23/4/2014: Some scary reading from the Eurostat...

Eurostat published full comparatives on key fiscal performance indicators across the EU and euro area for 2013. Here are three summary tables comparing euro 'periphery' states against each other and the EU18. You can click on images to enlarge:

First data summary:

Second: Ireland's share of the mess:

Third: Ireland's position within the 'periphery':

And key takeaways are:

1. In 2013, after years of austerity and pain, Irish Government deficit (7.2% of GDP) was the second worst in the euro 'periphery' group.
2. By relative comparative to EA18 (33% and 50% over EA18 levels), Ireland ranks worse than Italy, Cyprus and Portugal, and Spain (we have more 'red'/'green' cells).
3. In cumulative terms, 2010-2013 years were brutal to Ireland: we posted worst cumulated Government Deficits over this period and 2nd worst increases in Government debt.

Note: data is taken from http://epp.eurostat.ec.europa.eu/cache/ITY_PUBLIC/2-23042014-AP/EN/2-23042014-AP-EN.PDF

3/4/3014: Latest Country Risk Updates: April 2014

Latest updates to ECR Euromoney Country Risk scores (higher score implies lower risk):

Two notable sets of changes:

1. Russia and Ukraine scores continue to fall, with Ukraine still leading Russia
2. Euro area 'periphery' scores continue to rise, with Portugal and Ireland showing biggest improvements.

14/2/2014: BlackRock Institute Survey: N. America & W. Europe, February

BlackRock Investment Institute released its latest Economic Cycle Survey for EMEA region was covered here http://trueeconomics.blogspot.ie/2014/02/822014-blackrock-institute-survey-emea.html

Now, on to survey results for North America and Western Europe region. Emphasis is, as always, mine.

"This month’s North America and Western Europe Economic Cycle Survey presented a positive outlook on global growth, with a net of 65% of 110 economists expecting the world economy will get stronger over the next year, (18% lower than within January report).

The consensus of economists project mid-cycle expansion over the next 6 months for the global economy."

First, 12 months ahead outlook: "At the 12 month horizon, the positive theme continued with the consensus expecting all economies spanned by the survey to strengthen except Norway and Denmark, which are expected to remain the same."

Note that Ireland has moved closer to Eurozone average, away from 1st position in the chart it occupied in 2013.

Now, for 6 months outlook: "Eurozone is described to be in an expansionary phase of the cycle and expected to remain so over the next 2 quarters. Within the bloc, most respondents expect only Greece to remain in a recessionary phase at the 6 month horizon. Over the Atlantic, the consensus view is firmly that North America as a whole is in mid-cycle expansion and is to remain so over the next 6 months."

Note: Red dot denotes Austria, Norway and Switzerland.

Notable changes on previous: Greece position is much improved compared to 2013 when it occupied the North-Eastern most corner. Denmark is now in a weaker outlook position than Greece with higher expectations of a recessionary phase 6 months out. Ireland is bang-on on 10 percent assessing current state of economy as recessionary and same percentage of analysts expecting economy to be in a recession over the next 6 months. Coverage for Ireland is pretty solid in terms of number of analysts surveyed, so the above, in my opinion, shows that analysts consensus expects economy to strengthen over the next 6-12 months with strong support for a modest uplift.


Note: these views reflect opinions of survey respondents, not that of the BlackRock Investment Institute. Also note: cover of countries is relatively uneven, with some countries being assessed by a relatively small number of experts.

12/2/2014: Jobless Recoveries post-Financial Crises: Solutions Menu?

Next few posts will be touching on some interesting new research papers in economics and finance… in no particular order. Please note, no endorsement or peer review analysis from me here.

To start with: NBER WP 19683 (http://www.nber.org/papers/w19683) by Calvo, G., Coricelli, F. and Ottonello, P. "JOBLESS RECOVERIES DURING FINANCIAL CRISES: IS INFLATION THE WAY OUT?" from November 2013.

The paper discusses 3  traditional policy tools to mitigate jobless recoveries during financial crises: 

• inflation
• real devaluation of the currency, and  
• credit-recovery policies. 

The nominal exchange rate devaluation tool not being available to the euro area economies independently of the ECB, we have by now heard a lot about inflation (the need for). At the same time, real devaluation tool includes fabled European cost-competitiveness measures. 

Here's the pre-cursor to the paper: "The slow rate of employment growth relative to that of output is a sticking point in the recovery from the financial crisis episode that started in 2008 in the US and Europe (a phenomenon labeled “jobless recovery”). The issue is a particularly burning one in Europe where some observers claim that problem economies (like Greece, Italy, Ireland, Spain, and Portugal) would be better off abandoning the euro and gaining competitiveness through steep devaluation. This would be a momentous decision for Europe and the rest of the world because, among other things, it may set off an era of competitive devaluation and tariff war."

