12/5/2013: On euro's future...

A very interesting contribution from Niall Ferguson to the debate about the future of the euro: here. Interestingly, one can juxtapose Ferguson's article against the list of most recent news briefings from the PressEurop:

12/5/2013: What Greek OSI will mean for IMF?

While this story is still speculative, the very idea that IMF can be forced to take a haircut on its holdings of Greek bonds is very much significant. In my view:

1. IMF will be dragged into OSI on Greek bonds, although the timing of this uncertain;
2. IMF deserves to be dragged into OSI on Greek bonds because the Fund has - begrudgingly - agreed to the EU formula for dealing with the Greek crisis that involved no OSI from ECB / EU which would have been required early on to ensure IMF gets repaid;
3. When IMF takes a hit, this will signal much more than the simple 'first time ever' precedent. Because the IMF's close links to the EU leadership have been directly implicated in the botched structuring of the Euro area member states rescues, the IMF leadership will undoubtedly start actively migrating away from the EU dominance toward the BRIC(S).

The disastrous decisions underwritten by the current and the pervious IMF heads in the case of EU will mean, in the end, the vanishing of the relatively unbiased and transparent international lender of last resort to be replaced by the geopolitically-motivated leadership of the BRIC(S).

This will stand in stark contrast to the reformed and much more transparent functioning of the World Bank, started under the leadership of Paul Wolfowitz.

12/5/2013: Much austerity? Not really... & not of the kind we needed

A week ago I published a blogpost exploring IMF data on austerity in Europe, based on a sample of 20 EU countries with advanced levels of economic development (excluding Luxembourg). You can read that post here. The broad conclusions of that post were:

1. There is basically no austerity in Europe, traceable to either changes in deficits, changes in Government spending or changes in debt. If anything, the European fiscal policies can be characterised by a varying degree of fiscal expansionism during the current crisis, relative to the pre-crisis 2003-2007 period.
2. This, of course, does not account for transfers between one set of expenditures (e.g. public investment reductions) and other lines of spending (e.g. banking sector measures).
3. The only area of fiscal policy where austerity is evident is on taxation burden side, which rose in the majority of sampled economies.

The numbers got me worried and in this post I am looking solely on deficits side of Government spending. If there is savage austerity in EU27, so savage it is killing European economies, surely it would show up in General Government deficit numbers. As before all data reported is based on averages and comparatives computed by me from IMF's WEO data as reported in April 2013 edition of the database.

Let's take a closer look.

Only 2 countries out of 20 have recorded a reduction in average deficits during the crisis period (2008-2012) compared to the pre-crisis average (2003-2007). These were Germany, where annual average deficits declined by 0.95 percentage points (pretty significant) and Malta, where annual average deficits fell 0.79 percentage points (also pretty sizeable drop).

On average, EU20 sample annual deficits have increased by a massive 3.44 percentage points over the pre-crisis period. In  non-Euro area states, the average increase was 3.16 percentage points. But in 'savagely austerian' Euro area, the increases averaged 3.51 percentage points.

So far, the Euro area analysts' rhetoric opposing austerity has been focused on 2012 as the year of highest - to-date - cuts. Was this so? Not really:

Again, as above, there is scantly any evidence of deficit reductions, and plenty of evidence that deficits are getting worse and worse. Again, the comparative is not to the absurd levels of spending during peak spending years of the crisis, but to pre-crisis averages. After all, stimulus is not measured by an ever-escalating public spending, but by increase in spending during the recession compared to pre-recession.

The same conclusion can be reached if we look at 2007 deficit compared to 2012 deficit.

In other words, folks, Europe has had, so far, only 3 measurable forms of austerity, none comfortable to the arguments we keep hearing from European Left:

1. Tax increases (remember, we want to soak the rich even more, right?)
2. Revenue re-allocations to banks measures (remember, no one on Europe's official Left has come out with a proposition that banks should not be bailed out) and to social welfare (clearly, the Left would have liked to spend even more on this)
3. Germany

Note: we must recognise the simple fact that social welfare spending will rise in a recession for a good reason. The argument here is not that it should not (that's a different matter for different debate), but that when it does increase, the resulting increase is a form of Government consumption stimulus.

