12/10/2013: WLASze Part 2: Weekend Links on Arts, Sciences and zero economics

My first WLASze: Weekend Links on Arts, Sciences and zero economics focused on sciences, so now is the time to switch over to the other side: arts.

Enjoy.


SaatchiOnline is profiling an excellent new talent: Jessica Kirkpatric
http://www.saatchionline.com/profile/153958

Superbly technical work merging compositional competence, deconstructing and altering the reality to create new representations of space and objects. Almost story-telling like quality of change in subtextual.

Hockneyesque geometry of inanimate spaces meets Dutch masters-evoking colour and light tonalities?..


On a similar note of space and emptiness, but with much more distilled sense of void and air, and more direct colours: Matt Phillips' work:
http://www.theartcollective.com/artists/matt-phillips/

Technically more devolutionary than Kirkpatric's work, and very different compositionally and tonally, but still, to me - very proximate in overall semiotics of space and geometry's dominance over the landscape.


And for a light-hearted moment to rest on:

Via M&C Saatchi Milan: video http://www.mcsaatchi-milano.com/
Full project here: http://www.protectyourlife.it/


MART of Bolzano, Italy is co-hosting a retrospective of Fortunato Depero's work in Barcelona: http://www.mart.tn.it/mostre.jsp?ID_LINK=682&area=137&id_context=4312
Depero is one of the core masters of Futurismo - a powerful pre-cursor to much of the modern art that emerged in the 20th century. Here's one his graphic design examples:

And another one - still alive today (actually MrsG has couple bottles still in the fridge…)

More classic work:

Beautiful example of architecture organically included in the landscape without the need to camouflage the building:
http://www.dezeen.com/2013/10/08/holiday-house-vindo%CC%88-by-stromma-projekt/

The point of the house geometry is to stretch the space along the horizontal lines to subtly position it within the vertical space of the forest and to float it above the rock formation. I love the simple elegance of devoting the view to the forest, and air and light flow of the house. It is elegant precisely because it strikes the balance between being organic to the site, yet not having to be obscure. Reminds me of the classic 'dacha' elegance of the old summer houses in Russia.


From strong imagery to weak content: as the BusinessInsider review aptly puts it, "Banksy's oeuvre has ceased to be groundbreaking or unique".
Read more: http://www.businessinsider.com/acclaimed-street-artist-banksy-has-completely-run-out-of-things-to-say-2013-10#ixzz2hFgN5837
Favourite quote: "His stale images of monkeys, gas masks, bobbies, shopping carts, and rats are now so ubiquitous they've lost all meaning.  Similarly, his medium of public graffiti no longer carries any significant risk since his brand of 'vandalism' is widely applauded and serves to actually increase property values.  ... Banksy's popularity endures simply because he's preaching to the choir."

Boom! Exploded. My personal view - the more I think, the more I agree with the reviewer. An artist cannot be simply tied to the audience nor can the artist be defined to be just a rubble-rouser. The artist must create the audience. Joseph Brodsky said that poetry is the process of creating an alternative world. In contrast, Banksy is simply depicting the perceived world of his audience. That is equivalent to taking endless pictures of ones' self reflected in the mirror and posting them all over the public domain… tedious even for a Flickr amateur…


To round off on a positive note… Russian Aeroflot launched a new 'budget' airline, called Dobrolet. Dobrolet comes with a hugely important brand name pedigree in art, being a trade name of the airline that once flew back in the 1920s as the precursor to Aerflot… Here are some images from Dobrolet graphic designs by Alexander Rodchenko:

For those unfamiliar with Rodchenko's work:
http://theartstack.com/artists/alexander-rodchenko
http://theartstack.com/artists/alexander-rodchenko-1


And for a smile… with some serious side to it too:
http://the-dimka.livejournal.com/6645.html
Just read the description and enjoy… H/T to MrsG.

12/10/2013: WLASze Part 1: Weekend Links on Arts, Sciences and zero economics

This is the first WLASze: Weekend Links on Arts, Sciences and zero economics for this weekend. The first instalment is on sciences, so a bit heavy on some topics. Enjoy.


Starting with a very very old stuff: according to the Russian researchers, the meteorite that exploded above a Russian city of Chelyabinsk (and on youtube screens) in February was about 4.56 billion years old, or as old as the Solar System itself.
http://en.ria.ru/science/20131004/183951992/Russian-Meteorite-as-Old-as-Solar-System--Scientist.html
Infographic with some details on meteorite impact is available here: http://en.ria.ru/infographics/20130215/179495177/Meteorite-Fragments-Hit-Russia.html


A cool, quick (and simple) list of top 5 most important physics discoveries of the last 25 years via BusinessInsider… oh and they throw in 5 future discoveries that are likely to change the world too:
http://www.businessinsider.com/top-5-modern-physics-discoveries-2013-10
My personal favourites: measuring the neutrino mass using Japan's Super-Kamiokande neutrino detector… archi-cool… and from the futures list - quantum computing…

While on physics and sciences - Nobel Prizes this year:
Chemistry: http://physicsworld.com/cws/article/news/2013/oct/09/chemistry-nobel-honours-trio-who-combined-classical-and-quantum-physics
Physics: http://physicsworld.com/cws/article/news/2013/oct/08/englert-and-higgs-bag-2013-nobel-prize-for-physics
Physiology or Medicine: http://www.theguardian.com/science/2013/oct/07/nobel-prize-medicine-cell-transport-vesicles
All worthy, in my view, unlike this year's Nobel Peace Prize. Peace Prize 2013 is a bit of a dodo, to be honest, just like some previous ones: http://www.businessinsider.com/12-worst-nobel-peace-prize-winners-2013-10. In this category in general, the Nobels are often given for uninspiring, bizarre reasons.
Literature Prize: also too often given for political reasons or for the reasons of obscure complexity and academism - was given this year to seemingly a worthy recipient: http://www.nytimes.com/2013/10/11/books/alice-munro-wins-nobel-prize-in-literature.html?_r=0

We are obviously holding our breath for Economics 'Nobel' - to be announced comes Monday. My best are in with a number of news outlets, but I'd rather keep them off the blog, as I generally prefer to avoid making predictions...


