11/7/2013: Sunday Times 7/7/2013: Defining Mortgages Sustainability

This is an unedited version of my Sunday Times article from July 7, 2013.

In coming weeks, the Irish authorities are planning to complete the general policy reforms comprising the Personal Insolvency Act 2012, the Mortgage Arrears Resolution Targets (MART), Guidelines on a Reasonable Standard of Living and Expenses, the Review of Code of Conduct on Mortgage Arrears, and the Land and Conveyancing Law Reform Bill.

All of the above documents define the core objective of the reforms as delivering long-term sustainable solutions to mortgages crisis. None, save for the Central Bank’s MART, bother to explicitly define what constitutes such sustainability. Sadly, the Central Bank existent definition is both vague and, arguably, counterproductive in terms of its potential impact on the economy and society at large. As such, it is in need of urgent clarification and amendments.

MART states that " the Central Bank will assess the success of the institution’s progress by sampling cases and gauging the plausibility of their sustainability, including through the use of quantitative tools".

The Central Bank is currently in the process of defining what these sustainability assessment tools will be and what methodology will underpin these.  The public is unlikely to see these in full detail. This week, Seanad reading of the Central Bank Supervision and Enforcement Bill 2011 showed clearly that the Irish authorities are also unwilling to grant the Central Bank sufficient powers to robustly curb potentially anticompetitive and consumer-damaging actions of the banks.

All of this does not bode well for the prospect of effectively resolving the longer-term social and economic crises related to the household debt overhang.


MART sets out three fundamental principles that must be respected with regard to sustainability. These include consideration of both current and prospective debt servicing capacity of the borrower; the "need to use an appropriate interest rate when discounting future income flows, which should take account of the lender’s cost of funds”, and the requirement for the lenders to apply "a realistic valuation of the borrower's assets" and costs of foreclosure on the loan.

As such, the existent concept of sustainability substantively contradicts the economic and social considerations of long-term household debt sustainability.

The Guidelines on a Reasonable Standard of Living and Expenses form the cornerstone of the test for what can be recovered by the banks from defaulting households. Yet, the Guidelines do not allow for households accumulation of pension savings and savings that can be used to cushion against any potential future adverse shocks to household employment, earnings, health or other unforeseen risks, such as an old-age parent dependency. As the result of this, a sustainable mortgage arrangement can easily become unsustainable overnight at any point in time following the original restructuring.

Worse than that, the risks to future sustainability are actually higher the greater is the extent of the original distress. This so, because current mortgages problems are linked to future risks of unemployment, poorer health and lower pensions provisions. The draconian insolvency and debt restructuring regimes promoted by the Government further compound these risks.

Economists know that a household experiencing unemployment are more vulnerable to higher risk of unemployment in the future. The duration of the original unemployment spell is also a contributing factor.

Households that experience mortgages distress are also more vulnerable to adverse long-term health effects. The long-term health risks arise from the current stress, as well as from the lower lifetime disposable income available to the distressed mortgagees. These two risk factors, in turn, are reinforced by the fact that in Ireland, preventative health is an out-of-pocket expense. This means that economically distressed households tend to cut back on preventative health expenditures early on in the crisis.  Having entered into the Guidelines-determined payments arrangements with the banks, these households will have no future funding for either preventative health or insurance cover that facilitate prevention, early detection and treatment of chronic and disability-related illnesses.

Households at higher risk of unemployment also face exponentially higher risk of completing their work-lives without adequately providing for pensions, even in the absence of mortgages debt problems. Those that are forced to go through a debt restructuring processes are more likely to enter their retirement in poorer financial health. Which, in turn, implies that their pensions expenditures funding shortfall will be higher in the future than the gap which will befall their age cohort counterparts.

The endgame for the households experiencing financial difficulties today and facing a ‘sustainable’ mortgages restructuring can be high risk of old age poverty and low quality of old-age health.


