31/12/2012: Calling in the New Year

And calling in the New Year, an image via MacroMonitor:

May 2013 be somewhat different!

31/12/2012: Happy New Year!

A Very Happy 2013 to all readers of this blog!

Visit often, engage with comments, and don't forget to follow me on twitter: @GTCost

31/12/2012: Pimco Twitter-cast for 2013

Bill Gross of Pimco issued his 'twitter-cast' for 2013:

Gross: 2013 Fearless Forecasts: 

1. Stocks & bonds return less than 5% (so shallower returns for 2013 across both asset classes than in 2012, e.g. S&P500 YTD gain of 12.2%, US 10year Treasury yield index down from 1.880 to 1.7574 YTD)
2. Unemployment stays at 7.5% or higher 
3. Gold goes up (no indication by how much, but gold rose 6.3% in 2012 and is now on the longest price appreciation trend since 1920, having clocked 12th consecutive annual gain)
4. 5yr US Treasuries yield 0.70% by end of 2013 (5yr Ts started 2012 at 0.830 yield and closed off on 0.7229)
5. Dollar declines (see below)
6. Oil above USD100 at 'some point in year' (WTI is now down 8% for 2012 on foot of shale gas boom in the US, with WTI-Brent spread averaging at a discount USD17.44/barrel against a premium of USD0.95 for the 10 years period through 2010 (according to Bloomberg data). Brent was up 2.8% this year - a fourth consecutive annual gain. The significance of shale effect is hard to overestimate: US crude production is at 6/985 million barrels per day - the highest since 1993.)

And couple of precedent 'tweeter-casts':

Two charts for USD and Euro YTD changes:

Update: fresh closing data: Nasdaq Comp up almost 16% y/y, DJIA up 7.3% and S&P 500 up 13%.

23/12/2012: Q4 2012 Global Risk Analysis from BBVA - part 2

In the previous post I reproduced some interesting risk maps from BBVA Research report for Q4 2012. Here some more of the same:

And debt levels against risk thresholds (do keep an eye for Ireland's 'unique' position):

I am including the above primarily to re-enforce the fact that the issue of total economic debt I am continuing to raise in relation to Ireland and the rest of advanced economies is now becoming mainstream.

23/12/2012: Q4 2012 Global Risk Analysis from BBVA - part 1

Few interesting risk mappings for December 2012 from BBVA Research:

Per BBVA, through Q4 2012:

"The Western Central Banks “Put” drives financial tensions back to normal in both US and European
Markets. But some segments still “under pressure” (banks and interest rates). Emerging Markets among the most benefited markets during the quarter. The Central Banks actions leads EM Europe below the neutral area thanks to the diminishing Euro convertibility risk. Asian and to a lesser extent Latam financial pressure enter also in the very low tension area."

My view - don't be complacent on Latin America and some Asian markets - keep an eye out for Grey Swans (see my note here).

A nice chart showing easing of pressures in the sovereign CDS markets:

Nice performance for the Peripherals, but... caveat emptor - CDS markets might be singing a song of no content (see here).

Ratings agencies moves summary:

Note that Ireland is the longest running stressed ratings sovereign other than Hungary (shallower downgrades, albeit to below junk ratings). Which puts into perspective the irish Government claims to the success of Irish programme. In reality, we've been down for longer than anyone else, so everything else held equal, we should be expected to come of it earlier too. So far, however, there have been no upgrades (that's right, despite Irish Government claims - example here):

Here's an interesting risk radar map:

And same for Spain and Italy:

 and for Greece, Portugal and Ireland:

See the next post for more from BBVA Research...

23/12/2012: Not another cent?.. Irish banks state aid 2011

In the previous post, amidst the excitement of the aggregate figures reporting, I forgot one small, but revealing chart.

Now, recall the FG/LP election campaign promise of 'not another cent' for the banks?..

23/12/2012: State Aid in EU27 & Ireland

Yesterday, the EU Commission released updated analysis of state aid expenditures, covering 2012 data. The document, titled "State aid Scoreboard 2012 Update Report on State aid granted by the EU Member States - 2012 Update" is available here.

