4/9/2014: ECB: Little Done. Loads More to Be Done Still...

In its latest move in attempting to combat the risk of deflation in the euro area, the ECB pushed the policy interest rate down to 0.05% from 0.15%. Here are some historical dynamics of the rates and comparative analysis of the ECB policy relative to other Central Banks:

Let's start from the historical chart:

The chart is showing the historical evolution of the rates in six advanced economies. At this stage, we have a statistical convergence between the US, Japanese and Euro area rates at the lower margin feasible.

It is worth noting that from January 1999 through September 2008, pre-crisis average for the Euro rates is 3.10 which is now 3.05 percentage points above the current rate. In the case of the US, current rates are 3.37 percentage points below the pre-crisis average. In the UK, historical pre-crisis average is 4.83% which means we are at 4.33 percentage points below the historical average.

The dynamics of deviations in the ECB rates from their historical average are shown below:

Statistically, mean reversion in rates is now well-overdue and accounting for likely overshooting we are looking at the mean reversion taking the rates above 3.25-3.5%. Total duration of periods of deviation from the mean in the last episodes (for rates both above and below the mean) is 85 months over 9 years and 11 months. Current deviation is already 70 months long and counting. Excluding the 1999 period, which is consistent with the period of early establishment of the euro policy, total length of combined deviations from the historical average is 78 months, just 8 months short of the current period duration.

The higher the hill in the above chart gets, and the deeper the blue line goes, the greater pain will be required to revert the rates to their historical mean. This pain is coming, whether we like it or not and its timing and extent will have nothing to do with the legacy debts in Ireland or with our capacity to service them. It will come on foot of the Big 4 euro states data.

Meanwhile, this will do preciously nothing for the euro area economy. Why? Because the problem in the euro area economy is not the rates on loans to banks or between banks, as illustrated by the chart below. The problem is that policy rates are not feeding through to the retail rates charged on real loans for real companies and households in the real economy:

As the above chart clearly shows, the banking rates track reasonably well the policy rate (blue line, showing 12 months euribor rate deviation from the ECB repo rate), but the real rates (retail rates charged on loans in excess of EUR1 million with 1-5 years maturity for euro area non-financial companies) are getting increasingly more expensive compared to the ECB repo rates (red line).

The latest cut in rates is not going to do anything to the above story. And the ECB, so far, has found no means for breaking the financial markets blockage that prevents the policy rate to feed through to the retail rates. Nor, incidentally, has the ECB discovered any means so far to break the cycle of fragmentation in the credit system - the situation where by credit rates for non-financial companies and households diverge between different countries of the euro area.

Two real and actual problems: not cured. One imaginary problem - of official policy not being absurdly accommodative enough - is now addressed. Little done. Loads to be done still... and the future interest rates hikes super gun is loaded, primed and the fuse lit already...

4/9/2014: The Bizarre World of World Economic Forum Rankings

Recent, the WEF released its new Global Competitiveness Indicators, showing some pretty bizarre changes in Ireland's performance across a number of metrics.

Here are the historical trends and the latest figures.

Overall, 2014-2015 GCI rank for Ireland shows and improvement from 28th place in 2013-2014 rankings to 25th place in this year's assessment. Expect to see this figure paraded in the official Ireland Inc's power point slides issued by numerous state agencies and departments in months to come. 

The problem is that 25th place is based on a diminished sample of 144 countries and 2013-2014 rank of 28th place is based on a larger sample of 148 economies. If the two samples are reconciled, Ireland's performance did not improve at all. As WEF points out, if the two samples contain economies present in both 2013-2014 and 2014-2015 surveys, Ireland's rank in 2013-2014 survey is 25th, dead on same as in 2014-2015. All the reforms, changes, improvements, turnarounds in competitiveness over the last twelve months amount to standing still in global indicators.

Take a look at the 'Ireland's neighbourhood' in rankings:

Save for Italy (49th rank), Portugal (36th rank) and Spain (35th rank) we are at the bottom of the euro area advanced economies rankings. And we face stiff competition from the likes of the usual suspects and unusual ones, like UAE, Taiwan, Qatar, Malaysia, Saudi Arabia - ahead of us, and China, Thailand, Puerto Rico, Indonesia - within 10 place of us. You might think 10 places is a safe distance, but UAE moved massive 7 places up in rankings within just 1 year. even France, hardly a poster-child for competitiveness (a mistaken, but commonly-held view) is ahead of Ireland.

Never mind competition, here are some of our performance pearls:

Chart above summarises changes in our rankings in 2014-2015 compared to 2007-2008 rankings in categories where we have direct control over our destiny. Take a walk through these with care and consideration.

Take for example Infrastructure. Here we have it: rank of 49th place in 2007-2008 is vastly improved to a rank of 27th place in 2014-2015. Scratch your heads: between 2007-2008 and 2014-2015 our capital investment collapsed, infrastructure investment collapsed, we built virtually no major infrastructure projects… and yet… our performance greatly improved. Applying this logic, tearing down few railway lines in 2015 might get us to rank even better in 2016.

In Health and Primary Education - the area of largest cuts, costs-reallocations and other 'austerity reforms' in recent years, our performance is getting better and better: from 16th place in 2007-2008 to 8th place in 2014-2015. How? I have no clue. Scandals at HSE are running at a steady level of historical highs, funding for new facilities and technologies and treatments is nowhere to be seen, doctors are being replaced at an increasing rate down to emigration, education system had virtually no significant improvements or new funding in ages. Still, rankings improve.

Higher Education and Training: improved from 21st rank in 2007-2008 to 17th in 2014-2015. Meanwhile, our best universities rankings have slipped and our other universities rankings have not shown any visible improvements.

Labour Market Efficiency, however, is basically unchanged on 2007-2008. And that is despite huge efforts expended by the Government to improve our labour markets competitiveness. All the Troika reforms and all the gains in unit labour costs... to stay in the same place...

Innovation factors are also basically flat on the past. Again, despite billions in investment between 2007 and 2014 on innovation and R&D, myriad of funding programmes, agencies reforms, etc, etc.

Chart above shows evolution of our overall rankings in history of the WEF report. Thing to note here is that just as with all other rankings, our performance has deteriorated from the pre-crisis period. But this deterioration is now being erased, rapidly, on foot of the above mentioned (and some other) 'improvements'. 

The trend will continue on into the future: bogus data/analysis will be reinforced by more real gains, such as moderation in our obscene ranking (130th in the world) in terms of Macroeconomic Stability which is bizarrely lagging improvements in our Financial Markets Sophistication.

The latter point above is yet another 'scratch thy head' moment for WEF rankings. Macro stability ranking worst performance was 134th in 2013-2014 and this improved just 4 places to 130th in 2014-2015. In contrast worst Financial Markets performance ranking was 115th in 2011-2012 and this has improved by a massive 54 points to 61st place in 2014-2015 rankings. Now, give it a thought:

1) Irish financial system performance was effectively underwritten by the state debt and ECB. 

2) Irish Exchequer performance improved significantly since 2011, but banking system remains clogged with bad debts and legacy issues. The Exchequer is beating the targets, the banks are still contracting credit and face flat/declining deposits.

3) Economy (macro side) returned to growth some time ago and with some hiccups it is performing vastly better than the banking system.

How on earth can (1) - (3) above add up to a more dramatic gain in Financial Markets assessment against Macroeconomic assessment?

All of the above puts some serious questions up against the WEF rankings. Not just for Ireland, but for the rest of the world too... Then again, it was in January 2007 in a publication accompanying WEF research that Oliver Wyman claimed that the Anglo was the best-performing bank in the world over the previous 5 years. We know the accuracy of that insight.

4/9/2014: Repaying Ahead of Schedule: Ireland & IMF Loans

Last week Portugal's Expresso published a big article on Irish plans to repay earlier the IMF loans. The link is here: http://fesete.pt/portal/docs/pdf/Revista_Imprensa_30_e_31_Agosto_2014.pdf (pages 37-38)

My view on the subject in full:

1-      The Irish hurry is politically engineered or they understand that the present low sovereign bond yields mood can be a short-term window of opportunity in the Euro area?

In my view, Irish Government interest in refinancing IMF loan is driven by both political and economic considerations. On political front, following heavy defeats in the European and Local elections, the ruling coalition needs to deliver new savings in Exchequer spending to allow for a reduction in austerity pressures in Budget 2015 and more crucially support increased giveaways in the Budgets in 2016 and 2017. Savings of few hundred millions of euros will help. And an ability to claim that the IMF loans have been repaid, even if only by borrowing elsewhere to fund these repayments can go well with the media and the voters tired of the Troika. On economic incentives side, the Government clearly is forwarding borrowing and re-profiling its bonds/debt maturity timings to minimise short-term pain of forthcoming repayments and to safeguard against the potential future increases in the rates and yields. In addition, there is a very apparent need to refinance the IMF loans as the interest charges on these is out of line with the current funding costs for the Government. It is worth noting here that the Irish Government is far from being homogeneous on the incentives side. For example, from Minister for Finance, Michael Noonan's statements, it is pretty clear that the incentives to refinance the IMF loans are predominantly economic and financial. On the other hand, for majority of the Labour Party ministers and a small number of the Fine Gael Cabinet Ministers, the incentives are more political.


2-      The move is also a way of reducing the “official sector” debt in the overall sovereign debt composition (higher than 50 per cent)?

The issue of the 'official sector' debt as opposed to the total public debt is less pressing for the Irish state. Larger share of the official sector debt in total debt composition provides short-term support for bonds prices, as higher official sector debt holdings imply lower private sector debt holdings in the present. However, in the future, the expectation in the markets is that the official sector debt will be refinanced via private markets, thus higher share of official sector debt today is a net negative for the future debt exposures. The result is that higher official share of debt is supporting lower current yields, but rises future yields, making the maturity curve steeper, ceteris paribus. In the current environment, Irish government is not significantly exposed to shorter-term debt markets, but it is exposed to longer termed debt roll-over demands that are consistent with political cycle. Reducing official exposures, therefore, can be supportive of the longer-term view of the debt issuance by the state. However, the issue is marginal to Irish policymakers and certainly secondary to the political and economic benefits the early repayment of the IMF loans brings.


3-      This initiative is useful to upgrade the sovereign debt sustainability?

In the short run, if successful, the initiative will provide improvement in the sovereign cash flows, but will cause the rebalancing of some private portfolios of Irish government debt. In the longer run, the direct effect of a successful refinancing of the IMF loans will most likely lead to little material change in the Government debt dynamics. The issue of the greater longer term concern is what the Irish Government is likely to do with any savings achieved through the debt restructuring. If the funds were to be used to fund earlier closing off of other official loans, there is likely to be a positive impact in terms of markets expectations on supply of Government bonds in the future and the direction of Irish fiscal reforms, both of which will support better risk assessments of the sovereign debt and Irish bonds. This is unlikely, however, due to the strong political momentum in favour of spending the new savings on reversing in part past savings achieved via public sector spending cuts and wages costs moderation. Such a move would likely be detrimental to Ireland's debt sustainability in the longer run. A third alternative is to deploy savings to reduce austerity pressures in the Budget 2015 across tax and spend areas. Tax reductions can be productive in stimulating sustainable growth and thus improving the fiscal position of the state in the longer run; spending cuts reductions will simply be consumed by remaining inefficiencies within the public sector.


4-      The Irish had some interesting political initiatives during the bail-out and post-bail-out period. First they change the annual promissory notes repayments into very long long debt (a kind of soft debt restructuring of 25 billion, 12 per cent of total public debt); then they decided for a “clean” exit opting out from the OMT constraints; and now they take the move to get out of IMF loans. In the framework of the Euro are peripheral countries this is an “innovation”?

The Irish government has taken a clearly distinct path from other euro area 'peripheral' states. However, this path is contingent on a number of relatively idiosyncratic features of the crisis in Ireland. Restructuring of the IBRC Promissory Notes was required due to political pressures of facing continued and clearly defined cost of the IBRC restructuring, but also by the significant pressures from the ECB to close off the ELA lines to IBRC, as well as Frankfurt's unhappiness with the structure of the Promissory Notes. In the end, this policy 'innovation' basically traded off short term savings for longer term costs and increased longer term uncertainty. It achieved substantial improvements in cash flow up front, but, depending on the schedule of bonds sales into the future, created little real savings over the life time of the loans. In the case of 'clean exit', Ireland benefited from the fact that a bulk of its deficits were incurred in extraordinary supports for the banks through 2011. In this sense, the Government had two years of relative stabilisation and decline in fiscal pressures before exiting the Troika programme. No other country in the euro 'periphery' had such deficit and debt dynamics. The move to refinance the IMF loans, however, is probably the first significant policy lead that Ireland deployed, as this move (if successful) will be paving the way for Spain, Portugal and Greece to follow in the future. Throughout the second stage of the euro area sovereign debt crisis (2012-present), the Irish Government deserves the credit for being recognised as being the one most actively seeking marginal improvements in the cash flow and rebalancing of debt costs and maturities within the euro area 'periphery'. But in part, this activism is also down to the fact that Ireland had a longer run in the debt crisis than any other 'peripheral' states and it deployed a plethora of various programmes, creating a policy map that is a patchwork of temporary and poorly structured programmes, like the IBRC Promissory Notes. Repairing these programmes offers Ireland a rather unique chance to get an uplift on some of its exposures.

3/9/2014: R.I.P. That Seismic Game-Changer...

Remember June 29, 2012? No? But you do remember this:

"Speaking as he left the European Council building, Mr Kenny described the new deal as a seismic shift in EU policy, and said it would allow Ireland to re-engineer its overall debt level, which would reduce the burden on Irish taxpayers. "What was deemed to be unachievable has now become a reality and that principle has been established, decided and agreed upon by the council and heads of government," he said."

Following in Mr Kenny's footsteps, then Tanaiste Eamon Gilmore : "described last night’s deal as a "major game changer" for Ireland that will ease its path back to financial markets. "When the details are worked out between July and the end of the year, it will have a real impact on our debt level and will greatly improve our ability to get back into the market and not to need a second bailout," he told RTE’s Morning Ireland."

And so the saga of the 'Deal' promised by the 'For Jobs, For Growth' EU 'Partners' to struggling Ireland is now no longer needed... http://mobile.bloomberg.com/news/2014-09-03/noonan-says-esm-deal-on-bank-debt-no-longer-as-attractive.html Some 796 days after the seismic game changer rolled into town, the idea is all but abandoned to focus instead on 'early repayment of the IMF loans' or in other words, another not-restructuring of government debts.

Yes, the latter will save us some significant dosh and should be pursued. No, abandoning the former means abandoning a hope of still saving more cash, as ESM valuations mechanism is neither determined nor precludes payment of current market consideration/valuation. And no, Minister Noonan still has no solution in sight to the problem of EUR24 billion worth of Government bonds sitting in the Central Bank that will continue burning an ever widening hole in our finances as we proceed to sell them.

The seismic game changers of Europe, the come and go and jobs and growth remain the objective of the economy thrown onto the rocks, in part, with the help of Brussels and Frankfurt...

3/9/2014: BRIC Services PMIs and Composite Activity: August 2014

Earlier this week I covered Manufacturing PMI for August for BRIC countries (http://trueeconomics.blogspot.ie/2014/09/192014-bric-manufacturing-pmis-august.html). Here is the summary of Services PMIs.

• Brazil Services PMI lipped to 49.2 in August down from 50.2 in July. The change is significant and indicates a serious drop in overall activity m/m. Brazil is the worst performer in the Services PMIs in the group. The country Services sectors showed exactly the opposite move to the Manufacturing sectors which posted a rise in PMIs from 49.1 in July to 50.2 in August. On a 3 month basis, 3 mo average through August 2014 in Services stood at 50.3, which is down on 50.7 average for the 3 months through May and unchanged in the 3mo average through August 2013.
• Russian Services PMI posted a rise from 49.7 in July to 50.3 in August. Summary of Russian services PMI and composite PMI is here: http://trueeconomics.blogspot.ie/2014/09/392014-russian-services-composite-pmis.html
• China Services PMI improved from 50.0 in July to 54.1 in August, the largest rise in the group and the strongest performance. This represents 106th consecutive month of readings at or above 50.0. Current 3mo average is at 52.4 which is ahead of the 3mo average through May 2014 (51.3) and the 3mo average through August 2013 (51.8). Services sector improvement was offset partially by deterioration in growth conditions in Manufacturing as noted in the first link above.
• India Services PMI slipped from 52.2 in July to 50.6 in August. However, down to stronger performance in June-July, 3mo average through August currently stands at 52.4 which is significantly better than the 3mo average through May 2014 (48.8) and the 3mo average through August 2013 (49.1). 

Chart to illustrate

Combining the Manufacturing and Services PMIs into a simple summary index:

And a summary table of changes:

Overall, BRIC economies posted rather weak performance in August that is consistent with a modest improvement in conditions on July. Only Manufacturing PMI for China shows substantial activity expansion.

3/9/104: Vladimir Putin's 7-points Plan for Ceasefire

Here's the official 'Putin Plan' for addressing the issue of ceasefire in Eastern Ukraine:
http://www.kremlin.ru/news/46554

My translation:

The plan was presented by the President of Russia "during a press conference/meeting with the reporters covering the results of his working visit to Mongolia".

"In order to end the bloodshed and to stabilise the situation in the South-East of Ukraine, I believe that the conflict parties must immediately agree and coordinate the following actions:

1. Stop active offensive operations of the armed forces, armed militia groups from the south-east of Ukraine in direction of Donetsk and Luhansk.

2. Remove the armed units of the Ukrainian security forces to a distance that precludes the possibility of their firing artillery and using multiple rocket launchers against civilian areas.

3. Provide full and objective implementation of international enforcement of the parties compliance with the conditions of cease-fire and monitoring of the situation in the created safety zone.

4. Exclude the use of military aircraft against civilians and settlements in the conflict zone.

5. Organise exchange of the prisoners based on the formula "all for all" without any preconditions.

6. Open humanitarian corridors for the movement of refugees and the delivery of humanitarian supplies to the cities and other settlements of Donbass - Donetsk and Luhansk regions.

7. Facilitate sending to the affected Donbass region of repair crews to restore social and life-supporting infrastructure, to assist them in preparing for the winter."

A list which has been aired, in parts and bits, before.

Key stumbling block here is what will the militias have to do. It is crucial to note that the plan does not call for a symmetric withdrawal of forces. There is a symmetric ceasefire, not a unilateral one, but no symmetric withdrawal of armed units. The separatists are, therefore, allowed under the plan to hold their current positions, but will have to uphold the ceasefire. The above does not state their artillery and troops will have to be withdrawn too. This is one of major weaknesses in the plan - intentional or not.

But symmetric withdrawal will also create some problems: if everyone is gone, who will provide security and ensure law-and-order in the areas? Also, if the separatists do withdraw, their forces will be heavily concentrated in a much smaller area than the Ukrainian army, making them a sitting duck for a snap air assault. While 'artillery-range' cushion will allow some protection for them, it is no barrier to longer range missile and aircraft.

There are other points that remain unclear or wanting.

Chief amongst them is what happens to the Russian and other 'volunteers'? Are they to be withdrawn? If so - when? Presumably this can take place after the international control & monitoring are set up. Preferably before. But none of this is in the plan.

Another point, the international enforcement presence will have to come from somewhere. UN would be the firs to come to mind. But UN won't be a natural active enforcer. For example, if the 'repairs crews' were to come in with intentions other than 'preparing infrastructure for winter' - how will the UN peacekeeping force secure the area if Ukrainian army can't secure it?

And so on... many other issues remain open in the plan... some points of the plan are a good starting positions for an immediate ceasefire, but the devil is in the details...

3/9/2014: Russian Services & Composite PMIs: August 2014

Having covered Markit/HSBC PMI for Manufacturing for Russia here: http://trueeconomics.blogspot.ie/2014/09/192014-russia-manufacturing-pmi-august.html lets now update data for Services PMI and Composite PMI.

Services side of the economy posted a month of very anaemic growth, registering 50.3 in August after the contraction of 49.7 in July. On the surface, August reading break 5 month streak of PMIs below 50.0, but in reality, 50.3 is weak. So weak, it is statistically indistinguishable from 50.0 as was 49.7 before it and 49.8 in June.

3mo average through August is now at 49.9 - making the above point on weakness. This stands above 3mo average through May which was 46.9. As a reminder, weaknesses in Russian services sectors began well before all the geopolitical mess in the Ukraine set on. Hence, 3mo average through August 2013 was 49.8. Services sectors did bounce back in 2013 in August as they did this time around, but the bounce back is weaker in 2014 than in 2013. The recovery accelerated somewhat through December 2013 and then slumped from January on. It remains to be seen if September heralds some revival in the sector fortunes.

Historical average for the series at 55.8, so we are way below where the average growth is supposed to be, which is, adjusting for structural issues and dynamics is probably around 52-53 mark.

With weaknesses in services and only marginally better manufacturing reading, Composite PMI still under performed in August. August Composite PMI fell slightly to 51.1 from 51.3 in July. Nonetheless, the indicator stayed above 50.0 line for the third consecutive month in a row. 3mo average through August is at 50.8, up on 3mo average through May which was at 47.5. As with Services, 3mo average currently is above 3mo average through same period of 2013 (50.0), but the increase y/y is relatively weak.

Again, the same pattern found in the Services sector trends repeats in the Composite indicator:

• Overall economic weaknesses in the Russian economy were manifesting themselves back in June 2013 through September 2013, with Composite PMI running only slightly ahead of 50.0 mark. 
• Acceleration in growth in October-December gave way to an outright contraction from January on. It is worth noting that the first sight of sanctions against Russia appears around mid-March 2014 by which time the economy has been posting Composite 2mo average PMI readings below 50.0 for 3 months. 
• Sanctions acceleration in May coincided with lowest point in Composite PMI reading, although the low was statistically indistinguishable from all other contractionary readings, save for January. 
• Since May sanctions (round 2) through August (covering also sanctions round 3 in July), Composite PMI managed to return to growth territory. 

The main points, summarised in the chart below are:

1. Russian economy is still running well below capacity
2. Return of PMIs to growth is fragile and weak - this is the first month of all three metrics reading above 50.0 since October 2013
3. We need at least 2 more months of readings above 50 for all three metrics to call a reversal of the downward trend into an upward, and
4. We need to see PMI reading around 52-53 fort Services and Manufacturing to spot any improvement in surplus capacity.

3/9/2014: Services PMI for Ireland: August 2014

Services PMI for Ireland are out today, so here is the update on combined PMIs. You can read my analysis of the Manufacturing PMIs here: http://trueeconomics.blogspot.ie/2014/09/192014-irish-manufacturing-pmi-august.html

Services sector in Ireland posted another month of high level growth in activity in August.

• August PMI for Services sectors (Markit and Investec) rose to 62.4 from 61.3 in July and up on 61.6 in August 2013. 
• This marks 6th consecutive month of readings above 60 (which signify rapid growth), and 25th consecutive month of readings above 50 (which signify growth).
• 3mo average through May 2014 was 61.4 and 3mo average through August is at 62.1, showing continued trend support above 60-61 mark.

Chart below illustrates both series - Manufacturing and Services:

The above shows that both Manufacturing and Services sectors are now running at the levels well above their post-crisis period average.

Chart below shows the growth estimates consistent with averages:

The above shows some good news: current trend is above already robust long-term growth estimate.

The chart below combines both PMIs and shows that the two sectors together now fully supporting growth in the economy - which is a good news and a significant gain on 2013 and 2012.

So overall, strong news from the PMIs.

2/9/2014: Mortgages in Arrears Down, but Risks Rise

Much has already been highlighted in the latest mortgages arrears data from Ireland for Q2 2014. The Central Bank's full press release is available here: http://www.centralbank.ie/press-area/press-releases/Pages/ResidentialMortgageArrearsandRepossessionsQ22014.aspx

But some things are worth repeating, and a couple of things remain largely unreported. Let's focus on these.

First and foremost, all figures reported talk predominantly about PDH (principal residences) mortgages as distinct from BTL (Buy-to-Let) mortgages. This is fine, but in my view, many of these are inter-connected: same families hold both, securities are inter-linked etc. So I will cover here combined numbers of PDH and BTL loans.

1) At the aggregate level, there were 165,674 mortgages in arrears of any duration at the end of Q2 2014, down 3.44% (-5,904 accounts) on previous quarter. This is the good news. Slightly less impressive news is that the balance of these mortgages in arrears stood at EUR33.629 billion, which represents a decline of only 1.93% q/q (down EUR662.2 million). So the mortgages that remain in arrears are now of larger size on average than before. This, of course, may mean that by sheer accident, easier to repair smaller mortgages are being restructured, but it might also mean that the banks are cherry picking easier mortgages. Which is fine, in the early stages of the workout, but will also mean that things are going to get progressively tougher to resolve in the future.

2) Robust declines in arrears were recorded in mortgages at the lower duration of arrears:

• Number of mortgages in arrears up to 90 days declined 8.1% to 43,582 (a drop of 3,842 accounts) and their outstanding volume declined in line with the number of accounts - down 8.62% (ERU675.6 million)
• Number of mortgages in arrears of 91-180 days has fallen also significantly, down 7.88% (-1,378 accounts) and their values also dropped broadly in line with accounts reduction, down 8.26% or EUR266.6 million.

3) Things are a bit tighter with harder to resolve cases of longer duration arrears:

• Total number of mortgages in arrears over 180 days was down by just 0.64% q/q in Q2 2014 (-684 accounts). Note that repossessions rose by 200, so this suggests that very little restructuring of harder arrears cases is taking place. 
• Of the above, number of mortgages in arrears 181-360 days was down significantly - q/q down 9.74% or 2,421 accounts but their volume decreased somewhat less, down 8.35% or EUR397.6 million.
• Mortgages with arrears 361-720 days out have declined 3.82% (-1,269 accounts) which is far lower than declines in shorter arrears mortgages, and the volume of mortgages in arrears in this category fell only 3.02% (down EUR208.2 million) q/q.
• But the real problem is the increase in mortgages in arrears over 720 days. Despite all the ongoing efforts by the banks to dress up extend-and-pretend solutions to arrears as sustainable and long term, the number of mortgages in most severe distress rose 6.19% q/q up 3,006 accounts and the volume of these mortgages rose 7.64% or EUR884.8 million.
• As the result of the aforementioned cherry-picking by the banks, mortgages in arrears 91 days as proportion of all mortgages in arrears rose to 73.7% in Q2 2014 from 72.4% in Q1 2014 and 70.1% in Q2 2013.

4) Meanwhile, repossessions rose 11.87% q/q to 1,885 which is an increase of 200 accounts - still a far cry from what should be happening in the market and yet another data point supporting the thesis that the banks are still engaged in deploying extend-and-pretend solutions in a hope of delaying repossession to allow the price to rise. This, of course, also indicates that the banks are still unwilling to face the music and deal with the most distressed borrowers by resolving residual arrears and shortfalls prior to forced or voluntary sales.

5) Top of the line: restructured mortgages numbers rose to 125,763 accounts in total an increase of 10,284 accounts or +8.81% q/q. Of these, 76,901 accounts were not in arrears at the end of Q2 2014 a rise of 13.96% q/q or 9,418 accounts. This is good news. However, 48,862 accounts that were restructured were in arrears an increase of 1.54% q/q or 3,714 accounts.

6) As you recall, I define my own category of mortgages: those that are at risk of default or defaulting, or in simple terms, "mortgages at risk". This category includes, for obvious reasons, mortgages that are in repossession, mortgages in arrears, but also mortgages that were restructured, but are not in arrears to-date (the reason for this category inclusion is that currently 39% of all mortgages that were restructured are in arrears, despite the fact that restructuring are still relatively fresh and more accurately reflect the underlying financial conditions of the households, on average over the last 2 years, 45% of all mortgages that were restructured continued to run or slipped again into the arrears). So the 'at risk' category is where potential future risks are likely to arise. In Q2 2014 264,460 mortgages accounts in Ireland (27% of total number of accounts) were 'at risk' - an increase of 1.54% q/q or 3,714 accounts. These accounts amounted to EUR46.06 billion of debt or 34% of the total mortgages debt outstanding. The value of debt in this groups of mortgages rose 0.78% q/q or by EUR357.8 million.

This is the underlying problem we will have to continue facing over time.

2/9/2014: Levada Poll: Decline in Russian Public Support for Intervention in Ukraine

Levada Centre published the latest analysis of public opinion in Russia in relation to the crisis in Ukraine. The details are here [in Russian]: http://www.levada.ru/29-08-2014/chislo-storonnikov-vtorzheniya-na-ukrainu-za-polgoda-sokratilos-vdvoe

Top results summarised:

• Numbers of Russians who are prepared to support Russian direct engagement in an open military conflict is now below the number of those who oppose an open intervention for the first time since accession of Crimea.
• 43% of respondents "definitely" or "likely" will not support an open military confrontation with Ukraine now stands against 41% who are ready to support such an intervention. In March 2014, 74% supported direct intervention and in May the number was 69%.
• In March 2014, 36% of respondents said they would "definitely" support direct military intervention in Ukraine. In the latest poll the number is down to 13%.
• Only 17% think that Russia is responsible for the crisis in Eastern Ukraine, while 75% believe that Moscow bears no responsibility.
• 32% of respondents believe that Russia is interfering in the Ukrainian affairs, while 25% believe that Russia does interfere but should do so. 31% believe that non-interference is a correct approach.
• Overall, 48% of respondents are against any interference, while 40% are in favour.
• In April 2014, 35% of those surveyed viewed Eastern Ukraine as a potential member of the Russian Federation. In August poll that number fell to 21%. However, the numbers supporting independence for Eastern Ukraine rose from 25% to 40%.
• In May, 49% of Russians approved of Russian support for pro-Russian separatists, in July this proportion peaked at 56% and has now fallen back to 50% in August. Most common appropriate support means voiced are diplomatic, economic and humanitarian aid.

The survey was conducted on 22-25 of August, based on representative sampling of 1,600 respondents from 46 regions. Statistical error does not exceed 3.4%.

1/9/2014: BRIC Manufacturing PMIs: August 2014

With Brazil PMIs for Manufacturing sector finally in, time to update chart for BRIC Manufacturing PMI (data by Markit):

The above shows several interesting things:

1. Overall BRICs performance (Manufacturing data so far) is a mixed bag: Brazil and China barely above 50.0, signalling very slow growth (if any, as these readings are not statistically distinguishable from 50.0). Meanwhile, Russia showing relatively weak, but growth, while India showing rather modest growth.
2. Brazil posted its first above 50.0 reading after four consecutive months of below 50 readings. But the 'recovery' rate is very weak. Brazil's 3mo average through August is 49.3, which is lower than 3mo average through May 2014 (49.8) and basically unchanged on 3mo average through August 2013 (49.4). All suggests that things are still 'recessionary' in the manufacturing sector in the country.
3. Russia, despite sanctions already in place, posted second fastest growth amongst the BRIC countries in August and third fastest in July. Current 3mo average is 50.4, which better than 3mo average through May 2014 (48.6) and slightly better than 3mo average through August 2013 (50.1). Last two months saw readings above 50.0, breaking the cycle of 8 months of consecutive readings below 50.0. If anything, manufacturing data suggests stronger performance in the wake of sanctions than prior to them. The rot in the sector set on in the case of Russia back in July 2013, well before any troubles in Ukraine started. First round of sanctions saw PMIs falling from 48.5 to 48.3 - minor impact. Second round of sanctions saw PMIs rise from 48.5 to 48.9, while third round of sanctions saw PMIs staying flat at 51.0. 
4. India continued the trend of growing PMIs in August, with 3mo average now at 52.3, up on 3mo average through May (51.6) and up on recessionary 3mo average of 49.6 back in 3 months period through August 2013. All in, this marks the tenth consecutive month of PMIs above 50 for India, with all but one of these months recording PMIs above 51.3.
5. China posted 5 consecutive months of PMIs reading below 50 in January-May 2014. This negative momentum was reversed in June-August with the current 3mo average standing at 50.9, 3mo average though May 2014 at 48.5 and 3mo average through August 2013 at 48.6.

One more point on Russian PMIs dynamics: the switch in trend from below 50 to above 50 took place in July and involved a PMI swing of 1.9 points - the sharpest recovery for all BRIC manufacturing sectors during the last round of recoveries. Despite this, we only have two months of data above 50.0 and it will require at least 2-3 months more to determine if the Russian manufacturing is moving back onto sustainable growth path or if the current improvements are temporary.

1/9/2014: Irish Manufacturing PMI: August 2014

Irish Manufacturing PMIs released by Markit and Investec today show very robust and accelerating growth in the sector in August. These are seasonally adjusted series, and given this is a generally slower month for activity, acceleration is more reflective of y/y trends than m/m. Nonetheless, the PMI hit 57.3 in August, up on already blistering 55.4 in July, marking the highest PMI reading since December 1999.

Per release: "…output and new orders each rose at sharper rates. This encouraged firms to up their rates of growth in input buying and employment. Meanwhile, input prices fell for the first time in over a year and firms lowered their output charges."

This marks fifteenth consecutive monthly rise in Irish Manufacturing PMIs.

New orders and export orders are up (allegedly, as we have no data given to us by the Markit/Investec), but part of the sharp rise was down to firms working through backlog of orders, so that forward backlog of orders fell. This can lead to moderation in growth in months ahead 9note: moderating growth is not the same as contraction, so there is no point of concern on that front).

Full release here: http://www.markiteconomics.com/Survey/PressRelease.mvc/8ce17d65c9e14a54911931a09076cfbb

Couple of charts:

The above shows that Manufacturing PMI in Ireland is strongly breaking out of the post-crisis period averages, pushing the average toward longer-term levels observed in pre-crisis period. Thus, by PMI metric, Irish Manufacturing should have already fully recovered from the effects of the crisis. Alas, of course, we can see from the latest QNHS data that this is not the case when it comes to employment levels in the sector: http://trueeconomics.blogspot.ie/2014/08/3182014-changes-in-employment-by-sector.html In fact, Industry (ex-Construction) employment has been shrinking, not growing.

Chart below shows the shorter-term trends, distinguishing three periods in recent history:

Despite very robust rates of growth, overall PMIs expansion in the second period of recovery (second shaded block) have been slower than in the first period of recovery. But the trend is for solid recovery, nonetheless.

So lots of good news overall, but we will need a confirmation of this from actual production data, exports data and employment data in months to come. Let's hope the PMIs are signalling more than subjective optimism.