23/6/2012: Iceland makes another early repayment of IMF funds

Iceland makes another early repayment of IMF funds:

22/6/2012: Bilateral Trade with Russia - January-April 2012

After a couple of months, it is time to update the stats for Ireland's bilateral trade with Russia, especially since this week we saw the release of January-April Trade in Goods data.

Exports to Russia (goods only) rose to €189mln in 4 months from January-April 2012, up on €170mln for the same period of 2011. The y/y increase therefore is running at 11.2% for trade with Russia, against -0.62% contraction recorded for our total goods exports. Among 21 geographies other than EU27, bilateral exports to Russia posted 7th highest rate of growth in first four months this year compared to same period 2011.

Meanwhile, Imports from Russia fell from €54mln to €40mln y/y over the first four months of 2012.

As the result, our trade surplus vis a vis Russia rose from €116mln in January-April 2011 to €149mln for the same period of 2012 - a rise of 28.5% y/y (third largest increase among non-EU27 countries).

When compared to the rest of BRICs, Russia is not the only country that is generating trade surpluses for Ireland's exporters. India accounted for just €81mln in exports from Ireland in the first 4 months of 2012, up on €64mln a year ago, but it generated a trade deficit for us of €74mln in 2012 so far, against a deficit of €73mln in the same period of 2011. Brazil imports from Ireland fell from €94mln in January-April 2011 to €91mln in January-April 2012. As the result of this and due to much higher imports from Brazil, Brazil-Irish trade posted a deficit against Ireland of €100mln in January-April 2012 against a surplus of €31mln a year ago. China accounts for a much larger share of our exports, with exports of €757mln in January-April 2012, down on €759mln in the same period of 2011. However, we imported €859mln worth of goods from China in the first four months of 2012 (up on €855mln in 2011), resulting in a trade deficit against Ireland in our bilateral trade with China.

Crucially, Irish trade balance in goods with Russia is much more value-additive than our trade with any other non-EU27 country, save Australia and Switzerland. In the first four months of 2012, our ratio of exports to imports vis-a-vis Russia rose from 3.15:1 a year ago to 4.73:1. Meanwhile, our overall trade in goods imports intensity rose from 1.76:1 in 2011 to 1.81:1 in 2012.

Forecasts for 2012 bilateral trade with Russia based on historical trend and latest changes in volumes is provided below:

22/6/2012: Deleveraging of Households US v UK, Spain

An interesting chart from McKinsey today updating deleveraging process for household debt in the US, Spain, and the UK:

Nothing new here (I have been saying the US is ahead of Europe on deleveraging, if only due to speedier foreclosure actions - which are slowing down due to legal challenges etc). And, unfortunately, the chart is very limited as to the scope of countries represented... but it does show how unrealistic are Spanish current expectations when it comes to how much more debt repayment would have to be generated to even get close to a more benign debt crisis in Sweden in the 1990s.

22/6/2012: One hell of a graphic

Love this graphic via Washington Post:

22/6/2012: Don't rush with that 'Germany Imploding' headline, mate

So the silly season of 'Germany is collapsing' is on again today with the release of the Ifo Index and the subsequent media charade on foot of yesterday's PMIs.

Now, let's take a look at the thesis so beloved by on-line business media hacks. Is Germany really caving in?

Headline Business Climate Index from Ifo:

What do the numbers tell us?

• Headline Business Climate index fell from 106.9 in May to 105.3 in June - a monthly drop of 1.5%. Previous monthly drop was steeper at 2.7%, but 'business media' missed that.
• Year on year, the index is down 7.9% - steeper than back in May when it fell 6.4% y/y.
• 3mo MA is down 1.7% on previous 3mo period and is down 5.9% y/y.
• 6mo MA is at 108.3 same as 12mo MA and the last two months both came in at below that. But the 3mo MA is at 107.4 - and that is probably more significant of an indicator than monthly readings. 
• June reading is the lowest since March 2010 - the headline that many captured in their reports.