So let's make the following argument: Euro area did not experience 'austerity' in any pure form in the reductions in deficits. Instead, it experienced a 'stimulus' that was simply wasted on programmes and policies that had nothing to do with growth stimulus (e.g. banks supports). Here are two charts to illustrate:

What the charts above clearly show is that Euro area can be divided into three types of member states:

• Type 1: states where cumulated 5 year surpluses over pre-crisis period gave way to cumulated 5 year deficits. These are: Estonia, Finland, Spain and Ireland.
• Type 2: states where cumulated 5 year deficits over the pre-crisis period were replaced by more benign deficits over the crisis period period. These are Germany and Malta.
• Type 3: all other euro area states where cumulated 5 year deficits over pre-crisis period were replaced by even deeper cumulated deficits over the 5 years of the crisis.

The only two types of fiscal policy that Euro area is missing in its entirety is the type where pre-crisis deficits gave way to crisis period cumulated surpluses (no state in the sample delivers on this) and the type where pre-crisis surpluses gave way to shallower crisis-period surpluses (only one European state - Sweden - qualifies here).

Oh, and one last bit relating to the chart above: all of the peripheral countries, save Italy, had a massive increase in deficits on cumulated basis during the crisis compared to pre-crisis period. Apparently this is the savage austerity that has been haunting their economies.


Updated:
An interesting issue raised by one of the readers:

And my response:

8/5/2013: Thomas Sowell on Language, Evidence & Inquiry

Thomas Sowell doing what he does best: asking uncomfortable questions. http://townhall.com/columnists/thomassowell/2013/05/08/words-that-replace-thought-n1588497?utm_source=thdaily&utm_medium=email&utm_campaign=nl

This got me thinking: there are, as Sowell puts it 'words that replace thought', but there are even more detrimental to inquiry 'words that prevent thought'. In fact, his example of word 'diversity' is one. It is virtually impossible to challenge anything relating to the thesis that 'diversity is intrinsically good' without being shut down on the grounds that any argument to the contrary of the thesis is automatically an argument in favour of some exclusion (racism, anti-semitism, sexism, and so on...).  The only possible by-pass to this problem is to argue that 'diversity has no effect'.

But this falls into the trap discussed briefly here http://andrewgelman.com/2013/05/06/against-optimism-about-social-science/
under the file-drawer bias in publishing.

8/5/2013: Blackrock Institute Survey: N. America and W. Europe, May 2013

Just as I published April update from Blackrock Investment Institute Economic Cycle surveys, here comes May one for North America and Western Europe:

 Now, note change in Ireland's position compared to April:

May summary:

And conclusions (italics are mine):
"This month’s North America and Western Europe Economic Cycle Survey presented a large shift on the outlook for global growth over the next 12 months – although a net proportion of respondents remains positive, this is now a figure of 41%, compared with a net 71% last month. [In other words, things are turning gloomier for global growth outlook]

With regards to the US, the proportion of respondents expecting recession over the next 6 months remains low, with the consensus view firmly that North America as whole is in mid-cycle expansion. [In other words, current growth rates are not expected to rise much as would have been consistent with early-cycle expansion]

In Europe, the view continues to be more disparate, with a generally stronger northern Europe contrasted by continuing weakness in Eurozone as a whole. Belgium, France, Greece, Italy, the Netherlands, Portugal and Spain in particular are described in a recessionary state, with the consensus view remaining in this phase at the 6 month horizon in each case."

8/5/2013: Olli Rehn Departs Reality Once Again

If one needs an example of out-of-touch, reality-denying and self-satisfied EU Commissioner, travel no further than Olli Rehn. Here's the latest instalment from Court's Favourite Entertainer of Things Surreal:
http://europa.eu/rapid/press-release_SPEECH-13-394_en.htm

The speech focuses on what went wrong in Cyprus.

