21/5/2014: Few Slides Covering Russian Banks

Few slides from my bigger and newer Russia Deck - these covering Russian banks:

 In the above, note the nonperforming loans... Ugly does not even begin to describe Ukrainian situation. Russia's NPLs, however, are benign by comparative to rest of the FSU...

 Summary as is in both above and below...

21/5/2014: That Medicated Happiness in the Club Med...

"France’s love of anti-depressants, sleeping pills and other prescription medication has reached new heights according to figures showing one in three adults in the country use some form of psychotropic drug. A study by France’s National Drug Safety Agency (ANSM) found that 32 percent of French people used such medications in 2013, either on a regular or occasional basis, French daily Le Parisien reported Tuesday." This was reported in here.

There's more: "Another study released this week, carried out by Ipsos on behalf of the French Hospital Federation, found that 84 percent of patients polled said that doctors often hand out unnecessary prescriptions." And "a study by carried out by the company Celtipharm, also cited by Le Parisien, found that 230,000 French people were risking their health each month by mixing psychotropic drugs with other, non-compatible medication."

A cross-nations comparative shows trends for anti-depressant drug use across Europe for the period 1980-2009: http://www.plosone.org/article/info%3Adoi%2F10.1371%2Fjournal.pone.0066455

Interestingly, Mediterranean countries fared really poorly in the above study: Greece, Italy and Spain all recorded above average rises in the use of anti-depressants, with big increases from the mid-1990s on.

21/5/2014: Irish Credit Supply to Cash Ratios are Heading South, Still

Irish Central Bank and Government departments have been pushing hard to convert Irish economy into cashless, electronic accounting data storehouse, where everything gets counted and taxed (at least in theory).

Meanwhile, in Ireland's real economy, cash remains the king as the only metric of money supply still expanding in the deleveraging hell gripping the financial system:

To remind you: in Q4 2013, Irish private households' deposits fell to their lowest point since March 2009 (note, this makes them the lowest since around Q3 2005 as current figures reflect addition of the Credit Unions deposits to the dataset (they were not counted in until January 2009).

That's right... let's do away with cash so Irish banks deposits get another superficial (accounting) boost and few million worth of tax euros flows into the state coffers. Happy times all around... we know Irish households are getting richer and richer by day...

21/5/2014: Russia-China Gas Deal

Russia and China signed bilateral gas deal to supply 38bcm of Russian gas per annum, with an option of expanding shipments to 61bcm. The deal covers 30 years of supply. Full valuations and prices are not yet known, but the deal at 38bcm/annum x 30 years was originally valued at USD440 billion.

Here are the best reports on the deal so far (to be updated):

http://www.businessinsider.com/russia-and-china-sign-billion-gas-pipeline-mega-deal-2014-5

Update: zerohedge covers price details here: http://www.zerohedge.com/news/2014-05-21/russia-and-china-finally-sign-400-billion-holy-grail-gas-deal

WSJ on the deal: http://blogs.wsj.com/moneybeat/2014/05/21/russia-strikes-gas-gold-in-china/ pointing to heating up competition in Asia-Pacific energy markets and Russia's play coming ahead of Canadian exports flows. This, in part, explains why Russia agreed on a deal pricing gas at just above USD350 bcm whereas Russia previously looked for a price closer to USD400 bcm. As you can see from the second chart below, over the years while the deal with China was in negotiations stages, gas price inflation fell significantly, reducing room for price upside in the deal.

The deal is of huge importance to Russia.

Russian economy is only weakly-dependent on gas prices, Government deficits are somewhat more closely linked to these. See more here: http://trueeconomics.blogspot.ie/2014/03/2232014-russian-capital-flight-and.html and in the slide below:

The reason for this is that Russian economy is not as dependent on exports (gas accounts for ca 60% of these on goods side):

And in the long run, there is spending and income channel feed through from gas prices (and exports) to domestic demand:

It is worth noting that China-delivery price of Russian gas can be lower than European delivery for two reasons:

1. Internally contained transit costs
2. Lower risk of disruptions (remember that Ukraine routinely pushed Russian gas shipments to the brink by either threatening to or actually syphoning gas designated for Western European deliveries for domestic use) and non-payment (settlements are likely to be in Chinese yuan, rather than in the USD and with this, there is no risk of non-payment, as in the case of Ukraine). See: http://trueeconomics.blogspot.ie/2014/04/1042014-game-of-chicken-ukraine-debts.html for more.

Also, gas for China will be coming from newer fields, which are located closer to the Chinese border and, although more expensive in production, are not competing with Western Europe-focused Western Siberian fields.

Finally, new pipeline holds promise bringing exploration and production further East from existent centres of production.

All across - this should be a very good deal for Russia and China. The core threat here is to the US exports of LNG to Asia-Pacific, where US producers are collecting huge margins, compared to European markets. But this threat is still some years (if not decades) off from becoming a significant pressure point.

20/5/2014: Irish Credit Supply to Non-Financial, Non-Property Sectors

We keep hearing about banks lending to enterprises and the recovery in the banking sector in general. And we keep watching credit supply in the economy shrinking and shrinking and shrinking. The reality, of course, is simple: our banking system continues to deleverage and alongside, our companies continue to deleverage. This means that legacy debts relating to property investments and development are being washed off the books. Which, of course, accounts for property-related credit. But…

Take a look at this chart, plotting credit advanced to Irish private sector enterprises.

The property deleveraging story is in solid orange. And not surprisingly, it is still heading down. With all the fabled foreign and domestic property buyers reportedly killing each other on their hunts for bricks and mortar assets in Ireland, there is less and less and less credit available for the sector. In part, some of this decline is now being replaced by foreign funding (lending and equity, including private equity). But the credit story is still the same: property related lending is down 6% y/y in Q4 2013 (latest for which we have data).

Deleveraging in financial sector is also there - the sector credit lines have shrunk 15% y/y in Q4 2013.

But what on earth is happening in the 'healthy' (allegedly) sectors of the economy - those ex-Property and ex-Financial Intermediation? Here, total credit is down 4% y/y in Q4 2013.

In fact, from Q2 2009 onward, Irish financial system registered not a single quarter of y/y increases in credit supply to non-financial and non-property enterprises in Ireland. That's right: credit did not go up even in a single quarter. Worse, between Q4 2011 and Q4 2013, average annual rate of decline in credit to real economy was -4.0% which is exactly the same as in Q4 2013. In other words, even in terms of growth rates, there is no improvement. 

20/5/2014: Q1 2014 Gold Demand Report

Q1 2014 Gold demand report is out today. Highlights are:

1. Jewellery demand grew 3% year-on-year to reach 571 tonnes, the largest Q1 volume since 2005, as consumers responded positively to lower average gold prices. Geographically, demand was wide-spread; however it was China that posted the largest volume increase, rising by 18 tonnes from Q1 2013.
2. Shifts in the components of investment cancel out: net investment demand little changed, down 2%. Q1 investment demand of 282 tonnes was just 6 tonnes below Q1 2013. Bar and coin demand was down 39% from last year's elevated levels, while outflows from ETFs slowed to a virtual halt compared with outflows of 177 tonnes in Q1 last year.
3. All segments of technology saw a 4% decline in the first quarter, resulting in overall demand for the sector of 99 tonnes. The fall was primarily driven by continuing substitution to cheaper alternatives as manufacturers remained under pressure to reduce costs.
4. First quarter demand from central banks once again topped the 100 tonnes level, reaching 122 tonnes, and marked the 13th consecutive quarter of net purchases. The desire to diversify holdings in an uncertain global environment continues to underpin this source of demand.
5. The supply of gold in Q1 2014 saw a marginal year-on-year increase of 1%. Increased mine production was offset by a fall in recycled gold coming onto the market, leading to a total supply figure of 1,048 tonnes.
6. Total demand was down at 1,074.5 tonnes in Q1 2014 compared to 1,077.2 tonnes in Q1 2013

Summary chart:

Report is here.

Compared to 5 year averages:

• Jewellery demand was up at 570.7 tonnes against 5 year average of 512.0 tonnes
• Technology demand was down at 99.0 tonnes against 5 year average of 108.3 tonnes
• Total Investment demand was down at 282.3 tonnes against 5 year average of 367.6 tonnes. Of this, Bar & Coin demand was down to 282.5 tonnes relative to 5 year average of 338.2 tonnes; ETFs and similar products demand was net -0.2 tonnes compared to 5 year average of +29.5 tonnes
• Central Banks net purchases demand was up at 122.4 tonnes against 5 year average of 72.7 tonnes
• Overall demand was up at 1,074.5 tonnes against 5 year average of 1,060.5 tonnes

Top 10 official reserves:

17/5/2014: Debt, Equity & Global Financial Assets Stocks

An amazing chart via McKinsey and BIS showing the distribution of financial assets by class and overall stocks of financial assets. These are covering the period through Q3 2013.

What we can learn from this?

1. Stock of financial assets might seem absurdly high compared to overall economic activity, but it is not that much out of line with longer term growth trends. Between 2000 and 2014 the world GDP is expected to grow from USD32,731.439 billion to USD76,776.008 billion, a rise of 135%. Over 2000-2013, stock of financial assets rose at least 124%.
2. However, in composition terms, the assets are geared toward debt and especially sovereign debt. Public Debt securities are up in volumes 243% - almost double the rate of economic growth. Financial institutions bonds are up 144% - faster than economic growth. Private non-financial sectors debt is up from USD43 trillion to USD 91 trillion - a rise of 112%. Total debt is up from USD73 trillion to USD178 trillion or 144% so within debt group of assets, public debt is off the charts in growth terms.

There is much deleveraging that took place in the global economy over the recent years. All of it was painful. But there is no way current levels of debt, globally, can be sustained. 

18/5/2014: Global Gambling: Ireland of Saints & Scholars

A chart summarising some interesting stats on global gambling addiction…

Ireland in a 'proud' seventh position... and just like our 'aspirational' brethren in Finland, heavily into online gambling - a form of a-social entertainment that is pure addiction...

17/5/2014: That costly alphabet soup behind the European Banking Union

Two main building blocks of the Single Resolution Mechanism for future banks bailouts in the EU involve Deposit Guarantee Scheme Directive (DGSD) and the Bank
Recovery and Resolution Directive (BRRD). The issue at hand is funding the future bailouts.


The EU Member States are required to establish two types of financing arrangements:

• BRRD sets up the Resolution Fund to cover bank failure resolution. This will be used after 8% of losses gets covered by the bail-in of depositors and some funders.
• DGS covers deposits up to EUR100,000 in the case of a bank failure. 

There are several issues with both funds. For example, DSG funds (national level) will have to run parallel with the EU-wide Eurozone Single Resolution Fund (until the DSG pillar is integrated at a much later date into EBU). This implies serious duplication of costs over time and creation of the 'temporary'  but long-term national bureaucracy / administration which will be hard to unwind later.

By 2016, EA18 euro area members will have national DSG running parallel to EU18-wide single resolution runs (SRM) which cannot be merged together absent (potentially) a treaty revision, not EA-18 EU members will have national DSG and national resolution fund, which can be merged together.

What is worse is that national contributions to DSG cannot count toward national contributions to the resolution fund (SRM or in the case of non-EA18, to national resolution funds). This means that total national banking system-funded contributions to both funds will be 0.8% of covered deposits for DSG, plus 1% for SRM = minimum of 1.8% of covered deposits. Ask yourselves the simple question: given that banking in majority of the EU states is oligopolistic with high (and increasing) concentrated market power, who will pay these costs? Why, of course the real sector - depositors and non-financial, non-government borrowers.

It is worth noting that the 1.0% contribution to the resolution fund will cover not just covered deposits, but actually is a function of liabilities. In other words, it will be much larger proportion of covered deposits than 1%.

That is a hefty cost of the EBU and this cost will be carried by the real economy, not by financialised one. The taxpayers might get off the hook (somewhat - see here: http://trueeconomics.blogspot.ie/2014/04/1742014-toothless-shark-eus-banking.html) but the taxpayers who are also customers of the banks will be hit upfront. And who wins? Bureaucrats and administrators who will get few thousands new jobs across the EU to manage duplicate funds, collections and accounts. The more things change… as Europeans usually say…

17/5/2014: Are Markets Punishing Russia?.. or the Emerging Markets?

An interesting analysis from the BBVA Research on capital flows to EMs… while much can be discussed, one thing is of interest from my point of view (not covered by the BBVA): Russian inflows.

We've heard about alleged markets punishment and investors flight from Russia. And there has been some for sure. Except, the theory that this flight is tied to naughty kremlin behaviour in Ukraine is a little… how shall we put it… a stretch may be?

Ok, let's look at how net capital flows look in the EMs: 

Emerging markets are some 14% below trend - big outflows starting with non-Ukraine Fed tapering:

So Asia is even worse off than the general EMs... And Asia is Ukraine-free and Fed-tied.

Yes, Russia is down… 24% below trend by estimates of the BBVA

And guess what: decline started in the same 'tapering-on' period and well before Ukraine and accelerated similarly to the rest of EMs. 

And worse… look at what happened in Brazil:

Brazil's 'troubles with Ukraine' started earlier on than rest of EMs, but accelerate with Fed tapering.

Heard of Indonesia? It seems also to be in a conflict with Ukraine:

So how about that thesis alleging that Russia is being punished for Ukraine crisis by those investors? 

17/5/2014: Long-term unemployment: Sticky & Alarming

Things are pretty bad on the long-term unemployment front in Ireland. I covered this earlier here: http://trueeconomics.blogspot.ie/2014/05/1552014-innovation-employment-growth.html and here: http://trueeconomics.blogspot.ie/2014/05/1552014-jobs-employment-lot-done-more.html

But another look shows some truly dire comparatives.

