04/11/2011: PMI for Services: October

NCB Services sector PMI data is out today and as in the case of Manufacturing earlier last week (see details here), we have an effectively flatline economic activity in the sector. Here are the details.

Overall business activity index reading improved marginally from 51.3 in September to 51.5 in October. 3mo average through october is now at 51.3 against the 3mo average through July 2011 of 51.5. Year-to-date 2011 reading is 51.9 and same period 2010 reading was 51.0 with same period 2009 reading of 39.7. In other words, all data falls within the range of statistically indistinguishable from 50. Chart below illustrates.

The snapshot chart below shows the shorter-range PMI for Services plus the core driving constituent of activity - New Business sub-index. Worryingly, the latter remained in contraction territory at 49.7 in October, for the 6th month in a row. Year-to-date average is at 49.5, again signaling contraction, and 3mo through october average is 48.4 against 3mo through July average of 48.9. So things are getting worse, not less worse on a smoothed trend. Year-to-date period in 2010 saw average New Business sub-index at 50.2.

Profit margins (chart below) are moving in the wrong direction as well. Output prices sub-index remains at extremely rapidly falling 44 in October, same rate of contraction as in September. 3mo average is at 43.8 and year-to-date is 44.2. Last time output prices were expanding was in July 2008. Meanwhile, Input prices sub-index continues to signal inflation in intermediate and raw materials inputs at 52 in october on the back of 54 in September. Year-to-date average is 53.8 and 3mo through October average at 52.2 virtually identical to 52.4 average for 3 months through July. More on profit margins in a follow up post which will cover profits conditions in both manufacturing and services.

 Profitability sub-index (as per above discussion), illustrated in chart below remains under water. However, Business Confidence Index posted another 'we don't want to face reality' expectation reading, showing robust expectations of economic expansion from services providers. The sub-index rose to a massively expansionary 63.4 in October from 59.5 in September and the longer term trends are consistent with this reading. Of course, I have shown previously that Business Confidence component of the PMI has virtually nothing to do with the real performance metrics as measured by PMIs - the new orders and employment sub-index. This conclusion was based on econometric analysis performed on the entire time series for the data and tested for lags and directional causality.

Worryingly, New Exports Orders sub-index moved from expansionary 53.1 reading in September to virtually stand-still at 50.1 in October. This compares unfavorably against the 53.0 average for year-to-date and even against 3mo average of 51.2 through October. The above, alongside with 3mo average of 52.4 in 3 months through July suggests downward trend in overall growth in exports-related services.

 Lastly, employment in the sub-sector continued to contract. October reading of 46 was identical to September reading and signals significant contraction. The story is virtually identical to Manufacturing and will be subject of mored detailed discussion in the following post.

So on the net, there as flat-line performance across the sector in October, with majority of trends in sub-indices pointing to contraction in months ahead. Not good news, I am afraid, despite the 51.5 reading on overall PMI Services Business Activity index.

03/11/2011: ECB rate cut

ECB decision to reduce rates by 25bps today has led to a dramatic reduction of the ECB overall rate premium over the basket of advanced economies rates as shown below. With today's decision, the ECB premium declines from 16.73% in October to 1.21% in November (barring any change in the BofE rate later).

This move, however, directly contradicts ECB mandate for price stability with inflation for October anchored at 3.0%:

03/11/2011: Another shallow rise in unemployment

The Live Register figures are out for October with standardized (LR-implied) rate of unemployment inching up to 14.4%. Here are the details.

Live Register-implied Standardized Unemployment Rate (SUR) rose from 14.3% in September to 14.4% in October, matching the levels in July and August. 14.4% is the highest level SUR reached in 10 months through October 2011 and the third highest since the crisis began (note that 14.4% SUR was recorded in 4 months since the crisis began). October 2011 SUR is now identical to that recored in October 2010Chart below illustrates.

