7/5/2014: 1980s and 2010s: Live Register tells the tale...

Here are some comparatives relating to un- and under-employment between the current crisis and the dreaded 1980s malaise summarised in a chart :

Click on chart to enlarge

Remember, Ireland today is not Ireland in the 1980s...

7/5/2014: Simple vs Complex Financial Regulation under Knightian Uncertainty

Bank of England published a very interesting paper on the balance of uncertainty associated with complex vs simplified financial regulation frameworks.

Titled "Taking uncertainty seriously: simplicity versus complexity in financial regulation" the paper was written by a team of researchers and published as Financial Stability Paper No. 28 – May 2014 (link: http://www.bankofengland.co.uk/research/Documents/fspapers/fs_paper28.pdf), the study draws distinction between risk and uncertainty, referencing "the psychological literature on heuristics to consider whether and when simpler approaches may outperform more complex methods for modelling and regulating the financial system".

The authors find that:
(i) "simple methods can sometimes dominate more complex modelling approaches for calculating banks’ capital requirements, especially if limited data are available for estimating models or the underlying risks are characterised by fat-tailed distributions";
(ii) "simple indicators often outperformed more complex metrics in predicting individual bank failure during the global financial crisis"; and
(iii) "when combining information from different indicators to predict bank failure, ‘fast-and-frugal’ decision trees can perform comparably to standard, but more information-intensive, regression techniques, while being simpler and easier to communicate".

The authors key starting point is that "financial systems are better
characterised by uncertainty than by risk because they are subject to so many unpredictable factors".

As the result, "simple approaches can usefully complement more complex ones and in certain circumstances less can indeed be more."

The drawback of the simple frameworks and regulatory rules is that they "may be vulnerable to gaming, circumvention and arbitrage. While this may be true, it should be emphasised that a simple approach does not necessarily equate to a singular focus on one variable such as leverage… [in other words, simple might not be quite simplistic] Moreover, given the private rewards at stake, financial market participants are always likely to seek to game financial regulations, however complex they may be. Such arbitrage may be particularly
difficult to identify if the rules are highly complex. By contrast, simpler approaches may facilitate the identification of gaming and thus make it easier to tackle."

Note, the above clearly puts significant weight on enforcement as opposed to pro-active regulating.

"Under complex rules, significant resources are also likely to be directed towards attempts at gaming and the regulatory response to check compliance. This race towards ever greater complexity may lead to wasteful, socially unproductive activity. It also creates bad incentives, with a variety of actors profiting from complexity at the expense of the deployment of economic resources for more productive activity."

The lesson of the recent past is exactly this: "These developments [growing complexity and increased capacity to game the system] may at least partially have contributed to the seeming decline in the economic efficiency of the financial system in developed countries, with the societal costs of running it growing over the past thirty years, arguably without any clear improvement in its ability to serve its productive functions in particular in relation to the successful allocation of an economy’s scarce investment capital (Friedman (2010))."

And the final drop: clarity of simple systems and implied improvement in transparency. "Simple approaches are also likely to have wider benefits by being easier to understand and communicate to key stakeholders. Greater clarity may contribute to superior decision making. For example, if senior management and investors have a better understanding of the risks that financial institutions face, internal governance and market discipline may both improve."

Top line conclusion: "Simple rules are not a panacea, especially in the face of regulatory arbitrage and an ever-changing financial system. But in a world characterised by Knightian uncertainty, tilting the balance away from ever greater complexity and towards simplicity may lead to better outcomes for society."

7/5/2014: Eurocoin Leading Indicator: April 2014

The latest Eurocoin leading growth indicator for the euro area is at 0.39 in April, statistically unchanged on 0.38 in March.

Q1 2014 forecast based on Eurocoin is now at 0.34% q/q growth and Q2 2014 forecast is now running closer to 0.38%.

In other words, things are slack.

Here are some charts:

Crucially, Eurocoin reading in April was driven by "favourable performance of the financial markets and by household and business confidence, although these were counterbalanced by the small downwards revision of euro-area GDP in the fourth quarter of 2013." Actual industrial activity and external trade data was not supportive to the upside.

