17/8/15: Euro: The Land Where Growth Goes to Die

So we have had a massive QE - even prior the current one - by the ECB. And we are having a massive QE again, courtesy again, of the ECB. And the bond markets are running out of paper to shove into the… you've guessed it… the ECB. And the banks have been repaired. And we are being fed our daily soup of alphabet permutations (under the disguise of the European Union 'reforms' and policy initiatives): ESM, EFSF, EFS, OMT, EBU, CMU, GMU, TSCG, LTRO, TLTRO, MRO, you can keep going… And what we have to show for all of this?

2Q 2015 growth is at 0.3% q/q having previously posted 0.4% growth in both 4Q 2014 and 1Q 2015. This is, supposedly, the fabled 'accelerating recovery'.

So what do we have? Look at the grey lines in the chart above that mark period averages. Pre-euro period, GDP growth averaged 0.9% in quarterly terms. From 1Q 2001 through 4Q 2007 it averaged 0.5%. Toss out the period of the crisis when GDP was shrinking on average at a quarterly rate of 0.1% between 1Q 2008 and through 1Q 2013 and look at the recovery: from 2Q 2013 through 2Q 2015 Euro area economy was growing at an average quarterly rate of less than 0.27%.

Meanwhile, monetary policy is now stuck firmly in the proverbial sh*t corner since 2012:

You'd call it a total disaster, were it not for Japan being one even worse than the Euro area… and were it not for the nagging suspicion that all we are going to get out of this debacle is more alphabet soups of various 'harmonising solutions' to the crisis... which will get us to becoming a total disaster pretty soon. Keep soldering on...

15/8/15: Irish Universities: None in Top 100, One in Top 200 & Top 300

Academic Ranking of World Universities 2015 are out (see details here: http://www.shanghairanking.com/ARWU2015.html) and Ireland is not exactly shining.

Only 3 Irish Universities are ranked in top 500:

TCD managed to post flat performance on 2014, reaching its highest Institutional rank since 2003. Which is the best news we had.

Meanwhile, UCD ranking fell pretty substantially, with university ranked in 201-300 place in 2014 now ranked in 301-400 place:

UCC posted second consecutive year of declines in 2015, although it stayed within the 401-500 ranking group.

I will be blogging on data coming out of the survey more later this month, but for now, top line conclusion is: things are not getting better in top Irish Unis relative performance.

Time for more self-congratulatory government talk, promises and awards… and let's get few more Unis designated, just because stretching already scarce resources thin is, obviously, the best way to achieve greatness...

15/8/15: EEU: Kyrgyzstan the latest addition

On August 12, Kyrgyzstan became a member of the Eurasian Economic Union (EEU), joining Russia, Kazakhstan, Belarus and Armenia. Kyrgyzstan is the least developed of the EEU economies, relatively proximate only to Armenia in the group.

15/8/15: Russian External Debt: Big Deleveraging, Smaller Future Pressures

Readers of this blog would have noted that in the past I referenced Russian companies cross-holdings of own debt in adjusting some of the external debt statistics for Russia. As I explained before, large share of the external debt owed by banks and companies is loans and other debt instruments issued by their parents and subsidiaries and direct equity investors - in other words, it is debt that can be easily rolled over or cross-cancelled within the company accounts.

This week, Central Bank of Russia did the same when it produced new estimate for external debt maturing in September-December 2015. The CBR excluded “intra-group operations” and the new estimate is based on past debt-servicing trends and a survey of 30 largest companies.

As the result of revisions, CBR now estimates that external debt coming due for Russian banks and non-financial corporations will be around USD35 billion, down on previously estimated USD61 billion.

CBR also estimated cash and liquid foreign assets holdings of Russian banks and non-bank corporations at USD135 billion on top of USD20 billion current account surplus due (assuming oil at USD40 pb) and USD14 billion of CBR own funds available for forex repo lending.

Here are the most recent charts for Russian external debt maturity, excluding most recent update for corporate and banks debt:

As the above table shows, in 12 months through June 2015, Russian Total External Debt fell 24%, down USD176.6 billion - much of it due to devaluation of the ruble and repayments of maturing debt. Of this, Government debt is down USD22.1 billion or 39% - a huge drop. Banks managed to deleverage out of USD59.9 billion in 12 months through June 2015 (down 29%) and Other Sectors external liabilities were down USD88.8 billion (-20%).