In the speech, Mr Rehn commits gross omissions and conjures gross over-exaggerations.

Nowhere in his speech does Mr Rehn acknowledge that Cypriot banks were made insolvent overnight by the EU (including EU Commission, where Mr Rehn is in charge of Economic and Monetary affairs) mishandling of PSI in Greek government bonds.

Nowhere in his speech does Mr Rehn acknowledge that Cypriot banks were massively over-invested in 'core tier 1 capital' in the form of zero risk-weighted sovereign bonds (Greek bonds) on the basis of direct EU and Basel regulations that treated this junk as risk-free assets. Mr Rehn states that "The banking problems were aggravated by poor practices of risk management. Lacking adequate oversight, the largest Cypriot banks built up excessive risk exposures." But Cypriot banks largest risk mispricing took place on their Greek Government bond holdings and this was (a) blessed by the EU regulators and (b) made more egregious in terms of risks involved by the EU madness of Greek PSI.

Mr Rehn claims that "The problems of Cyprus built up over many years. At their origin was an oversized banking sector that thrived on attracting foreign deposits with very favourable conditions." Nowhere is Mr Rehn making a statement that the size of Cypriot banking sector was never an issue with the EU, neither at the point of Cyprus admission into the euro, nor at the accession to the EU, nor in any prudential reviews of Cypriot financial system. Mr Rehn flat out fails to relate his statement on deposits to the fact that the EU is currently pushing banks to hold higher deposits / loans ratios, not lower, and that higher deposits / loans ratio is normally seen to be a sign of banking system stability. Mr Rehn is also plain wrong on his claims about the nature of deposits in Cyprus. Chart below shows that Cypriot banks' deposits more than doubled in Q1 2008-Q1 2010 on foot of the EU-created mess in Greece and the rest of the periphery.

Source: @Steve_Hanke

And here's proof that Cypriot banks were running a shop with deposits well in excess of loans, implying low degree of risk leveraging, until Mr Rehn and his colleagues waltzed in with their botched 'rescue' efforts:

Source: Washington Post.

Olli Rehn could not be bothered to read IMF assessment of Cypriot economy from November 2011 (Article IV report) - despite him citing EU Commission June 2011 'warnings' - where IMF clearly states that the core problems faced by Cypriot banking system stem from Greece (page 14) and local commercial banks' loans, not depositors or foreign depositors. On deposits, IMF states (page 17 paragraph 21) "non-resident deposits (NRD) in Cypriot banks (excluding deposits raised abroad by foreign affiliates) are €23 billion (125 percent of GDP), most of which are short-term at low interest rates." Thus, IMF directly, explicitly and incontrovertibly contradicts Mr Rehn's statement about foreign deposits having been extended on "very favourable conditions".

IMF further states that when it comes to deposits, significant risk is also poised by "€17 billion in deposits collected in the Greek branches of the three largest Cypriot-owned banks could be subject to

outflows in response to difficult conditions in Greece. Outflows in the first half of 2011were close to €3 billion (nearly 15 percent of the total), although a portion of these returned to the Cypriot parents as NRD." ECB chart below confirms this risk materialising in the wake of Mr Rehn's structured disaster in Greece:

This outflow knocked out billions out of deposits cushion that Cypriot banks needed to reduce their financing needs. And Mr Rhen - the architect in charge of this disaster - has nothing to say about it.

I can go on and on. Virtually every paragraph of Mr Rehn's statement is open to critical examination. 

That is hardly news - Mr Rehn has made so many gaffes and outright bizarre statements in the past (including his assertions at every pre-bailout junction that each peripheral country heading into bailout was fully solvent, fiscally sustainable, etc), he became not just a laughing stock of the markets, but a contrarian indicator for reality. What is of concern is that Mr Rehn is still being given the task of speaking for the Commission on Monetary and Fiscal affairs.

