16/6/15: Russian Economy in a Chart: It's Structural...

Russian's economy problem is not crises-linked volatility. Instead, it is structural:

16/615: Building & Construction Ireland: Something's Up, Something's Down

So allegedly construction workers are now being bid out of Poland back into Ireland, the cranes are rising everywhere.

Nama is on track to deliver thousands of new homes, and commercial property markets are booming, primed for new development (see http://www.irishtimes.com/business/commercial-property/nama-set-to-dispose-of-ready-to-go-housing-sites-around-dublin-1.2234668)

Indices of construction activity are up in value, officially, q/q and y/y, while volume of activity is up y/y.

PMIs are signalling massive increases in building.

But the latest Building Information Index shows that the value of construction projects launched in 1Q 2015 was down EUR333 million or -20% on 1Q 2014, declining to EUR1.359 billion. In five out of seven escorts covered by the report there have been declines in activity, led by residential building sector that posted a decline of EUR174 million to EUR600 million in 1Q 2015. Good news, applications for new build are up 42% y/y in terms of value (including price and cost effects). Not surprisingly (down to price and development costs inflation), residential sector value of new applications is up 91%, while commercial is up 59%.

As they say, if we ain't building more and better, at least we are building more expensively...

16/6/15: Irish Exports & Trade Balance: April 2015

This year, we had some pretty darn bizarre stats coming out of the Irish data on exports of goods. April was no exception.

Take a look at the numbers:

• On a seasonally unadjusted basis, Irish imports of goods stood at EUR4,699.2 million in April 2015, up 9.35% y/y having previously posted a rise of 15.88% y/y in March. Over the last 3 months through April 2015, imports are up 12.57% y/y. Which sounds like a lot. But...
• Irish exports of goods have risen to EUR9,813 million in April 2015, up 30.08% y/y having previously posted an increase of 20.10% y/y in March. Over 3 months through April 2015, exports of goods were up cumulatively 22.4% y/y. April 2015 saw the highest monthly volume of exports of goods from Ireland on record.
• Irish trade surplus for goods trade only shot up 62.33% y/y in April to EUR4,484.1 million - the third highest monthly surplus on record. In March, trade surplus was up 27.60% y/y and over the 3mo through April 2015, trade surplus rose 38.2% y/y.

Charts to illustrate:

These numbers are simply not reflective of real economic activity in Ireland and are so heavily polluted by tax optimisation schemes and correlated exchange rates effects, there is little point of talking any more about our 'exporting' economy.

The CSO breaks down (or attempts to explain) some of the farce as follows: "The main driver behind the April 2015 increase was the increase in the exports of Medical and pharmaceutical products of €1,056 million (+63%) to €2,727 million. The exports of Organic chemicals also increased by €560 million (+40%) in April." On an unadjusted basis: "During April 2015 imports of Chemicals and related products increased by €234 million (+25%) to €1,179 million and imports of Miscellaneous manufactured articles increased by €137 million (+28%) to €628 million. Imports of Machinery specialised for particular industries also increased in April by 86% to €225 million." 

You have to laugh here: having created no new serious additional production capacity of any note over the last 12 months, we have rises in output to the tune of 25%-plus. If this wasn't a miracle economy of MNCs, we would be world-beating, record-holding economy for productivity growth, richer than Switzerland and Norway, combined. But do keep in mind, employment in pharma sector has been effectively stagnant for years, just as output of the sector is booming at exponential rates.

15/6/15: CBR Cuts Rates to 11.5% in Hope of Lifting Sagging Investment

Central Bank of Russia cut policy rate to 11.5% today from 12.5%, undershooting markets expectation for a 150bps cut to 11.0%. The move was expected and relatively modest cut this time around suggests more heavy cuts in 2H 2015. In part, this reflects relatively sharp decline in growth in April: having contracted modest 1.9% in 1Q 2015, Russian GDP fell at an annual rate of 4.2% in April. Another incentive for CBR to lower rates is the Ruble, which posted surprising comeback in early 2015, putting new pressure on the federal budget. CBR bough USD3.6 billion in May, in an attempt to keep Ruble lower.