In other words, much of the improvement in Eurocoin since December 2013 is down to financial and confidence effects and not to underlying real economy.

Monetary policy side and inflation remain stuck in slow-growth corner:

7/5/2014: Eurostat backs out of Greek data mess

Here's Ifo Institute press release on Eurostat and data manipulation for Greece:

I have covered the issue here: http://trueeconomics.blogspot.ie/2014/04/2542014-stretch-of-numbers-here-bond.html

7/5/2014: Russia PMIs: signalling second month of recessionary pressures

Russia's HSBC-Markit PMIs are signalling contracting economy for the second month in a row.

Manufacturing PMI is down at 48.5 which is marginally better (slower rate of contraction) than in March (48.3) and on par with the rate of decline measured in February (48.5). April marks the sixth consecutive month of below 50 readings.

3mo MA now stands at 48.4 which is down marginally from 48.7 for 3mo average through January 2014 and is down significantly on 51.1 3mo average back in February-April 2013.

Current 3mo average is statistically barely at the bound of recessionary reading (48.3).

Meanwhile, services index weakened further from March 47.7 to 46.8 in April. This is the second consecutive month of below 50 readings. 

3mo MA now stands at 48.4 which is down strongly from 52.2 for 3mo average through January 2014 and is down massively on 54.5 3mo average back in February-April 2013.

Current 3mo average is statistically below the bound of recessionary reading (47.2).

Composite PMI is also in a second consecutive monthly reading below 50.0 - March 2014 was 47.8 and April 2014 came in at 47.6.

3mo MA is at 48.5 which is down on 51.5 for 3mo average through January 2014 and is down significantly on 53.6 3mo average back in February-April 2013.

Current 3mo average is statistically above the bound of recessionary reading (47.6).

It is worth noting that weaknesses in Russian Composite PMI started well ahead of the current geopolitical risks amplification and reflect structural issues with the Russian economy. However, the rate of decline as well as weakness spread across two sectors increased since the beginning of this year.

6/5/2014: BlackRock Institute Survey: EMEA, April

BlackRock Institute published their April 2014 survey of economic conditions in EMEA region. Here are some takeaways:

1. "The consensus of respondents describe Russia, Slovenia, Croatia, Turkey and Turkey to be in a recessionary state, with an even split of economists gauging Kazakhstan and Egypt to be a in a recessionary or contraction."
2. "Over the next two quarters, the consensus shifts toward expansion for only Egypt."
3. "At the 12 month horizon, the consensus expecting all EMEA countries to strengthen or remain the same with the exception of Slovenia, Turkey, Russia and the Ukraine."

Russian economy specifics:

• "How do you think Russia's economy will develop over the next 12 months?" 72% of respondents expect economy to become weaker or a lot weaker
• "At this time, in which phase of the economic cycle would you say Russia's economy is?" 100% of respondents estimate that the Russian economy is currently in a recession.
• "Over the next 6 months, in which phase of the economic cycle would you say Russia's economy will be?" 86% of respondents expect Russian economy to remain in a recession.
• 57% of respondents estimate that currently Russian economy is operating with a positive or zero output gap.
• 71% of respondents estimate that currently Russian economy operates at above trend inflation that is increasing.

"Globally, respondents remain positive on the global growth cycle with a net 78% of 40 respondents expecting a  strengthening world economy over the next 12 months – an 9% decrease from the net 87% figure last month. The consensus of economists project mid-cycle expansion over the next 6 months for the global economy."

Note: Red dot represents South Africa, Czech Republic, Hungary, Romania, Israel, Poland and Slovakia.

Note: these views reflect opinions of survey respondents, not that of the BlackRock Investment Institute. Also note: cover of countries is relatively uneven, with some countries being assessed by a relatively small number of experts

4/5/2014: Ireland's Fabled External Balance Performance: 1990-2013

Ireland's external balance performance has always been a major point for departure in analysis of our economic growth, sustainability of our debt and overall consideration of our economic infrastructure quality. As a Small Open economy, Ireland is trade-intensive. As an MNCs-led economy, Ireland is even more trade-dependent, in so far as we need larger external surplus to deliver same jobs creation as other European economies with smaller MNCs-induced GDP/GNP gap.