Hypotheticals aside, the study starts by "digging more deeply into the relationship between inflation and jobless recovery, also considering the possible role of real currency depreciation and resource reallocation (between tradables and non-tradables)."

As authors note: "This discussion is particularly relevant for countries that, being in the Eurozone, cannot follow a nominal currency depreciation policy to mitigate high unemployment rates 

(e.g. Greece, Italy, Ireland, Spain, and Portugal)."

First finding is that there is "some evidence suggesting that large inflationary spikes (not a higher inflation plateau) help employment recovery. Even in high-inflation episodes, inflation typically returns to its pre-crisis levels…" so the effects of the induced inflation wear out quasi-automatically.

Second finding is that "(independent of inflation) financial crises are associated with real currency depreciation (i.e., the rise in the real exchange rate) from output peak to recovery. This shows that the relative price of non-tradables fails to recover along with output even if the real wage does not fall, as is the case in low-inflation financial crisis episodes. This implies that, contrary to widespread views, nominal currency depreciation may eliminate joblessness only if it generates enough inflation to create a contraction in real wages; real currency depreciation or sector reallocation might not be sufficient to avoid jobless recovery if all sectors are subject to binding credit 

constraints that put labor at a disadvantage with respect to capital." In other words, there goes Argentina's fabled hope for recovery via devaluations.

Third finding extends the second one to the case closer to euro area peripherals: "Similarly, for countries with fixed exchange rates, “internal” or fiscal devaluations during financial crises are likely to work more through reductions in labor costs than changes in relative prices and sectoral reallocation obtained through taxes and subsidies affecting differentially tradable and non-tradable sectors." In other words, internal devaluations work, and they work via cost competitiveness gains and exporting sector repricing relative to domestic.

Tricky thing, though: "However, neither nominal nor real wage flexibility can avoid the adverse effects of financial crises on labor markets, as wage flexibility determines the distribution of the burden of the adjustment between employment and real wages, but does not relieve the burden from wage earners." which means that a jobless recovery is more likely under internal devaluation scenario.

Fourth finding: "Our findings highlight the difficulty in simultaneously preventing jobless and wageless recoveries, and suggest that if the goal is to avoid jobless recovery, the first line of action should be an attempt to relax credit constraints." Oops… but credit constraints are not being relaxed in the case of collapsed financial systems and debt overhang-impacted households in the likes of Ireland.

More on this: "Only direct credit policies that tackle the root of the problem seem to be able to help unemployment and wages simultaneously. …common sense suggests the following conjectures. In advanced economies, quantitative easing operations, especially if they involve the purchase of “toxic” assets, can have an effect on increasing firms’ collateral and relaxing credit constraints that affect employment recovery." But, of course, in Ireland these measures failed to trigger such outcomes - Nama has been set up for two years now and credit restart is still missing. May be one might consider the fact that targeting of bad assets purchases is needed? May be buying up wasteful real estate assets was not a good idea and instead we should have pursued purchases and restructuring of mortgages? Sort of what Iceland (partially and with caveats) did?

Overall, tough conclusions all around. 

17/1/2014: BlackRock Institute Survey: N. America & W. Europe, January

BlackRock Investment Institute released its latest Economic Cycle Survey for EMEA region was covered here: http://trueeconomics.blogspot.ie/2014/01/1712014-blackrock-institute-survey-emea.html.

Now, on to survey results for North America and Western Europe region. emphasis is always, mine.

"This month’s North America and Western Europe Economic Cycle Survey presented a positive outlook on global growth, with a net of 83% of 109 economists expecting the world economy will get stronger over the next year, marginally higher than 81% reported in December. The consensus of economists project mid-cycle expansion over the next 6 months for the global economy."

"At the 12 month horizon, the positive theme continued with the consensus expecting all economies spanned by the survey to strengthen except Portugal, which is expected to remain the same."

Of note:

• Ireland is now moved into the middle of 'growth distribution' from previous position firmly ahead of the entire region. Italy and Spain are now posting stronger expectations than Ireland.
• Eurozone expansion expectations are still lagging those of the UK and the US.
• Germany continues to lead the Eurozone expectations.

Out to 6 months horizon: "Eurozone is described to be in an expansionary phase of the cycle and expected to remain so over the next 2 quarters. Within the bloc, most respondents expect only Greece to remain in a recessionary phase at the 6 month horizon."

"Over the Atlantic, the consensus view is firmly that North America as a whole is in mid-cycle expansion and is to remain so over the next 6 months."

Red dot denotes Austria, Germany, Norway and Switzerland



Note: these views reflect opinions of survey respondents, not that of the BlackRock Investment Institute. Also note: cover of countries is relatively uneven, with some countries being assessed by a relatively small number of experts.

15/1/2014: Things are fine... things are working...

