13/10/2013: Predictably, Russia pushes on toward ruble free float

One interesting note on Russian economy from recent news flow: the push toward free float for ruble continues, with the Bank Rossiy under new stewardship predictably continuing with the old policy objectives (as I predicted back in March: http://trueeconomics.blogspot.ie/2013/03/1432013-comment-of-appointment-of-new.html):

Latest news is that Bank Rossiy (Bank of Russia) broadened the band for interventions in ruble exchange rates to 3.1 rubles for euro/dollar basket - trippling the previous targets. The plan is still to get rid of the bands by 2015. Thereafter, inflation targeting (possibly with broader growth metrics in mind too) will be the main target. Side effect - expect dollar (and euro) reserves to rise on this move as interventions become less frequent.

13/10/2013: Yields, Prices and Damn Splits in Office Property Markets...

Few days back I highlighted the CBRE Q3 2013 research on Irish office and retail property markets. Here's food for thought in a related spectrum. Is Dublin office space still overpriced?

The above is taken from Q3 report on European markets from Cornerstone. Here's what they have to say on this: "On the supply side, local vacancy rates vary considerably – from around 5% in Paris CBD and central London to in excess of 20% in Dublin and Athens. Where vacancy levels are lowest, the recovery in average rents will tend to be faster. However, the lack of new development in recent years means that shortages of Grade A accommodation already exists in an increasing proportion of markets. The probability of rental growth, particularly on a net effective basis, at the top prime end is thus
growing."

Which suggests the markets in the likes of Dublin and Athens are bifurcating - demand for quality outstripping supply of quality and this means aggregate yields (inverse of prices) are not reflective of underlying market dynamics. Instead - new properties are finding buyers and seeing appreciation, older / existent properties are setting into stagnation before the onset of continued decline (as/when supply of new properties improves). It might be fine to think of the property prices as rising, unless you own the properties that are not fitting the rising demand for quality... God forbid, with leverage on top of ownership...

13/10/2013: On Taxes, Debt & Equity

EU Commission published some interesting research into Tax Reforms across the EU. The paper is available here: http://ec.europa.eu/economy_finance/publications/european_economy/2013/pdf/ee5_en.pdf

One interesting topic covered relates to the substitution away from equity in favour of debt funding in corporate capital investment. A chart to start with:

Now, per above, the disincentives to equity investment and incentives in favour of debt seem to be the lowest (in euro area) in Cyprus and Ireland. Note that these countries are associated with aggressive brass-plating (Luxembourg) are distinct from countries with aggressive tax arbitrage activities (Cyprus and Ireland). And thus, behold the skew in the EU Commission analysis: MNCs investing into these countries do not use debt on-shoring (US MNCs do not borrow in these countries), but use registry of equity there (for example, in Irish case - due to FDI-booked investments, or equity investment by IFSC companies, ditto for old Cypriot banking system vis Russian corporates).

The EU admits almost as much:
"There is also evidence that the tax advantage of debt fuels international profit-shifting activities as
rules on interest deductibility differ between countries and there are mismatches in decisions on which instruments are considered debt financing. Several studies analyse the debt financing of multinationals with either parent companies or subsidiaries in the United States, Germany, Canada and the EU. The results of these studies suggest that firms use intra-group loans to adapt their financial structure and minimise their overall tax burden. By shifting debt to an affiliate located in a high-tax country, corporate groups are able to deduct interest payments against a higher statutory tax rate while the interest received by the lending affiliate is taxed at a lower rate. Taking data from 32 European countries between 1994 and 2003, Huizinga et al. (2008) find that a 10 % increase in the tax rate increases leverage by 1.8 %. The authors also show evidence of debt-shifting as, for multinationals with two equal-size establishments in two countries, a 10 % increase in the tax rate in one country leads to an increase in leverage of the company located in that country by 2.4 % and a decrease in leverage in the affiliated foreign company by 0.6 %."

However, overall the tax rates also play the role in this debt-shifting: "Two recent meta-studies by Feld et al. (2013) and de Mooij (2011a) review the existing empirical studies and find that ... a one percentage point higher CIT rate is associated with a 0.27 percentage point higher debt-asset ratio."

