16/02/2012: Spanish & French bonds auction

Spain's bond auction results:

• €2.268bn - 3 year bond, 4% coupon, yield 3.332 against previous auction 2.861% with cover of x 2.2 against previous cover of x1.6.
• €0.733bn - 3 year obligacion, 4.4% coupon, yield 2.966 against previous auction 4.984% with cover of x 4.4 against previous cover of x2.4.
• €1.073bn - 7.5 year obligacion, 4.3% coupon, yield 4.832 against previous auction 5.352% with cover of x 3.3 against previous cover of x2.1.

Original target for sales €3-4 billion. Raised €4.074 billion - slightly ahead of target, with improved yields and cover. No allocation map to tell how much of take up was due to banks buying.

Dynamics similar to January 19th auction:

• €1.3bn - 4 year bond, 4.25% coupon, yield 4.021% against previous auction 3.912% with cover of x 3.2 against previous cover of x1.7.
• €2.3bn - 7 year bond, 4.6% coupon, yield 4.541% against previous auction 5.110% with cover of x2 against previous cover of x1.1.
• €3.0bn - 10 year bond, 5.85% coupon, yield 5.403% against previous auction 6.975% with cover of x2.2 against previous cover of x1.7.

And French auction results:

• €5.025bn - 5 year bond, 1.75% coupon, yield 1.93% with cover of x 1.99
• €2.09bn - 2 year bond, 3% coupon, yield 0.89% against previous auction 1.05% with cover of x 2.4 against previous cover of x2.1
• €1.34bn - 3 year bond, 2.5% coupon, yield 1.09% with cover of x 3.0

Via @ForexLive 

13/2/2012: Now - a Greece comparative that doesn't work in our favor

Sometimes those 'We are not Greece' comparatives work our way, sometimes (fortunately enough rarely) they take us in the opposite direction. Take a look at the following two charts from DB Research (hat tip to Zero Hedge). Note: you might want to click on the charts to enlarge.

Chart one clearly shows Ireland's impressive performance with low interest rates, bubble-fueled domestic growth. The chart below shows Ireland's disastrous growth performance since the bubble burst. What's the point, you ask? Ok, half of the period of our rapid decline has been the period of exports boom, the period of our growth has been the period of domestic growth. Irish exports have been on the tear since quarter  9 in the second chart. And yet, the miracle is not happening - the exports-led recovery is still not here.

And look at Greece. And Portugal. And Spain. And Italy. And compare to Ireland. Scary? Glance back at chart 1 above and spot the fall we've taken. Some might say as the consolation that we are still ahead of all the PIIGS in actual national income (do keep in mind - the above charts are GDP, not much more adversely impacted GNP). Ok, let's put it in simpler terms: Greece has fallen from the 10th floor to the 5th floor balcony. We have fallen from the 20th floor to the 10th floor roof terrace. We are still five stories above Greece, but, man it has to hurt more.

13/2/2012: Sunday Times 12/2/2012: The perils of long-term unemployment

This is an unedited version of my article in Sunday Times, 12 February, 2012.

The conflicting nature of the most recent data on unemployment in Ireland paints the picture of an economy bouncing at the bottom of the Great Recession. However, underlying trends in long-term unemployment represent the single greatest threat to our growth potential in years to come.

The latest Live Register figures reflect two months of consecutive and robust declines in the numbers drawing unemployment assistance. In December 2011, seasonally-adjusted Live Register dropped 3,600 (the third largest monthly decline since the beginning of the crisis). This was followed by a 3,200 decline in January 2012, marking the fourth biggest downward adjustment in the series since January 2008. Yet, January 2011 Live Register total remains just 2.1% below the peak of 449,200 attained in September 2010.

Since 2009, net emigration form Ireland totalled some 76,400 and gross emigration amounted to 236,800 according to CSO. Absent the officially registered emigration, Irish Live Register would have been closer to 522,900 in January 2012. In other words, the Live Register improvements now conceal, not reveal, the true extent of joblessness and underemployment in the country.