On foot of disastrous (for euro area) long range forecasts from DG ECFIN (covered here: http://trueeconomics.blogspot.ie/2014/01/1412014-dg-ecfin-latest-long-range.html), Morgan Stanley latest forecast for the global economy is here:

H/T Fabrizio Goria @FGoria

2012 outrun: euro area = lowest growth
2013 estimated outrun: euro area = lowest growth
2014 forecast: euro area = lowest growth
2015 forecast: euro area = lowest growth on par with Japan

Unpleasant, to put it mildly... Meanwhile, here's some bragging about the great euro area achievements... obviously not to be confused with those stated above... via ESM Press Office:

@ESM_Press:
#ESM MD Klaus #Regling in hearing with EU Parliament Members, Strasbourg: lv/stream at 15:00 http://www.europarl.europa.eu/ep-live/en/schedule …
#Regling: I welcome this debate because I think transparency & discussion are essential ingredients for lively democracies
#Regling: not my role to defend troika, support overall eco. approach. €area faced existential crisis with no tools, so troika was set up
#Regling: I worked for #IMF & know well #IMF program design which was model for program of €countries under assistance
#Regling: our critics miss the point. GR, IR, POR, CY faced choice: buying time with #EFSF/#ESM program or collaps w/ adjustment overnight
#Regling: no #EFSF/#ESM program would have meant risk of leaving €area; polls show citizens of concerned countries want to stay in €area
#Regling: disagree that there is no democratic control for programs; troika advises, political decision is taken by elected governments
#Regling: In POR & IR even opposition parties at the time, which are today in government, committed to assistance programme
#Regling: decisions on #EFSF/#ESM financial assistance is for national gov/parl because risk is on national budgets
#Regling: am not minimizing the difficulties that the countries are facing, especially unemployment
#Regling: there are clear signs that our strategy is working, in Dec IRL & ES had successfully exited their programs.

Happy times... and -0.6-0.5+0.6+1.1 is just a fine, fine, fine arithmetic... cause you know... 'things are working'...

16/12/2013: Troika Consultancies... via EUObserver

A very interesting article on the EUObserver.com today (disclosure: I contributed a comment) on the issue of professional advisory services relating to the banks and fiscal crises: "Troika consultancies: A multi-million euro business beyond scrutiny"

12/12/2013: BlackRock Institute Survey: N. America & W. Europe, December 2013

BlackRock Investment Institute released its latest Economic Cycle Survey for EMEA region was covered here: http://trueeconomics.blogspot.ie/2013/12/12122013-blackrock-institute-survey.html.

Now, on to survey results for North America and Western Europe region:

"This month’s North America and Western Europe Economic Cycle Survey presented a positive outlook on global growth, with a net of 71% of 115 economists expecting the world economy will get stronger over the next year, (6% higher than within the October report)."

Forward outlook:

• "The consensus of economists project a shift from early cycle to mid-cycle expansionary over the next 6 months."
• "At the 12 month horizon, the positive theme continued with the consensus expecting all economies spanned by the survey to strengthen except Norway, where we currently have a low participation rate."

Euro area: "The consensus outlook for the Eurozone continued to improve, where the 6 month forward outlook shifted from 87% to 90% expecting the currency-bloc to move to an expansionary phase. Within the bloc, most respondents expect only Greece to remain in a recessionary phase at the 6 month horizon."

North America: "Over the Atlantic, the consensus view is firmly that North America as a whole is in mid-cycle expansion and is to remain so over the next 6 months."

Note Ireland's position: vis-à-vis euro area (weaker) in the first chart and overall (strong) in the second chart.

 Note: Red dot denotes Austria, Canada, Germany, Norway and Switzerland.

Note: these views reflect opinions of survey respondents, not that of the BlackRock Investment Institute. Also note: cover of countries is relatively uneven, with some countries being assessed by a relatively small number of experts.

14/11/2013: With banks or without, things are heading for desperate in Italy...

The banks stress tests are coming up and the Euro periphery system is quickly attempting to patch up the massive cracks in the facade. The key one is the continued over-reliance of banks on sovereign-monetary-banking loop of cross-contagion. The banking system weakness is exemplified by Italy: Italian banks are the main buyers of Italian sovereign debt, which in turn means that Italian government stability rests on the banks ability to sustain purchasing, which implies that the ECB (with an interest of shoring up Italian economy) is tied into continuing to provide cheap funding necessary for the Italian banks to sustain purchasing of Italian Government debt… and so on.

Three key facts are clouding this 'stability in contagion' picture:

1. Banks in Italy and elsewhere are not deleveraging fast enough to allow them repay in full the LTROs coming due January and February 2015;
2. Banks in Italy are now fully saturated with italian Government debt, posing threats to future supply of Italian bonds and putting into question the robustness of the banking stress tests; and
3. Italian Government is running out of room to continue rolling over its massive debts.

If all 3 risks play out at the same time or close to each other, things will get testy for the Euro.


