23/1/2014: Funding Markets Spring Hits a Bump in the Euro Area: H2 2013 Repo Market Report

ICMA (International Capital Markets Association) report released yesterday showed massive 9.5% contraction in euro area repo markets, leading to lower availability of short-term funding to banks in the market over H2 2013 compared to H1. The core drivers of the decline are

• ECB's supply of funds met by lenders who are becoming more reliant on Central Bank's funding, and
• Cash hoarding by banks.

Here is a summary table showing H2 2013 repo market at the lowest point of any half-year period since H1 2009 and the third lowest reading since H1 2005.

At the same time, the share of anonymous electronic trading jumped unexpectedly to 25% from 19.8% a year ago. This came at the expense of domestic business (down to 26.1% from 29.7% a year ago) and less significantly at the expense of cross-border transactions within the euro area (down to 18% from 18.9% a year ago). The survey suggested that ECB's funding sources are the driver behind these trends in relation to domestic repos.

Summary table:

Net conclusion: things are not running smoothly in the funding markets, some five years since the crisis trough.

Full report here: http://www.icmagroup.org/media/Press-releases/

22/1/2014: Another 'Doing Business' Scorecard... Another Cloud of Fog...

Remember Forbes 'Best Places to Do Business' scorecard with no methodology but lots of claims to using data from other 'Best' rankings, some with overlapping data sources and some with clearly contradictory (to Forbes' results) assessments?

Reminder of that one is here: http://trueeconomics.blogspot.ie/2013/12/8122013-forbes-claims-v-reality.html and on contradictory inputs, here: http://trueeconomics.blogspot.ie/2013/12/5122013-that-forbes-folly-of-global.html

Well, now not to be out-shined by 'The Capitalist Tool', Bloomberg decided to labour out its own list... glorious details of which are here: http://www.bloomberg.com/slideshow/2014-01-21/best-countries-for-business-2014.html#slide1

Ireland ranks 20th, which is better than last year's 22nd.

And Portugal ranks 17th...

So, wait a second here. Apparently Portugal beats Ireland in:

• Business Start-up Cost 
• Labour/Material Cost
• Transport Cost

Let's take the first one: Business Start-up Cost. 

Per Doing Business Rankings from the World Bank, 2014, Ireland ranks 12th in this category. This is based on 4 procedures required to start a business here, 10 days average time, 0.3% of income per capita as a cost, and zero paid-in minimum capital. Total cost = EUR80-130 depending on specifics of memorandum and articles filed.

For Portugal, World Bank rankings produce rank of 32nd in terms of Starting Business. This is based on 3 procedures required to start a business here, 2.5 days average time, 2.4% of income per capita as a cost, and zero paid-in minimum capital. Total cost = EUR300-360.

I am not sure things are that much 'easier' in Portugal than they are in Ireland, when it comes to registering business.

Now to labour costs (Eurostat): 

• Nominal Unit Labour Costs (2005=100) in Ireland = 101.3 in 2012 against 103.2 in Portugal.
• Real Unit Labour Costs (2005=100) in Ireland = 102.8 in 2013 against 93.5 in Portugal
• ECBs Harmonised Competitiveness Indictors based on Unit Labour Costs: Q3 2013 latest: Ireland = 103.6 against Portugal = 101.1 (source: http://www.ecb.europa.eu/stats/exchange/hci/html/hci_ulct_2013-07.en.html)

So in nominal terms we rank better than Portugal, in real terms we rank lower, but ultimately, the gap is rather smallish at 2.5 points, with standard deviation of massive 22 points across all EEA countries.

But what about 'material cost'? Not sure what it all means, but the overall cost basis in the economy can be gauged by referencing the very same Harmonised Competitiveness Indicators cited above, except based on GDP deflator.

