3/12/2012: Current crisis systemic risk comparative

THE LIBERALIZATION AND MANAGEMENT OF CAPITAL FLOWS - an IMF paper released today has an interesting chart putting into perspective the extent of the euro area crisis in comparative terms to other crises (click on the image to enlarge):

The above clearly shows that to Q3 2011, the euro area crisis has been

1. Systemically separate from the preceding global financial crisis of Q1 2008 - Q1 2010, 
2. Much smaller in magnitude than the preceding crisis,
3. As measured by the crisis indicator - comparable in magnitude to the early stage of the Asian-Russian crises and ERM crisis, as well as to the early stages of the Scandinavian crisis
4. However, the spillover from the euro area crisis to the global economy remained more limited than contagion in previous crises, as illustrated by the systemic crisis indicator.

Another interesting feature of the chart is that it shows that the Age of Moderation (1990-2007) was actually a period with four systemic crises: the Scandinavian crisis of the 1990s, the ERM crisis, the Asian and Russian crises, and the dot.com bubble

Lastly, the above shows that both, the IMF systemic crisis indicator and Equal-weighted crisis indicator are not sufficient in providing lead-up signals for systemic stress build up.

3/12/2012: Austerity Dictionary

Brian Lucey has published a collection of twitter-sourced Austerity Dictionary - link here. Most worthy of reading.

3/12/2012: Ireland's Manufacturing PMI for November 2012

NCB Purchasing Manager Indices for Manufacturing for Ireland are out this morning with a deserved upbeat soundings on foot of the core data showing continued growth in the sector. Here are some details, both worth a positive overall note and some warning signs of potential tightness ahead.

Business conditions continued to improve in the Irish manufacturing sector during November, marking the ninth consecutive month of such increases, though there were slower rises in output and new orders.

Overall PMI was running at 52.4 in November, slightly up on October 52.1. November reading was the highest since July 2012. Strictly-speaking, both October and November indices were statistically indistinguishable from 50.0, however, with the last index reading that was statistically significantly above 50.0 was July 2012 and the last time this happened before then was April 2011.

Not to rain too much on the parade, 12mo MA through November 2012 is at 51.1 and 6mo MA is at 52.4, both encouraging. 3mo MA through November is 51.2 and this is behind 3mo MA through August 2012 which as 52.6. In other words, last 3mo activity does not seem to signal any significant improvement on June-August period, although both 3mo averages are ahead of 50.9 reading that represents the 3mo average between March and May 2012.

Likewise, looking at actual quarterly averages: Q1 2012 came in at 49.8 (contraction), Q2 at 51.5 (expansion at shallow rates), Q3 at 52.2 (another shallow expansion) and Q4-to-date at 52.25 (no material improvement on Q3).

Let's take a look at core subcomponents:

• Actual Output levels expanded in November at 53.8, down on 54.4 expansion in October, but up strongly on output growth of 51.0 and 51.3 recorded in August and September. 12mo MA is at 51.5. Both October and November readings were significantly above 50.0 line - adding some statistical support to the output growth signals. 6mo MA is now at robust 53.3 and 3mo MA is at 53.2, identical to the 3mo MA through August 2012. Q4-to-date reading is at strong 54.1 and up on 52.1 average for Q3 2012, 51.4 average for Q2 2012 and 50.2 average through Q1 2012. Good news, despite slower growth rate recorded m/m.
• New orders also moderated the rate of expansion to 52.1 in November, from 52.7 in October. 12mo MA is now at 51.4 and 6mo MA at 53.1, the latter being statistically significantly different from 50.0. 3mo MA is at 52.4 down from 53.7 3mo average through August 2012. On quarterly basis, Q1 average stood at 49.9, Q2 2012 average rose to 52.0, with Q3 2012 average hitting 53.3, and Q4-to-date average sliding back to 52.4.
• Growth in new orders seemed to have been driven by growth in export orders, up from 51.8 in October to 52.1 in November. Both months expansions were statistically insignificant. New export orders improvement, however, in m/m terms was more significant than improvement in overall new orders. 12mo MA for export orders stands at 52.3, with 6mo MA at 52.5. 3mo MA at 50.8 - signaling weakness in the overall sub-index performance, against 3mo MA of 54.2 recorded in June-August 2012. On quarterly basis: Q1 2012 average reading was 51.9, rising to 52.8 in Q2 and Q3, before sliding to 52.0 in Q4-to-date.