On a lighter (only slightly) scale of things: for aspiring physics fans: Physics World at 25 puzzle page: http://blog.physicsworld.com/category/physics-world-at-25-puzzle/


In continuation of the links I posted last week on the merger of materials sciences, human-tech interfaces and new tech development, here's an article about the latest discoveries in the metal composition are, showing shape-changing properties of metal crystal: http://www.bbc.co.uk/news/science-environment-24400101
And while on it: an article on 'smart' fabrics: http://www.bbc.co.uk/news/technology-20799344
And wearable tech: http://news.bbc.co.uk/2/hi/technology/7241040.stm
See my original links on the topic of 4D printing here: http://trueeconomics.blogspot.ie/2013/10/4102013-wlasze-part-1-weekend-links-on.html
These have now been incorporated into my talk about Human Capital-centric world and technological enablement which I will be delivering next comes early Monday at the Economic Forum / The Gathering-linked event in Ireland, hosted by the Irish-American biotech company, Alltech.


Talking of Irish researchers, we had some brilliant news out of TCD recently: http://www.belfasttelegraph.co.uk/news/local-national/republic-of-ireland/irish-scientists-in-solar-storms-breakthrough-29641467.html#sthash.p2oewCS2.BzoMB1YE.uxfs Basically, Trinity College researchers "have shown -- for the first time -- a direct link between solar storms, caused by explosions on the sun, and solar radio bursts, which cause the potentially dangerous communications disruptions on Earth."


The complex inter-relationship between observations, data collection and data analytics exemplified by TCD research mentioned above is, however, much more manageable than the data conundrums presented by ever-growing social data flows. Here is an excellent exposition of the problem http://www.wired.com/wiredscience/2013/10/topology-data-sets/
The problem is not the size of the data we are getting, but the "the sheer complexity and lack of formal structure". Put differently, and in comparative to physics: "“In physics, you typically have one kind of data and you know the system really well,” said DeDeo. “Now we have this new multimodal data [gleaned] from biological systems and human social systems, and the data is gathered before we even have a hypothesis.” The data is there in all its messy, multi-dimensional glory, waiting to be queried, but how does one know which questions to ask when the scientific method has been turned on its head?"

And a related article: http://www.wired.com/wiredscience/2013/10/big-data-science/

Stay tuned for arts posting later today.

11/10/2013: Euromoney Credit Risk Analysis: Q3 2013

The Euromoney Country Risk survey results are out for Q3 2013 and here is some analysis with a comment from yours truly. As usual, emphasis is mine:

"Some 101 of the 186 countries surveyed have succumbed to lower ECR scores (increased risk) since June, which, with 17 unchanged, leaves just 68 safer, according to the views of global economists and other country-risk experts surveyed during the third quarter."

Core global drivers:

• US federal shutdown & looming debt-ceiling deadline 
• Concerns about monetary tapering, and 
• Europe’s fiscal problems.

"... the shake-out that occurred in the wake of the collapse of Lehman Brothers in September 2008 has still left the majority of sovereigns – some 75% in all – with vastly increased risk levels than before the crisis; in the case of the eurozone periphery - Cyprus, Greece, Ireland, Italy, Portugal and Spain – an astonishing 25 to 50 points each."

Notice that in the above, Euro area shows the highest rate of deterioration of any region, save the CIS, and CIS deterioration is in part driven by links to the Euro area.

Per ECR: "US causing fewer flutters for G10 risk profile than Europe’s problems."

"Within the G10 group of leading industrialized nations, the US is not considered a particularly riskier prospect in spite of its latest political troubles. The world’s biggest economy has slipped to 17th in the rankings, but its score is still higher than at the start of the year."

In the case of Europe, core downward pressure drivers are:

• "The unwillingness to see the euro weaken", 
• "A banking sector still in need of repair",
• "Weak political resolve on budget issues"and 
• "Individual country economic prospects heading in different directions.”

Per ECR: "Indeed, greater concerns are reserved for 21st-placed France, with its fiscal targets missed and the economy remaining sluggish, as well as for Aaa-rated Sweden, in fifth spot, where a moribund economy and a government relaxing fiscal policy with tax cuts ahead of next year’s parliamentary election are gnawing away at the sovereign’s gold-plated creditworthiness."

"Both countries have seen their scores slip the most (by 0.7 points each since June), within a group where Germany is flat-lining as it awaits the formation of a new government..."

"In the European Union, 17 of its now 28 member states are riskier, whether compared with June or since the end of last year..."

"Remarkably, in spite of the recoveries witnessed in some of the bailout countries, notably Ireland and Portugal, the eurozone crisis is continuing to cause ripples, with no fewer than 10 of the 17 member states still succumbing to lower scores during Q3. This comes amid weak economies, excessively high unemployment rates, spikes in political risk, trade-weighted appreciation of the euro, and Greek borrowing concerns re-emerging to keep the region’s worst performer grounded on 34 points."

Notice Ireland's strong position second to Austria in terms of overall gains in the risk scores (lower risk).

"Constantin Gurdgiev, another ECR contributor, based in Dublin, says: “The changes in risk assessments broadly reflect improved sentiment across the euro area, consistent with both improved global growth outlook and internal regional stabilization in the wake of protracted sovereign debt and growth crises.

“[However] structural weaknesses and risks remain, with France presenting significant long-term risk due to the complete absence of serious efforts to reform the labour markets and address a chronic lack of investment in new enterprises formation.

“The US debt-ceiling uncertainty also presents a lower risk to the euro area economies than the longer-term upward pressure on US yields. As benchmark yields for the US and Germany deteriorate into 2014, there will be renewed pressure on funding excessive debt levels across the majority of the euro area economies, most notably for Greece, Italy, Portugal, Spain and Ireland, but also for Belgium and the Netherlands.”"

Apologies for shameless self-promotion... :-)

11/10/2013: BlackRock Institute survey: N. America & W. Europe: October 2013

BlackRock Investment Institute Economic Cycle survey for North America and Western Europe is out and here are core results (emphasis is mine):

"This month’s North America and Western Europe Economic Cycle Survey presented a positive outlook on global growth, with a net of 65% of 113 economists expecting the global economy will get stronger over the next year. (6% lower than within the September report).

At the 12 month horizon, the positive theme continued with the consensus expecting all economies spanned by the survey to strengthen or remain the same except Sweden. 

The consensus outlook for the Eurozone was also strong, with 87% of economists expecting the currency-bloc to move to an expansionary phase over next six months. The picture within the bloc was not uniform however, with most respondents expecting only Greece to remain in a recessionary phase and an even mix of economists expecting Portugal and Belgium to be in an expansionary or recessionary phase at the 6 month horizon (and similarly so for Sweden, outside of the currency-bloc). 

With regards to North America, the consensus view was firmly that the USA and Canada are in mid-cycle expansion and are expected to remain so through H2 2013."

Note that this correlates well with my own outlook: http://trueeconomics.blogspot.ie/2013/10/9102014-businessinsider-most-important.html

Also note: the above views do not reflect BlackRock own views or advice. 

Two charts as usual:

Note that in the chart above, Ireland now firmly converged with the Euro area. This is a very strong move compared to September survey: http://trueeconomics.blogspot.ie/2013/09/1292013-blackrock-institute-survey-n.html And the above is confirmed by the overall comparative expectations forward:

So on the net - good result for Ireland and positive outlook for Euro area as a whole.

11/10/2013: In Europe, as usual, everything is a legal fudge...

Remember the EU 'Project Bonds' idea? Ok, the premise sounded great - you are a sovereign in an economy that can't raise funding for much of big ticket infrastructure etc building. You go to the markets with a sovereign guarantee to cover the shortfall on a specific project returns, plus a sub-guarantee from the EU... More precisely, here's how the scheme was designed to work:

The Guarantors of project finance were supposed to be: European Investment Bank (EIB) and the national governments. These were supposed to supply 'credit enhancements' to debt issues that covered two tranches: senior debt and subordinated debt. The sub-debt (or Project Bond Credit Enhancement, PBCE) were to take a form of an EIB loan backed by EU Commission, to be issued to the promoting entity at the onset of the project financing. Or it could take a form of a contingent credit line 'drawn upon if the revenues generated by the project are not sufficient to ensure debt service'. The PBCE was supposed to underlie the senior debt and act as credit enhancement for investors. The promoting entity were to issue actual bonds - in other words, project owner was to do so, not the EIB or the Member State. The EU conditioned the scheme that the 'support will be available during the lifetime of the project, including the construction phase'.

According to the original plan (see http://www.eib.org/products/project-bonds/):

"The proposed mechanism of the initiative will:

1. have a maximum size of individual transactions of up to the lower of EUR 200 million or 20% of credit enhanced senior debt;
2. as subordinated debt, target an up-lift of the project rating to A-AA rather than AAA;
3. be based on the EIB’s capacity to deliver subordinated loans, not necessarily its rating;
4. only target the EIB’s core business, i.e. infrastructure financing;
5. only support robust projects
6. benefit from the EIB’s proven due diligence, valuation and pricing methodologies."

The first project approved by the EIB for investment was the Spanish Castor offshore submarine gas storage facility. This has now failed due to lack of proper technical oversight in design (insufficient seismic risks evaluations), clearly putting into question the claims (v) and (vi) above.

Furthermore, the Spanish Government is now attempting to exit its contractual guarantee obligations, just to make sure that the entire Credit Enhancement Mechanism is exposed as a total farce.

Details are here: http://www.euractiv.com/euro-finance/eu-project-bonds-may-see-value-d-news-531021?utm_source=EurActiv%20Newsletter&utm_campaign=5ff216b9d6-newsletter_daily_update&utm_medium=email&utm_term=0_bab5f0ea4e-5ff216b9d6-245613326

All of which just goes to prove that in Europe, Government guarantees are worth about as much as the paper on which they are written... Enhance that, if you want.

11/10/2013: What's 'new' in German Coalition talks... what's Ireland...

So today's report in the Irish Times on German Government coalition talks and demands by the Social Democrats (SPD) on Germany blocking use of ESM to cover Irish Exchequer debt exposures arising from the banking crisis and for Germany to adopt a tougher stance on irish corporate tax regime are news... Read them here: http://www.irishtimes.com/business/economy/irish-debt-linked-to-angela-merkel-talks-on-coalition-1.1556845

Now, recall this: http://trueeconomics.blogspot.ie/2013/10/8102013-german-voters-go-for-status-quo.html where all of this fall-out from the German elections was foretold...

10/10/2013: IMF's GFSR October 2013: More Focus on Banks

Now, back to GFSR and banks. I covered some of the IMF findings on banks here: http://trueeconomics.blogspot.ie/2013/10/10102013-imfs-gfsr-october-2013-focus_10.html

This time, let's take a look at what IMF unearthed on funding side of the banking systems. Fasten your seat belts, euro area folks…

Euro area banks have shallower deposits base than US banks… but, wait… euro area banks are supposedly 'universal' model, so supposed to have MORE deposits, than the originate and distribute model of the US banks… Oops… Euro area banks like holding banks deposits - just so contagion gets a bit more contagious. Euro area banks hold tiny proportion of equity, lower than that of the US banks.

By all means, this is a picture of weaker euro area banks than US banks - something I noted here: http://trueeconomics.blogspot.ie/2013/10/9102013-leveraged-and-sick-euro-area.html

Another chart, more bumpy road for euro area:

Per above, there is a massive problem on funding side for euro area banks in the form of huge reliance on debt (both secured and unsecured). The US banks are much less reliant on secured debt (they can issue real paper and raise securitised funding) and they rely less overall on borrowing.

Chart below shows the structure of secured bank debt. Euro area again stand out with huge reliance on covered bonds. US stands out in terms of its continued reliance on MBS. The crisis focal point of the latter did not go away… and the crisis focal source of contagion - banks debt funding - has not gone from euro area's 'reformed' banks.

Happy times... Mr Draghi today expressed his conviction that euro area banks have been cured from their ills... right... hopium-783 is the toast of Frankfurt.

10/10/2013: IMF's GFSR October 2013: Focus on Lending

More interesting analysis from the IMF's GFSR (previously covered topics: banks and corporate debt overhang are linked here: http://trueeconomics.blogspot.ie/2013/10/10102013-imfs-gfsr-october-2013-focus_10.html).