Point 1: Banks in the euro zone continue to carry assets that amount to three times the size of the euro area economy. This puts into question the core pillar of banking sector 'reforms' that the ECB needs to see before the banking union (BU) comes into being. The ECB needs to have clarity on quality of assets held by banks and, critically, needs to see robust deleveraging by the banks before th BU can be launched. If either one of these conditions is not fully met, the ECB will be taking over the banking system that is loaded with unknown and unpriced risks.

Per recent ECB data, Banks in the euro zone held EUR29.5 trillion in total assets by the end of 2012. That is down 12% on 2008. Too slow of a pace for a structural deleveraging. Worse, the bulk of the adjustments was back in 2009 and little was done since. Which makes the level of assets problem worse: on top of having too many assets, the system has virtually stopped the process of deleveraging. Knock on effect is that the firming of asset markets in Europe in recent two years was supported by a slowdown in assets disposals by the banks. In turn, this second order effect means that many banks assets on the books are superficially overvalued due to their withholding from the market. Nasty, pesky first and second order effects here.

Worse. Pressure on assets side is not limited to the 'periphery'. German banks held EUR7.6 trillion in total assets at the end of 2012, followed by the French banks with EUR6.8 trillion. Spain and Italy's banking sectors came in distant second and third, with EUR3.9 trillion and EUR2.9 trillion in total assets.

Capital ratios are up to the median Tier 1 ratio rising from 8% in 2008 to 12.7% in 2012. Quality of this capital is, however, subject to the above first and second order effects too - no one knows how much of the equity valuation uplift experienced by the euro area banks in recent months is due to banks reducing the pace of assets deleveraging…


Point 2: Assets quality in some large banking systems is too closely linked to the sovereign bonds markets. Italy is case in point. ECB tests are set to exclude sovereign debt risk exposures, explicitly continuing to price as risk-free sovereign bonds of the peripheral euro area states. But in return for this, the ECB might look into gradually forcing the banks to limit their holdings of sovereign bonds. This would be bad news for Italian banks and the Italian treasury.

The problem starts with a realisation that Italian banks are now primarily a vehicle for rolling over Government debt. Italy's Government debt is over EUR2 trillion. EUR397 billion of that is held by Italian banks. Another EUR200-250 billion can be safely assumed to be held by Italian banks customers who also have borrowings from these banks. Any pressure on the Italian sovereign and the ca EUR600 billion of Italian debt sloshing within the banking system of Italy is at risk.  That puts 20.7 percent of Italian banks assets at a risk play. [Note: by some estimates, Italian banks directly hold around 22% of the total Italian Government debt - close to the above figure of EUR397 billion, but way off compared to Spanish banks which are estimated to be holding 39% of the Spanish Government debt, hence all of the arguments raised in respect of Italy herein also apply to Spain. A mitigating issue for Spain is that it's debt levels are roughly half those of Italy. An exacerbating issue for Spain is that its deficit is second highest in Europe, well ahead of Italain deficit which is relatively benign).

Worse, pressure cooker is now full and been on a boiler for some time. In the wake of LTROs, Italy's banks loaded up on higher-yielding Italian Government debt funded by cheap LTRO funds - Italian banks took EUR255 billion in LTROs funds. In August 2013, Italian banks exposure to Italian Government debt hit EUR397 billion, just shy of the record EUR402 billion in June and double on 2011 levels. I

Either way, with or without explicit ECB pressure, Italian banks have run out of the road to keep purchasing Italian Government debt. Which presents a wee-bit of a problem: Italy needs to raise EUR65 billion in new debt in 2014. Italy is now in the grip of the worst recession since WWII and its debts are rising once again.

Chart below shows that:
1) Italian Sovereign exposures to external lenders declined in the wake of the LTROs, but are back to rising in recent quarters;
2) Italian banks reliance on foreign funding rose during the LTROs period, declined thereafter and is now again rising; while
3) Other (non-financial and non-state) sectors remain leveraged at the levels consistent with late 2006.

Point 3: Overall, Italian Treasury is now competing head on with the banks for foreign lenders cash and Italian corporate sector is being forced to borrow abroad in absence of domestic credit supply. Foreign investors bought almost 2/3rds of the last issue of Italian bonds, but how much of this appetite can be sustained into the future is an open question. Foreign investors currently hold slightly over a third of Italy's debt, or EUR690 billion, down from more than EUR800 billion back in 2011. The Italian Government is now turning to Italian households to mop up the rising supply. Italy issued EUR44 billion worth of inflation-linked BTP Italia bonds with 4 year maturity. As long as inflation stays low, the Government is in the money on these.

Next in line - desperate measures to raise revenues. Per recent reports, there is a proposal working its way through legislative corridors of power to raise tax on multinational on-line companies trading in Italy. The likes of Google, Amazon and Yahoo will be hit with a restriction on advertisers to transact only with on-line companies tax-resident in Italy, per bill tabled by the center-left Democratic Party (PD). The authors estimate EUR1 billion annual yield to the state - a tiny drop in the ocean of Italian government finances, but also a sign of desperation.

11/10/2013: Euromoney Credit Risk Analysis: Q3 2013

The Euromoney Country Risk survey results are out for Q3 2013 and here is some analysis with a comment from yours truly. As usual, emphasis is mine:

"Some 101 of the 186 countries surveyed have succumbed to lower ECR scores (increased risk) since June, which, with 17 unchanged, leaves just 68 safer, according to the views of global economists and other country-risk experts surveyed during the third quarter."

Core global drivers:

• US federal shutdown & looming debt-ceiling deadline 
• Concerns about monetary tapering, and 
• Europe’s fiscal problems.

"... the shake-out that occurred in the wake of the collapse of Lehman Brothers in September 2008 has still left the majority of sovereigns – some 75% in all – with vastly increased risk levels than before the crisis; in the case of the eurozone periphery - Cyprus, Greece, Ireland, Italy, Portugal and Spain – an astonishing 25 to 50 points each."

Notice that in the above, Euro area shows the highest rate of deterioration of any region, save the CIS, and CIS deterioration is in part driven by links to the Euro area.

Per ECR: "US causing fewer flutters for G10 risk profile than Europe’s problems."

"Within the G10 group of leading industrialized nations, the US is not considered a particularly riskier prospect in spite of its latest political troubles. The world’s biggest economy has slipped to 17th in the rankings, but its score is still higher than at the start of the year."

In the case of Europe, core downward pressure drivers are:

• "The unwillingness to see the euro weaken", 
• "A banking sector still in need of repair",
• "Weak political resolve on budget issues"and 
• "Individual country economic prospects heading in different directions.”

Per ECR: "Indeed, greater concerns are reserved for 21st-placed France, with its fiscal targets missed and the economy remaining sluggish, as well as for Aaa-rated Sweden, in fifth spot, where a moribund economy and a government relaxing fiscal policy with tax cuts ahead of next year’s parliamentary election are gnawing away at the sovereign’s gold-plated creditworthiness."

"Both countries have seen their scores slip the most (by 0.7 points each since June), within a group where Germany is flat-lining as it awaits the formation of a new government..."

"In the European Union, 17 of its now 28 member states are riskier, whether compared with June or since the end of last year..."

"Remarkably, in spite of the recoveries witnessed in some of the bailout countries, notably Ireland and Portugal, the eurozone crisis is continuing to cause ripples, with no fewer than 10 of the 17 member states still succumbing to lower scores during Q3. This comes amid weak economies, excessively high unemployment rates, spikes in political risk, trade-weighted appreciation of the euro, and Greek borrowing concerns re-emerging to keep the region’s worst performer grounded on 34 points."

Notice Ireland's strong position second to Austria in terms of overall gains in the risk scores (lower risk).

"Constantin Gurdgiev, another ECR contributor, based in Dublin, says: “The changes in risk assessments broadly reflect improved sentiment across the euro area, consistent with both improved global growth outlook and internal regional stabilization in the wake of protracted sovereign debt and growth crises.

“[However] structural weaknesses and risks remain, with France presenting significant long-term risk due to the complete absence of serious efforts to reform the labour markets and address a chronic lack of investment in new enterprises formation.

“The US debt-ceiling uncertainty also presents a lower risk to the euro area economies than the longer-term upward pressure on US yields. As benchmark yields for the US and Germany deteriorate into 2014, there will be renewed pressure on funding excessive debt levels across the majority of the euro area economies, most notably for Greece, Italy, Portugal, Spain and Ireland, but also for Belgium and the Netherlands.”"

Apologies for shameless self-promotion... :-)

11/10/2013: BlackRock Institute survey: N. America & W. Europe: October 2013

BlackRock Investment Institute Economic Cycle survey for North America and Western Europe is out and here are core results (emphasis is mine):

"This month’s North America and Western Europe Economic Cycle Survey presented a positive outlook on global growth, with a net of 65% of 113 economists expecting the global economy will get stronger over the next year. (6% lower than within the September report).

At the 12 month horizon, the positive theme continued with the consensus expecting all economies spanned by the survey to strengthen or remain the same except Sweden. 

The consensus outlook for the Eurozone was also strong, with 87% of economists expecting the currency-bloc to move to an expansionary phase over next six months. The picture within the bloc was not uniform however, with most respondents expecting only Greece to remain in a recessionary phase and an even mix of economists expecting Portugal and Belgium to be in an expansionary or recessionary phase at the 6 month horizon (and similarly so for Sweden, outside of the currency-bloc). 

With regards to North America, the consensus view was firmly that the USA and Canada are in mid-cycle expansion and are expected to remain so through H2 2013."

Note that this correlates well with my own outlook: http://trueeconomics.blogspot.ie/2013/10/9102014-businessinsider-most-important.html

Also note: the above views do not reflect BlackRock own views or advice. 