 Per Markit/NCB release: "According to respondents, slower growth of new business enabled manufacturers to work through outstanding business. Backlogs of work decreased for the twenty-first month running, albeit at a reduced rate." This is illustrated below:

As you know, I usually run more detailed comparatives on input/output prices and profitability in a separate post, once Services sector data comes in. But some reflections here:

• Output prices contracted in November, posting a reading of 49.7 down from 51.7 in October. This is the first contraction in the series since August 2012. Overall, trends in output prices are not encouraging for Irish manufacturers. 12mo MA is at 49.1, with 6mo MA at 50.3. Q1 2012 average is at 47.3, Q2 2012 average at 49.4 and Q3 average at 50.2, while Q4-to-date average is 50.7.
• Meanwhile, Input prices continued robust inflation trend set o since August 2012. In November, input prices subindex stood at 59.0 down slightly on 60.7 in October and 60.6 in September. 12mo MA is at 58.0, 6mo MA at 55.8, 3mo MA through November is at 60.1 and previous 3mo MA through August was at 51.4. In quarterly averages terms, Q1 saw average subindex reading of 60.4, Q2 at 57.9, Q3 at 55.1 and Q4-to-date at 59.9.
• Continued widening gap between input prices (cost) inflation and output prices (revenue) deflation suggests two possible pressures in the sector: (1) rising transfer pricing - as opposed to actual activity - in the sector by the cost-base-driven MNCs, and (2) shrinking profit margins for Irish firms and profit-base-driven MNCs.

Lastly, per chart above, employment:

• Employment subindex expanded to 53.5 in November, a robust rise on 51.9 in October, but behind 54.1 reading reached in September. Overall, employment index is now ahead of 50.0 line for nine consecutive months. 12mo MA is at 52.3, 6mo MA at 53.3. 3mo MA through November is at 53.2, slightly down on 53.4 3mo MA through August 2012. In quarterly terms, Q1 saw subindex average 50.0, Q2 2012 - 54.4, Q3 2012 - 52.8 and Q4 2012-to-date averages at 52.7. In other words, there seem to be robust hiring signal coming from the sector in the last 9 months.

Net conclusion: good PMI readings, especially considering that Euro area continues to tank and global trade slowdown is yet to be reversed. Some tightness on profit margins and weakening new orders growth rate are to be watched. However, the two warning signals above are likely to be offset by the stocks rebuilding in months ahead, should new orders hit a slowdown.

Updated:
Manufacturing PMIs across the euro zone contracted for a sixteenth consecutive month in November, with last month's reading at 46.2, up on 45.4 in October. November marks the slowest pace of contraction in eight months, but the downturn remains strong. New exports continued decline, while Italy PMI is down to a 3mo low of 45.1 and Spain is at 45.3.


The Markit/HSBC China Manufacturing PMI for November rose to 50.5, up from 49.5 in October hitting for the first time in 13 months the 50.0 mark.

1/12/2012: Greek Deal 3.0

If you need to read anything at all on Greek 'Deal' 3.0 signed in November this year, go no further than this post from Yanis Varoufakis. Lethally direct & brutally correct assessment, in my view.

If you want to understand why 120% debt/GDP ration by 2020 or 2022 is not attainable absent OSI, see my note here.

1/12/2012: Irish banking Reforms: are things getting better?

In the previous post, I discussed changes in irish banking system systemic stability in 2012 (January-November). But here's a longer range view - from September 2010 on through November 2012.

