04.07/2011: Eurocoin for June 2011

In advance of ECB decision and with a week delay - here's the latest leading indicator for Euro area growth - eurocoin - as issued by CEPR (link to release here).
As shown above, eurocoin posted a small decline from 0.62 in May to 0.52 in June. This reading is below 3mo MA of 0.57 and behind 6mo MA of 0.56, but is 13% ahead of the June 2010 reading of 0.46. The series continue to signal expansion, albeit at a slower pace.

Mapping out eurocoin alongside quarterly growth rates suggests, should eurocoin lower trend be established in July-August - slower growth in Q2/Q3 2011:

Lastly, a chart mapping eurocoin against ECB decisions:
The above suggests that although eurocoin signals alleviation in the pressures on ECB to raise rates this month, there is, nonetheless continued disconnect between the historical rates and eurocoin readings. Historical relationship between level and changes in eurocoin and ECB repo rate implies repo rate around 2.0-2.5% or roughly double current rate.

03/07/2011: SMEs and Corporate Credit: April 2011 data

In the previous post I looked at the latest data on lending rates and volumes for Irish households, which, among other things, showed

• lack of any significant easing in rates themselves (except for consumer credit), and
• lack of any uptick in credit issuance (in fact, there has been contraction in lending volumes in 3 out of 4 categories examined)

Here, let's take a look at business lending. First, loans up to € 1 million in volume (primarily loans that are focused on SMEs). Keep in mind the objectives of:

• creating Nama
• pumping countless billions into IRL-6 zombies
• setting aside specially designated funds within AIB & BofI for small business lending, and
• increasing various seed programmes (EI) and targeted tax reliefs

were to increase supply of credit to Irish SMEs.

Top line numbers for loans under €1 million are:

• Average rates charged on loans under €1 million in volume with up to 1 year fixed duration (or floating) has risen from 4.27% t0 4.74% between March 2011 and April 2011. The rate now stands just-shy of 4.906% historical average and 4.801 average for crisis period of January-2008 through present. 12mo MA is now below April 2011 rate at 4.087%. Volatility of these rates has risen from 1.002 standard deviation for historical period to 1.302 standard deviation for the crisis period. In short, there are no signs of any improvement in the rates charged during the crisis.
• At the same time, volume of non-financial corporate loans under €1 million with floating or up to 1 year fixed rates has fallen from €404 million in March to €250 million in April 2011. Volumes of new loans written in this category now stand well below historical monthly average of €919 million, crisis period average of €832 million and 12mo MA of €448.4 million.
• Fixed-rate loans (with rate fixed for more than 1 year) also became more expensive in April (6.17%) than in March (5.86%). These are now well above the historical average rates of 5.234%, the crisis average of 5.329% and the 12mo MA of 5.008%. Volatility of these rates also rose during the crisis.
• Volumes of over 1 year fixed smaller loans has shrunk to €45 million in April, down from €64 million in March and down on historical average of €160 million, crisis period average of €110 million and 12mo MA of €70.25 million.
  

So to sum this up, small businesses are seeing higher charges and shrinking volumes of loans across both types of loans under €1 million in volume. Anyone wondering why the hell all the above measures are failing to deliver on the promise?

But wait, what about larger loans? Next, consider loans issued to non-financial corporations that are over €1 million in volume:

• Rates charged on loans of €1 million and more that are floating or under 1 year fixed have fallen from 3.51% in March to 3.22% in April and are now standing well below 4.407% historical average, 4.01% crisis period average, but above 12mo MA of 3.048%. Volatility of these loans rates have risen during the crisis from historical 1.159 standard deviation to a standard deviation of 1.518 during the crisis.
• So more of those loans should be pursued by businesses, you'd think? Not really. At least not when it comes to actual issuance of these loans. Volume of larger loans issued on floating or fixed up to 1 year rate basis has fallen in April to €626 million, down from €1,119 million in March. Both numbers pale in comparison with historical average of €3,948 million and crisis period average of €4,654 million and both are below 12mo MA of €1,784 million.
• Rates charged on loans of €1 million and more in volume with fixed interest rate over 1 year have also declined from 2.30% in March to 2.27% in April. The rates are now well below 4.054% average over historical period and 3.666% average over crisis period. 12mo MA is also higher than the current rates - at 2.772%. Lower rates here again come with higher volatility.
  