Overall, seasonally-adjusted LR rose to 447,100 in October 2011, up 2,700 on September 2011. year on year, LR fell 300 (-0.07%). In September 2011, LR declined 4,300 mom and fell 5,400 yoy (-1.2% yoy). 3mo average through October 2011 is down 0.31% yoy. As shown below, we have a virtually flat trend.

Seasonally-adjusted LR numbers for those 25 years of age and older rose 2,100, from 364,000 in September to 366,100 in October. Year on year the number of 25 years and older workers on LR is up 2,600 (+0.72%) and 3mo average through October is 1.4% above the same period yoy. The numbers of under 25-yo workers on LR increased 500 (+0.62%) from 80,400 in September to 80,900 in October 2011. However, year on year, the number of young workers on LR fell 5,700 (-6.6%) - a shallower fall than in September 2011, but a significant decline. Overall, this suggests that younger workers exits into education, emigration and general falling out of the benefits net can be a significant source for moderating trends in LR figures overall in recent months.

Casual and part-time workers counts on LR rose 1,012 (+1.2%) from 84,017 in September to 85,029 in October 2011. 3mo average through October is now 9.1% above the same period in 2010 and year on year October reading is 7,105 (+9.1%) ahead of October 2010 level. Chart below illustrates.

Numbers of non-nationals on LR fell 384 in October to 75,037 - a decline of 0.51% and are up year on year by 402 (+0.54%). Numbers of Irish nationals on LR declined 6,625 mom (-1.83%) and are up 477 yoy (+0.13%). For both series there were small (less than 0.22%) declines in 3mo average through october, yoy. Please remember - these are not seasonally adjusted.

Per CSO release, "in October 58.2% (250,659) of all claimants on the Live Register were short term claimants. The comparable figure for October 2010 was 65.6% (281,945)." The annual fall of 31,286 (-11.1%) was recorded in the number of short term claimants. "The number of long term claimants on the Live Register in October 2011 was 179,773", up  32,165 (+21.8%) yoy. "This rate of increase in long term claimants has been slowing through the year with an annual increase of 57,597 (55.9%) having been recorded in January 2011."

The rate of increase, however, can be slowing due to several factors not mentioned by the CSO, such as draw down in LR numbers due to training programmes participation, emigration and dropping out of unemployed second earners from the labour force and LR benefits.

02/11/2011: A DofF note on Anglo Bonds Repayments

Here's the bull***t that passes for 'advisory analysis' for politicians - the copy of the note sent out to Government TDs from a specific party based on the Department of Finance information. I am publishing it here without any specific comments - judge for yourselves reading it - my only general comment is that it is uses a number of deceitful tricks, false juxtapositions and selective omissions to present the case for repaying unsecured unguaranteed bondholders in Anglo Irish Bank / IBRC.

(You can click on the pages to enlarge the text. I am publishing it without an explicit HT so as not reveal my source).

01/11/2011: Manufacturing PMI for October

NCB Manufacturing PMI for Ireland is out this morning with some surprises to the positive side of things. Let's start from the top:

• Irish manufacturing production rebounded in October with new orders increasing for the time since May. The rebound was extremely shallow with PMI reaching just 50.1 (barely above 50 mark that denotes expansion). PMI reading has improved dramatically, however, rising from 47.3 in September. 12mo average remains above current levels at 52.0, 3mo average is however below at 49.0. Previous 3mo average was 49.9. 2010 average for the 3 months through October was 50.1. 
• It is worth noting that with the historical standard deviation of 4.6 and standard deviation for the crisis period of 5.9, the current expansion reading is really statistically meaningless. 