So things are not great. But are the schloss walls caving in? Look at the historical chart above. Current reading. Current 3mo MA is 107.4 - well ahead of historical average of 100.8 and crisis-period average of 103.2.

Next, take a look at the components of the index:

• Business Situation sub-index actually improved in June to 113.9 from 113.6 in May. So last m/m move was +0.5% against previous m/m move of -3.6%. Y/y comparatives are less pleasant: June 2012 y/y index fell 7.5% against May 2012 y/y fall of 6.7%. 3mo MA fell 1.8% on previous and 5.7% y/y. 
• Overall Business Situation sub-index remain weak - marking second lowest reading since August 2010. And it is below 12mo MA of 117.0 and 6mo MA at 116.0 both in level terms and in 3mo MA terms. Still, the sub-index is well ahead of 101.7 historical average and 107.1 crisis-period average.
• Business Expectations sub-index fell 3.6% m/m in June to 97.3 compounding the fall of 1.8% in May. Y/y sub-index is down 8.3% in June after -6.0% drop in May. 3mo MA is down 1.7% on previous and down 6.2% on same period in 2011.
• At 100.3 3moMA is now below 6moMA at 101.2 but is identical to 12mo MA at 100.3. The 3moMA for the sub-index is basically tracing the historical average of 100.2 and is only slightly ahead of the crisis-period average of 99.7.
• Sub-index is now at the lowest point since October 2011.
• But I wouldn't read too much into expectations sub-index, which tends to reflect the mood of the day, rather than act as a true leading indicator.

So overall, things are weak. The weakness is not accelerating in m/m terms, but is accelerating in y/y terms. Short-term averages are performing in line with June trends. Not a happy place, but not quite Armageddon either.

21/6/2012: IMF Article IV on euro Area: a massive miss, but loads of passion

So having penned the G20 response to the euro area crisis (see post here) last night, tonight, IMF decided to issue another missive on the topic (here). Which makes you wonder if the IMF has become so frustrated with the euro area's lack of real leadership, it has now resorted to the tactic known as blanket bombing the EU with gloomy assessments.

Here are some interesting extracts [comments and emphasis are mine]:

"Downward spirals between sovereigns, banks, and the real economy are stronger than ever. 

As concerns about banks’ solvency have increased—because of large sovereign exposures and weak growth prospects in many parts of the euro area—the effectiveness of liquidity operations has diminished. [It is clear that the IMF is seeing the entire euro area response policy as a set of liquidity supply measures, rather than solvency and structural reforms set of measures.]

Sovereigns, in turn, are struggling to backstop weak banks on their own. Absent collective mechanisms to break these adverse feedback loops, the crisis has spilled across euro area countries. Contagion from further intensification of the crisis—including acute stress in funding markets and tensions involving systemically-important banks—would be sizeable globally. And spillovers to neighboring EU economies would be particularly large. 

A more determined and forceful collective response is needed."

So far so good. In the nutshell, the IMF is saying that the euro crisis is now threatening the EU itself. In other words, were some nut eurosceptic to invent a tool for undermining the EU, he couldn't have done much better than inventing the current euro zone.

So what are the IMF proposals for the euro area more forceful collective response? Why, of course it is integrate more and grow.

"Completing EMU: Banking and Fiscal Union to Support Integration

A strong commitment toward a robust and complete monetary union would help restore faith in the viability of EMU. This should encompass a credible path to a banking union and greater fiscal integration, with better governance and more risk sharing. However, achieving this goal will take time and hence requires a clear timeline, with concrete intermediate actions to set the guide posts and anchor public expectations."