This time around: lending to the economy. One chart:

Note that Ireland is a euro area outlier in terms of the huge extent of policy supports one demand side for credit and simultaneously above average support on supply side of credit:

Puzzled? Me too. Yes, we have huge number of various programmes, grants, schemes, incentives for funding supply and demand. Most of it is not in the form of credit, but rather equity - e.g. Enterprise Ireland funding. No, we don't have much of credit supply supports when it comes to policies or institutions relating to banks. We have lots of hot air talking about the need for banks to lend, more hot air on various 'checks' as to whether banks are lending or not… etc. So let's take a look at the table where the IMF gets its ideas on the above policies existence:

Per table above, Ireland has produced policies of Household Debt Restructuring. Wake me up here, folks, cause I am apparently living in some different Ireland from the one visited by the IMF. Oh, and yes, we also have put in place new policies on Corporate Debt Restructuring. What are these? Hiding our heads in the sand as companies go to the wall? Or may be these are policies promised on dealing with upward-only rent reviews which have driven thousands of companies into the ditch?

I think the IMF folks need to get out a bit more often… before compiling reports...

10/10/2013: IMF's GFSR October 2013: Focus on Banks

As promised in the earlier post, focusing on Corporate Debt Overhang (http://trueeconomics.blogspot.ie/2013/10/10102013-imfs-gfsr-october-2013-focus.html), I am covering in a series of posts the latest IMF GFSR.

Let's take a look at the banking sector focus within the GFSR:

Note the relatively healthy position of the euro area banks on the basis of Tier 1 capital ratios. However, when it comes to leverage, the chart below shows a ratio of tangible equity to tangible assets (the so-called Tangible Leverage ratio). The higher the number in the first chart above, the lower is the capital ratio ('bad thing'), the higher the number is in the chart below, the higher is the ratio of equity to assets ('good thing'):

So euro area banks are doing fine by Tier 1 capital, but are not fine by leverage... As the rest of the IMF analysis highlights, much of this aberrational result arises from the nature of the euro area banking model (assets-heavy 'universal banking' model), plus, as IMF politely puts:

"The conflicting signals also highlight the  importance of restoring investor confidence in the accuracy and consistency of bank risk weights. This also suggests that risk-weighted capital ratios should be supplemented by leverage ratios, as proposed in the Basel III framework."

No comment on the above...

GFSR is deadly on profitability of banks and equity valuations. Here's the key chart:

Notice the concentration of euro area banks at the bottom of the distribution. Still think Irish banks shares held by the Exchequer are worth EUR11 billion?.. really?.. By the chart above, they should be valued at around 2-3% of their tangible assets... which would be what? Close to EUR6 billion, maybe EUR9 billion. Which refers to all Irish banks. Listed, unlisted, foreign, domestic... And to all their equity... not just the equity held by the Exchequer.

Never mind. Like Irish banks, euro area banks are going to continue dumping assets... err... deleverage...

"European banks have been deleveraging in response to market and regulatory concerns about capital levels, and may continue to do so. ...a combination of market and regulatory
concerns about bank capitalization has already led to an increase in capital levels at EU banks. …Over the period 2011:Q3–2013:Q2, large EU banks reduced their assets by a total of $2.5 trillion on a gross basis — which includes only those banks that cut back assets — and by $2.1 trillion on a net basis."

So you thought it was surprising/unusual/unexpected that the banks are not lending? Every policymaker harping on about banks credit 'growth' should have known this deleveraging is ongoing and with it, no new credit growth will occur… I mean USD2.5 trillion!

"…About 40 percent of the reduction by the banks in the EU as a whole was through a cutback in loans, with the remainder through scaling back noncore exposures and sales of some parts of their businesses… As discussed in the April 2013 GFSR, banks have been concentrating on derisking their balance sheets by reducing capital-intensive businesses, holding greater proportions of assets with lower risk weights (such as government bonds), and optimizing risk-weight models."

Put differently, to beef up capital ratios, the banks shed primarily riskier loans. Now what these might be? Oh, yes, SMEs and non-financial corporate loans in general… So that 'credit growth' to SMEs?..

"The capital ratio projection exercise previously discussed suggests that some banks will need to continue raising equity or cutting back balance sheets as they endeavor to repair and strengthen their balance sheets."

Read my lips: no new credit growth… QED…

You can read the entire GFSR here: http://www.imf.org/External/Pubs/FT/GFSR/2013/02/pdf/text.pdf

Note: my recent article on European banks is here: http://trueeconomics.blogspot.ie/2013/10/9102013-leveraged-and-sick-euro-area.html

10/10/2013: Prof Honohan is correct on 'strategic defaults'... but...

It is good to see Prof Honohan making a substantive and strong statement on the issue of 'strategic' mortgages arrears, contrasting the current 'debate' with some reasoned commentary:
http://www.independent.ie/business/irish/patrick-honohan-some-mortgage-holders-not-paying-up-29649978.html

Prof. Honohan is correct - there are borrowers who are attempting to game the system. This is rational and expected. And often it is abusive. Prof. Honohan is also correct in pointing out that Ireland's environment for insolvency and bankruptcy resolution is different from the US, making comparisons to the US data and evidence incomplete at best.

However, Prof. Honohan is not correct in solely placing the blame for the insolvencies crisis on the shoulders of borrowers. Irish State and banks are to share in responsibility for this crisis as well by:

1. Banks - due to failing to properly price risks in issuing loans. Banks are paid to price these risks (this is what they collect the lending margins for) and they have not done their work in properly selling loans to some/many households.
2. State - due to failure to properly supervise loans risk pricing in (1) above and due to failure to protect borrowers from occasionally excessively aggressive loans origination practices of the banks.
3. Banks - due to failure to secure sustainable funding for loans origination, leading to excessive reliance on short-term borrowings and thus increased exposure to funding risks. These risks, once materialised, have been in part loaded onto the shoulders of borrowers with adjustable rate mortgages, in some cases potentially precipitating and in other exacerbating the extent of the crisis.
4. State - due to failure to properly regulate and supervise banks risk taking activities in funding markets.

