7/6/2012: Spanish auction

Spanish auction results:
Sold €2.07bn of debt - above target of '€1-2 billion'
10-year bonds at average yield of 6.04%, bid-to-cover ratio of 3.29 up on previous auction cover of 2.56.
New issue close to secondary yields of 6.14%
Crunchy.

5/6/2012: Some recent links

Few past links worth highlighting:

An excellent article from PressEurop titled "The people have become a nuisance" focusing on real democratic deficit at the heart of modern Europe as exposed by the financial crisis.

An article on MEPs approving CCCTB.

And an article on symmetric pressure on Irish corporate tax rates from the other side of the pond.

A good summary (non-technical) of Basel III expected impact on European banks.

S&P Note on USD43-46 trillion refinancing cliff.

EU Commission assessment of the graveyard: Zombies Must Do as Zombies Have Done on fiscal deficits.

PMIs for June:

And add Spain at 41.8 for Services - the latest disaster. Along with Spanish unemployment chart worth taking a look at.

Soros on grave state of financial economics.

Excellent piece on the end of easy growth path for China.

1/6/2012: Museums & Visitors

Cool study:

A recent study by Brida, Juan Gabriel, Disegna, Marta and Scuderi, Raffaele, titled “Visitors of Two Types of Museums: Do Expenditure Patterns Differ?” (May 15, 2012). Available at SSRN: http://ssrn.com/abstract=2060840 looks at two different types of visitors differentiated by attendance of two types of museums: the museum of modern art and the archaeological museum.

Based on a survey of attendees to MART (Museum of Modern and Contemporary Art of Trento and Rovereto) and South Tyrol Museum of Archaeology (STMA), the study finds that there are, overall, two distinct profiles of visitors for each museum.

Overall, the analysis considered three different categories of expenditure:

• Total spending excluding transportation reflects the ‘economic trace’ that the tourist leaves on the visited community.
• Accommodation expenditure characterizes tourists and their decision of overnight stay.
• All visitors instead may spend on food and beverage.

“Significant differences emerge between the two museums and concur in defining two distinct profiles of visitors.

1. The average visitor [to MART] has a higher education level than in STMA and comes with families of smaller size and less frequently in presence of children.
2. For [MART] tourists interested in its cultural value exert a significant and positive effect on total spending, [e.g.] positive coefficient of the number of museums visited, of visitors with higher education, and of those that declared to visit the museum to ‘learn’ something new.
3. A further support to this interpretation is the negative effect of the ‘generalist’ visiting, that is those who think that the visit is something worthwhile or come to the museum for accompanying someone.
4. The subset of those who decided to stay overnight considers MART as one of the attractions of the territory, but at the same time they are aware that visiting something that one ought to do. These overnight stayers visit MART mainly on weekends.
5. The intensity of spending on accommodation is instead negatively related to the opinion of the visiting to the museum as a moment for learning.
6. Also spending on food and beverage suggests a positive association with the ‘cultural’ tourist.
7. The impact of STMA on the local economy is instead associated to a more ‘generalist’ profile of visitor.
8. [STMA] is perceived more as one of the main attractions that are part of the tourist supply than for its strict ‘cultural’ value.
9. This emerges also from the analysis of accommodation and food and beverage spending, where no particular proxy of ‘cultural’ aspects is related to spending.

1/6/2012: Irish CDS bounce up

Two charts - Irish CDS 5year:

Tough!

1/6/2012: PMIs May[hem] 2012

As of 11:00 GMT - here's where Europe's heading:

Via BusinessInsider: http://www.businessinsider.com/may-global-pmi-2012-5

1/6/2012: Irish Manufacturing PMI for May 2012

NCB Manufacturing PMIs for Ireland are out for May, so time to update charts.

Per release: "Operating conditions at Irish manufacturing firms improved again in May as output returned to growth and the expansion in new business was sustained. Increased workloads encouraged companies to take on extra staff, and the rate of job creation was solid during the month. Meanwhile, cost inflation remained elevated amid rising prices for fuel and other oil- related products."

Ok, running with numbers:

• Overall Manufacturing PMI has posted a moderate expansion at 51.2 in May up on 50.1 in April 2012. May reading is still within 1/2 stdevs from zero expansion level of 50, but nonetheless, a strong improvement on April. May reading is below 51.5 in March. 
• 12mo MA remains below 50 at 49.4, but 3mo MA is now above 50 at 50.9, compared to previous 3mo MA of 48.9.
• 3mo MA activity remains well below same period 2011 - 54.5 and below same period 2010 - 53.5.
• 6mo MA is about to cross 50, currently at 49.9.