Rate cut is a welcome move, but in current environment it also shows just how little room for manoeuvre the monetary policy has. Russian banks are deleveraging. Loans outstanding in the corporate and household sectors have fallen in 1Q 2015. The trend continued in April: SME loans share of total corporate loans fell from 22% in April 2014 to 18% in April 2015. In January-April 2015, corporate lending outstanding was up nominally 17% in ruble terms compared to the same period 2014. Inflation run at around 15.8%, which means that in real terms, corporate loans remained basically flat. Household loans grew by 4% y/y in ruble terms. Which means in real term, level of outstanding loans to households fell. As usual, roughly 1/3 of all corporate loans were denominated in foreign currency.

The rate cut will also help with non-performing loans. Stock of NPLs in the corporate sector rose by roughly 30% y/y in the first four months of 2015 to 6% of the total stock of corporate loans. Household credit NPLs stood at 7%. Both rates of NPLs are relatively benign, by Western standards, but the growth rate in NPLs is worrying. Lower cost of carrying these loans will help alleviate some of the pressures.

Overall, Russian investment remains a major bottleneck for the economy. Chart below shows Russian Investment as percentage of GDP, compared to both the Emerging Asia economies and Emerging Europe economies. This clearly highlights the dire state of Russian investment over 2000-2013, and a significant decline in investment from 2014 on, including the IMF forecasts for 2015-2020 period.

15/6/15: Next Step: Cyprus.

Next stop for Greece:
http://www.ecb.europa.eu/press/pr/date/2013/html/pr130321.en.html
... or in simple terms: Cyprus.

Anyone surprised by Draghi not mentioning any of this anywhere today, shouldn't be. Il Capo does not do the work of Soldati... But Dr. Draghi did say he thinks ELA underwrites solvent banks... presumably in an insolvent state... which, of course, makes banks insolvent too.

How? In two steps: Step 1 - banks hold 'insolvent' state bonds. As long as they do, the state remains 'solvent' but once the state becomes insolvent, banks go too. Step 2 - Greek banks have tax offsets. Once the state goes, so do the offsets and banks.

Source: Raoul Ruparel ‏@RaoulRuparel

15/6/15: Long Run Oil Price Chart

Quite a wonkishly fascinating chart (I love long time series, even if much of them are imaginary numbers): via http://uk.businessinsider.com/oil-is-cheaper-than-it-was-in-the-1860s-2015-6?r=US we have oil prices from 1860s on, though, sadly, not updated to most current, which is just around 1970s decade average.

Draw conclusions at your own peril. I chance to say: post 1900 price trend is all steady, until Governments mess up (the 1970s crisis - Governments-led, the 2000s lift-off - also Governments-led). So here you have it... boring commodity that is occasionally over-politicised into a bizarre beast.

15/6/15: Euro Area Labour Productivity: It's Low and Lagging

Euro area's problem in one chart? Might sound like a bit of an over-simplification, but here is a summary of labour productivity index simply constructed as real GDP per employee:

The chart shows several facts:

1. Euro area labour productivity is currently low, despite massive uplift in unemployment (which should have increased output per employee more substantially).
2. Euro area labour productivity has grown faster than that in the U.S. in the period of 1986-1995, but has been growing at a slower rate for some twenty years now.
3. Post-2010, euro area productivity has been lagging all groups of advanced economies.

Now, remember, no one talks as much about carrying out labour markets reforms as euro area leadership. In a way, this might be warranted, given poor performance, but in a way it also might suggest that the reforms are not working. After all, since the start of the Great Recession, allegedly, we had plenty of these reforms, and we had a 'productivity-enhancing' rise in unemployment, reduction in labour force and wages moderations galore. And productivity is not really expanding much. Secular stagnation, anyone?

14/6/15: Why Read Wallace's Speech on Nama & IBRC?