None of the points 1-4 are liability of the borrowers. All of the points 1-4 are contributors to the crisis to some extent. 

There is co-shared responsibility by the State and the Banks and this responsibility must translate into liability to aid homeowners in distress. Such assistance can and should take form of cost-efficient and effective solutions. Unfortunately, current discussion does not even begin tackling this issue and Prof Honohan's comment today is not helping the process either

Note: my recent Sunday Times column on strategic defaults issue is here:

http://trueeconomics.blogspot.ie/2013/09/592013-sunday-times-september-1.html

My full position on strategic defaults and related matters of foreclosures is here:

http://trueeconomics.blogspot.ie/2013/08/182013-strategic-defaults.html

10/10/2013: CBRE Research Q3 2013: Dublin Offices Market & Irish Retail Market

Some good news from the Dublin Office Property markets and Irish Retail Property markets via CBRE Research Notes today. CBRE Research, as usual, provide very good insights and both notes, so quoting from the first note directly:

• 56 individual letting transactions signed during Q3 2013
• Almost 80% of Dublin office take-up in Q3 located in the city centre
• 68% of total lettings in the quarter smaller than 465m2 (5,000 sq. ft.)
• Prime rents expected to increase over coming months as the scarcity of prime office buildings in the city centre escalates
• Continued decline in vacancy rates in all districts
• Prime office yields have contracted by a full 150 basis points in the last 18 months
• Escalation in investment transactional activity over recent months
• Prime Dublin office yields contracted to 6% during Q3
• The city centre accounted for 79% of overall take-up in Dublin in Q3
• The Dublin 2/4 postcode accounted for almost 44% of letting activity in the city centre in the quarter
• The city centre vacancy rate was 15.7% at the end of the third quarter while the vacancy rate in Dublin 2/4 was 12.7%
• 8 office investment sales totalling € 73.65 million completed in Dublin during Q3
• Offices accounted for 30% of overall investment spend in the Irish market during the first nine months 2013

Some charts:

Less encouraging changes in the Retail Property sector. Again, via CBRE:

• An improvement in consumer trends in the first half of 2013 as the Irish economy shows some signs of improvement
• Some variation between the performance of different sectors of the retail market
• Considerable retail leasing and sales activity occurring in the property market
• Prime Zone A rents now showing signs of stabilisation following 60% fall from peak
• Little improvement in high street vacancy rates over the last six months with vacancy rates in provincial towns remaining stubbornly high
• €84 million invested in retail investment properties in the first half of 2013, accounting for 14% of investment activity in the period
• Prime retail yields have contracted since the beginning of the year in response to strong investor demand

And a couple of charts:

10/10/2013: IMF's GFSR October 2013: Focus on Corporate Debt Overhang

I'll be blogging out today some interesting charts from the IMF's GFSR October 2013... these will appear in no particular order, with brief summaries...

Here's a start: non-financial corporate sector debt crises in the euro periphery. I always noted that the important issue in the current crisis is not just a traditional sovereign debt crunch, but the debt overhang over what I call the total real economic debt: household, non-financial corporate and government debts.

In the above that Irish banks offer lower rates, based on the bank capital and reserves ratio to NPLs than other banks, including Portugal, Italy and Spain. Also note that 5 years into the crisis and after massive recapitalisations Irish banks buffers are lower than for any other economy, save Cyprus and Greece. That is the cost of delaying resolution of the loans.

Note: my latest article on European and Irish banking systems is available here: http://trueeconomics.blogspot.ie/2013/10/9102013-leveraged-and-sick-euro-area.html

The next four charts show that quality of loans to non-financial corporate sector is deteriorating and remaining poor for firms in the periphery, while improving for German and French firms.

Most worrying is the Italian situation where quality of loans is continuing to deteriorate and the rate of deterioration is accelerating, while Spanish situation remains exceptionally weak:

Things are desperate-to-dire in Greece and Portugal too:

More to come, so stay tuned...

9/10/2013: Leveraged and Sick: Euro Area Banks - Sunday Times October 6

This is an unedited version of my Sunday Times column from October 6, 2013.


Newton’s Third Law of Motion postulates that to every action, there is always an equal and opposite reaction. Alas, as recent economic history suggests, physics laws do not apply to economics.

The events of September are case in point. In recent weeks, economic data from the euro area and Ireland have been signaling some improvement in growth conditions. Physics would suggest that the reaction should be to use this time to put forward new systems that can help us averting or mitigating the next crises and deal with the current one. Political economy, in contrast, tells us that any improvement is just a signal to policymakers to slip back into the comfort of status quo.

Meanwhile, the core problems of the Financial Crisis and the Great Recession remain unaddressed, and risks in the global financial markets, are rising, not falling.

More ominously, the Euro area, and by corollary Ireland, are now once again in the line of fire. The reason for this is that for all the talk about drastic changes in the way the financial services operate and are regulated, Europe has done virtually nothing to effectively address the lessons learned since September 2008.


Last month we marked the fifth anniversaries of the Lehman Brothers’ bankruptcy and the introduction of the Irish banking guarantee. These events define the breaking points of the global financial crisis. In the same month we also saw the restart of the Greek debt negotiations ahead of the Third Bailout, the Portuguese Government announcement that its debt will reach 128 percent of the country GDP by the end of this year, a renewed political crisis in Italy, and continued catastrophic decline in the Cypriot economy. Public debt levels across the entire euro periphery are still rising; economies continue to shrink or stagnate. Financial system remains dysfunctional and loaded with risks. Voters are growing weary of this mess. In Spain, political divisions and separatist movements gained strength, while German and Austrian elections have signaled a prospect of the governments’ paralysis.

In Ireland, the poster boy for EU policies, pressures continued to build up in the banking system. The Central Bank is barely containing its dissatisfaction with the lack of progress achieved by the banks in dealing with arrears and is forcefully pushing through new, ever more ambitious, mortgages resolutions targets. Yet it is not empowered to enforce these targets and has no capacity to steer the banks in the direction of safeguarding consumer interests. Business loans continue to meltdown hidden in the accounts.

Meanwhile, the latest set of data from the banking sector is highlighting the fact that little has changed on the ground in five years of the crisis. Domestic deposits are flat or declining – depending on which part of the system one looks at. Foreign deposits are falling. Credit supply continues to shrink.


