30/1/2012: Fake Doctors Treating Fake Disease in Greece

There are many 'expert' voices in the media saying Greece should exit the Euro zone in order to return to growth. This, as I commented earlier today, is a gross oversimplification of the reality.

There is simply no evidence whatsoever that Greece can grow on its own any faster or more sustainably than it did within the Euro. In fact, the evidence presented below shows that the only period during the last 30 years in which Greece was able to somewhat marginally close the gap in growth between itself and the Advanced Economies group is the period immediately following its accession to the Euro.

It is a fallacy of 'alternative expectations' to believe Greece will be enabled to grow its economy under post-euro devaluation beyond achieving a 1-2 years-long 'bounce'. Analysts who expect Greece to recover on the back of exiting the euro & devaluing are deluding themselves for two major reasons:

1. Greece has no fundamentals for growth & its debt overhang will remain, unless it defaults hard. Even with a default, removing debt overhang is not going to deliver growth to Greece beyond simple mechanical post-depression bounce, as Greece lacks all fundamentals for growth - institutional, cultural and historical. 
2. However, with a hard default option, post-Euro, Greece will not be able to borrow & absent Government spending Greece has no capacity to grow. This is clearly shown in the charts below which highlight that in 23 out of the last 29 years, Greece has managed to achieve growth only with accompanying fiscal imbalances. 

In summary, Greece never once had any fundamentals to grow on its own without massive subsidies either via loose monetary policy or overinflated expectations relating to the country accession to the European common structures. Greece is not about to get real growth-driving fundamentals within or outside the euro area.

In short, all those talking about 'Greece must exit euro zone to achieve growth' are nothing more than fake doctors treating a patient who himself is faking a disease. Greece's problem is not the Euro. It's problem is Greece itself.

Here are the charts proving the point.

Fiscal imbalances:

Structural failure:

External insolvency:

Rotten growth fundamentals:

And lastly, rotten growth record

QED.

28/1/2012: Spin of 'great investment destinations' - Malta

For 'Malta is a great investment destination' crowd. Here is a quick stats summary based on IMF WEO:

So let’s summarize the above:

Malta is poor, has moderate inflation, which is of course consistent with low growth. Malta’s exports of goods and services are growing very slowly – if it is such a great trading location, can someone explain this? Malta performs well in unemployment terms, but this conceals the fact that Malta’s population is either too old or too young or too long unemployed to actually count as being in the workforce. Hence, Malta is second worst performer in the euro area in terms of actual employment rates.

Malta’s public finances are in line with majority of other Accession States, so it is doing decently well (though not spectacularly) in terms of Government deficit and structural balance. It is not exactly a stellar performer when it comes to Government debt, but it is extremely poor performer when it comes to external balance – current account. Which, of course, is the exact opposite of the evidence required to support the premise that Malta is a success in terms of attracting foreign investment, or being a great destination to trade from.

You can tell, I hate spin!

28/1/2012: Eurocoin for January 2012

The latest leading indicator for euro area growth -Eurocoin - for January continues to signal recessionary dynamics, albeit at moderating rates of decline.

January Eurocoin rose to -0.14 from -0.20 in December 2011. Here are some charts:

Eurocoin is now in the negative territory for four consecutive months. 3mo MA is at -0.18, 6mo MA at -0.07, crossing into negative for the first time since the last recession. In January 2011 the indicator stood at +0.48. Quarterly rate of growth is now at -0.17 implying annualized contraction of -0.56%.

There is now, due to persistent negative reading, more consistency in eurocoin and ECB repo rate, but inflation-growth remain unbalanced when it comes to applying Taylor rule to ECB rate policy.

All in, the rates decision based on the leading indicator performance should be to stay put and await more significant moderation on inflation side. Mild bout of inflationary recession is still on the cards for the euro area for Q1.

26/1/2012: Rip-off Ireland - Sunday Times, 22 January 2012

This is an edited version of my Sunday Times column from January 22, 2012.

Back in 2004, with much fanfare, Fine Gael launched its ripoff.ie campaign that highlighted a large number of cases where policy-related or regulated price structures and practices have resulted in our cost of living falling well out of line with other Euro area economies. In 2009, Fine Gael launched a policy paper that was supposed to end Rip-off culture, including in state controlled sectors, once and for all.

Fast-forward to today. Since elections, having abandoned its pro-consumer agenda, Fine Gael has done marvellously in playing a ‘responsible’ possum to Irish vested interests.

According to the CSO, year on year, consumer prices in Ireland rose 2.5% through December 2011. The range of these price changes across sectors, however, was dramatic.

Clothing and footware prices were up 0.4% in 12 months through December, Furnishings, Household Equipment and Routine Household Maintenance prices fell 1.9%, Recreation and Culture deflated by 0.6% and Restaurants and Hotels costs fell 0.9%. Health costs rose 2.6%, Transport by 1.6%, Education by 8.9%.

Majority of these price hikes have nothing to do with private firms ‘profiteering’. Per Purchasing Manager Indices, tracking the changes in input and output prices for goods and services, Irish firms and MNCs have experienced sustained shrinking of the profit margins since the beginning of the crisis, as consistent with deflation. Instead, the largest price increases, and ever expanding profit margins, took place in the sectors that, in the past, Fine Gael have correctly identified as being state-controlled parts of the Rip-off Ireland.

Food and non-alcoholic beverages prices are up just 5.9% in the last 10 years, cumulatively. State-controlled Tobacco prices are up 69.6% and Alcohol 21.6%. Housing, Water, Electricity, Gas and Other Fuels – single largest category of consumer spending – is up 64.4% on December 2001, with 90% increase in Energy Products costs, 63.3% increase in Utilities and Local Charges, and 99.1% increase in Mortgage Interest costs. In the last five years, Rents have fallen 8%, while Mortgage Interest rose 11.3% despite the fact that ECB rates have dropped 2.5 percentage points over the period. Electricity prices are up 28.3% in 5 years and 11.5% in the last year alone, despite the fact that natural gas prices – the main generation source for Irish electricity – have declined worldwide.

While Fine Gael cannot be blamed for the full extent of price hikes since 2001 or 2006, the current Government bears responsibility for failing to address state-controlled inflation since taking the office.

The above sectors are indirectly controlled by the state via regulation, state ownership of banks and enterprises, and indirect tax measures. But what about those costs more directly set by the Government?

Health costs are up 56.5% on December 2001, Education is up 81.5%. In Health, the core drivers of inflation have been Hospital Services (up 40.2% since December 2001 and 9.8% in 2011), Dental Services (up 20.6% in 5 years, but down 0.3% in the last 12 months). Meanwhile, prescribed drugs prices are down 11.3% on 2006 and 4% in the last 12 months. Health insurance costs are up 75.7% and 22.9% since December 2006 and in the last 12 months, respectively. This in a country with younger population and well-established trends in terms of demand for healthcare. In contrast, vehicles insurance – privately provided and similar in predictability of total claims risks – inflation since December 2006 amounts to just 9% and 0.9% in the last 12 months.

Same story of the state-led rip-off is replicated in the Transport sector. Here, overall costs are up 9.3% in the last 5 years, but bus fares are up four times as much. Privately controlled costs of buying vehicles have declined 15.4%, while state-set motor tax rose 14.3%. Ditto in Communications, where telecoms services costs are up 5.8% in the last 5 years, but postal services up double that.

In two sub-sectors of education where the Government has least power to influence prices – Primary Education and Other education and training – inflation is the lowest. The highest price increases are in the third level education, with prices up 50.1% in just 5 years (13.4% in last 12 months alone).

The above clearly shows that the Government and the semi-state bodies and enterprises it owns, along with the banks are at the heart of the extortion racket that is our cost of living. Over the recent years, rapid deflation in prices and costs in the private economy has been offset by the rampant inflation in prices and costs in the state-controlled and regulated sectors. In majority of cases, this inflation was directly benefiting state and semi-state employment, management and Government coffers. In all cases, the costs were directly impacting Irish consumers who are left with no meaningful choice, but to comply with the pricing structures set in the markets.

CHARTS:

Sources: CSO database and author own calculations

Meanwhile, Budget 2012 clearly shows that the Government is hell-bent on extracting ever-higher rents out of consumers through taxes and charges.

For example, the Government has introduced increased mortgage interest relief that amounts to €52 million in help for most indebted-households. But the very same Government refuses to intervene in the banks’ internecine policies of shifting the burden of losses from trackers onto the adjustable rate mortgagees. The households that the Government finds in the need of increased mortgage interest relief will be liable for the new Household Charge. And, if Minister Noonan has his way, mortgagees who default on their loans will pass into outright debt slavery to the banks.

There are more direct inflation-linked or inflation-raising taxes, such as VAT. Increase in the VAT rate simultaneously pushes up the overall tax component of all goods and services sold in the state that are taxable at the higher rate (an increase in inflation of some 9.5% for those items) and increases the costs of all goods and services that are dependent on intermediate inputs. Excise tax on tobacco comes against the Revenue Commissioners’ analysis showing that tobacco taxes have reached, even before Budget 2012 measures are factored in, the point where higher taxes harm receipts and fuel black markets. And Carbon Tax quadrupling from €5 per ton to €20 per ton has been responsible for some 2% rise in inflation in fuel and related activities. Motor tax increases, accounting for double the share in an average household expenditure that accrues to bus fares, are going to directly drive up the cost of transport.

Increases in State charges for hospital beds are expected to raise the cost of healthcare for middle class patients by some €268 million in full year terms. Health insurance levy hike further compounds this inflationary grab-and-run approach to policy. Secondary education ‘savings’ are likely to see parents being forced to cover much of the gap in funding out of their own pockets. Third level measures, while relatively modest in size, will compound massive inflation already accumulated in the sector over the last 5 years.

By the metrics of the Budget 2012, the current Government didn’t just mothball its pre-election ideas on reducing the reach of the State-sponsored Rip-off Ireland, it has actively moved to embrace the cost-of-living increases through indirect taxation and encouraging avarice of the semi-state commercial bodies and dominant near-monopolies. All of which means that the path to economic recovery we continue upon is the path of deflationary spiral in private sector economy, with mounting unemployment and businesses insolvencies, offset by the unabated cost increases when it comes to the meagre services the State does supply or control.

Box-out:

Following an almost 11% month on month decline in trade surplus in October, Irish exporters have posted a record-breaking return to health in November, bucking all expectations. The market consensus was for the Irish trade surplus (merchandise trade only) to decline marginally to ca €3.4 billion in November. Instead, the trade surplus rose – on seasonally adjusted basis – to €4.31 billion – the highest on record. In 11 months through November, cumulative merchandise trade surpluses now amount to €40.53 billion or 1.6% ahead of the same period in 2010. As before, the core drivers of trade surplus were exports increases in Organic Chemicals, and Medical and Pharmaceutical products, while indigenous exports rose significantly during the last year in Dairy products category. The latest data highlights the resilience of the Ireland-based MNCs’ exporting capabilities, providing continued contrast to the majority of our counterparts in the Euro area ‘periphery’ who have been posting dramatic slowdowns in exports and deepening trade deficits since the beginning of Q4 2011.

26/1/2012: IMF's latest statement on Greece

Here's an interesting statement:

Given widespread press speculation and rumors regarding IMF views, the following can be attributed to an IMF spokesman, William Murray:

"To ensure debt sustainability for Greece, it is essential that a new program be supported by a combination of private sector involvement and official sector support that will bring debt to 120 percent of GDP by 2020. The Fund has no view on the relative contribution of private sector involvement and official sector support in achieving this target. In line with this view, the IMF has not asked the ECB to play any specific role."

So IMF is making a pre-emptive announcement of 'neutrality' on the issue of the day - who'll be blamed when Greek PSI talks eventually end up in the courts and Greek debt/GDP ratio shoots past 150% mark.

And here's IMF own December 2011 report on Greece (available here)"

Page 13:
"The previous July 21 financing package [agreed for Greece] would not work. Public debt would peak at 187 percent of GDP in 2013 and fall to 152 percent of GDP by 2020. Net external debt would peak at 128 percent of GDP in 2012 and fall to 96 percent of GDP by 2020. These already weak downward trajectories would not be robust to shocks.

The precise outcome of the PSI exercise has an important bearing on public debt dynamics and how robust any improvement would be (the external debt sustainability analysis shows a similar pattern):

• With near-universal participation in a debt exchange targeting a 50 percent face value haircut and offering a low coupon, and European support at an interest rate of about 4 percent, debt could be brought to 120 percent of GDP by 2020 (the maximum level considered sustainable for a market access country). The trajectory would also be less susceptible to shocks (including to the official sector funding cost), although a longer period of time would be required to bring debt-to-GDP below 120.
• However, with low participation in the debt exchange and a significant amount of hold outs to be amortized with European support—a real risk under a purely voluntary approach (i.e., an approach not involving any measures to induce higher participation levels)—debt could stick above 145 percent of GDP in 2020. Moreover, the trajectory would no longer be robust to the usual range of shocks.  

Thus, securing a sustainable debt position will depend on whether PSI negotiations deliver the targeted €100 billion in debt reduction, in particular on the ability of the features of the exchange to deliver near-universal participation."

So in other words, why issue pre-emptive statements now? Because a month ago IMF has already washed its hands on Greece, basically saying that, 'look, if all goes really well, things might get to sustainable scenario (assuming Greece delivers on all structural reforms and privatizations and there are no slippages in growth and external balances, etc), but we don;t quite believe they will...'

25/1/2012: Return to the Bond Markets

According to the report in FT Alphaville (link here) Ireland has 'returned' to the bond markets by carrying out a swap of a 4% coupon 2014-maturing bond for a 4.5% coupon 2015-maturing bond. This reduces 2014 outgoings on redemption of maturing bonds and forces more maturity into 2015, which has more benign profile. But the switch comes at a price - the coupon is up 12.5% on previous.

In effect, if this is less of an Ireland's 'return to the bond markets', more of Eddie 'The Eagle' Return to the Olympics type of an event. Much pomp (official announcements and Government statements to follow), no circumstance (Ireland still cannot fund itself outside the Troika agreement), and even less real substance (avoiding a total blowout in 2014 is now clearly an objective for policy measures). But hey, let it be a much needed 'green jerseying' distraction, as FT Alphaville suggests, to the gruesome reality of Ireland torching another €1.25 billion worth of taxpayers' funds on that pyre called IBRC/Anglo.

24/1/2012: Residential property prices - 2011 highlights

Latest Residential Property Price Index (RPPI) from CSO posts another monthly decline in the price series and marks deep drops in the property prices in 2011. Here are top of the line figures - end of year readings:

And updated Nama valuations referencing:

So to summarize (note - there will be more detailed analysis of this data coming up in later posts):

• All properties index is now 31.1% below January 2005 levels
• Houses are now down 28.3% below January 2005 levels
• Apartments are now down 46.5% below January 2005 levels
• Dublin all properties are now down 39.3% below January 2005 levels
• Rates of decline (monthly) are greater than 1.5% (12mo average) for 3 months in a row for all properties and for houses.

24/1/2012: Europe's Latest Non-Leadership on ESM/EFSF

Another heated non-debate is sweeping Europe. In the latest round of bizarre, outright Kafkaesque rhetorical contortions, European leaders are now engaged in a heated discussion on the 'enlargement' of ESM. Alas, the whole thing is clearly heading for the same outcome as Europe's previous rounds of 'solutions'. Here's why.

Recently, as reported in German press (here) Angela Merkel started to yield on the idea that the 'permanent' ESM fund should be increased from €500 billion to closer to €1 trillion by, among other things, allowing for concurrent running of existent €250 billion EFSF facility and the setting up of the new ESM.

Sadly, this 'solution' is really a complete red herring, despite all the hopes the EU is pinning onto it. In fact, it so much of a fake, the markets are simply likely to laugh their way through it.

The EFSF is designed to run out of time in the end of 2013. ESM is designed to start the earliest in mid-2012. Which means that even in theory, combined ESM/EFSF can last not much longer than 12 months. In practice, however, even this is not going to happen.

Firstly, EFSF is becoming increasingly funded through short term debt issuance and this means that as we hit 2013, the rate of EFSF paper maturing is going to accelerate. To roll this into longer-dated paper will require more than just re-writing the statutes of the EFSF. It will require EFSF raising funding at the same time as ESM is raising funding. The likelihood of this being a successful market funding strategy is zero.

Secondly, ESM capital basis of (meagre) €80 billion is not going to be fully invested on the initiation of the fund. Which means ESM even in theory is not going to come out on day 1 and borrow full €500 billion capacity. In practice, it can't be expected to raise even 1/4 of that in the first year of operations.

Which means that even running concurrently, EFSF+ESM duo will not constitute a fund with anything close to €750 billion capacity. And this means that European leadership is clearly in line for winning the Global Non-Leadership Prize again this year. IMF, insisting on the concurrent running of EFSF/ESM as well, is going to be a runner up.

23/1/2012: Extreme Events

Going through 2 charts and mapping the big themes of the ongoing crises, one has to be in awe of the volatility. Here are the maps of extreme (3-Sigma-plus) events with 'directionality' reflected:

Lovely, aren't they? But the trick in the above is: we are not at the decay stage of volatility on the sovereigns re-pricing stage. This, to me, suggests that once the sovereign crisis re-pricing draws to conclusion (whenever that might happen - isa different story), there will be the need for finding that 'new normal' (reversion-to-the-trend target) for the markets valuations overall. And that is the whole new game, dependent less on the previous equilibrium that should have followed the Great Bursting period, but more on the future risks and trends in post-debt economies. Which, itself, really depends on whether any given market can sustain growth without endless supports (implicit and explicit) from the Government borrowings.

Just thought I'd throw few thoughts out there...

22/1/2012: An update to Euribor risk premium post

On the foot of the previous post, I recomputed risk premia for 3 maturities: 12, 9 and 6 months euribor. Here's the chart:

And some top of the line numbers:

To compare against rates dynamics:

22/1/2012: What do interbank lending rates tell us about risk valuations?

Here is an interesting set of charts for euribor:

Notice that as maturity span shortens, there is an increasingly rapid decline in the rates in recent month. This, of course, is a reflection of two forces acting simultaneously - the ECB LTRO and the rate drop in December. You can see this here in the context of 12 months euribor plot for end-of-month (and end of last week for January 2012):

Sounds good? Indeed, the short-term end of liquidity curve improved dramatically, but... here's a trick - the long-term end of the curve is not improving as much as (1) the repo rate supports, and (2) LTRO (3 year facility) should lead it to. To see this - here's a chart:

And the above term premium is rising despite the risk premium falling:

Note: the last chart above is not seasonally adjusted and, with exception for 2010, euribor rates tend to fall seasonally in January compared to December.

In fact, current risk premia are well above the long-term relations and at more extreme end of the spectrum than during the previous months:

The above suggests to me that what we are observing in the liquidity markets is a combination of some improvement due to ECB's LTRO move (substitution along maturity curve) and the (very) incomplete pass through of ECB rate change to funding markets. There appears to be no evidence in risk reduction anywhere in sight.

22/1/2012: 'Markets are crazy', says market economy Ireland

So we used to have an 'Innovation Island' here that was run by the Deputy PM who confused Einstein with Darwin. She was directly in charge of Innovation policies.

Now we have a 'Competitive Market Economy' that 'Is Open for Business', as we constantly remind our potential foreign investors (domestic investors we have simply taxed into oblivion already and are even expropriating their wealth through Minister Noonan's 'levy' on pensions), run by the Minister responsible for the following statements (source here HT to @brianmlucey for flashing this one out):

"Michael Noonan, Ireland's finance minister, criticised the involvement of private creditors in the [Greek PSI] talks, arguing that it had made the crisis worse. Mr Noonan told the German newspaper Sueddeutsche Zeitung it had been a "fatal" mistake to involve the private creditors and this had "driven the markets crazy". He said that markets would only calm when they were convinced that eurozone countries were making serious efforts to solve their debt problems."

So, 'markets are crazy' and proper risk sharing with private investors in the case of insolvency is a 'fatal mistake'.

Does Minister Noonan believe in slavery? Because if he doesn't then there is no alternative in the case of Greek crisis resolution options to PSI. Of course, Minister Noonan believes in slavery - the modern variety of it - slavery that subjugates those who do not emigrate from Ireland to decades of involuntary repayment of privately accumulated debts they did not contract to accumulate. Minister Noonan has no problem with the Government of Ireland simply undertaking all private debts of a private insolvent banks and forcing ordinary people - not shareholders or lenders to these banks who were paid to take the risks in the first place - to repay them. Just like that. Without any consent: "Give us your money, granny, or else!"

But there's more to the statement above, which shows Minister Noonan in an equally unpleasant light. You see, Minister Noonan swears by the wisdom of the IMF and the ECB and the European 'partners' when it comes to his domestic policies. He did so officially earlier this week when he used Troika endorsement of Ireland's 'progress' in the programme as the reflection of their support for his policies. Yet, it is the very same Troika he so blindly follows into Ireland's economic oblivion which deemed Greek debt levels unsustainable - aka non repayable even were the modern day debt slavery terms (as imposed in Ireland) deployed in Greece as well.

So, for all our Irish concerns about the sanity of the Troika 'solutions' for Ireland, there's an even greater concern that should be preoccupying our minds - concerns for the positions taken by our own national leaders. And for all those would-be foreign investors into Ireland - please remember, you are about to invest in the economy run by those who think that 'markets are crazy' and contracts for risk pricing are 'fatal mistakes'.


PS: Never mind, Minister Noonan's only plan for Ireland is to attempt, asap, borrowing in the 'crazy' markets to finance his 'sane' fiscal management strategies.