23/1/16: Poland's Sovereign Risk Troubles

With what appears to be a political-motivated downgrade by the S&P on January, from A to BBB+, with steady outlook, Poland’s sovereign and macro risks have been pushed to the top of news flow. Meanwhile, Moody’s rates Poland A2 (stable) and Fitch A. However, as noted by Euromoney country risk recent assessment, the sovereign risks turmoil that accelerated over the last few weeks has been building up for some time now.

Euromoney Country Risk (ECR) survey shows that by the end of 2015, Poland’s political risk score dropped to 20.06, “the lowest it has been since ECR launched an updated methodology in 2011”. More interestingly, “Poland’s political risk score has been declining – indicating increased risk – since 2011.”

Worse, per ECR: “the drop in Poland’s political score from 20.17 in September to 20.06 in December combined with a fall in its economic risk score from 19.38 to 19.27 over the same period, contributing to a decline in its overall score to 65.62 from 66.93. Poland, which enjoyed a ranking as the 29th safest country in the world in September, dropped four spots in rankings since the yearend survey.

Here is ECR’s summary of scores for Poland, including some recent moves:

It is interesting to see Poland significantly underperforming Slovakia:

Overall, given that both Slovakia and Hungary have, over recent years, adopted a series of reforms that severely undercut effectiveness of institutional checks and balances over the power of the executive, the reaction of ratings agencies and European authorities to Poland following the same route suggests growing concern and nervousness in Europe over all and any national experimentation with populist and/or non-conformist (to EU 'standards') policies.

Not being a fan of the current Polish leadership, I find myself in Poland's corner: in a democratic setting, it is people, not Eurocrats, who should decide on their future institutions.

20/1/16: "Немного фантастики. Где у России остался потенциал роста”

My latest column for Slon.ru covering the topic of how Russia can jumpstart growth through targeted reform of its Special Development Zones and clustering environment: https://slon.ru/posts/62652.

19/1/16: After the crisis: Is there light at the end of the euro tunnel?

Here is my recent column for Cayman Financial Review covering the prospects for growth in the Euro area and the structural problems relating to the Euro institutions: http://www.compasscayman.com/cfr/2015/10/07/After-the-crisis--Is-there-light-at-the-end-of-the-euro-tunnel-/.

18/1/16: Forget Conventional Geopolitics, Demographics is the New Global Conflict Ground Zero

While analysts are worried about geopolitical tensions relating to *hot*, *cold* and *frozen* conflicts of traditional nature, the real Global Conflict is unfolding, slowly-paced, in the realm of demographics.

Here are two key themes underlying it:

Firstly, the ongoing widening of the generational gap, highlighted in my recent talks including here: http://trueeconomics.blogspot.ie/2015/07/29715-retailgoogle-key-trends-on.html. The Generational gap that can be described as the difference between economic power and aspirations of two distinct generations: the post-millenials and baby-boomers.

To see this we can take two examples of views from the baby-boom generation:

• The view of Jeremy Paxman: http://www.dailymail.co.uk/news/article-2055497/JEREMY-PAXMAN-Baby-Boomers-selfish-generation-history.html
• And the view of Edwina Currie: http://www.telegraph.co.uk/finance/personalfinance/pensions/12102364/Hey-youngsters-No-pension-No-home-No-wonder.-Look-at-you.html

The second manifestation is that of the disappearing middle classes, best highlighted by the following series of links covering Pew Research analysis of the U.S. data:

• The shrinking of the U.S. middle class: http://www.pewresearch.org/fact-tank/2015/12/14/americas-middle-class-is-shrinking-so-whos-leaving-it/
• And income impact of the above: http://www.pewsocialtrends.org/2015/12/09/4-middle-class-incomes-fall-further-behind-upper-tier-incomes/
• Including changing nature of demand: http://www.pewresearch.org/fact-tank/2015/12/30/its-no-longer-a-leave-it-to-beaver-world-for-american-families-but-it-wasnt-back-then-either/?utm_content=buffere1c76&utm_medium=social&utm_source=twitter.com&utm_campaign=buffer
• As well as changing social preferences: http://www.zerohedge.com/news/2015-12-24/faltering-faith-losing-hope-rising-charity-15-striking-findings-2015
• Leading to the growing gap between baby-boomers and the millennials:  http://www.bloombergview.com/interactives/2015-millennials/

All of the above concluding with the twin trend of vanishing core generational driver for the global economy: http://www.pewsocialtrends.org/2015/12/09/the-american-middle-class-is-losing-ground/

If you still think conventional weapons and geopolitical power plays are the biggest disruptors of status quo ante, think again.

15/1/16: Household Debt Sustainability in One Chart?

Here is a neat chart plotting household debt against long term interest rates in an attempt to visualise property prices in affordability / sustainability context:

Source: @resi_analyst

Irish progression is poor by debt measure, and is sustained (barely) by low interest rates, even post-deleveraging.

15/1/16: Gold Bullion as Risk Diversifier: 2015 Overview

A note of mine covering 2015 Gold market and the continued role of gold bullion & coins as risk diversifiers in current environment is now available on GoldCore page here: http://www.goldcore.com/us/gold-blog/gold-bullion-retains-key-role-of-a-major-diversifier-dr-gurdgiev/.

15/1/16: Russia in a Downshifters Club

A very interesting speech by German Gref (Sberbank) on Russian economic development amidst global economic transition from hydrocarbons-based economy

In the nutshell: Russian economy is in a state of 'downshifting' and is positioned to be a losing economy in the new post-hydrocarbons era.

I am not sure about Gref's timing (he thinks there is at most a decade left before the global economy fully re-orients toward alternative sources of energy), but he is correct on the urgency of institutional reforms.

14/1/16: Push or Pull: Entrepreneurship Among Older Households

Recently, I highlighted some of the potential problems relating to the less stable nature of the Gig Economy employment, including the longer-term pressures on life-cycle savings and pensions, as well as health care provision (you can see my discussion here: http://trueeconomics.blogspot.ie/2015/12/71215-cx-future-of-work-summit-dublin.html and my slides here: http://trueeconomics.blogspot.ie/2015/11/111115-gig-economy-challenge.html.

Mainstream economics has been lagging behind this trend, with little research on the long-term sustainability of the Gig Economy employment. Thus, it is quite heartening to see some related, albeit tangentially, research coming up.

One example is a very interesting study on entrepreneurship amongst the U.S. older households. Weller, Christian E. and Wenger, Jeffrey B. and Lichtenstein, Benyamin and Arcand, Carolyn, paper titled "Push or Pull: What Explains Growing Entrepreneurship Among Older Households?" (November 30, 2015: http://ssrn.com/abstract=2697091) does what it says: it looks at both push and pull factors for entrepreneurship and self-employment amongst older households.

Per authors (italics are mine): "Older households need to save more money for retirement, possibly by working longer. [Which is a pull factor for self-employment and  entrepreneurship]. But, the same labor market pressures that have made it harder for people to save, such as increasingly unstable labor markets, have also made it more difficult for people to work longer as wage and salary employees. [Which is a push factor toward self-employment and entrepreneurship].

Self-employment hence may have become an increasingly attractive alternative option for older households.

Entrepreneurship among older households has indeed grown faster than wage and salary employment, especially since the late 1990s.

But, this growth, rather than reflecting rising economic pressures, may have been the result of growing financial strengths – fewer financial constraints and more access to income diversification through capital income from rising wealth. Our empirical analysis finds little support for the hypothesis that growing economic pressures have contributed to increasing entrepreneurship. Instead, our results suggest that the growth of older entrepreneurship is coincident with increasing access to income diversification, especially from dividend and interest income. We also find some tentative evidence that access to Social Security and other annuity benefits increasingly correlate with self-employment. Greater access to interest and dividend income follows in part from more wealth and improved access to Social Security may reflect relatively strong labor market experience in the past."

This is an interesting result, because it is based on older households' access to:

1. Income from savings and wealth, including assets wealth; and
2. Income from retirement.

In the Gig Economy, both are likely to be compressed due to higher income volatility (and thus rising precautionary savings), tax incidences that impose liability with a lag (inducing higher income uncertainty), and lower earnings (due to lack of paid vacations, maternity/paternity and sick leave). In some cases, e.g. countries like Ireland, there is also an explicit income tax penalty for the self-employed (via both lower standard deductions and higher tax rates, such as those under the USC). All of which implies reduced access to income from retirement in the future, lower savings and wealth (including through inheritance). 

Subsequently, the current cohort of older entrepreneurs and self-employed may exhibit exactly the opposite drivers for their post-retirement employment choices than today's younger cohorts. And that matters because entrepreneurship and self-employment that start with push factors (e.g. necessity of life and constraints of the labour markets) is less successful than entrepreneurship and self-employment that start with pull factors.

14/1/16: Debt in Sub-Saharan Africa & Country-Specific Risks

The age of QE in the West, as well as the Great Recession and the Global Financial Crisis have both undoubtedly left some serious scars on the Emerging Markets. One example is the rising (once again) debt in the countries that prior to 2007 have benefited from major debt restructuring initiatives. Here is the new World Bank paper assessing the extent of debt accumulation in Sub-Saharan Africa post-2007.

"Sub-Saharan African countries as a group showed a considerable reduction in public and external indebtedness in the early 2000s as a result of debt relief programs, higher economic growth, and improved fiscal management for some countries. More recently, however, vulnerabilities in some countries are on the rise, including a few with very rapid debt accumulation."

Across Sub-Saharan African countries, "borrowing to support fiscal deficits since 2009, including through domestic markets and Eurobond issuance, has driven a net increase in public debt for all countries except oil exporters benefitting from buoyant commodity prices and fragile states receiving post-2008 Highly Indebted Poor Country relief. Current account deficits and foreign direct investment inflows drove the external debt dynamics, with balance of payments problems associated with very rapid external debt accumulation in some cases. Pockets of increasing vulnerabilities of debt financing profiles and sensitivity of debt burden indicators to macro-fiscal shocks require close monitoring."

And looking forward, things are not exactly promising: "Specific risks that policy makers in Sub-Saharan Africa need to pay attention to going forward include the recent fall in commodity prices, especially oil, the slowdown in China and the sluggish recovery in Europe, dependence on non-debt-creating flows, and accounting for contingent liabilities."

Full paper: Battaile, Bill and Hernandez, Fernando Leonardo and Norambuena, Vivian, Debt Sustainability in Sub-Saharan Africa: Unraveling Country-Specific Risks (December 21, 2015). World Bank Policy Research Working Paper No. 7523 is available via SSRN: http://ssrn.com/abstract=2706885

14/1/16: Two Charts to Sum Up Global Growth Environment

SocGen recently produced some interesting charts looking into 2016 trends. Two caught my eye, as both relate to long running themes covered on this blog throughout 2015.

The first one is that of a decline in global trade flows as the driver for growth. Per SocGen: "Global trade growth has been anchored below its historical average since the Great Recession, offering further evidence of tepid world economic recovery. Decreasing global demand, especially due to slowing emerging markets, weighs on the outlook for world trade."

http://uk.businessinsider.com/societe-generales-charts-of-the-global-economy-in-2016-2016-1


Another relates to the second drag on global economic progress - debt overhang. SocGen focuses on Emerging Markets’ debt, saying: "Zero interest policies in the developed world have bolstered debt issuance from EM corporates. Only a fraction of EM countries are immune to the current adverse conditions requiring a cautious approach to these markets."

Both do not offer much optimism when it comes to both cyclical (interest rates forward) and structural (capex and demand capacities) drivers for global growth. And both suggest that 2016 is unlikely to be more robust year for the world’s economy than 2015.

13/1/16: Bail-ins in Europe: Have Some Fun, Legal Eagles…

In a recent article for Forbes, In Europe, 2016 Will Be The Year Of Lawsuits, Frances Coppola neatly summed up the problem of the EU’s attempts to structure a functional bail-in mechanism for failing banks resolution regime.

I covered to topic in a number of previous posts here (the more recent one). But as the first days of the New Year are rolling in, the problem is becoming apparent.

FT covered the problem with Portugal’s Novo Banco bail in here. Summing up the case: “Europe’s new regime for winding up failing banks has made an inauspicious start, as investors lashed out at the European Central Bank for allowing Portugal to impose losses on almost €2bn of senior bondholders in Novo Banco”.

And beyond Portugal, there is the case of Austria’s attempt to reduce burden on taxpayers from bailing out Hypo Alpe Adria via “imposing losses on bondholders through a reversal of guarantees given by the province of Carinthia”. Back in July 2014, the whole house of cards that is Europe’s ‘no-bail-outs’ promise of the new regulatory architecture was taken down by the Austrian court ruling that ex post bail ins of bondholders can’t be done. Which rounds things from the impossibility of ex post bail-ins to the impossibility of ex ante bail-ins.

And then there is the case of the Cypriot banks’ depositors bail-ins of 2012 that is about to start going.  A reminder of the case: “The EU initially agreed to provide bank recapitalisation assistance as it was necessary to safeguard the Eurozone, but in March 2013 the European Commission and the European Central Bank relented and set new conditions for providing financial assistance that involved depriving depositors of Cyprus Popular Bank (Laiki Bank) of all their savings – except the government-guaranteed amount of €100,000 – and in the case of Bank of Cyprus of 47% of uninsured deposits. The EU’S change of mind was unprecedented and unexpected because bank deposits are regarded as sacrosanct. …The EU was not prepared to assist depositors in Cyprus with €7 billion because the International Monetary Fund (IMF) was not satisfied Cyprus could sustain such a debt.”

One must also remember the role of the European ‘regulators’ in all of this mess. Take the Bank of Cyprus. It passed EU banks stress tests just before it crashed and burned in a subsequent bail-out and bail-in to the tune of €23 billion to the taxpayer and a 47.5% haircut on deposits over €100k.

It looks like 2016 is going to be a fun year for European financial sector ‘reforms’ and a stimulus to the legal profession. All paid for by the taxpayers, of course.

12/1/16: That Savage Deleveraging: Global Debt 2000-2015

Here's a neat summary chart based on data from BIS through June 2015, covering total global credit (debt) outstanding (excluding IMF debt), issued in three main currencies:

That savage deleveraging... it has been truly epically... unnoticeable... Oh, and one more thingy: the unsustainable build up of debt prior to the onset of the Global Financial Crisis (GFC) was just about the same as the increase in debt during the so-called deleveraging period since the onset of the GFC.