Two more major points raised in the paper:

1. Welfare costs: "The tax bias towards debt financing also creates welfare costs. Weichenrieder and Klautke (2008) estimate this cost at between 0.08 % and 0.23 % of GDP, while Gordon (2010) estimates it at about 0.25 % of GDP. As pointed by de Mooij (2011b), these estimates ...fails to take into account the heterogeneity of responses and hence the additional welfare costs due to misallocations. Existing studies also fail to include the larger welfare costs of the negative externalities of using debt, such as systemic risk, the probability of default and the social costs of business cycle fluctuations. Finally, they do not take into account the distortions created by debtshifting activities and misallocation due to international tax arbitrage and administrative and compliance costs (de Mooij, 2011b). Consequently, the welfare impact of the debt bias can be assumed to be higher than what has been found in the literature so far."
2. Banking Systems and Debt Shifting: "Keen and de Mooij (2012) ...show that taxes influence the capital structure of banks and that, despite capital requirement constraints, the size of the effects of corporate taxation on the financial structure of banks is close to those for non-financial firms." In other words: capital rules do not induce any significant changes in banks behaviour when it comes to funding of banking activities: debt incentives still drive leverage up. Furthermore, "Hemmelgarn and Teichmann (2013) have found that bank leverage, dividend payouts and earnings management (in terms of loan loss reserves) react to changes in the domestic statutory CIT (corporate income tax) rate. ...In the three years after a tax increase by 10 percentage points, the results predict an increase in leverage of 0.98 percentage points or a relative increase by about 1.1 % (in relation to the equity ratio it would mean a notable relative decrease, of 8.9 % of equity)." Core conclusion: "These results suggest that a reduction in the preferential treatment of debt would result in a significant decrease in bank leverage. In addition, the results also show that regulatory capital requirements in the banking sector alone do not seem to be a prime determinant of financial structure. ... the effect of taxation conflicts with the aim of current regulatory reform to increase capital in the context of Basel III."

12/10/2013: WLASze Part 2: Weekend Links on Arts, Sciences and zero economics

My first WLASze: Weekend Links on Arts, Sciences and zero economics focused on sciences, so now is the time to switch over to the other side: arts.

Enjoy.


SaatchiOnline is profiling an excellent new talent: Jessica Kirkpatric
http://www.saatchionline.com/profile/153958

Superbly technical work merging compositional competence, deconstructing and altering the reality to create new representations of space and objects. Almost story-telling like quality of change in subtextual.

Hockneyesque geometry of inanimate spaces meets Dutch masters-evoking colour and light tonalities?..


On a similar note of space and emptiness, but with much more distilled sense of void and air, and more direct colours: Matt Phillips' work:
http://www.theartcollective.com/artists/matt-phillips/

Technically more devolutionary than Kirkpatric's work, and very different compositionally and tonally, but still, to me - very proximate in overall semiotics of space and geometry's dominance over the landscape.


And for a light-hearted moment to rest on:

Via M&C Saatchi Milan: video http://www.mcsaatchi-milano.com/
Full project here: http://www.protectyourlife.it/


MART of Bolzano, Italy is co-hosting a retrospective of Fortunato Depero's work in Barcelona: http://www.mart.tn.it/mostre.jsp?ID_LINK=682&area=137&id_context=4312
Depero is one of the core masters of Futurismo - a powerful pre-cursor to much of the modern art that emerged in the 20th century. Here's one his graphic design examples:

And another one - still alive today (actually MrsG has couple bottles still in the fridge…)

More classic work:

Beautiful example of architecture organically included in the landscape without the need to camouflage the building:
http://www.dezeen.com/2013/10/08/holiday-house-vindo%CC%88-by-stromma-projekt/

The point of the house geometry is to stretch the space along the horizontal lines to subtly position it within the vertical space of the forest and to float it above the rock formation. I love the simple elegance of devoting the view to the forest, and air and light flow of the house. It is elegant precisely because it strikes the balance between being organic to the site, yet not having to be obscure. Reminds me of the classic 'dacha' elegance of the old summer houses in Russia.


From strong imagery to weak content: as the BusinessInsider review aptly puts it, "Banksy's oeuvre has ceased to be groundbreaking or unique".
Read more: http://www.businessinsider.com/acclaimed-street-artist-banksy-has-completely-run-out-of-things-to-say-2013-10#ixzz2hFgN5837
Favourite quote: "His stale images of monkeys, gas masks, bobbies, shopping carts, and rats are now so ubiquitous they've lost all meaning.  Similarly, his medium of public graffiti no longer carries any significant risk since his brand of 'vandalism' is widely applauded and serves to actually increase property values.  ... Banksy's popularity endures simply because he's preaching to the choir."

Boom! Exploded. My personal view - the more I think, the more I agree with the reviewer. An artist cannot be simply tied to the audience nor can the artist be defined to be just a rubble-rouser. The artist must create the audience. Joseph Brodsky said that poetry is the process of creating an alternative world. In contrast, Banksy is simply depicting the perceived world of his audience. That is equivalent to taking endless pictures of ones' self reflected in the mirror and posting them all over the public domain… tedious even for a Flickr amateur…


To round off on a positive note… Russian Aeroflot launched a new 'budget' airline, called Dobrolet. Dobrolet comes with a hugely important brand name pedigree in art, being a trade name of the airline that once flew back in the 1920s as the precursor to Aerflot… Here are some images from Dobrolet graphic designs by Alexander Rodchenko:

For those unfamiliar with Rodchenko's work:
http://theartstack.com/artists/alexander-rodchenko
http://theartstack.com/artists/alexander-rodchenko-1


And for a smile… with some serious side to it too:
http://the-dimka.livejournal.com/6645.html
Just read the description and enjoy… H/T to MrsG.

12/10/2013: WLASze Part 1: Weekend Links on Arts, Sciences and zero economics

This is the first WLASze: Weekend Links on Arts, Sciences and zero economics for this weekend. The first instalment is on sciences, so a bit heavy on some topics. Enjoy.


Starting with a very very old stuff: according to the Russian researchers, the meteorite that exploded above a Russian city of Chelyabinsk (and on youtube screens) in February was about 4.56 billion years old, or as old as the Solar System itself.
http://en.ria.ru/science/20131004/183951992/Russian-Meteorite-as-Old-as-Solar-System--Scientist.html
Infographic with some details on meteorite impact is available here: http://en.ria.ru/infographics/20130215/179495177/Meteorite-Fragments-Hit-Russia.html


A cool, quick (and simple) list of top 5 most important physics discoveries of the last 25 years via BusinessInsider… oh and they throw in 5 future discoveries that are likely to change the world too:
http://www.businessinsider.com/top-5-modern-physics-discoveries-2013-10
My personal favourites: measuring the neutrino mass using Japan's Super-Kamiokande neutrino detector… archi-cool… and from the futures list - quantum computing…

While on physics and sciences - Nobel Prizes this year:
Chemistry: http://physicsworld.com/cws/article/news/2013/oct/09/chemistry-nobel-honours-trio-who-combined-classical-and-quantum-physics
Physics: http://physicsworld.com/cws/article/news/2013/oct/08/englert-and-higgs-bag-2013-nobel-prize-for-physics
Physiology or Medicine: http://www.theguardian.com/science/2013/oct/07/nobel-prize-medicine-cell-transport-vesicles
All worthy, in my view, unlike this year's Nobel Peace Prize. Peace Prize 2013 is a bit of a dodo, to be honest, just like some previous ones: http://www.businessinsider.com/12-worst-nobel-peace-prize-winners-2013-10. In this category in general, the Nobels are often given for uninspiring, bizarre reasons.
Literature Prize: also too often given for political reasons or for the reasons of obscure complexity and academism - was given this year to seemingly a worthy recipient: http://www.nytimes.com/2013/10/11/books/alice-munro-wins-nobel-prize-in-literature.html?_r=0

We are obviously holding our breath for Economics 'Nobel' - to be announced comes Monday. My best are in with a number of news outlets, but I'd rather keep them off the blog, as I generally prefer to avoid making predictions...