Here are some interesting bits:


"Between 1 October 2008 and 1 October 2012, the Commission approved aid to the financial sector totalling €5,058.9 billion (40.3% of EU GDP). The bulk of the aid was authorised in 2008 when €3,394 billion (27.7% of EU GDP) was approved, mainly comprising guarantees on banks’ bonds and deposits. After 2008, the aid approved focused more on recapitalisation of banks and impaired asset relief rather than on guarantees, while more recently a new wave of guarantee measures was approved mainly by those countries experiencing an increase in their sovereign spreads, such as Spain and Italy.

Between 2008 and 2011,  the overall amount of aid used  amounted to  €1,615.9 billion (12.8% of EU GDP).  Guarantees accounted for the largest part amounting to roughly €1,084.8 billion (8.6% of EU GDP), followed by recapitalisation €322.1 billion (2.5% of EU GDP), impaired assets €119.9 (0.9% of EU GDP) and liquidity measures €89 billion (0.7% of EU GDP)."


In other words, keeping up the pretense of solvency in the legacy banking system of the EU (primarily that of the EA17) has created a cumulated risk exposure of €5.06 trillion (over 40% of the entire EU27 GDP). With such level of supports, is it any wonder there basically no new competition emerging in the sector in Europe.


"In 2011, the Commission  approved aid to the financial sector  amounting to  €274.4 billion (2% of EU GDP). The new aid approved was concentrated in a few countries and involved guarantees for €179.7 billion, liquidity measures for € 50.2 billion, recapitalisations for €38.1 billion and impaired asset relief for € 6.4 billion.

The overall volume of aid used in 2011 amounted to € 714.7 billion, or 5.7% of EU GDP. Outstanding guarantees stood at € 521.8 billion and new guarantees issues amounted to €110.9 billion. Liquidity interventions amounted to € 43.7 billion and new liquidity provided in 2011 stood at €6.5 billion. Recapitalisation amounted to € 31.7 billion. No aid was granted through the authorised impaired assets measures."

Some illustrations of historical trends.

First non-crisis aid:

Amongst the euro area 12 states, Ireland has the fourth highest level of state aid over the period 1992-2011 and this is broken into 5th highest in the period of convergence with the EA12 (1992-1999), 5th highest for the period of the monetary bubble formation (2000-2007) and the second highest for the period of the crisis (2008-2011).

Relative to EU27, Irish state aid was above EU27 average in 1992-1994, 1998-2002, 2007-2011. In other words, Ireland's state aid was in excess of EU27 for 13 out of 20 years. And that despite the fact that our income convergence to the EU standards was completed somewhere around 1998-1999.

In terms of financial sector supports during the crisis, we are in a unique position:

The overall level of supports for financial sector in Ireland is so out of line with reality that our state aid to insolvent financial institutions stood at 365% of our GDP in 2011 or roughly 460% of our GNP. In other words, relative to the size of our economy, the moral hazard created by the Government (and Central Bank / FR) handling of the financial crisis in Ireland is now in excess of measures deployed by the second and third worst-off countries in EU27 (Denmark and Belgium) combined.

The chart above shows that Guarantees amounted to 246.7% of GDP in Ireland, almost identical to 245.7% of GDP in Denmark. Which means that our Guarantees were basically equivalent to those of seven worst-off Euro area countries combined.

However, stripping out the Guarantees, the picture becomes even less palatable for Ireland:

Ex-Guarantees, Irish State supports for the financial sector were more than 10 times the scale of EU27 supports and at 118.4% of GDP amounted to almost the combined supports extended by all EA12 states (123.2% of GDP).

21/12/2012: Slight upgrade for Ireland

Nice small present for the Day After (yep, that 'End of the World' thingy passed peacefully): Euromoney Credit Risk survey gave Ireland a small, but welcome upgrade:

Note that Ireland is just one of 3 countries receiving an upgrade.

Not a hugely significant development, but a nice step - 1 place up in the global rankings, now to 45th highest risk country (meaning there are 44 countries that rank less risky than Ireland). Do note, however, that our systemic risk scores in Structural Assessment has slipped, while Credit Ratings and Debt Indicators remained static.

20/12/2012: Pensions, health costs & education fees for 2014-2015

Staying with the IMF report on Ireland, and with the theme of 2014-2015 adjustments, here's again what the IMF had to say on what we should expect from the Government:

"The authorities should outline the remaining consolidation measures for 2014–15 around the time of Budget 2013 (MEFP ¶8). The program envisages additional consolidation of 3 percent of GDP over 2014–15. Taking into account the measures already specified for these years (such as on capital spending), and carryover savings from earlier measures, new measures of about 1½ to 2 percent of GDP remain to be identified for 2014-15."