Err... Mr IMF, I have a question: suppose we have a banking union. Which means all banks will be regulated under singular umbrella. Note - this does not mean having a proper regime for shutting down currently insolvent banks, nor does it mean a unified system of banks assets workout. It means, however, joint deposits protection scheme. Good thing, deposits protection. Confidence improving. Alas, last time I checked, Greek banks are sick because of the sick sovereign, bonds of which they hold & of the sick economy. Spanish and Irish banks are sick because they made bad loans. In all cases so far, banks are sick not because they lack regulatory unification, and not because they lack deposits protection, but because they have bad assets. How can a banks union make these assets any better?

Good news, IMF says: "The proposed EU framework for harmonized national bank resolution processes is a necessary first step. But it needs to go further. ...A common bank resolution authority is also needed. It should be backed by a common resolution fund to ensure burden sharing and to limit fiscal costs. These efforts should be supported by a common supervisory and macro-prudential framework to forestall further financial fragmentation. While a banking union is desirable at the EU27 level, it is critical for the euro 17."

Bad news: there are absolutely no proposals even discussed yet to cover banks resolution mechanism. IMF is exceptionally silent on what should be done to achieve such 'resolution' and EU has shown no willingness to allow shutting down of a single bank. Thus, common resolution mechanism in the IMF parlance means preciously little, but in the EU vocabulary it means simply 'burden sharing'. In other words, 'banks resolution' mechanism is more about shafting bad banks debt onto all of the euro zone collectively. While this might help individual countries, e.g. Ireland, it does nothing to change the reality that euro area combined Government debt is going to be 90% of GDP this year alone. In other words, relabeling, for example, Irish banks debt an EA17 debt, instead of the Irish Government debt, will not achieve any net improvement in terms of breaking the links between banks and sovereigns (the sovereign here, thus becomes EA17 instead of national) and it will do absolutely nothing to restore functioning banking in EA17. 

My suggestion would be for IMF to be more forthright and tell exactly what this 'resolution mechanism' should look like.

IMF goes on with lofty dreamin: 

"More fiscal integration, with risk sharing supported by stronger governance, can reduce the tendency for economic shocks in one country to imperil the euro area as a whole. Ultimately, this could mean sufficiently large resources at the center, matched by proper democratic controls and oversight, to help insure budget shortfalls at the national level. Getting to this endpoint will take time. But the process can start with a commitment to a broad-based dialogue about what a fuller fiscal union would imply for the sovereignty of member states and the accountability of the center. This should deliver a schedule for discussion, decision, and implementation."

Wait, aside from the desirability of such a solution (which is open to a debate), the IMF says that the solution will take time. Lots of time. And yet, this is supposed to be a response to the ongoing acute crisis? Or does IMF honestly believe that 'a commitment to a broad-based dialogue' will do anything to compensate for the fact that euro area peripheral states are currently insolvent? How? By telling the markets that they are 'broadly-speaking talking to each other'?

I do note that the IMF is clearly stressing the need for democratic systems reforms in line with integration. I wonder, however, what they have in mind, exactly. Are they saying EU is currently not democratic enough? After all, if EU is democratic, then 'proper democratic controls and oversight' would exist already and would simply need to be deployed to a new structure...

The IMF also offers an interesting insight into its perception of the euro bonds ideas: 

"Introduction of a limited form of common debt, with appropriate governance safeguards, can provide an intermediate step towards fiscal integration and risk sharing. Such debt securities could, at first, be restricted to shorter maturities and small size and be conditional on more centralized control (e.g., limited to countries that deliver on policy commitments; veto powers over national deficits; pledging of national tax revenues). Common bonds/bills financing could, for example, be used to provide the backstops for the common frameworks within the banking union."

Interesting, isn't it? On one hand, IMF foresees limited common debt issuance. On the other it foresees this common debt being used to 'backstop ... banking union'. Now, wait - I thought banking union backstop would have to be enough to deal with current acute problems in Greece, Ireland, Portugal, Spain and Italy. That would be what? €300 billion? €500 billion? And that would have to be 'cheaper' and 'more stable' source of funding than ECB already provides. So it cannot be 'limited' and it cannot be 'short-term' (LTROs are already €1 trillion-large and 3-years long and they are not working).

In short, I see loads of frustration from the IMF side, but no real tangible solutions to the euro are crisis. 

21/6/2012: FDI attractiveness survey 2012

A very insightful, albeit subject to survey data/methods caveats, report from Ernst&Young on 2011 FDI and attractiveness of Europe (including Ireland) to FDI is just out. Link to downloadable report here.

Some (mostly Ireland-centric) highlights:

The good news is - Ireland is in top 10 in the 9th position - same as in 2010. The bad news - 2011 saw a decline in FDI into Ireland (kind of undercutting the Government claims). Now, keep in mind - these stats are based on number of deals, not size of deals, and these cover only Europe.

Here's what Ernst&Young survey had to say about Ireland:
"Securing 106 new FDI projects in 2011, Ireland retained its ninth place in the ranking of European FDI destinations. US investors provided nearly two-third of the projects. During the past three years Ireland’s competitiveness has improved significantly, with a striking reduction in business costs, including those for payroll, energy, office rents and services. A corporation tax rate of 12.5%, one of the lowest in the world, adds to Ireland’s attractions. In addition, Ireland enjoys good access to the rest of Europe and the Middle East and Africa. The country is also emerging as a preferred onshore destination for software firms seeking to establish regional or global headquarters. During the year, companies including Oracle Corp, EasyLink Services and McAfee Inc established or expanded their European headquarters in Ireland. The country also drew more FDI projects from pharmaceutical companies including Eli Lilly, Sanofi-Aventis SA, Pfizer Inc. and Merck & Co Inc."

Ireland didn't make the list of most attractive countries for FDI in the next 3 years

Nor did Dublin make the list for innovation top locations relating to ICT services (our core competency area), suggesting that ICT FDI into Ireland might be more focused on delivery to European markets, rather than innovation:

Interestingly, when asked what Europe can do to improve its innovation capacity, the responses were:

Needless to say, we are not doing much in Ireland to get priority 1, we claim to have good priority 2, but are hardly putting any policies in place to improve that, we have much of tax incentives already in place, but they are patently not working... as per rest... well, same story, really.

21/6/2012: Flash PMIs for Euro Area, Germany & France - June

Flash PMIs out for France, Germany and euro area. Predictably, not a pretty sight...

Here are the details:

Eurozone:

Germany:

 France:

There's a lot of surprise today in the media about 'German economy showing cracks' right... let's see:

• The Chinese stopped buying Mercs & BMWs on foot of their own property bubble deflating... &
• European companies & sovereigns stopped buying high end capex equipment on foot of euro bubble deflating... & 
• German consumers... well, they've been dead since 1991... & 
• German banks are discovering Greece-sized skeletons in their closets... 
• Oh and per leading indicator for Germany - look at France...

so those cracks in German economy's facade... what a surprise then!


In reality, what is happening out there is simple -  a bunch of junior journos who got promoted into online news start-ups are all hopping mad over data they don't really quite know how to read. And lacking any real business experience, they are drawing conclusions no one can quite understand. 

21/6/2012: Few thoughts on G20 report on Euro Area

Joint G20 assessment of the euro area (emphasis and comments are mine):

"Efforts on several fronts  are still needed to build a stronger monetary union. Specifically: 

1. moving toward a pan-euro-area financial stability framework, which inter alia implies centralized powers in banking supervision and resolution, and common deposit insurance; [banking union, consistent with my view of what is required to shore banking sector, but absent a pan-European insolvency resolution regime, not sufficient condition for sustainable crisis resolution]
2. stronger fiscal integration, including national fiscal rules, as envisaged by the Fiscal Compact, complemented by fiscal risk sharing to ensure that economic dislocation in one country does not develop into a costly fiscal and financial crisis for the entire region; [Naive, or rather politically correct, statement. The Fiscal Compact can be expected to have any real effect on fiscal performance in the medium-long term. Precisely the time scale over which it will be most likely non-enforceable.]
3. structural reform to strengthen competitiveness and improve the  ability to adjust to shocks, including by a wage-setting mechanism that is more responsive to firm-level economic conditions, reducing labor market duality and in general barriers to hiring and firing, and lowering barriers to domestic and foreign competitions in product markets. [This is another weak policy orientation. Structural reforms are needed, beyond any argument, but these must start not from altering cost competitiveness but from creating institutional and operational platforms for entrepreneurship and investment. Europe lacks growth dynamics not because its labour costs are too high or there is a difficulty with hiring and laying off workers. These are important factors, but they are not primary ones. Europe lacks growth because the Governments take up 50% of the economy, because taxes are prohibitive to investment and jobs creation, consumption and saving, because the structure of European institutions favors incumbents over newcomers and thus retards fully social mobility and renewal.]

There is growing awareness among European policy makers to move along these lines and
active efforts are underway to build the necessary consensus."

Overall, G20 is still held hostage to:

1. Consensus policies represented by the IMF-think - of micro-fixing sub-structures of specific politically correct markets for inputs (labour) instead of focusing on the larger scale imbalances that lead to unsustainable expansion of the state over private sector opportunities and returns.
2. Politically correct 'non-interference' in specific solutions designed by the euro area - most visible in the acceptance of the Fiscal Compact framework as a 'sustainable' solution to the fiscal crisis.

I find it amazing that the G20 (or rather it is IMF who authored the document) is treating recent adjustments in the economic imbalances in the euro area as if it is something that is consistent with a functional adjustment.

"The global financial crisis has triggered a noticeable narrowing of external imbalances. As world trade collapsed, current account balances of deficit economies improved substantially—well in excess of what would have been expected given the fall in output based on standard trade elasticities (i.e., “residual” changes are large), despite a significant increase in interest costs on their external debt. Substantial demand compression following the collapse of credit, asset and housing booms and a decline in confidence in periphery economies, reinforced by fiscal consolidation, played an  important role in this wrenching adjustment. Many of the factors identified below as contributing to the imbalances—such as excessive optimism and easy financial conditions begetting consumption and construction booms—are out of the picture now. Hence, much of the adjustment observed so far is likely to be lasting."

Firstly, I agree that much of the adjustment outlined above is now engrained into consumer and investor behavior. Secondly, I disagree that the fiscal adjustments have been either significant or sustainable in the long run. Let us keep in mind that there is no decrease in government spending in 2011-2012. There is an increase. But what worries me most in the above is that the adjustments described would be consistent with the rates of growth into the future that are hardly sustainable given debt overhang. In other words, the environment of depressed consumer credit, consumer spending, high interest cost of capital, etc warrants growth expectation for euro area of 1-1.5 percent annually in real terms, if not lower. Working out debt of 90% to GDP (fiscal debt alone) and well in excess of 250% for the total debt at the above rates of growth, in my view, is simply not going to happen. Unless we are talking about double-digit inflation.

An interesting related chart: 

The above clearly shows how deep collapse of economy has driven 'improvements' in Irish external balance (purple area representing collapse in growth) and how our automatic fiscal policy destabilizers (income & transfers) have been a 'break' on the external balance improvements. (Note: I am not suggesting there is a positive value in driving income & transfers down, just observing the fact). As per my term of automatic fiscal destabilizers, here's the quote from the report:

"In some booming economies (e.g., Ireland and Spain), debt ratios declined, but given the extent to which ample fiscal revenues had been linked to unsustainable asset market developments, structural balances remained fundamentally weak. That weakness was unmasked by the crisis."

I'll blog on specific risk assessment report tomorrow, so stay tuned.

19/6/2012: Euro area - flawed from design through execution

Here's the article on euro's flawed construct from Canada's The Globe&Mail citing myself (among others). And here is the full comment on the topic:

The core mistake within the entire architecture of the euro is the creation of the common currency in the first place. 

