16/9/2012: IMF on PCARs and banks recaps

In the latest IMF Article IV Consultation paper on Ireland, the fund made some interesting observations on the ongoing Irish property bust. Here are some of these:

Firstly a chart showing where we are at in terms of current declines in property prices relative to other crises and in duration:

Next, there's a very revealing statement on the banks recapitalizations process (PCAR 2011) in relation to mortgages arrears (the statement that predates Professor Honohan's expression of doubt that PCARs were robust enough to all dealing with the mortgages arrears):


"Residential mortgage arrears continue to rise, but remain within the assumptions for bank recapitalization. As of end March 2012, almost 14 percent of the total principal balance of owner occupied residential mortgages outstanding was affected by arrears of 90 days or more, broadly doubling since end 2010. [Note: IMF seemingly had no desire to update their analysis for more up-to-date H1 2012 data released by CBofI and CSO (see here and here) before they published the Article IV paper].

Nonetheless, the overall arrears balance, together with developments in house prices and
unemployment, remain within the adverse scenario of the Prudential Capital Assessment Review (PCAR) that guided bank recapitalization in 2011.

[Italics are mine. The reason why I find this important is that the banks were not recaped to the adverse scenario requirements, but to the baseline scenario requirements plus cushion. The difference is significant: Overall, Blackrock estimated that BlackRock lifetime loan losses post-deleveraging would amount to €27,522 million in baseline case rising to €40,119 million in adverse case. Of these, the Central Bank assumed that only €20,014 million will take place pre-2014 in the baseline case and only €27,722 million in adverse case. That's a difference of €7 billion right there. The CBofI then made some additional assumptions and determined that €18.7 worth of capital will be needed by the banks overall. Clearly, given that this was less than what the banks estimated themselves to be the case (banks own forecast provisions totalled €17.04-22.23bn for baseline to adverse scenario cases), the CBofI 'imposed' additional 'cushion requirements' to raise overall capital requirement under PCARs to €24bn. But, wait, that is not consistent with the adverse scenario that IMF is referencing above, which is €27.7bn! So the banks were not recapitalized to the adverse scenario levels and IMF is using this term 'adverse' here to rather politely point out to the Irish authorities that the proverbial sh*t might be hitting or about to hit the fan.]

More so: "It is notable that about half of total arrears arise from loans that have already been
restructured, although part of these arrears could have arisen prior to each loan restructuring, so the effectiveness of rescheduling of distressed loans is unclear." [Now, we know this much ourselves - in H1 2012, more than 52.65% of already restructured mortgages were in arrears (see here)].

"Repossessions and voluntary surrenders of property are also very low, cumulating to 0.2 percent of the stock of mortgages on owner-occupied dwellings in the 11 quarters to March 2012. This is consistent with the one-year moratorium on repossessions of primary residences  under the Code of Conduct on Mortgage Arrears, but may also reflect a need to buttress the repossession framework."

Some charts:

Two things to note here: table above includes voluntary surrenders of properties, something that CBofI does not ordinarily publish in their mortgages arrears data, and the chart below shows just how thin the margins are on PCAR 'stress scenario'.

So things, according to the IMF, are for now within the parameters of the adverse scenario and, per chart above, within the stress scenario. Which seems to be just about ok, when it comes to PCAR injections to-date. But crucially, there is stress building up here. Only 1 year into the programme of recapitalizations, the banks are close to hitting the wall again.

15/9/2012: A handy IMF map for Budget 2013?

The elephant in the room (at 9% of GDP or 11% of GNP, with pensions - at 10.6% GDP or 13 of GNP, that's right more than one euro in eight) - courtesy of the IMF:

15/9/2012: Russia to revamp SWF structure

According to the report in the Euromoney ( http://www.euromoney.com/Article/3087655/Category/4298/ChannelPage/0/Russias-new-SWF-seeks-bond-and-equity-exposure.html?copyrightInfo=true) Russia will launch a new state-owned investment agency in 2013 "to invest the country’s oil wealth in global financial markets, finance minister Anton Siluanov tells Euromoney in an exclusive interview."

The new Federal Financial Agency (FFA) will have investment mandate to cover "a more diverse range of domestic and international securities, including bonds and equities for the first time, under an investment strategy similar in part to that employed by the Norwegian sovereign wealth fund (SWF)". Anton Siluyanov, Russian finance minister said the FFA "will be managed by investment professionals and will be free from government intervention".

The fund will have under management assets of $150 billion-worth of investment funds in Russia’s existent Reserve Fund and the National Welfare Fund. These are currently managed from the Central Bank.

The net positive here is that the fund will be free to invest in domestic non-state owned enterprises - a significant opportunity for deepening Russian capital markets. It also can provide some new support for corporate debt issuance inside Russia. To-date Russian SWFs were primarily invested in foreign sovereign bonds. New allocation, according to Siluyanov, can be closer to 15%-20% equities.

15/9/2012: Derivatives v Banks Lending and Economic Growth

A recent by Becchetti, Leonardo and Ciampoli, Nicola, What is New in the Finance-Growth Nexus: OTC Derivatives, Bank Assets and Growth (July 20, 2012). CEIS Working Paper No. 243 (Available at SSRN: http://ssrn.com/abstract=2114072) covers the issue of "finance-growth nexus before and around the global financial crisis using for the first time OTC derivative data in growth estimates."

According to the authors, data shows "that bank assets contribute… negatively [to economic growth], while OTC derivative positively or insignificantly with a much smaller effect in magnitude. At the same time the impact of the crisis is captured by a very strong negative effect of year dummies around the event."

The study lists various positive and negative channels for feedback from the derivatives to growth and establishes the net effect of these channels.

"Our main finding is therefore the identification of three empirical channels: a first positive and weak link between OTC trading and economic growth, a second negative and significant link between aggregate bank credit and economic growth (larger in magnitude than the first) and the negative impact of the global financial crises in the last years of our sample period. The first channel is likely to capture wealth and efficiency effects embedded in derivatives hedging properties. An overall evaluation of the role of derivatives on growth deserves however further attention. If the negative impact of bank credit, and definitely more so, the overall negative effect of the financial crisis have to be related to the negative properties of derivatives (increase of interconnectedness and systemic risk) the net impact of the latter may turn out to be negative at least in the current regulatory framework."

15/9/2012: In life things are a bit like in art

The best illustration of the current Presidential Campaign in the US is this painting by Mark Tansey:

Depicting Sherlock Holmes and Professor Moriarty in a deadly struggle at the edge of the precipice. One articulate and sophisticated villain v one cool dude who delivers over the fiscal cliff. Ah, one would hope we can distinguish which one is which: is Holmes = Romney or Obama? Never mind, the truth is - it's the cliff that dominates the whole set up.

15/9/2012: Brazil soaks bank bondholders

H/T to Ed - here's Brazil shutting down one medium-sized insolvent bank (link) and triggering the largets corporate bonds default in Latin America since 2002.

According to the report, ATMs still are functioning in Brazil. 

And a lovely quote from the Irish Government advising HSBC (alas via their Brazil division):

“It is quite healthy to have this kind of reminder every once in awhile that doesn’t pose a systemic threat,” said Pedro Bastos, chief executive officer of HSBC Global Asset Management in Brazil, in a phone interview from Sao Paulo. “It’s an important reminder that risk and return need to be in line with the investor’s profile.”

And lest we think Brazil's CB is not 'reckless' enough (in Irish counterparts parlance), Brazilian authorities are investigating fraud allegations - something that Irish authorities are not too keen on doing.

Obviously, there will be likely costs associated with the decision, namely, funding costs for the country medium sized banks might rise (they will most certainly rise in the short term, but it is the medium term that anyone should be concerned with as Central Banks can provide the bridge for the shorter term funding).

15/9/2012: Irish Services Activity July 2012

Recent release of the monthly Services sectors activity index for Ireland highlights the stabilizing nature of the current activity in the economy, since the end of Q1 2012. Here are some details:

Overall seasonally-adjusted monthly services activity rose 1.2% in July 2012 m/m and was up 7.8% y/y. Index 3mo MA through July is at 104.9 ahead of the 3mo MA through  March 2012 (101.6) and well ahead of 98.9 reading in 3mo to July 2011. Year on year increase of 7.8% is the strongest since November 2010. (Note: index is being compiled only since October 2010, so trend comparatives are against weak position. Index is set at 100=2009).

Here's the chart summarizing index levels and y/y growth rates:

By-sector activity:

• Wholesale and Retail Trade (+3.4% m/m and +8.0% y/y), 
• Business Services (+2.5% m/m and 3.1% y/y), 
• Accommodation and Food Service Activities (+1.2% m/m and no change y/y) and 
• Information and Communication (+0.1% m/m and +16.3 y/y) 
• Transportation and Storage (-3.5% m/m and 8.0% y/y), and 
• Other Services (-2.2% m/m and +0.9% y/y).

Chart to illustrate:

3mo MA through July 2012 are also encouraging:

• Wholesale & Retail Trade at 109.7, up on 107.8 3 months ago and on 103.4 a year ago
• Information & Communications at 112.9 well ahead of 109.4 in 3mo through April and on 99.6 recorded in 3 months through July 2011
• Business Services at 103.3, strongly up on 98.4 in 3 months through April, but unchanged y/y
• Transportation & Storage at 109.0, up on 104.0 in 3mo through April 2012 and on 98.2 a year ago
• Accommodation and Food remain the lagging sector despite Government efforts to stimulate it at 89.0 in 3mo average through July 2012 slightly up on 87.1 in 3mo through April 2012 and down on 90.3 in 3mo through July 2011.
• Other Services are also relatively flat, but with a slight upside at 74.3 in 3mo through July 2012 compared against previous 3mo average of 72.4 and 3mo through July 2011 average of 72.8.

Overall, some good news here and a continuation on the trend highlighted a month ago.

14/9/2012: 36 years of state-incentivised inflation?

Some historical (up to August 2012) charts on Irish CPI. Orange bars mark state-dominated categories of goods and services. Interpret these as you wish. Summary table at the end is pretty much self-explanatory:

14/9/2012: Irish CPI for August - detailed charts

With some delay, here's the analysis of latest Consumer Price Inflation data for Ireland for August 2012:

Summary table of monthly and annual changes

Note: I will blog on overall inflation trend separately in the next post.

Here are changes by sector, including notable changes by sub-sector.

Monthly inflation:

Big spikes are in:

• Clothing and Footware +6.6%
• Mortgage Interest -3.2% (although CSO does not separate the differences between the ARM and trackers, which have been moving in the opposite directions)
• Transport +1.6% (Petrol up 3.5%, Diesel up 4.0%
• Transport Services +0.5% driven by Air Transport (+1.0%)

Year on year comparatives are more revealing:

The above clearly shows that most of the inflation on annual basis remains concentrated in the state controlled sectors (either via regulatory price hikes or direct state taxation and charges effects or via semi-states hiking prices on their own). Note that even in the 'Other Services' category, the inflation is driven by household charge being added in April 2012.

The Government strategy is clear, albeit, unlike the previous Government, the current one stays away from openly declaring this: milk Irish consumers for every penny they got via higher charges and state-captured prices. In effect, much of the price increases not caused by direct state taxation are still a form of taxation as the Government collects higher VAT and other taxes on those goods and services, provision of which it controls via semi-state bodies.

14/9/2012: Another Indo 'Property Boom Cometh' Missive

An interesting article in the Indo on house prices vs debate about the property tax or site value tax - link here.

A key phrase that caught my eye is: "CSO reports show that prices increased in Dublin".

The latest CSO report we have is that covering data through July 2012, which states:

• Dublin All Residential Properties: June prices down 1.0% m/m (down 0.3% on 3 mo before June, down 16.4% on 12 month to June 2012); July prices down 0.3% m/m (down 1.2% on 3mo before and down 16.6% on 12 mo before);
• Dublin Houses: June down 0.8% m/m (0.2% on 3 mo ago, down 16.4% y/y) and July down 0.2% m/m (down 0.5% on 3mo ago and down 16.7% on a year ago);
• Dublin Apartments down m/m, on 3mo and y/y in May, June and in July down 3.9% m/m, down 8.6% on 3 mo previous and down 19.6% on 12 mo ago.

So unless Indo has either discovered some new data set from CSO, or it has some CSO data on dog houses and parking spots in Dublin (all of which might have gone up in July), then what on earth are they talking about?

14/9/2012: Russian CB raises rates

Bank of Russia hiked key refinancing rate to 8.25 by 25bps on the foot of rising inflation pressures, with current rate back at the levels seen last in November 2011. The bank also hiked overnight repo rate to 5.5% and deposit rate to 4.25%.

Inflation in agricultural commodities is the core driver as Russia raised some food tariffs and as weaker crops bit into domestic supply. Imports demand for agricultural goods and relative pressure on the ruble vis USD are additional factors.

The signal from the BR is relatively clear: although Russian economic growth has been under some pressure in H1 2012, inflation is back on the rise, hitting 5.9% in August up on record low of 3.6% back in Q2 2012. BR target is for inflation at 5-6% so the move is reactionary, rather than precautious. The balance in BR decision is between containing inflation and political fallout from rising food prices, associated pressure on the ruble, against the corporate sector demand for capital. In other words, the BR is comfortable with the overall levels of investment in the economy in the short run. This highlights the dilema faced by the Russian policymakers, who are aware that Russia needs to push up domestic investment in core areas where capital modernization is desperately required: manufacturing and industrial base, as well as basic infrastructure. This longer term objective is likely to be supported by a combination of public investment and incentives for longer term private investment. With this in mind, recent restructuring of the Russian SWF and easing of the new SWF mandate to invest in a range of financial instruments, including listed equities.

Chart for Russian CPI forecasts:

13/9/2012: Buying more time for the Euro

My recent analysis of the ECB announcement of the OMT in The Globe & Mail