20/07/2011: EU's Banks Levy is a dangerous idea that will impede reforms in the sector

The latest calls for introduction of the banks levy within the EU (see here) as:

• the means for financing some of the banks rescue measures and
• the means for reducing the probability of the future crises
  

represents nothing more than a cynical and/or largely economically illiterate attempts by the EU lawmakers to dress up new revenue raising measures as ‘reforms’.

The core problems with this proposals are:

1. With current market structure & declining competition in Euro area banking sector, this levy represents another hidden tax on European households & companies. The current environment in banking sectors in many EU countries lends itself to the incumbent banks being able to pass the levy on to their customers without incurring any, whatsoever, direct moderation either on their own leverage levels or stabilization of their funding streams.
2. xWith declined competition in the sector, the new levy will act to further reduce Returns on Equity for any new entrant into the market, thus effectively acting as a barrier to entry and the means for protecting European zombie banks from competition from non-legacy banking institutions.
3. A levy will do absolutely nothing to resolve the problem if Europe’s zombie banks unable to exist as functional banking institutions, but sapping vital deposits and savings out of investment stream, thus starving the European economies of capital. European banks require some €250-500 billion worth of funds to cut their dependence on public funding and ECB/CB emergency assistance for funding and capital. Raising €10 billion annually through the proposed banks levy is simply too little to address the above gap.
4. In many cases, this levy will in effect result in a transfer of taxpayers’ own or guaranteed funds from the banks balance sheets (where these funds are now being deposited to support capital and funding activities of the zombie banks) to the EU collecting body.
   

A recent (June 2011) IMF Working Paper /11/146, titled “Recent Developments in European Bank Competition” by Yu Sun clearly finds that introduction of the common currency and the current financial crises have led to repeated reductions in overall degree of competition within the European banking sector, compared before and after EMU (1995–2000), post-EMU (2001–07) and post-crisis (2008-09)."

"Columns (3) and (4) in the table below report the H-statistic (higher H-stat reflects higher degree of competition in the banking sector) and standard error before EMU for each country or region, columns (5) and (6) after EMU. Column (9) displays the changes in the H-statistics from pre to post EMU period."

Thus, “the overall competition level in euro area dropped slightly after EMU, from 0.699 to 0.518 while competition levels across member countries converged [the standard deviation of H-statistics of euro member countries drops from 0.17 before EMU to 0.12 after EMU]."

“The finding that large and financially integrated countries or regions tend to exhibit less competitive behavior than smaller sectors is in line with others studies, including Bikker and Spierdijk (2008), who also find some deterioration in competitive behavior over time for Europe’s banks. They argue that banks in large and integrated financial markets are pushed by rising capital market competition and tend to shift from traditional intermediation to more sophisticated and complex products associated with less price competition."

“While the small decline in the level of bank competition for the euro area is statistically significant, it is somewhat smaller than the estimates reported by Bikker et al. (2008) using an un-scaled revenue function. For Austria and Germany, a slight increase in the competition level of their banking systems is estimated; however, the increase is not statistically significant. The H-statistics in Finland, France, Greece, Italy and Netherlands dropped after EMU. At the same time, Spain, the U.K. and the U.S. experienced some small but statistically significant improvement in the competition level of their banking systems."

Before and after the recent financial crisis: “The recent financial crisis and possibly corresponding policies seem to have left a strong mark on bank competition in many countries, as indicated by the competition indicators before and after the crisis for the sample…. Columns (7) and (8) of Table 3 show the H-statistics after the financial crisis. In the U.S., Italy, Germany, Spain and the euro area, bank competition seems to have declined following the financial crisis; however the declines in Germany, Italy and euro area are trivial.”

Bank competition among large (top 50) and small banks (bottom 50): “For some countries, like U.S. and U.K., small banks compete more intensively, while larger banks in Austria, France, Italy, Portugal and Spain are more competitive before EMU. In other countries, the competition indicators of larger banks are not statistically different from those of smaller banks before EMU”. Competition within small and large banks: “The euro area, France, Greece, Italy and Netherlands have experienced a significant drop in competition in both small and large banks, while both banks in the U.S. and U.K. showed a noticeable increase."

So overall, “the euro area experienced a significant but small decline in bank competition after EMU and the financial crisis. Some studies with similar findings have attributed the decline in competition to the process of consolidation, and the movement of bank activities from traditional financial business to off-balance sheet activities [both anti-competitive processes have accelerated under regulatory blessings of many Governments since the crisis]. More importantly, competition levels in euro countries seem to have converged after EMU, not just at the average national market level, but also between different bank types and ownership [so that less competitive markets became more competitive with euro creation, while more competitive ones became less so]. Finally, following the financial crisis, competition fell in many countries, and especially in some countries where large credit and housing booms took place."