• Ireland = 101.4 vs Portugal = 102.8 for Q3 2013, as before.
• Eurostat supplies producer prices in industry, but Portugal does not report either quarterly or monthly data here, while Ireland does. So no Bloomberg-like comparative for us.
• For domestic market, producer prices in industry are: Ireland = 111.60 in October 2013 against Portugal = 109.00. For non-domestic markets: Ireland = 100.30 against Portugal = not reported. Which suggests that the end comparative can be a small advantage to Ireland (swing across domestic and non-domestic prices is large for Ireland). Note: Spain has 104.73 and Spain is ranked by Bloomberg well ahead of Portugal.
• Portugal does not report services producer prices data, unlike Ireland. 

So I am not too convinced that Ireland is that much poorer than Portugal on costs basis either.

The point is that all of these rankings are a silly way of rounding up publicity and are hardly indicative of the true realities on the ground. But I am looking forward to seeing Department of Finance and/or NTMA and/or other quango or Government publishing division putting Bloomberg rankings on their 'Ireland is the Best' list, as they are currently doing with the Forbes ranking.

A side-note: it would be helpful if Bloomberg actually published the data behind their rankings calculations. But at least they do provide scant methodological notes, unlike Forbes.

22/1/2014: Tale of Two Italian Earthquakes: Long-Term Effects of Institutional Capital

A very interesting paper from Banca d'Italia on the two divergent outcomes of similar earthquakes in two Italian regions.

The paper, titled "Natural disasters, growth and institutions: a tale of two earthquakes" by by Guglielmo Barone and Sauro Mocetti (Number 949 - January 2014: http://www.bancaditalia.it/pubblicazioni/econo/temidi/td14/td949_14/en_td949/en_tema_949.pdf) is worth reading.

Here is a summary of findings:

"We examine the impact of natural disasters on GDP per capita by applying the
synthetic control approach. Our analysis encompasses two major earthquakes that occurred in two different Italian regions in 1976 and 1980."

Regions covered: Friuli (1976 quake) and Irpinia (1980 earthquake).

"We compare the observed GDP per capita after the quake (which is an exogenous and largely unanticipated shock by definition) in each area with that which would have been observed in the absence of the natural disaster. We carry out this comparative analysis using a rigorous counterfactual approach, the synthetic control method, proposed by Abadie and Gardeazabal (2003) and Abadie et al. (2010)."

"According to our findings there are no significant effects of the quake in the short term. However, this result can be largely attributed to the role of financial aid in the aftermath of the disaster. Using different assumptions regarding the magnitude of the fiscal multiplier, we estimate that the yearly GDP per capita growth rate in the five years after the quake, in the absence of financial aid, would have been approximately 0.5-0.9 percentage points lower in Friuli and between 1.3-2.2 points lower in Irpinia."

Note that the above suggests that even at lower levels of impact, fiscal transfers played less importance in Friuli than in Irpinia.

This, however, is not what happens in the long run. While financial aid was effective in reducing impact of the earthquakes in their short-term aftermath, the same aid was not sufficient to counter longer term adverse effects. "In the long term, we find two opposite results: the quakes yielded a positive effect in Friuli and a negative one in Irpinia. In the former, 20 years after the quake, the GDP per capita growth was 23 percent higher than in the synthetic control, while in the latter, the GDP
per capita experienced a 12 percent drop."

What drove these divergent effects? "After showing that in both cases, the dynamics of the GDP per capita largely mirrors that of the TFP, we provide evidence that the institutional quality shapes these patterns. In the bad-outcome case (Irpinia), in the years after the quake fraudulent behaviors flourished, the fraction of politicians involved in scandals increased, and the civic capital deteriorated. Almost entirely opposite effects were observed in Friuli. Since in Irpinia the pre-quake institutional quality was ‘low’ (with respect to the national average) while in Friuli it was ‘high’, we argue that the preexisting local economic and social milieu is likely to play a crucial role in the sign of the economic effect of a natural disaster. Consequently, our results also suggest that disasters may exacerbate differences in economic and social development."

