25/9/2012: One hell of a mess...

A quick quote from the recent Citi report on euro area economics, relating to ESM (emphasis is mine):

"Of the €500bn, €100bn is earmarked for future Spanish bank recapitalisation. If Ireland retroactively gets full mutualisation of sovereign debt issued to recapitalise its banks, that would require another €64bn. Equivalent treatment for Greece would cost €45bn and for Portugal €8.5bn. That would leave €282.5bn, a pittance compared with the likely future funding needs of Spain and Italy, unless the ECB
does most of the heavy lifting through the OMT."

Puts matters into perspective: Irish banking mess would cost EZ more funds than Greece and Portugal combined. Put alternatively, Irish taxpayers have done more to underwrite risks within the EZ banking system than Greek and Portuguese taxpayers combined. Take your pick of the option for interpreting...

To wet your appetite for explicatives further, here's another quote:

"We are still likely to see multiple sovereign debt restructurings of EA periphery sovereigns, starting possibly with Greece and probably lasting into 2015.

• We expect Portugal will likely require sovereign debt restructuring, possibly in 2014-15, but could happen even earlier, both through OSI and through PSI (Private sector involvement). 
• Unless Ireland benefits from major OSI, say in the form of a mutualisation through the ESM of up to €64bn worth of sovereign debt – the counterpart of the capital injection into its banking system provided by the Irish authorities between 2008 and 2010 – we believe it too is likely to see sovereign debt restructuring.
• The Spanish sovereign and banking sector taken together are most likely insolvent. The relevant question then becomes what combination of mutualisation, bank debt restructuring and sovereign debt restructuring will occur...
• Italy should never suffer a sovereign default due to inability to pay in our view. It is a rich country with massive private wealth and, by the standards of the periphery, is in a relatively good economic shape, although massive structural reforms are required to get out of the swamp the country now finds itself in."

25/9/2012: Some thoughts on US Government debt

There's much of a debate going on about which US President has added most to the US Government debt stockpile. The question is far from trivial.

Here's the chart plotting overall evolution of the US debt since 1980 with presidential tenures super-imposed onto it:

So far, it appears the contest is between Ronald Reagan, George W. Bush and Barack Obama. The tables below summarizes the presidential administrations' performance in terms of the US debt first in terms of absolute current US dollars and then in terms of debt to GDP ratios:

The problem is, of course, two-fold:

1. Presidential tenure starts in year 1, for which some of the budgetary dimensions are already Pre-set by the previous administration, and the tenure ends in year 4, when the outgoing President sets out some of the legacy measures for the incoming one;
2. Presidential tenures range between 4 and 8 years in the above period.

Controlling for the (1) is hard, so let's assume that the incoming President shares the burden of fiscal regime setting in year 1 with his predecessor. Tables below show this analysis:

The last two columns in the above summarize overall rates of change per year in office and this makes it clear:

• Current administration leads in terms of overall rate of increasing the US Government debt by a factor of 5 times that of the Reagan administration;
• The above does not account for inflation, as figures stated are in current US Dollars, but to match Barack Obama's rate of increasing public debt in real terms to that achieved by the Reagan administration we need annual inflation in excess of 6.5% pa. Meanwhile, over the period GDP deflator averaged 3.56%pa, while CPI averaged between 2.95% and 2.96% (depending on annual metric chosen);
• Obama administration also leads, by a massive margin, every other administration in the rates of debt increases relative to GDP.

24/9/2012: Irish Building & Construction decline v EU27

Last post on Irish Building & Construction sector data for Q2 2012. Here are the comparatives for EU member states based on current activity (through Q1-Q2 2012) compared to 2006-2007 peak levels:

No need to comment on the above...

24/9/2012: Irish Building & Construction Sector Activity Q2 2012

And in another post prompted by @stephenkinsella tweet, here's an update on CSO data for Irish Building & Construction sector activity:

Ex-Civil Engineering:

• Value index fell to 17.6 in Q2 2012 from 18.7 in Q1 2012, marking 5.88% decline q/q and down 15% y/y.
• H1 2012 Value index is down 12.11% on H2 2011 and down 13.78% on H1 2011.
• Value index fell to 15.5% relative to the peak and volume index declined to 14.66% of the peak level
• Volume index dropped to 15.6 in Q2 2012 down on 16.7 in Q1 2012, marking a 6.59% decline q/q and 16.6% decline y/y. 
• H1 2012 volume index was down 13.17% on H2 2011 and down 14.55% on H1 2011.
• Both Value and Volume indices are now down on an annual basis for 22 consecutive quarters.

Civil Engineering:

• Value of Civil Engineering activity rose from 58.4 in Q1 2012 to 62.7 in Q2 2012 (+7.36% q/q) and advanced 11/4% y/y, registering the first annual rate of increase after 15 quarters of contraction.
• H1 2012 value index rose +1.68% on H2 2011 and is up 5.21% on H1 2011.
• Volume of activity also grew from 52.3 in Q1 2012 to 55.8 in Q2 2012 (+6.69% q/q and +9.8% y/y) also breaking for the first time annualized contraction period of 18 quarters.
• H1 2012 volume index rose 0.93% on H2 2011 and is up 4.75% on H1 2011.

Residential and non-residential:

• Residential construction value index fell from 9.1 in Q1 2012 to 8.6 in Q2 2012 (-15.7% y/y and -5.49% q/q). H1 2012 index was down 9.69% on H2 2011 and down 16.51% on H1 2011. Relative to peak, the index is now down 92.45%.
• Residential construction volume index fell to 7.7 in Q2 2012 from 8.3 in Q1 2012 (decline of 7.23% q/q and down 17.2% y/y). The index is now down 92.53% on peak.
• Non-residential construction value index fell from 55.4 in Q1 2012 to 51.5 in Q2 2012 (-14.7% y/y and -7.04% q/q). H1 2012 index was down 14.41% on H2 2011 and down 12.23% on H1 2011. Relative to peak, the index is now down 58.23%.
• Non-residential construction volume index fell from 49.4 in Q1 2012 to 46.0 in Q2 2012 (-15.8% y/y and -6.88% q/q). H1 2012 index was down 15.12% on H2 2011 and down 12.48% on H1 2011. Relative to peak, the index is now down 58.89%.

To sum up: rates of decline are (annually) in double digits and/or accelerating in Q2 2012 in Residential (value and volume), Non-residential (value and volume) and ex-Civil Engineering (value and volume). Residential construction is now at 8.6% of 2005 levels in value terms and 7.7% of 2005 levels in volume terms. Non-residential construction is now at 51.5% of 2005 levels in value terms and 46% in volume terms. Civil Engineering activity is now at 62.7% of 2005 levels in value terms and at 55.8% in volume terms. All activity ex-civil engineering is now down to 17.6% of 2005 levels in value terms and 15.6% in volume terms.

24/9/2012: Euro peripherals Building & Construction activity

Here's a chart updating to latest data index of Building & Construction sector activity in the peripheral euro area states:

As inspired by @StephenKinsella: "Ouch!"

24/9/2012: Italy's debt overhang effect

Via @FGoria on twitter, this chart on Italy's potential GDP and output gap:

Shows brilliantly the cost of Italy's public debt overhang as a steadily falling potential GDP growth and sustained structural recession since ca 1990-1992. Better yet, shows that even cheap liquidity in the naughties failed to produce any real effect on the economy.

Now, keep in mind, Italy is suffering solely from the Government debt overhang, with relatively benign debt levels on household and corporate balancesheets, and with relatively functioning banking system.

23/9/2012: Euro area bonds supply Sept-October 2012

5 weeks from September 14th - cumulated gross supply of sovereign bonds of €70.5bn and €57.3bn of redemptions and coupons:

And supply calendar

All courtesy of Morgan Stanley

20/9/2012: Russian stock market performance for September

Danske analysis of emerging markets performance for September - a nice chart:

Spot RUB - Russian markets.

20/9/2012: Is 'Johnny the Foreigner' at fault? Q2 Irish trade results

In the real world, confronted with the unpleasant truth, we usually react with a denial of the facts and a desperate search for someone else, other than ourselves, to blame for the misfortune. Today's QNA data release triggered exactly this basic psychological reaction. With no reason for it, other than 'let's get Johnny the Foreigner out to blame', some of the favorite economists of our Minister for Finance decided that 'Irish economic growth is suffering from the slowdown impacting our main trading partners'.

Right... and Lehmans caused Irish banks collapse and bungalows prices deflation... that sort of malarky.

Now, that is either an uninformed error of judgement, or an outright lie, folks. In reality, exactly the opposite is happening - our external trade is still booming, while our internal, home-made depression is still raging.

I wrote about the domestic activity collapse already earlier (here's the link). Now, let's take a look at the activity arising from the allegedly falling demand from our trade partners.

First in current prices terms:

• Exports of goods & services from Ireland to the rest of the world hit €45.01 bn in Q2 2012, up 6.21% y/y. This marks a slowdown in growth from 7.4% y/y growth in Q1 2012, but nonetheless, in Q1 2012, Irish exports of goods and services hit an absolute record since Q1 2006. I wouldn't be going around saying that a historic record is... err... a drag on our growth.
• Exports of goods alone rose 1.26% y/y in Q2 2012, down on the 4.02% rate of annual growth in Q1 2012, but still posting an absolute record for any quarter since Q1 2006.
• Exports of services rose 11.46% y/y in Q2 2012, faster than already blistering growth of 11.11% y/y in Q1 2012. Again, volume of exports of services hit an absolute record level for any quarter since Q1 2006.

But maybe the 'Johnny the Foreigner' baddy is pushing down Ireland's growth in real terms? Ok, in constant terms:

• Exports of goods & services from ireland rose 2.06% y/y in Q2 2012, posting, yep, you know this much already, an absolute record in level terms for any quarter since Q1 2006.
• Exports of goods did fall off y/y - declining 4.42%. Which amounts to a drop of €973 million which is less than €3bn plus lost to patent cliff. So, err... the demand from US, UK and EA has nothing to do with this, but rather patents expiration in pharma sector drives the decline.
• Meanwhile exports of services grew, in constant prices terms, by a massive 9.05% in Q2 2012 compared to the same period of 2011.

As the result of these gains and also as a function of our own (not US, UK, EA, etc) demand collapse (marked by the decline in imports), our trade balance (the net positive contributor to our GDP and GNP) has actually expanded. 

Irish trade surplus has grown by a massive 18.98% in Q2 2012 in current prices terms and by impressive 14.47% in constant prices terms. Things are actually so good when it comes to 'Johnny the Foreigner Demanding Irish Exports' that our services sector posted an absolute historical record surplus in Q2 2012 of €1,387mln - for only the third time in the series history since Q1 2006. Our total trade balance surplus reached €11.391bn in Q2 2012 - by far the largest surplus reading in any quarter since Q1 2006. This is 14.1% higher than the previous quarterly record attained in Q3 2011.

Here are two charts to summarize trade balance changes:

The problem, of course, that our Green Jersey folks are not too keen on acknowledging is that overall, Johnny The Foreigner thirst for Irish goods and services has preciously little connection to our GDP activity. But that, illustrated below, is a different story.

20/9/2012: 'Flat growth' and the shrinking Irish economy

Ok, folks... the latest batch of news from CSO and the official 'Green Jerseys' reaction to same would have made a fine candiate for a Nobel literature prize, were they published in a single tome with a heading Literature of Absurd on it...

We have our routine 'Housing market has bottomed out' shrills from the property pushers in the media - despite the fact that property prices continue to fall. We also have the metronome-like 'Unemployment has stabilized' tale, a chapter of gargantuan efforts to avoid mentioning the fact that fewer and fewer people actually work in Ireland, earning living and paying taxes.

Today we have a new pearl: 'Irish economy is growing once again, albeit slowly'.

Complete porkies, if you ask me. Here's the plain and simple reality of what's going on:

In constant market prices terms, Irish GDP based on constant factor cost (in other words, the real activity in the economy carried out by MNCs and domestic enterprises, net of taxes, gross of subsidies) grew 2.3% (+€819 mln) q/q in Q2 2012. Alas, as usual, q/q growth is... err... mostly meaningless. Instead, y/y comparative shows this metric shrinking €300mln (-0.8%).

What's the dynamic here? Oh, not good, either. In Q2 2011, y/y real GDP (constant factor basis) grew 3.21% y/y. In this quarter it shrunk 0.8% y/y... a negative growth swing of 4 percentage points!

Now, adding taxes (net of subsidies) to the above figure produces official real GDP (GDP expressed in constant prices terms). This stood at €40.327 billion in Q2 2012 up €744 mln on Q1 2012 (+1.9% q/q) but down 1.1% (-€442mln) y/y. Now, wait, folks... so official GDP is down y/y. Not up.

What's the dynamics of this change? Oh, well, in Q2 2011 official real GDP was up 2.86% on same period in 2010, so Irish economic growth has overall deteriorated in Q2 2012 compared to same period a year ago by a whooping 3.9 percentage points.