Olli Rehn should read something more cogent than his own speeches on what has happened in Cyprus (e.g. business.financialpost.com/2013/03/28/seeds-of-cyprus-disaster-planted-months-ago-by-eu/ and www.reuters.com/article/2013/04/02/us-eurozone-cyprus-laiki-insight-idUSBRE9310GQ20130402 or http://online.wsj.com/article/SB10001424127887323501004578386762342123182.html) and preferably do so free of charge to European taxpayers, on his own time, while up-skilling for his next job.

7/5/2013: Irish Services Index, Q1 2013 data

Irish Services Index is out today for Q1 2013 and here are some details (monthly data analysis to follow). Keep in mind, data only starts from Q1 2009, so when referencing current levels of activity to peak, that refers to peak from Q1 2009 and not relative to pre-crisis activity.

• Value in Wholesale & Retail Trade, Repair of Motor Vehicles & Motorcycles sector declined in Q1 2013 to 105.2 q/q (down 3.22% from 108.7 in Q4 2012) and is down 5.40% y/y. Q4 2012 value index was down 1.36% y/y, so things are getting worse faster. Relative to peak (since 2009 Q1 data start) the index is now down 5.40%. 
• Value index for Transportation and Storage sector slipped marginally from 110.5 in Q4 2012 to 110.0 in Q1 2013 (-0.45% q/q) and is up 5.97% y/y. However, rate of annual growth declined in Q1 2013 compared to Q4 2012 when it stood at 8.97%. Relative to peak the index is still down 9.39%.
• Accommodation and food services activities index also slipped marginally from 104.7 in Q4 2012 to 104.3 in Q1 2013 (down 0.38% q/q). Y/y index is up 3.48% in Q1 2013 and this is a slight gain on 3.05% y/y growth in Q4 2012. However, relative to peak index reading is still down 14.86%.

• Information and communication sector index remained practically flat in Q1 2013 in q/q terms at 116.6 which is only 0.09% up on 116.5 in Q4 2012. Y/y index is up 3.83% and this shows deceleration in growth from +8.47% growth posted in Q4 2012. Despite this, Q1 2013 marks the peak of activity in this sector for any quarter since Q1 2009.
• In contrast with ICT sector activity, the knowledge economy core services sub-sector, Professional, scientific and technical activities index has suffered steep declines since 2009. In Q1 2013 the index stood at 91.2 (up 0.22% q/q) up only 0.55% y/y. This marks a minor reversal of a significant decline of -8.36% recorded in 12 month through Q4 2012. The index is down massive 29.14% on peak.

• Administrative and support service activities index has been a surprising performer during the crisis. In Q4 2012 it stood at 104.7 and Q1 2013 this increased to 110.4 a gain of 5.44% q/q. Index is now up 20.92% y/y and this compounds 11.38% y/y growth recorded in Q4 2012. Q1 2013 marks the peak quarter on record for the sub-sector.
• Overall services index slipped from 107.2 in Q4 2012 to 106.2 in Q1 2013 (-0.93% q/q), although activity is still up 0.85% y/y. Y/y growth in Q1 2013 marks a slowdown from 2.19% y/y expansion in Q4 2012. The index overall is 0.93% below the peak and is currently running slightly behind the level of activity recorded in Q1 2009.

Overall, quarterly data shows weakening in Services sectors performance, and stripping out the effects of ICT (dominated by tax transfers-booking MNCs), Services side of the economy is showing weaknesses that are alarming. Recall that exports of services growth in 2010-2012 acted to compensate for declines in domestic demand and weaker growth (turning negative) in exports of goods. Should Services activity continue to suffer even modest declines, our GDP and GNP growth will be impaired. 

To see more forward-looking data, read my analysis of Services PMI for April: http://trueeconomics.blogspot.ie/2013/05/352013-irish-services-pmi-april-2013.html

7/5/2013: Blackrock Institute: April 2013 Global Economic Conditions - 2

More updates from the Blackrock Investment Institute Economic Cycle surveys for April 2013. Here are core charts for regions not covered in the previous post.

Note of caution: some of the countries coverage in responses is thin, so data should be treated as only indicative. And the surveys are based on opinion of external experts, not Blackrock internal views.