These are absolutely massive figures indicating:
1) One of the underlying causes of the ongoing economic recession (contracting credit supply and debt repayments drag on investment and consumer credit);
2) Strengthening of corporate and banks' balance sheets; and
3) Overall longer term improvement in Russian debt exposures.

14/8/15: IMF on Two Unfinished Bits of Greek Bailout 3.0

IMF's Ms. Christine Lagarde statement on Greece:

Key points are:

1) Per Lagarde, “of critical importance for Greece’s ability to return to a sustainable fiscal and growth path", "the specification of remaining parametric fiscal measures, not least a sizeable package of pension reforms, needed to underpin the program’s still-ambitious medium-term primary surplus target and additional measures to decisively improve confidence in the banking sector—the government needs some more time to develop its program in more detail." In other words, the path to Eurogroup's 3.5% long term primary surplus target on which everything (repeat - everything) as far as fiscal targets go, hinges is not yet specified in full. The Holy Grail is not in sight, yet...

2) "…I remain firmly of the view that Greece’s debt has become unsustainable and that Greece cannot restore debt sustainability solely through actions on its own. Thus, it is equally critical …that Greece’s European partners make concrete commitments in the context of the first review of the ESM program to provide significant debt relief, well beyond what has been considered so far." In simple terms, for all the lingo pouring out of the Eurogroup tonight, Greece has not been fixed, its debt remains unsustainable for now and the IMF - which ESM Regling said tonight will be expected to chip into the Bailout 3.0 later this autumn - is still unsatisfied with the programme.

"Significant debt relief" - off the table so far per Eurogroup - is still IMF's default setting.

14/8/15: Two Facts About Irish Minimum Wage

Having recently spoken about the issues of minimum wage, especially in the Irish context, here are some facts, based on Eurostat latest data.

Firstly - about the level of minimum wages in Ireland relative to the EU counterparts.

In monthly terms, Irish minimum wage comes in at EUR1,462 per month (1Q 2015 data). Despite some claims that we have the second highest minimum wage in Europe, this puts us in the 5th position just below 4th ranked Germany (EUR1,473 per month) and ahead of the sixth ranked France (EUR1,458 per month). It is worth noting that Denmark, Italy, Cyprus, Austria, Finland and Sweden have no national minimum wage.

However, when comparing minimum wages in different countries, it is worth looking at figures, adjusted for Purchasing Power Parities (controlling for cost-of-living differences, albeit imperfectly). Chart below shows these:

In terms of PPP-adjusted figures, Irish minimum wage is 6th highest in the EU at EUR1,238 per month (PPP). This is quite significantly ahead of the UK (ranked 7th at EUR1,114 per month PPP-adjusted), but below France (at EUR1,337 per month PPP-adjusted).

Another possible comparative is in terms of 'replacement rate' for minimum wage earners - in other words, how much worse-off (relatively-speaking) minimum wage earners are compared to, say, average wage earners. Chart below illustrates that:

Per chart above, minimum wage earners in Ireland earn on average around 41.6% of the gross average wage on a monthly basis. Comparable, but slightly more than their counterparts in the UK.

What the above two charts illustrate is that Irish minimum wage is not set at an extremely high level, as some claim. 

They also show that crucial point for people earning minimum wages is the cost of living in Ireland, rather than just the level of wages they earn. 

My view, within the context of the Irish minimum wage debate is that we must focus more of our efforts on the cost of living side, less on incrementally increasing minimum wage. And more crucially, there is little point, in my opinion, to increase minimum wage by a small (token) amount, as variability of hours worked and zero hours contracts offered will erase much of the benefit to be gained by those still holding minimum wage jobs after the wage increase. 

Sadly, for politicians, small/marginal give-aways to well-defined groups of voters bring in political returns. Large-scale, longer-term reforms bring in dissatisfaction of vested interest groups & lobbies. No prizes for guessing what path Irish Government will opt for ahead of the elections...

Update: with thanks to Seamus Coffey ( @seamuscoffey) here are two charts detailing tax burden for minimum wage earners:

Given the levels of progressivity in Irish tax system, it is quite un-surprising that Irish minimum wage earners are carrying low tax burden on tax side, which does push after-tax minimum wage in Ireland to higher poll position in the league tables. On the other hand, the Eurostat data on which my analysis was based uses 39 hour weeks for computing minimum wage earnings, without adjusting for working days. Which, probably, pushes our minimum wage earners' annual incomes down (especially given the prevalence of low hours and zero hours contracts in some sectors).