See these the map highlighting the quality of institutions differences:

Or in more succinct terms: "Consistently with these findings, we offer further evidence suggesting that an earthquake and related financial aid can increase technical efficiency via a disruptive creation mechanism or else reduce it by stimulating corruption, distorting the markets and deteriorating social capital. Finally, we show that the bad outcome is more likely to occur in areas with lower pre-quake institutional quality. As a result, our evidence suggests that natural disasters are likely to exacerbate differences in economic and social development."

22/1/2014: Russia and the Middle-Income Trap

Is Russia exhausting sources for economic growth?

A very important article from Andres Aslund http://www.themoscowtimes.com/opinion/article/russia-is-losing-sources-of-economic-growth/493094.html

The idea of the 'middle income trap' is covered here:  http://www.imf.org/external/pubs/ft/wp/2013/wp1371.pdf

The original research (revised to January 2013) is here: http://www.nber.org/papers/w18673 and non-technical exposition: http://www.voxeu.org/article/growth-slowdowns-redux-avoiding-middle-income-trap and here: http://www.voxeu.org/article/avoiding-middle-income-growth-traps

22/1/2014: 2013 - A Kinder Year for Peripheral CDS...

2013 was a kind year for Irish CDS... but it was an even kinder one for CDS of the countries from which, allegedly, Ireland decoupled, e.g. Italy and Spain...

Oddly enough (for those claiming Ireland's 'uniqueness' in terms of positive performance) the year was even kinder for Slovenia - a country that is only starting to move into a crisis mode:

And even lots-of-pain-for-little-gain Greece and Cyprus managed to pick up some positive momentum:

So the entire thesis for the 2013 CDS markets in euro area 'periphery' is really about global chase for yield squeezing more and more funds into 'peripheral' bonds and bidding down risk valuations of the said paper. This re-assessment of risks has little to do with underlying reforms or fundamentals on the ground in the countries and more to do with the exuberance of investors pushing cheaper funds into every corner of financial universe.

The good news is - this has a positive effect of lowering longer-term borrowing costs. The bad news is - this presents a threat of reforms fatigue. But we know this much already. After all, the sovereigns are not immune from the effects of QE...

21/1/2014: Davos: Outdated Irrelevance of Banality?

If you do need to know exactly why the World Economic Forum at Davos is a vacuous undertaking, go no further than this:

The top 5 risks the #WEF survey delivers to us as a break-through insight into the future from all this 'intellectual' elite gathering in Swiss Alps this week are so... how should I put it mildly... banal? well-rehearsed? predictable? all of the above?

If we already know what Davos is just setting 'ahead' for the discussion, what on earth can be the point of following this global navel gazing ego fest?..

More to the point: Water crisis, Climate change, High unemployment, and Fiscal crises all have been at the core of Davos discussions in previous years. Apparently, the Greats of this World still can't resolve any of them. Time to fuel up that Learjet, cause pressing 'risks' are upon us...

21/1/2014: No Special ICT Services Tax, but Double-Irish is Back in the News

Fresh instalment of 'Non-tax Haven' double-Irish news: http://www.ft.com/intl/cms/s/0/ec659cec-81ef-11e3-a600-00144feab7de.html#axzz2r17cBb9C

To track back numerous links on the topic, follow this link: http://trueeconomics.blogspot.ie/2013/12/26122013-italys-illegal-measure-takes.html

21/1/2014: Four Reasons to Worry About Income Inequality

Not being a fan of 'relative poverty' concept for a number of economic reasons, here's my real concern:

Source for both charts: http://www.oxfam.org/sites/www.oxfam.org/files/bp-working-for-few-political-capture-economic-inequality-200114-summ-en.pdf

The core concerns I have are that

• Extreme disparities of wealth and income distributions can lead to inequality of opportunity and, as the result, to non-meritocratic distribution of wealth and income over generations. 
• Extreme divergence in wealth and income distributions can lead to the decline of democratic participation and thus to a rise in political extremism.
• Extreme differentials in income inequality the wake of a major economic crisis compound long-term effects of the crisis and reduce the rate of recovery, including structural recovery.
• In the current crisis, the core cost of the crisis befell the highly indebted households, primarily from middle and upper-middle classes, plus lower-skilled unemployed. Exit from the crisis, therefore, requires repairing their balancesheets more robustly than the balancesheets of the top 1% earners. The fact that we are witnessing the opposite effect tells me that the underlying causes of the crisis have not been addressed. We have wasted trillions in scarce economic resources and achieved preciously little for it.

