5/6/15: The Fiat of OMT: (almost) three years on...

Remember all the bull about the 'unique' efforts, the 'best in class', the 'prudent policies' that got our bond yields down so dramatically in the past? Well, the view here was and remains that most of the 'normalisation' in bond yields was down not to our internal policies or choices, but to ECB and that our yields declined, largely, in tandem with the Euro area yields (that tandem bit is best explained as the decline in financial fragmentation - the financial gap between the 'periphery' and the 'core'). Here's a handy chart from the BBVA Research plotting the evolution of the latter with some timelines added:

What's even more 'funny' in the above is that what 'worked' for the Euro area was not tangible measures such as LTROs, TLTROs, QE, ELAs etc, but the never-to-be-fulfilled promise of an ultimate backstop - the OMT, which never once was actually used or deployed as a tangible instrument and remains, through today, just that - verbal promise/threat unbacked by anything but the fiat of the markets conviction that no matter how much one needs to, swimming up the powerful waterfall is a bad idea.

The original 'Whatever it takes' moment: https://www.ecb.europa.eu/press/key/date/2012/html/sp120726.en.html

5/6/15: Right? Wrong? Green? Blue?..

With Greek chaos apparently presenting some analysts with a chance at comparative between Greece (belligerence) and Ireland (compliance) paths to 'salvation' in this crisis, one can point to two key observations these comparatives commonly miss:

1. Ireland's case was different from the Greek case: we complied with the EU/ECB dictate concerning private debts of a failed bank to private lenders. Not sovereign debts of the state to official lenders. To refresh some memories, Greece did default on (restructure) its sovereign debts to private lenders as a part of PSI. It is now on the verge of defaulting on sovereign debt to state/official lenders. 
2. Ireland's case for pushing harder for resolution of debt overhang does not involving a direct sovereign default (a unilateral refusal to pay on state liabilities), but rather a case for orderly cooperative writedown of the legacy bonds created by restructuring (at the time - unilateral - may I remind the readers) of promissory notes. This is crucially different from the Greek case which implies default on general government bonds across the entire swath of these obligations, not a well-defined targeted sub-set. Furthermore, Irish liabilities at play are held within Irish institution (the Central Bank), while Greek liabilities at play are held outside Greek institutions (the ECB, ESM and IMF). Finally, there was no question raised in the case of Ireland defaulting on IMF debt. In Greece, that portion of debt is now at play via the Greek Government proposal for debt restructuring published earlier this week.

Last, but not least: if anyone think it is 'crazy' or 'dangerous' to talk about the potential 'hard-ball' tactics or 'pressure' negotiations, here is a refresher from that tool of the markets: the WallStreet Journal that outlines for Ireland the case that Irish Government has failed to outline: http://www.wsj.com/articles/SB10001424127887324590904578289921520466036. 

4/6/15: Greece is Not Zimbabwe... but It Is Groovying with Zambia

So Greece opted to bundle its repayment to the IMF due June 5th into final one-shot payment due 'before' June 30th, raising total to be paid on June 30th to EUR1.5 billion. Before then, Greece faces public sector wages and state pensions bill of ca EUR1.5 billion, and EUR5.2 billion of maturing short-term debt.

The IMF official statement is here:
"The statement below is attributable to IMF Communications Department Director and Chief Spokesman Gerry Rice:

“The Greek authorities have informed the Fund today that they plan to bundle the country’s four June payments into one, which is now due on June 30.

“Under an Executive Board decision adopted in the late 1970s, country members can ask to bundle together multiple principal payments falling due in a calendar month (payments of interest cannot be included in the bundle). The decision was intended to address the administrative difficulty of making multiple payments in a short period. “"

As IMF notes, the 1970s decision (see below) is designed to deal with 'administrative' issues. In Greek case, the delay is linked to the ongoing battle between Greece and the Institutions [formerly known as Troika] over the new 'bailout' package. Which hardly fist 'administrative' label in any way.

IMF 1970s decision is cited here:

 Source: @jsphctrl 

Only payments for one calendar month can be bundled and interest due must be paid outside the bundling arrangement.

So far, in history of IMF, only Zambia availed of this arrangement in the 1980s. At least - a consolation prize for Europe - it was not Zimbabwe.