Now, keep in mind: since September 2010, Irish banks had

1. Massive recaps (2011-2012)
2. Full reform and deleveraging programmes, approved by the EU and Irish authorities
3. Rounds of increases in charges on customers to beef their own interest margins
4. Vast subsidies from the ECB and CBofI
5. Subsidies from the Government via deposits (see here)
6. According to the Government, BofI (largest bank) has completed its deleveraging programme, while AIB (second largest bank) is ahead of target
7. Massive sales of riskiest assets to Nama that crystalized losses and led to recaps, which are now completed
8. According to the Government have bee operating in more benign environment of property prices stabilization
9. Benefited from a 88% rally in Government bonds which they stuffed onto their balancesheet over 2010-present like there is no tomorrow

and so on. In other words, there are tomes and tomes of Government sponsored propaganda to suggest that things are going honky-dory in the banking sector in Ireland. Here's what Head of the Department of Finance had to say this week about the banking sector 'progress' (emphasis is mine):

"With PCAR capital investments and the Bank of Ireland sale, confidence started to return to the banking sector. [this refers to 2011]"

"In 2012 we have witnessed further tangible signs of stability. …Even though non-performing loans continue to grow; here again there are tentative signs that in the mortgage arrears area the growth in new arrears has been arrested. 

The banks still have a lot of work to do to roll out sustainable mortgage solutions, but this process is underway.

Importantly, confidence is returning to our banking system following its recapitalisation.  Deposits across the Irish system are up 2.5% with stronger growth recorded by AIB, BOI and PTSB (which are up 5.3%).

We are in a situation now where the domestic banking system is getting stronger, albeit from a very weak starting point.

• The large scale balance sheet restructuring has been completed;
• BOI have completed the disposal of non-core portfolios
• AIB have substantially completed their disposals. 
• The funding gap has been significantly reduced and the drawing on Eurosystem funding by our government supported going-concern banks continues to decline, and is now less than €60 billion (excluding IBRC).
• Importantly, as I said earlier deposits are growing and the banks are back in the funding markets."

So, in other words, we should expect Ireland's banking system to have performed well in progressing since 2009-2010 lows?

Here's the chart:

In reality, courtesy of Euromoney surveys, we know that Irish banking system stability has deteriorated, not improved, between September 2010 and November 2012, and this deterioration was the second largest amongst 37 European countries.

1/12/2012: Ireland - still the second worst banking sector in EA

Another Euromoney risk survey on and the results for the banking sector are out:

Ireland's banking sector zombies are ranked as 4th least safe in the entire Europe of 37 countries. Next to Greece (3rd least safe), and Macedonia (1 place ahead of Ireland - 5th least safe). Iceland, having defaulted and demolished its banks, ranks 7th least safe. Note, Ireland remains the second weakest banking sector in the EA17.

Of course, our 'leaders' would say that yes, things are bad, but they are improving... hmm...

Are they? Well, sort of. Ireland's score (higher score, greater systemic stability) have risen in 11 months of 2012, but the rise was far from spectacular. Ireland's improvement in the score is 7th largest in the sample, behind that for Iceland.

Ireland's gap to the peers (Advanced Small Open Economies) in overall score is about 4.4 points. 11 months of heroic Government reforms have yielded a gain of 0.2 points in Irish position, and the deterioration in the overall euro area climate has resulted in a decline in the average ASOE score of 0.07 points. This means the spread improved in favour of Ireland by less than 0.3 points in 11 months - a rate of 'reforms' that can close the current gap, assuming continued deterioration in ASOE average, over  161 months. In other words, unless the 'reforms' in Ireland's banks start bearing fruit much faster than they have done in 11 months of 2012 so far, it will take us 13.4 years to reach ASOE average levels of banking system stability.

1/12/2012: Irish Government deposits with Zombie Banks

On the foot of the analysis of deposits from Irish Residents, one might ask a question if the Irish Government deposits within the Irish banking system are significantly skewed in favour of the Covered Group of banks (Irish domestic banks largely owned by the Government).

The hart below plots the ratio of Irish Covered Banks Deposits from Irish Residents as a percentage of all same category deposits within the Domestic Banks group:

And the subsequent chart plots Government deposits in Domestic group and within Covered group:

Per first chart above, it is pretty clear that Irish Government deposits are biased in favour of the Covered banks and that this bias has risen dramatically during the current crisis (since the beginning of 2008). Of course, the effect of this bias is two-fold:

1. This represents a direct subsidy from the Exchequer to the Covered Banks at the expense of non-Covered banks, and
2. This results in lowering the deposit rates that Covered Banks must charge to attract depositors.