In contrast to the Live Register data, more direct evidence on the job markets conditions is provided by the monthly Purchasing Managers Indices (PMI) surveys published by NCB Stockbrokers. These make for a rather depressing reading. January Services PMI employment conditions registered a deeply contractionary 44.5, exacerbating declines posted in December 2011. January marked the sharpest rate of decline in the services sectors employment in 21 months. In Manufacturing employment index rose in December to 50.5 before falling again to a contractionary 49.5 in January 2012. Manufacturing employment index is now 4.1% below January 2011, marking the fourth drop in the past five months.

These are the short-term signs of the labour market that remains in continued distress. And further deterioration in the underlying jobs and employment dynamics can be expected in the medium term.

Firstly, dramatic increases in the cost of laying off workers under Budget 2012 are likely to translate into an overall stabilization of the Live Register figures at a cost of the deterioration in the quality of jobs (wages and bonuses, and promotional opportunities losses) and hours of work as employers will be seeking cuts to their cost bases through lower pay and fewer billable hours. Budget 2012 makes it less likely that employers will be taking on new workers any time soon.

Secondly, the already rampant rise of the long term structural unemployment will continue unabated. Here Ireland is in the league of its own when compared to other European economies. In Q3 2011 our long-term unemployment stood at 8.8% - the third highest in the EU27. Over the period covered we have experienced a sharpest increase in long-term unemployment in Europe.

Matters are even worse when it comes to very long-term unemployment – defined as unemployment spells in excess of 24 months. With a rate of 5.4% in Q3 2011 we are now the second worst performer in Europe in terms of overall very long-term unemployment rate, and we are the absolute worst in the EU27 in terms of increases in very long-term unemployment since the beginning of the crisis.

Long-term unemployment exacts tremendous social and economic tolls. International research shows that long-term spell out of work leads to reduced life-time earnings (with estimates of up to 20% loss in earnings years after the return to the job market), higher probability of future unemployment (in some studies reaching over 2.3 times higher probability of unemployment that average), and rapid and profound deterioration in human capital of the unemployed. These effects also hold for those entering the workforce during the periods of elevated long-term unemployment, such as the current Irish graduates.

In today’s environment, rising long-term unemployment in Ireland, threatens to reinforce already adverse future trends in productivity growth. A study by the European Commission from 2006 has shown that across EU27, over the next 25-30 years, ageing workforce will require greater use of skills-driven productivity growth. The last thing we want is to lose the skills of the current generations of young workers and students to long-term unemployment.

In terms of timing of the policy responses to the long-term unemployment, therefore, it is critical that we do not delay the necessary structural reforms.

Most of the research on the policy solutions to this problem is focused on the structural and institutional aspects of the labour markets. A number of recent studies from the UK, Italy, and the US, as well as more broadly-focused studies across the advanced economies show that long duration strong unemployment protection, and high cost of hiring and laying off workers, along with rigid systems of wage setting can act as structural barriers to dealing with the long-term unemployment. This point has been most recently flagged in the case of Ireland by the OECD report from June 2011. High minimum wage and strong collective bargaining have been linked to segmentation of the labour force and increased job instability for the younger and less-skilled workers. Systemic reforms of social welfare and wages-setting mechanisms are clearly an extremely painful, but necessary part of the comprehensive solution.

On the enabling side of the policy equation, the focus should be on enhancing the human capital of the unemployed and incentives for private sector jobs creation, not public investment-driven policies.

Immediate labour market measures should be developed for the long-term younger unemployed. The Government, consistent with the advice from the IMF and OECD is pursuing so-called active labour market programmes in this area. These are primarily represented by the ‘push’ policies designed to force young people off the unemployment benefits and into state-run training programmes. According to the Nobel Laureate James Heckman training schemes designed to de-list people from the unemployment rosters had zero effect on labor markets outcomes in the 1990s. More recent research for European countries experiences prior to 2008 confirms the same. In Ireland the real impact of FAS programmes on long-term unemployment both before and during the crisis has been negligible.

OECD data very clearly shows that Ireland spends more than the Nordic countries as well as high income EU countries on direct jobs creation and state training. In total, Ireland spent 0.87% of GDP or 1.10% of GNP in 2010 on all active labour markets programmes, compared against 1.06% in the Nordic countries and 0.70% in the rest of the high income EU states. It is clear that we are simply not getting a good value for money out of this expenditure.

Instead of relying on active labour markets programmes alone, Ireland should focus on facilitating formal education access for long-term unemployed, especially to undergraduate and MSc programmes closely aligned with business and industry interests and featuring large component of direct industry-related teaching. Retraining grants and supports can be linked with mobility grants to assist mobility of those moving off unemployment benefits.

For the very young at-risk of future unemployment, financial incentives to stay in school can be developed via social welfare systems.

There is strong evidence to support the view that private sector jobs creation can be assisted through carefully targeted tax breaks and deferrals. These require extremely close monitoring, strict conditionality and enforcement, while assuring that there is no older workers displacement. Another significant measure would be to suspend minimum wage for all workers under-25 years of age, but this policy cannot be expected to generate sustainable, higher quality jobs.

Reducing USC rates for self-employed below those for PAYE workers to reflect the reality of their restricted access to social benefits would provide some support for early-stage entrepreneurship and skills-based self-employment.

The last thing the Government should do in the current environment is to use scarce taxpayers cash on direct physical capital investment as such measure would subsidise capital-intensive, not skills-enhancing activities which will cease the minute Government cash dries up once again.

Both the IMF and the OECD provide very clear-cut suggestions as to the core composition of the structural labor markets reforms based on three pillars: welfare reforms, labour markets reforms and activation systems enhancement. Augmenting these with more direct measures to incentivise private sector jobs creation mentioned above would be a net benefit in combating long-term unemployment.

Table: Spending on active labour market programmes, 2010, % of GDP

	Ireland (GDP)	Ireland (GNP)	Nordic Countries	Other OECD Europe	OECD non-Europe
Public employment service and administration	0.18	0.23	0.30	0.17	0.07
Training	0.37	0.47	0.26	0.22	0.09
Direct job creation	0.26	0.33	0.03	0.08	0.05
Other active measures	0.06	0.08	0.46	0.23	0.07
Active Labour Market Programmes, total	0.87	1.10	1.06	0.70	0.28

Source: OECD, Employment Outlook 2011, table 3.2

Box-out:

As the farcical show of Greek negotiations and austerity talks continued its merry-go-round through this week, the ECB has caused some excitement by opening up the discussion on allowing some writedowns of the Greek bonds it holds. The EFSF bonds swap would see ECB converting Government bonds the Central bank bought in the markets, for higher rated EFSF bonds, writing down its purchase discount, which in the case of Greek bonds stands around 31% of the face value of debt bought. The move has been gathering momentum and driving the bond prices up since the mid-week in a hope it will be extended to other peripheral bonds. Yet, no one in the markets seemed to notice a simple paradox. In order to create any real lasting effect on bond yields, such monetization would require a de facto injection of hundreds of billions in cash into the Euro area economy. The upside of this would be further cheapening of the credit for the peripheral states. The downside will be an even greater liquidity trap via EFSF and a sharp rise in the future interest rates on Euro denominated debt of the ordinary households and companies. With 4-4.5% ECB rates on offer and double-digit retail rates on banks loans, ECB would be robbing Paul and Jane to pay off Governments across the EU weakest states. This we now call Europe’s greatest hope for salvation?

12/2/2012: A road map to a cooperative solution for Greek crisis

Papandreou: 'this is a battle between the markets and democracy'.

Greek political discourse - mirroring the received wisdom of the crowds has been reduced to a blatant, and populist lie.