The second point about the MART definition of sustainability is that it ignores the margins between the cost of borrowing for the households and the cost of funding these loans for the banks. This difference is non-trivial. The Central Bank criteria for sustainability require that a restructured mortgage should be at least self-funding for the bank. Currently, average new adjustable rate mortgage is priced at around 3.45 percent or ca 0.7 percent above the lowest cost of funding currently available via a bond placement. As the Pillar banks are moving toward the Government-set 2014 deadline for switching to independent funding, both margins and the funding costs for the banks are likely to rise.

Over 2003-present, average new business retail interest rates on adjustable rate mortgages peaked at 5.62%. Yet, during the period when the new business rates were at their highest, banks margins were actually relatively low. If the margins increase, as envisioned by the Central Bank-own policies on reforming the Irish banking sector, convergence of wholesale funding costs to historical averages will imply that the retail rates faced by the households can jump above 7 percent. MART definition of sustainability will account for only about 60 percent of this increase, with 40 percent left outside the official long-term sustainability consideration.

The third core component of sustainability definition under MART also requires significant re-thinking. The banks have no incentives, under the reformed personal insolvency regime to consider longer-term implications of household asset valuations and costs of foreclosure.

Taking all mortgages that are either in arrears, restructured and in banks possession, 238,254 mortgages accounts amounting to the total of EUR46.21 billion were at risk of default or defaulting in Q1 2013. While the number of accounts in distress was down 0.17 percent quarter-on-quarter in Q1 2013, the volume of lending these accounts represent rose 2.27 percent. The rate of increase in Q1 2013 was three times faster than in Q4 2012.

Some percentage of the non-performing mortgages is undoubtedly represented by the accounts that are in strategic arrears - the case brought to the forefront of the news-flow this week by the Ulster Bank statement on the matter. However, what is not in doubt is that overall, the quality of the outstanding mortgages pool in Ireland is deteriorating. This is happening at the time when the property prices are continuing to fall, especially in the areas and regions where mortgages distress and quality of mortgages loans are most likely the lowest – outside the core urban locations. With this, the costs associated with future foreclosures are rising as well.

Some anecdotal evidence and reports by the insolvency support organisations indicate that the banks are currently attempting to accelerate foreclosures on properties with some positive equity, where households have fallen behind their mortgages repayments. If true, this will put added pressure on the market prices and increases, not reduces the costs of foreclosure for the mortgages that are truly unsustainable in the long run. Perversely, the current system for mortgages arrears resolution is incentivizing the bank to pursue short-term maximization of funds recovery at the expense of genuine long-term sustainability.


Given the extent of the Irish mortgages crisis, we have no easy and painless solutions to the problem of household debt overhang. The more efficient and sustainable long-term options require direct writedowns of household debts to reflect, at least in part, collapsed asset markets valuations of Irish property. Arguably, with the Irish Governments committing all resources aimed at restructuring the banking sector to writing down development and investment loans underlying the commercial real estate bust, we no longer have this option available to us.

In its absence, we need to prepare for a wave of bankruptcies that will have to take place to absorb the losses accumulated within the banking system. Doing so will require taking a longer-term view of the Mortgage Arrears Resolution Targets, and relaxing significantly the Guidelines on a Reasonable Standard of Living and Expenses to allow for accumulation of savings and provision of health cover as discussed above.

We also need to cut the insolvency period duration from the current 6+1-years formula that applies to mortgages down to 1+2-years formula similar to the one that is in place in the UK, but only for households in genuine financial distress. Strategic defaulters who subsequently enter bankruptcy proceedings should be subject to the tougher regime as currently outlined in the existent legislation.

To finance these measures, we need to secure long-term cheap funding for the banks that will allow them rebuild their balancesheets not in a matter of 12 months, as currently planned, but over the next 10-15 years. The latter should be the job for the Eurosystem and the Central Bank.

