15/4/15: Ruble Trades Below 50 to USD

Russian Ruble has crossed an important marker today, closing below 50 to USD for the first time since the end (28th to be precise) of November, effectively erasing all of the losses sustained during the speculative run of December 2014.

There has been more volatility in euro markets, so a bit less of an event today there:

Longer-term chart shows Ruble dramatic gains in both Euro and Dollar terms from around February

As I said before, these gains can prove to be temporary, so stay long with care, if you are long...

15/4/15: S&P Ukraine Ratings and Reality Check on IMF Programme

S&P Ratings Services cut long-term foreign currency sovereign credit rating on Ukraine to CC from CCC- with negative outlook and held unchanged the long-term local currency sovereign credit ratings at CCC+.

Per S&P release: "The downgrade reflects our expectation that a default on foreign currency central government debt is a virtual certainty." S&P also warned that any 'exchange offer' - an offer mandated under the IMF latest loan package to Ukraine (http://trueeconomics.blogspot.ie/2015/03/16315-ukraines-government-debt.html) - will constitute default. "Once the distressed exchange offer has been confirmed, we would likely lower the foreign currency ratings on Ukraine to SD and the affected issue rating(s) to D".

Per S&P: "The Ukraine ministry of finance’s debt operation is guided by the following objectives: (i) generate $15 billion in public-sector financing during the program period; (ii) bring the public and publicly guaranteed debt-to-GDP ratio under 71% of GDP by 2020; and (iii) keep the budget’s gross financing needs at an average of 10% of GDP (maximum of 12% of GDP annually) in 2019–2025… The treatment of the eurobond owed to Russia (maturing in December 2015) is likely to complicate matters. The Ukrainian government insists it will be part of the talks, while the Russian government insists that the bond, although issued under international law, should be classified as "official" rather than "commercial" debt given the favorable interest rate and the fact that it was purchased by a government entity. …if Ukraine has to pay the $3 billion in debt redemption this year, it will make it very difficult for Ukraine to find the $5 billion in expected debt relief in 2015 that underpins the IMF’s 2015 external financing assumptions."

Forbes labeled the new rating for Ukraine as "super-duper junk" (http://www.forbes.com/sites/kenrapoza/2015/04/10/ukraine-debt-rating-now-super-duper-junk/)

Beyond the restructuring threat, there is economic performance that is not yielding much consolation: "The negative outlook reflects the deteriorating macroeconomic environment and growing pressure on the financial sector, as well as our view that default on Ukraine’s foreign currency debt is virtually inevitable,”

S&P forecast is for the economy to shrink 7.5% in 2015, following the decline of 6.8% in 2014. The S&P forecasts Ukrainian GDP to grow by 2% in 2016, 3.5% in 2017 and 4% in 2018. Inflation is expected to peak at 35% this year from 12.2% in 2014 and fall to 12% in 2016 and 8% in 2017. Government debt is set to rise from 40.2% of GDP in 2013 to 70.7% of GDP in 2015 and to 93% of GDP this year, declining to 82.6% in 2018.

Meanwhile, ever cheerful IMF is projecting Ukrainian GDP to shrink by 'only' 5.5% in 2015, and grow at the rates similar to those forecast by S&P between 2016 and 2018. IMF sees inflation rising to 33.5% this year. Government debt projections by the IMF are only marginally more conservative than those by the S&P.

Meanwhile, lenders to Ukraine have already pushed out a tough position on talks with the Government: http://www.bloomberg.com/news/articles/2015-04-09/ukraine-creditors-fire-opening-salvos-before-restructuring-talks

As I noted before, this an extraordinary 10th IMF-assisted lending programme to Ukraine since 1991. None of the previous nine programmes achieved any significant reforms or delivered a sustainable economic growth path. In fact, the IMF presided, prior to the current programme over nine restrcturings of the Ukrainian economy that produced more oligarchs, more corruption at the top of the political food chain and less economic prosperity, time after time.

Meanwhile, over the same period of time, world's worst defaulter, Argentina, has managed to have just three IMF-supported lending programmes. Argentine bag of reforms has been mixed, but generally-speaking, the country is now in a better shape than it was in the 1990s and is most certainly better off than Ukraine, as the relative performance chart of two economies over time, based on IMF WEO (April 2015) data, indicates:

Somewhere, probably in the basement of the 700 19th St NW, Washington DC, there exists a data wonk that truly believes that Ukrainian debt is 'sustainable' and that this time, things with 'structural reforms' will be different from the previous nine times. I would not be surprised if the lad collects Area 51 newspapers clippings for a hobby. He's free to do so, of course. But the Ukrainian economy is not free when it comes to paying for the IMF's bouts of optimism. And with it, neither are the Ukrainian people.

What the Ukrainian economy really needs right now is a combination of pragmatic political reforms to bring about real stabilisation, root-and-branch clearing out of corrupt elites, including business elites and not withstanding the currently empowered elites, assistance to genuine (as opposed to corrupt rent-seeking) entrepreneurs, all supported by assisted and properly structured FDI, direct development aid and a real debt writedown. The IMF-led package does not deliver much on any of these objectives. If anything, by passing the cost of reforms onto ordinary residents, it does the opposite - drains investment, saving and demand capacity from the economy, imperilling its ability to create new growth and enterprises.

15/4/15: Russian Foreign Exchange Reserves

Few weeks ago, based on the three weeks data from the Central Bank, I noted an improvement in Russian Forex reserves, while warning that this requires a number of weekly observations to the upside to confirm any reversal in the downward trend.

Now, with monthly data available for the full month of March, my concerns about temporary nature of improvements have been confirmed. Full month of March data shows a decline, not a rise, in forex reserves. Specifically, total reserves dipped from USD360.221 billion at the end of February to USD356.365 billion at the end of March - a m/m decline of USD3.856 billion.

Now, in monthly terms, March decline was the smallest since October 2014 and the second smallest (after September 2014) in 17 months. Nonetheless, forex reserves are now down to the levels of March-April 2007, having fallen USD129.766 billion y/y (-26.7%). Over the period of sanctions, total reserves are down USD136.961 billion (-27.8%). Over Q1 2015 the reserves are down USD29.095 billion.

Month on month, foreign exchange reserves (combining foreign exchange, SDRs and reserve position in the iMF) are down USD4.338 billion, with USD3.646 billion of this decline coming from foreign exchange alone. Gold holdings are up USD482 million month on month.

Gold, as percentage of total reserves, currently stands at 13.265%, the highest since November 2000. Gold holdings performed well for Russia over the period of this crisis, rising USD3.917 billion year on year through March 2015 (+9%) and up USD2.684 million since the start of the sanctions.

In terms of liquid cash reserves, foreign exchange holdings are down at USD298.665 billion at the end of March 2015, a level comparable to January-February 2007. end of March figure represents a decline of USD131.024 billion y/y (-30.5%) and the decline during the period of the sanctions is even steeper at USD136.9 billion (-31.4%).

Good news: Russian economy is past the 2015 peak of external debt redemptions (see: http://trueeconomics.blogspot.ie/2015/04/14415-russian-external-debt-redemptions.html).

Bad news: there is another USD54 billion worth of external debt that will need repaying (net of easy inter-company roll overs) in Q2-Q4 2015. Worse news: Q1 declines in foreign reserves comes with CBR not intervening in the Ruble markets.

Good news: capital flight is slowing down.

Bad news: capital flight is still at USD32.6 billion over Q1 2015 (http://www.themoscowtimes.com/business/article/russian-capital-flight-slows-sharply-in-first-quarter/518927.html) although much of that is down to debt redemptions.

Which means there is little room for manoeuvre anywhere in sight - should the macroeconomic conditions deteriorate or a run on the Ruble return, there is a very much diminishing amount of reserves available to deploy. Enough for now, but declining…

As I said before: watch incoming risks.

14/4/15: Russian external Debt Redemptions: Q1 2015 - Q3 2016

With Q1 out of the way, Russia passed a significant milestone in terms of 2015 external debt redemptions.

In total USD36.647 billion of external debt matured in Q1 2015, the highest peak for the period of Q1 2015 - Q3 2016. Even controlling for inter-company loans and equity positions, the figure was around USD24 billion for Q1 2015, again, the highest for the entire 2015 and the first three quarters of 2016.

Here is the breakdown of maturing external debts:

All in, over the last 3 quarters alone, Russia has managed to repay and roll over USD156.23 billion worth of external debt, with net repayment estimated at around USD96.5 billion.

Painful in the short run, this is not exactly weakening Russian economy in terms of forward debt/GDP and other debt-linked ratios.

13/4/15: Greek Deposits: Worse Run than in the Previous Iterations

Couple of interesting graphs on the Greek crisis via @FGoria

First, the ECB supports vs ELA for Greek banks: 

Notable trend above is for support switching. At the rise of first round of Greek crisis (post PSI), ECB funding was displaced by the ELA. The same pattern is now replaying once again.

Next: Greek banks deposits:

Again, the above shows the re-amplification of the crisis and continued decline in deposits levels, with acceleration in the rate of deposits flight. Outflows are now present across all maturities of deposits, and there is a strong increase in outflows for deposits with maturity in excess of 1 year.

The above charts are dire: covering the period for January-February 2015, we are witnessing a full-scale deposits flight (a funders' run on the banks) that is more extreme (in volume and composition of deposits outflows) than during the previous iterations of the crisis.