Perhaps the greatest problem faced by the euro area and Ireland is that since the late 2008, tens of thousands of pages of new regulations have been drawn up in attempting to cover up the collapse of the banking system. Well in excess of EUR 700 billion was spent on ‘repairing’ the banks. And yet, few tangible changes on the ground have taken place. The lessons of the crisis have not been learned and its legacy continues to persist.

There are three basic problems with euro area financial systems as they stand today - the very same problems that plagued the system since the start of the crisis. These are: high leverage and systemic risks, excessive concentration of the banks by size, and wrong-headed regulatory responses to the crisis.

European banks are still leveraged far above safety levels. Lehman Brothers borrowed 31 times its own capital in mid-2008. Today, euro area banks borrow even more. No new European rules on leverage have been written, let alone implemented.

New York University’s Volatility Lab maintains a current database on systemic risks present in the global banking sector. Top 50, ranked by the degree of leverage carried on their balance sheet, euro area banks had combined exposure to USD 1.376 trillion in systemic risks at the end of last week. The banks market value was half of that at USD668 billion. Average leverage in the euro area top 50 banks is 58.5 or almost double Lehman's, when measured as a function of own equity. Two flagship Irish banks, still rated internationally, Bank of Ireland and Ptsb, are ranked 37th and 46th in terms of overall leverage risks and carry combined systemic risk of USD11.4 billion. Accounting for the banks provisions for bad loans, the two would rank in top 20 most risky banks in the advanced world.

Compare this to the US banking system. The highest level of leverage recorded for any American bank is 20.4 times (to equity). Total systemic risk of the top 50 leveraged financial institutions in the entire Americas (North and South) is around USD489 billion, set against the market value of these institutions of USD1.4 trillion.

Since September 2008, systemic risk in the US banking system has more than halved. In the case of euro area, the decline is only one-fifth.

Euro area banks positions as too-big-to-fail are becoming even stronger as the result of the crisis. In the peripheral euro states, and especially in Ireland, this effect is magnified by the deliberate policies attempting to shore up their banking systems by further concentrating market power of ‘Pillar’ banks.


Another area in which change has been scarce is the regulations concerning the funding of the banks. The crisis was driven, in part, by the short-term nature of banks funding – the main cause for the issuance of the September 2008 banking guarantee in Ireland.

In the wake of the crisis, one would naturally expect the new regulatory changes to focus on increasing the deposits share in funding and on reducing banks’ reliance on and costly (in the case of restructuring) senior bonds. None of this has happened to-date and following Cypriot haircuts on depositors one can argue that the ability of euro area banks to raise funding via deposits has now been reduced, not increased.

In addition to driving consolidation of the sector, Europe’s political leaders promised to raise the capital requirements on the banks. Actions did not match their rhetoric. Higher capital holdings are not being put in place fast enough. The EU is actively attempting to delay global efforts at introduction of new minimum standards for capital. As the result, current levels of capital buffers held by the top 50 euro area banks are below those held by Lehman Brothers at the end of 2008. Irish banks capital levels, even after massive injections of 2011, are also lower than that of Lehman’s once the expected losses are accounted for.


Even more ominously, the ideology of harmonisation as a solution to every problem still dominates the EU thinking. This ideology directly contradicts core principles of risk management. By reducing diversity of the regulatory and supervisory systems, the EU is making a bet that its approach to regulation is the best that can ever be developed. History of the entire European Monetary Union existence tells us that this is unlikely to be the case.

Moving from diverse regulatory systems and competitive banking toward harmonised regulation and more concentrated financial sector dominated by the too-big-to-fail ‘Pillar’ institutions implies the need for ever-rising levels of rescue funds and capital buffers.

Currently, there are only two proposals as to how this demand for rescue funds can be addressed. You guessed it – both are utterly unrealistic when it comes to political economy’s reality.

The first one is promising to deliver a small rescue fund for future banks rescues capitalized out of a special banks levy. The fund is not going to be operative for at least ten years from its formation and will not be able to deal with the current crisis legacy debts.

The second plan was summarized this week in the IMF policy paper. Per IMF, full fiscal harmonisation is a necessary condition for existence of the common currency. A full fiscal union, and by corollary a political union as well, is required to absorb potential shocks from the future crises. The union should cover better oversight by the EU authorities over national budgets and fiscal policies, a centralised budget, borrowing and taxing authority, and a credible and independent fund for backstopping shocks to the banking sector. In more simple terms, the IMF is outlining a federal government for Europe, minus democratic controls and elections.

Under all of these plans, there is no promise of relief for Ireland on crisis-related banking debts. In fact, the IMF proposals clearly and explicitly state that the stand-alone fund will only be available to deal with future crises. Addressing legacy costs will require separate mutualisation of the Government liabilities relating to the banking sector rescues. The IMF proposal, in the case of Ireland, means accepting tax harmonisation and surrendering some of the Irish tax revenues to the federal authorities.


At this stage, it is painfully clear to any objective observer that fundamental drivers of the Financial Crisis triggered by the events of September 2008 remain unaddressed in the case of European banking. Thus, core risks contained in the financial system in Europe and in Ireland in particular are now rising once again. Politics have been trumping logic over the last five years just as they did in the years building up to the crisis. This is not a good prescription for the future.

Box-Out: 

A study by the Bank for International Settlements researchers, Stephen Cecchetti and Enisse Kharroubi, published this week, attempted to uncover the reasons for the negative relationship between the rate of growth in financial services and the rate of growth in innovation-related productivity. In other words, the study looked at what is known in economics as total factor productivity growth – growth in productivity attributable to skills, technology, as well as other 'softer' sources, such as, for example, entrepreneurship or changes in corporate strategies, etc. The authors found that an increase in financial sector activity leads to outflow of skilled workers away from entrepreneurial ventures and toward financial sector. This, in turn, results in the financial sector growth crowding out growth in R&D-intensive firms and industries. The study used data for 15 OECD countries, including some countries with open economies and significant shares of financial sector in GDP, similar to Ireland. The findings are striking: R&D intensive sectors located in a country whose financial system is growing rapidly grow between 1.9 and 2.9% a year slower low R&D intensity sectors located in a country whose financial system is growing slowly. This huge effect implies that for the economies like Ireland, shifting economic development to R&D-intensive activity will require significant efforts to mitigate the effects of the IFSC on draining the indigenous skills pool. It also implies that Ireland should consider running an entirely separate system for attracting skilled immigrants for specific sectors.