Three charts:

Box-out:


This week, the Central Bank of Ireland published the data on the holdings of Irish Government long-term bonds for May 2013. Since May 2012, the amount of outstanding long-term dated Irish Government bonds rose by some EUR6.4 billion, once we control for the new bonds arising from the conversion of the IBRC Promissiory Notes in February 2013. EUR3.41 billion of this increase in supply of bonds was absorbed by the non-resident investors and institutions, while Irish Central Bank and monetary and financial institutions (aka Irish banks) have increased their holdings of long-dated Government bonds by EUR6.37 billion. All other investors, including financial intermediaries other than banks, non-financial corporations and households have reduced their holdings of   long-dated Government bonds by EUR3.37 billion. The data clearly shows that the degree of the inter-connectedness between the banks and the state, as measured by the Irish Government exposure to banks demand for its debt, did not decline since January 2012 through May 2013. Instead and in contrast to all official statements on the subject of the Sovereign-banks contagion risks, such risks today are only stronger than they were seventeen months ago.

11/7/2013: Assessing 2 years of Irish economic performance since Q1 2011

Currently, the Dail is debating around the clock one of the most important pieces of legislation: The Protection of Life During Pregnancy Bill 2013 (see my post on the core ethical issue involved in the actual vote here: http://trueeconomics.blogspot.ie/2013/07/972013-voting-on-conscience-vs-voting.html). The Government is unhappy with the possibility that it might lose several very high profile TDs on the issue.

In the background, Irish economy is appearing to gather more and more supporters of the thesis that things are getting better under the stewardship of the Government. Are they? Let's take a look at the Q1 2013 data from the Quarterly National Accounts.

Quick guide: I take four metrics of economic health: GDP, GNP (which is GDP less net transfers of profits and earnings abroad), Final Demand (private and public investment and spending on goods and services) and Total Demand (Final Demand less changes in stocks of inventories). To be more precise: Final Demand = Personal Consumption of Goods and Services + Net Expenditure by Central & Local Government on Current Goods & Services + Gross Domestic Fixed Capital Formation).

Also, consider the above variables in terms of current prices (including inflation effects) and in constant prices (controlling for inflation), as well as seasonally-adjusted and not seasonally-adjusted.

Here are three summary tables. Red marks cases of decline (in percentage terms) in excess of 1%, Green marks cases of increase in excess of 1%.

Remember - these are 2 years cumulated changes.

First GDP and GNP not seasonally-adjusted:

Second GDP and GNP seasonally-adjusted:

 Last, Final and Total Demand:

In the first two tables, I also showed the changes in GNP that accrue to changes in MNCs decisions to either retain earnings or expatriate them (Factor Payments). Whenever GDP is down and GNP is up, this effect is solely due to decline in transfers by MNCs of profits abroad or higher returns from Irish investments abroad repatriated into Ireland or both.

Another quick explanation: I reference both Q1 2011 to Q1 2013 change, as the Government officially took over the economy at the end of Q1 2011. But since economic activity is 'sticky' (and does not immediately respond to changes in Government policies) and since any Government requires some transition to power, we can treat both Q1 and Q2 2011 as basically being determined by the previous Government. Hence I am also showing comparatives for Q1 2013 relative to Q1-Q2 2011 average.

Draw your own conclusions.

10/7/2013: Four charts that scream 'Wake Me Up, Scotty!'

A look into the future in four charts:

The charts above show the demographic divergence between the US, and other core G7 economies, as well as the differential in trend for France and the UK from Japan and Germany. 

Of course, labour mobility is much more open today than in the 1950s-1990s, but given that back in those days Europe usually sent its brightest to North America (more recently also to Australia and in the near future to the rest of the world, if we keep going at current rates of youth unemployment), and that with the above charts this is not likely to change. If anything, given the rends above, why would anyone young stay in declining Europe? To mind the decaying family estates and pay for the growing demand for geriatric supplies and services? So one has to wonder: is the Old World really going to have any growth?.. Of course, it might be the case that by, say 2050, Europe will harmonize and consolidate and coordinate and centralize and stabilise and OMT itself to such an extent that no one will have to work at all in the paradise fully funded by an unlimited ESM. 

