6/1/2015: BRIC PMIs: Weaker Outrun in December

Markit released PMIs for all BRIC countries for both Services and Manufacturing covering December 2014. Here are the main results.

Starting with manufacturing:

• Brazil Manufacturing PMI posted its first 50+ reading after 3 months of consecutive sub-50 readings. December PMI came in at 50.2, which is basically signalling no statistically significant growth. On a quarterly basis, Q4 2014 average came in at 49.3 - a contraction, against 49.3 (yep, same) for Q3 2014 and 50.1 (almost no growth) in Q4 2013.
• Russian Manufacturing PMI for December came at disappointing 48.9, marking the first month of sub-50 readings since June 2014. Q4 2014 average is at 50.3 (basically near-zero growth) against Q3 2014 reading of 50.4 (very weak growth) and Q4 2013 reading of 50.0 (stagnation).
• China Manufacturing PMI came in at 49.6, the first monthly contraction that follows six consecutive months of at or above 50 readings. Q4 2014 average was 50.0 - meaning Chinese manufacturing posted flat growth across the quarter. Q3 2014 average was 50.7, same as Q4 2013. Overall, there are some very serious weaknesses in Chinese manufacturing sectors.
•  India Manufacturing PMI jumped from 53.3 in November to 54.5 in December, signalling acceleration in activity in the sector. Q4 2014 average is at 53.1 - up on 52.0 average for Q3 2014 and on 50.5 average for Q4 2013.

Now, Services:

• Brazil's Services PMI was even worse, set at 49.1 in December (a shallow contraction), continuing with sub-50 readings for the third month in a row. Q4 2014 average is at 48.6 (outright contraction), against Q3 2014 average of 50.5 (weak expansion) and 52.1 (stronger expansion) in Q4 2013.
• Russian Services PMI stood at 45.8 - sharp contraction - in December 2014, marking third consecutive month of sub-50 readings. The index averaged less than impressive 45.9 in Q4 2014, showing severe strains from collapse in domestic services, such as financial services. The index averaged 50.1 in Q3 2014 and 53.0 in Q4 2013.
• China Services PMI surprised to the upside, posting 53.4 reading in December, up on 53.0 in November. Q4 2014 average is at 53.1 - faster growth signal compared to Q3 2014 reading of 52.7 and Q4 2013 reading of 52.0.
• India Services PMI, lastly, posted a slight de-acceleration in growth, slipping from 52.6 in November to 51.1 in December. Q4 2014 reading is now at 51.2, which marks a slowdown in growth from 52.2 index reading in Q3 2014 and47.0 reading in Q4 2013.

And a table and a chart summarising changes in both sets of PMIs

Note the increase in weaker growth signals in December data compared to previous month, driven by poorer PMIs in Manufacturing and by unchanged performance outlook in Services. Also note, per chart above, Russia not only acts as a main downward driver for the BRIC overall PMI-related performance, but it shows strong decoupling in the direction of trend from January-March 2014 on, with the divergence now accelerating over the last three months.

6/1/2015: The Darker Side of Sell-Side Research?

My blog post for @LearnSignal blog on the topic of conflict of interest problem with sell-side markets research: http://blog.learnsignal.com/?p=138.

6/1/2015: Irish PMIs December 2014: Strong End to 2014 Activity

Markit-Investec Irish PMIs releases were finalised today with Services data made public few minutes ago. Here is my quick analysis:

• December 2014 Manufacturing PMI reading stood at 56.9, signaling a strong expansion. The index was at a 4-months high. 3mo average (Q4 average) stood at 56.7, which represents a rise on Q3 2014 average of 56.1. Q4 2014 marked the highest quarter in terms of Manufacturing PMI average. The series are now 4.5 points ahead of post-crisis average.
• December 2014 Services PMI reading stood at 62.6, which, as Markit commentary says is a tie with June 2014 reading for the highest mark since February 2007. It is worth noting that September 2014 reading of 62.5 was, of course, statistically indistinguishable from December and June readings. 3mo average through December (Q4 average) is at 61.9, which is only marginally below Q3 and Q2 averages of 62.1. Relative to longer-period average, December reading is 7.1 points ahead of post-crisis average for the series.

Chart to illustrate:

Predictably, given the levels of both indices, there is some moderation in the growth rate of the index (second derivative, effectively):

Which is not a discouraging sign, as historically, the indices do signal strong growth in both sectors:

And as the chart above shows, uplift in Manufacturing is very strong, relative to historical trends. All good signals so far, but do stay tuned for some longer-range analysis later.

Note: as usual, I do not cover composition of the indices, as Investec refuses to supply actual data on indices components.  Should you want to consult their sell-side analysis, feel free to do so at http://www.markiteconomics.com/Public/Page.mvc/PressReleases

6/1/2015: Glance Back: Grey and Black Swans of 2014

Portuguese blog by Jorge Nascimento Rodrigues quoting my comments on the topic of black swan and grey swan events of 2014: http://janelanaweb.com/novidades/2014-em-revista-cisnes-negros-cinzentos-6-surpresas/

My comment in English in full:

Black swan events are defined not only by their unpredictability ex ante the shock and the magnitude of the shock-related losses, but also by the fact that the rationale for their occurrence becomes fully explainable ex ante the event. In this sense, looking back at 2014, one can only imperfectly interpret key events as either black or grey swans.

One of the major black swan events of 2014 was the flaring up of a major geopolitical crisis involving Russia and the West. This pre-conditions for the emergence of this crisis were present throughout the late 2000s - early 2010s, but its rapid escalation from to the state of a proxy war fought by the two players over the Ukraine was not something we could have foreseen at the end of 2013.

On economic front, the decoupling of the US economy from global economic outlook and acceleration in the US growth was accurately reflected in a number of major forecasts published in the second half of 2013. As was the associated continued downtrend in growth in the euro area. But the simultaneous crisis across the major emerging economies, including Brazil and South Africa, as well as the onset of the outright recession in Russia and the Russian Ruble crisis of Q4 2014 were black swan events.

A good example of the grey swan event - an event with some predictability ex ante, but with unpredictable timing, was a massive decline in global oil prices. The decline was forecastable in 2013, given the rate of growth in potential supply from the non-OPEC countries, primarily Canada and the US. The rates of new wells drilling and the levels of average output and output dynamics from the existent wells should have told us well in advance that the decline in oil prices was coming. Ditto for the signals coming from the natural gas price divergence in North America against Europe and Asia Pacific. But the exact timing of this decline in oil prices was not easily predictable. In the end, the drop in oil prices in 2014 was driven by a combination of two forces. The supply dynamics - largely predictable, and the contraction in demand driven by the black swan shock to global (and in particular emerging markets) growth.

Two major themes that dominated the financial markets in 2014 - continued decline in sovereign debt yields and simultaneous divergence in prices between the US and European equity markets - was hardly a black swan, given the differences in monetary policies between ECB and the Fed. Nonetheless, to some extent both themes were shaped also by the global growth divergence, and as such, both constitute a sort of a grey swan event.

Last, but not least, the flaring up of the euro area peripheral crisis, starting with Q4 2014 political risk flaring up in Greece, was neither a black swan nor a grey swan, and instead constitutes an empirical regularity of long term instability in the euro area periphery. This instability (both political and economic) is driven by the legacy of the debt crisis and the fallout from the policies used to address it. Nothing, absolutely nothing, has been resolved within the euro area when it comes to addressing debt overhangs present in a number of economies. Nothing has been done to address the endemic lack of structural growth drivers in the majority of the peripheral economies. If anything, the structural growth crisis contagion has now firmly spread to the core economies, such as France and Finland, and is impacting even Germany. Despite lots of sabre-rattling, the ECB remains in a passive policy mode, with the central bank balancesheet stubbornly stuck in the post-crisis lows and liquidity fully captured within a fragmented banking sector.

5/1/2015: 2015 Outlook: Ireland

My overview of 2014 and outlook for 2015 for the Irish economy, via @sheehymanning : http://issuu.com/manning-financial.ie/docs/mf_christmas_newsletter_web

5/1/2015: The Value of Better Teachers

Hanushek, Eric A. and Piopiunik, Marc and Wiederhold, Simon, paper, "The Value of Smarter Teachers: International Evidence on Teacher Cognitive Skills and Student Performance" (December 2014, NBER Working Paper No. w20727: http://ssrn.com/abstract=2535179) looks at the differences in teacher quality and the impact of these differences on students' outcomes.

Per authors, "difference in teacher quality are commonly cited as a key determinant of the huge international student performance gaps." The authors "use unique international assessment data to investigate the role of teacher cognitive skills as one main dimension of teacher quality in explaining student outcomes. Our main identification strategy exploits exogenous variation in teacher cognitive skills attributable to international differences in relative wages of nonteacher public sector employees." The study also controls for parental inputs and other factors.

"Using student-level test score data, we find that teacher cognitive skills are an important determinant of international differences in student performance. Results are supported by fixed-effects estimation that uses within-country between-subject variation in teacher skills."

First table below shows basic estimation results highlighting the positive effects of teachers skills (in maths and reading) and parental skills on outcomes (in mathematics and zero effect in reading).

Second table above shows sample statistics. An interesting comparative in terms of Irish teachers' skills being very much average and ranked below average in the group of countries.

Third table below shows more advanced econometric controls for estimation, showing qualitatively similar results as above

And finally, chart below showing Ireland's relative position, compared to other countries in terms of the relationship between teacher skills and students' outcomes:

The above clearly shows below average link between teacher skills and student outcomes for Ireland (which are sub-standard relative to the average) in maths and slightly above average link between teacher skills and student outcomes in literacy (which are above average in terms of outcomes, but near average in terms of the teachers' skills effects).

The key, from my point of view, is that the paper shows a clear link between measurable metrics of teacher quality and measurable outcomes for students, while controlling for a number of other factors. This supports my view that pay-for-performance can and should be used to incentivise, support and promote better teachers, and that such system of compensation can be of benefit to our students.

Our education system pursuit of homogeneity and collective bargaining-set pay scales is outdated, outmoded and inefficient from social and economic point of view. Our teachers and students deserve better. Reforming education system should not be about reducing average wages and earnings, but realigning rewards with effort and outcomes.

5/1/2015: IMF on Debt Relief for Greece: Repeating the Repeats

Much of talk nowadays from the European leaders on Greek debt situation and the link to political crisis in the country. Some conversations are about lack of potential contagion from Grexit, other conversations are about the right of the Greeks to decide on their next Government, whilst all conversations contain references to the new Government having to abide by the previous commitments. Which is fine. Except, what about the European partners commitments? Specifically one commitment - relating to further debt relief for the country?

Here is 2013 IMF assessment of the Greek situation (emphasis in italics is mine):

"47. The program continues to satisfy the substantive criteria for exceptional access but with little to no margin. Delays in the implementation of structural reforms raise concerns about the capacity of the authorities to implement the program in a difficult political environment. …The continued commitment of euro area member states to support Greece, including by providing additional official financing to fill future financing gaps and through further debt relief as necessary, is an essential part of meeting the criteria."

And then:

"48. …The program is fully financed through July 2014, but a projected financing gap will open up in August 2014. Thus, under staff’s current projections, additional financing will need to be identified by the time of the fifth review, to keep the program fully financed on a 12-month forward basis. The Eurogroup has initiated discussions on how to eliminate the projected financing gaps. In this regard, the Eurogroup’s commitment in February and November 2012 to provide adequate support to Greece during the life of the program and beyond, provided that Greece fully complies with the program, is particularly important."

For some more on debt relief:

"55. As noted in the third review staff report, debt sustainability concerns continue to remain a risk. …The commitment of Greece’s European partners to provide debt relief as needed to keep debt on the programmed path remains, therefore, a critical part of the program. But the programmed path entails still very high debt well into the next decade, leaving Greece accident prone for an extended period. Should debt sustainability concerns prove to be weighing on investor sentiments even with the framework for debt relief now in place, European partners should consider providing relief that would entail a faster reduction in debt than currently programmed."

And

"56. …The program remains subject to numerous risks, mainly from the worsening of the macro outlook combined with a further deterioration in banking sector assets (feeding back to the real economy), difficulties with the implementation of ambitious fiscal policy and administrative changes, and—above all—failure once again to ensure a reinvigoration of structural reforms in the face of strong resistance from vested interests. Absent a critical mass of structural reforms that would transform the investment climate, the growth outlook—and, therefore, crucially the assumptions regarding financing needs for the rest of the program period and the debt path—would not materialize. Externally, closing financing gaps and delivering on the commitment to reduce debt will be a test of European support."

And in Box 4, Criterion 2:
" …In light of the commitments from euro area member states to provide additional debt relief as necessary, the baseline debt trajectory is sustainable in the medium-term but subject to significant risks."

Link to the above: http://www.imf.org/external/pubs/ft/scr/2013/cr13241.pdf


But there are more statements from the IMF on the issue of debt relief for Greece.

Take for example Transcript of a Press Briefing by William Murray, Deputy Spokesman, International Monetary Fund, from September 11, 2014 (http://www.imf.org/external/np/tr/2014/tr091114.htm):

"QUESTIONER: You told us many times from this podium that the issue of the Greek debt will be discussed at the sixth review. As I understand this, it's going to begin at the end of the month. The Euro Group said on Monday that the debate will begin after the sixth review. What we want to hear is that are the discussions about the financing of the Greek program and about the debt, still proceeding on an orderly way as you told us before many times? And what is your plan or your strategy for the Greek debt? Is there an option of those talks between you and the Europeans? Are the Europeans onboard to discuss this big problem for Greece?

MR. MURRAY: ...I do want to remind you and others what we have said all along. There is an agreed framework in place for ensuring debt sustainability with Greece's European partners agreeing to provide any additional debt relief as needed to help bring Greece's debt down to 124 percent of GDP by 2020. And to substantially below 110 percent of GDP by 2022 as long as Greece continues to deliver on its program commitments."

Now, IMF estimates debt/GDP ratio for Greece to be at 170% of GDP. Which means that over the next 5 years, the programme will have to deliver debt.GDP ratio reduction of a massive 50 percentage points. How on earth can this be achieved without debt relief is anyone's guess.

And more: Interview by Greece’s newspaper Ethnos with IMF Mission Chief for Greece, Poul Thomsen, published in Ethnos, June 15, 2014 (http://www.imf.org/external/np/vc/2014/061514.htm):

"QUESTION: You talk constantly about the commitment of Europeans regarding the financing needs of Greece and Greek debt relief. If Europeans do not show the determination needed or the courage to take bold decisions, like last time, what is the IMF planning to do?

ANSWER: We are confident that the European partners will deliver on their commitments. Do you believe that Greece's debt is now sustainable or do you believe that the situation needs new and drastic interventions? Are European commitments to contribute to debt relief enough for the IMF? What could the potential tools for debt relief be? The agreed framework is credible, provided that Greece and its European partners deliver on their promises. For Greece, this means continuing to advance reforms and achieving and maintaining a fiscal primary surplus of 4.5 percent of GDP. For the European partners, this means providing additional debt relief, if required, to keep debt on the programmed path. Thus, if adhered to, the framework will make the debt sustainable."

So 4.5% primary surplus over 5 years - even if achieved, will deliver somewhere in the neighbourhood of 1/2 of the required debt adjustment. The rest, presumably, will have to be achieved via economic growth, which will have to be running, on average, at 4% per annum to provide for the adjustment planned. And, thus, do tell me if the above any realistic, let alone probabilistically plausible.

In its 5th (most recent) assessment of the Greek situation, IMF reiterated (paragraph 49) that "The continued commitment of euro area member states to support Greece, including by providing additional official financing to fill future financing and through further debt relief as necessary, is an essential part of meeting the criteria" for debt sustainability. (see http://www.imf.org/external/pubs/ft/scr/2014/cr14151.pdf)

And it also carries Greek authorities expectation of the European funders agreement to further debt relief: "The program is fully financed through the next twelve months. Firm commitments are also in place thereafter from our euro area partners to provide adequate support during the program period and beyond, provided that we comply fully with the requirements and objectives of the program. In this regard, we remain on track to receive the first phase of conditional debt relief from our European partners, as described in the Eurogroup statements of November 27 and December 13, 2012." (page 71)

The same was stated in May 2014 Letter of Intent, Memorandum of Economic and Financial Policies, and Technical Memorandum of Understanding from the Greek authorities (see: http://www.imf.org/external/np/loi/2014/grc/051414.pdf). On foot of the IMF press conference statement on same (see: http://www.imf.org/external/np/tr/2014/tr050814.htm).

And so on, to no end and… no closure from the European partners…

4/1/2015: Eurasian Economic Union: Extra "E" & Less of "U"

In other 'Russia et al' news, Eurasian Economic Union came into force this week. This includes original founders (2010): Russia, Belarus and Kazakhstan, plus Armenia which joined in October 2014. In May, Kyrgyzstan is expected to join, having signed formal agreement last month.

Here's a summary of the EEU economic position, based on IMF data and forecasts.

The EEU objective is to increase economic integration and coordination within the sub-set of CIS states. Like the EU, it also sets a target of achieving integrated energy and capital markets.

In 2012, the EEU founding states agreed to implement free mobility of labour and capital, as well as free movement of goods and services. While there were transitionary periods set, integration to-date has been relatively limited and in recent months it came under increasing pressure, primarily driven by Belarus, but also, to a lesser extent, by tougher-talking Kazakhstan.

Ruble crisis certainly not making things easier. In recent weeks, there have been renewed border inspections between Russia and Belarus, and the latter demanded that trade with Russia be settled in foreign currency, not Ruble.

4/1/2015: Russian Economy Update

As I noted earlier, Russian economy posted an estimated decline in real GDP of 0.5% in November for the first time since 2009, while Russian inflation accelerated to 11.4% y/y in December, up from 9.1% in November. Latest guesses for economic growth in 2015: -4.0% at average crude prices of USD60 bbl via Finance Minister, Siluanov. Previous estimate by CBR consistent with this oil price level was 4.5-4.7% contraction.

To reduce inflationary pressures and to alleviate 'precautionary demand' (stockpiling) of some core goods, the Government is considering imposing a freeze on some food prices, according to Andrei Tsiganov, deputy head of the Federal Anti-Monopoly Service.

Still, according to CBR First Deputy Governor Ksenia Yudaeva, long term inflation target remains in place at 4% by the end of 2017. Good luck to that…

Largest driver for inflation was mid-December Ruble crisis (December 16-17). While Ruble posted some recovery in subsequent days, it came at a hefty price tag for the Russian foreign exchange reserves and Ruble resumed slide last week as CBR refrained from intervening in the markets from December 22nd.

Key driver for the upside of the Ruble has been, in addition to aggressive interventions by the CBR, the decision on December 17th to mandate five largest Russian state-owned enterprises: Gazprom, Rosneft, Alrosa, Zarubezhneft, and Kristall to reduce their foreign exchange holdings to the levels of October 2014. The deadline for this is March 2015. The companies will report their forex levels on a weekly basis. Behind the scenes, President Putin started discussions with larger private enterprises to also reduce their forex deposits.

Talking about deposits, to reduce pressure on retail banks, Duma passed the legislation to raise deposit insurance coverage from RUB700,000 to RUB1.4 million on December 19th. Russian Finance Ministry supported the bill, having previously resisted smaller increase. On corporate funding side, CBR announced, on December 23rd, new forex credit lines of 28-days and 365-days basis.

4/1/2015: "Betting on Ukraine" - Project Syndicate

I have been trying to reduce my commentary on Ukraine to a minimum for a number of reasons, including the viciousness of the 'Maidan lobby' and the fact that Ukraine is not a part of my specialisation.

However, occasionally, I do come across good and interesting commentary on the subject. Here is one example: http://www.project-syndicate.org/commentary/european-union-ukraine-reform-by-andres-velasco-2014-12.

To add to the above: the USD15 billion additional funding required, as reported to be estimated by the IMF, will also not be sufficient. Ukraine will require double that to address investment gap. USD15 billion estimate only covers the short-term fiscal gap.

Note: I called from the very start of the crisis for a Marshall Plan for the Ukraine, and suggested that for it to be more effective it should include Russian participation in funding and economic engagement. Funding Ukraine via standard IMF loans (shorter maturity instruments designed to address immediate liquidity crises) is simply useless. The country needs decade-long reforms and these reforms will have to be accompanied by investment and growth for them to be acceptable politically and socially. Such funding can only be supplied by a structured long-term lending programme. One additional caveat to this is that funding sources must be distinguished from funding administration. Given extreme politicisation of Ukrainian situation, neither Russia, nor the EU or the US can be left to administer actual funding programme. Hence, the task should be given to an World Bank or IMF-run administration mechanism that includes direct presence at the Board level of funders.

4/1/2015: Greek Crisis 4.0: Politics 1 : Reality 0

With hundreds of billions stuffed into various alphabet soup funds and programmes, the EU now thinks that Greece has been isolated, walled-in, that contagion from the volatile South to the sleepy North is no more (http://www.reuters.com/article/2015/01/03/us-eurozone-greece-germany-idUSKBN0KC0HZ20150103). Backing these beliefs, the EU and core European states have gone on the offensive defensive when it comes to Greek latest iteration of the political mess.

Yet, for all the 'measures' developed - from European Banking Union, to 'Genuine' Monetary Union, to EFSF, EFSM, ESM and ECB's OMT, LTROs, TLTROs, ABS, etc etc - the EU still lacks any clarity on what can be done to either facilitate or force exit of a member state from the EMU.

The state of the art analysis of the dilemma still remains December 2009 ECB Working Paper on the subject, available here: http://www.ecb.europa.eu/pub/pdf/scplps/ecblwp10.pdf which is, frankly put, a fine mess. Key conclusion, however, is that "a Member State’s exit from EMU, without a parallel withdrawal from the EU, would be legally inconceivable; and that, while perhaps feasible through indirect means, a Member State’s expulsion from the EU or EMU, would be legally next to impossible."

So much for all the reforms, then - lack of clarity on member states' ability to exit the euro, whilst lots of clarity on measures compelling and incentivising a member state to submit to the euro area demand (e.g. bail-ins, access to Central Bank funding etc) - all the evidence indicates that the entire objective of 2009-2014 reforms of the common currency space has been singular: an attempt to simply lock-in member states' into the euro system even further. Disregarding any monetary or fiscal or financial or economic or social realities on the ground.

Which brings us back to the starting point: at 175% debt/GDP ratio, Greece cannot remain within the euro area (for domestic and international financial, economic and social reasons). Yet, it cannot exit the euro area (for domestic and international political reasons). Politics 1 : Reality 0, again.

4/1/2015: Homeownership, House Prices and Entrepreneurship

Two papers on related topics, the link between enterprise formation and homeownership/mortgages. In the past, I wrote quite a bit about various studies covering these, especially within the context of negative equity impact of reducing entrepreneurship and funding for start ups.

In the first paper, Bracke, Philippe and Hilber, Christian A. L. and Silva, Olmo, "study the link between homeownership, mortgage debt, and entrepreneurship using a model of occupational choice and housing tenure where homeowners commit to mortgage payments."

The paper, titled "Homeownership and Entrepreneurship: The Role of Mortgage Debt and Commitment" (CESifo Working Paper Series No. 5048: http://ssrn.com/abstract=2519463) finds that, from theoretical model perspective, "as long as mortgage rates exceed the rate of interest on liquid wealth [short-term bonds, deposits etc - and this usually is the case in all markets]:

1. mortgage debt, by amplifying risk aversion, diminishes the likelihood that homeowners start a business; 
2. the negative relation between mortgage debt and entrepreneurship is more pronounced when income volatility is higher; and
3. the relation between housing wealth and entrepreneurship is ambiguously signed because of competing portfolio and hedging considerations. 

Empirical analysis by the authors "confirm these predictions. A one standard deviation increase in leverage makes a homeowner 10-12 percent less likely to become an entrepreneur."

So back to negative equity. Negative equity is significantly increasing leverage taken on by the borrower. For example: original mortgage with LTV of 75% set against property price decline of 10% generates leverage increase of 8.3 percentage points. In Irish case, same mortgage (in Dublin case) brought back to current valuations of the property from the peak prices pre-crisis implies a leverage increase of, roughly, 50 percentage points, which is, roughly an increase of 12 standard deviations.


The second study is by Jensen, Thais Laerkholm and Leth‐Petersen, Søren and Nanda, Ramana, titled "Housing Collateral, Credit Constraints and Entrepreneurship - Evidence from a Mortgage Reform" (CEPR Discussion Paper No. DP10260: http://ssrn.com/abstract=2529930). The paper looks at "how a mortgage reform that exogenously increased access to credit had an impact on entrepreneurship, using individual-level micro data from Denmark."

The authors find that "a $30,000 increase in credit availability led to a 12 basis point increase in entrepreneurship, equivalent to a 4% increase in the number of entrepreneurs. New entrants were more likely to start businesses in sectors where they had no prior experience, and were more likely to fail than those who did not benefit from the reform."

What does this mean? "Our results provide evidence that credit constraints do affect entrepreneurship, but that the overall magnitudes are small. Moreover, the marginal individuals selecting into entrepreneurship when constraints are relaxed may well be starting businesses that are of lower quality than the average existing businesses, leading to an increase in churning entry that does not translate into a sustained increase in the overall level of entrepreneurship."

So the study basically shows that mortgage credit constraints in Denmark are not highly important in determining the rate of successful entrepreneurship. But the study covers only intensive margin constraints - in other words it covers credit availability increases over and above normal operating credit markets. This does not help our understanding of what happens in the markets where credit constraints are severe.