Two charts as usual:

Note that in the chart above, Ireland now firmly converged with the Euro area. This is a very strong move compared to September survey: http://trueeconomics.blogspot.ie/2013/09/1292013-blackrock-institute-survey-n.html And the above is confirmed by the overall comparative expectations forward:

So on the net - good result for Ireland and positive outlook for Euro area as a whole.

11/10/2013: In Europe, as usual, everything is a legal fudge...

Remember the EU 'Project Bonds' idea? Ok, the premise sounded great - you are a sovereign in an economy that can't raise funding for much of big ticket infrastructure etc building. You go to the markets with a sovereign guarantee to cover the shortfall on a specific project returns, plus a sub-guarantee from the EU... More precisely, here's how the scheme was designed to work:

The Guarantors of project finance were supposed to be: European Investment Bank (EIB) and the national governments. These were supposed to supply 'credit enhancements' to debt issues that covered two tranches: senior debt and subordinated debt. The sub-debt (or Project Bond Credit Enhancement, PBCE) were to take a form of an EIB loan backed by EU Commission, to be issued to the promoting entity at the onset of the project financing. Or it could take a form of a contingent credit line 'drawn upon if the revenues generated by the project are not sufficient to ensure debt service'. The PBCE was supposed to underlie the senior debt and act as credit enhancement for investors. The promoting entity were to issue actual bonds - in other words, project owner was to do so, not the EIB or the Member State. The EU conditioned the scheme that the 'support will be available during the lifetime of the project, including the construction phase'.

According to the original plan (see http://www.eib.org/products/project-bonds/):

"The proposed mechanism of the initiative will:

1. have a maximum size of individual transactions of up to the lower of EUR 200 million or 20% of credit enhanced senior debt;
2. as subordinated debt, target an up-lift of the project rating to A-AA rather than AAA;
3. be based on the EIB’s capacity to deliver subordinated loans, not necessarily its rating;
4. only target the EIB’s core business, i.e. infrastructure financing;
5. only support robust projects
6. benefit from the EIB’s proven due diligence, valuation and pricing methodologies."

The first project approved by the EIB for investment was the Spanish Castor offshore submarine gas storage facility. This has now failed due to lack of proper technical oversight in design (insufficient seismic risks evaluations), clearly putting into question the claims (v) and (vi) above.

Furthermore, the Spanish Government is now attempting to exit its contractual guarantee obligations, just to make sure that the entire Credit Enhancement Mechanism is exposed as a total farce.

Details are here: http://www.euractiv.com/euro-finance/eu-project-bonds-may-see-value-d-news-531021?utm_source=EurActiv%20Newsletter&utm_campaign=5ff216b9d6-newsletter_daily_update&utm_medium=email&utm_term=0_bab5f0ea4e-5ff216b9d6-245613326

All of which just goes to prove that in Europe, Government guarantees are worth about as much as the paper on which they are written... Enhance that, if you want.

5/10/2013: Euromoney Country Risk: Italy v Spain

Euromoney Country Risk scores changes:

Notice-worthy:

• Improved score for Hungary driven by gains in Economic Assessment, Political Assessment and Structural Assessment
• Cyprus scores continue to deteriorate despite the claims from the Troika that the economy is close to 'stabilising'. Cyprus risk metrics are tanking at a rapid rate from 58.0 in March post-default rating to 52.1 only 6 months later.
• Spain is rated below Italy, but the two counter-moved in recent ratings, with scores differntials driven by the following:

The political cycle clearly disfavours Italy, but economic performance is on Italy's side.

Here's ECR's analysis on Italy v Spain, with comment from myself (you can click on slides to enlarge):

12/9/2013: BlackRock Institute survey: N. America & W. Europe: September 2013

BlackRock Investment Institute released its latest Economic Cycle Survey for North America and Western Europe region for September 2013.

Per summary: "This month’s North America and Western Europe Economic Cycle Survey presented a positive outlook on global growth, with a net of 71% of 119 economists expecting the global economy will get stronger over the next year. (1% higher than within the August report). 

At the 12 month horizon, the positive theme continued with the consensus expecting all economies spanned by the survey to strengthen or remain the same. 

The consensus outlook for the Eurozone continued to improve, where the 6 month forward outlook shifted from 75% to 86% expecting the currency-bloc to move to an expansionary phase. The picture within the bloc was not uniform however, with most respondents expecting Portugal, Greece, Belgium and the Netherlands to remain in a recessionary phase over the next 2 quarters. 

With regards to the US, the consensus view firmly that North America as a whole is in mid-cycle expansion and remaining so through H2 2013."

September improvement for the global outlook was much shallower than a 10 point jump in August. Ditto for Eurozone outlook: this rose from 57% in July to 75% in August to 87% in September. Italy outlook seemed to have improved quite markedly, however.

Note: these views reflect opinions of survey respondents, not that of the BlackRock Investment Institute. Also note: cover of countries is relatively uneven, with some countries being assessed by a relatively small number of experts.

Two charts as usual:

Ireland continues to lead expectations, just as it did in previous 3 months.

In global expectations there were some notable movements in analysts' replies. 6% of analysts expected global economy to get a lot stronger over the next 12 months back in August, and this declined to 2% in the current survey. 69% expected it to get a little stronger in August and this proportion rose to 76% in September. 5% expected the global economy to get a little weaker in the next 12 months back in August, which in September rose to 6%. 

In Ireland's case, in August zero percent of analysts expected the economy to get a lot stronger over the next 12 months and this remained unchanged in September survey. All analysts (100%) expected the Irish economy to get a little stronger over the next 12 months in September survey - same as in August. 57% of analysts expected the economy to be in an early-cycle recovery over the next 6 months back in August, and this fell to 50% for September survey. There was significant rise (from 0% to 17% between August and September surveys) in the proportion of analysts expecting Irish economy to be in mid-cycle expansion over the next 6 months period. The number of analysts expecting the economy to be in a late-recession over the next 6 months dropped from 43% in August to 33% in September.

6/9/2013: BlackRock Institute survey: North America & Western Europe: August 2013

BlackRock Investment Institute released its latest Economic Cycle Survey for North America and Western Europe region.

Per summary: "This month’s North America and Western Europe Economic Cycle Survey presented an improvement in the outlook for global growth over the next 12 months – the net proportion of respondents with a positive outlook increased to 70% from 60% last month. 

The consensus outlook for the Eurozone was particularly positive, where the 6 month forward outlook shifted from 57% to 75% expecting the currency-bloc to move to an expansionary phase. 

The picture within the bloc was not uniform however, with most respondents expecting Portugal, Greece, Belgium and the Netherlands to remain in a recessionary phase, while the consensus has shifted to expect expansion for France, Spain, Finland and Ireland over the next 2 quarters. An even mix of economists expect Italy to be expansionary or recessionary at the 6 month horizon (and similarly so for Norway, outside of the currency-block). 

With regards to the US, the proportion of respondents expecting recession over the next 6 months remain low, with the consensus view firmly that North America as a whole is in mid-cycle expansion and remaining so through H2 2013."

Note: these views reflect opinions of survey respondents, not that of the BlackRock Investment Institute. Also note: cover of countries is relatively uneven, with some countries being assessed by a relatively small number of experts.

Here are two summary charts:

9/8/2013: Political Waffle Passing for Learning?

Mr Schulz - the President of the European Parliament - has penned an op-ed that is available here: http://www.linkedin.com/today/post/article/20130809113308-239623471-did-we-really-learn-the-lessons-of-the-crisis?trk=tod-home-art-large_0


My response is as follows:

This article is a trite rehashing of cliches, some of which have served as pre-conditions to the crisis, by a man who is presiding over the institution complicit in creation of the crisis in the first place, as well as in exacerbating the adverse impact of the crisis on the member states of the EU. 

Let me just deal with the first set of Mr Schulz's core hypotheses: 

"Firstly, the invisible hand of the market does not work and needs a robust regulatory framework." 

Given that the Euro area crisis arose from the disastrous mis-management of the monetary union, the statement is absurd and ideologically dogmatic. Markets require proper regulation and are legally-based structures. Mr Schulz seems to fail to understand this and is confusing anarchy with the 'invisible hand' of the markets. European markets have failed, in part, due to wrong regulation (not the lack of regulation) and in part due to the lack of enforcement of existent regulation. Mr Schulz seems to have no idea as to these facts. Institutions that commonly failed to enforce existent regulations and treaties include, among others, the European Commission (allegedly reporting to the EU Parliament, that Mr Schulz presides over) and the European Parliament itself.

The markets failures were, in the case of the 'peripheral' euro states, exacerbated by the inactions and actions of the European authorities, including those by the European Parliament.

"Secondly, politics should gain primacy over markets and labour over capital." 

Primacy of politics over markets (or rather economics) in Europe is exactly what led us into this crisis. 

Political dominance over economic policies design is behind the creation of the monetary union and the expansion of the union to include countries that are not ready for a single currency regime. It is also responsible for the fraudulent ways in which some member states have acceded to the monetary union (e.g. Italy and Greece, where misreporting and financial instrumentation of deficits and debt were rampant and Mr Schulz's institution was amongst those that were aware of these facts, were required to be aware of these facts, and yet were inactive in the face of these facts). Politicization of the markets for Government bonds, for foreign exchange, for credit, for equity, for risk pricing, etc has been responsible for inducing many deep failures in the markets in Europe. For one, this politicization has led to an unsustainable debt accumulation in the private sector and transfer of private debts onto the shoulders of taxpayers. 