As chart above further highlights:

• Output expanded strongly to 52.7 in October, up from contractionary reading of 49.8 in September. The latest reading compares favorably against 3 mo average of 51.6 and is statistically significant for the entire history of the series, but is not statistically significant for the crisis period data. 
• New orders posted an expansion of 51.4 up from September contractionary reading of 45.8 - a considerable increase in mom terms, pushing the series well ahead of 3mo average of 48.3, but still below 52.7 12mo average. However, the new reading remains statistically insignificantly different from 50 both in historical terms, in terms of data since January 2000 and in terms of data for the crisis period (since January 2008). The increase in total new orders growth was solid, and the fastest since April.
• New export orders posted a slight slowdown in the rate of contraction moving to 49.8 in October from 49.2 in September. Obviously, both readings are not statistically significant from 50 as new exports sub-index is more volatile than majority of other components of PMIs. However, the new reading is still below 12mo average of 55.2, below 3mo average of 50.8 and below 3mo average through October 2010 of 53.0.
• The surprising factor here is that the overall PMI in manufacturing is now moving in the opposite direction to New Export Orders. According to NCB: "Anecdotal evidence suggested that uncertainty surrounding the eurozone had a negative impact on new business from abroad. Conversely, there were some reports that favourable exchange rate movements had helped to stimulate demand."

Chart above shows that profit margins have continued to shrink in October (more on this later in the week once we have Services PMI data as well). The contraction in profit margins was driven by significant increase in inputs price inflation and continued deterioration in output prices. stock of purchases and stocks of finished goods continued to contract.

Crucially, per chart above, employment sub-index posted another contraction in October at 47.1 against 46.5 in September. The index 12mo average is now at 50.5 and 3mo average through october is 48.2. 3mo average for the period to July 2011 is 49.1 and the current contraction is statistically significant.

So on the net - the slightly positive news on overall PMI and new orders fronts are clearly offset by negative readings on new exports orders, profit margins and employment. These suggest that we might be witnessing a 'dead cat bounce' effect. If the new trend toward cautious growth were to be supported by data, we need couple more data points to see this.

31/10/2011: IRL5 banks - no signs of real improvements in September

Few posts back I looked at the latest data for Irish banking system stability from the CBofI. Here, I complete my analysis by focusing on 5 covered institutions or IRL 5 (previously known as IRL 6 before the merger of Anglo & INBS into IBRC).

Here's the data:

• Borrowing from the euro system by IRL5 has risen from €68,430mln in August to €70,340mln in September. Year on year, this is still down 4.73% or €3,489mln, but at that rate of unwinding IRL6 liabilities to euro system will take, oh, some 20 years (!)... Mom, the increase in borrowing from the euro system was €1,910mln or more than 50% of the reductions achieved yoy.
• Deposits from Irish residents in IRL6 were up from €192,431mln in August to €193,929mln in September, prompting cheers from the Irish Times and Department of Finance, among others. Mom rise of 0.78% or €1,498mln contrasts a 22.22% decline yoy in very same deposits or €55,393mln loss. In other words, to get us back to September 2010 levels (not exactly healthy ones) at current rate of mom increase would take 37 months. In the last three months, on average, deposits were down €26,337mln compared to 3 months through June 2011 (-12.05%).
• The mystery of rising deposits is explained easily by looking at their composition: Monetary and financial institutions (aka other banks) have seen their deposits in IRL5 rising €1,298mln in September (+1.47%) mom, although these deposits are down €32,308mln or -26.53% yoy. This explains 87% of the entire increase in the overall deposits.
• In addition, General government deposits also rose €333mln in September (+16.28%) mom, explaining the remainder of the rise in overall deposits, heralded by our Green Jerseys as 'signs of improvement/stabilization' in Irish banks.
• In contrast to the above two sub-categories, private sector deposits in Irish banks (IRL 5) have shrunk in September by €133mln (-0.13%) mom and are down 18.12% (-€22,589mln) yoy. September marked 5th consecutive month of declines in private sector deposits, which have shrunk by €6,135mln since April 2011.