Per chart above and the snapshot below:

• Output index rose to 51 in May from 48.6 in April, with 12mo MA at 50.1 and 3mo MA at 50.8. Previous period 3mo MA was 48.8. Output activity remains subdued compared to same period 3mo MA in 2011 - 56.4 and 2010 - 57.7. 6mo MA is at 49.8, heading for 50.
• Per release: "Higher new orders led firms to raise production during the month. Output increased slightly, following a reduction in the previous month. Production has risen in three of the past four months."
• New orders index moderated the pace of growth in May from 51.4 in April to 51.1. 12mo MA is now at 49.1 and 6mo MA at 49.7. 3mo MA in May stood at 51.7, against previous 47.6 - representing a solid improvement. However, new orders remain subdued compared to same period 3mo MA in 2011 - 56.0 and 2010 - 55.4.
• Per release: "New business at Irish manufacturing firms increased for a fourth successive month in May, with respondents mainly linking growth to higher new export orders."
• New exports orders also moderated the pace of growth in May from 53.1 in April to 52.9. 12mo MA is now at 51.5 and 6mo MA at 52.1. 3mo MA in May stood at 53.7, against previous 50.5 - representing a solid pick up in growth. However, new orders remain subdued compared to same period 3mo MA in 2011 - 59.0 and 2010 - 59.5.
• Per release: "New business from abroad rose at a solid pace as firms were reportedly able to generate sales from outside the eurozone."

Other sub-indices performed reasonably well with no surprises.

Per release: "A depletion of outstanding business also supported output growth in May, with backlogs decreasing at the sharpest pace since January. Manufacturers raised their employment for the

third month running in May amid increased workloads. The pace at which staff were taken on was solid, and the sharpest since March 2011." More on this once Services data is available.

"The rate of inflation of input prices remained sharp in May, and was only slightly slower than that seen in the previous month. According to respondents, the rise mainly reflected higher costs for fuel and other oil-related products. Strong competition largely prevented firms from passing on increased costs to clients, however, and prices charged were reduced fractionally." As usual, I will update profitability conditions changes once we have Services data, so stay tuned.

Overall, Irish Manufacturing is not exactly booming, but is clearly breaking the overall euro area trends. Robust exports exposures are supporting activity and are currently consistent with a shallow expansion in economic activity in Q2 2012.

1/6/2012: Gains in Competitiveness? Much done, yet even more to do

Much has been made of the fabled increases in Irish competitiveness in recent years. And to be honest, data does show some significant gains. But as this blog has pointed out repeatedly, these gains have not been (a) as straight forward as the Government would like us to believe, and (b) not a significant as to warrant the claims that we are one of the most competitive countries when it comes to labour productivity.

On (a) above, we know that most of the gains in Irish competitiveness during the crisis are accounted for by jobs destruction in heavily overheated construction and retail sectors. In other words, Irish average productivity improved because we pushed less productive workforce into emigration and unemployment, not because our more productive sectors increased their labour productivity.

On (b), here are the latest stats. All data is based on Harmonized Competitiveness indicators, unit labour costs, reported by the ECB. Latest data is through Q4 2011 and higher values reflect lower competitiveness.

Consider first the data for annual average readings:

Chart above suggests relative improvement in Ireland's position vis smaller member states of the euro area, but lack of significant gains compared to some groupings, especially those that combine more advanced economies in Europe. And chart below confirms the same:

Looking at the Q4 data - Irish competitiveness gains through 2011 have been far less impressive than annual averages suggest. Charts below show full sample of countries, followed by the EA12 euro area states excluding the 2004 Accession states.

Considered across the end-of-year figures, Irish unit labour costs remain well ahead of those in our closest competitors. Luxembourg - a country with virtually un-interpretable statistics due to huge imbalance between its workforce and population, as well as its economic output composition - is the only country of the old EA12 group that currently has lower labour competitiveness than Ireland.

What about pre-euro and euro-period changes? Chart below illustrates:

The introduction of the euro has resulted in deterioration in hci-based labour competitiveness metrics in all euro area economies, save for Austria, Finland and Germany. Largest deterioration took place in Slovakia and Estonia (catching up period, due to high entry differential), with Ireland posting third largest deterioration. The same remains even during the crisis period 2008-present, as illustrated in the chart below.