Since the start of the crisis, Irish current account performance was invariably brought forward as evidence of significant improvements in the underlying economy's competitiveness. And our gains were pretty strong - judging by this metric:

• In the 1990s, Ireland averaged current account surpluses of 1.85% of GDP annually
• In the 20002, we run current account deficits averaging -2.29% GDP per annnum
• Since 2010 through 2013 we have been running current account surpluses averaging 3.35% per annum
• The swing - from the deficit to surplus is 5.43% of GDP for Ireland - seemingly strong stuff.

The question is, of course, are the above numbers really strong, as in exceptionally strong or very strong as judged by comparison with other similar economies?

Let's consider EEA24 - 24 advanced economies of EEA community (excluding those economies of EEA that are not making it into 'advanced economies' club).

• In 1990-1999 Ireland's performance was strong in terms of the current account, but it was not exceptions - we ranked 5th in the EEA24 in the size of average current account surplus, behind Belgium (4.67% of GDP), Luxembourg (10.52% of GDP), the Netherlands (4.16% of GDP), and Switzerland (6.93% of GDP).
• In 2000-2009 we ranked 14th (no need to list the countries we were behind in this metric during this period - we were doing badly).
• In 2010-2013 we ranked 7th - behind Denmark (6.09%), Germany (7.05%), Luxembourg (6.91%), the Netherlands (9.17%), Sweden (6.08%) and Switzerland (10.74%).

Here's a chart illustrating this performance - for legibility, I only left in the chart Small Open Economies.

But what about the overall period of the crisis, you might ask? 

Instead of decades-averages, let's take a look at the average current account balances over 2008-2013 period. Here we rank 8th in the EEA24 with our current account surplus averaging 5.4% of GDP.

The key point here is that Ireland's current account performance has been strong, but it has not been exceptional. Certainly not exceptional given the need of this economy for deleveraging (and associated requirement for higher current account surpluses). 

The good news is that at 5.4% of GDP, our current account surpluses since 2008 are above those in the deleveraging period of 1992-1997 when these averaged 3.13% of GDP.

The bad news is that we are still to undo the aggressive current account leveraging accumulated during the 2000s. In the decade of 2000s, Ireland's cumulated current account deficit amounted to USD52.42 billion. During the 1990s our cumulated surplus was USD12.49billion and in 2010-2013 our cumulated surplus was USD28.88 billion. In other words, from 1990 through 2013 we are still in a deficit of USD11.04 billion and if we take 2000 as the starting point, our cumulated deficit is USD23.54 billion.

For comparison, Switzerland's cumulated 2000-2013 surplus is USD644.86 billion, Sweden's USD377.99 billion, Denmark's 149.18 billion. 

In fact, non-euro EEA24 members are in a vastly stronger current account position than their euro area counterparts, but that is probably a matter best covered separately, although it does probably explain why euro area needs ESM and other means for borrowing externally.

Lastly, however, let's come back to that 'swing' in our current account from deficits in the 2000s to surplus in 2010-2013. Remember, the swing was a sizeable 5.64% of GDP. But it only ranks us as 5th economy in the EEA24 in terms of the magnitude of improvement in our competitiveness. Not exactly an 'exceptional case' either.