• Volumes of these loans, however, fell precipitously, reaching €45 million in April, down from €169 million in March. Historical monthly average of new loans of this type issued stands at €632.3 million, while crisis period average is €488.5 million and 12mo MA is €190 million.

Lastly, let's take a look at the spreads between the rates based on loan volume:

• Spreads on corporate loans under €1 million, flexible rate & under 1 year fixed over and above those for over €1 million, should - in theory - be negative, unless there is a selection bias of SMEs predominantly taking smaller loans. At any rate, we would expect the spread to be moving in the direction of lower spreads if Government 'get credit flowing to SMEs' policies were working. Alas, in April 2011, the spread stood at 1.52pp up from March 0.76 percentage points and well above the historical average of 0.499pp and crisis period average of 0.791pp. It was also above 12mo MA reading of 1.039pp. Spread volatility has declined marginally during the crisis. So no, Government policy does not help selecting in favor of smaller corporate borrowers and does not provide support for working capital lending.
  
• Spreads on corporate loans under €1 million with fixed rate (>1 year duration) over and above similar loans of volume in excess of €1 million stood at 3.9pp in April up from 3.56pp in March. The spread is now massively above historical average of 1.180pp and crisis period average of 1.663pp, as well as 12mo MA of 2.237pp. Spread volatility has risen during the crisis. Again, no evidence here that SMEs are getting any support from Government policy 'instruments' listed above when it comes to gaining smaller loans as opposed to larger corporates access to credit.

03/07/2011: Household Credit: latest data

Some more analysis of new lending - based on CBofI data through April 2011.

Household loans and consumer loans are covered in this post. So house purchase loans first:

• Rates for the loans for House Purchases floating and up to 1 year fixation have risen from 3.09% to 3.20% in April 2011, relative to March. Historical average rate is 3.743% and the average rate since the beginning of the crisis (January 2008) is 3.574%. Current rates are above their 12mo MA of 2.959%. It is interesting to note that this data clearly shows that there is no statistically significant easing of rates during the crisis as crisis period average rates are not statistically significantly different from those for the entire history of the data series. Another interesting point is that when house purchasers are concerned, volatility of retail rates has risen during the crisis: the historical standard deviation of the series is 0.827 while post-January 2008 standard deviation is 1.072.
• Volumes of loans in the above category has declined from €1.190 billion issued in March 2011 to €1.092 billion in April 2011. Again, current rates of issuance are signaling continued credit tightening: historical monthly average issuance stands at €2.577 billion, while issuance since January 2008 averages €2.0 billion.
  
• Rates for the loans for House Purchases, over 1 year fixation have also increased mom in April from 4.23% to 4.29%. The rates are now above their historical average of 4.213% but below their crisis period average of 4.34%. April rate is above 12mo MA of 4.115%. As in the case of floating rate loans, fixed rate loans rates also risen in volatility during the crisis with overall historical standard deviation for the rates at 0.641 and January 2008-present standard deviation of 0.723.
• However, good luck to anyone trying to get these loans. Fixed rate loans for House Purchases issuance fell from €568 million in March to €331 million in April. New issuance of these loans is now well below historical average monthly volumes of €705 million and below crisis-period average of €521 million. Although 12mo MA is above the crisis average at €526 million.

A chart:
But what about consumer loans not designated for house purchases?