I wrote about the above here. But there's more:

"To maximize the credibility of fiscal consolidation, and to reduce household and business uncertainties, the authorities should set out directions for some of the deeper reforms that will deliver this effort. These could include, for instance, on the revenue side, reforming tax reliefs on private pension contributions; and on the expenditure side, greater use of generic drugs and primary and community healthcare, and an affordable loan scheme for tertiary education to enable rising demand to be met at reasonable cost."

Further, per box-out on Health costs overrun: "there is scope for increased cost recovery in respect of private patients‘ use of public hospitals"

Hence, per IMF, the Government should hit even harder privately provided pensions (on top of the wealth tax already imposed), thus undermining even more private pensions pools and increasing dependency on state pensions. For those of us with kids, IMF - concerned with already unsustainably high personal debt levels - has in store more debt. This time to pay for our kids education. And for those of us with health insurance, there is more to pay too.

The above combination of measures is idiocy of the highest order. Per IMF, Irish economy is suffering from private debt overhang which leads to more deleveraging, less consumption and less investment. And these lead to lower growth. I agree. But what IMF is proposing is going to:

• Increase private debts and reduce the speed of deleveraging, and
• Raise the demand for already stretched public services.

This is the Willie Sutton moment for Ireland: the state (with the IMF blessing) is simply plundering through any source of money left in the country is a hope of finding a quick fix for Government insolvency. Now, with low hanging fruit already bagged, this process is starting to directly impact our ability to sustain private debts. But no one gives a damn! As Sutton, allegedly claimed, it makes sense to rob banks, because that is where the money are. Alas, with banks out of money, the Government, prompted by the IMF 'advice' is going to continue robbing us.

So a message to our Pensions industry, which hoped that going along with expropriation of customers' funds via pensions levy would allow the industry to avoid changes to tax incentives on pensions (the blood of the sector demand). Prepare for tax reliefs savaging. Once you fail to stand up to the bullies and protect the interests of your customers, you deserve what you are going to get. Every bit of it.

19/12/2012: Mr Grinch Travels in Threes

It hasn't been a good month or so for irish banks... Right, true, AIB & BofI sold some paper around, covered bonds that is. And this triggered a veritable drooling of happiness from some (mostly sell-side) analysts. But then the mortgages defaults figures for Q3 came in... Boom! The IMF started sounding alrams about risks in the stalled banking sector... Boom-Boom! And now, Moody's weighing in too...

"Announcement: Moody's: Irish Prime RMBS performance steadily worsened in October 2012

Global Credit Research - 19 Dec 2012
Irish Prime RMBS Indices -- October 2012
London, 19 December 2012 -- The performance of the Irish prime residential mortgage-backed securities (RMBS) market steadily worsened during the three-month period leading to October 2012, according to the latest indices published by Moody's Investors Service.

From July to October 2012, the 90+ day delinquency trend and 360+ day delinquent loans (which are used as a proxy for defaults) reached a new peak, rising steeply to 16.52% from 15.19% and to 7.91% from 6.58%, respectively, of the outstanding portfolios. Moody's annualised total redemption rate (TRR) trend was 2.95% in October 2012, down from 3.40% in October 2011.

Moody's outlook for Irish RMBS is negative (see "European ABS and RMBS: 2013 Outlook", 10 December 2012,http://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBS_SF309566). The steep decline in house prices since 2007 has placed the majority of borrowers deep into negative equity. Falling house prices will increase the severity of losses on defaulted mortgages (see "High negative equity levels in Irish RMBS will drive loan loss severities to 70%", 16 May 2012 http://www.moodys.com/viewresearchdoc.aspx?docid=PBS_SF285527). The rating agency expects that the Irish economy will only grow 1.1% in 2013 (see "Credit Opinion: Ireland, Government of", 07 November 2012 http://www.moodys.com/research/Ireland-Government-of-Credit-Opinion--COP_423933). In this weak economic recovery, it will be difficult for distressed borrowers to significantly increase their debt servicing capabilities and so arrears are likely to continue increasing.

On 15 November, Moody's downgraded nine senior notes and placed on review for downgrade one senior note out of five Irish RMBS transactions, following the rating agency's revision of key collateral assumptions. The downgrades reflect insufficient credit enhancement for notes rated at the country ceiling. All notes affected by this rating action remain on downgrade review pending re-assessment of required credit enhancement to address country risk exposure. Moody's also increased assumptions in eight other transactions, which did not result in any rating action due to sufficient credit enhancement. (See PR: http://www.moodys.com/research/Moodys-takes-rating-actions-on-5-Irish-RMBS-transactions--PR_259945).

As of October 2012, the 19 Moody's-rated Irish prime RMBS transactions had an outstanding pool balance of EUR48.97 billion. This constitutes a year-on-year decrease of 7.1% compared with EUR52.69 billion for the same period in the previous year."

So, that's EUR48.97 billion of trash which are 7.91% fully destroyed and decomposing (EUR3.87bn) and is showing signs of severe rot at 16.52% (EUR7.96bn). With 70% expected loss, at EUR8.28bn expected writedown, swallowing all funds allocated under PCARs to mortgages arrears?

Who says there's just one Mr Grinch? Comes Christmas time, its IMF & Moody's & bad, bad, bad, moral-hazardous households that just can't pay their mortgages... Time to raise those AVR mortgages costs, then, to cover the losses on errm... mortgages...

19/12/2012: Fiscal Issues, flagged by the IMF

Keep on reading the IMF report, folks. Nice little bots on offer regarding the fiscal programme performance.

Platitudes abound, well-deserved, but...

"A combination of slower growth, higher unemployment, and the over-run in health spending, have dimmed prospects for any significant fiscal over performance in 2012. Indeed, given the weak economic conditions, only about half of the 6 percent of GDP consolidation effort over 2011-12 has translated into headline primary balance improvement. [Meaning that we've been running into a massive headwind, with pants caught on rose bushes behind us...] Nonetheless, the authorities‘ consistent achievement of the original program fiscal targets despite adverse macroeconomic conditions gives confidence in their institutional capacity and commitment to consolidation."

Question is, when will rose bushes thorns get our fiscal pants shredded? We don't know, but here's the road ahead:

Of course, we knew this before, but it is a nice reminder that Enda Kenny's claim that Budget 2013 is going to be the hardest of all budgets is simply bull - the above figures have to be delivered on top of Enda's 'hardest' Budget 2013. Per IMF, however:
"The program envisages additional consolidation of 3 percent of GDP over 2014–15. Taking into account the measures already specified for these years (such as on capital spending), and carryover savings from earlier measures, new measures of about 1½ to 2 percent of GDP remain to be identified for 2014-15.

"To maximize the credibility of fiscal consolidation, and to reduce household and business uncertainties, the authorities should set out directions for some of the deeper reforms that will deliver this effort. These could include, for instance, on the revenue side, reforming tax reliefs on private pension contributions; and on the expenditure side, greater use of generic drugs and primary and community healthcare, and an affordable loan scheme for tertiary education to enable rising demand to be met at reasonable cost."

In other words, the Government will have to find somewhere around €3-3.2bn more cuts/tax hikes in 2014-2015 on top of those already factored in for 2013.

Now, in spirit with IMF paper, let me reproduce for you a box-out from IMF report on public sector wages in Ireland:

Enjoy the above - you can enlarge the text by clicking on the images.

19/12/2012: IMF on Irish Banks Zombies

Continuing with reading IMF latest report on Ireland, here's another bit. This time about Irish banks. Now, recall that in recent months and days we heard about Bank of Ireland and AIB meeting their lending targets, the latest data on mortgages printed a little rise in the number of them outstanding etc. The Government has been running around telling anyone willing to listen (not many, admittedly) that banks are 'repaired' and 'well-capitalized'. Here's IMF take on the comedy (emphasis is mine):

"Bank lending has remained weak. Lending flows have fallen to new lows, with gross mortgage loans to households down 10.3 percent y/y in the first three quarters of 2012 and new SME loan drawdowns (excluding financial intermediation and property-related) down 20.7 percent y/y in first half. Interest rates on SME loans (proxied by loan agreements below €1 million) remain well above euro area average levels."

Few charts:

So as the economy is starving for credit, irish banks - heavily subsidized by ELA and ECB funding (see below) are gouging SMEs for every last bit they can squeeze. Jobs creation in this environment? You gotta be kidding!