Next step is for us to subtract from our real GDP outflows of payments abroad (net of inflows of income from abroad) - the so-called Net Factor Income From the Rest of the World adjustment. Bear with me here. It is important.

In Q2 2012 we, as economy, have managed to send out €7.219 billion in factor payments abroad, net of what we received from abroad. Sounds a lot? Not really - this is down on €8.397bn in Q1 2012 (which added €1,178mln to our GNP) and it is down €1,385 mln on Q2 2011 (which adds same amount to our GNP compared to Q2 2011 levels).

What the above means? Here's the punchline to reality: as the result of €744mln increase in our GDP and a €1,178mln decrease in our payments abroad, our GNP officially expanded by €1.922bn in Q2 2012 q/q. Meanwhile, due to a contraction in real GDP of €442mln offset by reduction in outflows of income abroad of €1,385mln, our GNP rose €943mln (+2.9%) y/y in Q2 2012.

Thus, real economic activity in Ireland fell, y/y in Q2 2012, but because the MNCs have decided to expatriate less income out of Ireland in Q2 2012, our GNP actually rose.

Why would MNCs decide not to expatriate much of profits? For a number of reasons:

1. Lack of capital investment around the world means corporates have no incentive to move profits out of Ireland outside the immediate objective of boosting reported profits at home;
2. Booming equity markets in the US mean that there is no immediate pressure for US MNCs operating here to ship retained profits out of Ireland's tax heaven;
3. Fall-off in pharma exports from Ireland also took a bite out of the retained profits here.

Any of these have any tangible effect on our real economy? Not really. Actually - none whatsoever. 

In real economic terms, Irish economy shrunk in Q2 2012 by 1.1% (real GDP terms) y/y and that is it, folks. 

One more note. In seasonally adjusted, constant prices terms:

• Personal Consumption of Goods & Services has hit absolute record low in Q2 2012 of €19,598mln for any quarter since Q1 2007.
• Net Expenditure by Central and Local Government on Current Goods and Services has hit an absolute low of €5,934mln in Q2 2012 for the entire period since Q1 2007.
• Gross Domestic Fixed Capital Formation has hit a record low of €3,427mln
• Exports of Goods and Services have posted a contraction on Q1 2012 but are up €1 billion on Q2 2011
• Imports of Goods and Services have posted a q/q contraction of €1.7bn and are now at a historical low for any Q2 period of 2007-present period
• Total domestic demand is now at the absolute lowest point for any quarter since Q1 2007 and is down €1.6bn on Q1 2012 and €1.9 billion on Q2 2011.

This is not flat growth, folks. This is shrinking real economy.

Note: I will post updated charts later tonight. Stay tuned.

18/9/2012: Irish exports credit guarantee

Leaves you speechless:

I am hearing that Irish Gov Exports Credit Guarantee Scheme requires +2% fee for participation to be paid by SMEs.

Risk-weighting of such schemes=0%, as this is a de facto re-insurance scheme with Government assuming liability only in third teer in the worst case scenario.

UK equivalent Scheme=-1%.

Thus Irish-UK differential for companies successfully exporting = +3% surcharge to the disadvantage for Irish SMEs.

Really, it appears we do tax our SMEs successes and then call this 'support' policy!

17/9/2012: Russian economy shows signs of pressure build up

Big jump in producer price inflation in Russia (via fxstreet.com link here):

This confirms build up of inflationary pressures (see note on CB of Russia latest move in tightening monetary policy last week: link here).

Meanwhile, industrial production posted a slowdown in growth in August, rising 2.1% y/y after posting 3.4% growth in July, but ahead of .9% in June. The slowdown was concentrated primarily in Electricity, Gas and Water sector (+0.2% y/y) and the Mining & Quarrying sector (+0.8% y/y), with Manufacturing sector expanding at 4.1% y/y. M/m industrial output fell 0.7% in August, reversing gains of 0.8% in July. So far, January-August 2012 cumulated growth in Industrial Production stands at 3.1% y/y.

Twin effects of slower growth and rising producer prices suggest that either the slowdown might accelerate over time with inflation on the costs side (wages) feeding into reduced capacity of the producers to absorb twin pressures of shrinking exports demand and rising cost base.

On the other hand, we have continued general upward trend in Russian equity markets:

MICEX up from 1389 3mo ago to 1532 currently. The market is betting on temporary nature of the slowdown?

IMF has indicated they might downgrade Russian growth forecasts for 2013-2014 on foot of continued build up of pressures from European demand for Russian exports.