Who knows... but for now, you can play with the UN Population data through 2100 here: http://esa.un.org/unpd/wpp/unpp/panel_population.htm

Updated: an interesting article on the crisis effects on European birth rates: http://hromedia.com/2013/07/10/eurozone-economic-crisis-hit-birth-rates/

10/7/2013: France credit score continues to slide

Per Euromoney Country Risk Survey, France score continued to decline in Q2 2013 falling to 71.9 from 72.3 in Q1 2013, despite tighter CDS. France now ranks as the second worst performer in the euro area after Slovenia.

France's score is well behind AAA-rated Germany and is 0.7 points behind the G8 average. The core drivers for recent downgrades are:

• Deteriorating Government finances;
• Poor employment outlook; and
• Increased transfer risk

9/7/2013: Voting on Conscience vs Voting with the Whip.

As you know, I rarely post on matters outside economics (exception being my WLASze weekend links posts). The current, heated on both sides, debate about the Protection of Life During Pregnancy Bill is too often spilling into passion-driven mud slinging. This I find always disturbing in a civilised society.

I do not want to convey support for one side of the argument or the other. My personal opinion on this is probably irrelevant to anyone but myself, but given I am aware that it will be thrown my way once this post goes life, let me preclude any potential accusations and state that

1. I am a socially liberal Libertarian and I am also aware of the deeply rooted ethical dilemmas involved in the issues when there is actual or potential termination of life at stake.
2. That said, I tend to favour current legislation and this is my personal judgement not to be taken as any sort of endorsement.

With these caveats, as I pointed earlier on twitter: whether I agree with their position on the Bill or not, I believe that those TDs who vote on the basis of their conscience - be they in 'Yes' camp or 'No' camp - deserve to be respected. 

There are basically two types of issues, our legislators face: policy and ethical. 

• Policy issues votes should be aligned with the TDs understanding of the specific policy benefits and costs to their constituents and to the nation overall. This is basic representative democracy at work.
• Ethical issues are bigger. These involve fundamental values and can be associated with unresolvable dilemmas that cannot be called on the basis of plurality or majority. These must be determined on the basis of one's deeper convictions and the test of these convictions in a representative democracy comes with elections. 

I have said on numerous occasions that the Church and the State shall be always kept separate and this separation should be considered not only to sustain integrity of the State, but also to sustain integrity of the Church. 

However, we must recognise that people are free to hold a religious belief. When they do hold a belief - any belief - their acting on such a belief (e.g. voting on the basis of it) is not a reflection of the institution power over the State. It is a reflection of their belief. Separation of Church and State does not mean removal of religious beliefs from voters' choices. It means removal of the Institution of Church from directly determining outcomes of the State policies and legislative processes. 

The core test here, again, is whether a person (a TD) is voting with their conscience or with their institutional affiliation. Those TDs who vote with the whip are doing the opposite of what separation of State and Religion requires. They force Institutional consideration into Legislative outcome. Those TDs who vote with their conscience (again - regardless of whether they vote Yes or No) are doing exactly that which is consistent in principle with separation of Church and State - they put their conscience above the Institutional framework of the whip.

9/7/2013: Gold Price, Gold/Oil Price and What's the Fundamental Difference?

Here's a chart from @freegolds on oil-gold price co-movements:

The point is - as raised here: http://www.sciencedirect.com/science/article/pii/S1057521912001226

Main points of our research:

For the US data: "… our results discussed above indicate that the oil market does not in general act as a safe haven for stocks. However, we find that oil in fact acts as a safe haven during specific periods, such as around 1990, which is presumably related to the first Gulf War and recently, after the 2007-2009 financial crisis (the “credit crunch”). Moreover, the role of oil following the most recent crisis seems to be continuing. Similarly, oil acted as a safe haven for bonds after the 1987 stock market crash and also, after 2000, which is presumably related to the crash in technology and telecommunications stock on the NASDAQ. These results seem to create a pattern for the role of oil that has not been reported before."

"… we find specific periods in which gold market acts as a safe haven. In particular, for equities, we detect evidence for this after 1990, again presumably related to the war, and also, for the recent credit crunch. The role of gold as the anti-dollar is further confirmed in this analysis, also. Gold can be considered a safe haven for dollar in most of the last decade."