• Cost of consumer credit for floating loans and loans up to 1 year fixation fell from 6.02% in March 2011 to 5.23% in April. Thus, April rates were below their historical monthly average of 5.584%, their crisis period average of 5.565% and their 12mo MA of 5.640%. Note that crisis period was associated with higher volatility of rates in this category as well, with standard deviation rising from historical 0.836 to crisis-period 1.099.
• In terms of volumes of loans issued in the above category, the volume increased from €134 million to €156 million between March 2011 and April. However, volume of new loans issuance remains well below its historical average of €393 million, crisis-period average of €378 million and 12mo MA of €193 million.
• Cost of consumer credit for fixed loans (over 1 year) has fallen from 10.09% in March to 9.90% in April 2011, with current rate still above historical average of 8.589% and crisis period average of 9.494%, but is now below 12mo MA of 10.217%. Interestingly, volatility of rates charged on these types of loans has fallen from historical standard deviation of 0.962 to crisis-period standard deviation of 0.695.
• Again, good luck securing such loans, though, as volumes issued declined from €60 million in March 2011 to €51 million in April. Historical average issuance stands at €169.5 million, while crisis period average is €96 million. Current issuance however remains above 12mo MA of €48.8 million.

A chart to illustrate:

02/07/2011: SMEs and smaller corproate loans rates

An interesting chart of rates charged on new business loans across SMEs and households - my calculations based on Table B.2.1 from the Central Bank database:
In April 2011, the spread between Non-Financial Corporate Loans volume under €1 mln over those for house purchases were:

• Floating rate and up to 1 year fixation corporate loans v similar house purchase loans: 1.54 percentage points, up from 1.18 in March and well above the historical average spread of 1.16 percentage points. Historical average spread for the period January 2008-present is 1.23 percentage points. April 2011 new business rate spread is the highest since January 2009.
• Over 1 year fixation rates spread stood at 1.88 percentage points in April, up on 1.63 percentage points in March 2011. Historical average is 1.02 percentage points and average spread for the period since January 2008 is 0.99 percentage points.

Hence, overall, setting aside the pesky issue that very little new credit is issued by the banks, current credit conditions are clearly pricing historical highs in terms of risk premium for smaller corporate loans. For businesses operating in Ireland, the credit crunch is only getting crunchier, it seems.

02/07/2011: Was banks Guarantee 2008 a subsidy to foreign lenders?

Please note: the figures below are estimates, based on Table A.4.2 data from the Central Bank of Ireland for 6 covered banking institutions liabilities as of September 2008. These charts illustrate the comment I provided to the Quarterly Journal of Central Banking - forthcoming issue for Q3 2011.
First, straight forward composition of liabilities as shown in the chart above.

Next, the same expressed as percentages of total liabilities:
Finally, assumptions and calculations of total implicit subsidy from the Irish taxpayers/Exchequer to foreign liabilities holders:
Click on the chart to enlarge and see assumptions and calculations. Euro area residents accounted for €39.572 billion of our banks' liabilities or 6.42%, while non-Euro area residents accounted for €218.836 billion or 35.5% of total Ireland-6 liabilities at the time the Guarantee was issued. Thus, Euro area residents received an implicit subsidy from the Irish taxpayers to the tune of €5.5-6.7 billion over the time of the Guarantee - well in excess of the life-time cost of 1% reduction in the interest rate on our EU loans.

Of course, this is a crude estimate based on official provided and expected default rates on assets held by the Irish banks - excluding Anglo and INBS. Which means it is likely to be an under-estimate. Expected losses at INBS and Anglo are multiples of those assumed for the Ireland-4 covered in the main PCARs. With Anglo & INBS thrown into the mix, subsidy to Euro area residents rises to ca €8 billion.

Another issue here is that I am using estimates through 2013 only. This means that, like the CBofI I am assuming (ad hoc) that post-2013 IRL-6 will be able to cover their own losses without resorting to taxpayers capital injections. This assumption, in my view, is absolutely unrealistic.

Finally, no allowance is made here for the Irish Government underwriting of the funding debts incurred by the banks vis-a-vis ECB and CBofI - the debts which, at least in the case of Anglo & INBS, should be treated as largely reckless lending to insolvent institutions and which should not be a liability of the taxpayers.

In the end, in my opinion, Irish Government had no business underwriting a Guarantee for any of the liabilities in excess of €130.2 billion of domestic deposits and €2.813 billion of its own deposits with the IRL-6.

Note - another issue not addressed in these estimates, but also likely to increase the implicit subsidy extended to Euro area residents is that Monetary & Financial Institutions deposits figures cover IRL-20 banks regulated here, which include a large number of deposits from Euro area banks that are within IRL-20.

