Tuesday, September 6, 2011
06/09/2011: Recapitalization of Irish Banks 2011
On August 31, 2011 Irish Government committed €17.3 billion of our - taxpayers - money to underwrite banks recapitalization following the PCAR 2011 exercise carried out by the CBofI. Three "banks" - BofI, AIB and IL&P received the funds. Here is the official summary of how these funds were distributed. No comment to follow.
06/09/2011: Euro area 2Q 2011 GDP analysis
Euro area GDP increased by 0.2% qoq in 2Q 2011, same rate as GDP growth in EU27, according to second estimates released by Eurostat. 1Q 2011 respective growth rates were +0.8% in the euro area and +0.7% in the EU27. Year-on-year, GDP was up 1.6% in the euro area and 1.7% in EU27 in 2Q 2011, down from annual growth rates of 2.4% (both EU27 and euro area) for 1Q 2011.
US GDP also grew 0.2% qoq in 2Q 2011 up from +0.1% in 1Q 2011. Year-on-year US GDP expanded by 1.5% in 2Q 2011 and 2.2% in 1Q 2011. Japan's GDP contracted 0.3% in 2Q 2011, following -0.9% contraction in 1Q 2011. Year-on-year Japan's GDP fell 0.9% in 2Q 2011 and fell 0.7% in 1Q 2011.
Components of GDP:
Table below summarizes some of the results.
In terms of Gross Value Added in q/q terms:
If you think we are in the age of austerity, think again. Government expenditure contributions to GDP, seasonally adjusted series, stood flat in 2Q 2011 at +0.0% growth (against +0.1% in 1Q 2011) in the euro area and in the EU27. Annualized rate of increase for Government spending was +0.1% in 2Q 2011 (+0.2% in 1Q 2011) in both the euro area and the EU27.
Now, on to forecasts forward. Chart below plots updated series for GDP growth against the leading economic activity indicator eurocoin. The series suggest that Euro area GDP for 3Q 2011 consistent with July-August readings of eurocoin is 0.3% (unadjusted for 2Q realization) and adjusting for 2Q 2011 realized rates of growth, the forecast is in the range of -0.1% to +0.1% GDP change.
US GDP also grew 0.2% qoq in 2Q 2011 up from +0.1% in 1Q 2011. Year-on-year US GDP expanded by 1.5% in 2Q 2011 and 2.2% in 1Q 2011. Japan's GDP contracted 0.3% in 2Q 2011, following -0.9% contraction in 1Q 2011. Year-on-year Japan's GDP fell 0.9% in 2Q 2011 and fell 0.7% in 1Q 2011.
Components of GDP:
- In 2Q 2011, household consumption fell 0.2% in the euro area and 0.1% in EU27. In 1Q 2011, the respective numbers were +0.2% and +0.0%.
- Gross fixed capital formation was up 0.2% in 2Q 2011 in the euro area (+1.8% in 1Q 2011) and up 0.4% in EU27 (+1.2% in 1Q 2011).
- Exports were up 1.0% (+2.0% in 1Q 2011) in the euro area and +0.6% (+2.2% in 1Q 2011) in the EU27 (after +2.0% and +2.2%). Imports rose by 0.5% in the euro area (+1.5% in 1Q 2011) and by 0.4% in the EU27 (+1.4% in 1Q 2011).
Table below summarizes some of the results.
In terms of Gross Value Added in q/q terms:
- Agriculture, hunting & fishing contracted by -0.2% in 2Q 2011 (against +0.6% in 1Q 2011) in the euro area and contracted -0.5% in EU27 (+0.9% in 1Q 2011)
- Industry, including energy expanded by 0.4% in 2Q 2011 (against +1.7% in 1Q 2011) in the euro area and +0.3% in EU27 (+1.4% in 1Q 2011)
- Construction expanded by 0.0% in 2Q 2011 (against +2.5% in 1Q 2011) in the euro area and +0.3% in EU27 (+1.5% in 1Q 2011)
- Trade, transport and communication services expanded by 0.2% in 2Q 2011 (against +0.6% in 1Q 2011) in the euro area and +0.4% in EU27 (+0.7% in 1Q 2011)
- Financial and business services expanded by 0.2% in 2Q 2011 (against +0.2% in 1Q 2011) in the euro area and +0.3% in EU27 (+0.2% in 1Q 2011)
- Other services expanded by 0.2% in 2Q 2011 (against +0.2% in 1Q 2011) in the euro area and +0.2% in EU27 (+0.4% in 1Q 2011)
- Total gross value added expanded by 0.2% in 2Q 2011 (against +0.7% in 1Q 2011) in the euro area and +0.3% in EU27 (+0.7% in 1Q 2011). In annualized terms, total GVA expanded 1.6% in 2Q 2011 (against 2.2% in 1Q 2011) in the euro area and by +1.7% (against 2.2%) in the EU27.
If you think we are in the age of austerity, think again. Government expenditure contributions to GDP, seasonally adjusted series, stood flat in 2Q 2011 at +0.0% growth (against +0.1% in 1Q 2011) in the euro area and in the EU27. Annualized rate of increase for Government spending was +0.1% in 2Q 2011 (+0.2% in 1Q 2011) in both the euro area and the EU27.
Now, on to forecasts forward. Chart below plots updated series for GDP growth against the leading economic activity indicator eurocoin. The series suggest that Euro area GDP for 3Q 2011 consistent with July-August readings of eurocoin is 0.3% (unadjusted for 2Q realization) and adjusting for 2Q 2011 realized rates of growth, the forecast is in the range of -0.1% to +0.1% GDP change.
Monday, September 5, 2011
05/09/2011: Ackermann: cover us
Deutsche Bank CEO, Josef Ackermann, speaking today at a conference "Banks in Transition", organized by the German business daily Handelsblatt in Frankfurt, made some far reaching comments on the state of European banking system.
"We should resign ourselves to the fact that the 'new normality' is characterized by volatility and uncertainty... All of this reminds one of the autumn of 2008." And as a reminder of these very days 3 years ago, the ECB reported that banks have raised their overnight deposits with ECB to €151 billion - the highest level in more than 12 months. Overnight deposits with ECB are seen as a safe haven as opposed to lending money in the interbank markets, with latest spike suggesting that even European banks are now becoming weary of lending to each other.
Crucially, according to Ackermann, "it is an open secret that numerous European banks would not survive having to revalue sovereign debt held on the banking book at market levels" to reflect their current market value. This is an interesting point - not because it is novel (every dog in the street knows that to be true), but because it is being made by the man who leads the largest banking institution in the land where banks have vigorously fought EBA on methodology and disclosure of stress test results. The battle line drawn back then was precisely their sovereign bond holdings.
And there is an added contradiction in what Ackermann was saying - if banks in Europe will not survive mark-to-market revaluation of their books, then how come Mr Ackermann claims they don't require urgent recapitalization?
In truth, Ackermann was really saying that were the banks in Europe forced to mark-to-market their holdings of PIIGS and Belgian bonds, they would take such losses that can lead to destabilization of banks equity valuations across the EU, thus triggering calls on governments' funding, which will therefore destabilize the bonds markets. Truth hurts, folks. It hurts over and over again when it is denied.
Mr Ackermann also appears to be saying: "Hey politicians. Don't force us to fix our books to the market. Fix the market for us."
Ackermann also repeated his earlier statement that calls for robust and rapid recapitalization of the banks were "not helpful" and threatened to undermine European efforts to assist crisis-stricken euro-zone sovereigns. In his view, such a recapitalization would send the message that the EU had little faith in its own strategy for dealing with the crisis. In other words, in Ackermann's view, if banks need urgent capital to cover losses on sovereign bonds, then the current valuations of these bonds in the market are irreversible. Which, of course, would mean that all efforts of the EU to roll back sky-high yields on PIIGS + Belgian debt are not likely to produce long-term results any time soon.
Which brings us to the point of asking: if so, why the hell are we burning through tens of billions of ECB and taxpayers' funds to buy out sovereign bonds and repay banks bond holders? Is it simply an exercise of buying time?
Another interesting comment from Ackermann relates to longer term prospects of the banking sector: "Prospects for the financial sector overall ... are rather limited... The outlook for the future growth of revenues is limited by both the current situation and structurally." What this means is that with regulatory tightening, new capital requirements (both on quality and quantity of capital) and with devastated savings and investment portfolia of investors, plus rising taxes on income and capital, margins in the banking sector will be depressed over long term horizon, while more risk averse investors will be weary of buying into higher margin high risk structured products.
In other words, all that Mr Ackermann's speech today amounts to is a call by a banker on the European governments to cover up the banks' cover up of losses: "Print money, buy out our bonds, but don't restructure or recapitalize us".
But Ackermann's warning presents an even more dire warning for the Irish officials who have made significant bets (using taxpayers money) on Irish banking sector returning to high rates of profitability soon. If Ackermann is correct and long term profitability of the entire sector is on decline, Irish banks will be unlikely to recover without a dramatic restructuring of their books.