Another (close enough) case, but with more sinister outrun was Argentina, back in 2003-2004: "Last September, Argentina temporarily defaulted on a $2.9 billion payment due to the IMF until the new Standby Arrangement was hammered out. This March, the Argentines threatened to withhold payment of a $3.1 billion payment unless the IMF staff recommended completion of the second review of the loan accord." Source here. [h/t for this to @drubaid].

WSJ already updated their debt maturity timeline for Greece to reflect the 'bundling': http://graphics.wsj.com/greece-debt-timeline/

With OMT, LTROs, TLTROs, ELA, SMP, PSI, OSI, capital controls, SDR (IMF) reserves manipulation and now 'bundled' payments, Greeks are getting more and more inventive at creative sovereign finance...

Congratulations, Euro, the 'very soft default' has arrived...

4/6/15: Bank Fines Data

A handy graphic from @Reuters tallying up banks fines http://graphics.thomsonreuters.com/15/bankfines/index.html?utm_source=twitter
And a full table:

Of course, in Ireland, there has never been any unwanted actions by the core banks deserving fines or other such going ons... except for Ulster Bank and that on foot the IT systems meltdown: http://www.irishtimes.com/business/financial-services/central-bank-issued-fines-totalling-more-than-5m-last-year-1.2097056.

4/6/15: Trend-spotting Out in 3 Key Charts

If you want to understand the German (and the Euro area) economy key trend, here are three charts:

Source for all: http://www.pewsocialtrends.org/2015/05/21/family-support-in-graying-societies/#

Combined, these imply one thing and one thing only: Domestic Demand (Investment + Consumption + Government Spending) can be sustained [in theory] over the next decades by just one thing: "Government Spending". In practice, the bad news is: such spending is neither hugely productive, nor feasible in current levels of indebtedness worldwide. Worse [from economic perspective] news: much of this spending will be swallowed by health & end-of-life services that will not be increasing the productive capacity of our societies.

In the mean time, logic of the above two charts implies:

1. Increased build up of external imbalances (current account surpluses in more extremely ageing countries);
2. Increased savings not suitable (due to risk profiles) for private investment (hence higher retail & long-term demand for highly rated bonds and equity, as opposed to higher growth bonds and equity); 
3. Reduced domestic consumption;
4. Heating up tax competition on the side of capturing revenues (as opposed to incentivising higher growth);
5. Growing reliance on 'hidden' taxes (e.g. currency devaluations and indirect taxation) to amplify (1) and (4);
6. Current 'peak productivity' generation (chart 3 above) is screwed on the double, and productivity growth curve going forward is downward-sloping, most likely even if we control for technological innovation.

All six points currently are at play. Draw your own conclusions.

4/6/15: Irish Growth Fudge: Village, May

My most recent article for the Village Magazine [May 2015] is now available on-line: http://www.villagemagazine.ie/index.php/2015/05/1-not-5-growth-in-2014/

Covering the problems with Irish growth accounting.

4/6/15: Irish Fiscal Spring: Village, April-May

My recent article for the Village Magazine [April-May edition] on Irish economy is now available on-line: http://www.villagemagazine.ie/index.php/2015/05/spring-unsprung/ 

3/6/15: BRIC Services & Composite PMIs: May 2015

Time to tally up BRICs PMIs for May.

Manufacturing numbers were covered here: http://trueeconomics.blogspot.ie/2015/06/2615-bric-manufacturing-pmi-continued.html

On services side:

• Brazil Services PMI tanked spectacularly, falling from already strongly contractionary 44.6 in April to a 74-months low of 42.5 in May. 3mo average through May is now at an abysmal 45.0 against 3mo average through February at 49.9 and 3mo average through May 2014 of 50.7. All in, this is the third consecutive month of sub-50 readings and adjusting for statistical significance, Services PMI index rose above 50.0 only three times over the last 16 months. 
• Russia Services PMI, meanwhile, surprised to the upside, rising from 50.7 in April (signalling weak growth) to 52.8 in May, signalling pretty robust recovery. 3mo average through May, however, is poor at 49.9, albeit an improvement against 3mo average through February at 43.7 and 3mo average through May 2014 of 46.9. All in, this is the second consecutive month of above-50 readings and first month of readings statically significantly above 50.0. May reading is the strongest since December 2013.
• China Services PMI continued to signal expansion in the sector at an accelerating rate, as the index increased from 52.9 in April to 53.5 in May. 3mo average through May is now at a relatively strong 52.9 against 3mo average through February at 52.4 and 3mo average through May 2014 of 51.3.
• India Services PMI tanked in May, falling from 52.4 in April to a 13-months low of 49.6 in May. 3mo average through May is now at 51.7 against 3mo average through February at 52.5 and 3mo average through May 2014 of 48.8. This development suggests substantial weakening in growth conditions in India which was the bright spot for growth within the BRICs group.

As the charts below shows, on a composite side, Russia has now reversed - for the second month running - previous trend and is now acting as a positive growth contributor to BRICs aggregates. The rest of BRICs, however, are acting as a drag on growth, especially when it comes to Brazil.

Table below summarises recent changes in the PMIs for both components across all BRICs:

3/6/15: Russian Services & Composite PMIs: May

Having covered Russian Manufacturing PMI earlier (here), now lets update data for Services PMI and Composite PMI.

In contrast to disappointing Manufacturing PMI, Services PMI for Russia came in at a surprising strong upside, rising to 52.8 in May 2015 from 50.7 in April. This marks the highest reading since December 2013 and the second consecutive month of above 50.0 readings in the series. 3mo average through May 2015 is now at 49.9 as opposed to 3mo average through February 2015 at 43.7 and 3mo average through May 2014 at 46.9.

Composite PMI, pushed up by Services sector reading posted another surprising rise to 51.6 in May, signalling rather solid growth momentum, compared to 50.8 in April 2015. 3mo average for the series is at 49.7 against 3mo average through February 2015 at 45.8 and 3mo average through May 2014 at 47.5.

As chart above illustrates, we now have strong growth in Services sectors driving up overall Composite indicator. This is quite surprising, given April real dynamics (see here).

Overall, PMIs indicate a volatile, trend-less movement toward overall economic stabilisation that require two things to confirm a positive trend: 1) improvement in Manufacturing reading over the next 2-3 months and 2) continued above-50 readings in Services over another 2-3 months. In simple terms, it is too early to call a positive trend in the economy, but Services dynamics are encouraging.

3/6/15: Irish Manufacturing PMI: May 2015

Irish Manufacturing PMI for May came in at a stronger 57.1 reading up on 55.8 in April. The indicator currently stands above 12 mo average (56.3) and 3mo average (56.6). 3mo average through May is marginally up on 3mo average through February 2015 (56.5).

Looking at shorter run shows that current levels of activity are consistent with flattening out of the trend at high levels at the trend level of 56.5-57.0:

Overall, good solid reading for Manufacturing, subject to all usual caveats relating to questionable MNCs activities and data bias in favour of MNCs.

2/6/15: Greece: Back to the [Groundhog Day] Future

Couple of weeks back I posted a detailed list of ECB ELA hikes since February 2015. So here's an updated table:

- Feb 5, 2015 = EUR59.5 bn
- Feb 12, 2015 = EUR65.0bn
- Feb 18, 2015 = EUR68.3 bn
- Mar 5, 2015 = EUR68.8bn
- Mar 12, 2015 = EUR69.4bn
- Mar 18, 2015 = EUR69.8bn
- Mar 25, 2015 = EUR71.0bn
- Apr 1, 2015 = EUR71.7bn
- Apr 9, 2015 = EUR73.2bn
- Apr 14, 2015 = EUR74bn
- Apr 22, 2015 = EUR75.5bn
- Apr 29, 2015 = EUR76.9bn
- May 6, 2015 = EUR78.9bn
- May 12, 2015 = EUR80.0bn
- May 21, 2015 = EUR80.2bn
- May 27, 2015 = EUR80.2bn
- Jun 2, 2015 = EUR80.7bn

Now, that implies 3 weeks cumulative ELA rises of EUR700mln and reserve cushion on ELA below EUR2.5bn by my estimate. And for all that, Greek Central Bank recoverable assets are currently at EUR41 billion. Ugh… Oh… the proverbial nose is tightening… but on who's neck?

The neck is somewhere in here - within the Greek Target 2 liabilities debate, liabilities that continue to rise, prompting a fine, but esoteric debate:

• Sinn on his perpetual obsession, Target 2 liabilities an default: http://www.project-syndicate.org/commentary/varoufakis-ecb-grexit-threat-by-hans-werner-sinn-2015-05
• Bershidky (really - Karl Whelan) on Sinns perpetual misunderstanding of Target 2: http://www.bloombergview.com/articles/2015-06-02/does-greece-have-a-diabolical-plan-b-

I side with Karl Whelan on this. What is material is Sinn's assertion that the Greek residents' "stock of money sent abroad and held in cash having already ballooned to 79% of GDP". And Greece is facing big bills on debt redemptions and wages and pensions in the next 3 months (see timeline here: http://trueeconomics.blogspot.ie/2015/04/24415-greek-debt-maturities-through-2016.html) or:

One thing is clear from all of this: Credit Swiss estimate of 75% chance of a deal being done this month on Greek 'programme', while the CDS markets are pricing in 75% probability of Greek default over the next 5 years:

And we have equally conflicting 'proposals' on how such  programme might be arranged: http://www.zerohedge.com/news/2015-06-02/greece-troika-submit-conflicting-eleventh-hour-deal-proposals which can be summarised as "the bottom line seems to be that, fed up Syriza's unwillingness to concede its election mandate, the troika will now write the agreement for Greece and Tsipras can either sign it or not. Apparently, the IMF has scaled back its demands for EU creditor writedowns (another loss for Athens) but remains skeptical of the entire undertaking."

If this is true, the entire 'new deal' being offered to Greece amounts to a new can being kicked down the same road.

Map of the road? [note: the below table excludes short-term debt]

h/t to @NChildersMEP 

So to sum up today on the Greek front:

1. ELA is running tight, just as deposit flights goes on;
2. Target 2 liabilities continue to mount;
3. Probability of default remains material at present;
4. Choices available to Greek authorities are Plan A: horrible and Plan B: terrible; and
5. Absent debt write down, even the best case scenario still leads to high risk of a political crisis in the short run and a default in the medium (3 years) term. 

It's Back to the Future, in a Groundhog Day-like sorts of the Future...

2/6/15: BRIC Manufacturing PMI: Continued Pain in May

Things got pretty ugly for Manufacturing sector across the BRIC economies in April, and the trend continues into May. The latest data from Markit shows that:

• Brazil Manufacturing PMI slipped marginally from strongly contractionary 46.0 in April to 45.9 in May. 3mo average through May is now at an abysmal 46.0 against 3mo average through February at 50.2, 3mo average through May 2014 was 49.6. All in, this is the fourth consecutive month of sub-50 readings and adjusting for statistical significance, PMI index rose above 50.0 only once over the last 16 months. This May reading is the lowest for any month since September 2011.
• Russia Manufacturing PMI fell from a contractionary 48.9 reading in April to a very poor 47.6 in May. 3mo average through May is now at 48.2 - not a disaster, but poor - against 3mo average through February at 48.7, 3mo average through May 2014 was 48.6. All in, this is the sixth consecutive month of sub-50 readings and adjusting for statistical significance, PMI index rose above 50.0 only once over the last 9 months. May 2015 reading ties for the lowest level of PMI for the Russian economy since June 2009.
• China Manufacturing PMI rose marginally from a contractionary 48.9 reading in April to a still sub-50 reading of 49.2 in May. 3mo average through May is now at 49.2 - a poor reading for the economy - against 3mo average through February at 50.0, 3mo average through May 2014 was 48.5. This May marks the third consecutive month of sub-50 readings and adjusting for statistical significance, PMI index rose above 50.0 last time in July 2014.
• India Manufacturing PMI continued to buck the BRIC trend, staying above 50.0 mark, albeit slipping from 53.0 reading in April to 52.6 in May. 3mo average through May is now at 52.0 against 3mo average through February at 52.9, 3mo average through May 2014 was 51.3. All in, this is the 19th consecutive month of above-50 readings.

Overall, three out of four BRIC economies posted sub-50 PMIs for Manufacturing in May, for the third consecutive month in a row, while the fourth BRIC economy (India) posted slowdown in the rate of positive growth in the sector.