I might agree with Mr Schulz on the point of 'labour' supremacy over 'capital'. Alas these are poorly defined concepts in Mr Schulz's case. Labour can mean labour unions (organised labour movement) or labour as human capital (skills, entrepreneurship, creativity, etc) and everything in-between. All of these definitions will contain internal contradictions in incentives, preferences for policies and responses to policies to each other and to the definitions of capital that can be deployed. Mr Schulz fails to define the categories he references, which suggests that his assertions are once again nothing more than populist sloganeering. Mr Schulz seems to have no idea that capital can be physical, technological, financial, intellectual or human. That 'labour' can be complementary to physical and technological capital in which case primacy of labour over technology can be destructive to the objectives of both. Mr Schulz appears to be inhabiting a simplistic universe more corresponding to that inhabited by Marx and Engels in the late 1840s than the one that exists today.

"Thirdly, and most importantly, the economy and politics should return to the values of solidarity, social justice, decency and respect." 

This is both historically incorrect and, frankly put, too rich coming from someone heading a powerful EU institution. 

It is inherently incorrect because a return implies existence of something in the past. European societies never possessed any real sense of 'solidarity' or 'social justice' but historically (and to-date) relied on preservation of the status quo of distribution of wealth within the set confines of the European elites and independent of merit. Thus, Europe never pursued meritocratic systems of wealth and income allocations. And subsequently never developed such systems. What Mr Schulz might mean (and we are reduced here to guessing) is the return to the status quo of interest groups-driven 'social' allocations of resources - a system commonly known as tax (someone else) and spend (on me or my friends). 

It is a rich statement coming from Mr Schulz because he presides over the EU institution that was at least complicit in forcing member states to transfer private sector losses onto taxpayers and failed to structure properly core institutional frameworks of the EU. Whether this complicity involved errors of omission or commission is irrelevant. The outcomes of these errors are Greece today, Cyprus today, Ireland today, and Italy, Spain, Portugal and so on. From this point of view, the perspective of returning to values by the political and economic institutions of Europe would first and foremost involve (require) restructuring of the European institutions from the top. Mr Schulz's job would be on the line in any such process of renewal and return to accountability. 

That, alas, is the nature of leadership: you fail and you are gone. Writing op-eds full of well-meaning waffle is, frankly, not an excuse for the failures of both action and inaction.

25/7/2013: BlackRock Institute latest survey results for global economic outlook: June 2013

The latest summary of the global growth conditions from the BlackRock Investment Institute. Click on the chart to open larger version. I have highlighted Ireland on the chart.

Blue bars reflect consensus on current phase of economic development (for example, in Ireland's case, current phase is seen as being recessionary by roughly 25% of respondents to the survey). Red dot corresponds to 6mo forward expectation (in Ireland's case, 50% of respondents expect recession in Ireland to either continue or to present itself again in 6 months time).

Note: this is the view of surveyed economists and not the view of the BlackRock II. The chart is based on the "trailing 3 survey reports for the other regions we poll. In our first month of this initiative, we collected the views of over 430 economists from more than 200 institutions, spanning over 50 countries"

25/7/2013: More on Sovereign-Banks Contagion risks in Spain and Italy

Two interesting charts detailing continued rise in risk links between the sovereigns and Italian and Spanish banks:

 Both via Ioan Smith @moved_average.

19/7/2013: Spain's Bad Loans: Heading for the Eurotroit solution?

Spanish banks bad loans ratio of all assets for May 2013:

H/T: Ioan Smith @moved_average

The Eurotroit keeps rolling on... Notice how Spain has by now largely erased the reductions in bad loans driven by assets shifts to 'bad bank' Sareb (EUR50.45bn portfolio, with 76,000 empty housing units, 6,300 rented homes, 14,900 plots of land and 84,300 loans). Spanish bad loans as a percentage of total credit rose from10.5% in March to over 11.2% in May.

And they will continue rising.

That's because in Spain, ultimate level of bad loans is going to be closer to Ireland's, where over 50% of SME loans are non-performing, over 25.8% of all mortgages are non-performing or at risk of default, and as of June 2013, 24.8% of all loans were non-performing, against EuroTanic's average 7.5-7.6% (EUR920bn or so). Irish numbers exclude Nama.

So even with the sunshine and sea, Costa del Concrete is going to cost Spain over 20% in terms of bad loans ratio in the end.

4/7/2013: Blackrock Institute Surveys: North America, Europe and EMEA: June 2013

Two charts showing most recent consensus expectations on North American, Western European and EMEA economies from the Blackrock Investment Institute panel of economists (note: these do not represent views of Blackrock).

Notice clustering of peripherals and France, as opposed to marginally better clustering of the Netherlands, Sweden, Belgium and Eurozone.

Note Ukraine as the sick man of the region. Also note Slovenia and Croatia - two EU economies that are significantly under-performing the regional grouping.