EMEA:
"With caveat on the depth of country-level responses, which can differ widely, this month’s EMEA Economic Cycle Survey presented a generally bearish outlook for the region. However, there has been a marked improvement in the outlook for Eastern European countries at the 12 month horizon, compared to earlier reports this year.

The majority of respondents for the Czech Republic, Croatia, Egypt, Hungary, Poland, Slovakia, Slovenia, and the Ukraine describe these countries in a recessionary state; however only half of these -- Croatia, Slovakia, Slovenia and the Ukraine -- are expected to remain so by the majority of economists, at the 6 month horizon. 

At a longer horizon of 12 months, the outlook becomes more positive within Eastern Europe, with only the economies of Slovenia and Slovakia expected to continue to weaken."

Asia Pacific:

"...continuing bullish outlook for the region. Out of the 14 countries covered, only Singapore and Vietnam are currently described to be in a recessionary state. Over next 6 months the balance of consensus opinion shifts back to expansion for these countries, while in Australia the proportion of economists expecting recession increases to 50%. Australia stands out as the only country in the region where respondents expect the economy will weaken over the next year."

Latin America: 

"With a caveat on the depth of country-level responses, which differs widely, this month’s Latin America Economic Cycle Survey presented a generally bullish outlook for the region. Brazil, Mexico, Colombia, Peru and Chile are described to be in expansionary phases of the cycle and expected to remain so over the next 2 quarters, while Brazil is expected to mature from early-expansion to mid-cycle expansion and Chile is expected to move from mid-cycle expansion to late-cycle expansion. 

The exceptions to this theme within the region were Venezuela and Argentina. Both are described by the consensus of economists to be in a recessionary state, with growing proportion respondents expecting this to continue at the 6 month horizon." 

7/5/2013: Blackrock Institute: April 2013 Global Economic Conditions - 1

A number of updates from the Blackrock Investment Institute Economic Cycle surveys for April 2013. Here are core charts.

Note of caution: some of the countries coverage in responses is thin, so data should be treated as only indicative. And the surveys are based on opinion of external experts, not Blackrock internal views.

Global outlook: 

"...a positive outlook on global growth, with a net 71% of 127 economists expecting the global economy will get stronger over the next year, (2% higher from the March report), based on North America and Western Europe panel."

For the EMEA panel, "Respondents remain positive on the global growth cycle, with a net 57% of 64 respondents expecting a strengthening world economy over the next 12 months – however this is large downward shift from the net 74% figure last month."

Asia Pacific panel: "The global growth outlook remains positive, with a net of 71% of participants expecting a stronger global economy over the next 12 months; however this is a large step down from the net 84% figure in last month’s report."

Latin American panel: "The global growth outlook remains positive, with a net 47% of 49 participants expecting a stronger global economy over the next 12 months; however this is a large step down from the net 62% in last month’s report."

North America and Western Europe:

"With regards to the US, the proportion of respondents expecting recession over the next 6 months remains low, with the consensus view firmly that North America as whole is in mid-cycle expansion. 

In Europe, the view continues to be more disparate, with the UK and Eurozone as a whole described in a recessionary state. With caveat that the depth of country coverage varies significantly, the consensus view remains recessionary at the 6 month horizon for France, Greece, Italy, the Netherlands, Portugal, Spain and Belgium."

Note: Ireland results are based on very 'thin' data. 

More regions to follow in the next post.

6/5/2013: Self-contradictions & EU Commission

Trapped in their own failures, EU 'leaders' are no longer simply contradicting each other - they are now contradicting themselves. And, I must add, via ever more apparent and bizarre statements.
Behold the latest instalment of absurdity from one of the multiple EU 'Presidents': the man in charge of the EU economic policies and performance, European Commission chief Jose Manuel Barroso. As reported in the EUObserver (http://euobserver.com/economic/120040), Mr Barroso stated that "What is happening in France and Portugal is not Merkel's or Germany's fault … The crisis and their problems are not a result of German policy or the fault of the EU. It is the result of excessive spending, lack of competitiveness and irresponsible trading in the financial markets."
Thus,