In this environment, in my view, introducing a banking levy will simply reinforce the existent market structure and further prevent markets-led corrective adjustments in the sector. At the same time, the levy will exert new costs and pressures on banks clients.

20/07/2011: Foreign Nationals & Foreign-born population in EU27

Eurostat published new statistics on foreign-born and non-national populations across the EU for 2010 (see Statistics in Focus, 34/2011, "6.5% of the EU population are foreigners and 9.4% are born abroad").

In 2010, there were 32.5 million foreign citizens living in the EU27 Member States, of which 12.3 million were citizens of another EU27 Member State and the remaining 20.2 million were citizens of countries outside the EU27.

Foreign citizens accounted for 6.5% of the total EU27 population.

On average in 2010, foreign citizens living in the EU27 were significantly younger than the population of nationals (median age 34.4 years compared with 41.5 years).

Among the EU27 Member States, the highest percentage of foreign citizens in the population was observed in Luxembourg (43% of the total population), followed by Latvia (17%), Estonia and Cyprus (both 16%).
High proportion of foreign citizens in Latvia and Estonia is due to a bizarre situation where large numbers of residents of these countries have no official citizenship due to discriminatory (in my view) practices against people of non-Latvian and Estonian ethnicity. As Eurostat notes: “In the case of Latvia and Estonia, the proportion of non-EU foreign citizens is particularly large due to the high number of ‘recognised non-citizens’, mainly former Soviet Union citizens, who are permanently resident in these countries but have not acquired Latvian/Estonian citizenship or any other citizenship. The foreign-born would include people who were born in other parts of the former Soviet Union." It is worth noting that many of these 'non-citizens' have resided in these countries all their lives and many were actually born inside the borders of these countries. Despite this, the EU largely overlooks the issue of their rights within Latvia and Estonia, even though outside these countries, they are accorded the same rights as EU nationals.

The percentage of foreign citizens was less than 2% in Poland, Lithuania and Slovakia.

In terms of citizenship, nearly 40% of the EU foreign population were citizens of another EU27 Member State, with the highest shares in Luxembourg (86% of the foreign population), Ireland (80%), Belgium (68%), Cyprus (66%), Slovakia (62%) and Hungary (59%). A third of the foreign-born population were born in another EU27 Member State.

Since citizenship can change over time, it is interesting to complement this information with data on the foreign-born population. They include foreign citizens who have acquired the citizenship of the country of residence, but who were born abroad, plus nationals born abroad (for example in the territory of a former colony) or nationals born in a part of a state which, due to dissolution or border changes, no longer belongs to the same country.

The number of foreign-born people exceeded the number of foreign citizens in all Member States, except in Luxembourg, Latvia and the Czech Republic.

In 2010, there were 47.3 million foreign-born people living in the EU27, with 16.0 million born in another EU27 Member State and 31.4 million born in a country outside the EU27. In total, foreign-born people accounted for 9.4% of the total population of the EU27.

Data on the place of birth of the foreign-born population show that one third of foreign-born people living in the EU27 were born in another EU27 Member State, with proportions above 50% being observed in Luxembourg (83% of total foreign-born), Ireland (77%) and Hungary (67%).

19/07/2011: Ireland-Russia Bilateral Trade - April 2011

Updating our trade statistics for Russia for April 2011:

• In April 2011, Irish exports to Russia stood at €51.5 million, up from €40.6 million in March and up on €35.8 million a year ago
• Irish imports from Russia in April 2011 were €15 million, flat on March 2011 and down from €18.8 million in April 2010

• Irish trade balance with Russia in April 2011 stood at €36.5 million - the highest trade balance achieved in bilateral trade with Russia in any month since January 2009

Using data for the first 4 months of 2011, we can update (still very crude) forecast for annual bilateral trade:
One way or the other, the data suggests we are on track to post another record trade year and record trade surplus year in 2011.

Some more stats. For the first 4 months of the year, 2011 trade surplus with Russia amounted to €113.8 million, which was the 5th highest trade surplus for Irish trade with the countries other than EU 27 and US. Only Australia (€202.5 million), Japan (€251.9 million), Saudi Arabia (€179.3 million) and Switzerland (€1,032 million) yielded stronger trade surplus for Ireland than Russia in absolute terms. The trade surplus for the first 4 months of 2011 rose substantially - by 252.32% or €81.5 million compared to the same period of 2010.