Absent organic, democratically-anchored federal union, common currency zone is simply non-viable even at the level of the 'strong Nordic' euro, let alone at the level of the euro that binds together vastly divergent - politically, economically, culturally and institutionally - states. 

The comparison of divergences present within the euro with those present amongst the states of the US - the common argument that divergences are not the systemic weak point of the euro construct - is missing the core point. That point is that divergence within the euro area are demographically, historically and institutionally anchored and no amount of 'top-to-bottom' siloed integration and harmonization of policies will deliver on breaking these divergences. Only organic, bottom-up and horizontal integration first of political systems, alongside human capital mobility and capital mobility, with trade liberalization, stretched over a number of generations can result in the emergence of the shared platforms that can unify the systems and instituions of vastly differing demographics that represent Europe.

By foregoing flexibility of diverse currencies and monetary policy systems, by forcing superficial convergence of policies and institutions onto the economies with no developed competitive advantages suitable to the current constantly and rapidly changing world (and often even against the already existent competitive advantages), the euro has weakened, not strengthened the core economies, making it virtually inevitable that the less advanced economies of the euro area will develop an asset bubble of one type or the other as the sole driver for growth, absent real organic drivers.

The crisis of the euro does not stem from the lack of monetary fitness. The lack of such fitness is itself is the symptom of the deeper problems within the euro architecture. Instead, the crisis was caused by the failure of the European economic model that first relied on public debt and subsequently, having run out of the road on public debt financing of growth in early 2000s, on private debt. Now, like Japan of the early 1990s, Europe is a debt-ridden economy with no catalyst for growth. Like Japan, it eliminated social and entrepreneurial mobility and pursued self-preservationism at all levels of its economy for far too long. 

Alas, unlike Japan, Europe is neither an R&D, nor exports, nor modern infrastructure powerhouse in the world that is much more advanced than it was in the 1990s. Which makes euro area a Japan2.0 with far fewer options and user friendliness. 

Good luck selling that as a 'vision' to global investors.

19/6/2012: IMF raises more funds at Los Cabos

IMF has secured some serious money at Los Cabos G20. From Christine Lagarde statement today:

"A number of IMF member countries have today announced pledges to boost IMF resources, completing the effort launched jointly at our Spring Meetings in April 2012 by the International Monetary and Financial Committee (IMFC) and G-20 (see Press Release No. 12/147). Countries large and small have rallied to our call for action, and more may join. I salute them and their commitment to multilateralism. As a result, total pledges have risen to US$456 billion, almost doubling our lending capacity."

Here's a table. Stars mark countries that contributed at G20 meeting in Los Cabos:

Keep in mind - contributions totals are new contributions on top of existent ones, so IMF is not running out of money. Spain will make things worse, but it too will not put IMF over the top... not yet. 


You can read the above as the 'good news': IMF got more fire power to deal with the crises. You can also read it as the bad news: in desperately seeking its next debt fix, Europe has de facto surrendered its last bastion of geopolitical influence - the IMF - to the new economies. The road that led us to Los Cabos marks that change from the Euro area being the controlling power over the IMF, if only in conjunction with the US, to it becoming the largest borrower from the IMF. With this change, we might as well recall that ten years ago, Brussels leaders were talking about this being a European Century.

18/6/2012: Told ya so... Greek tax collection slumps during elections

Yesterday, I commented that during the elections, Greeks have stopped pushing through austerity measures so as not to aggravate the electorate. When challenged to explain what I meant I said that during the elections, Governments pay their debts to businesses on time, pay suppliers on time, stop enforcement actions on taxes due and stop tax reforms. Here it the confirmation that this has happened: link. Note Novotny saying that Greek tax collection is virtually halted during elections and will now be restarted and recent austerity measures are said to add hundreds (if not thousands) of unexpected euros to tax bills.

Update 25/6/2012: this just in - Greece exceeded targets for hiring civil servants and effectively suspended structural adjustments for two months during elections (link).