For the UK data: "Our main finding perhaps is that we continue to observe a significant role for the oil market as a safe haven when short time periods are targeted in our rolling regression analysis…  In particular, oil acts as a safe haven for the UK stocks around 2001-2002, which coincide with the technology stocks collapse, and as well as around 2007- 2008, which coincide with another crash in stock values during the “credit crunch”. Moreover, oil is a safe haven for the UK bonds also around 2001-2002 period."

"On the other hand, gold cannot be considered a safe haven for the UK stocks during these equity markets turmoil periods, which should be of interest to market participants."

"Gold, however, continues to play its role as a safe haven against paper currencies with regards to the Sterling, also. Hence, our findings indicate that the attributes of gold in this regards are not confined to the US dollar. We find that gold is a safe haven for Sterling around 1998, which was a period of turmoil in financial markets due to the collapse of the hedge fund LTMC; around, 2001, again a period of turmoil due to collapse in technology stocks as mentioned above; and further around 2007-2008, which is of course the recent global financial crisis."

The core issue the chart above raises is that simplified worldview of gold (or any other asset class) as a pure 'absolute return' play. Instead, every asset should be considered in the context of total portfolio of assets being held, including risk-adjusted returns the asset offers and hedging and safe haven properties it affords.

8/7/2013: IMF on Euro Area: Repetition in the Endless Unlearning of Reality

IMF released its statement on 2013 Article IV Consultation with the Euro Area

The Statement reads (emphasis mine):
"Policy actions over the past year have addressed important tail risks and stabilized financial markets. But growth remains weak and unemployment is at a record high."

So what needs to be done, you might ask? Oh, nothing new, really. Euro area needs:
-- To take "concerted policy actions to restore financial sector health and complete the banking union". Wait… err… this was not planned to-date? Really?
-- "continued demand support in the near term and deeper structural reforms throughout the euro area remain instrumental to raise growth and create jobs". In other words: find some dish to spend on stuff and hope this will do the trick on short-term growth. Reform thereafter.

Not exactly encouraging? How about this: "…the centrifugal forces across the euro area remain serious and are pulling down growth everywhere. Financial markets are still fragmented along national borders and the cost of borrowing for the private sector is high in the periphery, particularly for smaller enterprises. Ailing banks continue to hold back the flow of credit." So the solution is - more credit? Now, what did we call credit in old days? Right… debt, so: "In the face of high private debt and continued uncertainty, households and firms are postponing spending—previously, this was mainly a problem of the periphery but uncertainty over the adequacy and timing of the policy response is now making itself felt in falling demand in the core as well." Wait a second, now: more credit… err… debt will solve the problem, but the problem is too much debt… err… credit from the past…

Ok, from IMF own publication earlier this year, what happens when credit - debt - is let loose:

Source: http://blog-imfdirect.imf.org/2013/03/05/a-missing-piece-in-europes-growth-puzzle/


Just in case you need more of this absurdity: "…reviving growth and employment is imperative. This requires actions on multiple fronts—repairing banks’ balance sheets, making further progress on banking union, supporting demand, and advancing structural reforms. These actions would be mutually reinforcing: measures to improve credit conditions in the periphery would boost investment and job creation in new productive sectors, which in turn would help restore competitiveness and raise growth in these economies. A piecemeal approach, on the other hand, could further undermine confidence and leave the euro area vulnerable to renewed stress." Oh, well, 5 years ago we needed

1. 'actions on repairing banks balance sheets' - five years later, we still need them;
2. actions on 'supporting demand' - aka, no tax increases and some investment stimulus - five years on, we still need them;
3. actions on 'advancing structural reforms' and five years on, we still need them too;
4. "measures to improve credit conditions in the periphery would boost investment and job creation in new productive sectors" - wait a second ten years ago we had easy credit conditions in the periphery and they failed comprehensively to 'boost investment and job creation in new productive sectors', having gone instead to fuel property and public spending bubbles… five years since the start of the crisis, we now should expect a sudden change in the economies response to easier credit supply?

