks are most effective in helping the unemployed return to work will require ongoing evaluation and adaptation."


In basic terms, there is nothing new in the above. Keep going the way we've been going: more questionable quality training programmes, more forced participation, more exits from the labour force dressing up unemployment figures. Just shove the long-term unemployed under the rug and pretend there is nothing there.

In short, the Troika review is a dud: it found little new, it offered no new policies, save for making things worse for developers and builders. But it, usefully, pointed the hotheads from the Government 'spend and be merry' side in the direction of the cooler winds of risks painting our horizon in unpleasantly steely hues.

9/10/2014: IMF Lagarde: We Are Out of Ideas, You Are Out of Convictions

In several recent posts, I have highlighted the fact that the IMF - that stalwart of global 'structural' reforms - has now effectively exhausted its toolkit of ideas as to how we can get global growth back on track. And the governments around the advanced economies world are now equally out of conviction to deploy the IMF's old toolkit.

This is evident across the board: from the Fund latest World Economic Outlook update which keeps endlessly banging on about the need for

• Accommodative monetary policies and, simultaneously, de-risking of the financial economy (the two tasks that actually contradict each other, as IMF own GFSR report admits);
• Structural markets reforms (which in the IMFspeak means preciously little more than more reforms of the labour markets, or in distilled terms: more 'activation' efforts to bring the unemployed to still inexistent jobs and push welfare recipients off the dole into still inexistent jobs);
• Credit supply restoration in the economy amidst continued banks deleveraging (which basically means that the banks need to get rid of old - presumably bad risk - loans while increasing their stock of new - presumably better risk - loans);
• Creation of better, more robust risk management frameworks in banking while increasing banking sector concentration (the outcome of the deleveraging process) and increasing risks concentrations by creating more centralised controls and supervision (e.g. the European Banking Union); and so on.

All of the above 'reforms' are clearly self-contradictory in so far as achieving one side of the objective implies undermining the other side.

And with today's release, we have a veritable Map to the Middle-Earth from the Fund's own Christine Lagarde. In today's "The Managing Director's Global Policy Agenda" Ms. Lagarde is navel gazing over 14 pages of text, charts and slides under the sub-heading of "Aiming Higher, Trying Harder". You get the sense of frustration of the Fund stuff with the intransigent Governments unwilling to deploy all of the medicines prescribed to them by the Fund, but you also get a feeling for the out-of-touch banality of the IMF's approach to the crisis.

Take the preamble. "Bold and resolutely executed policies are needed to prevent growth from settling into a “new mediocre,” with unacceptably low job creation and inclusion. Measures should emphasize":

• "Lifting growth. Decisive structural reforms are needed to bolster confidence and lift today’s actual and tomorrow’s potential growth and break the pattern of persistent underperformance and insufficient job-creation. Accommodative monetary policies should continue to support demand and provide breathing space as these reforms are implemented. But it is essential that they are accompanied by macro-critical reforms that remove deep-seated distortions in labor and product markets; improve credit flows to productive sectors; strengthen growth-friendly fiscal frameworks; and eliminate infrastructure gaps." You get a sense that this has been said before, argued many times over and offers nothing new. In effect, the IMF is saying: spend more, cut spending more, re-spend more; and fund it all by printing presses, while making sure the rag-tag of the real economy (SMEs and households) don't get their hands on the printed cash.
• "Building resilience. Easy money continues to increase market and liquidity risks, especially in the shadow banking sector, potentially compromising financial stability. Appropriate regulation and vigilant financial sector supervision, including developing and deploying macro-prudential tools, can help limit excessive financial risk-taking. Preparations for less benign financial conditions also need to be stepped-up. As monetary policy normalization approaches in some major economies, stronger policy frameworks, institutions, and economic fundamentals can mitigate potentially adverse spillovers." But, dear IMF, who creates this 'easy money'? And for who the money is 'easy'? The answer is in the first point above: printing presses do create 'easy money' and Governments and larger banks get 'easy money'. So de facto, IMF advice 1 and 2, taken together mean that creating growth + building resilience to risk = growing the share of Government and big banks in the economy. That should really keep troubles at bay, especially since the current crisis is caused by… yep, you've guessed it, rising role of Governments and big banks in the economy. Apparently, what can't kill you makes you stronger.
• And then there is IMF advice that IMF should learn to follow itself: "Achieving coherence. International cooperation is needed to amplify the benefits from these bold policies and to avoid exacerbating existing distortions, particularly regarding financial stability and global imbalances. Dialogue and policy cooperation can help smoothly rebalance global demand; minimize adverse spillovers and spillbacks from asynchronous monetary unwinding; ensure consistent financial regulation; and maintain an adequate global financial safety net. Fresh momentum must be injected into the global trade dialogue." Where did we hear that? Ah, yes, right - we've heard in Greece (when the IMF quietly stood by as the EU rained chaos onto Greek and Cypriot financial systems and Exchequers by refusing to get Public Sector Participation - or restructuring - going); and we heard it in Ireland (where the IMF stood idly by as the Irish Governments and European partners loaded some EUR70 billion-plus worth of banks debts onto the real economy and then destroyed entire sectors of the economy in the name of Nama-lution); and in Italy (where IMF is still refusing to acknowledge the need for sovereign debt restructuring).