On a lighter (only slightly) scale of things: for aspiring physics fans: Physics World at 25 puzzle page: http://blog.physicsworld.com/category/physics-world-at-25-puzzle/


In continuation of the links I posted last week on the merger of materials sciences, human-tech interfaces and new tech development, here's an article about the latest discoveries in the metal composition are, showing shape-changing properties of metal crystal: http://www.bbc.co.uk/news/science-environment-24400101
And while on it: an article on 'smart' fabrics: http://www.bbc.co.uk/news/technology-20799344
And wearable tech: http://news.bbc.co.uk/2/hi/technology/7241040.stm
See my original links on the topic of 4D printing here: http://trueeconomics.blogspot.ie/2013/10/4102013-wlasze-part-1-weekend-links-on.html
These have now been incorporated into my talk about Human Capital-centric world and technological enablement which I will be delivering next comes early Monday at the Economic Forum / The Gathering-linked event in Ireland, hosted by the Irish-American biotech company, Alltech.


Talking of Irish researchers, we had some brilliant news out of TCD recently: http://www.belfasttelegraph.co.uk/news/local-national/republic-of-ireland/irish-scientists-in-solar-storms-breakthrough-29641467.html#sthash.p2oewCS2.BzoMB1YE.uxfs Basically, Trinity College researchers "have shown -- for the first time -- a direct link between solar storms, caused by explosions on the sun, and solar radio bursts, which cause the potentially dangerous communications disruptions on Earth."


The complex inter-relationship between observations, data collection and data analytics exemplified by TCD research mentioned above is, however, much more manageable than the data conundrums presented by ever-growing social data flows. Here is an excellent exposition of the problem http://www.wired.com/wiredscience/2013/10/topology-data-sets/
The problem is not the size of the data we are getting, but the "the sheer complexity and lack of formal structure". Put differently, and in comparative to physics: "“In physics, you typically have one kind of data and you know the system really well,” said DeDeo. “Now we have this new multimodal data [gleaned] from biological systems and human social systems, and the data is gathered before we even have a hypothesis.” The data is there in all its messy, multi-dimensional glory, waiting to be queried, but how does one know which questions to ask when the scientific method has been turned on its head?"

And a related article: http://www.wired.com/wiredscience/2013/10/big-data-science/

Stay tuned for arts posting later today.

11/10/2013: Euromoney Credit Risk Analysis: Q3 2013

The Euromoney Country Risk survey results are out for Q3 2013 and here is some analysis with a comment from yours truly. As usual, emphasis is mine:

"Some 101 of the 186 countries surveyed have succumbed to lower ECR scores (increased risk) since June, which, with 17 unchanged, leaves just 68 safer, according to the views of global economists and other country-risk experts surveyed during the third quarter."

Core global drivers:

• US federal shutdown & looming debt-ceiling deadline 
• Concerns about monetary tapering, and 
• Europe’s fiscal problems.

"... the shake-out that occurred in the wake of the collapse of Lehman Brothers in September 2008 has still left the majority of sovereigns – some 75% in all – with vastly increased risk levels than before the crisis; in the case of the eurozone periphery - Cyprus, Greece, Ireland, Italy, Portugal and Spain – an astonishing 25 to 50 points each."

Notice that in the above, Euro area shows the highest rate of deterioration of any region, save the CIS, and CIS deterioration is in part driven by links to the Euro area.

Per ECR: "US causing fewer flutters for G10 risk profile than Europe’s problems."

"Within the G10 group of leading industrialized nations, the US is not considered a particularly riskier prospect in spite of its latest political troubles. The world’s biggest economy has slipped to 17th in the rankings, but its score is still higher than at the start of the year."

In the case of Europe, core downward pressure drivers are:

• "The unwillingness to see the euro weaken", 
• "A banking sector still in need of repair",
• "Weak political resolve on budget issues"and 
• "Individual country economic prospects heading in different directions.”

Per ECR: "Indeed, greater concerns are reserved for 21st-placed France, with its fiscal targets missed and the economy remaining sluggish, as well as for Aaa-rated Sweden, in fifth spot, where a moribund economy and a government relaxing fiscal policy with tax cuts ahead of next year’s parliamentary election are gnawing away at the sovereign’s gold-plated creditworthiness."

"Both countries have seen their scores slip the most (by 0.7 points each since June), within a group where Germany is flat-lining as it awaits the formation of a new government..."

"In the European Union, 17 of its now 28 member states are riskier, whether compared with June or since the end of last year..."