Thus, as a note of caution, all of the above data should be read as all economic data should be read: with caution and without attempting to make sweeping generalisations.

14/8/15: Individual Consumption and the Irish Crisis

Couple of interesting charts showing the latest annual data on individual consumption in the EU.

First, volume indices of real expenditure per capita in PPS (with index for each year set at EU28=100) (these figures are adjusted for inflation and exchange rates differences.

The chart shows how growth in consumption in the EU28 over time was coincident with decline in relative position of Ireland in terms of individual consumption throughout the crisis period. In 2003-2004 Irish individual consumption stood 8 and 7 percentage points above EU28 average. This was marginally below the EA12 average. In 2005-2007, Irish individual consumption grew faster than consumption for EU28 and EA12, rising to 110 in index terms, or 10 percentage points above the EU28 and roughly 2 percentage points above the EA12. Since 2008, however, Irish individual consumption fell both relative to EU28 and EA12 figures. In the second year of 'robust recovery' - 2014 - Irish individual consumption (adjusting for inflation and exchange rates differences) hit the period low of 93 - full 7 percentage points below EU28 and 14 points below EA12.

As the result of the crisis, our real consumption per capita was down 16.2% on 2007 levels, which is the second worst performance after Greece (down 17%). Our performance was much worse than a 13.6% decline registered in the U.K., 10.6% decline registered in Iceland, 9.9% drop in Cyprus, 9.7% decline in the Netherlands, 8.2% drop in Spain and so on.

In nominal terms (without adjusting for inflation), our individual consumption record was equally abysmal (comparing only euro area states to remove distorting effects of exchange rates variation):

In summary, even after the onset of the 'fastest recovery' in the euro area, Ireland's actual individual consumption of goods and services remained au-par. In 2014 itself, our individual consumption grew 6.0% y/y - second fastest in EU28 after Luxembourg - but years of past devastation meant that our consumption remained second worst hit compared to pre-crisis levels. In 1999, Ireland ranked 12th in terms of individual nominal consumption in the EU 28 group of states. Our best year was attained in 2008 when we ranked 3rd. In every year between 2011 and 2014, we ranked 11th. In simple terms, the entire history of the euro area membership for Ireland has been equivalent to, largely, standing still in terms of our relative wellbeing compared to other EU states. 

13/8/15: Eurocoin: Marginal Strengthening of Euro Area Growth in July

Earlier this week I covered Ifo Institute Index of Economic Conditions for the Euro Area.  This time around, lets take a look at the leading growth indicator, Eurocoin published by CEPR and Banca D'Italia.

July 2015 reading for Eurocoin stood at 0.41, up on 0.39 in June and well ahead of 0.27 reading recorded in July 2014. This means that economic growth slightly firmed up at the start of Q3 2015 compared to the end of Q2 2015.

2Q 2015 Eurocoin average suggests growth at around 0.35-0.4% which compares to 0.4% growth recorded in actual real GDP in 1Q 2015. However, growth improvements are continuing to come against core inflation (HICP) remaining at 0.1 percent through May 2015.

This is despite the ECB rate remaining in the near-zero corner:

The reason is simple: per Eurocoin release, "the recovery in stock prices and the performance of industrial activity in several of the leading countries prevailed over the decline in confidence of households and firms." In other words, growth firming up is coming not from organic real activity on the ground, but from trade effects (weaker euro) and financial markets effects (monetary policy driving euro).

12/8/15: Ifo Index of economic conditions: Euro Area 3Q 2015

Latest Ifo Index of Economic Climate for the Euro Area fell from 129.2 for 2Q 2015 to 124.0 for 3Q 2015, running ahead of 118.9 reading in 3Q 2014 and at the second highest level since 4Q 2007.

Present Situation Index reading, however, is up at 148.3 in 3Q 2015, compared to 145.5 in 2Q 2015 and 128.7 in 3Q 2014. The index is at its highest reading since 4Q 2011. Overall, based on Present Situation assessments, 1Q 2015 - 3Q 2015 activity (average of 137.1) is running below the levels of activity during previous expansionary sub-cycle of 1Q 2011 - 3Q 2011 (average of 152.9), suggesting weaker growth conditions in the current recovery phase than 4 years ago.