Do not forget that the IMF team has run out of Athens this week in a hissy - the most heavily 'repaired' economy in the world seems to be going off-the-rails again.

Here is the road map for advanced economies as traced by the IMF:

As we have it: in Euro Area the achievements were: 1) 'good progress' on monetary easing (the printing press) but more to be done; 2) 'some progress' on consolidating the banking system eggs in one regulatory basket (and more to be done); 3) basically no fiscal reforms; and 4) no reforms on taxation, no improvement in competition across both labour and product markets (not to mention decline in competition in financial economy).

Are we still talking, Ms Lagarde? Oh yes…

Let's take a look at the first pillar of IMF 'wisdom': the printing press. Here's Fund own assessments of the outcomes: "Despite massive and welcome monetary support in major advanced economies and slowing fiscal consolidation, the recovery remains uneven and sluggish. Growth, and hence policy advice, are increasingly divergent across countries. Inflation is still below target in many advanced economies and is a growing concern in the euro area, while unemployment has stayed high. … The envisaged acceleration in economic activity has again failed to materialize."

So just as with Krugmanomics, the IMFology calls for more printing, cause previous rounds weren't enough: "Growth prospects in advanced economies are expected to remain uneven across regions. The strongest growth rebound is expected in the United States, while growth in Japan will remain modest. The crisis legacy brakes (including high private and public debt) are expected to only gradually ease in the euro area, while inflation expectations continue to drift down and deflationary risks are rising. Growth elsewhere, including other Asian advanced economies, Canada, and the United Kingdom, is projected to be solid."

And with all of those 'structural reforms' - do we have an uplift in at least potential (if not actual) output? Nope: "Growth potential may be lower than earlier assumed… Increasing evidence suggests that potential growth started to decline in advanced economies even before the onset of the crisis—which may be affecting the current pace of recovery. The recent slowdown in EMEs also has a large structural component, raising questions about the sustainability of growth rates achieved prior to the crisis and during the 2010–11 rebound."

So here are two road maps side by side: one for Spring 2014 and another for Fall 2014… and, save for gentle re-phrasing of the same, the two are largely identical when it comes to the advanced economies.

So spend more on infrastructure as opposed to reduce debt overhang... and that will be funded by what? Pears and apples?

Out of new ideas. QED.

8/10/2014: IMF GFSR: That Battleship Potemkin Moment...

In the previous post (http://trueeconomics.blogspot.ie/2014/10/8102014-imf-gfsr-oh-dear-its-headless.html) I covered some of the IMF's discoveries concerning the risks present in financial markets.

Irony aside, the Fund does provide a handy map to these risks. Here it is:

The closer things are to the centre of the spiderweb, the lower are the associated risks. Which is preciously funny, if you are into morbid sense of humour.

You see, here's the same map from October 2013:

First thing first: let's take a look at Risks:

• Emerging Markets risks have scaled up in 12 months through April 2014 and then stayed where they were through October 2014. 
• Credit Risks have gone down - undoubtedly the result of just one thing: write down and insolvencies waves that swept across primarily the US and UK and to a lesser extent (due to slower response) through the EU banking systems.
• Market and Liquidity Risks - the wonder sparks of the Central Banks' attention - have grown, and by much. Now, recall that the entire first stage of the crisis was about providing liquidity. ECB is still forcing more and more liquidity into the system… and the risks are rising, not subsiding.
• Macroeconomic Risks - the gold dust of the Governments and Central Bankers - is not budging. Not a notch decline in these risks for all the efforts over the last 18 months.

Now look at the underlying Conditions:

• Monetary and Financial conditions have eased through April 2014 and then got stuck in the same spot.
• Risk Appetite conditions have improved a little in 6 months through October 2013, then grounded to a halt through April 2014 and deteriorated since back to where they were in April 2013. 18 months of going nowhere policies.

This really does make you wonder - all the heroic efforts of the Central Bankers, Treasuries, Governments and international agencies, all the push for more cash, more 'reforms', more 'deleveraging'... and what? Swimming harder to stand still?..

Mommy, the pram is still rolling moment from Battleship Potemkin anyone?..

8/10/2014: IMF GFSR: Oh dear, financial markets are headless chickens...

Financial markets are headless chickens rampaging across the risks landscape, says IMF. This being hardly surprising, the IMF goes on to astonish us all by admitting that the beheadings were the job of the Central Bankers and international policy advisers... aka, the IMF...


IMF's Global Financial Stability Report published today offers some very uneasy reading on the topic of the global financial system risks, both in terms of the evolution of these risks over time and the sources of the risks.

Per IMF: "Easy money continues to increase global financial stability risks. Accommodative policies aimed at supporting the recovery and promoting economic risk taking have facilitated greater financial risk taking."

In other words, instead of reducing the overall level of risks accumulated in the financial system, monetary and regulatory policies deployed since the onset of the Global Financial Crisis (GFC) have resulted in an increase in these risks. Why? Because the entire response since the start of the GFC was focused on priming the debt pump. This manifested itself in record low rates charged by Central Banks on funding they supply into the banking system; in massive waves of liquidity injected by the Central Banks into the sovereign and private debt markets; in incessant pressure to accumulate credit placed on the economies from the policymakers irrespective of the debt levels already present; in wilful reduction of the debt repayment capacity of the households via increased taxation by the insolvent states and so on. All of this has meant that while economic fundamentals (the Great Recession and debt overhang) should have led to a reduction in credit supplied into the global financial system, the opposite took place.

Asset bases of the banks grew, on the aggregate, Central Banks balance sheets swell and asset markets boomed. As IMF notes: "This has resulted in asset price appreciation, spread compression, and record low volatility, in many areas reaching levels that indicate divergence from fundamentals." In other words: as companies managed no significant gains in their productive capacity, their capital valuation exploded. Solely because the hurdle rate on investment (the cost of investment) collapsed. Never mind there is no new demand for companies' output. When money is cheap, it pays to borrow. So asset prices appreciated. Meanwhile, the risk spreads between various quality borrowers have become much tighter. During the crisis, we saw massive widening of risk premia that lower quality (higher risk) borrowers (sovereign, corporate and household) had to pay to secure credit. Now, with money being given away at negative real prices, no one gives a damn is one borrower is less likely to repay than the other: risks are misplaced once again. You don't have to look any further for the evidence of this than the Euro area sovereign yields. When Italy borrows in the markets at negative rates, you know the jig is up. Surprisingly, all of this: irrationally easy credit and outright bubbly assets valuations, coincided with a decline in markets volatility. In other words, markets are now acting as if their participants are 100% (or close) certain the trend is only up for asset prices. And worse, this applies to all asset classes: from housing to bonds to VCs to Private Equity.

IMF notes that "What is unusual about these developments is their synchronicity: they have occurred simultaneously across broad asset classes and across countries in a way that is unprecedented." The word *unprecedented* should ring the alarm bells. We are deep into the monetary policy corner (zero rates, massive liquidity pumping programmes) and fiscal policy corner (debt levels carried by the sovereigns are now breaking all-time records). Should the *unprecedented* start unwinding, what stands between here and a full blow disaster?

Nothing. Worse than nothing.

Most certainly not the fabled 'reformed' banking systems with all the layers of new supervisors and rules mounted on top of their crumbling strategies is no solution, despite all the European chatter about Banking Union and joint supervision and macro prudential risks oversights and so on… All of this is pure blabber. For as the IMF states: "Capital markets have become more significant providers of credit since the crisis, shifting the locus of risks to the shadow banking system. The share of credit instruments held in mutual fund portfolios has been growing, doubling since 2007, and now amounts to 27 percent of global high-yield debt." So risks have: (1) risen, and (2) migrated into the less manageable, more poorly monitored and understood sub-system.

"At the same time, the fund management industry has become more concentrated. The top 10 global asset management firms now account for more than $19 trillion in assets under management." So risks have: (3) concentrated behind fewer black boxes of management strategies.