As mentioned above, borrowings from the euro system have gone up in September. In contrast, as shown in the chart below, total borrowing from the ECB & CBofI have declined slightly in September to €123,596mln from €124,379mln in August (a mom drop of 0.63%). Year on year, the borrowings are still up massive €28,572mln or 30.7%. Over the last 3 months (July-September), average borrowings from the euro system and CBofI declined 1.39% or €1,748mln compared to 3 months from April through June.

Loans to irish residents have contracted once again in September, reaching €294,224mln against August levels of €294,503. The declines were accounted by drops in loans to MFIs and increases in loans to the General Government (+€58mln) and Private Sector (+€95mln). hardly anything spectacular.

Now to the last bit - recall that the comprehensive reforms of the Irish banking sector envision deleveraging Irish banks to loans-deposits ratio of 125.5%. These targets were set in PCARs at the end of March 2011. back in march 2011, LTD ratios stood at 143.25% for all of the IRL6/IRL5 and 173.71% for private sector LTD ratio only. Since then, if anything was going up to the CBofI / Government plans, we should have seen at least some reductions in LTDs.

As chart above illustrates:

• Overall LTD ratio for IRL5 at the end of September 2011 stood at 151.72% - below August reading of 153.04%, but well ahead of March 2011 reading of 143.25% and certainly much ahead of the target of 125.5%.
• For private sector loans and deposits, LTD ratio was 174.61% in September - ahead of 174.29% in August and still above 173.71% back in March.

And the summary is: there's no real stabilization or improvement I can spot in the above for IRL5.

31/10/2011: Bailout-3: The Gremlins Rising premiers

What a day this Monday was, folks. What a day. Just 4 days ago I predicted that the latest 'Bailout-3: The Gremlins Rising' package by the EU won't last past January-February 2012. And the markets once again cabooshed my perfectly laid out arguments squashing my prediction.

As of today we had:

• Italian bonds auctioned last week at 6.06% yield for 10 year paper, the most since 1999. The yield was up from 5.86% at the auction a month ago which marked the previous record high. For Italy, given its growth potential and debt overhang, yields North of 5.25-5.3% would be a long-term disaster. Yields close to 6.1% are a disaster! But things were worse than that last Friday: the Italian Treasury failed to fullfil its borrowing target of €8.5bn to be sold. Instead, the IT sold only €7.9bn worth of new paper. Boom - one big PIIGSy gets it in the 'off-limits' region!
• Also on Friday, Fitch issued a note saying that 'voluntary' haircuts of 50% on Greek debt will constitute... eh... a default / credit event (see report here). Which kinda puts a boot into the softer side of the 'Bailout-3' deal. Boom - Greece gets it in the gut!
• Today, Belgians went to the bond markets and got rude awakening: Belgium placed €2.155bn worth of bonds along 3 maturities: 2014, 2017 and 2021. The country wanted to raise €1.7-2.7bn (with upper side being more desirable), so there was a shortfall on allocation. 10 year bond yields for September 2021 maturity are at 4.372% against 3.751% for those issued in September 2011. Belgium is yet to raise full €39bn planned for 2011 as it has so far covered €37.517bn in issuances to-date. it will be a tough slog for the country with revised deficit of 5.3% of GDP in 2012 (assuming no new austerity measures) and debt/GDP ratio of 94.3% expected in 2012. Boom - a non-PIGSy gets a kick too.
• Also today, Germany marched to the markets with €1.933 billion in new 12-month bubills at a weighted average yield of 0.346% and the highest accepted yield of 0.354%. On September 26th, Germany sold same paper at an average yield of 0.2418%. Today, Germans failed to allocate €67mln of bills despite an increase of 40% in yields in just 5 weeks. Big Boom - the largest Euro area economy gets smacked!
• And for the last one - per reports (HT to @zerohedge : see post here): Europe, hoped to issue €5 billion in 15 year EFSF bonds. Lacking orders, it cut issuance volume by 40% to €3bn and the maturity by 33% to 10 years. As @zerohedge put it: "But so we have this straight, Europe plans to fund a total of €1 trillion in EFSF passthrough securities.... yet it can't raise €5 billion?" Massive Boom, folks - mushroom cloud-like.