19/1/2014: McKinsey Study of European Education System

McKinsey published this week a large study on the jobs markets outcomes of higher education.

The basic conclusion is that from employment point of view, European education is - on 'average' - not exactly fit for purpose.

I know, this is bordering on soliciting nasty responses from Irish academic establishment. Last time I dared criticise some of the practices witnessed in our higher education, I had triumphant academics denouncing myself across their blogs, as if the louder the chorus, the closer to truth the arguments get. Still, caveats on McKinsey research aside, the paper does present worrying conclusions and some evidence.

Read it for yourselves here:
- Global study: http://mckinseyonsociety.com/downloads/reports/Education/Education-to-Employment_FINAL.pdf
- European study: http://mckinseyonsociety.com/downloads/reports/Education/A4E2e_DOWNLOAD_BOOK_FINAL.pdf

Note that Ireland is not explicitly covered in the study, so any analysis would have to be on the foot of comparatives to other systems. I am not going to provide this here.

In the nutshell, McKinsey suggests that educated Europeans are lacking basic work skills and that European education system is suffering from poor access, high cost, poor career planning and development, and lack of applied skills focus.

Evidence:  "The conventional wisdom, of course, is that the financial crisis and slow growth are the reason so many are finding it difficult to find stable, full-time work of the kind that will allow them to raise families and evolve into productive adulthood. This is true, of course, but it is not the whole truth."

"Youth unemployment was at a high level in many countries long before the financial crisis began to bite. Compared to unemployment in the general population, youth unemployment is stubbornly high in Europe... For the EU as a whole, the youth unemployment rate has not dropped below 17 percent at any point this century." In other words: "… economic conditions are not to blame for the frustration of employers as they evaluate the skills of young applicants."

Per McKinsey survey: "Only four in ten employers surveyed, in widely different countries and industries, reported that they were confident they could find enough skilled graduates to fill entry-level positions."

Why? "In Germany, …32 percent of employers surveyed said that lack of skills is a common reason for leaving entry level positions vacant, because the labour market is tight; only 8 percent of youth are unemployed". On the opposite side of the youth unemployment spectrum: in Greece "…more than 55 percent of youth are unemployed. Even so, our survey found that 33 percent of employers regularly leave vacancies open because they cannot find the skills they need."

McKinsey concludes that "…a lack of job-readiness skills— even in countries with slack labour markets—is hindering employment for young people. In effect, many employers choose not to hire, rather than take a risk on spending time and money training them."

"The shortage of skills is also holding back employers. In each one of the countries surveyed except the United Kingdom, more than a quarter of employers said that lack of skills has caused significant problems for their business. It is particularly interesting to note that in the countries with the highest youth unemployment, such as Greece, the proportion of employers reporting lack of skills as a problem was generally higher."

When you read McKinsey reports, the core problems with education-based skills development are striking.

"The most important barrier to enrolling in post-secondary education is cost. Although university tuition fees are generally highly subsidised in Europe, many students find the cost of living while studying still too high to sustain."

Applied skills? "...in a number of countries, vocational courses are not subsidised and can therefore be prohibitively expensive."

"A second barrier is a lack of information. Except in Germany, fewer than 25 percent of students in Europe said they received sufficient information on post-secondary courses and careers. In Europe, where many young people make a decision between vocational and academic paths at around age 15, such information is crucial."

Obviously, why would academic institutions bother with career advice when education is not about achieving any employment / career/ economic / business outcomes, as such outcomes pollute the pristine world of academia? Remember, we have academics who are proudly denouncing the pressures for skills and aptitude from the economy.