02/07/2011: Irish Manufacturing PMI

Last month I was expressing some concerns about the direction of the PMIs, as well as questioning the argument that confidence of its own, is causally capable of driving fundamentals, rather than reflect them. The latest data for PMIs in Manufacturing from NCB Stockbrokers released today (covering June 2011) confirms the validity of my concerns. Here are the headlines:

• Manufacturing PMI for June fell to 49.8 - below the critical 50 mark, implying contraction in the overall manufacturing activity. The PMIs are down from 51.8 in May 2011. This is the first time since September 2010 that PMIs are below 50. While in order to establish a trend the PMIs should drop below ca 48, the swing from 51.8 to 49.8 is statistically consistent with at least 70% chance of this drop being a sign of real deterioration.
• The 12mo MA now stands at 52.6, with 3mo average at 52.5 down from 56.1 in 3 months for January-March 2011. Same period 3mo average for 2010 was 53.1 and for 2009 it was 39.3.
• Output overall also moved into contraction territory with June reading of 49.3 down from May reading of 52.6. Again, the magnitude of the swing is statistically significant. 12 mo MA now stands at 54.0 while 3mo average at 53.5 down from the previous 3mo average of 59.2.
• Output has not been below 50 since February 2010.
  

• New orders are down to 48.7 in June from 52.9 in May - a very strong decline and are now below 50 for the first time since September 2010. In Q2 2011 the average new orders reading was 53.0 against 58.6 for Q1 2011. 12mo MA is 53.3 in June 2011 well ahead of the current monthly reading.
• New export orders are the only component of PMIs that still signals expansion, albeit at 51.5 in June this expansion is much slower than 58.7 recorded in May 2011. New exports orders 12mo MA in June was 56.0. Q2 2011 reading of 56.4 is significantly below Q1 2011 reading of 60.4. same period average for 2010 was 57.4.
• Backlogs and inventories are also signaling troubles ahead. Per NCB analysis: "As has been the case in each month since March, backlogs of work at Irish manufacturers decreased in June. Moreover, the rate of depletion accelerated sharply to the strongest since October 2009. According to respondents, reduced demand was a key factor behind the fall in outstanding business. More than 31% of panellists reported a drop in backlogs over the month, compared with just 9% that posted a rise." While inventories are still being depleted, the rate of depletion has slowed down to lowest since May 2008.
• Suppliers delivery time extended to 19 months with the survey respondents highlighting "both shortages of raw materials and capacity pressures at suppliers as reasons for the latest deterioration."
• Lastly, for the second consecutive month Irish producers cut back on their purchases of inputs into production in line with falling orders.
  

• On prices front, "June data pointed to a further considerable increase in input prices at Irish manufacturing firms. Input costs have now risen throughout the past year-and-a-half. However, the rate of inflation eased for the third month running to the weakest since September 2010. Respondents noted that oil-related costs had been a key factor behind higher input prices." Input price index stood at 63.5 in June - down from 68.9 in May and down on 3mo and 12mo averages. At the same time, output prices index fell from 54.3 in May to 53.2 in June. "The rate of inflation [in terms of output prices] moderated for the third consecutive month to the slowest in the current period of increased charges. Panellists reported that the passing on of higher raw material costs to clients was the principal cause of the latest rise in output prices." So output prices are not catching up with input prices, implying margins are not being rebuilt.
  

• In terms of employment, "staffing levels at Irish manufacturing firms decreased for the second consecutive month in June, with respondents largely attributing this to falling workloads. The rate of job cuts accelerated to the steepest since September 2010. All three monitored market groups posted a decline in employment." Employment index in manufacturing fell to 48.3 in June from 49.9 in May. The index now stands below 12mo average of 50.2, Q1 2011 reading of 53.2 and Q2 2011 average of 50.7. Q2 2010 reading was 49.0 - ahead of June 2011 reading.

All of this means that I was correct in pointing to the weaknesses in PMIs in May 2011 and, unfortunately, it means that per PMIs our Manufacturing has now re-entered a recessionary territory: