31/5/15: Remittances from Russia Sharply Down in 1Q 2015

Latest Central Bank of Russia data shown decline in private forex outflows in 1Q 2015 as migrants and Russian citizens cut back on transfers abroad. In 1Q 2015, based on CBR data, private money transfers from Russia were down to USD2.1 billion - the lowest level of transfers since 1Q 2010 and down on USD3.9 billion in 1Q 2014 and USD4.3 billion in 4Q 2014. The data covers only cash transfer (wire transfers) and does not include bank transfers. Still, the number is significant for two reasons:

1. In 2014, cash wire transfers amounted to USD21 billion - or nearly 1/3 of total private residents transfers (USD69 billion).
2. Transfers decline signals slowdown in remissions from migrant workers - a major problem for a number of countries net senders of migrants into Russia (see an earlier note on this here: http://trueeconomics.blogspot.ie/2015/01/1312015-remittances-from-russia-big.html).

Transfers outside the CIS zone amounted to USD348 million (down 39% y/y and down 45% q/q), transfers to CIS zone states fell 47% y/y and 51% q/q to USD1.8 billion.

Net transfers deficit was USD1.1 billion in 1Q 2015, down from USD3 billion in 1Q 2014 and 4Q 2014. Reminder: net outflow of capital (corporate and households, plus banks) fell 31% y/y in 1Q 2015 to USD32.6 billion (see earlier notes on this here http://trueeconomics.blogspot.ie/2015/04/18415-fitch-postpones-russian-ratings.html and here: http://trueeconomics.blogspot.ie/2015/04/14415-russian-external-debt-redemptions.html)

Key drivers for slower rate of capital and forex outflows are:

• Ruble devaluation impacting earnings of migrant workers, while Ruble strengthening in 2015 so far reducing demand for forex accounts amongst Russian depositors and improved confidence in Russian banking sector (in part due to doubling of deposits protection levels to RUB1.4 million). Higher deposit rates offered by the Russian banks also helped.
• Decline in real earnings (http://trueeconomics.blogspot.ie/2015/05/30515-russian-demand-down-sharply-in.html)
• External debt redemptions (see earlier links)
• Exporters reducing overall demand for forex deposits

A side note: in 1Q 2015 household deposits in Russina banks rose RUB537 billion (+2.9% y/y to RUB19.6 trillion) in contrast to 1Q 2014 when deposits fell 2.3% (to RUB16.6 trillion). CBR projects deposits rising 8% over 2015 y/y.

Another factor responsible for improved outflows is change in the migration laws. Prior to January 1, 2015, citizens from countries with visa-free entry to Russia were allowed to remain in Russia for 90 days and could re-enter any time after exiting the country. From January 1, the new rules require them to stay maximum 90 days and after exiting the country, remain outside Russia for 90 days before re-entering. It is worth noting that this is identical to similar rules applying to visa holders in many Western countries. As the result, based on Federal Migration Service data, inflow of migrants into Russia fell 70%. One outcome of this is that unemployment levels in Kyrgyzstan, Tajikistan and Uzbekistan - three key net senders of migrants to Russia - jumped, while remittances from Russia to Uzbekistan fell 16% in 2014, and to Tajikistan  by 8%. Third largest net sender of migrants to Russia was Ukraine, with remittance to Ukraine down 27% y/y in 2014.

30/5/15: Russian Demand Down Sharply in April

As BOFIT reports this week: Russian domestic demand shrunk at an accelerating rate in April with retail sales down 10% y/y after contracting 7.5% in 1Q 2015. Investment was down 5% in April, following 4% drop in 1Q 2015. Investment fall would have been even sharper if not for a massive +30% rise in volume of new housing completions (most likely a temporary rush to complete stock of unfinished housing int espouse to higher cost of carry).

Real wages declined also continued to fall in 1Q 2015, down 8% y/y, posting second consecutive quarterly decline. In April, real wages shrunk 13%. Pensions dropped 4% y/y in 1Q 2015.

Latest estimates from the Economy Ministry put Russian GDP at -4% in April, deeper than 1.9% contraction recorded in 1Q 2015.