The battles in Greece today are between democracy and European/ECB dogma of preserving the status quo of existent statist system, of which patronage by the State of some markets participants is just an element. Here's why:

1. The markets did not impose ANY conditions on Greece - EU/ECB did. The markets simply refuse to be conned any longer into subsidizing the Greek state through cheap credit. This is the basic right of any participant in the markets - to refuse investing or lending to anyone, just as it is the right of any baker to refuse selling bread to someone with no money and no desire to pay on credit.
2. The markets investors are the injured party - excluding the bottom-fishing hedge funds who bought Greek bonds very recently at hefty discounts. The investors are the only ones who were first deceived by the Greek Governments cooking books and fudging numbers in official statistics. The investors should have known better, but that is not a valid defense of the case against them - they were deceived by fraudulent data reporting by the Greek State (yes, right - politicians, Governments, civil servants). The markets/investors are also the only ones who have to take any writedowns. The ECB and the European Union are taking no writedowns on Greek bonds, and are, in fact, lending Greece 'rescue funds' at a profit. 

I am pointing this not to prevent imposition of losses on Greek bonds investors. They deserve to lose and they should lose more than 70-75% of the face value of their investments in Greek bonds.

I am writing this to point that the battle we are facing in Athens today is between people pushed to a breaking point by the policies of the Governments past, and the EU/ECB.

And there is a way out, folks. Here's what should be done:

1. Impose full losses on Greek bondholders to bring debt/GDP ratio in Greece to 75%. Do same for banks bondholders in Ireland and Spain, and combine these sovereign and banking measures to achieve the same in Portugal and Belgium. Seniority under these arrangements should be as follows: private sector debt holders take the first hit, followed by the public debt holders.
2. All PIIGS bonds held by the ECB are to be transferred into a separate holding fund. This fund is to run between 2012 and 2021. Bonds are to be held in the fund not at face value, but at purchase value to instantaneously reduce debt overhang in these countries. Note: this imposes no loss on ECB until the fund is wound up.
3. The ECB Special Fund (outlined in (2) above) is to monitor the conditions of compliance with real (not the currently identified) reforms aiming to restructure PIIGS economies to put them on the path of private sector-driven growth and fiscal sustainability over 10 years horizon.
4. No coupon payments or principal repayments to be accepted by the ECB on these bonds between 2012 and 2021 to reduce debt overhang drag on the participating economies and improving their fiscal capacity to implement reforms.
5. The bonds held in the ECB fund are to be automatically written down to zero face value in 2021 as long as the participating country meets conditions of implementing the reforms.

The above proposal will eliminate or severely restrict the problem of moral hazard, as countries participating in the programme will be subject to strict reforms programme implementation. The plan will also reduce the burden of repayment of debt on the countries that do stick to the conditions of the reforms. The plan will also bring, gradually, these countries economies to more competitive institutional, fiscal and regulatory environment. In other words, the proposal contains both the sticks (under items (2), (3) and conditionality) and the carrots (items (4) and (5)).

In other words, the fund, as outlined above, would satisfy core objectives of the crisis resolution framework:

• Allow for meaningful change and reforms
• Create an incentive to participate actively in reforms for the countries engaged with the fund
• Reduce moral hazard problem
• Help to establish popular support for reforms by providing real, tangible improvement in the economies ability to sustain reforms

We can't keep fighting battles driven by noble objectives, but based on faulty logic that simply serves the very same elites that have created this crisis. We need to find a cooperative solution to the problems we face.

11/02/2012: Labor Productivity - some cross-EU comparatives

There has been much of talk about Euro area (and EU27) competitiveness trends recently in the media. Some of the commentary I've seen references the issue of decoupling in competitiveness across EU states. In light of this, I decided to take a look at productivity trends. Using eurostat data, I was able to:

1. Take eurostat main series for per person aggregate (total) productivity index that sets 2005=100
2. Rebase the index to Q1 2000=100 and recompute entire set of EU27 countries, plus EA17 and EU27 aggregates
3. Obtain via (1) and (2) above new set of productivity indices that reflect dynamics in per person productivity since Q1 2000 through Q3 2011
4. Note: data is seasonally adjusted and I am only reporting countries where data is hours adjusted as well.