Not surprisingly, with the above attitudes, learning real trades and skills is a 'dirty' thing. "A third is stigma. Most of those surveyed said they perceived a social bias against vocational education even though they viewed it as more helpful to finding a job than an academic path. Fewer than half of those who wanted to undertake a vocational course actually did so."

On basic skills shortages: "...building the right skills, too many students are not mastering the basics, with businesses reporting a particular shortage of “soft” skills such as spoken communications and also problems with work ethic."

Now, really, folks... spoken communications and work ethic... obviously outrageously neo-con demands...

"Furthermore, too many young people are taking courses that lead to qualifications for which there is reduced demand. In Spain, for example, the number of people employed in construction has dropped 62 percent since 2008, but the number of students graduating in architecture and building increased 174 percent since 2005."

There are serious issues with 'chasing demand' view of education, issues arising due to long lags to completion of education, changes in trends in demand for skills etc. But there are also real problems here - lack of serious career guidance and development not only in the last year of education, but also in the first year, and before entering the third level institution.

Ok, you hear the shouting going on in academia, "we are no slaves to business" and "employers would say so"… but the problem is that even students themselves are noticing. Chart below illustrates:

There's loads more to read in the reports, so I encourage you do that... Valerian drops can be purchased in your local (to the University or IT school you are teaching at) pharmacy...

18/1/2014: WLASze: Mathematics of Birds, Internet of Robots, Architecture on the edge, & Hannah Höch Retrospective

This is WLASze: Weekend Links on Arts, Sciences and zero economics.


A very well-written essay on natural optimisation, the case of migrating birds:
http://arstechnica.com/science/2014/01/doing-math-on-the-fly-birds-form-the-flying-v-for-efficiency/

Favourite quote: "It may be that birds have sensory abilities we weren’t previously aware of. It might also be that ibises, and possibly other birds, have an innate ability to do the required mathematics, quite literally, on the fly: judging the distance to the next bird and counting wingbeat cycles as they go." Good luck solving that optimisation problem in your head, folks…

And while on the topic of mathematics for birds, here's another bit, on distribution of territorial rights amongst sea birds: http://www.futurity.org/sea-birds-do-math-to-divvy-up-turf/

What's the PISA score for birds mathematical abilities, anyone?


Mathematics is language, and language is about communications. Pair together cold logic of simple dynamic systems (linear learning) and complex mechanics (robotics) and you have an untapped demand pool for communications between robots… Which begs a question: why not create an 'internet for things'?.. Why not, indeed, when one can easily be conceived as a cloud-based system...
http://scinewsblog.blogspot.ie/2014/01/robots-can-now-communicate-over-world.html
Skynet it is not. At least it is not yet. But as more humanity decamps for Mars in the future, who knows, may be the planet of Earth will succumb to an apocalyptic vision of robots-dominated machines-led Skynet?.. I personally prefer mathematics for birds to internet for robots… kind-of less menacing and more beautiful at the same time...


Earlier this month, AIA, American Institute of Architects named best projects of the year its Honor Awards: http://www.dezeen.com/2014/01/13/2014-aia-institute-honor-awards-winners-announced/
My favourite is, as usual, residential project (I love the challenge of site/scale/space/aesthetic that residential and small-scale public buildings provide):

Here's more on that project: http://www.archdaily.com/255187/the-pierre-olson-kundig-architects-2/


It seems I can't escape birds themed posts today, so here's the one that flips fly fishing upside-down… or at the very least adds some serious challenge to it:
http://scinewsblog.blogspot.ie/2014/01/fish-catches-bird-in-flight-video.html
Those of you who know about fly fishing would appreciate the sheer challenge of replicating this with a fly rod… weight 18 won't cast out a fly to simulate a bird… no way… we need some more serious gear for that…


St Petersburg in the news - the city got a Faberge museum, courtesy of Viktor Vekselberg: http://www.iskusstvo-info.ru/event/item/id/67

Meanwhile, Sundance Festival gets Russian treats… http://rbth.co.uk/arts/2014/01/17/russia_standouts_at_sundance_33331.html


A new retrospective in London that is beyond 'worth visiting' - it is a must-see… "In the 1910s, German artist and feminist Hannah Höch was the lone woman among Berlin’s avant-garde Dada movement, the raucous group responsible for naming a men’s urinal Fountain and turning it into one of the most influential artworks of the last century. Though she hung out with art stars like Piet Mondrian, they never quite saw her as an equal--artist Hans Richter once smugly dismissed her as “the girl who procured sandwiches, beer, and coffee, on a limited budget.”"