30/5/15: Private Sector Counter-Proposal for Ukrainian Debt Restructuring

An interesting and far-reaching article on Ukraine's attempts to restructure some of its debts via Bloomberg: http://www.bloomberg.com/news/articles/2015-05-29/ukraine-creditors-said-to-offer-coupon-cuts-10-year-extension-ia9ao4ey

In the nutshell, Ukraine needs to restructure its debt per IMF three targets for debt 'sustainability':

• generate $15 billion in public-sector financing during the program period; 
• bring the public and publicly guaranteed debt-to-GDP ratio under 71% of GDP by 2020; and 
• keep the budget’s gross financing needs at an average of 10% of GDP (maximum of 12% of GDP annually) in 2019–2025

Note, these are different than what Bloomberg reports.

Key difference, however, is the matter of Russian debt. S&P note from February 2015 addressed this in detail: see more here: http://trueeconomics.blogspot.ie/2015/04/15415-s-ukraine-ratings-and-reality.html. In simple terms, Ukraine's debt to Russia is not, repeat: not, a private debt. Instead it is official bilateral debt. As such it is not covered by the IMF programme condition for restructuring privately held debt regardless of whatever Ukrainian Rada or Government think. Full details of the IMF programme are linked here: http://trueeconomics.blogspot.ie/2015/04/7415-imf-ninth-time-is-gonna-be-lucky.html

As I noted in March note, "IMF has already pre-committed Ukraine to cutting USD15.3 billion off its Government debt levels via private sector 'participation' in the programme" (http://trueeconomics.blogspot.ie/2015/03/16315-ukraines-government-debt.html) Once again, Bloomberg 'conveniently' ignores this pesky fact about only private debt being covered.

Now, it appears we have the first private sector offer for restructuring. It is pretty dramatic, as Bloomberg note linked above outlines. But it is clearly not enough, as it involves no cuts to the principal. This is the sticking point because the proposal front-loads notional savings to the amount of USD15.8 billion, but it subsequently requires Ukraine to repay full principal - a point that is not exactly in contradiction to the IMF plan in letter, but certainly risks violating it in spirit. The chart below shows that beyond Q2 2017, Ukraine is facing pretty steep repayments of debt and there is absolutely no guarantee that by then Ukraine will be able to withstand this repayments cliff.

To further complicate issues, Ukrainian Parliament (Rada) passed a law last week that would hold off repayments of debt until there is an agreement with private holders on haircuts. This presents three key problems for Ukraine:

1. The law can be used to hold off on repaying Russian debt, which is not private by definition and as such will constitute a sovereign default on bilateral loans. This will be pretty much as ugly as it gets short of defaulting on IMF.
2. The law, if implemented, will also halt repayments on genuine private debt. Which will also constitute a default.
3. If Russia refuses to restructure its debt (for example, citing the fact that it is non-private debt), Rada law will have to be applied selectively (e.g. if Rada suspends repayments on Russian debt alone), which will strengthen Russian position in international courts.

In case of default, be it on Russian debt or on private debt, or both, Ukraine will see its foreign assets arrested. Which involves state enterprises-owned property, accounts etc. The reason for this is that Rada has no jurisdiction over laws governing these bonds, which are issued under English law. In addition, Ukrainian banks - big holders of Ukrainian Government debt - will be made insolvent overnight as the value of their assets (bonds) will collapse.

Final point is that ex-post application of the law, there will be no possibility for achieving any voluntary restructuring of debt as all negotiations will be terminated because Ukraine will be declared in a default.

While Greece continues to attract much of the media attention, the real crunch time is currently happening in Kiev and the outcome of this crisis is likely to have a significant impact across the international financial system, despite the fact that Ukraine is a relatively small minnow in the world of international finance.

Here is Euromoney Country Risk assessment of Ukrainian credit risks:

Ukraine score is 26.30 which ranks the country 147th in the world in creditworthiness.

30/5/15: Irish Retail Sales: April

Some good news on Irish retail sales side for April with latest CSO data showing seasonally adjusted core (ex-motors) sales up 2.65% m/m in April in Value terms to 100.6 index reading - the highest since September 2008. Remember - value series have been lagging far behind the volume series. April 2015 m/m increase comes after 0.31% contraction m/m in March and is a strong signal of a positive momentum returning to the sector.

Volume series continued to perform strongly, jumping 3.07% m/m in April after disappointing 0.65% drop in March. The series now stand at 110.7 which is the highest since July 2007.

Strengthening of the positive correlation between volume (and now also value) of core retail sales and Consumer Confidence indicator is also signalling that we are on an upward trend (remember, Consumer Confidence indicator is pretty useless in timing actual trend reversals, but performs pretty well in tracking trends). Still, rate of increase in consumer confidence indicator is out-pacing increases in retail sales on 3mo MA basis.

3mo MA for Value of core retail sales is up 0.95% compared to previous 3mo period and Volume series 3mo average is up 1.78%. Both series posted declines in 3mo average in March.

As the result of April changes, Value of core retail sales was up 3.16% y/y and Volume of retail sales was up 6.67% y/y - both strong indicators of a positive trend.

Couple of points of continued concern:

• y/y increase in Value (+3.16% in April 2015) is slower than y/y growth rates posted in the series in April 2014 (4.4%) with Volume growth rates basically identical.
• Compared to peak, 3mo average through April 2015 is down 40.6% for Value of sales and down 34.8% in Volume of sales, so there is still much to be done to restore the sector to full health.

On the net, however, the figures are healthy and strong, and very encouraging.

30/5/15: The New Financial Regulation: Part 10: Legal v Operational Logistics

My post for @learnsignal blog on EU financial regulation covering operational logistics is now available: http://blog.learnsignal.com/?p=188.

29/5/15: Margin Debt: Another Zombie Hits Town Hall...

So you've seen this evidence of how global real economic debt is now greater than it was before the crisis... and you have by now learned this on how debt levels and debt growth rates are distributed globally. And now, a new instalment in the Debt Zombies Portraits Gallery:

Source: http://www.zerohedge.com/news/2015-05-29/margin-debt-breaks-out-hits-new-record-50-higher-last-bubble-peak

Now, do keep in mind that just this week, ECB ostriches have declared that things are fine in the European financial system because 'leverage is low'.

Yes, Irish Financial Regulator of the Celtic Garfield Era, Pat Neary, would have made the Frankfurt stars-studded team with his knowledge...


Note: hare's China's rising contenders for the above distinction: http://ftalphaville.ft.com/2015/05/18/2129638/does-china-already-have-the-highest-level-of-margins-vs-free-float-in-market-history/ h/t to @TofGovaerts

29/5/15: When the Chickens Come Home to Roost: EU 'Constitution'

Daniel Hannan on the 10th anniversary of French and Dutch referenda on EU Constitution: http://www.capx.co/10-years-on-from-the-french-non/.

This is a must-read, and it is short, but the best summary of the entire piece is the following passage: "As Jean-Claude Juncker put it the other day, “There can be no democratic choice against the European Treaties”. Which puts the coming British renegotiation into perspective. Whatever deal is notionally agreed, as long as the legal supremacy of the EU institutions remains, it will be interpreted by people whose commitment to deeper integration overrides whatever belief they have in freedom, democracy or the rule of law."

On the money, there, @DanHannanMEP ! 

29/5/15: Large Fiscal Policy Multipliers & Private Debt Overhang

"Private Debt Overhang and the Government Spending Multiplier: Evidence for the United States" by Marco Bernardini, Gert Peersman (March 31, 2015, CESifo Working Paper Series No. 5284) uses "state-dependent local projection methods and historical U.S. data" to show  that government spending multipliers are "considerably larger in periods of private debt overhang."

In low-debt state: there is a "significant crowding-out of personal consumption and investment" in response to fiscal spending stimulus, "resulting in multipliers that are significantly below one."

However, "conversely, in periods of private debt overhang, there is a strong crowding-in effect, while multipliers are much larger than one. In high-debt states, more (less) government purchases also reduce (increase) the government debt-to-GDP ratio." 

These results are robust to controls for the business cycle, government debt overhang and the zero lower bound on the nominal interest rate. Which lead authors to a conclusion that fiscal "spending multipliers were likely much larger than average during the Great Recession."

As a note of caution, the authors posit that "it is not clear what the exact reason is for the different behavior of the private sector in periods of debt overhang. Can it be explained by borrowing constraints or rule-of-thumb behavior of households?.. Is it driven by a much higher marginal propensity to consume of highly-leveraged households?.. Or are there alternative explanations?"

To add to this list, one needs to consider the sovereign capacity to actually undertake fiscal stimulus. In the current crisis, for many states (unlike the U.S.) room for stimulus is severely curtailed by already present public debt overhang. In addition, one has to be careful translating the U.S. results to other, smaller and more open economies, such as euro area states. Finally, the findings need confirmation in a setting with fixed exchange rates.

"Another relevant extension of our analysis is the question whether also tax multipliers are different across private debt states. Our findings also have some relevant policy implications. In particular, the state of private debt seems to be an important indicator for the consequences of fiscal consolidations and stimulus programs. In periods of debt overhang and deleveraging in the private sector, it is probably not a good idea to conduct austerity policies, because it could have dramatic effects on economic activity. In contrast, deficit-financed government purchases policies could significantly stimulate and stabilize the economy in periods when households are deleveraging and depressing aggregate demand. On the other hand, once private debt levels are again below trend, the timing is perfect to conduct fiscal consolidations, having little consequences for economic activity."

Fascinatingly, this evidence lends credence to the latest theory of financial imbalances, known as the "excess financial elasticity" theory, formulated by Borio: https://www.bis.org/publ/work456.pdf on which I have just submitted an article to a U.S. publication (stay tuned for the unedited version to be posted here later next month). I covered Borio's research recently here: http://trueeconomics.blogspot.ie/2015/05/8515-bis-on-build-up-of-financial.html

29/5/15: That U.S. Engine of Growth Is Going 'Old Fiat' Way

Folks, what on earth is going on in the U.S. economy? Almost 2 months ago I warned that the U.S. is heading for a growth hick-up (http://trueeconomics.blogspot.ie/2015/04/4415-another-sign-of-us-growth-slowdown.html). Now, the data is pouring in.

1Q 2015 GDP growth came in at a revised -0.7%. And that's ugly. So ugly, White House had to issue a statement, basically saying 'damn foreigners stopped buying our stuff and weather was cold' for an excuse: https://m.whitehouse.gov/blog/2015/05/29/second-estimate-gdp-first-quarter-2015. Rest is fine, apparently, though U.S. consumers seem to be indifferent to Obamanomics charms and U.S. investors (in real stuff, not financial markets) are indifferent to the charms of ZIRP.

For the gas, the WH added that "The President is committed to further strengthening these positive trends by opening our exports to new markets with new high-standards free trade agreements that create opportunities for the middle class, expanding investments in infrastructure, and ensuring the sequester does not return in the next fiscal year as outlined in thePresident’s FY2016 Budget." Now, be fearful…

Source: @M_McDonough 

Truth is, this is the third at- or sub-zero quarterly reading in GDP growth over the current 'expansion cycle' - which is bad. Bad enough not to have happened since the 1950s and bad enough to push down 4 out of 6 key national accounts lines:

Source: @zerohedge

Good news, 1Q 2014 was even worse than 1Q 2015. Bad news is, 1Q 2015 weakness was followed by April-May mixed bag data.

Un-phased by the White House exhortations, the Institute for Supply Management-Chicago Inc.’s business barometer fell to 46.2 in May from 52.3 in April. Readings lower than 50 indicate contraction. Per Bloomberg: "The median forecast of 45 economists surveyed by Bloomberg called for the measure to rise to 53, with estimates ranging from 51 to 55. The report showed factory employment contracted this month."

Yep, that is a swing of massive 6.8 points on expectations.

Source: @ReutersJamie


Worse news, for the overheating markets that is, "Profits from current production (corporate profits with inventory valuation adjustment (IVA) and capital consumption adjustment (CCAdj)) decreased $125.5 billion in the first quarter, compared with a decrease of $30.4 billion in the fourth. …Profits of domestic non-financial corporations decreased $100.4 billion, in contrast to an increase of $18.1 billion. The rest-of-the-world component of profits decreased $22.4 billion, compared with a decrease of $36.1 billion."

Source: @ReutersJamie

Gazing into the future, the doom is getting doomed.

Source: @GallupNews

The above is via http://www.gallup.com/poll/183407/no-improvement-economic-confidence-index.aspx. The economic confidence index fell two points from the previous weekly score, Economic outlook component at -11, and Current conditions score of -6 higher than outlook. The index has been in negative territory for all but one of the past 14 weekly readings.

Source: @GallupNews 

Yes, the engine of global growth is spewing oil and smoke like the old 'Fix it up, Tony' Fiat... and the White House is just not having any new ideas on sorting it out.

Bad weather… Bad Double-Bad foreigners… Bad Triple-Bad Consumers/Savers…

28/5/15: ECB does a "Funny Me, Tearful You" Macro Risks Assessment

You have to love ECB analysts… if not for the depth of their insights, then for their humour.

Here are two charts, posted back to back in the latest (May edition) of the ECB's Financial Stability Review.

The above says what it says: risks are low in financial markets, in fiscal policy and in the banks.

Now, Chart 2:

The above says risk-taking is high in financial markets, sovereign debt markets (fiscal side), and the economy's real investment is weak (to which the banks are exposed just as much as to the Government bonds).