With (1)-(3) above you have: "The combination of asset concentration, extended portfolio positions and valuations, flight-prone investors, and vulnerable liquidity structures have increased the sensitivity of key credit markets, increasing market and liquidity risks."

That's IMF-speak for 'sh*t about to hit the fan'. In more academic terms, Nassim Taleb - in 2011 article in Foreign Affairs said: "Complex systems that have artificially suppressed volatility tend to become extremely fragile, while at the same time exhibiting no visible risks. Such environments eventually experience massive blowups, catching everyone off-guard and undoing years of stability or, in some cases, ending up far worse than they were in their initial volatile state. Indeed, the longer it takes for the blowup to occur, the worse the resulting harm in both economic and political systems."


In 2008-2011 GFC, global economy had a buffer: the Emerging Markets. These fared better than advanced economies precisely because regionalisation has enabled them to offset the risk transmission channels that globalisation has created. But what about now? This time around, the buffer is no longer there. Quoting IMF: "Emerging markets are more vulnerable to shocks from advanced economies, as they now absorb a much larger share of the outward portfolio investment from
advanced economies. A consequence of these stronger links is the increased synchronization of asset price movements and volatilities." Translation: if sh*t does hit the fan, there won't be an umbrella big enough to cover everyone… nay, anyone…


But IMF does another useful thing in its GFSR report. It evaluates the impact of the credit risks present. "To illustrate these potential risks to credit markets, this report examines the impact of a rapid market adjustment that causes term premiums in bond markets to revert to historic norms (increasing by 100
basis points) and credit risk premiums to normalize (a repricing of credit risks by 100 basis points)." Now, note - they are not suggesting any risk-run on the markets, nor change in sentiment of any variety. They are just measuring what will happen if *historical norms* were to prevail (for comparison, however, that norm in the euro area implies credit risks and term premia repricing by more like 200 basis points).

"Such a shock could reduce the market value of global bond portfolios by more than 8 percent, or in excess of $3.8 trillion. If losses on this scale were to materialize over a short time horizon, the ensuing portfolio adjustments and market turmoil could trigger significant disruption in global markets." You don't say… sure they will. Remember that the ECB is hoping to deliver roughly USD1 trillion addition to its balance sheet through extraordinary measures, such as TLTROs and ABS purchases. And the shock is almost 4 times that of the ECB extraordinary efforts. What happens, then, with the euro area banks that are so stuffed with Government bonds and corporate debt they are making even thick-necked ECB squirm? Oh, right, they will need to either absorb these losses (which can be of the size of the GFC-induced write downs) or pretend that their bonds holdings are not subject to risks, just as the entire world will see them as being subject to huge risks. Take your pick - either we have an insolvent banking system or we have a dishonest banking system… or may be both… or may be we already have instead of *will have*…


The IMF is always keen on suggesting what needs to be done. But, alas, the Fund has now been devoid of any new ideas on all policy fronts for some time. Ditto on the topic of global financial stability. IMF says: "Managing risks from an ongoing overhaul in bank business models to better support economic risk taking. The policy challenge is to remove impediments to economic risk taking and strengthen the transmission of credit to the real economy." Wait, what? Superficial risk taking stimulation that the IMF said above is the cause of the imbalances is now also the solution to the built up imbalances? Yep, you've heard it right: hair of the dog to the power of 10. "Cure the hangover from 10 pints by downing 10 bottles of vodka…", says Doc. IMF.

But more on the banks in the next post…

7/10/2014: IMF on Global & Euro Area Growth: Cloudy with 40% chance of a storm

My analysis of the IMF 2014-2015 forecasts for the global economy and euro area are now available on Learn Signal Blog: http://blog.learnsignal.com/?p=62 

4/10/2014: IMF on Russia: What Never Hurts Repeating...

As predicted (see here: http://trueeconomics.blogspot.ie/2014/09/2992014-russian-economy-briefing-for.html) IMF came in weighing heavily on the doom for its outlook for Russian economy this week.

In its "Russian Federation: Concluding Statement for the September 2014 Staff Visit" report from  October 1, 2014, the Fund notices (quite a sharp eyesight there) that: "Geopolitical tensions are slowing the economy already weakened by structural bottlenecks."

According to the IMF, the solution is for the Central Bank of Russia (CBR) to "tighten policy rates further to reduce inflation and continue its path towards inflation targeting underpinned by a fully-flexible exchange rate." Investment is falling down, capital flight de-accelerated but remains a problem, deposits are desperately needed for the banks to stay liquid (absent foreign funding sources and coming bonds maturities), so has to kill the economy to keep economy alive dilemma...