Here are the core charts (I added Ireland and EU 27 average in every chart):

So few trends are apparent:

• Ireland performs - since the beginning of the crisis extremely well in terms of productivity improvements and levels - much due to the massive destruction of its employment base (I commented on this effect a number of times before). Overall - this is remarkable performance albeit at huge cost.
• Spain has posted some significant increases as well, mostly due to destruction of employment - much more so than Ireland.
• Italy is performing poorly as does Greece. In fact, Greece is the third worst performer in the entire EU27 in terms of productivity growth since the beginning of the crisis (Q1 2008).
• Portugal improvements appear to be largely consistent with the pattern for Spain.
• Finland clearly leads the pack (after Ireland) in the group of Small Open Economies (SOEs)
• Strong trends in growth in East-Central Europe (ex Hungary and Slovenia) 

Now, let's take a look at cumulative growth in productivity since the beginning of the crisis - note: green boxes mark countries that outperform EU27 average by more than 1/2 STDEV, while red boxes mark those countries that underperform the EU27 average by more than 1/2 STDEV:

And similar analysis for cumulative growth in productivity since Q1 2000:

 So is there 'decoupling' going on in terms of labor productivity? Not really. Here's what's happening:

• Spain shows highest gains in total productivity since Q1 2008 but weak (roughly average) gains since Q1 2000
• Ireland shows second highest gains since Q1 2008 and above average (6th highest in EU27) gain since Q1 2000
• Slovakia doing spectacularly well, albeit, of course, from low levels, as is Estonia (though not too great during the crisis period)
• During the crisis, Belgium, UK, Greece, Hungary, Italy, lux & Sweden all posted below average (more than 1/2 STDEVs) performance
• Since Q1 2000, Italy and Lux were the only two statistical underperformers.

So unless we go beyond Q1 2000 (the period for which we don't really have coherent comparable data) there is no 'decoupling' going on in labor productivity. There is shallow growth in it on average, but no dramatic 'decoupling'. In other words, much of core Europe is pretty poor in terms of labor productivity growth, while East-Central Europe and Ireland are performing pretty well.

11/02/2012: Globe & Mail 9/02/2012

Here's the link to my latest article for Economy Lab with Canada's Globe & Mail.

10/2/2012: Two charts for a Friday night pint

Two charts for some Friday night thinking instead of (or even while) drinking. One courtesy of Lorcan Roche Kelly flagging it on twitter (link here):

No, it's not Nouriel Roubini references that are of import in the above - entertaining as they might be - it's the likely pending reversal in the series that some techies have noticed. Hope you are not too long into the weekend...

Second chart is my own. I took a simple ratio (expressed in %) of General Government Deficit to Structural Deficit to highlight the extent of the spending related to excess over structural imbalances, in other words - to show some pro- and counter-cyclicality. Underlying data came from IMF WEO.

Some points worth noting: US has been running expansionary (in excess of structural) deficits since 2007 and these have peaked in 2009. UK started slightly later - in 2009 and will be running these through the entire forecast period. Here's an interesting thing - for all the austerity claims in the UK, ordinary deficits are expected to run above structural deficits all the way through 2016. 

10/2/2012: Few thoughts on the global policy crisis

What makes me really concerned nowdays is not the ongoing crisis, but the logical and numeric impossibility of the mounting policy "solutions' to the crisis. Here's a quick synopsis. Take a look around the world:

• Bank of England repeated QE rounds in the face of £1 trillion+ debt pile is a strategy for growth via debasement of the currency
• Fed's continued unrelenting QE is much the same
• ECB has been debasing any real connection between banks, real economy and banks profits via uninterrupted injection of cash into banks - giving a license to earn free profits on interest margins while monetizing already excessive Government debts. Real economy, of course, gets hammered by sterilization via reduced real credit flows. The end game - moral hazard of massive proportions in the financial sector across Europe
• EU itself is hell-bent on debasing real incomes and wealth of its citizens by implementing the Fiscal Compact as the sole policy tool for dealing with the crisis
• Obama Administration is debasing, in contrast with EU, the future generations' wealth and income by continuing to spend Federal dollars like a drunken sailor arriving in a casino
• Ireland's Government is actively debasing the entire domestic economy, oblivious to the reality that households and businesses deleveraging is being prevented by banks and Government deleveraging - all for the sake of grand posturing of "We will pay all our debts" variety
• Japan is engaged in an active pursuit of debasing Government balancesheet as the debt bubble spreads to Japanese Government bonds - now in negative yields
• China is debasing its monetary and fiscal policies to deliver a 'soft landing' to the massive train wreck of its vastly bubble-like property and banking sectors

Close your eyes and think - how will the world be able to reverse out of these disastrous desperate policies in years ahead without completely shutting off growth via high interest rates, destabilized savings-investment links and in the presence of ever-rising public, private and corporate debts? What levels of inflation will be required to 'inflate' out of this mess? What degree of real wealth destruction has to be imposed on the ordinary people to sustain these gambles without a structured, orderly and coordinated restructuring of debts? What asset class and geography hedge can protect you from this avalanche of disastrous policy choices by the Western leaders?

9/2/2012: Interesting chart on Euro area deposits

Here's an interesting chart from Credit Suisse via zerohedge:

Now, it's not the blue line that worries me and the others (EAP5=Euro Area Periphery states or PIIGS). It's the massive dip in the grey line. Given there's little deleveraging of consumers and corporates in France and Germany and that there is little it terms of concerns for stability of German banks (whether or not this sense of security is justified or not), the chart suggests that deposits are flying out not just in fear of local banks risks, but in fear of the euro risks.

The link to zerohedge post is here.

9/2/2012: What can ECB do?

In relation to the recent statements from Minister Noonan and Taoiseach Kenny on their expectations that ECB involvement in Greece should be matched by ECB extending assistance to Ireland:

What can ECB provide in relief for Ireland:

1) ECB can do a swap of Irish higher coupon bonds for cheaper EFSF/ESM bonds at current or even reduced (via suitable averaging) market value, saving interest charges and reducing outstanding principal of Irish debt. This will not be a credit event, as the transaction will be purely contained within ECB balancesheet.

2) ECB can give a green light to the Central bank of Ireland not to sterilize ELA returns under the promisory notes, effectively rebating the funds back to the Exchequer.

3) ECB can also consent to restructuring of ELA (partial form of (2) above)

So there are a few things ECB can do, but all will de facto open ECB to a major risk of other countries coming to it with similar demands.

Regardless of the outcome, the Taoiseach and Minister Noonan are correct in demanding ECB step forward with solutions to the problems in Ireland that have been created in the first place by ECB policies of the past.

9/2/2012: Few bothers

Today's mid-day CDS spreads (courtesy of CMA):

This should bother few sovereigns:

 and few banks:

And is likely linked to Greek bailout costs falling on: France, Netherlands, and Finland while doing nothing good to over-indebted Belgium and Italy and leading to a slowdown in Norway and Denmark... while taking a bite out of the balancesheets of few big banks. And that comes on top of markets already expecting the fallout from the Greek deal...

9/2/2012: ECB rate decision

So we have ECB keeping rates at 1%... which relates to:

1) growth:

So with growth leading indicator stuck for the 4th month in a contraction territory, 1% repo rate is a bit too high, given we are now into the second leg of recession judging by leading indicators.

2) inflation:

So with inflation still anchored well ahead of 2% bound, that 1% repo rate is a bit too low for the ECB mandate, unless the ECB expects rapid de-acceleration of prices.

And in case you wonder, the pull on policy side comes from divergent growth/inflation dynamics:

And thus we have: ECB latest decision is inconsistent with either inflationary or growth signals. You might say that on average, that makes ECB policy balanced. Or you might want to say that this mismatch reflects monetary union internal inconsistency. Or both... take your pick.