4/5/2014: Some links & quotes from the week past

Few links to my recent comments in the media:

• Portugal's Expresso: http://expresso.sapo.pt/juros-da-divida-portuguesa-lideraram-descida-em-abril=f867881 covering sovereign bonds bubble in the euro area
• Reuters via BusinessInsider on US companies feeling the impact of the Ukraine-Russia crisis: http://www.businessinsider.com/r-some-us-companies-starting-to-feel-pain-from-ukraine-crisis-2014-30 
• The same as above (shorter version in Slovak with seemingly misquoted meaning of what I said): http://firmy.etrend.sk/firmy-nefinancny-sektor/americky-biznis-sa-v-rusku-kazi-pocit-odporu-rastie.html
• FT on Anglo Three trial fallout: http://www.ft.com/intl/cms/s/0/a778bc98-c6de-11e3-aa73-00144feabdc0.html
• US role in Ukraine (my comment on EU role in Nato): http://www.forbes.com/sites/dougbandow/2014/04/07/washington-should-not-defend-ukraine-or-expand-nato-u-s-should-shift-responsibility-for-europes-defense-to-europe/
• My post on G7 composition covered in Italy: http://www.fanpage.it/renzi-punti-su-pmi-e-startup-per-ripartire/ (post link here: http://trueeconomics.blogspot.it/2014/03/2332014-about-that-kicking-russia-out.html)
• On crisis impact on migration: http://www.handelsblatt.com/politik/international/europawahl/multimedia-projekt-ich-bin-ein-eu-baby/9744852.html
• My interview with FXStreet on ECB, Euro, Sovereign Debt and Russia-Ukraine crisis: http://www.fxstreet.com/analysis/forex-live-analysis-room-interviews/2014/04/29/
• InvestorDiscussionBoard covering my post on Ukraine-Slovakia Gas Deal: http://investordiscussionboard.com/boards/ind-energy/ukraine-slovakia-agreement-reversed-shipments-gas
• GDP comparatives for the crisis period - my post picked up by http://gold.sport24blog.com/?p=16704

3/5/2014: Crisis Impact Comparatives: GDP changes 2007-2013

A very interesting map plotting changes in the GDP across various European countries since 2007:

My own calculations using IMF database and showing more up-to-date data and broader set of GDP metrics covering all advanced economies ex-Luxembourg, San-Marino, and Latvia (you can click on the image to enlarge):

One sample of just European economies:

And two sets of summary tables pooling together Euro area 'peripherals' plus Iceland:

We can't really say we are much better off than Iceland, and we are certainly to-date worse off than Portugal, although we are better off than Greece.

2/5/2014: Ethnic Russians in Ukraine are Centuries-Old, Not Decades-Deep...

As someone just remarked on twitter, the proverbial sh*t just got real in Ukraine. And mightily it did - Ukrainian authorities report 31 dead in clashes in largely Russian-speaking Odessa. Other sources report 'dozens killed' - e.g. http://www.bbc.com/news/world-europe-27259620.

Here are two stills from the live broadcast by a Ukrainian channel of events in Odessa, showing the civilian firetruck being used by the pro-Kiev forces to attempt to break through opposition barricades. The broadcast showed personnel with what appeared to be field helmets on hiding under the cover of the truck.

Odessa is a serious flash point for three major reasons:

1. It is largely Russian-speaking and highly ethnically diverse. The city has a very old Jewish diaspora (greatly reduced by the nazis during the WWII) and of its large (1 million) population, roughly 60% are ethnic Ukrainians, followed by 29% of Russians. It also has Armenian, Albanian, Azeri, Crimean Tatar, Bulgarian, Romanian etc diasporas. Even a Greek diaspora. The city is very much reflective of the current ethnic tensions - although majority of population is not ethnically Russian, main spoken language remains Russian, despite the language not being recognised as official. Historically, like most of Eastern Ukraine, Odessa was Russian - it was Russian in the 19th century when the city was the fourth largest in the Russian empire after Moscow, St Petersburg and Warsaw. Crucially to its history, Odessa was Russian ethnically all the way until mid 20th century. Notice that this is a direct contradiction to the extreme nationalist views being propagated in Ukraine that Russian population of Eastern and Southern Ukraine represented 'new colonisers' who arrived there after Stalin-induced Soviet Union-wide famine of the 1920s.
2. Odessa is culturally and strategically aligned with Crimea (via sea linkages) and its Oblast borders Transnistria region of Moldova.

The push point in the conflict is, in my view, moving closer and closer to an open confrontation between Russia and Ukraine. 