In comparison with Ireland's trade surplus with Russia of €113.8 million in January-April 2011, Ireland recorded:

• A trade surplus of €30.6 million with Brazil,
• A trade surplus of €108.6 million with Canada,
• A trade deficit of -€61.7 million with China,
• A trade deficit of -€71.8 million with India,
• A trade surplus of €98.5 million with Mexico,
• A trade deficit of €343 million with Norway,
• A trade surplus of €74.7 million with Turkey
  

19/07/2011: Irish Trade Stats for May 2011

External trade figures for May (provisional) and terms of trade figures for April are out this week, so time to do some updates.

PS: Please, note - the source for these is CSO and all complaints about numerical values reported/shown arising due to some readers disliking some results for whatever reason - out to them.

• Imports in May 2011 came in at €3,727.9 million in seasonally adjusted terms, which was €1,199.6 million below April figure (-24.35% mom), €154.7 million above the same figure in May 2010 (+4.33%) and €357.5 million below May 2009 figure (-8.75%).
• Exports in May 2011 came in at €7,511.3 million which was €48.8 million below April figure (-0.65%), up €76 million (+1.02%) yoy and up €534.6 million (+7.66%) on May 2009.

• Trade balance in May stood at €3,783.5 million which is €1,150.9 million above April 2011 level (+43.72% mom), but down €78.7 million (-2.04%) yoy and up €892.2 million (+30.86%) on May 2009.

• Terms of trade continued to improve (vis-a-vis external sales with price of exports ratio to the price of imports falling) in April (there is 1 month lag in TT data compared to trade volumes data), posting an improvement for the 4th consecutive month. TT measured index 76.6, down from 77.1 in March and down 8.70 points yoy (-10.20%). Compared to April 2009, this year April reading was down 11.80 points or 13.35%.
  

So mapping the above progression:
The chart above suggests that in 2011 we are potentially entering some structural (and much expected - remember IMF forecast for trade growth for Ireland is about 50% below that attained in 2010) slowdown in the rate of growth in external trade.

Lastly, imports-intensity of exports (a ratio of exports volume to imports) has increased in May from 153.4% in April to 201.5% in May 2011 - an increase of 31.3% mom. At the same time, imports-intensity declined from a year ago by 3.2% although it is up on May 2009 by 18.0%.
So courtesy of CSO:

• "With seasonally adjusted exports remaining static and imports decreasing by 24% (or €1,200m) between April and May, the trade surplus increased by 44% to €3,784m" in mom terms. The improvement, therefore is solely due to decline in inputs imports and further contraction in consumption.
• "On an unadjusted basis, the value of exports in May 2011 (€7,390m) was slightly down (-0.6%) on the May 2010 figure of €7,435m. The value of imports (€3,749m) was up 5% on the May 2010 figure."

In January-April 2011, compared to the same period in 2010 exports increased by 8% to €31,161m:

• Exports of Medical and pharmaceutical products increased by 17% or €1,324m,
  
• Organic chemicals by 14% or €896m
• Overall Chemical and related products category exports rose from €17,347.3m in January-April 2010 to €19,607.7m in the same period of 2011, while imports in this category rose from €2,889.9m to €3,591.9m over the same period of time
  
• Petroleum by 126% or €208m. of course over the same period, petroleum imports rose from €1,410.1m to €1,752.8m
  
• Exports of food and live animals rose from €2,077.1m to €2,465.1m as trade balance in this category rose from €635.4m in the first 4 months of 2010 to €831.0 million in the same period of 2011
  
• Exports of goods to the USA increased by 17% or €1,069m, to France by 18% or €276m and to Switzerland by 25% or €258m. Exports to Belgium fell by 5% or €232m and to Spain by 19% or €225m.
• In the first four months of 2011, 52% of Ireland’s exports went to the USA, Belgium and Great Britain.
  

Over the same period, imports increased by 13% to €17,293m:

• Imports of Other transport equipment (including aircraft) increased by 27% or €401m,
  
• Petroleum increased by 24% or €342m and
  
• Medical and pharmaceutical products by 22% or €251m.
• Goods from Great Britain rose by 19% or €782m, from the United States by 7% or €188m and from Germany by 15% or €167m.
• Over half (54%) of Ireland’s imports came from Great Britain, the USA and Germany in the first four months of 2011.
  