So here we have it, a nice start for the first week post-'Bailout-3: The Gremlins Rising'...

31/10/2011: Euro area Consumer Sentiment & Expectations: October 2011

In line with the latest inflation data (see the previous post), latest data for EU27 and Euro area consumer expectations continued to move in the direction of further weaknesses.

Data for October shows that for EU27:

• Consumer confidence fell from -19 in September to -20 in October, the lowest level since July 2009. A year ago, Consumer Confidence index stood at -12.
• Financial Situation sentiment for the last 12 months period remained at -18 in October, same as in September, down from -17 in August. A year ago, sub-index stood at -14.
• Financial Sentiment expectations for 12 months ahead has also remained at -9 in October, same as in September and down on -8 in August. In October 2010 the sub-index was at -5.

 As chart below illustrates:

• General Economic Situation perception index for next 12 months fell to -29 in October from -27 in September. The sub-index is now at the lowest level since May 2009 an is down on -12 reading in October 2010.
• Unemployment Expectations over the next 12 months sub-index rose from 32 in September to 36 in October - the highest level since March 2010. A year ago, sub-index stood at 26.

Euro area data was showing similar weaknesses to EU27:

• Consumer confidence fell from -19 in September to -20 in October, the lowest level since August 2009. A year ago, Consumer Confidence index stood at -11.
• Financial Situation sentiment for the last 12 months period improved to -16 in October, from -17 in September, but still down down from -15 in April-August. A year ago, sub-index stood at -14.
• Financial Sentiment expectations for 12 months ahead has also remained at -9 in October, same as in September and down on -7 in August. In October 2010 the sub-index was at -6.

• General Economic Situation perception index for next 12 months fell to -29 in October from -27 in September. The sub-index is now at the lowest level since May 2009 an is down on -10 reading in October 2010.
• Unemployment Expectations over the next 12 months sub-index rose from 30 in September to 33 in October - the highest level since May 2010. A year ago, sub-index stood at 22.

Much of this evidence is consistent with the latest unemployment figures reported today with Euro area unemployment up to 10.2% in September (EU27 figure at 9.7%) up from 10.1 in August 2011 (9.6% for EU27).

31/10/2011: Europe's latest blunder

This is an unedited version of my article in October 30, 2011 edition of Sunday Times.

This week was a fruitful and productive one for Europe’s leaders. Not because the battered euro block has finally produced a feasible and effective solution to the raging debt, fiscal and banking crises sweeping across the common area, but because they spent the entire week doing what they do best: holding meetings and issuing communiqués.

The latest plan, unveiled this Wednesday, shows once again that the EU remains incapable of actually doing what needs to be done.

The real European disease is debt. Too much debt. Based on the latest IMF forecasts and statistics from the Bank for International Settlements by the end of 2011, combined public, household and non-financial corporate debts will reach 280% of GDP in the US. In France, the Netherlands, Sweden and Belgium, this number will be closer to 330-335%, in Italy – 314%, in Greece – 290%, in Portugal 375%, in Spain 360%, and in Ireland a whooping 415%.

The composition of these debts, and in particular the weight of public sector debts in total non-financial debt overhang, may differ, but the end result is the same for all of the above. Per August 2011 research paper from the Bank for International Settlements, combined private sector debt in excess of ca 250% of GDP results in a long term (aka permanent) reduction in future growth rates. This reduction, in turn, puts under pressure the ability of the indebted states to repay their obligations.

Further compounding the problem, European banking systems have become addicted to Government bonds as a form of capital. In the past, this addiction was actively encouraged by the Governments, regulators and the ECB. With the latest proposals in place, we are likely to see even more Government/EFSF debt piling into the banks in the long term.

Having ignored basic risk management rules, banks across the Euro area are now fully contaminated with their exposures to sovereign bonds that are about as bad – from the risk perspective – as the adjustable rate mortgage borrowers in the US. Based on the second set of stress tests carried by the European Banking Authority this summer, Greek haircut of 75%, as suggested by the IMF, against the core tier 1 requirement of 9% will imply a capital shortfall of €180 billion. Failing to recognize this, the EU plan unveiled on Wednesday calls for just €100 billion recapitalization under a 50% haircut.

This, of course is far too little too late for Greece and for Europe overall. To bring public debt to GDP levels back to the point of fiscal stabilization (under 100% of GDP) will require ca 20% write-down in Portugal, 40% in Italy, and 30% in Ireland. Europe’s problem is at least €730 billion-strong. It can become bigger yet if – as can be expected – Greece fails once again to deliver on prescribed fiscal adjustment measures and/or the write-downs trigger CDS calls and/or the credit contraction triggers by the measures leads to a new recession. All in, Euro area needs closer to €820-850 billion in funding in the form of both rights placements, assets disposal, and government capital supports.

Now, factor in the second order effects of the above numbers onto the real economy.

Injecting €820 billion in new capital or, equivalently, providing some €1 trillion in fresh capital and bonds guarantees as envisaged under the EFSF proposals being readied by the European officials will increase broad money supply by 10%. This is consistent with long term ECB rates rising to well above their previous historical peak of 4.75% - triple the current rate. European banks trying to raise new capital and deleveraging foreign assets will saturate equity markets across Europe with capital demand. Reduced banking sector competition, pressures on the margins and higher funding costs will push retail rates into double-digit territory.

For European companies – more addicted to debt financing than their US counterparts and now competing for scarce equity investors against their European banks – this will mean a virtual shutting down of credit supply. Starved of domestic credit, European multinationals will aggressively divest out of the Continent and pursue jobs and investment growth in places where capital is more abundant – the US and Asia.

As Paul Krugman recently said, “The bitter truth is that it’s looking more and more as if the euro system is doomed. And the even more bitter truth is that given the way that system has been performing, Europe might be better off if it collapses sooner rather than later.”

Sadly, Krugman is correct. European cure proposals to the crises are worse than the disease itself and the Wednesday’s proposals for dealing with the crisis are case in point.

Firstly, banks recapitalizations – first via private equity raising and bond-to-equity conversions, then via sovereign/EFSF funding – risks extending the recapitalization procedures into the second half of 2012 and simultaneously increase the risk premia on banks funding. In other words, credit crunch is likely to get worse and last longer. Most likely, this will require additional guarantees to ensure the funding market does not collapse in the process. The ECB balance sheet exposure to peripheral banks and sovereign debts – currently at €590 billion, up from €444 billion back in June 2011 – will become impossible to unwind.

Secondly, the insurance option for sovereign bonds issuance is likely to be insufficient in cover and, coupled with greater seniority accorded to EFSF debt can lead to a rise in yields on Government bonds. This, in turn, will amplify pressure on countries, such as Spain and Italy which are facing demand for new bonds issuance and existent debt roll over of some €1.3-1.5 trillion over 2012-2014.

Thirdly, leveraging EFSF to some €1 trillion via creation of an SPIV (Special Purpose Investment Vehicle) will create a nightmarishly complex sovereign debt structure.

Under leverage EFSF option, a country borrowing from the fund €1 billion will receive only a small fraction of the money directly from the fund itself, with the balance being borrowed from international lenders that may include IMF. In order to secure such lending, the EFSF will require seniority for international lenders over and above any other sovereign debt issued by the borrowing state. This will de facto prevent the EFSF borrower from raising new funding in the capital markets in the future.

In all of this, Ireland is but a small- albeit a high risk – player with the power to influence some of the EU decisions, especially those that matter most. Alongside the EFSF reforms and banks recapitalizations, the EU will require stronger fiscal and sovereign debt oversight measures, and ultimately closer integration.