And here is a voting map from the last elections, showing just how closely the South-Western Ukrainian area - including Odessa region - is aligned with the Eastern Ukraine:

Here is a handy map showing movements of Russian and Ukrainian troops (http://www.washingtonpost.com/blogs/worldviews/wp/2014/05/02/map-how-ukraine-and-russia-are-moving-toward-war/):

How did the Russians get into Ukraine, you might ask? Well, here is a handy guide (see note below):

• Eastern Ukraine was added to Russian Empire in 1654-1667 with western border defined by River Dniper. These parts were first incorporated into the Ukrainian territories in 1919-1920 and then in 1922 Treaty that created the USSR. Here are the lands lost in the Polish War by Polish-Lithuanian Commonwealth and gained by Ukraine via Russia: http://en.wikipedia.org/wiki/File:Polish-Lithuanian_Commonwealth_1635.svg
• Today's Western Ukraine was formed during one of the subsequent three partitions of Poland: http://en.wikipedia.org/wiki/File:Rzeczpospolita_Rozbi which also added significantly to the Ukrainian territories claimed today.
• In 1783 Russia added Crimea and other parts of Tatar Crimean khanite, including Odessa.
• Irony has it, as http://www.britannica.com/EBchecked/topic/612921/Ukraine/30071/Ukraine-under-direct-imperial-Russian-rule points, it was Russian imperial control that allowed Ukrainians to settle into Crimea and Southern Ukrainian territories. 
• After WW2, Soviet Union largely expanded Ukrainian territory adding over 65,000 square miles and 11 million population (an increase of over 1/3 on pre-war period. The main expansion took place along the Curzon Line at the expense of Poland, Romania, Czechoslovakia.
• Lastly, in February 1954, Russian Republic (RSFSR) 'gifted' Crimea to the Ukraine - from legally Russian territory (sub-part of the USSR). Only 22% of Crimean population at the time was Ukrainian (the rest were Tatars, other ethnic minorities and those, who Kiev supporters today frequently call post-genocide occupants of Ukraine coming from Russia, but in reality are Russian ethnicity residents of Crimea and Eastern Ukraine since 17th century).

Here is a summary map of what shaped the territory of the Ukraine prior to 2014:

These changes in the territories clearly indicate that ethnically Russian population is not a phenomena of colonisation post 1922 famine, but an outcome of centuries old movements of people with changes and reshaping of national, political, economic and cultural boundaries.

In my view, nationalist Kiev position resisting the initiation of the democratic process on federalisation of Ukraine is not sustainable. Ukraine now has to move fast into securing a roadmap to

1. Orderly elections in May (the timing is unfortunate, but the commitment is irreversible); 
2. Followed by pre-committed regional referenda on membership in the Ukrainian Federation (respecting any region that votes to exit); and
3. Pre-committed process of democratic federalisation post exits of the secessionist regions.

I would have preferred to see Ukraine remain fully unified, territorially unaltered state with greater autonomy extended to the regions that wish to have it. I think that such Ukraine was possible under February 21st agreement, violated by the Maidan forces and by the current leadership in Kiev.

Alas, with every day passing, this hope of a unified Ukraine is becoming less and less feasible in the longer run and Kiev's insistence on avoiding orderly, democratic federalisation now threatens to lead to a civil war in the short run.

I hope I am wrong in this assessment...

Note: I do not care to make any of the above points to justify territorial break up of Ukraine. I never supported such a break-up in the first place. I am, however, interested in pointing out that nationalist rhetoric treating ethnic Russians (or any other ethnic group living in Ukraine) as being 'foreign' presence in the country is absurd, vile and does not contribute to the cause of unifying Ukraine and helping it preserve its own territorial integrity.

And, I am no less concerned about emerging Russian nationalism - not only in Ukraine, but also in Russia proper. This, however, is a matter for separate posts, maybe in some near future.