Mick Wallace, TD speech from earlier this week is worth a read: http://mickwallace.net/index.php/dail-work/dail-diary/760-ibrc-behind-bureaucracy-and-secrecy-our-government-takes-best-care-of-big-business

Let me quote some choice bits relating to the way Ireland operates at the level of IBRC, Nama et al. Italics and bold typeset are added by me.

"We are discussing the alleged preferential treatment of the private sector, in particular deals that may have cost Irish taxpayers startling sums of money. …The number of people who have complained to me in the past couple of years about trying to buy assets from financial institutions controlled by the State, including NAMA and banks, but have not been able to do so despite being prepared to pay more than others, is frightening."

So Deputy Wallace is saying here that, allegedly, Nama has been turning down higher bidders and accepting lower bids. This can take place perfectly legally, in cases where bidders are connected to the original borrowers (Nama does not allow such bids, although this practice is rather bizarre to begin with and is in contrast to normal practice in the U.S., past practice in Sweden and Finland, and even IBRC practice). If Deputy Wallace's allegation stands for cases excluding bids by parties connected to the original borrowers, then we have a problem.

"…I was also shocked at how NAMA, ...operated. I understood NAMA was going to hold assets until their value recovered and would not offload stressed assets for less than what they were worth. Some of the apartments I built have been sold for €100,000 each during the banking crisis, Apartments which I could not build now for €200,000, even if I got the land and the money for nothing."

Now, Deputy Wallace is an ex-developer with quite an experience under his belt. So he knows what he is talking about. Deputy Wallace goes on to cite several examples, where combined loss to the taxpayers due to Nama premature sales of assets amounts to ca EUR165.1 million. From just a handful of examples.

What he is arguing is that Nama has been engaged in a destruction of value - selling assets at depressed valuations compared to what could have been achieved if it properly managed these assets.

The deals cited by Deputy Wallace are all on the record, in the media. I have been made aware of at least one case of an asset originally pushed by Nama into the market, subsequently being withheld from the market due to legal actions, staying off the market for a year or less. The asset was subsequently sold by Nama for a hefty upside on the original asking price. An upside comparable with what vulture funds reap in their own operations. In other words, delays by developers in this case produced actually higher returns to Nama. These delays were actively resisted by Nama. I have been made aware of at least one asset sold by Nama seemingly in disregard for its upgrading and/or development potential and possible uplifts to asset value arising due to completion of major adjoining public infrastructure project. In another project, I was told of a situation whereby Nama presided over termination of a value-additive joint venture with another organisation that could have nearly doubled the value of the original asset.

In economics, there is a term of 'opportunity cost' - the cost arising from pursuing one course of action as opposed to opting for a different course. In Deputy Wallace-cited examples of public knowledge, that cost is non-negligible EUR165.1 million. Or, roughly, 2/3rds of the the 'savings' achieved in one year from imposing higher costs onto users of insurance-funded health services. That too is an 'opportunity cost'.

12/6/15: Anglo Overcharging Saga: Ganley Affidavit of 2013

Here are some select quotes from the Affidavit, filed by Mr. Declan Ganley on August 12, 2013 with respect to his knowledge about the share interest rate rigging practices at the Anglo Irish Bank as covered in my earlier posts here:
http://trueeconomics.blogspot.ie/2015/06/1062015-bombshell-goes-off-on-anglo.html
http://trueeconomics.blogspot.ie/2015/06/11615-full-letter-concerning-ibrc.html
and implications of which are discussed here:
http://trueeconomics.blogspot.ie/2015/06/11615-anglos-toxic-legacy-it-is-still.html

Per Mr .Ganley's Affidavit: he met Mr. R.K. - former executive in Anglo Irish Bank in October 2010 and during the course of his discussion with Mr. R.K., Mr. R.K. "told me that one of several areas that should be pursued should be the opportunistic over charging of interest rates targeting multiple customers of Anglo. He said that it wasn't a great secret within Anglo and that it had been standard practice for many years. He said that the skim on these loans was jokingly known as "TIBOR" after a Mr. Tiarnan O'Mahoney, who he said oversaw this practice at the bank. He explained that TIBOR was the fake rate that Anglo would apply, pretending that it was the daily DIBOR rate. He said that it would be easy to check, by just looking into what the actual DIBOR rate was on a given day and then checking what Anglo had reported it to be to various customers. The resulting mark up would go to Anglo's coffers."

Now, take a slightly different angle on this. Suppose you go to a Bank and ask for a tracker mortgage loan. Suppose you get a quote of "ECB rate plus 1%". You take the loan and subsequently receive a statement that your interest rate charged in the past month was 1.35%. Except that 1.35% = ECB rate of 0.05% + 1% declared margin + 0.3% clerk-own make up margin. You contracted to pay 1.05%. You paid 1.35%. The clerk pocketed 0.3% as personal gain. How fast would the law be brought down on that clerk's case? Oh, in a nanosecond.

In Anglo's DIBOR case, there is no law being brought down on anyone. Because a bank engaged in defrauding customers is not the same as a clerk engaging in defrauding customers.

"I expressed a certain degree of disbelief that such a practice could run for more than a year or two without someone spotting it, a regulator, auditor, a professional investor (e.g. a bond investor) or other. I also said it was hard to imagine that the practice was well known."

"Mr. R.K. then said that not only was it the case but that he even had a copy of internal Anglo Irish Bank minutes where it was covered as a matter of fact practice."

Now, note, the above alleges explicitly that the fraud was conducted repeatedly, regularly, knowingly and was approved by the bank.

"He offered to show me a copy, I said "yes" and he proceeded to produce a copy of a document that appeared to be minutes of an Anglo Irish Bank meeting covering TIBOR. I then made arrangements to forward a copy of the document to a media outlet in London, who proceeded to use their documents as part of their basis for a report on the "TIBOR" story…

One of the pages was a schedule of "TIBOR" rates that the bank has charged to their clients as genuine DIBOR rates over a provisos period. I checked these rates against the official rates for the same period and confirmed that none of the rates replicated the actual published DIBOR rates. It appeared from the documents that, per Mr. R.K.'description, the official DIBOR rates had all been randomly and substantially loaded by differing amounts by Anglo Irish Bank."

Now, let us return to that clerk in your local bank example. Suppose that there is evidence showing that the said clerk perpetrated the same fraud time after time after time with all borrowers who came to his office to secure a mortgage. And that he notified his superior of this fraud and arranged to report regularly on his progress of defrauding banks' clients. How long will it be, in your view, before the weight of law is brought down onto the bank clerk's superior?

We had several cases in the past when bank employees would engage in stealing clients funds. These cases were prosecuted, wrong was addressed and clients were compensated. But when it comes to "TIBOR", even after two courts establish evidence that Anglo Irish Bank engaged in sharp practices, and years after this is notified to the Irish authorities by the likes of Mr. Ganley and John Morrissey and John Flynn and others, there is static silence in the air on the topic from all Irish authorities concerned.

And this is a simple, established, evidence-backed case. What can we expect from a much more complex inquiry into business dealings of IBRC? And more importantly, what can we expect from any attempt by the State to even look into how Nama has been running its business?

Nope, I don't have much of conviction we will see a definitive conclusion to this Anglo/IBRC saga any time soon.

Note: Mr. Ganley's affidavit references the fact that in late 2010 the TIBOR scandal was made public in international press and through other media channels. In other words, Irish Government and authorities were aware of the problem since then. They are yet to reply on how it can be rectified.

12/6/15: IMF Tells Kiev: "Default"

Things are getting really testy Friday night in Ukraine. As I noted earlier today (see here: http://trueeconomics.blogspot.ie/2015/06/12615-ukraine-debt-haircuts.html), IMF gave Kiev a bit of strong-man-behind-me support in negotiations with private sector bondholders.

Later today, IMF head had the following to say on the subject: "To ensure economic and financial stability, [programme] objectives need to be achieved in a manner consistent with maintaining a strong international reserves position over the medium term, in line with projections under the program. In this regard, the NBU’s international reserves cannot be used for sovereign debt service without the government incurring new debt, which would be inconsistent with the objectives of the debt operation. Ultimately, Ukraine’s debt repayment capacity is limited by its fiscal capacity."

De facto, Ms. Christine Lagarde means the following: forex reserves held by the National Bank of Ukraine will not be used to fund debt repayments or servicing. IMF loans cannot be used for debt redemptions or servicing. Which means Kiev can only pay out on bonds out of current revenues left or via new borrowing in the markets. Kiev has none of those funds available, so Ms. Christine Lagarde effectively gave Kiev an order to default, as "Ukraine lacks the resources under the program to fully service its debts on the original terms."

"...in the event that a negotiated settlement with private creditors is not reached and the country determines that it cannot service its debt, the Fund can lend to Ukraine consistent with its Lending-into-Arrears Policy."

Ms. Lagarde effectively said in Ukraine, IMF will act differently than it did in all European programme countries and differently from pretty much every other case in its history.

In addition, Ms. Christine Lagarde has gone as far as ordering the bondholders to accept Kiev deal or face a forced default. Ms. Lagarde qualified this order being in the interest of the bondholders, explicitly linking that interest to the IMF 'conviction'. This is a major point, because IMF is now indirectly dictating - via Kiev - to the private markets terms and conditions of their surrender.

Note: I tend to agree with Ms. Christine Lagarde on the necessity of a write down, but this is one of these rare (if not unique) occasions where the IMF is effectively ordering a default and expropriating private property of third parties.

Final note: private sector investors have based their proposal for haircuts on the premise that Ukraine will be able to use forex reserves at NBU as a source of repayments post-restructuring. Ms. Lagarde now cancelled that position in one go.

All of this means two things - beyond the immediate consideration of Ukrainian situation:
1) IMF is trying to hedge the risk of future (not current) slippage in the programme and insulate the funds it supplies from being exhausted on debt servicing and repayments. This means the IMF is seeing Ukraine as a huge risk engagement at this stage and is doing preemptive damage control. All the talk about debt sustainability under the IMF programme is a fig leaf of decorum: even if haircuts are delivered as planned, IMF sees big risk of programme being derailed and wants its money ring-fenced.
2) IMF is also trying to re-establish some sort of an independent agency reputation, post-European experience.

Ukraine's default is now a matter of days, unless private bondholders surrender. Prepare for a wild ride…

12/6/15: Ukraine Debt Haircuts

Important article today in the FT on the issue of write downs on Ukrainian debt: http://www.ft.com/intl/cms/s/0/949628a4-102a-11e5-bd70-00144feabdc0.html#axzz3cg6nwFC9

In my view, the write down should take into the account discounts at which current debt holders have taken their long positions, so that vulture funds and distressed debt speculators take a larger haircut than someone who held debt over longer term and bought it at lower discounts. This will put heavier penalty onto distressed debt speculators and reduce penalty on investors who acquired Ukrainian debt before the crisis started.

Meanwhile, Ukraine's probability of default is climbing. Here are two sources: implied bonds probability of default at >95% and Credit Default Swaps implied probability of default at almost 82%.

Source: @Schuldensuehner

Source: CMA

The latest spike in default probabilities took place following IMF comments (see:  http://www.imf.org/external/np/tr/2015/tr061115.htm) that effectively altered markets expectation as to whether or not the IMF will allow Kiev to default on private debt. It now appears that the IMF has little problem with Kiev using strong-arm tactic of threatening (and enacting) a default on private sector debt. Prior to this week, the understanding was that the IMF will not lend to Ukraine if it goes into a default - a position that allowed private debt holders to argue that their intransigence is supported by the pressure from the IMF on Kiev to conclude a deal. Now, that pressure is gone and IMF seemingly is giving green light to Kiev to default, as long as such a default does not take place after any deal conclusion.