The Irish Government should make it clear from the earliest date possible that Ireland’s participation in this process is conditional on three measures. First, Irish banks debts to the euro system should be written down to the tune of €60-70 billion, allowing for clawing back some of the funds injected into banks as capital and providing a stronger cushion for a households’ debt writeoff. Second, we should demand that the debt-for-equity swaps explicitly encouraged as the means for recapitalization of the euro area banks in Wednesday agreement be applied to Irish banks. These swaps can be used to further reduce previously committed funds and reverse some of the debt accumulated by the Exchequer (on and off its balancesheet). Third, Irish Government should make it unequivocally clear that we will veto any tax harmonization in the future.

On the net, European solutions unveiled this Wednesday are simply not going to work. In Q1 2012 the latest recapitalization of Euro area banks and Greece will run out of steam. Next time around, this will happen in the environment of slower growth and possibly a full-blown recession with Spain, Italy and Portugal all running into deeper fiscal troubles. The real price of Europe’s serial failures to deal with the crisis will be the real economy of the euro zone.

Box-out:

This week’s CSO-compiled Residential Property Price Index (RPPI) had posted another 1.49 percent monthly fall in house prices nationwide. Exactly four years ago, at the peak of residential property valuations, RPPI stood at 130.5. At the end of September this year, the index was just 72.8 or 44 percent below the peak. The misery of falling prices is now impacting not only hundreds of thousands of negative equity mortgage holders, but even the all-mighty Nama. Nama referenced its original valuations of the assets it took over from the banks to November 30, 2009. Since then, residential prices in the nation have fallen 29.5% and apartments prices (the category of property more frequently related to Nama loans) have fallen 33.9%. All in, Nama will now require a 35% uplift on its assets (55% for apartments) to break even, not including the organization’s gargantuan costs of managing its assets.

31/10/2011: Stagflation on Europe's doorsteps

Euro area preliminary inflation estimate came in today with October reading at 3.0%. This is the second month in a row with inflation anchored at 3.0% and coupled with the signs of a recession (see charts below showing eurocoin leading growth indicator for October at -0.13, signaling contraction in economic growth) we are now in the stagflationary territory.

 You can see the dramatic deterioration in inflation-growth dynamics year on year in the chart above. The chart below shows updated 'optimal' inflation-consistent zone for ECB rates at over 4.0% against the current rate of 1.50%.

The above suggests that the ECB is now boxed into the proverbial stagflationary corner - lowering rates to improve growth outlook will risk pushing inflation even higher, while hiking rates or even staying put at current rates risks continuing deterioration in growth fundamentals.

30/10/2011: Irish banking - getting sicker slower in September

Is Irish banking sector getting slowly better - as numerous articles, including in the Irish Times are suggesting on the back of the Central Bank data for September, or is it getting worse slower?

Consider CBofI data for 18 banks, plus numerous credit unions operating in Ireland. In this post we shall cover the entire domestic group of banks, with IRL6 guaranteed domestic banks to be covered in the follow up post.

The first metric by which our banking system is allegedly doing much better now days is deposits. Apparently, in recent month the flight of deposits from Ireland has been reversed. Charts below illustrate:

 Total system-wide liabilities in September 2011 stood at €659,387 mln or €895 mln up on August, but €108,011 mln down on September 2010. So mom we are up 0.14% while yoy we are down 14.07%. Over the 3 months July-September 2011, there were on average €10,704 mln less in liabilities in the system than in the 3 months from April through June. Nothing to conclude about the 'health' of the system yet, before we look at the liabilities breakdown.

So deposits then. Shall we start at private sector deposits?

Total private sector deposits in the system of all banks operating in Ireland have declined from €166,152mln in August to €163,992mln in September (down 1.3% mom), the same deposits are down 6.43% (or -€11,267mln) yoy. July-September average deposits in the system were 1.59% (€2,679mln) below those for 3 months between April and June 2011. So by all metrics here, the system deposits are shrinking.

This shrinking is captured by declines in overnight deposits and deposits with maturity of less than 2 years. Deposits with maturity over 2 years have increased from €10,843mln in August to €10,946mln in September, marking second consecutive monthly increase, this time around - by a whooping 0.12%. Yes, that's right, the first time we discover anything of an increase is in the smallest sub-component of deposits and that is a massive 0.12%.

Yet, we keep hearing about increases in deposits. So let's take a look at all deposits in the system across all banks operating in Ireland:

Chart above provides breakdown of all deposits in the system. This shows:

• Total deposits in the system stood at €248,861mln in September or 18.12% below their levels in September 2010 (-€55,061mln), but a massive 0.09% up on August 2011 (mom increase of overwhelming €225mln). Quarter 3 average deposits were 10.15% below quarter 2 average deposits (of course most of this decline is due to Government deposits being converted into capital by banks)

What explained this miracle of rising deposits in the system? Was it private sector (productive economy) newly discovered riches or restored confidence in Irish banking system by corporations & households? Nope, remember - private deposits are down, so the increases are broken down into:

• MFIs (inter-banks etc) deposits were up in August (celebration time, folks) from €101,780mln in August to €103,293mln in September. Impressed? That was 1.49% mom rise, that is contrasted by a 23.32% decline yoy. So in a year we lost €31,419mln in interbank deposits and gained €1,515mln in a month. 20 months left to go till we are back at September 2010 levels. Or relative to peak - we are now €48,066 mln down - so only 32 more months of celebrated increases to regain the peak.
• Oh, another thing that drove our total system deposits up in September compared to August was an increase in Government deposits from €2,360mln in August to €2,740 in September. 
• Please note that in 2011, unlike in 2010, there are also some new depositors in the private sector that are potentially channeling new dosh through Irish banks - namely, Nama. That's right, the state agency is, of course, a private company and is cash generative for now. This means that the true decline in real economy's private sector deposits was probably even more substantial than the data shows (next point)
• Private sector deposits - the real economy in Ireland - have declined in September to €142,828mln - down 14% or €23,252mln yoy and 1.15% or €1,668mln mom. 3 months through September average private sector deposits were 4.44% or €6,720 mln below the average for 3 months through July 2011.

 Now, recall that the other metric of health of the banking sector is the Loans to Deposits ratio - the metric of solvency of the system. Recall that the Central Bank of Ireland is aiming for 125.5% ratio for IRL6 banks (more on these in the next post). So what's happening in this area? Chart below illustrates:

And, folks, we thus have:

• Overall across the Domestic Banking Sector, LTD ratios have declined from 145.32% to 145.14% between August and September. The rate of decline that would require 182 months to deliver 125.5% benchmark for stability envisioned under CBofI reforms (note: the benchmark of course does not apply to all Domestic Group banks, just to IRL6, but nonetheless, this can be seen as a comparative metric). Year on year the ratio is up 7 percentage points.
• In the private sector, the LTD ratio actually rose in September to 165.2% from 163.06% in August. Year on year the ratio rose 4 percentage points.

So in summary - there are no signs that things are improving or stabilizing in the broader banking sector in Ireland. The following post will look into IRL6 guaranteed institutions, but as the whole banking system goes, no confidence gained, private sector deposits are continuing to contract, LTD ratio is rising for private sector and the only area of improvement is the inter-bank deposits, which means close to diddly nothing to the economy at large. 

28/10/2011: Euro area - growth drop out

Chart of the day today, folks is the index of quarterly real growth rates in Asia-Pacific's Advanced Economies against those in the US, UK and Euro area...

Oh, and yes, you read it right - Japan and Euro area are the two drop-outs from global growth picture since 1995. Then again, the dropping-out became even more pronounced in the current crisis. So all that price-stability... hmmm... it really pays off.

And even low interest rates were of little help for Euro area: