2/2/15: Russian External Debt: Falling & So Far Sustainable

BOFIT published an update on Russian external debt as of the end of December 2014. The update shows the extent of debt deleveraging forced onto Russian banks and companies by the sanctions.

In H2 2014, repayments of external debt accelerated.

Banks cut their external debt by USD43 billion to USD171 billion over the year, with much of the reduction coming on foot of two factors: repayment of maturing debt and ruble devaluations. Ruble devaluations - yes, the ones that supposed to topple Kremlin regime - actually contribute to reducing Russian external debt. Some 15% of banks' external debts are denominated in Rubles.

Corproate external debt fell by USD60 billion to USD376 billion, with Ruble devaluation accounting for the largest share of debt decline, as about 25% of all external corporate debt is denominated in Rubles.

So do the maths: Ruble devaluations accounted for some USD16 billion drop in banks debts, and some USD54 billion in corporate debt in 2014 (rough figures as these ignore maturity of debt composition and timing).

Additional point, raised on a number of occasions on this blog, is that about 1/3 of corporate debt consists of debt cross-held within corporate groups (loans from foreign-registered parent companies to their subsidiaries and vice versa).

All in, end-2014 external debt of Russian Government, banks and corporates stood at USD548 billion, or just below 30% of GDP - a number that, under normal circumstances would make Russian economy one of the least indebted economies in the world. Accounting for cross-firm holdings of debt, actual Russian external debt is around USD420 billion, or closer to 23% of GDP.


CBR latest data (October 2014) puts debt maturity schedule at USD108 billion in principal and USD20 billion in interest over 2015 for banks and corporates alone. Of this, USD37 billion in principal is due from the banks, and USD71 billion due from the corporates. Taking into the account corporates cross-holdings of debt within the enterprise groups, corporate external debt maturing in 2015 will amount to around USD48 billion. Against this, short-term banks' and corporate deposits in foreign currency stand at around USD120 billion (figures from October 2014).

In other words, Russian banks and companies have sufficient cover to offset maturing liabilities in 2015, once we take into the account the large share of external debts that are cross-held by enterprise groups (these debts can be easily rolled over). Of course, the composition of deposits holdings is not identical to composition of liabilities, so this is an aggregate case, with some enterprises and banks likely to face the need for borrowing from the CBR / State to cover this year's liabilities.

BOFIT chart summarising:

2/2/15: Irish Manufacturing PMI: January 2015

Markit/Investec Irish Manufacturing PMI is out for January, posting 55.1, down on 56.9 in December and the lowest reading in any month since May 2014. Still, 55.1 is a strong performance.

3mo MA is now at 56.1 which is slightly worse than 56.5 3mo reading through October 2014, but is ahead of 55.7 average for 12 months through January 2015.

The growth rate is slowing down, but the activity remains robust:

2/2/15: Russian Manufacturing PMI slips in January

Russian Manufacturing PMI (Markit and HSBC) for January came in at 47.6, below 50.0 (statistically significant sub-50 reading), down from 48.9 in December. This is the second consecutive month of below 50 readings.

3mo MA through January is at 49.4, which is well down on 3mo MA through October 2014 which stands at 50.6, but ahead of 3mo MA through January 2014 which was 47.6.

The trend remains negative and has been reinforced in January.

1/2/15: Oh, those largely repaired Irish banks...

What do foreign 'experts' like BofE Mark Carney forget to tell you when they say that Ireland's banking system has been [largely] repaired?

Oh a lot. But here are just two most important things:

Both, in level terms and in growth terms, Irish banks remain zombified. 'Repaired' into continuously shrinking credit supply and stagnant household deposits base, the banks have been flatlining ever since the beginning of the crisis. In the last 6 consecutive quarters, household deposits posted negative rates of growth - a run of 'improvement' that is twice longer than the 'recovery period' of Q3 2012 - Q1 2013 when the deposits rose (albeit barely perceptibly).  Meanwhile, credit continues to shrink in the system with not a single quarter of positive growth (y/y) since Q4 2009. In four quarters through Q3 2014, credit for house purchases shrunk at just around 3.05% on average - the steepest rate of decline since the start of the crisis.

"Yep, [largely] repaired, Mr. Carney", said undertaker firming up the dirt on top of the grave...