IMF is more sound on banks: "bank losses need to be fully recognized, frail but viable banks recapitalized, and non-viable banks closed or restructured". But, five years, bank losses needed to be fully recognised too and we are still waiting. And when it comes to closing or restructuring non-viable banks, pardon me, but where was the IMF in the case of Ireland when the country was forced by the ECB to underwrite non-viable banks with taxpayers funds?

"A credible assessment of bank balance sheets is necessary to lift confidence in the euro area financial system." Ok, we had three assessments of euro area banks - none credible and all highly questionable in outcomes. Five years in, we are still waiting for an honest, open, transparent assessment.

Cutting past the complete waffle on the banking union and ESM, "The ECB could build on existing instruments—such as a new LTRO of longer tenor coupled with a review of current collateral policies, particularly on loans to small and medium-sized enterprises (SME)—or undertake a targeted LTRO specifically linked to new SME lending." Ooops, I have been saying for years now that the ECB should create a long-term funding pool for most distressed banks, stretching 10-15 years. Five years into the crisis - still waiting.


On structural reforms, IMF is going now broader and further than before and I like their migration:

"For the euro area, …a targeted implementation of the Services Directive would remove barriers to protected professions, promote cross-border competition, and, ultimately, raise productivity and incomes. A new round of free trade agreements could provide a much-needed push to improve services productivity. In addition, further support for credit and investment could be achieved through EIB facilities. The securitization schemes proposed by the European Commission and the European Investment Bank could also underpin SME lending and capital market development." Do note that the last two proposals are still about debt generation (see above).

"At the national level, labor market rigidities [same-old] should be tackled to raise participation, address duality—which disproportionally hurts younger workers—and, where necessary, promote more flexible bargaining arrangements. At the same time, lowering regulatory barriers to entry and exit of firms and tackling vested interests in the product markets throughout the euro area would support competitiveness, as it would deliver a shift of resources to export sectors [ok, awkwardly put, but pretty much on the money. Except, greatest protectionism in the EU is accorded to banks and famers, and these require first and foremost restructuring]."

In short - little new imagination, loads of old statements replays and little irony in recognising that much of this has been said before… five years before, four years before, three years before, two years before, a year before… you get my point.

8/7/2013: EU-US 'snooping' scandal and a bowl of petunias?

Priceless European fake 'indignation' stuff via EUObserver headlines:

Dirty little secrets of Berlin?
"US snoopers were 'in bed' with German intelligence"
As one might say… oopsy...

And undeterred by own laundry showing up all over the front yard, the EU presses on:
"EU-US counter-terrorism pacts at risk over snooping affair"
Enter the drums...

and on…
"Kroes: Spy scandal could harm US Cloud firms"
Enter even heavier drums…

But wait… what's that?
"MEPs slam US snooping, amid revelations France does the same"
a bowl of onion soup?..

Or a bowl of petunias…
"France and Germany eat their words on US trade talks"

Looks like the latter:
"Barroso keen to start US trade talks despite spy affair"

So recall how “Curiously enough, the only thing that went through the mind of the bowl of petunias as it fell was Oh no, not again. Many people have speculated that if we knew exactly why the bowl of petunias had thought that we would know a lot more about the nature of the Universe than we do now.”

I wonder when the sperm whale is going to show up?..

8/7/2013: The More Things Change... in Greece

So Greece - off-the-charts in terms of not meeting its 'Programme' requirements has been fudged:

Now, recall:

• Privatizations penned in for 2012-2013 are not happening - at all,
• IMF requirement for at least full year funding held in reserves - not fulfilled at all,
• 12,500 public sector workers that were to be put into 're-allocation or redundancy' pool are not there,
• There is a massive overspend in a number of areas, including health, with a shortfall of EUR1bn at the state-owned EOPYY health insurer,
• Income tax, property tax and corporate tax are not being enforced in full, despite numerous promises...

Earlier this am I predicted that:

And per IMF release above, this is exactly what has happened - fudging complete... And what fudging!

While Troika says that outlook for the country remain uncertain, there has been a staff-level (technocrats) agreement on new 'reforms' on top of the old one on which Greece failed to deliver. And these new reforms - hold your breath - are more cuts in health spending, repeated promises to cut 12,500 public employees, and more tax reforms... The more things change...

"The More Things Change the more the stay the same

The more things change the more the stay the same

Ah, is it just me or does anybody see

The new improved tomorrow isn't what it used to be

Yesterday keeps comin' 'round, it's just reality

It's the same damn song with a different melody

The market keeps on crashin' "...

Well, at least markets are not yet crashin' cause 'Greece really doesn't matter anymore' theory, right?..


Updated: 

The Eurogroup continued the endless parade of statements, comments and instructions today with this: http://www.eurozone.europa.eu/newsroom/news/2013/07/eurogroup-statement-on-greece/ which is largely the same drivel as already released by the Troika.

Some exceptions:

The Eurogroup also takes note that the economic outlook is largely unchanged from the previous review and is encouraged by the early signals pointing to a gradual return to growth in 2014.

I mean, ok, the logic is iron-clad: for months we've noticed that things are largely unchanged, but we've had rounds and rounds of changes made to T&Cs of the 'bailout' because things are largely unchanged. Still, our expectations never stopped changing... the recovery previously penciled in for 2012 has been moved to H2 2012, then H1 2013, then H2 2013 and now to H1 2014 or maybe H2 2014...

and more:

The Eurogroup commends the authorities for their continued commitment to implement the required reforms

But obviously, these are not enough and are not being implemented, so the commendations are for what?.. Alternatively - they are enough and are bing implemented, in which case why is Eurogroup issuing any statements on Greece?

At the same time, significant further work is needed over the next weeks to fully implement all prior actions required for the next disbursement

Aha, now I understand - 'further work' is needed... except, wait a second, the 'further work' is the 'prior-agreed work' that... per above statement is a part of 'commitment to implement'... which Greece either has delivered (per commendation) or failed to deliver (per rather urgent 'need for further work')... so which one?..

Much of the rest in the statement is rather specific and make sone wonder - if Greece is being asked to do in the next two weeks what it has failed to do in last 12 months, why on earth is Greece deserving and commendations or, alternatively, how on earth can it be expected to deliver that?!

Never mind, all of it is pure fudge - Greece will not deliver 12,500 souls to the Purgatorio and it will not be able to tighten tax collection (something it failed to do over close to 50 years) in time for October 2104. And the Eurogroup is not expecting it to. Instead, there will be noise of compliance, sound of cash register emptying, followed by 3 months of calm and German elections.

To quote another musician:

So long, Marianne, it's time that we beganTo laugh and cry and cryAnd laugh about it all again
Laugh about it, folks... for following the Eurogroup statement, the IMF Chief, Christine Lagarde went out to face the public with a claim that, hold your breath, Euro area needs growth and ... deep gulp of air, please... jobs.

So long, Marianne, it's time that we began...

7/72013: Irish Manufacturing & Services PMI: June 2013

In the previous post I covered in detail the dynamics of the Services PMI (here) and few posts back, I covered Manufacturing PMIs (here). Now, lets take a look at both together.

Chart above shows the deviations of both PMIs from 50.0, with pre-crisis and post-crisis averages.
The relative weakness in Manufacturing performance, from the end of Q2 2011 through current is pretty much apparent. Both, manufacturing and services PMIs signaled much stronger growth conditions prior to the crisis, than since the beginning of 2010.

The most significant decline took place in Services, with the pre-crisis average deviation from 50.0 at 7.6 falling to 1.9 average deviation in post-January 2010 period. With STDEV at 6.5 since 2008 (7.4 prior historical), and with skew at -0.7 and kurtosis at 0.73, we are nowhere near average deviation being statistically significantly different from zero since the onset of 'recovery'.

Manufacturing decline has been more modest, given weak rates of growth in pre-crisis period. The average rate of pre-crisis deviation from 50 was 2.6 and that well to 1.1. With historical STDEV of 4.2 and STDEV since 2008 at 5.2, skew at -1.6 and kurtosis of 3.24, this is again indistinguishable from zero growth conditions.

On slightly better side of things and along shorter-run dimension, 3mo MAs are both above zero, but, once again, none are statistically significantly different from zero.

There is a strong, but non-linear relationship between Manufacturing and Services PMIs at levels, and it shows that year on year, relative gains in Manufacturing over 2011-2012 got erased over 2012-2013 and were replaced by relative gains in Services.

Irish PMIs have, however, very tenuous link to actual economic growth. Here are two charts showing this week relationship for log-log growth terms, but exactly the same picture is confirmed by taking simple level deviations in PMIs from 50, as well as for linear and cubic relationships (for robustness):

It is quite telling that Services PMIs have much weaker explanatory power for GDP and GNP growth than Manufacturing PMIs, confirming that Irish services, dominated by ICT and IFSC tax-optimising MNCs are not as relevant to Irish economy as manufacturing sectors.

Another telling thing is that both for Services and Manufacturing, the sectors activity as measured by PMIs has stronger relationship with GDP than GNP - which is also predictable, once you consider the PMIs heavy slant toward MNCs.


Note: raw data on PMIs levels is taken from Markit-Investec releases, with all analysis above, as well as deviations from 50 and all other transformations, including quarterly data computations, undertaken by myself. These transformations and analysis are intellectual property of my own and should not be cited without appropriate attribution.

7/7/2013: Services PMI for Ireland: June 2013

Necessity is a mother of all inventions. Necessity of recent commands that those of us who care to do an in-depth analysis of Irish data have to scale back analysis of the PMIs. The reason for this is that Investec and Markit are no longer publishing in a general release any relevant data concerning the PMIs components. In the case of Services PMIs, Markit went even farther:

All that is left for any non-profit analysts like myself is to take the few numbers still being reported on an ad hoc basis, and make most of them. Sad to see years of data & analysis models going to waste because Markit & Investec don't really understand how to work with new media and independent analysts.


Here is the updated trends analysis for Services Sectors PMI (my earlier post on Manufacturing PMIs is here):

• 12mo MA for the series stands at 54.0, which is statistically indifferent from 54.9 recorded in June 2013. 
• June 2013 reading is statistically significantly above 50.0, so no denying it, the sector is expanding.
• 3mo MA currently and 54.3, which is also statistically significantly different from 50.0, and is virtually unchanged on 54.2 3mo MA through March 2013.
• The 3mo MA through June 2013 (or Q2 2013 average) is ahead of same period 2012 (50.3), 2011 (51.0) and 2010 (52.9). All pointing in the good direction, then.

Charts below illustrate the trends:

Chart above shows that, despite the robust growth, we are in a secular slowdown in underlying growth when it comes to Services sectors. In pre-crisis period, average PMI ranged 7.6 points above 50.0, which was consistent with roughly GDP growth of 4.4-4.6 percent per annum. Since the 'recovery on-set, average PMI is above 50.0 by 1.9 points, which is not statistically significantly distinct from zero growth in the sector. it is also consistent with average GDP growth of ca 1.2-1.5% per annum.

Now, keep in mind: these are Services, heavily dominated by exports-driven ICT and Financial Services - in other words, this is the sector of the economy where the 'exports-led recovery' story has been the rosiest since the 'official' end of the crisis.

Stay tuned for my combined series analysis for Manufacturing and Services PMI.

6/7/2013: Feeding that Sovereign Cash Addiction?..

When the cure might be worse than the disease?

Two charts from BBVA Research:

Notice the size (as % of GDP) for the BoJ QE and notice the composition: BoJ now bought more JGBs as proportion of GDP than the Fed bought of Treasuries in Q1+Q2+Q3. But, as the chart below shows, that is still not making much of the difference (yet) in JGB holdings: banks and insurance companies remain captive to the state debt.