Time lapsing to today, Höch is now recognised as one of the most important Dadists in the history of art, and yet rarely profiled in solo shows. This makes a major new exhibition at London’s Whitechapel Gallery that showcases over 100 works by Höch from the 1910s until her death at age 88 in the 1970s. Run to http://www.whitechapelgallery.org/exhibitions/hannah-hch

Enjoy!

18/1/2014: Portugal 'doin Dublin' or going for broke?

A very interesting interview with David Slanic, CEO of Tortus Capital Management LLC on Portugal's sovereign debt sustainability and the need for further debt restructuring.

http://janelanaweb.com/trends/portugal-needs-a-national-salvation-pact-with-a-short-mandate-to-restructure-the-sovereign-debt-david-salanic-tortus-capital/

Is Portugal really that close to restructuring as to pre-borrow reserves forward? Or is it pre-borrowing to do what Dublin did and exit in H2 2014 with no precautionary line of credit?..

Signals from the CDS markets? No evidence of serious markets concerns so far...

18/1/2014: Ireland's Credit Upgrade: Some Background

Moody's upgraded Irish sovereign debt ratings last night. My analysis is here: http://trueeconomics.blogspot.ie/2014/01/1812014-moodys-upgrade-for-ireland.html

Couple additional of points in relation to the upgrade.

Here's the current Western Europe league table in the Euromoney Country Risk Survey, placing Ireland at the top of the peripherals:

This is a consensus view across ECR group of economists and analysts and the core downward risk source for the ratings is Economic Assessment. Ratings upgrade will most likely translate into a higher score on Credit Rating, pushing us closer to France into the 2nd tier.

The upgrade was predictable and overdue. Two weeks ago I run the analysis of CDS spreads over 2012-2013 period (here: http://trueeconomics.blogspot.ie/2014/01/512013-euro-periphery-in-cds-markets.html) and the core conclusion relevant to today's news is in the last bullet point of the post.

• Irish CDS since the beginning of 2012 are carrying heavier weighting on probability of default estimates: in the last two charts, our CPD is priced along the mid envelope of (CDS, CPD) quotes, while Greece implies underpricing of the probability of default (along the lower envelope). Our probability of default is slightly over-estimated compared to Portugal and Spain, but is in line with Italy. This potentially relates to the point raised above in relation to speed of our CPD declines over 2013: we might be experiencing an over-due repricing (very slight) in the relationship between the CDS levels and implied estimates of the probability of default.

In other words, the CDS pricing was signalling lower probability of default for Ireland. And it was predictable on the basis of core fundamentals as well. Here's from the post back in March 2013:
http://trueeconomics.blogspot.ie/2013/03/1532013-irish-banks-still-second.html "my view is that we are due an upgrade, but a single notch one, to reflect economic decoupling from the peripherals".

So to reiterate: the upgrade was

1. Overdue
2. Expected
3. About right on the side of the change in the rating
4. A good net positive on expected markets impact, and
5. Enhancing stability of our debt, with medium-term expectation for lower borrowing costs (this will not play out right away, as Ireland's debt maturity profile is long-dated).