18/07/2011: Some thoughts on Irish stocks bubble

There is a classic defined relationship between the various stages of bubble formation and markets responses, as illustrated in the chart from (source here) below.

Of course, there is an argument to be made that ‘normal’ bubbles are driven by either information asymmetries or behavioural ‘exuberance’ or both, and are, therefore, significant but temporary departures from the steady state ‘mean’ growth trend. The return to the mean, thus implies the end of the correction phase, as also shown in the chart below.


Of course, one can make an argument that what we have experienced in the case of Ireland is more than a simple bubble, but a structural break underwritten by underlying fundamentals, such as lower permanent rate of growth.

Irish GDP grew 8.82% cumulative in the period 2003-2010 in terms of constant prices or annualized rate of growth of 1.215%. In per capita terms current prices it grew by 14.85% cumulatively and at an annualized rate of 1.998%. Taken from these rates, from 2003 on through today, the average expected value of IFIN should be around 8,898 (mid-point between 8,659 and 9,139 implied by above rates from the ‘Smart Money’ period mid-point valuation). Note that, crucially, the new mean post-bubble bursting should be at least at or above the ‘Smart Money’ end-of-period valuations.

This is certainly not the case with Irish financials as shown in figure below:
Note that three forecasts (my own calculations, so treat as indicative, rather than absolute) provided assume that the average annual growth rate of 1.998% (upper forecast from the starting point at 2003-2004 average), mean forecast (based on 1.215% annualized average growth, starting from 2003-2004 average) and lower forecast (based on 1.215% annualized growth, starting from 2000-2003 average). All three are well above the post-Despair peak.

What about other signs of a classic bubble?
In the run up to the Public Money phase, it is clear that IFIN shows a number of sell-offs and shallow bear traps, but these can be linked to higher overall volatility of the index.

For any period we can take, IFIN exhibits more volatility than either S&P or FTSE bank shares sub-indices. Historically, across indices (to assure comparable scale), IFIN standard deviation stands at 65.40 against S&P’s BIX at 36.84 and FTSE A350 Banks at 32.70. January 2003 through June 2006, IFIN standard deviation was 25.16 against that for BIX of 10.29 and FTSE A350B at 12.07. For the run up to the crisis period between June 2006 and June 2007, IFIN standard deviation was 15.66 against S&P’s BIX of 4.64 and FTSE A350B of 5.22. Lastly, during the crisis – from July 2007 through today, IFIN standard deviation was 56.40 against 28.07 for S&P BIX and 27.83 for FTSE A350B.

To see the relationship, or the lack there of between the volatilities, consider the following chart.
Even from the simple consideration of the rates of change, week on week, IFIN has the lowest correlation with the S&P Banking BIX index – with relatively low explanatory power. Things are even worse if we are to look at the downside risks. Chart below plots downside weekly movements for the three indices that correspond to market declines of 2% or more week-on-week. Again, you can see that both before and during the crisis, there is little relationship between downside risk to Irish financials and to S&P measure.
And the same story is formally confirmed by the Chart below which plots the pair-wise relationships between S&P BIX and FTSE A350 and IFIN.
So overall, IFIN data strongly suggests that we are not in a “normal” financial bubble scenario.

But what about that claim that Lehman's Bros collapse had influence on our banks shares? Recall, Lehman was in trouble since Spring 2008 and went to the wall on September 15, 2008. Also recall that the issues started with Bear Sterns troubles in March 2008 and JPMorgan Chase completed its acquisition of Bear Stearns on May 30, 2008. So let's take the data subset on extreme downward volatility for the period from May 2008 through September 2009. If Lehmans and/or Bear had much of an effect on Irish financials we should expect either one of the following two or both to hold:

1. Correlation between IFIN and S&P BIX to be large and significant
2. Correlation between IFIN and BIX to be larger in the period considered than over the history from 2003 through today.

Overall, evidence suggests that actually the opposite of both (1) and (2) above holds. In fact, based on data for weekly market declines greater than 2% (relatively significant events, but not really too dramatic by far), the period between Bear & Lehman collapse and the next 12 months, Irish financials were less impacted by the US financial shares movements than in the period of 2003-present overall. The impact of Lehmans & Bear on UK financials was stronger, although not dramatically strong, however.

18/07/2011: Two charts on electricity prices

Another look at the residential and industrial prices for electricity across EU27 + 3 (Norway, Turkey and Bosnia candidate states). All information within the charts.