8/5/15: BIS on Build Up of Financial Imbalances

There is a scary, fully frightening presentation out there. Titled "The international monetary and financial system: Its Achilles heel and what to do about it" and authored by Claudio Borio of the Bank for International Settlements, it was delivered at the Institute for New Economic Thinking (INET) “2015 Annual Conference: Liberté, Égalité, Fragilité” Paris, on 8-11 April 2015.

Per Borio, the Achilles heel of the global economy is the fact that international monetary and financial system (IMFS) "amplifies weakness of domestic monetary and financial regimes" via:

• "Excess (financial) elasticity”: inability to prevent the build-up of financial imbalances (FIs)
• FIs= unsustainable credit and asset price booms that overstretch balance sheets leading to serious financial crises and macroeconomic dislocations
• Failure to tame the procyclicality of the financial system
• Failure to tame the financial cycle (FC)

The manifestations of this are:

• Simultaneous build-up of FIs across countries, often financed across borders... watch out below - this is still happening... and
• Overly accommodative aggregate monetary conditions for global economy. Easing bias: expansionary in short term, contractionary longer-term. Now, what can possibly suggest that this might be the case today... other than all the massive QE programmes and unconventional 'lending' supports deployed everywhere with abandon...

So Borio's view (and I agree with him 100%) is that policymakers' "focus should be more on FIs than current account imbalances". Problem is, European policymakers and analysts have a strong penchant for ignoring the former and focusing exclusively on the latter.

Wonder why Borio is right? Because real imbalances (actual recessions) are much shallower than financial crises. And the latter are getting worse. Here's the US evidence:

Now, some think this is the proverbial Scary Chart because it shows how things got worse. But surely, the Real Scary Chart must reference the problem today and posit it into tomorrow, right? Well, hold on, for the imbalances responsible for the last blue line swing up in the chart above are not going away. In fact, the financial imbalance are getting stronger. Take a look at the following chart:

Note: Bank loans include cross-border and locally extended loans to non-banks outside the United States.

Get the point? Take 2008 crisis peak when USD swap lines were feeding all foreign banks operations in the U.S. and USD credit was around USD6 trillion. Since 'repairs' were completed across the European and other Western banking and financial systems, the pile of debt denominated in the USD has… increased. By mid-2014 it reached above USD9 trillion. That is 50% growth in under 6 years.

However, the above is USD stuff... the Really Really Scary Chart should up the ante on the one above and show the same happening broader, outside just the USD loans.

So behold the real Dracula popping his head from the darkness of the Monetary Stability graveyards:

Yep.  Now we have it: debt (already in an overhang) is rising, systemically, unhindered, as cost of debt falls. Like a drug addict faced with a flood of cheap crack on the market, the global economy continues to go back to the needle. Over and over and over again.

Anyone up for a reversal of the yields? Jump straight to the first chart… and hold onto your seats, for the next upswing in the blue line is already well underway. And this time it will be again different... to the upside...

6/6/2014: Credit to Irish Resident Enterprises: Q1 2014

Since time immemorial (ok, since around 2009) Irish Government after Irish Government has been promising the restoration of functioning credit markets. Targets were set for the banks to lend out to non-financial (aka real economy) enterprises. Targets were repeatedly met. Banks have talked miles and miles about being open for lending, approving loans etc etc etc. And credit continued to fall and fall and fall...

And so the story repeats once again in Q1 2014. Central Bank latest data on credit advanced to Irish resident private sector enterprises attests to the lifeless, deleveraging-bound, zombified banking sector.

• Credit advanced to financial intermediation companies is down 3.63% in Q1 2014 compared to Q4 2014. This marks 9th consecutive quarter of declines. Since Q4 2008, credit has fallen in 11 quarters, and actually it has fallen in 12, since Q4 2011 rise was down to reclassifications being factored into the equation for the first time. Worse than that, majority of declines came since the current Government took office, not before. 
• Credit advanced to financial intermediation and property sectors fell 4.05% q/q in Q1 2014. The fall was steeper than in Q4 2013 compared to Q3 2013 and also marks ninth consecutive quarterly decline in the series or 11th if we are to control for 2011 reclassifications.
• Excluding financial intermediation and property, credit advanced to Irish resident non-financial companies ex-property sector has fallen 1.31% q/q in Q1 2014. This marks fourth consecutive quarterly fall. Credit to the real economy is now down in 20 quarters since Q4 2008. Since the current Government came into office, credit to these companies is down in 10 quarters out of 12.
• Total credit advanced to Irish resident enterprises was down 3.49% q/q in Q1 2014 - steeper than the decline of 3.07% recorded in Q4 2013, and marking ninth consecutive quarter of declines (11th, if reclassifications are ignored).

So keep that hope alive... one day, some day... things will be better. Do not forget to give credit to the Government and the Central Bank - they predicted this 'betterment' years ago and like a stopped clock, one day they will be proven right...