13/4/15: Dublin Port Shipments at New Record in Q1 2015

Some strong growth numbers for Dublin Port volumes in Q1 2015:

Per Dublin Port, the volume shipped now 3% ahead of previous record set in 2007.

13/4/15: That Utilitarian Logic of EU Tax Probes...

Yet another international publication, this time The Economist, is going off the Irish Government 'reservation' with an article on how Apple is being 'helped' to tax avoidance: http://www.economist.com/news/business/21621810-multinationals-deals-tax-friendly-countries-are-coming-under-fire-bit-too-cosy?fsrc=scn/tw_ec/a_bit_too_cosy_. The farce is, it is the very same State that enabled this practice which now stands to gain from the unwinding of the practice.

Ah, the logic of the European Union... it is, rather, err... relativist in nature...

13/4/15: Bonds Traders: Give Us a Shake, Cause We So Sleepy...

Recently, I have been highlighting some of the problems relating to the Central Bank's driving up the valuations of government bonds across the advanced economies. In the negative-yield environment, the victims of Central Banks' activism are numerous - from banks to long-hold investors, to corporates, to capex, to savers, to... well... the fabled bonds trades(wo)men... the poor chaps (and chapettes) aren't even showing up for work nowadays: http://www.bloomberg.com/news/articles/2015-04-10/take-off-friday-and-monday-because-most-bond-traders-already-are because Sig. Mario is making their lives sheer misery with his euro bonds acrobatics.

Apparently, there is just not that big of a demand out there for the idea of giving money to the Governments on top of paying taxes and trading volumes are now where the rates are - in the zero corner. So the 'industry' solution is, predictably, for the Fed to raise rates. When was the last time you heard the car manufacturers begging regulators for a safety recall of their vehicles 'to jolt the complacent consumers a bit'?

12/4/15: Economic Divergence: U.S. v Europe

Recently, I have highlighted couple of signs of emerging weaknesses in the U.S. economy relative to the positive news momentum in the euro area. You can see Manufacturing Sector evidence here and Business Activity evidence here. Meanwhile, economic surprise indices have also been pointing to the same: here.

An interesting chart from Pictet summarising the trend by plotting Economic Surprise Indices for euro area and the U.S. side by side:

Source: Pictet

The above shows divergence in the two series from Q4 2014 on.

And the overall markets valuations heat map showing stronger over-valuation (lighter colouring) in Q1 2015 in the euro area core compared to the US:

Source: BBVA Research

In cyclical terms, the above reinforces the view that the U.S. economy is settling into the growth range around 3.1% of GDP, while the euro area economy is moving closer to 1.1-1.4% growth. The divergence in two economies' core signals of future activity is in part driven by the differences in the monetary policies expectations, with ECB driving deeper into its QE programme, while the Fed is now shifting toward tighter stance.

In particular, recent statements from the Fed are fuelling uncertainty about the dollar and the U.S. interest rates environment. Median analysts outlook suggests a 50bps hike by the end of 2015 on the Fed side, with my own view that the Fed is most likely to hike around September. This outlook is highly uncertain, due to divergent signals coming from the Fed. Another point of uncertainty is what will follow the initial hike in U.S. rates. My view is that we can see a relatively long period of time over which the Fed will do nothing, before hiking the rates for the second time. The reason for this is that the Fed is fully aware of the risk of making a policy error on its first hike size and timing, and it will leave a wide enough period to collect evidence on the effects of its first intervention before moving again.

Meanwhile, the ECB has delivered twin push on its expansionary monetary policy in March, completing EUR60 billion in purchases of bonds and also deploying EUR97.8 billion TLTRO lending. The balancesheet of the ECB is growing, finally, and with it, Frankfurt has delivered a big stimulus to the euro area financial markets. This pushed bond yields to record lows: German yields are negative out to 6 year maturity, with 10 year Bunds trading at around 0.2% yields, and UST-Bund 10 year spread widening to 180 bps. It also shifted liquidity into risk assets, such as stocks and corporate bonds. Stock markets rallied: Germany up 25% in 2015 so far, France up 22%, Portugal up 31%, Spain up 14% and so on. Virtually none of these gains can be attributed to improved corporate balancesheets or companies' performance.

Here is a neat summary by Pictet of markets moves over Q1 2015:

Source: Pictet

The above highlights two things:

1. European equities outperformance over Q1 2015 is massive and is completely unjustified by the macroeconomic fundamentals and companies' performance; and
2. European equities outperformance accelerated in March

As Pictet notes, virtually all of the above outperformance is down to monetary policy-induced revaluation of the exchange rates: "Shares, in local currency terms and with dividends reinvested, are up by 16.8% in Europe, well ahead of the S&P 500’s 1.0% gain. However, European investors who

had invested in US equities will have benefited from a 13.7% rise in the S&P 500 when translated into euros, considerably reducing Wall Street’s underperformance in the year to date. Japanese shares have been the top performers though, advancing by 10.5%. If we add in the euro’s fall in value against the yen, that translates into a rise of just over 24.5%." 

Excluding energy sectors, corporate earnings growth forecasts currently put expected earnings uplift of 9.0% in the U.S. against 15.8% in the euro area over 2015, again predominantly on the back of currency valuations changes.

All in, the worrying trend of economic performance fully dependent on unorthodox monetary policies and relatively unanchored in the real economy remains. Rising divergence between the U.S. - euro area signals shows inherent weaknesses and risks present in such  environment.

11/4/15: 2014 European Labour Costs Comparatives

Ireland's manufacturing is booming, services exploding, unemployment falling, and wages... well, wages...

Here is the latest data for full year 2014 from Eurostat providing some comparatives:

Ireland ranks on par with Italy and below all high income euro area states (ahead of just 'Southern' or 'peripheral' Europe) in terms of hourly labour costs. For the 'most productive' (if measured by returns on FDI booked via Ireland) country, we are amazingly labour cost-competitive. Which, of course, only highlights the questionable nature of our labour productivity, plus lower non-wage costs of labour (such as employer taxation).

Now, recall - Ireland has been aggressively rebuilding its 'competitiveness' by reducing costs of labour. The internal devaluation meme and so on.... Right? Almost:

Over 2008-2014 our labour costs actually rose. Of course, our favourite 'competitiveness' metric - the unit labour costs (cost of labour required to produce a unit of output) fell. But that decline has nothing to do with our gained labour cost 'competitiveness'. Instead, it has to do with increased output 'units' booked per hour of work. Which is, primarily, down to two factors:

• MNCs pushing more and more tax optimising 'activities' via Ireland (superficially increasing units of output per hour of work); and
• Destroying hundreds of thousands jobs in less productive sectors (the unemployment effect).

Hence a paradox: Irish labour costs rose last time in 2012 - not a great year for our economic performance. They stayed static since then, through the stagnation of 2013 and the roaring GDP & GNP growth in 2014. 

And another paradox, the one yet to come: once construction industry and retail sector employment and activity pick up, the unit labour costs in the economy will rise solely due to output in less productive sectors picking up. If wages inflation returns, they will rise even faster, proving again that all this competitiveness story is largely a figment of tax-optimisation-induced imagination.

11/4/15: One Number Busts Greek 'Internal Devaluation Can Work' Myth

An interesting note from the Fitch on the likelihood of success for Greek 'bad bank' set up here.

Neat summary of the problem: "NPLs have reached staggeringly high levels. Fitch estimates that domestic NPLs at National Bank of Greece, Piraeus Bank, Eurobank Ergasias and Alpha Bank (which together account for around 95% of sector assets) reached EUR72bn at end-2014, equivalent to 35% of combined domestic loans. Net of reserves, Greek NPLs reached a high EUR30bn and still exceeded the banks' combined equity."

NPLs at 35% of all domestic loans... and someone still believes Greece can just do that external devaluation thingy?..

11/4/15: Inflation, Wages Controls and Ruble: Welcome to Q2 Start in Russia

Russian inflation reached 16.9% in March, year-on-year, highest since 2002, despite slowing month-on-month inflation. March inflation came in at 1.2% m/m, lower than 2.2% m/m in February.

Slower m/m trend is down to Ruble re-valuation, so assuming no renewed speculative attacks on the currency, annual rate of inflation should be down at year end, around 10-12 percent range, or broadly in line with 11.4% annual inflation registered in 2014.

One key policy instrument to contain inflation (and also to correct for the adverse effect of ruble strengthening on budget balance - see below) is the decision by President Putin to suspend the legal requirement for automatic cost-of-living (COLI) adjustments to public sector wages. The decision, signed on April 6th will allow the Government to avoid hiking wages for 9 months through December 2015. President Putin's amendment also covers some of the COLI requirements on social payments adjustments. Overall, public wages and social benefits will increase in 2015 only to reflect the Budget 2015 assumed medium-term inflation target - 5.5%, well short of the actual inflation that is projected to range between 11 and 13 percent this year.

On the subject of Ruble valuations and budgetary pressures: Russian Federal Budget is set in Rubles. As Ruble strengthens against the USD and EUR, exports revenues-related taxes fall, imports declines are moderated and external surplus on trade account declines. This means potential pressure on Government deficits. Last year dramatic devaluation of the Ruble, while causing hysterical reactions abroad, actually helped the Government to achieve near balanced budget (with a deficit of just around 1 percent of GDP). This time around, the pressure is reversing.