Now, some more detailed stats on the same subject:

• In October 2008, 75.49% of all Resident Deposits within the Domestic System were banked at the Covered Institutions. This represented a decline of 0.505% on September 2012 and a drop of 3.67% on October 2011.
• Share of Covered Banks in total Domestic Resident deposits was down on 3mo average basis (q/q and y/y) and on 6mo average basis
• In October 2012, share of Covered Banks in total Domestic banking system resident deposits was down 3.67% on October 2011, down 7.44% on October 2010 and down 6.56% on October 2009.
•  While total share of Covered Banks in domestic deposits has declined, in Government deposits their share has risen. In October 2012 Covered Banks' share of Government deposits rose to 91.992% (up 1% m/m and 0.8% y/y). The said share is no up 1.92% on October 2010.

Let's take a look at longer term series:

• Prior to 2008, average share of Covered Banks in total resident deposits was 78.7% and this fell to 75.3% for the average from 2008 through present, with 3mo average through October 2012 share now at 75.7%.
• Prior to 2008, average share of Covered Banks in Private Sector resident deposits was 75.7% and this fell to 73.6% for the average from 2008 through present, with 3mo average through October 2012 share now at 72.8%.
• Prior to 2008, average share of Covered Banks in Government deposits was 81.5% and this rose to 92.4% for the average from 2008 through present, with 3mo average through October 2012 share now at 90.9%.

While Private Sector seemingly is diversifying away from Irish banking zombies, Irish Government is increasingly subsidizing them. Given the Government simultaneously deposits with the banks that it owns and guarantees, one wonders if such apparent and blatant subsidization of the domestic covered institutions through deposits holdings by the Government is (1) consistent with competition rules present in the EU, and (2) consistent with good practices of risk management.

1/12/2012: Much Hype on Little Signs: Private Sector Deposits in October

Much hoopla is doing rounds these days about the 'rise in October deposits' in irish banking system. Head of the Department of Finance has referenced the 'welcome news' in his most recent speech and the Central Bank has cheerfully noted as much in the release published last night. Alas, as usual, the reality is not as encouraging as the 'Green Jerseys' crowd might suggest it is.

Let's cut some fog of numbers here.

First, Domestic Group of banks:

• Total Deposits in Domestic Group of banks (covering all banks registered to operate in Ireland) rose from €206,363mln in September to €208,633mln in October. In other words, deposits rose 1.1% m/m (reversing a -0.19% contraction m/m in September 2012).
• However, total deposits in Domestic Group are down 16.6% y/y in October 2012, oops... volatility in m/m figures seems to be clouding the minds at the 'Green Jerseys' clubhouse. And worse:
• More worrying: 3mo average deposits through October 2012 are down 7.9% on 3mo average deposits through July 2012, and are down 16.8% on 3mo average through October 2011. 
• Likewise, 6mo average through October 2012 is down 10.0% on 6mo average through April 2012 and is down 15.4% on 6mo average through October 2011.
• Some might say that these averages are down because of some exits of banking institutions from Ireland, but that is simply false, as data for Covered Banks (see below) shows an even more disastrous trend.
• Now, October 2012 levels of total deposits from Irish Residents are down 16.6% on October 2011, down 31.2% on October 2010 and down 32.8% on October 2009. Only Borat would cheer these trends with a 'Good news' headline.

Much of the above data trends is driven by the Monetary & Financial Institutions deposits changes. Much, but not all. 