"Remarkably, in spite of the recoveries witnessed in some of the bailout countries, notably Ireland and Portugal, the eurozone crisis is continuing to cause ripples, with no fewer than 10 of the 17 member states still succumbing to lower scores during Q3. This comes amid weak economies, excessively high unemployment rates, spikes in political risk, trade-weighted appreciation of the euro, and Greek borrowing concerns re-emerging to keep the region’s worst performer grounded on 34 points."

Notice Ireland's strong position second to Austria in terms of overall gains in the risk scores (lower risk).

"Constantin Gurdgiev, another ECR contributor, based in Dublin, says: “The changes in risk assessments broadly reflect improved sentiment across the euro area, consistent with both improved global growth outlook and internal regional stabilization in the wake of protracted sovereign debt and growth crises.

“[However] structural weaknesses and risks remain, with France presenting significant long-term risk due to the complete absence of serious efforts to reform the labour markets and address a chronic lack of investment in new enterprises formation.

“The US debt-ceiling uncertainty also presents a lower risk to the euro area economies than the longer-term upward pressure on US yields. As benchmark yields for the US and Germany deteriorate into 2014, there will be renewed pressure on funding excessive debt levels across the majority of the euro area economies, most notably for Greece, Italy, Portugal, Spain and Ireland, but also for Belgium and the Netherlands.”"

Apologies for shameless self-promotion... :-)

11/10/2013: BlackRock Institute survey: N. America & W. Europe: October 2013

BlackRock Investment Institute Economic Cycle survey for North America and Western Europe is out and here are core results (emphasis is mine):

"This month’s North America and Western Europe Economic Cycle Survey presented a positive outlook on global growth, with a net of 65% of 113 economists expecting the global economy will get stronger over the next year. (6% lower than within the September report).

At the 12 month horizon, the positive theme continued with the consensus expecting all economies spanned by the survey to strengthen or remain the same except Sweden. 

The consensus outlook for the Eurozone was also strong, with 87% of economists expecting the currency-bloc to move to an expansionary phase over next six months. The picture within the bloc was not uniform however, with most respondents expecting only Greece to remain in a recessionary phase and an even mix of economists expecting Portugal and Belgium to be in an expansionary or recessionary phase at the 6 month horizon (and similarly so for Sweden, outside of the currency-bloc). 

With regards to North America, the consensus view was firmly that the USA and Canada are in mid-cycle expansion and are expected to remain so through H2 2013."

Note that this correlates well with my own outlook: http://trueeconomics.blogspot.ie/2013/10/9102014-businessinsider-most-important.html

Also note: the above views do not reflect BlackRock own views or advice. 

Two charts as usual:

Note that in the chart above, Ireland now firmly converged with the Euro area. This is a very strong move compared to September survey: http://trueeconomics.blogspot.ie/2013/09/1292013-blackrock-institute-survey-n.html And the above is confirmed by the overall comparative expectations forward:

So on the net - good result for Ireland and positive outlook for Euro area as a whole.

11/10/2013: In Europe, as usual, everything is a legal fudge...

Remember the EU 'Project Bonds' idea? Ok, the premise sounded great - you are a sovereign in an economy that can't raise funding for much of big ticket infrastructure etc building. You go to the markets with a sovereign guarantee to cover the shortfall on a specific project returns, plus a sub-guarantee from the EU... More precisely, here's how the scheme was designed to work:

The Guarantors of project finance were supposed to be: European Investment Bank (EIB) and the national governments. These were supposed to supply 'credit enhancements' to debt issues that covered two tranches: senior debt and subordinated debt. The sub-debt (or Project Bond Credit Enhancement, PBCE) were to take a form of an EIB loan backed by EU Commission, to be issued to the promoting entity at the onset of the project financing. Or it could take a form of a contingent credit line 'drawn upon if the revenues generated by the project are not sufficient to ensure debt service'. The PBCE was supposed to underlie the senior debt and act as credit enhancement for investors. The promoting entity were to issue actual bonds - in other words, project owner was to do so, not the EIB or the Member State. The EU conditioned the scheme that the 'support will be available during the lifetime of the project, including the construction phase'.