So which one is the true chart? Or is there even a concept of coherent analysis in any of this?

"The sharp increases in asset prices relative to the fundamentals have pushed valuations up, particularly in the fixed income market, but increasingly also in markets for other financial assets. Nonetheless, a broad-based stretch in euro area asset valuations is not evident. Moreover, the recent increases in asset prices have been accompanied neither by growing leverage in the banking sector nor by rapid private sector credit expansion."

Now we have it: things are fine, because there is little leverage. And they are even extra-specially-fine in fixed income (aka bonds) markets. Because there is little leverage. The ECB won't tell us that this 'fine' is down to ECB itself buying bonds, pushing valuations of debt up, and incentivising risk-taking in the financial markets by its own policies. Oh no… all is just down to relatively sound fundamentals. But, guess what: even though things are fine, there is a "rise in financial risk-taking". But bad news is that there is no corresponding rise in "economic risk-taking".

"Financial system vulnerabilities continue to stem not only from the financial markets, but also from financial institutions, spanning banks, insurers and – increasingly – the shadow banking sector." But, wait… there is little leverage in the system. So how can financial institutions be responsible for the rise in financial system 'vulnerabilities' (which are at any rate negligible, based on Chart 1 'evidence'). Ah, of course they can, because the whole pyramid of debt valuations in the secondary markets is down to the ECB-own QE buying up of sovereign debt and years of Central Banks' printing of easy money for the financial institutions, including via LTROs and TLTROs and the rest of the ECB's alphabet soup of 'measures'.

Stay tuned for more analysis of the ECB's latest 'stability' missive...

27/5/15: No ELA Increase amidst Deposits Flight: Greece

Three quick updates to my earlier post on things getting crunch-time(y) in Greece:

Firstly, the U.S. is stepping up its pressure on the European 'leadership' to take Greek risks more seriously: U.S. Treasury Secretary Jack Lew : "My concern is not the good will of the parties -- I don't think anyone wants this to blow up -- but ... a miscalculation could lead to a crisis that would be potentially very damaging". Talks are going to be toasty at G7 summit and this time around not down to Vladimir Putin.


Secondly, as I said in the earlier post, we have EUR3 billion cushion left when it comes to Greek banks ELA and increases in ELA approvals by the ECB are getting smaller by week. So here's the bad news: "Greek banks have seen deposit outflows accelerate over the past week as fears rise that the euro zone country will default on debt, two banking sources said on Wednesday." This is via Reuters. Remember, last hike in ELA was EUR200 million. And today, ECB decided not to increase ELA limit - a sign that Frankfurt is getting edgy. Guess what: "The past week in May was more challenging compared to the previous ones in the month, with daily outflows of 200 to 300 million euros in the last few days," a senior Greek banker said. This might be mild after outflows of EUR12.5 billion in January and EUR7.57 billion in February, but the latest increase in outflows is coming on foot of already weak deposits and signals renewed increase in pressures. Outflows are up in April to ca EUR5 billion from EUR1.91 billion in March.

Thirdly, we now have rumours of real capital controls coming in: Athens introduced a 'small charge' on ATM withdrawals. Despite this glaringly 'capital control'-like measure, Athens subsequently said it has ruled out capital controls. But, two days ago, Greek opposition lawmaker Dora Bakoyianni said "the country could be forced into capital controls to stem deposit outflows if it did not reach a deal for aid with the government this week". And on May 20, Moody's issued a statement saying that capital controls in Greece are now "highly likely".

and CDS markets are not impressed, again...

Though the bond markets are actually pricing in continued ECB 'cooperation' - across all of the euro area peripherals:

The Euro Saga continues…

27/5/15: CCTB is Baaaack...

It's Happy Hour again in Brussels, as the EU is reviving its plans for tax harmonisation across the continent.

At stake, the EU proposal for CCCTB, or Common Consolidated Corporate Tax Base, which would set the first precedent for tax harmonisation, outside Vat. As reported in the media, the plans appears to have support from the EU Commission (predictably), France (predictably) and Germany 9again, predictably). UK (predictably) is opposed: http://www.cityam.com/216514/uk-brushes-aside-german-tax-plan.

Today, the EU officials are discussing how to tackle tax avoidance and create a system of “fair, transparent and growth friendly” corporation taxation with discussion expected to “feed into” an announcement on corporation tax in June.

Key article on this is here: https://global.handelsblatt.com/edition/183/ressort/finance/article/a-tax-collision-course.