9/10/2013: Returning to Reinhart & Rogoff Debate

Remember the debate about Reinhart & Rogoff paper and the excel errors? Here's a superb response to the idiotic (that's right - absolutely idiotic) level of debate on the topic in the media from Angus Deaton: http://www.econbrowser.com/archives/2013/10/on_weights_and.html

To remind you, my own view was expressed here:

http://trueeconomics.blogspot.ie/2013/07/272013-village-june-2013-real-effects.html

9/10/2014: BusinessInsider Most Important Charts Slidedeck Q4 2013

BusinessInsider came out with their quarterly slide deck of the Most Important Charts in the World. Honoured to be on number 30... http://www.businessinsider.com.au/most-important-charts-in-the-world-q4-2013-10#share

The actual chart is also reproduced here (click on the chart to enlarge):

8/10/2013: Jokers Burning Money: Public Sector Reforms - Village, October 2013

My article for the Village Magazine on pre-Budget 2014 analysis of health spending in Ireland: http://www.villagemagazine.ie/index.php/2013/10/gurdgiev-on-healthcare-jokers-burning-money/

8/10/2013: German Voters Go For Status Quo... Redux: Sunday Times September 29, 2013

This is an unedited version of my Sunday Times column from September 29, 2013.


By any measure, last Sunday's German elections highlighted a resounding failure of the country electorate to connect with reality. Despite returning a number of historical outcomes, the voters reaffirmed the passive-conservative leadership mandate exercised by Angela Merkel since 2009. As the result, German policies are now likely to drift even farther away from the immediate needs of the euro area periphery, risking a renewal of the euro area crisis and a slowdown in the already less-than ambitious speed of European reforms. None of this is good news for Ireland.

The historical nature of the 2013 German elections is highlighted by the fact that Angela Merkel became the first euro area leader to be reelected as the head of state since the beginning of the Great Recession. And she has done it twice: first some 12 months into the crisis in 2009 and now 5 years from its onset. Ms. Merkel won the highest number of votes for her CDU/CSU party in 23 years. And she became the first German leader since the golden days of Konrad Adenauer back in 1961 to personally dominate the elections, instead of standing in the shadow of her party. Individually, all of these are rare events in modern German history. Taken together, they are probably unprecedented.

But herein lies the problem for all of us living outside Germany. The elections of 2013 have produced a strong mandate for doing nothing new when it comes to either the euro area or the larger Union reforms. The Chancellor re-elect retook the Bundeskanzleramt on a mandate of being a 'safe pair of hands'. The campaign her party waged focused on such important topics as charging foreign drivers for using autobahns. Instead of debating the core issues faced by the EU, and the role of Germany in this mess, voters largely engaged in navel-gazing. Satisfied with their relatively well-performing economy and receding immediate danger to the euro, they endorsed the leadership devoid of ideas, alternative views and aspirations. Not surprisingly, philosopher Jurgen Habermas declared the 2013 general election campaign a "collective failure" of the elites.

This means that the German elections left the core problems of the euro crisis unaddressed, raising the specter of renewed uncertainty about the future of the common currency area. This concern became immediately visible this week.

On Monday, ECB's Mario Draghi rushed to compensate for the policy paralysis signaled out of Germany by stating that the ECB is ready to deploy a new round of quantitative easing in the form of the third Long-Term Refinancing Operations (LTRO3). To remind you, the first two rounds of LTROs were the ECB’s ‘pre-nuclear option’ response to strategic threats to the euro area economy in late 2010-early 2011. The ‘nuclear option’ was the subsequent announcement of the stand-by quantitative easing programme, known as Outright Monetary Transactions (OMT). Mr. Draghi mentioning the prospect of renewing the LTRO scheme suggests that the ECB expects no change in euro area policies in the aftermath of last week’s elections.

Acknowledging this, Draghi also tried to push aside the pesky issue of the Greek Bailout 3.0. And in a direct reflection of the Berlin’s preferences, Draghi also downplayed the possibility of the ESM being licensed to provide financing cover for future bank failures.

Mr Draghi’s precautionary moves were timed perfectly. Following the elections, sovereign yields on all peripheral countries’ bonds rose relative to German bunds. Credit default swaps – insurance contracts underwriting sovereign bonds – also crept up. The markets are not buying the ‘return to status quo’ story as good news. This was contrasted by the domestic news which saw the German economic sentiment, as measured by the CESIfo index of economic conditions rise for the third month in a row. This marks fifteenth consecutive quarter of the CESIfo index reading above historical average. In contrast, euro area economic conditions index has been stuck below its historical average levels for eight quarters in a row through this September.

Since 2009 elections, Chancellor Merkel held back from directly leading the euro area and instead opted repeatedly to wait for an escalation of the crises before responding with un-prepared, often ad hoc and wrong-footed solutions. Best examples of this approach to leadership are the EU's failures in Cyprus and Greece. Both are directly linked to Ms. Merkel’s prevarication in the face of escalating crises. All were driven by swings in domestic public opinion, rather than by any cohesive principles.

For Ireland, this mode of leadership spells lack of progress on key issues.

Gauging German public opinion there is currently zero appetite to shift away from the pre-elections status quo in which the Irish crisis is seen as largely self-induced and peripheral to German interests. This means that Germany is likely to continue supporting Irish debt sustainability rhetorically, while opposing practical resolution of the debt overhang. This week, Ms. Merkel gave another loud endorsement to Irish Government policies during the crisis. As she did so, the Irish Government – usually not known for its skeptical pragmatism – was actively pushing the timeline for banking debts problem resolution out into the later months of 2014. My gut feeling is that we can expect this timeline to stretch beyond 2015. Instead of allowing restructuring of our banking debts, Berlin will nod approvingly to a precautionary line of credit for Ireland via set-aside stand-by facility at the ESM. This credit will be provided on current ESM funding terms, some 1 percent below the cost of IMF funding and with longer maturities. Which is the good news.