1/2/15: World Trade Growth:Now a Scariest Chart Candidate

The scary chart of the month: post-Great Recession, World Trade volumes are growing at the slowest average pace in 35 years (even if we are to 1) exclude recession effects, and 2) accept IMF's rosy projection for 2015 and ignore latest Baltic Dry Index tumbling):

30/1/15: Timeline of Russian Credit Ratings

A neat summary of Russian sovereign ratings changes over time via RBC.ru:

Click on image to enlarge

Source: http://top.rbc.ru/economics/26/01/2015/54c6832e9a7947485b5dc04e#[lenta_body]-[news

29/1/15: Where the Models Are Wanting: Banking Sector & Modern Investment Theory

My new post for Learn Signal blog covering the shortcomings of some core equity valuation models when it comes to banking sector stocks analysis is now available here: http://blog.learnsignal.com/?p=152.

Tune in next week to read the second part, covering networks impact on core valuation models validity.

27/1/15: Greek Debt: Non-Crisis Porkies Flying Around

There is an interesting sense of dramatic contradictions emerging when one considers on the one hand the outcome of the Greek elections, and on the other hand the statements from some EU finance ministers (for example see this: http://www.bloomberg.com/news/2015-01-27/schaeuble-says-greece-needs-no-debt-cut-due-to-no-interest-phase.html). The basic contradiction is that one set of agents - the new Greek government and the Greek electorate - seem to be insisting on the urgency of a debt writedowns, while the other set of agents - majority of the European finance heads - seem to be insisting on the non-urgency of even discussing such.

What's going on?

Here is a neat summary of official (Government) debt redemptions coming up, by the holder of debt (source: @Schuldensuehner):

This clearly, as in daylight clear, shows 2015 as being a massive peak year for redemptions.

Note to the above: GLF debt reference covers GDP-linked bonds - see https://www.diw.de/documents/publikationen/73/diw_01.c.488644.de/diw_econ_bull_2014-09-5.pdf.

Alternative way of looking at the burden of debt is to compare debt dynamics and debt funding costs dynamics. Here these are for Greece, based on IMF data:

Take a look at the above blue line: in effect, this measures the cost of carrying Government debt. This cost did improve, significantly in 2012 and 2013, but has been once again rising in 2014. It is projected to continue to rise into 2019. So Greece can run all the primary surpluses the Troika can demand, the cost of servicing legacy debts is on the upward trend once again and Herr. Schaueble and his ilk are talking tripe.

Now, consider the red line in the chart above: in absolute terms, there is no reduction in Greek debt to-date compared to 2012. But do note the third argument advanced by Herr. Schaueble in the link above, the one that states that Greek debt reductions have exceeded those forecast under the programme. Did they? Chart below shows the reality to be quite different from that claim:

What the chart above shows is that 2015 projections for debt/GDP ratio (the latest being published in october 2014) range quite a bit across different years when forecast was made. Back in October 2010, the IMF predicted 2015 level of debt/GDP ratio to be 133.9%, this rocketed to 165.1% in October 2011 forecast, rose again to 174.0% forecast published in October 2012, declined to 168.6% in forecast published in October 2013 and rose once again in forecast published in October last year to 171% of GDP.  In other words, debt outlook for Greece for 2015 did not improve relative to 3 forecast years and improved only relative to one forecast year. Rather similar case applies to 016 projections and 2017 projections and 2018 projections. So where is that dramatic improvement in debt profile? Ah, nowhere to be seen.

And then again we keep hearing about the fabled end of contagion, 'thank God', that Herr. Schaeuble likes referencing. I wrote about this before, especially about the fact that risk liabilities have not gone away, but were shifted over the years from the shoulders of German banks to the shoulders of German taxpayers. But you don't have to take my word on this, here's a German view: http://www.cesifo-group.de/de/ifoHome/policy/Haftungspegel/Eurozone-countries-exposure.html#losses.

27/1/15: Bankruptcy & Capitalism Are Not the Same as Religion & Hell

I have recently seen some economists offer the following explanation of the role of bankruptcy in the market economy: "Capitalism without bankruptcy is like catholicism without a concept of hell".

That is a fallacious view at best, and a dangerous basis for policy formation to boot.

It is fallacious for a number of reasons, relating to both philosophy and economics.

Firstly: Capitalism, unlike religion is an ethical, but not a moralist (imperative) system. Hence, a concept of eternal damnation simply does not apply, nor should apply, to capitalism. Nothing eternal (imperative) is relevant to capitalism, including the principle of permanently enshrined law. In fact, capitalism is a system that is based on change, including change applying to its core principles. Example: transition in property rights definition as it evolved under capitalism. Change is something that is impossible in a moral imperative systems: the Hell is the Hell and it will always be the Hell. In contrast, even the most basic foundations of capitalism evolve over time. Humanity used to have markets for slaves. We no longer do, for a good of the system. Capitalism used to define capital as physical 'stuff', it now includes 'intangibles'. And so on. This ability of capitalism to change - both continuously (evolutionary) and discontinuously (revolutionary) - preempts any possibility of an 'eternal' value concept, such as 'Hell', applying to it.

Secondly: Capitalism is based on utilitarian ethics. It is ok to alter private property rights (even with partial only compensation) under certain circumstances. It is ok to restrict some markets and transactions, when Pareto efficiency allows us. And so on... There can be no Pareto efficiency justification for a fundamental sin. Hence, bankruptcy in capitalism is not a form of punishment (damnation) a priori, but a system for resolving dilemma of un-recoverable liabilities. It is instrumental - a resolution system and a restart system. Hell is a permanent state, inescapable once entered into. And Hell exists solely for the purpose of punishment. It is not instrumental - it is absolute.

Thirdly: Bankruptcy is a manifestation of the process of creative destruction. Which is a dynamic process and also value-additive process. Hell is a system of a final state of being. There is neither a desirability for finality, nor transformative imperative to alter a being through bankruptcy.

In short, a statement of "Bankruptcy ~ Hell", while sounding remotely plausible, commits a basic fallacy of moralism: over-extending an imperative moral consideration to something that requires none.

So why do I take this statement to task?

Precisely because our system of bankruptcy is erroneously designed to follow that fallacious principle. We use bankruptcy not to resolve the problem of un-repayable liabilities in the first action, but to punish the person / entity that caused the problem. We make bankruptcy painful beyond the reason of simply maximising the recovery of losses in order to 'teach others a lesson' in a way that the threat of Hell is supposed to do.

As long as we keep following such a moralist view of bankruptcy, we will continue to unncessarily penalise entrepreneurship and risk-taking; we will continue to force unnecessarily high costs of failure on enterprises and people that undertake enterprise. In other words, we will continue to subsidise returns and rewards to statism to a life of secured complacency.

Capitalism without bankruptcy is a prison without an exit. It imprisons, wrongly, the innocents to rescue bankrupt enterprises (as in the case of banks rescues), or it imprisons too harshly those who take a risk and experience a failure (as in the case of some entrepreneurs trapped in, say, Nama). In both cases, absence of a utilitarian (not absolutist or moralist) bankruptcy destroys value - economic, social and personal.

Hell is the concept of an ultimate judgement and eternal punishment for moral sins, best left to God to apply, than economists.

26/1/15: Markets v Greece: Too Cool for School... for now

There is much talk about the impact (or rather lack thereof) of Greek elections on the markets.

In fact, the euro continued to price in the effects of a much larger factor - the QE announcement by the ECB, the stock markets did the same. Only bonds and CDS markets reacted to the Greek elections, and even here the re-pricing of Greek risks was moderate so far (see chart below and the day summary for CDS - both courtesy of CMA).

The reason for this reaction is two-fold.

Firstly, Greece is a small blip on the overall radar map of Euro area's problems. Even in terms of Government debt. Here is the summary of the Government debt overhang levels (over and above 60% of debt/GDP benchmark) across the Euro area:

In simple terms, real problems for the euro, in terms of risk pricing, are in Italy, France and Spain.

Secondly, Greece is a political risk, not a financial risk to the Euro area. And it is a risk in so far, only, as yesterday's election increases the probability of a Grexit. But increasing probability of a Grexit does not mean that this increase is worth re-pricing. It is only worth worrying about if (1) increase in probability is significant enough, and (2) if elections changed the timing of the possible event, bringing it closer to today compared to previous markets expectations.

Now, here is the problem: neither (1) nor (2) have been materially changed by the Syriza victory last night. My comments to two publications yesterday and today, summarised below, explain.


Greek elections came as a watershed for both the markets analysts and the European elites, both of which expected a much weaker majority for the Syriza-led so-called 'extreme left' coalition. The final outcome of yesterday's vote, however, is far from certain, and this has been now fully realised by the markets participants.

The confrontation with the EU, ECB and the IMF, promised by Zyriza, is but one part of the dimension of the policy course that Greece will take from here on. Another part, less talked about today in the wake of the vote is accommodation.

Let me explain first why accommodation is a necessary condition for both sides in the conflict to proceed.

Greece is systemically important to the euro area, despite all claims by various European politicians to the contrary. Greece is carrying a huge burden of debt, accumulated, in part due to its own profligacy, in part due to the botched crisis resolution measures developed and deployed by the EU. It's debt is no longer held by the German, French and Italian banks, so much is true. German and French banks held some EUR27 billion worth of Greek Government debt at the end of 2010. This has now been reduced to less than EUR100 million. There is no direct contagion route from Greek official default to the euro area banking sector worth talking about. But Greek private sector debts still amount to roughly EUR10 billion in German and French banking systems (with more than EUR8 billion of this in German banks alone). Greek default will trigger defaults on these debts too, blowing pretty sizeable hole in the euro area banks.

However, lion's share of Greek public debt is now held in various European institutions. As the result, German taxpayers are on the hook for countless tens of billions in Greek liabilities via the likes of the EFSF and Eurosystem.

And then there is the reputational costs: letting Greece slip out into a default and out of the euro area will mark the beginning of an end for the euro, especially if, post-Grexit, Greece proves to be a success.

In short, one side of the equation - the Troika - has all the incentives to deal with Syriza.

One the other side, we can expect the fighting rhetoric of Syriza to be moderated as well. The reason for this is also simple: the EU-IMF-ECB Troika contains the Lender of Desperate Resort (the ECB) and the Lender of Last Resort (the IMF). Beyond these two, there is no funding available to Greece and Syriza elections promises make it painfully clear that it cannot entertain the possibility of a sharp exit from the euro, because such an exit would require the Government to run a full-blown budgetary surplus, not just a primary surplus. For anyone offering an end to austerity, this is a no-go territory.

So we can expect Syriza to present, in its first round of talks with the Troika, some proposals on dealing with the Greek debt overhang (currently this stands at around EUR 210 billion in excess debt over the 60% debt/GDP limit), backed by a list of reforms that the Syriza government can put forward in return for EU concessions on debt.

These reforms are the critical point to any future negotiations with the EU and the IMF. If Syriza can offer the EU deep institutional reforms, especially in the areas so far failed by the previous Government: improving the efficiency and accountability of the Greek public services, robust weeding out of political and financial corruption, and developing a functional system of tax collections, we are likely to see EU counter-offers on debt, including debt restructuring.

So far, Syriza has promised to respect the IMF loans and conditions. But its rhetoric about the end of Troika surveillance is not helping this cause of keeping the IMF calm - IMF too, like the ECB and the EU Commission, requires monitoring and surveillance of its programme countries. Syriza also promised to balance the budget, while simultaneously alleviating the negative effects of austerity. In simple, brutally financial terms, these sets of objectives are mutually exclusive.

With contradictory objectives in place, perhaps the only certainty coming on foot of the latest Greek elections is that political risks in Greece and the euro area have amplified once again and are unlikely to abate any time soon. Expect the Greek Crisis 4.0 to be rolling in any time in the next 6 months.

So in the nutshell, don't expect much of fireworks now - we all know two deadlines faced by Greece over the next month:

• The IMF review, to start as soon as the new Government is in place;
• February Euro Group meeting (tomorrow one will not be of much substance) with Greek bailout expiring February 28th, although the EU is already signaling, less than 24 hours after Greek election, willingness to extend maturity of the programme (http://uk.reuters.com/article/2015/01/26/uk-greece-election-eu-idUKKBN0KZ0ZB20150126)

These are the markers for the markets to worry about and these are the timings that will start revealing to us more information about Syriza policy stance too. Until then, ride the wave of QE and sip that kool-aid lads... too cool to worry about that history lesson, for now...

26/1/15: If not Liquidity, then Debt: ECB's QE competitive limping

I have written before, in the context of QE announcement by the ECB last week (see here: http://trueeconomics.blogspot.ie/2015/01/2312015-liquidity-fix-for-euro-what-for.html) that the real problem with the euro area monetary and economic aggregates has nothing to do with liquidity supply (the favourite excuse for doing all sorts of things that the ECB keeps throwing around), but rather with the debt overhang.

In plain, simple terms, there is too much debt on the books. Too much Government debt, too much private debt. The ECB cannot even begin directly addressing the unspoken crisis of the private debt. But it is certainly trying to 'extend-and-pretend' public and private debt away. This is what the fabled EUR1.14 trillion (or so) QE announcement is about: take debt surplus off the markets so more debt can be issued. More debt to add to already too much debt, therefore, is the only solution the ECB can devise.

While EUR1.14 trillion might sound impressive, in reality, once we abstract away from the fake problem of liquidity, is nothing to brag about. Take a look at the following chart:

Forget the question in red, for the moment, and take in the numbers. Remember that 60% debt/GDP ratio is the long-term 'sustainability' target set by the Fiscal Compact - in other words, the long-term debt overhang, in EU-own terminology, is the bit of debt above that bound. By latest IMF stats, there is, roughly EUR3.5 trillion of debt overhang across the euro area 18, just for Government debt alone. You can safely raise that figure by a factor of 3 to take into the account private sector debts.

Which puts the ECB QE into perspective: at the very best, when fully deployed, it will cover just 1/3rd of the public debt overhang alone (actually it won't do anything of the sorts, as it includes private and public debt purchases). Across the entire euro area economy (public and private debt combined) we are talking about the 'big bazooka' that aims to repackage and extend-and-pretend about 10-11% of the total debt overhang. Not write this off, not cancel, not burn... but shove into different holding cell and pretend it's gone, eased, resolved.

This realisation should thus bring us around to that red triangle and the existential question: What for? Between end of 2007 and start of 2015, the euro area has managed to hike its debt pile by some EUR3 trillion, after we control for GDP effects. Given that this debt expansion did not produce any real growth anywhere, one might ask a simple question: why would ECB QE produce the effect that is any different?

The answer, on a post card, to the EU Commission, please.

25/1/15: Russian Current Account Improved in 2014

I have remarked on a number of occasions just how rapidly Russian current account can adjust to an external shock. This time around, the adjustment is via decreasing imports to compensate for both - the ruble devaluation effects and the sanctions/counter-sanctions effects, as well as the traditional economic recession pressures.


Based on the preliminary data from the Central Bank of Russia, Russian exports of goods and services fell 19% in dollar terms in Q4 2014 and were down 12% in euros. Russian imports of goods and services fell at the same rate.

Full year 2014 preliminary estimates show exports down 6% and imports down 9% in both dollar and euro terms. In 2013, exports of goods and services run USD593 billion or 28.3% of GDP. In 2014 exports of goods and services slipped to USD560 billion, but stood at 29.4% of GDP (these are dollar-denominated GDP figures). Trade balance in goods stood at USD182 billion (8.7% of GDP) in 2013 and this rose to USD186 billion (9.7% of GDP) in 2014. Trade balance in services also improved, from a deficit of USD55 billion in 2013 (-2.8% of GDP) to a deficit of USD55 billion (-2.9% of GDP) in 2014.

While goods imports contracted 10% over full year 2014, in Q4 2014, goods exports fell a whooping 19% in USD terms. Q4 2014 imports of tourism services (travel by Russian residents abroad) fell 20% compered to Q4 2013.


On the Financial Account side, State accounts excluding the Central Bank were in a healthy surplus of USD30 billion for the full year 2014, up on USD 5 billion in 2013.

Private sector accounts, however, were abysmal. Total Private Sector financial accounts finished 2014 with a deficit of USD150 billion (-7.9% of GDP) which is far worse than USD62 billion (-3.0% of GDP) in 2013. The USD150 billion figures is what we usually attribute to capital flight from Russia. This figure consisted of USD50 billion of financial deficit in the banking sector (against USD7 billion deficit in 2013) and USD 100 billion deficit on ex-banks private sector accounts (against USD55 billion in 2013).

Good news is: fictitious transactions (basically a shell-game with company money involving foreign offshore holding firms) shrunk dramatically in 2014: falling from the net outflow of capital via such transactions of USD27 billion in 2013 to net outflow USD 9 billion in 2014.

Another interesting note: as noted by me on numerous occasions, part of capital outflows was down to aggressive dollarisation of the economy at the end of 2014, which saw build up of private sector forex cash deposits held in Russia. Based on CBR data, in 2013 such deposits shrunk by USD0.3 billion, while in 2014 they rose by USD34 billion (USD18 billion of that increase took place in Q4 2014 alone).


Overall, Russian current account surplus improved significantly in 2014 despite all the cash outflows and decline in exports. In 2013, Russian current account surplus stood at USD34 billion (1.6% of GDP), and in 2014 this increased to USD57 billion (3.0% of GDP), with USD11 billion of that accruing in Q4 2014 alone.

We can expect more dramatic declines in both, oil and gas revenues on exports side and imports of goods and services in 2015. One key parameter to look at is exports and imports of services. The reasons for this are simple, albeit not easy to gauge or forecast.

Firstly, significant share of Russian exports of services (and also some associated imports) is down to effectively Russian companies producing services using (in accounting and also contracting sense) off-shore affiliates. We might see some of this activity being on-shored in Russia, with resulting decrease in imports and a rise in exports.

Secondly, Russian enterprises and investors are likely to cut back on imports of key financial, ICT and business consultancy services as the Russian economy suffers from downward pressures on investment and growth.