During the crisis, Irish hci-ulc index reading fell from 130.5 at the end of 2007 to 111.5 in Q4 2011 - the largest gain in competitiveness of all EA12 states. However, the rate of gains for Ireland has slowed down significantly in 2011. In 2009, the first year of improvements, competitiveness rose 7.1% on 2008, which was followed by a gain of 9.1% in 2010 and only 2.9% in 2011.

29/5/2012: Quick note on Structural Deficits and Growth

Per someone request: can growth result in larger structural deficit?

Answer is yes, it can. Here's how.

Equation 1:
Structural Deficit = Total Government Deficit -- Cyclical Deficit -- One-off Measures

(One-off Measures are emergency spending, one-off banks recaps etc)

So Structural Deficit = Government Deficit that would have prevailed if economy operated at 'full employment' (full capacity)

What is Cyclical Deficit in the above?
Equation 2:
Cyclical Deficit = Output Gap * Elasticity of Fiscal Balance
where
Output Gap = Potential (Full-Employment) Output of Economy -- Actual (realised) Output of Economy
Output Gap is expressed in % terms difference.
Elasticity of Fiscal Balance = 0.38-0.4 for Ireland and captures the percentage change in (Government expenditure net of Government revenue) per 1% change in output gap. DofF estimates this to be 0.4 and EU Commission estimates it to be 0.38 for Ireland.

Thus, from Equation 2 above:
Equation 3:
Cyclical Deficit  = [Potential GDP -- Actual GDP]*0.38     
for EU Commission, or replacing 0.38 with 0.4 above gets you approximation for DofF model.

Now, economic growth can happen at the point above 'Full Employment', in which case Output Gap will be negative, as potential GDP will exceed actual GDP, giving positive output gap - consistent with economy overheating.

Alternatively it can happen at 'Below Full Employment', so that output gap is negative (economy growing without overheating).

If growth happens when economy is overheating, in the equations above, cyclical deficit becomes positive, in other words, there is actual deficit. If it is happening in the economy that is not overheating, then cyclical deficit is negative, so there is cyclical surplus.

Now's for an interesting bit: both the EU Commission and the DofF estimate that in 2014, despite the fact that we are expected to run double-digit unemployment, Irish economy will be technically in 'overheating' or 'above full-employment' mode. This explains why even with shallow growth, in 2015 Ireland is still forecast to run 3.5% structural deficit (DofF forecast, which is ahead of 2.5% structural deficit forecast for the same year by the IMF).

In other words, if we hike growth even more, in 2015 over and above currently assumed by the DofF, so that our output gap will rise by 1% in 2015, this will result in an increase in Cyclical Deficit of 0.4%. This will result in subtracting a larger negative number in computation of Structural Deficit in the first equation above, thus increasing Structural Deficit.

In other words, if growth happens when economy is considered 'overheating' and that growth does not increase potential output of the economy, but only transient output, then such growth will increase, not decrease Structural Deficit, unless the state somehow taxes entire growth*0.4 out of the economy and does not spend the collected amounts. This can be done if we were to run a cash-based sovereign wealth fund that will not invest any of its proceeds back into the economy.

Logic? Who said economics supposed to have real world logic? Not me...

29/5/2012: Fiscal Compact - one very interesting view

I rarely post articles by others on this site, usually preferring links, alas the following article is not available on the web. Its full attribution goes to the Irish Daily Mail (Monday 28, 2012 edition) and it is written by one of the best - if not the best - commentators in the paper both sides of the pond - Mary Ellen Synon.

It is a must-read to understand the context of the Referendum, because it places our vote into the broader and more real context than any domestic debate we might have on merits or failings of the Treaty.

Please note, I am not advocating you follow Mary Ellen's conclusion on the vote - as you know, I am not advocating in favour of any direction of the vote. Make your own choice. I am posting this because I think that many risks highlighted in the article are real.

To be fair to the 'Yes' side, if any of you, readers, spot an excellent article on that side of the argument, I will be delighted to post it. So far, I have not come across one, but that might be due to the omission, rather than lack thereof. (see update below)

Thus, judge for yourselves:

Update: I remembered - the best argument for 'Yes' side I ever read is from another economist, one whose opinion I respect and who has provided many clarifications during this debate to my own occasionally erroneous positions - Professor Karl Whelan. Here's the link and here are his full remarks on the Treaty - certainly worth reading.

27/05/2012: RPPI for April 2012: Implications for Nama

In the previous post I looked at the potential changes in the trends relating the RPPI and its components. Now - a quick update, as usual on implications of April Residential Property Price Index on Nama valuations.

Please keep in mind two things: 1) this relates only to residential property and is not fully reflective of the entire Nama portfolio, as both selection effects and portfolio composition effects would introduce significant differential for Nama actual losses, 2) LTEV and burden sharing assumptions apply in terms of averages, not specific to each type of property covered here. In other words, these numbers are simply comparative approximations and not exact forecasts of Nama losses.

• Overall residential property price index has posted a decline of 49.89% on peak in April 2012. This corresponds to a decline of 36.7% on Nama LTEV valuations and 33.67% decline on Nama valuations inclusive of LTEV and net of burden sharing.
• Recall that Nama first called 'the bottom' for property markets to occur at the end of Q1 2010. Alas, since then property prices have fallen - on aggregate - 27.09%.
• Nama holds some houses. These are now down 48.41% on peak and 36.31% down on Nama cut-off valuation date, implying a decline of 33.27% on Nama valuations inclusive of LTEV and burden-sharing.
• Nama holds loads of apartments, which are down 59.07% on peak and 41.13% down on Nama cut-off valuation date, implying that these are down 38.33% on Nama valuations inclusive of LTEV and burden-sharing.

Some pretty big figures out there.

27/05/2012: Residential Property Prices: April 2012

Much has been made in the media on the foot of the latest (April 2012) data for residential property prices in Ireland.

In light of this, let's do some quick analysis of the data. The core conclusions, in my opinion are:

1. Data from CSO - the best we have - only covers mortgages drawdowns reflecting actual sales. So this is tied to mortgages issuance activity and is of limited use in the markets where cash sales are significant.
2. If increases in prices are sustained, mortgages drawdowns might be reflective of improved credit flows or credit flows fluctuating along the bottom trend.
3. The above two points strongly suggest that we need to see more sustained trend to draw any conclusions on alleged 'stabilization' of the market.
4. Aside from seasonality, the data shows patterns of false bull-runs or 'stabilization' episodes in the trends that usually were followed by downward acceleration on the pre-stabilization trend. Not surprisingly, the core improvements in March-April 2012 are in exactly the segments of the markets where such false starts have been more pronounced in the past.

So caution is warranted. 

Top stats:

• Residential property price index has fallen from 66.1 in February and March 2012 to 65.4 in April implying m/m change in overall prices of -1.06% - the shallowest monthly decline since July 2011, other than zero change in m/m prices recorded in March 2012. 
• This m/m pattern of slower decline (to near zero rate of fall) from a steep previous drop, followed by re-acceleration in decline is something that is traceable to October 2010-January 2011, June-August 2011, July-September 2010, February-April 2010, October-December 2009, so caution is warranted in interpreting short-term 'stabilization' episodes.
• Y/y index fell 16.37% in April, an acceleration on March 2012 y/y decline of 16.32%, but a very slight one. Current y/y decline is the second shallowest since November 2011, so no signs of stabilization here either. In fact, April 2012 y/y rate of decline was the 5th sharpest for any month since January 2010.
• Index reading continues underperforming its 3mo MA which currently stands at 65.87.
• Relative to peak, the index is now down 49.89%.
• Thus, overall, by both, its absolute level, and its 3mo MA, as well as relative to peak, the index is at its new historic low. Stabilization is not happening anywhere at the levels terms.

Chart below shows sub-indices performance for houses and apartments. While it is clear that houses sub-index is the driver of overall prices, the apartments sub-index received much of attention in recent months. The reason for it is two consecutive months of increases in apartments prices. Details are below:

• Overall, House prices fell in April 2012 to index reading of 68.1 from 68.9 in March, registering a m/m drop of 1.16%. This represents an acceleration from -0.14% m/m decline in March 2012. However, April m/m drop is the shallowest since July 2011. 
• Despite the above, bot the index and the 3mo MA have again hit their lowest point in history of the series.
• Y/y house prices are down 16.24% and this is the fastest y/y decline since November 2011. 
• Relative to peak house prices are now down 48.41%.
• Apartments prices index has improved from 48.6 in March 2012 to 49.6% in April 2012 (m/m rise of 2.06% following a 0.41% rise in March 2012).
• However, m/m rises are not rare for the sub-index. Apartments prices subindex rose - in m/m terms - in November 2011 (+2.68%), December 2010 (+0.31%), December 2007 (+0.50%) and posted falt or near-flat (1/4 STDEV from zero reading) in February 2008, January 2011, May 2011, and December 2011. 
• 3mo MA is now at 48.87% and this is the lowest on the record 3mo MA reading for the sub-index.
• Y/y the decline in April was 17.88% while March 2012 y/y decline was 20.33%. This is the lowest y/y decline reading since January 2012. However, back in April 2011, y/y decline was 'only' 15.29% - shallower than in April 2012.
• Relative to peak apartments prices are now down 59.97%.

Conclusion: any talk about 'price trends improvement' in apartments will have to wait for further confirmation of the upward trend.

Chart below shows trends for prices in Dublin - another focal point of attention for those claiming substantive change in property prices trends.

• Dublin property prices sub-index has improved from 58.0 in march 2012 to 58.3 in April 2012, reaching exactly the same level as in January 2012. Thus, m/m index rose 0.52% which is slower than March 2012 m/m rise of 0.69%. Last time the sub-index posted non-negative m/m change was in July 2011 when it remained unchanged m/m and last time sub-index actually posted positive growth was in May 2011.
• To see two consecutive monthly rises in the index, however, is rare. We would have to go to January-February 2007 for that. However, index posted a number 'near trend reversals' in the past marked on the chart. All turned out to be false calls and virtually all led to re-acceleration of the downward momentum compared to pre-event.
• Y/y sub-index posted a decline of 17.30% against 18.31% in March 2012. In April 2011 y/y change was 12.96% - much shallower than current y/y decline.
• 3mo MA is unchanged in April 2012 at 57.97 compared to March 2012, and is much lower than 71.27 registered in April 2011.
• Relative to peak, house prices in Dublin are now 56.65% down which is identical to their position in January 2012.

Overall, all data points to potential stabilization that is in a very nascent state. However, this is certainly a local phenomena for now - with Apartments and Dublin properties showing some potential signs of improvement. Only the future can tell if:

1. we are witnessing actual flattening of the trend, and/or
2. we are witnessing a reversal of downward trend toward a positive (sustained) trend.

25/5/2012: Why I don't like Eurobonds

Three reasons I don't like the idea of the Eurobonds:

1. Issuing Eurobonds to swap for existent Government debt is equivalent to attempting to treat debt overhang by relabeling the debt. While it might reduce the interest burden on the sovereigns suffering from more severe debt overhang, but that is a relatively shallow improvement, especially given that the heavier-indebted sovereigns are already being financed or about to be financed from a collective funding source of ESM.
2. Issuing Eurobonds to create capacity for new borrowing is equivalent to fighting debt overhang with more debt. In addition to being seriously problematic in terms of logic, there is also a capacity constraint. Eurozone will sport 89.964% debt/GDP ratio this year and under current IMF projections this debt will remain above 90% (+/-1%) bound for 2012-2015. At these levels, debt exerts long term drag on future growth potential for the Euro area as a whole. And this region doesn't have much of cushion in terms of growth rates to sustain such drag.
3. Issuing Eurobonds to generally drive down or harmonize the borrowing costs across the EA will simply replicate the very same conditions of cheap credit misaligned with relative sovereign risks that have been instrumental in creating the current crisis during the loose monetary policy pursued by the ECB. Except with a major difference this time around - loose credit costs will only apply to one side of the economy, namely the Public Sector. This is double troubling, because, in my view, it is the nature of the European disease that our policymakers are incapable of thinking about growth outside that supported by subsidies and neo-protectionism vis public expenditure. 

For these three reasons (not to mention lack of political infrastructure and the fact that once borrowing costs come down the sovereigns will simply engage in diverting 'savings' achieved to priming the public spending pump once again, setting their economies up for the scenario of lax structural reforms and raising the risk of increasing the strength of automatic fiscal destabilizers in the future cyclical downturns) I do not think Eurobonds represent a correct approach to dealing with this crisis.

Nor do I think it is reasonable to label Eurobond issuance a 'burden-sharing', unless Eurobonds are raised by a fully federal power presiding over the entire Euro Area - a power that is hard to imagine emerging for a number of reasons, including that Euro area is only a subset of a broader EU27 block.

I am with the Germans on this one - Eurobonds are a dangerous illusion of a solution.

Update: an interesting side-proposal is contained here. And a polar opposite to that - the senile ideas of one ex-ECB chief here.