On fiscal side, things are ok-ish: "While the projected overall fiscal stance is appropriately neutral in 2015, the needed fiscal consolidation should resume in the following years… The proposed federal budget, which is consistent with the fiscal rule, envisions a loosening in 2015. However, this is offset by a tightening at the sub-federal levels. This strikes an appropriate balance between the need to consolidate in the medium term, with the non-oil deficit remaining near historical high, and the need for supportive fiscal policy in the face of the current downturn." And as I noted in the note linked above: "The use of the National Wealth Fund for domestic infrastructure projects may be appropriate to consider if done in the context of the budget process and subject to appropriate safeguards. The diversion of contributions from the fully-funded pillar weakens the viability of the pension system, creates disincentives to save, and dilutes the credibility of the fiscal rule."

On growth: "The economic outlook appears bleak. GDP is expected to grow by only 0.2 percent in 2014 and 0.5 percent in 2015." Not as gloomy as the World Bank but uuuuugly…
Drivers, predictably are:

• "Consumption is expected to weaken as real wages and consumer credit growth moderate." No… wait… they are already weak and moderated… 
• "Geopolitical tensions—including sanctions, counter-sanctions, and fear of their further escalation—are amplifying uncertainty, depressing confidence and investment. Capital outflows are expected to reach USD 100 billion in 2014 and moderate somewhat but remain high in 2015." Again, no surprises here.
• "Inflation is projected to remain over 8 percent by the end of 2014 mostly due to an increase in food prices, caused by import restrictions, and depreciation of the ruble. In the absence of further policy actions, inflation is expected to stay above target in 2015." That we know too. No surprises here. 

On banks, pretty much same as I have been saying: "Increased oversight and heightened financial stability remain a priority. Banks and the corporate sector are facing a challenging environment due to the weak economy, limited access to external financing, and higher financing costs. Existing financial buffers together with appropriate policy responses by the CBR have limited financial instability thus far. Nonetheless, the current uncertain environment could create difficulties in individual banks and businesses, even in the near term. In case of acute liquidity pressures, emergency facilities should be temporarily offered to eligible counterparties, against appropriate collateral, priced to be solely attractive during stress periods."

On structural side, I would have expected more clarity. Instead, we have more generalities: "Despite the slowdown, the economy is expected to have limited excess capacity owing to structural impediments to growth… Even if [geopolitical] uncertainty dissipates next year, domestic demand and potential growth are projected to remain weak in the medium term due to insufficient investment and deterioration in productivity. Potential growth is projected to be about 1.2 percent in 2015, reaching 1.8 percent in 2019, with downside risks. Structural reforms are needed to provide appropriate incentives to expand investment and allocate resources to enhance efficiency. Protecting investors, reducing trade barriers, fighting corruption, reinvigorating the privatization agenda, improving competition and the business climate, and continuing efforts at global integration remain crucial to revive growth."

Then again, all this you could have heard at our briefing breakfast for IRBA… to stay ahead of the IMF analysis… 

2/10/2014: IMF Report: Risk Taking Behaviour in Banks

As some of you might have noticed, I started to contribute regularly to Learn Signal Blog last week. This week, my post there covers IMF Global Financial Stability Report update released this week, dealing with the drivers for risk taking behaviour of the banks prior to and since the Global Financial Crisis: http://blog.learnsignal.com/?p=46

4/9/2014: Repaying Ahead of Schedule: Ireland & IMF Loans

Last week Portugal's Expresso published a big article on Irish plans to repay earlier the IMF loans. The link is here: http://fesete.pt/portal/docs/pdf/Revista_Imprensa_30_e_31_Agosto_2014.pdf (pages 37-38)

My view on the subject in full:

1-      The Irish hurry is politically engineered or they understand that the present low sovereign bond yields mood can be a short-term window of opportunity in the Euro area?