1. Loose monetary policy by the ECB that was custom-tailored to suit German needs during 2002-2007 period had nothing to do with the crisis in the peripheral states, despite the fact that it triggered vast inflows of capital from Germany (and other core states) into the euro area periphery, inflating assets bubbles left, right and centre, and leading to unsustainable debt accumulation in these economies.
2. ECB (heavily influenced by German ethos and political economy) and EU Commission and regulatory bodies' insistence on treating all sovereign bonds issued by the euro area states as risk-free assets on banks balance sheets (the main trigger for Cypriot crisis and the reason for massive transfers of banking sector costs onto taxpayers in Ireland and other member states) had nothing to do with Berlin or with Berlin's insistence on closing its eyes on what was happening in regulation / enforcement EU-wide.
3. Berlin's inability to reign in German (among other) banks' gross misplacing of risks in interbank lending to other euro area banks had nothing to do with the crisis.
4. Berlin's insistence, repeated parrot-like by Mr Barroso and his colleagues in the Commission, that the whole crisis can be addressed via fiscal adjustments (recall, that was the position the EU Commission occupied for the last 6 years) and current account rebalancing has nothing to do with mis-shaped economic policy responses across the EU since 2008 crisis onset.
5. Berlin's 'guidance' toward internecine and economically illiterate Fiscal Compact, eagerly endorsed by Mr Barroso and his colleagues in recent past, has nothing to do with the failure of Europe to respond to the crisis.
6. Berlin's opposition to the half-baked EU ideas about stimulating growth in euro periphery that shut the door on any real stimulus has nothing to do with the crisis.
7. Berlin's opposition to increasing domestic demand and abandoning contractionary pursuit of current account surpluses, also noted by Mr Barroso's Commission in the past, had nothing to do with the crisis duration or depth.

Mr Barroso also claimed that Chancellor Merkel is "one of the only [leaders], if not the only leader at the European level who best understands what is going on."

Really? Suppose so. In this case, Mr Barroso has either no clue what is going on, or simply doesn't care to be consistent with his own exhortations of the recent past, because he openly and directly contradicted Ms Merkel couple of weeks ago by claiming that 'austerity was overdone' and had "reached its limits."

Irony has reached so far in Mr. Barroso's waltzing across the ideological & economic policy landscape that according to the EU's 'President', Ms Merkel's brilliance also encompasses the fact she is presiding over German economy currently sliding toward a recession. IMF analysis shows real GDP growth in Germany will fall from 4.024% and 3.096% in 2010 and 2011 to 0.865% and 0.613% in 2012 and 2013. This might be better-than-average record for the euro area, but it is hardly an achievement worth praising.

Someone should point to Mr Barroso that eating one's cake (taking a populist position against austerity, and thus Ms Merkel) and having it (taking an appeasing position toward the major architect of all economic policy blunders so far deployed in Europe since the onset of the crisis) is just something that doesn't happen outside the make-belief world of Brussels.

5/5/2013: Things are going according to plan... in Italy & Germany

That euro area 'policy' for dealing with the crisis is working marvelously, yeah?

Source: Euromoney Country Risk
Note: lower ECR score = higher sovereign credit risk

Yes, Italy's bonds are trading at much lower yields, and the country is issuing new debt at lower costs... but how much of that has to do with something / anything that Italian Government has done, as opposed to the overall shifts in markets sentiment / liquidity flows, who knows? One thing is for sure, absent yields changes, Italian fundamentals are getting worse, not better. Ditto, between, for all other 'peripherals'.

4/5/2013: European way?

Here's an interesting chart that summarises both, the source of European disease and the nature of the European response to the crisis:

Source

And the point is: during the current crisis, Europeans have opted not so much to reduce Government spending, as to hike taxes, state-controlled prices and charges. Transfer of income from households to banks and Government, exacerbated by the Great Recession and collapse of borrowing have meant a dramatic decline in households' contribution to the economy. End result: Europe is about to go into a Great Depression.