Meanwhile, this week's Euromoney ECR note on FY2013 credit risks shows continued drag on ratings in the euro area:

The full analysis (restricted access) is here. My quote on the above is about the general sense of complacency at the euro area 'leadership' level:

My full comment given to ECR on the 2013 results is here:

Euro area:

Euro area remained the weakest economic region globally, over the entire 2013, with a number of countries struggling with high unemployment, recessionary macroeconomic conditions, extremely low and near-deflationary price pressures and operating in the monetary environment still characterised by anaemic growth in money supply and tight credit markets. Based on the latest data, euro area is the only region world wide that is expected to post negative real GDP growth in 2013. 

The fact that this abysmal performance comes alongside relatively benign output gap, compared to other regions, and amidst overall improved global economic outlook, signals structural nature of the Great Recession in the euro area. In addition to the weak macroeconomic performance, euro area continued to suffer from acute leadership deficit - a fact that did not go unnoticed by the analysts. 

In 2013, eurozone's leadership effectively shifted from the risk-management mode that underpinned relatively rapid and robust rhetorical responses to the crisis in 2012, to a navel-gazing mode. Few of the policy proposals tabled over 2012 in response to the sovereign debt and banking sector crises were implemented or fully structured in 2013. The monetary policy, while remaining  relatively accommodative, continued to deploy the very same measures used in previous years, with little improvement in the credit supply conditions on the ground, at the level of the real economy. Thus, monetary growth was subdued and retail interest rates margins over the policy rate continued to rise, making credit to euro area enterprises and households both less available and more expensive.

Sub-regional:

The focal point of the euro area adverse news flow over 2013 has shifted from the so-called PIIGS to the relative newcomers to the crisis-stricken periphery: Cyprus and Slovenia. With Cyprus' depositors bail-ins setting a new benchmark for private sector burden sharing that will serve as a template for the euro area future crisis resolution measures, Slovenia has been desperately attempting to avoid a formal Troika bailout of its weak banking system. As the result, the country saw significant deterioration in macroeconomic environment over 2013. 

In the second half of 2013, with growth starting to return to core euro area economies, the centre of gravity in the Great Recession moved to economically weak Italy and France and away from the recovery-bound Ireland and Spain. In fact, 2013 macroeconomic and fiscal performance by the former warrants significant improvements in its credit scores, while the latter is starting to gain ground in terms of stabilising external trading conditions, while lagging on fiscal side. The expectation, therefore, is for continued decoupling of Ireland from the weaker peripherals sub-group as signalled by the CDS spreads and bond yields to-date.

Overall, Italy remains the weakest large euro area economy, member of the Big 4 countries of the eurozone, with virtually no growth and no reforms compounded by the risk of renewed political instability. Current expectation is for the real GDP contraction of 1.8% in 2013 following a 2.37% decline in 2012. Italy is also the only large euro area economy that is expected to post a fall in overall exports of goods and services in 2013 and, along side Spain, reduction in levels of employment across the economy. As the result of its poor growth performance, Italy is likely to post the only increase in the net government deficit for 2013 of all big euro area states, leading to an increase in the country debt/GDP ratio to 132.3%. The key to the country deteriorating credit risk scores, however, rests with the general markets perception that Italian political leadership remains incapable to deliver any meaningful structural reforms. 

Meanwhile, France is showing all the signs of deepening deterioration in manufacturing and core services activity since the onset of Q4 2013. French economy is currently once again on the edge of another recessionary dip and unemployment is poised to post further increases in Q4 2013-Q1 2014. At the same time, like Italy, French leadership appears to be stuck in 'neutral' when it comes to fiscal and structural reforms - a situation that is likely to spillover into a twin crisis of anaemic growth conditions and renewed industrial unrest in early 2014 (in 2013, French unemployment rate exceeded that recorded in Italy in 2012). With nearly zero structural adjustment underway, France's current account remains in deficit (-1.6% of GDP in 2013), while general government gross debt is now at around 93.5% of GDP, up on 90.2% in 2012, and heading higher in 2014. France also has second largest primary deficit of all larger euro area economies, as well as overall Government deficit that is in excess of that recorded in Italy. With public and household finances in tatters, France is likely to finish 2013 with lowest end-of-year inflation of all big euro area economies, pushing the country closer to deflation.