Take long-term unemployed as proportion of all unemployed - you get two insights:

1. The proportion is rising. In Q3 2013 it was 58.4% and in Q4 2013 it rose to 61.4%. That's right, more than 6 out of 10 unemployed have been jobless more than a year, continuously. We do not know those who have been jobless more than 6 months (the cut-off point beyond which some research starts showing long-term deterioration in skills and aptitude).
2. The proportion is sticky in the long run - it has been above 50% since Q3 2010 and above 56% since Q4 2010. Un-yielding. 

The second bit relates to the proportion of long-term recipients of LR supports - this too yields two conclusions:

1. It is rising as well: up from 45.4% in Q4 2013 to 45.8% in Q1 2014.
2. And it is on a rising trend over time.

But here's a damning thingy: all this long-term unemployment sustains our 'productivity' gains and competitiveness 'improvements': http://trueeconomics.blogspot.ie/2014/05/1652014-competitive-sports-of.html

17/5/2014: Central Bank Annual Report 2013: Not Much to Report, Much to Promote

This is an unedited version of my Sunday Times article from May 4, 2014.


This week, the Irish Central Bank published its annual report for 2013.

In the opening statement, Governor Patrick Honohan said: "The Bank’s key priorities included the ongoing repair of the banking system and achieving progress in the delivery of sustainable solutions for distressed borrowers. Significant progress was achieved on these fronts, though many tasks still remain to be completed."

This was not a great moment to stake such a claim.

In recent days, the state-controlled Ptsb, announced a substantial hike in variable rate charges on mortgages. Bank of Ireland, faced criticism for using a 'blunt force approach' with distressed borrowers.

Central Bank data, highlighted in the annual report, shows that in 2013 lending to non-financial corporations in Ireland posted its steepest year on year decline since the start of the crisis, down 6 percent. Credit to households fell at the second fastest annual rate, down 4.1 percent on 2012. Mortgages arrears, including the IBRC mortgages sold to the external investment funds, as percentage of all house loans outstanding, were virtually unchanged year on year at the end of 2013.

Reading through the Central Bank own financial accounts also reveals some significant insights into the inner workings of our financial system and its watchdog.

In the last three years, Irish Exchequer reliance on income from the Dame Street has gone up exponentially. In 2009-2013, the Central Bank paid EUR4.73 billion in total dividends to the State. Of this, 50 percent came from its operations in 2012-2013. This makes the CBI the largest net contributor to the State coffers of all public and semi-state organisations.

The bulk of the Central Bank earnings come from interest on assets it holds. Last year marked the second year of declines in this income. Back in 2010, the Central Bank collected EUR3.67 billion worth of interest. As the scope of the emergency lending to Irish banks fell, the interest income also declined, reaching EUR2.6 billion in 2012 and EUR2.02 billion in 2013.

Central Bank’s highest-paying assets today cover Irish Government Floating Rate Notes, NAMA bonds, and a Irish 2025 bond. All in, the money paid by the Government and NAMA to the Central Bank is being recycled back to the Exchequer at a hefty cost margin.

In a sign of continued improvement in the Irish banks funding situation, marginal refinancing operations and long-term refinancing operations (MROs and LTROs), representing lending to credit institutions from the Eurosystem fell to EUR39.1 billion in 2013, down from EUR70.9 billion in 2012. At their peak in 2010, these lines of credit amounted to EUR132 billion.

Central Bank’s staff-related expenses rose from EUR106.3mln in 2012 to over EUR121.4mln in 2013. These increases were down primarily to salaries, allowances and pensions, as staff numbers employed stayed relatively unchanged between 2011 and 2013. Per employee staff expenses are now up 15 percent on 2012 levels.

Other operating expenses were up from EUR57.5 million to EUR70.3 million. The largest hikes incurred were in Professional fees, which rose by a quarter to EUR27.1 million. Only in 2011, at the height of banks’ recapitalisation, did the Central Bank manage to spend more on external consultants. So far, the banking crisis has been a bonanza for the Central Bank advisers who were paid EUR98.3 million in fees since 2009.

In return for the rise in expenses, the Bank marginally expanded some of its enforcement and supervisory functions. There was a rise in prudential supervision activity, but a decline in authorisations and revocations of regulated entities. The number of investigations also fell, from 216 in 2012 to 184 in 2013. However, the Central Bank oversaw 1,004 regulatory actions taken in 2013, up on 2012, but down on 2011.

Overall, the Annual Report paints a picture of the Central Bank continuing to engage in active enforcement and supervision, amidst overall declining need for banking sector supports.