27/4/2014: Ukraine-Slovakia Agreement on Reversed Shipments of Gas

Per today's reports (see: http://www.rosbalt.ru/main/2014/04/27/1262169.html), Ukraine reached an agreement with Slovakia for reverse-delivery of natural gas via Vojany-Uzhgorod pipeline. Shipments can start in October with maximum delivery of 3 billion cubic meters per annum, and from March 2015 the capacity can be raised to 10 billion cubic meters per annum.

As the article notes, from April 2, Russian President Vladimir Putin signed the decree annulling Kharkiv agreements that provided a discount on gas price for delivery to Ukraine of USD100 per 1,000 cubic meters, so starting from Q2 2014 Ukraine delivery is priced at USD385.5 per 1,000 cubic meters from USD268.5

Following this, on April 3, head of Gasprom Aleksey Miller said that taking into the account arrears on past gas deliveries, Ukraine gas deliveries will be priced at USD485 per 1,000 cubic meters.

Here is my earlier note on Ukrainian arrears relating to Russian gas deliveries and Ukrainian Government debt held by Russia: http://trueeconomics.blogspot.ie/2014/04/1042014-game-of-chicken-ukraine-debts.html.

25/4/2014: A stretch of numbers here... a bond sale there... Greek Deficit in 2013

This week we had the data release by Eurostat showing the fiscal position of the euro area sovereigns for 2013, followed by the statement by the Troika (EU Commission, the ECB and the IMF) on Greece's fiscal position.

Based on data-driven Eurostat conclusions (see details here: http://trueeconomics.blogspot.ie/2014/04/2342014-some-scary-reading-from-eurostat.html) Greek fiscal deficit was 12.7% of GDP in 2013. Based on the Troika conclusions, Greece has managed to generate a budget surplus of 0.8% of GDP in 2013. The two numbers are so widely apart that the case of 'thou shalt not spin too much' comes to mind.

In reality, to arrive at 0.8% surplus, the Troika had to do some pretty extreme dancing around the real figures: they took out non-recurring spending out of the Greek deficits (all banks measures and all interest paid on gargantuan 175.1% of GDP Government debt). Just how on earth can debt interest payments be non-recurring is anyone's guess. But even removing that (to arrive at normal definition of primary deficits), the official primary deficit for Greece at the end of 2013 stands at 8.7% of GDP. The swing of 9.5% of GDP bringing this to a surplus of 0.8% is 'banks measures'.

The problem is that with 12.7% of GDOP deficit and 8.7% primary deficit in 2013 and with debt of 175.1% of GDP, Greece is plain simply and undeniably an insolvent state. This is precisely why exactly at the time of the above data publication and at the time when the Troika was extolling the virtues of the fiscal surplus in Greece, the very same European authorities praising Greek Government were announcing that they have engaged in a new round of debt relief negotiations with Greece (http://www.ft.com/intl/cms/s/0/9ec817d8-cadf-11e3-9c6a-00144feabdc0.html#axzz301XTTXyT).

Meanwhile, bust, bankrupted and in new default talks, Greek Government is hell-bent on buying votes into the upcoming European elections. Per FT account linked above:

"About 70 per cent of the [bogus Greek] primary surplus has already been allocated for current expenses rather than for writing down existing debt, according to the finance ministry. The government has set aside €524m as a one-off payment to low-income families and pensioners ahead of next month’s European elections. Another €320m will cover a projected deficit this year at IKA, the main social security organisation, following a decision agreed with international lenders to cut employers’ contributions."

This is truly epic: European authorities praising national Government for bogus surpluses that are explicitly being used to fund giveaways to vulnerable voters groups at the time of elections. This is 'reformed Europe'?

This is precisely the circus that is driving up valuations of peripheral bonds (http://mobile.bloomberg.com/news/2014-04-23/samaras-met-dimon-for-greek-bonds-on-way-to-a-400-return.html?alcmpid=markets) and that has an exactly negative correlation with the underlying strength / structural health of some of the peripheral economies (see my comment on this here: http://trueeconomics.blogspot.ie/2014/04/2542014-ecb-denmark-negative-rates.html).