• Government deposits with Domestic Banks rose 25.9% m/m in October having posted a 6.0% rise in September 2012. Year on year, Government deposits are up 44.8% in October 2012 and they were up 2.4% in September 2012. Virtually all trends on Government deposits are up.
• In contrast, Private Sector deposits with Domestic banks grew only 1.16% m/m in October 2012 and 2.2% in September 2012. 
• In longer term trends, Private Sector deposits didn't fare that well: 3mo average through October 2012 rose 0.06% on 3mo through July 2012, while it was up 0.73% y/y. 6mo average was up 1.2% in October 2012, compared to 6mo average through April 2012, but down 1.25% in y/y terms.
• Now, for dysmal science analysis of the Private Sector deposits: in october 2012, Private Sector Deposits in Domestic Group of banks were up 2.2% on October 2011, down 13.0% on October 2010 and down 18.0% on October 2009.
• Borat back, please.

Let's take a look at the levels of change in Domestic Group deposits:

• Cheerful increase in total Irish residents' deposits in Domestic Group of banks amounted to €2,270mln in October compared to September 2012, with only €923mln of that - less than half - accumulating in Covered Banks. Looks like foreign banks are beating Irish zombies in the deposits gathering game.
• There was a rise of €1,663 million in Private Sector deposits in the Domestic Group of banks in October, compared to September. Of this, only €574mln - roughly one third - landed in Irish banks, with 2/3rds going to foreign banks.
• Borat would say that the above shows success in restructuring Irish banking system. More even-headed analysis suggests success in foreign banking system operating in Ireland.

Now, Covered Banks (aka Irish Banking Zombies):

• Total Residents' deposits in Covered Banks were up €923 million in October 2012 (+0.59%) m/m, reversing a -0.01% decline in September. Y/y deposits are down 19.63% - worse performance than in September 2012 (-19.26%).
• Let's put things into perspective: in a year to October 2012, Irish Residents' deposits in Covered Banks shrunk €38.5 billion. In the 'cheers inducing' month of October 2012 they rose €923mln. Simple math suggests that it will take us 48 months of these 'improvements' to get back to where Irish Residents' deposits were back in October 2011.
• But there's more: Total Residents' deposits in Covered Banks in October 2012 were -19.63% below October 2011, -36.35% below October 2010, -37.64% lower than in October 2009. You get my point - Covered Banks (which were supposedly reformed, repaired, recaped per Department of Finance & CBofI, ages ago) are still performing woefully worse than foreign banks operating in Ireland.
• Government deposits with Government-owned banks rose €695 million m/m in October (+27.2% m/m and +45.92% y/y), outstripping increases in private deposits of €574mln (+0.55% m/m and +3.3% y/y).
• Private Sector Irish Residents' deposits with Covered Banks fell -0.75% on 3mo average basis through October 2012 compared to 3mo average through July 2012, although these are up 2.80% y/y. On another positive note, 6mo average for Irish Residents' Private Sector deposits with Covered Banks rose 1.8% on 6mo average through April 2012.
• Nonetheless, Irish Residents' Private Sector deposits with Covered Banks in October 2012 were still down 15.8% on same period of 2010 and down 20.7% on same period 2009.
• Switching back to more positive bit of news: Private Sector deposits with Domestic Banks were up €3.121bn in October 2012 y/y, and up €3.379bn for deposits with Covered Banks, which means that y/y Irish Covered Banks are generating stronger activity in attracting Private Sector Residents' deposits than foreign banks.

Here are some charts illustrating the above trends:

1/12/2012: US birth rate hit an all-time record low in 2011

The 2011 preliminary data for the US released this week showed 3,953,593 births in the US, a 1% decrease (-45,793) compared to 2010. The US fertility rate of 63.2 per 1,000 women age 15-44 years has now "declined to the lowest rate ever reported for the United States."
Full release here: http://www.cdc.gov/nchs/data/nvsr/nvsr61/nvsr61_05.pdf

In other words, the US birth rate is now below where it was during the WW2 years and the Great Depression.

Per release:

• The number of births declined for most race and Hispanic origin groups in 2011, whereas the rate declined only for Hispanic, non-Hispanic black and AIAN women. 
• The birth rate for teenagers 15-19 years fell 8 percent in 2011 (31.3 births per 1,000 teenagers 15-19 years), another record low, with rates declining for younger and older teenagers and for all race and Hispanic origin groups. 
• The birth rates for women in their twenties declined as well, to a historic low for women aged 20-24 (85.3 births per 1,000). 
• The birth rate for women in their early thirties was unchanged in 2011 but rose for women aged 35-39 and 40-44.  
• The birth rate for women in their late forties was unchanged in 2011. 