Expectations for the next 6 months period Index slipped significantly in 3Q 2015 to 109.8 from 119.7 reading for 2Q 2015 and matching rather poor expectations reading recorded in 1Q 2015. The Index is down on 3Q 2014 when it stood at 113.1. Over the entire 2015 to-date, the index has averaged 113.1 against same period average of 117.5 for 2014, and identical to 113.1 average for the same period of 2011. On expectations basis, there is weak optimism among survey participants in growth conditions forward.

Expectations Index gap to Present Conditions is currently at 74% compared to 82.3% in 2Q 2015 and 93.4% in 1Q 2015. This suggests overall deepening gap between current assessment of economic situation and forward expectations to the downside on forward expectations. Still, judging by 6mo lags, current conditions continue to turn out better than previous expectations of the same would have implied, with 6 mo lagged expectations index under-shooting forward 6 months reading for actual conditions by 38.5 points.

Charts to illustrate:

As charts above show:

• Expectations Index (6mo forward) suggests weaker conditions expectations in the future and remains consistent with poor producers' expectations prevailing from around 4Q 2013 on.
• Current situation assessment, meanwhile, is improving, but remains relatively weak and only most recently (2Q-3Q 2015) reaching above historical average line.
• Current economic sentiment published by the EU Commission has now been diverging from 6mo forward expectations published by Ifo for the period starting from 4Q 2014, with expectations being reported by Ifo running more subdued (and worsening) than EU Commission reading of current conditions.
• Despite being more optimistic than Ifo Expectations, and despite running above its own historical average, the EU Commission Sentiment Index remains rather subdued by historical standards.

In simple terms, things are getting better, but these improvements appear to be more on the surprise side, rather than structural side.

11/8/15: Russian 2Q growth: beating forecasts on the wrong side

With apologies for a slight delay (I am actually away from work these weeks), here is a quick update on Russian 2Q 2015 GDP figures.

Those who read my musings on the Russian economy would recall that in recent months we have been seeing some signs of stabilisation in the economy performance, albeit I have been reluctant to call these signs a full turnaround as data required robustness confirmation and broadening of any improvements.

Good thing I stayed more cautious on the matter of calling a recovery. In 1Q 2015, Russian economy shrunk 2.2% y/y, surprising on the positive side the consensus expectation of a 3.7% drop. However, this time around, 2Q 2015 preliminary estimate for real GDP growth came in at 4.6%, worse than consensus forecast for 4.5%.

Now, 0.1 percentage points on expectation is not quite ugly, but -4.6% is ugly. Thus, in itself, the 2Q 2015 figure does not quite put under sever pressure the expected 3.4-3.6% annual contraction for 2015 as a whole, but it does put question marks around the thesis of Russian economy's recovery.

The contraction in 2Q takes us into July-August when oil prices have fallen even further and ruble devaluation pressures returned - both making it hard for the CBR to cut rates to support economy.

Noticeably, acceleration in the decline can be seen in q/q seasonally-adjusted figures. These are yet to be released, but Capital Economics shows estimates of 2.5% q/q decline in real GDP on seasonally adjusted basis, nearly double the rate of contraction (1.3% q/q) recorded in 1Q 2015.

The charts below show just how ugly 2Q 2015 figures are on a historical perspective:

 and over the shorter horizon:

Source: both: Capital Economics

As noted by Barclays, much of the deterioration in growth in 2Q was down to oil prices

 Source: @Schuldensuehner

Although in terms of pressures on growth, consumption component of the Domestic demand remains weak.

Source: @Schuldensuehner

The CBR policy rates are clearly weighing on the consumption and investment ability to rebound, with high policy rate (11%) compounding already tight funding markets for the banks, resulting in very high cost of credit.

We have no details on the GDP figure breakdown, yet, but Capital Economics suggested that based on 2Q headline figure, household expenditure fell at a rate similar to 1Q 2015 (-8.9%). Which implies that it was industrial production that drove growth figures further down in 2Q 2015.

The latter point is consistent with the evidence from Manufacturing PMIs in recent months:

So what's the top level conclusion from all of this? 2Q was ugly. Signs of stabilisation in the economy are still present, but robustness of these signals is now more under question than a week ago. In simple terms, we will need to see Q3 data posting closer to 0% change in GDP and beating 1Q 2015 reading, if we are to confirm expectation for growth recovery in 4Q 2015 - 1Q 2016. 

10/8/15: Europe: Where All Do What None Believe In

Here is Bloomberg report on the Finnish Government coalition position on the Greek Bailout 3.0 which, in simple terms, implies that at this stage, no one, save for Brussels and ESM, believes that the Greek Bailout can work. And yet everyone votes in favour of the bailout.

You can't make this up.

Per Bloomberg: "The Finns party, which in April became part of a ruling coalition for the first time, has no choice but to support a bailout since not doing so would cause the three-party government to collapse. That would only open the door for the left-wing opposition, Soini said."

Of course, as we all know, were the Left wing opposition to come to power in Finland, it too will vote for that which they think won't work. Promptly. Without kicking any fuss. Just as Syriza is doing now in Greece.

It no longer matters who, where and why is in power in Europe, as everyone - on political Left, Right and Centre - is hell-bent on doing that which none of them believe in. Except for the Middle Earth of EU 'institutions' who believe in nothing and hence have all the power to do precisely that which they believe in...

8/8/15: Transactions Costs v Quality of Banks' Collateral

In standard financial theory (and practice), presence of transactions costs has an impact on asset prices traded in the markets. A recent ECB Working Paper, titled "Collateral damage? micro-simulation of transaction cost shocks on the value of central bank collateral", by Rudolf Alvise Lennkh and Florian Walch (ECB Working Paper Series, No 1793 / May 2015: https://www.ecb.europa.eu/pub/pdf/scpwps/ecbwp1793.en.pdf) "analyses how changes in transaction costs may affect the value of assets that banks use to collateralise borrowings in monetary policy operations."

The authors estimate the effect of a 10 basis point increase in transaction costs to be a decline of -0.30% in collateral value. Adjusting for the expected drop in the volume of trades for each asset (reduced liquidity), the decline in asset prices is shallower - at -0.07%. "We conclude that banks will on average suffer small collateral losses while selected institutions could face a considerably larger collateral decrease."

So far - benign?

The problem, of course, is in that second order effect. The authors look at 25% and 75% decreases in turnover of pledged collateral debt instruments (e.g. bonds pledged by the banks in repo operations). This second order effect reduces the loss of collateral value to -0.22% and -0.07%, for the two assumed turnover reductions scenarios, respectively. In other words, the lower the turnover rate of the pledged assets, the lesser is the impact of the transactions costs on collateral value.

Now, as the study notes, when collateral is held longer (turnover lower), liquidity in the markets is impacted. The longer the banks hold collateral assets off the markets and in the central banks' repo vaults, the lesser is market liquidity for traded collateral-eligible paper. Thus, the higher is the associated liquidity risk. Banks dump risk premium into the markets.

Cautiously, the ECB paper goes on: "The results underline that transaction costs in financial markets can be one among many factors contributing to the scarcity or decline of liquid, high quality collateral. …an upward transaction cost shock that occurs simultaneously with a market or regulation-induced shortage in collateral assets, and in particular high-quality collateral assets, could hamper the access of financial institutions to central bank liquidity. The central bank could [make] additional collateral eligible for monetary policy operations. As most of high-grade collateral is already central bank eligible, such a move could entail a shift to collateral assets with more inherent risk that would have to be compensated with appropriate haircuts. This in turn could increase asset encumbrance on banks’ balance sheets."

But there is another channel not considered in the paper: reduced turnover of collateral implies reduced supply of assets into securitisation pools, as well as into the OTC markets. Both effects are hard to estimate, but are likely to induce even higher risk premium into the markets for risky assets, pushing the above estimates of costs wider.

As an interesting aside, the table below summarises, by the end of 1Q 2014, one quarter of all collateral pledged into Eurosystem central banks repo operations was of low quality variety Non-marketable assets (in other words, assets with no immediate markets). This represents an increase in the share of low quality assets from 24.75% in 1Q 2012 to 24.96% in 1Q 2014. Medium-to-low quality stuff accounted for another 20 percent of the total.

Now, for all the esoteric debates about the ECB supplying liquidity, not providing solvency supports, one wonders just how much of a haircut would all of this proverbial 'assetage' gather were it to be collateralised into the markets to raise the said liquidity… for you know: if a bank is solvent, its assets would cover its liabilities, inclusive of haircuts, which means they are repoable… in which case, of course, there is no liquidity shortage to cover, unless markets were misfiring. The latter simply can't be the case in 2014 when the financial markets were hardly oversold.