In my view, Irish Government interest in refinancing IMF loan is driven by both political and economic considerations. On political front, following heavy defeats in the European and Local elections, the ruling coalition needs to deliver new savings in Exchequer spending to allow for a reduction in austerity pressures in Budget 2015 and more crucially support increased giveaways in the Budgets in 2016 and 2017. Savings of few hundred millions of euros will help. And an ability to claim that the IMF loans have been repaid, even if only by borrowing elsewhere to fund these repayments can go well with the media and the voters tired of the Troika. On economic incentives side, the Government clearly is forwarding borrowing and re-profiling its bonds/debt maturity timings to minimise short-term pain of forthcoming repayments and to safeguard against the potential future increases in the rates and yields. In addition, there is a very apparent need to refinance the IMF loans as the interest charges on these is out of line with the current funding costs for the Government. It is worth noting here that the Irish Government is far from being homogeneous on the incentives side. For example, from Minister for Finance, Michael Noonan's statements, it is pretty clear that the incentives to refinance the IMF loans are predominantly economic and financial. On the other hand, for majority of the Labour Party ministers and a small number of the Fine Gael Cabinet Ministers, the incentives are more political.


2-      The move is also a way of reducing the “official sector” debt in the overall sovereign debt composition (higher than 50 per cent)?

The issue of the 'official sector' debt as opposed to the total public debt is less pressing for the Irish state. Larger share of the official sector debt in total debt composition provides short-term support for bonds prices, as higher official sector debt holdings imply lower private sector debt holdings in the present. However, in the future, the expectation in the markets is that the official sector debt will be refinanced via private markets, thus higher share of official sector debt today is a net negative for the future debt exposures. The result is that higher official share of debt is supporting lower current yields, but rises future yields, making the maturity curve steeper, ceteris paribus. In the current environment, Irish government is not significantly exposed to shorter-term debt markets, but it is exposed to longer termed debt roll-over demands that are consistent with political cycle. Reducing official exposures, therefore, can be supportive of the longer-term view of the debt issuance by the state. However, the issue is marginal to Irish policymakers and certainly secondary to the political and economic benefits the early repayment of the IMF loans brings.


3-      This initiative is useful to upgrade the sovereign debt sustainability?

In the short run, if successful, the initiative will provide improvement in the sovereign cash flows, but will cause the rebalancing of some private portfolios of Irish government debt. In the longer run, the direct effect of a successful refinancing of the IMF loans will most likely lead to little material change in the Government debt dynamics. The issue of the greater longer term concern is what the Irish Government is likely to do with any savings achieved through the debt restructuring. If the funds were to be used to fund earlier closing off of other official loans, there is likely to be a positive impact in terms of markets expectations on supply of Government bonds in the future and the direction of Irish fiscal reforms, both of which will support better risk assessments of the sovereign debt and Irish bonds. This is unlikely, however, due to the strong political momentum in favour of spending the new savings on reversing in part past savings achieved via public sector spending cuts and wages costs moderation. Such a move would likely be detrimental to Ireland's debt sustainability in the longer run. A third alternative is to deploy savings to reduce austerity pressures in the Budget 2015 across tax and spend areas. Tax reductions can be productive in stimulating sustainable growth and thus improving the fiscal position of the state in the longer run; spending cuts reductions will simply be consumed by remaining inefficiencies within the public sector.


4-      The Irish had some interesting political initiatives during the bail-out and post-bail-out period. First they change the annual promissory notes repayments into very long long debt (a kind of soft debt restructuring of 25 billion, 12 per cent of total public debt); then they decided for a “clean” exit opting out from the OMT constraints; and now they take the move to get out of IMF loans. In the framework of the Euro are peripheral countries this is an “innovation”?

The Irish government has taken a clearly distinct path from other euro area 'peripheral' states. However, this path is contingent on a number of relatively idiosyncratic features of the crisis in Ireland. Restructuring of the IBRC Promissory Notes was required due to political pressures of facing continued and clearly defined cost of the IBRC restructuring, but also by the significant pressures from the ECB to close off the ELA lines to IBRC, as well as Frankfurt's unhappiness with the structure of the Promissory Notes. In the end, this policy 'innovation' basically traded off short term savings for longer term costs and increased longer term uncertainty. It achieved substantial improvements in cash flow up front, but, depending on the schedule of bonds sales into the future, created little real savings over the life time of the loans. In the case of 'clean exit', Ireland benefited from the fact that a bulk of its deficits were incurred in extraordinary supports for the banks through 2011. In this sense, the Government had two years of relative stabilisation and decline in fiscal pressures before exiting the Troika programme. No other country in the euro 'periphery' had such deficit and debt dynamics. The move to refinance the IMF loans, however, is probably the first significant policy lead that Ireland deployed, as this move (if successful) will be paving the way for Spain, Portugal and Greece to follow in the future. Throughout the second stage of the euro area sovereign debt crisis (2012-present), the Irish Government deserves the credit for being recognised as being the one most actively seeking marginal improvements in the cash flow and rebalancing of debt costs and maturities within the euro area 'periphery'. But in part, this activism is also down to the fact that Ireland had a longer run in the debt crisis than any other 'peripheral' states and it deployed a plethora of various programmes, creating a policy map that is a patchwork of temporary and poorly structured programmes, like the IBRC Promissory Notes. Repairing these programmes offers Ireland a rather unique chance to get an uplift on some of its exposures.