While the banks have deleveraged somewhat out of ELA and ECB (per below):

1. Their dependence on these sources is still extraordinarily high.
2. Taken in conjunction with lack of lending to the SMEs, the above suggests that what Ireland needs is not just an EU buyout of banks debts carried by the Exchequer, but also a special funding provision arrangement, which can allow Irish banks to retain high ELA/ECB exposures for at least 5-10 years, to allow economy some breathing room to pay these down. 
3. While banks deleveraged, households - despite significant savings and higher than Euro area average returns on savings - are nowhere near deleveraging curve, with debt/income ratios falling so far only  to the levels of mid-2009 (we are not even at pre-crisis levels!)

But IMF has more on Irish banks: "Domestic banks have high and rising impaired assets and remain unprofitable, which is eroding their currently strong capital buffers. Gross non-performing loans have risen to 23 percent of PCAR banks gross loans at end September, up from 17 percent a year ago, with 50 percent provisioning coverage." So: to summarize the above:

• Gross loans declined from  €247.2bn to €229.6bn  Q3 2011-2012
• Loan loss provisions rose from €19.5bn to €26.5bn (cover rising from 7.89% to 11.54%
• Gross NPLs (Non-Performing Loans)  meanwhile rose from €42.1bn (17% of Gross Loans) to €53.0bn (23.1% of Gross Loans), so te loans provisions amounted to 46.3% of NPLs in 2011 and now account for 50% of NPLs.
• However, Net NPLs to net equity ratio has risen dramatically from 68.6% to 109.3%. In other words, equity cushion is being depleted once again, especially as continued accumulation of NPLs coincided with drawdowns of net equity from €32.9bn to €24.2bn.

More form the IMF: "For the first three quarters of 2012, these banks reported a €0.8 billion pre provision loss excluding non-recurrent items (-0.3 percent of average assets) and, under their restructuring plans, they are not expected to break-even until 2014. Although these banks remain well capitalized, with Core Tier 1 ratios of 15.5 percent of risk-weighted assets and 7.5 percent of total assets, these buffers are expected to decline as loans are worked out and will be further eroded if operational losses persist."

What the hell does this mean, you might ask? Oh, why, let IMF speak. Here's the list of core risks faced by Ireland:

"This gradual recovery faces impediments that pose significant risks. Net exports, still the sole engine of growth, are naturally sensitive to any further weakening in trading partner activity. A sustained recovery that generates sufficient job creation also requires a revival of domestic demand, which faces a range of hurdles that create substantial uncertainty around prospects beyond the near-term:

• Financial reform benefits. In the wake of an exceptionally deep financial crisis, with impacts across the system, financial sector reform challenges remain substantial, and there is uncertainty around the timing and magnitude of the benefits of financial sector reforms for reviving banks‘ profitability and capacity to lend to households and SMEs. 
• Debt overhangs. Government debt is set to peak at some 122 percent of GDP, household debt is 209 percent of disposable income, and many SMEs are burdened by property-related loans. These debts drag on growth through private deleveraging, reduced access to credit at higher cost, and concerns about future tax burdens.
• Bank-sovereign loop. These debt stocks are compounded by still large contingent liabilities from the banking system in a scenario where weak growth reduces asset values and heightens loan losses. As a result, the challenges for sovereign and banks in accessing market funding are interlocked, magnifying the growth uncertainties.
• Fiscal drag. Fiscal consolidation will continue to be significant in coming years, with the growth impact depending on the composition of measures and also on external economic conditions and progress in easing credit constraints."

Do note that the banks play a role in all, I mean all, of the above risks. And the risks are correlated:

"Leaning against such developments with additional fiscal consolidation may help slow down the rise in the debt ratio, but would further reduce growth and raise unemployment and increase risks of hysteresis. Moreover, the resulting higher loan losses would generate new capital needs once banks‘ buffers are exhausted, which could raise debt ratios in the medium term, heightening the challenges to
recovery. Such setbacks in Ireland would exacerbate the broader euro zone crisis..."

And now to 'Boom!' factor: The "risks around medium-term growth prospects are a key source of
fragility in Ireland‘s debt sustainability, in part because prolonged low growth could result in
new capital needs in the financial sector."

In other words, were we to so see fiscally-induced and debt-overhang enabled structurally lower growth (at current rates), the debt crisis can lead to a new capital call from the banks on the Government. In this light, all the Government talk about 'improved' banking operations are, frankly put, tripe.