In exchange for this token gesture we will be required to strictly adhere to fiscal adjustment targets for 2015. We will be further subjected to a new multi-annual fiscal programme stretching into 2018-2020 to be supervised by the EU Commission. ECB – by proxy, the German government – will be watching from the shadows.

Meanwhile, as Mr. Draghi statement this week indicates, Germany will block ESM from having any powers in dealing with future banking crises. Our retrospective banks debt deal will then have to wait until a new funding facility, most likely administered by the ECB, comes into place. Pencil that for sometime in 2016. Pushing legacy debts incurred by the Exchequer as the result of rescuing our banks into the hands of the ECB is likely to cost us. Frankfurt can, and potentially will, demand something in return for this. One thing the ECB can ask for is accelerated sales of the Central Bank-held Government bonds (the fallout from the Promissory Notes deal done earlier this year).  The ECB already has the power to do so. It also has a direct incentive: the bonds are set against our banks borrowings from the euro system. Of course, this will mean that we will be trading one debt for another, as accelerated sales of bonds will erode the temporary fiscal ‘savings’ achieved by the Promo Notes restructuring.

But the cost of the EU/German ‘assistance’ for Ireland will most likely extend further than bonds sales acceleration and new fiscal targets setting. German political agenda is well-anchored to continued saber-rattling on the need for corporate tax harmonization across the EU. With the 2009-2011 Franco-German tax harmonisation initiative all but dead, the focus in the next two-three years will shift toward advancing the consolidated common corporate tax base (CCCTB) proposals that suit German interests more than any other form of tax coordination. Based on her record to-date, Ms. Merkel is a fan of the CCCTB as are all of her potential coalition partners and the German voters.

German elections are also promising to create less certainty as to the structural reforms in the European Union space. Last Sunday’s results produced strong votes for the anti-euro party, Alternative fuer Deutschland (AfD). The party also did well in the previously held local elections. The new Merkel-led coalition will have to show caution when facing any prospect of further harmonisation and consolidation of power in Brussels.

When it comes to structural reforms, German public prefers for euro area to focus on specific hard fiscal targets and on replicating Germany's own structural reforms of the 1990s. While such reforms can be beneficent to the euro area peripheral states, for Ireland they offer only marginal gains. German reforms of the 1990s have focused on two core policy pillars: increasing flexibility of the labour markets and decreasing the burden of the welfare state. These came at a cost of continued consolidation of German economy around larger enterprises and suppression of domestic demand and household investment.

Ireland today requires some reforms in the social welfare system. But we also need to break up our dominant market players in the domestic sectors and to increase our households’ spending and investment.

In short, in the wake of the German elections, there is preciously little that Ireland can expect in terms of the European support for our recovery. Europe, with German blessing, will most likely lend us a hand to help us out of the 'safe' boat of the Troika programme. Thereafter, swimming in the turbulent waters of the Eurozone crisis will be up to us. Let's hope Budget 2014 provides generously for flotation vests.

BOX-OUT:

Marking the fifth anniversary of the Banking Guarantee of September 2008, there are plenty of stocktaking exercises going around. Yet, for all the ‘Fail’ marks being rightly handed out to the Guarantee, all signs in the streets suggest we have learned next to nothing from our past errors. This week offers at least two such examples. Firstly, the crisis showed that a non-transparent system of monitoring and managing financial risks will result in the connected-few gaming the entire system. This week, Minister Noonan intervened in the process of winding down the IBRC, bending the rules that normally apply to company liquidations. Granting anonymity to the funders of the toxic banks comes as a priority in this country. Unintended consequence of this is that it also perpetuates the cronyist relationship between the financial services and the state – exactly the outcome we should have learned to avoid. Secondly, we know that principles-based regulations require swift, robust and unambiguous enforcement. Also this week, the Central Bank effectively shut the door on any further investigations into Anglo dealings with the regulators that could have arisen from the infamous Anglo Tapes. Five years in, there are zero prosecutions, and scores of closed investigations. To paraphrase Bon Jovi’s famous refrain: the less we learn, the more things stay the same…

7/10/2013: Ifo publishes updated forecast for Euro area growth: Q3 2013-Q1 2014

CESIfo issued an update to its Q3-Q4 2013 forecasts for the euro area today.

Per release:

"After six consecutive quarters of decline, GDP in the Eurozone increased by 0.3% in Q2 2013. Economic activity is projected to expand further over the forecast horizon (+0.1% in Q3, +0.3% in Q4 2013 and +0.4% in Q1 2014) mainly on the back of the expected pick-up in external demand as well as fiscal policy gradually becoming less contractionary."

"However, the recovery is likely to be very modest, as fiscal austerity measures and structural reforms currently undertaken by member states will continue to hamper the expansion of domestic demand."

Specifically:
-- "The unfavourable labour market conditions will keep on weighing on the development of real disposable income and private consumption will therefore recover only slowly."
-- "Aggregate investment is forecast to expand, albeit still at a rather low rate over the forecast horizon. This profile will be mainly driven by the increasing needs to replace depreciated capital as well as the robust foreign-demand growth."
-- "Under the assumptions that the oil price stabilizes at USD 111 per barrel and that the euro/dollar exchange rate fluctuates around 1.35, inflation is expected to remain well below 2% (1.5% in Q4 2013 and 1.4% in Q1 2014)."
-- "The major downside risks to this scenario arise from possible renewed escalations of the debt crisis and from a stronger than expected deceleration in some emerging markets."

Note: my work on positive euro area growth signals based on CESIfo data will be featuring in monthly economics slide deck on Business Insider - stay tuned. Meanwhile, two previous post covering advanced pre-conditions for the above forecasts:
http://trueeconomics.blogspot.ie/2013/10/4102013-eurocoin-cautious-return-of.html (note eurocoin-consisted forecast for Q3 2013 set by me at 0.1% which is in line with CESIfo forecast above).

Also, note my Sunday Times article from September 29, 2013 covering Ifo data on euro area economic conditions.

Stay tuned for the Sunday Times article posting here and for BusinessInsider slide link.