18/7/2014: IMF Approves Ukrainian Funding... & Pushes the Country into Deeper Austerity

IMF Announced agreement with Ukraine on First Review under the Stand-By Arrangement. Comments in italics are mine.

Mr. Nikolay Gueorguiev, mission chief for Ukraine, made the following statement today in Kyiv: “The mission has reached understandings with the Ukrainian authorities on the policies necessary for the completion of the first review under the SBA… the authorities have committed to take a number of policy actions prior to the completion of the review. …The completion of the review would enable the disbursement of ...about US$1.4 billion. The mission found that policies have generally been implemented as planned and that all but one of the performance criteria for end-May have been met. All structural benchmarks for the first review have been met as well, although some of them with a delay. This is a notable achievement as the intensification of the conflict in the East means that the program has been implemented in an environment that is considerably more difficult than anticipated when it was launched."

It is worth noting that IMF generally does not lend to countries in a state of civil war or major insurgency. Presumably, when it does lend to such countries, the conditions for lending allow for the risk of acceleration of the conflict. It appears IMF is taken by the surprise by the continuation of the conflict and by amplification in both the Ukrainian Government offensive and the rebels' defensive stances:

“The conflict is putting increasing strain on the program [after just a MONTH of the programme existence?!] and a number of key elements of the macroeconomic framework have had to be revised: (i) economic prospects have deteriorated notably, and GDP is now expected to contract by 6.5 percent this year, compared to 5 percent when the program was adopted; (ii) a shortfall in revenue collections in the East, higher security spending, and lower-than-expected debt collection by Naftogaz will cause fiscal and quasi-fiscal deficits and financing needs to rise above the programmed path; and (iii) higher-than-expected capital outflows and monetization of fiscal deficits are causing pressures on net international reserves."

Ok, one can excuse IMF for missing the forecast, but points (ii) and (iii) risks were predictable and material even BEFORE the programme started. One has to wonder, did IMF extend funds under the assumptions that 

1. The conflict will somehow go away without major costs on the ground?
2. The Government will be able to engage in revenue collection in rebel-controlled areas?
3. Naftogaz will be able to do more successfully that which the Government is failing to do?
4. Capital outflows will be benign and monetization of fiscal deficits will not be aggressive to compensate for (1)-(3)?

Things get worse. “Notwithstanding the authorities' continued commitment to the program and good record of implementation so far, the authorities have decided to take a number of compensatory measures to limit the negative impact of the conflict in the short run, and ensure that key program objectives are achieved over the period of the two-year program".

This sounds actually fine, except when you start reading into what exactly the IMF prescribed for the authorities and what they did in the wake of this prescription:

• Point 1: "On fiscal policy, the authorities have decided to implement a package of revenue and expenditure measures, amounting to 1 percent of GDP in 2014, offsetting the effect of increased security spending by other expenditure cuts. They have also committed to limiting wage and pension increases to the level of inflation in 2015, continuing reform-based reduction in public sector employment, and exercising tight control over discretionary spending." Set aside the issue of 2015. Look at NOW. The country is in a civil war, it is facing into the prospect of medium-term rebuilding and peace-building. Government response: cut spending, increase allocation to defense. The latter is necessary, no doubt. But the former is simply inconsistent with the need to build peace and rebuild infrastructure and businesses and peoples' lives. De facto, IMF is pushing Ukraine into austerity just at the time as the country is going through a civil war! As a fiscal hawk, I have to ask if this is simply mad?
• Point 2: "In the energy sector, the authorities are taking additional actions to strengthen payment discipline and compliance, such as pursuing payments from collectible accounts and seizing assets if repayment is not forthcoming. They are also preparing to restructure Naftogaz with a view to improve the transparency of its operations and reduce costs." Should second take place before the first? Should Naftogaz be reformed to increase its legitimacy and democratic acceptance and only AFTER that should it pursue more aggressive collection? Remember, again, this is not a society with comfortable margins of income and security!
• Point 3: "The authorities are taking steps toward strengthening governance and improving the business climate. A recent diagnostic study has identified major areas for reforms. Based on the study’s recommendations the authorities plan to implement a wide range of anti-corruption measures, including establishment of an independent anti-corruption agency with broad investigative powers and adoption of legislative amendments to support the anti-corruption effort." This is an area where progress is necessary and vital. And it is good to see Ukrainian Government taking serious reps here, if only academic ones for now.