The worrisome trend here is not the decline in teenage births, obviously, but a combination of dramatic fall-off in the birth rates for 20-24 and 25-29 age groups. In addition, increases in 40-44 age group and 35-39 age group are associated with smaller family sizes.

 

• The first birth rate in 2011 (25.4 births per 1,000) was the lowest ever recorded for the United States. 
• The birth rate, the number of births, and the percentage of births to unmarried women each declined for the third consecutive year.  
• The birth rate was 46.1 birth per 1,000 unmarried women aged 15-44 and the percentage of births to unmarried women was 40.7. 

There are two trends working through here:

1. The birth rate in the US has declined in every year since 2007 when the total number of births reached over 4.3 million - an effect attributable to the severity of the economic crisis. As the top chart clearly shows, this is similar to what was experienced during the Great Depression, albeit at a shallower scale. Same took place in the 1970s. The effect of the Great Recession is now more moderate than in the earlier years of the crisis, with 1% decline y/y in 2011 following on 2% drop in 2010 and 3% drop in 2009.
2. Long-term trend to the downside in overall birth rates - the trend clearly present since the late 1950s. The rate of this long-term decline in the US is still benign compared to Europe. In Germany, birth rate currently stands around 1.36 children per woman, while in the US it is at 1.9.

30/11/2012: Moody's downgrade ESM and EFSF

Moody's downgrade of ESM and EFSF: here.

The downgrade was driven by two factors:

1. Moody's downgrade of France - the second largest provider of callable capital in the case of the ESM and as a guarantor country in the case of the EFSF.
2. "Moody's view that there is a high correlation in credit risk among the entities' supporters is consistent with the evolution to date of the euro area debt crisis and the close institutional, economic and financial linkages among the major euro area sovereigns. As a result, the credit risks and ratings of the ESM and the EFSF are closely aligned to those of its strongest supporters."

Another point of interest: "Moody's acknowledges that the ESM benefits from credit features that differentiate it from the EFSF, including the preferred creditor status and the paid-in capital of EUR80 billion. However, in Moody's view, these credit features do not enhance the ESM's credit profile to the extent that it would warrant a rating differentiation between the two entities."

Update: here's a good take on some of the issues involved in the downgrade: http://dealbreaker.com/2012/11/efsf-conveniently-downgraded/

30/11/2012: Greek debt distribution

Updated Greek debt shares based on latest 'deal' (to my post on impossibility of 120% debt/GDP target http://trueeconomics.blogspot.ie/2012/11/15112012-impossibility-of-greek-2020.html)

via MacroMonitor

30/11/2012: Eurocoin continues to signal EA17 downturn in November

In November euro area leading growth indicator Eurocoin stood at -0.29 % which is the same level as in October. This reading "reflects the opinions of households and businesses, as recorded by the surveys, which overall remain still unfavourable, though signs of an easing of pessimism emerged in some euro-area countries less affected by the sovereign debt tensions". Some details can be found at http://eurocoin.cepr.org/index.php?q=node/148 .

Reading below zero signals contraction in economic activity and the Eurocoin is now under water for 14 months in a row. The reading of -0.29 is the 3rd lowest the indicator reached during the current downturn. 

Consistent with the current slowdown, the price-growth dynamics suggest that there is an opening for further ECB easing:

Per above, it is quite obvious that we are stuck in the quick sand of being very near the zero-rate bound and no improvements in growth.

Per below, current inflation is still above the target, but the direction of change is encouraging:

In particular, latest inflationary pressure easing appears to be in line with ECB expectations and suggest that inflation is relatively well anchored, although still ahead of the ECB formal target.

Furthermore, 3-mo MA for Eurocoin through November 2012 is at -0.3 and 6mo MA at -0.273, both close to -0.31 average for the crisis period of 2008-2009.

The mixed bag of indicators is firmly shifting toward some action from the ECB soon.