According to the original plan (see http://www.eib.org/products/project-bonds/):

"The proposed mechanism of the initiative will:

1. have a maximum size of individual transactions of up to the lower of EUR 200 million or 20% of credit enhanced senior debt;
2. as subordinated debt, target an up-lift of the project rating to A-AA rather than AAA;
3. be based on the EIB’s capacity to deliver subordinated loans, not necessarily its rating;
4. only target the EIB’s core business, i.e. infrastructure financing;
5. only support robust projects
6. benefit from the EIB’s proven due diligence, valuation and pricing methodologies."

The first project approved by the EIB for investment was the Spanish Castor offshore submarine gas storage facility. This has now failed due to lack of proper technical oversight in design (insufficient seismic risks evaluations), clearly putting into question the claims (v) and (vi) above.

Furthermore, the Spanish Government is now attempting to exit its contractual guarantee obligations, just to make sure that the entire Credit Enhancement Mechanism is exposed as a total farce.

Details are here: http://www.euractiv.com/euro-finance/eu-project-bonds-may-see-value-d-news-531021?utm_source=EurActiv%20Newsletter&utm_campaign=5ff216b9d6-newsletter_daily_update&utm_medium=email&utm_term=0_bab5f0ea4e-5ff216b9d6-245613326

All of which just goes to prove that in Europe, Government guarantees are worth about as much as the paper on which they are written... Enhance that, if you want.

11/10/2013: What's 'new' in German Coalition talks... what's Ireland...

So today's report in the Irish Times on German Government coalition talks and demands by the Social Democrats (SPD) on Germany blocking use of ESM to cover Irish Exchequer debt exposures arising from the banking crisis and for Germany to adopt a tougher stance on irish corporate tax regime are news... Read them here: http://www.irishtimes.com/business/economy/irish-debt-linked-to-angela-merkel-talks-on-coalition-1.1556845

Now, recall this: http://trueeconomics.blogspot.ie/2013/10/8102013-german-voters-go-for-status-quo.html where all of this fall-out from the German elections was foretold...

10/10/2013: IMF's GFSR October 2013: More Focus on Banks

Now, back to GFSR and banks. I covered some of the IMF findings on banks here: http://trueeconomics.blogspot.ie/2013/10/10102013-imfs-gfsr-october-2013-focus_10.html

This time, let's take a look at what IMF unearthed on funding side of the banking systems. Fasten your seat belts, euro area folks…

Euro area banks have shallower deposits base than US banks… but, wait… euro area banks are supposedly 'universal' model, so supposed to have MORE deposits, than the originate and distribute model of the US banks… Oops… Euro area banks like holding banks deposits - just so contagion gets a bit more contagious. Euro area banks hold tiny proportion of equity, lower than that of the US banks.

By all means, this is a picture of weaker euro area banks than US banks - something I noted here: http://trueeconomics.blogspot.ie/2013/10/9102013-leveraged-and-sick-euro-area.html

Another chart, more bumpy road for euro area:

Per above, there is a massive problem on funding side for euro area banks in the form of huge reliance on debt (both secured and unsecured). The US banks are much less reliant on secured debt (they can issue real paper and raise securitised funding) and they rely less overall on borrowing.

Chart below shows the structure of secured bank debt. Euro area again stand out with huge reliance on covered bonds. US stands out in terms of its continued reliance on MBS. The crisis focal point of the latter did not go away… and the crisis focal source of contagion - banks debt funding - has not gone from euro area's 'reformed' banks.

Happy times... Mr Draghi today expressed his conviction that euro area banks have been cured from their ills... right... hopium-783 is the toast of Frankfurt.

10/10/2013: IMF's GFSR October 2013: Focus on Lending

More interesting analysis from the IMF's GFSR (previously covered topics: banks and corporate debt overhang are linked here: http://trueeconomics.blogspot.ie/2013/10/10102013-imfs-gfsr-october-2013-focus_10.html).

This time around: lending to the economy. One chart:

Note that Ireland is a euro area outlier in terms of the huge extent of policy supports one demand side for credit and simultaneously above average support on supply side of credit:

Puzzled? Me too. Yes, we have huge number of various programmes, grants, schemes, incentives for funding supply and demand. Most of it is not in the form of credit, but rather equity - e.g. Enterprise Ireland funding. No, we don't have much of credit supply supports when it comes to policies or institutions relating to banks. We have lots of hot air talking about the need for banks to lend, more hot air on various 'checks' as to whether banks are lending or not… etc. So let's take a look at the table where the IMF gets its ideas on the above policies existence:

Per table above, Ireland has produced policies of Household Debt Restructuring. Wake me up here, folks, cause I am apparently living in some different Ireland from the one visited by the IMF. Oh, and yes, we also have put in place new policies on Corporate Debt Restructuring. What are these? Hiding our heads in the sand as companies go to the wall? Or may be these are policies promised on dealing with upward-only rent reviews which have driven thousands of companies into the ditch?

I think the IMF folks need to get out a bit more often… before compiling reports...

10/10/2013: IMF's GFSR October 2013: Focus on Banks

As promised in the earlier post, focusing on Corporate Debt Overhang (http://trueeconomics.blogspot.ie/2013/10/10102013-imfs-gfsr-october-2013-focus.html), I am covering in a series of posts the latest IMF GFSR.

Let's take a look at the banking sector focus within the GFSR:

Note the relatively healthy position of the euro area banks on the basis of Tier 1 capital ratios. However, when it comes to leverage, the chart below shows a ratio of tangible equity to tangible assets (the so-called Tangible Leverage ratio). The higher the number in the first chart above, the lower is the capital ratio ('bad thing'), the higher the number is in the chart below, the higher is the ratio of equity to assets ('good thing'):

So euro area banks are doing fine by Tier 1 capital, but are not fine by leverage... As the rest of the IMF analysis highlights, much of this aberrational result arises from the nature of the euro area banking model (assets-heavy 'universal banking' model), plus, as IMF politely puts:

"The conflicting signals also highlight the  importance of restoring investor confidence in the accuracy and consistency of bank risk weights. This also suggests that risk-weighted capital ratios should be supplemented by leverage ratios, as proposed in the Basel III framework."

No comment on the above...

GFSR is deadly on profitability of banks and equity valuations. Here's the key chart:

Notice the concentration of euro area banks at the bottom of the distribution. Still think Irish banks shares held by the Exchequer are worth EUR11 billion?.. really?.. By the chart above, they should be valued at around 2-3% of their tangible assets... which would be what? Close to EUR6 billion, maybe EUR9 billion. Which refers to all Irish banks. Listed, unlisted, foreign, domestic... And to all their equity... not just the equity held by the Exchequer.

Never mind. Like Irish banks, euro area banks are going to continue dumping assets... err... deleverage...

"European banks have been deleveraging in response to market and regulatory concerns about capital levels, and may continue to do so. ...a combination of market and regulatory
concerns about bank capitalization has already led to an increase in capital levels at EU banks. …Over the period 2011:Q3–2013:Q2, large EU banks reduced their assets by a total of $2.5 trillion on a gross basis — which includes only those banks that cut back assets — and by $2.1 trillion on a net basis."

So you thought it was surprising/unusual/unexpected that the banks are not lending? Every policymaker harping on about banks credit 'growth' should have known this deleveraging is ongoing and with it, no new credit growth will occur… I mean USD2.5 trillion!

"…About 40 percent of the reduction by the banks in the EU as a whole was through a cutback in loans, with the remainder through scaling back noncore exposures and sales of some parts of their businesses… As discussed in the April 2013 GFSR, banks have been concentrating on derisking their balance sheets by reducing capital-intensive businesses, holding greater proportions of assets with lower risk weights (such as government bonds), and optimizing risk-weight models."

Put differently, to beef up capital ratios, the banks shed primarily riskier loans. Now what these might be? Oh, yes, SMEs and non-financial corporate loans in general… So that 'credit growth' to SMEs?..

"The capital ratio projection exercise previously discussed suggests that some banks will need to continue raising equity or cutting back balance sheets as they endeavor to repair and strengthen their balance sheets."

Read my lips: no new credit growth… QED…

You can read the entire GFSR here: http://www.imf.org/External/Pubs/FT/GFSR/2013/02/pdf/text.pdf

Note: my recent article on European banks is here: http://trueeconomics.blogspot.ie/2013/10/9102013-leveraged-and-sick-euro-area.html