I will skip monetary policy points identified by the IMF - these are technical and, for now, theoretically supportive of the economy.

So two sets of 'compensatory' policies are de facto a road to disaster, one is the road toward potentially better future and one is technically supportive of the present. 

Still, the Fund is pleased: “On the strength of these compensatory measures and continued implementation of other policies agreed when the program was approved, staff is confident that the program can achieve its fundamental objectives of restoring internal and external macroeconomic equilibrium, generating sound and sustainable economic growth, and strengthening economic governance and transparency. In particular, while the combined fiscal and quasi fiscal deficits are projected to amount to 10.1 and 5.8 percent of GDP in 2014 and 2015, respectively—compared to previous targets of 8.5 and 6.1 percent—the structural adjustment is stronger by ½ percent of GDP over 2014-16 and the headline deficit will be below the originally programmed path by 2016. Similarly, gross reserves will be only some US$3.4 billion lower than programmed by end-2015. While external debt to GDP will peak 7 percentage points higher than programmed at end-2015, it will be on a steady downward slope by the end of the program, suggesting that external viability is not at risk." This is a bag full of estimates, assertions and forecasts. We know how these play out in reality even in countries not undergoing a civil war conflict.

But it gets better: “The program hinges crucially on the assumption that the conflict will begin to subside in the coming months." How many months? No idea. What happens in the post-conflict process? No idea. How much destruction will be brought about in resolving the conflict? No projections. Hope, hope and more IMF money… while Ukrainian people and State are doing all the heavy lifting.

I noted months ago that Ukraine will need a Marshall Plan, not an 'emergency liquidity support'. It still does - more than ever. This is not even being discussed.

7/7/2014: About those Global Growth Uplift Forecasts...

Last week, IMF updated its World Economic Outlook with a fresh upgrade to global growth forecast for 2015. Lot's of media miles have been travelled over this upgrade (here's one example). And, in fairness, the IMF might be right: there has been some firming up in global growth in recent months.

More significantly, the firming up is coming on foot of stronger performance of the advanced economies, where the cycle is now clearly indicating early stages recovery.

The same positive momentum has been confirmed in a number of expert surveys, e.g. BlackRock Investment Institute and McKinsey Global Institute and so on.

Still, just to be on the safer side, it is worth taking IMF forecasts in perspective. The Fund has been systematically wrong in its outlooks for Global and Advanced economies growth in recent years. Here is some evidence.

First: take the same period estimates (April-published estimates for the same year growth). These should be pretty easy to predict, as by the date of their release, the Fund has contemporaneous data flows on the economies (e.g. PMIs) and previous year dynamics pretty much sorted. Table below shows that, despite some data already being available, the Fund has rather varied experience with its estimates. And when it comes to the World Economy estimates, things have goo ten worse over the last three years, compared to the 5 years range.

Second, let's look at one year-ahead forecasts. Here, things are better in most recent three years, but they are not brilliant, especially when it comes to the Fund forecasts for the Euro Area. 3-5 year average over-estimate of growth is to the tune of 0.76-1.05% per annum. When it comes to World growth forecasts, these too turn out to be too optimistic, in the range of 0.56-0.60% annually.

Third: over two years forecasts, Fund's performance is worse: for the World economy forecasts tend to be on average more optimistic than the outrun by between 0.68% and 1.04% per annum. The same range for Euro Area is 1.19% to 1.53%.

Two charts illustrate the above. First: One-year ahead forecasts compared to outrun:

Next: 2008-2012 forecasts and 2013 (April) estimate for growth in 2013 compared to actual outrun:

Someone criticised my choice of the period covered, but the entire point of my argument here is not that the IMF is bad at forecasting (it is no worse than many other sources), but that forecasts at the times we live in are by their nature highly restrictive. That is, of course, not the notion one gets from reading business media reports of every IMF (or other major source) forecasts update.

So the net conclusion must be that there are indicators of global growth firming up… but I would't be rushing to buy on foot of IMF statements about 2015… At least not until there is a clear and established trend along which the forecasters can glide smoothly. When we need forecasts most, they are least useful… such is reality.