Update: The strategy deployed by IMF in the case of Ukraine - the strategy of actively forcing a default as a credible threat to private sector holders of debt - is not new. It was outlined in this document from 2002 (see page 28 of http://www.imf.org/external/pubs/ft/exrp/sdrm/eng/sdrm.pdf): "There may be a risk that creditors would withhold an extension of the stay in the hope that the IMF would provide more financing or call on the member to make additional adjustment efforts. For example, even in circumstances where the member is implementing good policies and negotiating in good faith, creditors may refuse to extend the period of the stay as a means of persuading the member to turn to the IMF for financing that could enhance the terms of any restructuring. The creditors could threaten to lift the stay to force the debtor to agree to more adjustment than contemplated under the IMF-supported program. Such risks could be reduced, however, by the resolute application of the IMF’s policy of lending into arrears, under which it signals its willingness to continue to support a program, even if the member has interrupted payments to its creditors."

12/6/15: Did Ireland Abandon Homeowners in Need?

An short, but informative article on the issue of mortgages arrears in Ireland:
http://www.herald.ie/news/state-has-abandoned-mortgage-holders-31296163.html

The article correctly points to the lack of state engagement with the issue of long term arrears and the banks' strategy of extend-and-pretend in hope that rising house prices will maximise their returns on future foreclosures.

But the real, the main, point here is whether the Irish state has abandoned the homeowners in need. In my view - the Irish State was never concerned with the interests of homeowners. To think otherwise is to delude oneself once again into a fallacy of seeing the State as an agent concerned with the interests of the people.

Here are the excerpts from the recent study commissioned by the EU Parliament on changes in core rights accruing to individuals across a number of European nations in the wake of the post-crisis austerity programmes. The selection addresses the view of the reporters on Ireland in the context of the right to housing.

"Right to housing was affected in Belgium, Cyprus, Ireland and Spain in two
principal ways: with the increase of foreclosures and evictions and by the
interventions into the allocation of social housing and rental allowances." (page 15)

Note: this is not 'new' as in being indicative of an 'abandonment' of homeowners - rather, this is an assessment of systemic, long-term changes enacted by the State. And it covers both: private structure of homeownership and rental markets, and public provision of social housing.

"At the same time, in Belgium, Cyprus and Ireland, rental allowances or the
availability of social housing are inadequate and insufficient to respond to the needs of people in the wake of the crisis" (page 123)

"The Irish social housing budget was cut by 36% in 2011 and by another 26% in 2012. At the same time, with the loss of jobs and turbulence in the labour market, it is not surprising that the number of households on waiting lists for social housing increased by 75% between 2008 and 2011, i.e. from 56,000 to 98,000. Moreover, it is estimated that in 2011, approximately 5,000 people were homeless in Ireland compared to 3,157 people in 2008. The continued rise in rents, particularly in the last 12 months, is seen as contributing to the problem498, while rent supplements, having been reduced by 20% to 25%, are becoming increasingly inadequate with the severe budget cuts. Certain vulnerable groups have been adversely affected in Ireland. Travellers have
experienced 85% spending cuts on housing since 2008. Moreover, resource allocations for asylum seeker accommodation were reduced by 13% in 20115. In 2008, 36% of all single-parent households were on the waiting list for social housing and one fifth of all people who relied on a rent supplement to meet their rental costs were single parents. The capital assistance scheme, which used to house people with disabilities, was also reduced from EUR 145 million in 2010, to EUR 50 million in 2012" (page 125)

So here you have it - the EU report does not document an act of abandonment as a departure from past policy. It suggests systemic, long term trend toward such abandonment. In other words, the report findings imply a lack of concern or interest on behalf of the State to secure rights to housing from the start of the crisis, not a sudden change of heart.

Full EU report is available here: EUP (2015: PE 510.021) "The impact of the crisis on fundamental rights across Member States of the EU Comparative analysis". Study for the Libe Committee, Policy Department C: Citizens’ Rights and Constitutional Affairs, European Parliament. February 2015: http://www.europarl.europa.eu/RegData/etudes/STUD/2015/510021/IPOL_STU(2015)510021_EN.pdf