"We should resign ourselves to the fact that the 'new normality' is characterized by volatility and uncertainty... All of this reminds one of the autumn of 2008." And as a reminder of these very days 3 years ago, the ECB reported that banks have raised their overnight deposits with ECB to €151 billion - the highest level in more than 12 months. Overnight deposits with ECB are seen as a safe haven as opposed to lending money in the interbank markets, with latest spike suggesting that even European banks are now becoming weary of lending to each other.
Crucially, according to Ackermann, "it is an open secret that numerous European banks would not survive having to revalue sovereign debt held on the banking book at market levels" to reflect their current market value. This is an interesting point - not because it is novel (every dog in the street knows that to be true), but because it is being made by the man who leads the largest banking institution in the land where banks have vigorously fought EBA on methodology and disclosure of stress test results. The battle line drawn back then was precisely their sovereign bond holdings.
And there is an added contradiction in what Ackermann was saying - if banks in Europe will not survive mark-to-market revaluation of their books, then how come Mr Ackermann claims they don't require urgent recapitalization?
In truth, Ackermann was really saying that were the banks in Europe forced to mark-to-market their holdings of PIIGS and Belgian bonds, they would take such losses that can lead to destabilization of banks equity valuations across the EU, thus triggering calls on governments' funding, which will therefore destabilize the bonds markets. Truth hurts, folks. It hurts over and over again when it is denied.
Mr Ackermann also appears to be saying: "Hey politicians. Don't force us to fix our books to the market. Fix the market for us."
Ackermann also repeated his earlier statement that calls for robust and rapid recapitalization of the banks were "not helpful" and threatened to undermine European efforts to assist crisis-stricken euro-zone sovereigns. In his view, such a recapitalization would send the message that the EU had little faith in its own strategy for dealing with the crisis. In other words, in Ackermann's view, if banks need urgent capital to cover losses on sovereign bonds, then the current valuations of these bonds in the market are irreversible. Which, of course, would mean that all efforts of the EU to roll back sky-high yields on PIIGS + Belgian debt are not likely to produce long-term results any time soon.
Which brings us to the point of asking: if so, why the hell are we burning through tens of billions of ECB and taxpayers' funds to buy out sovereign bonds and repay banks bond holders? Is it simply an exercise of buying time?
Another interesting comment from Ackermann relates to longer term prospects of the banking sector: "Prospects for the financial sector overall ... are rather limited... The outlook for the future growth of revenues is limited by both the current situation and structurally." What this means is that with regulatory tightening, new capital requirements (both on quality and quantity of capital) and with devastated savings and investment portfolia of investors, plus rising taxes on income and capital, margins in the banking sector will be depressed over long term horizon, while more risk averse investors will be weary of buying into higher margin high risk structured products.
In other words, all that Mr Ackermann's speech today amounts to is a call by a banker on the European governments to cover up the banks' cover up of losses: "Print money, buy out our bonds, but don't restructure or recapitalize us".
But Ackermann's warning presents an even more dire warning for the Irish officials who have made significant bets (using taxpayers money) on Irish banking sector returning to high rates of profitability soon. If Ackermann is correct and long term profitability of the entire sector is on decline, Irish banks will be unlikely to recover without a dramatic restructuring of their books.
05/09/2011: Euro area governance indicators: evolution or decline?
In recent years, the EU has embarked on a set of institutional reforms and unveiled a number of institutional platforms for reforming the core principles of governance, transparency and accountability. These reforms are rooted in 2000-2005 processes that accompanied direct evolution of the Euro area and the EU enlargement.
In this light, it would be instructive to take a closer look at the dynamics of EU governance evolution, focusing on the specifically more integrated group of countries – the Euro area. Using data from the World Bank Governance Indicators for 1996-2009 (latest available) we can draw some interesting conclusions on the topic.
Before we begin, however, note that WB data is lagged in some cases up to 2 years. In addition, many variables are "sticky" - in a sense that they do not change dramatically year on year as institutional reforms take time to feed through to actual delivery on metrics. Hence, the period from 1996 through 2002 is really covering a period of data closer to 1985 through 2001, on average. Thus, I separate the data into 2 periods: the period prior to the Euro area creation (1996-2002) and post Euro area creation (2003-2009). In addition, note the following two facts: that help support this division:
So to summarize - a table
What the above clearly shows is that Governance scores improvements across the euro area were driven primarily by improvements in the Accession States. In 4 out of 6 criteria, Core euro area member states have, on average, posted deterioration in the scores. Thus, overall euro area scores improved in 3 out of 6 criteria, remained unchanged in 2 criteria and deteriorated in 1 criteria.
Pretty poor performance for the group of states that set out as their core agenda to achieve transparency, good governance, government effectiveness, etc. And even worse for the idea that more integration yields better policy outcomes. Clearly, in the case of governance at least, it does not.
In this light, it would be instructive to take a closer look at the dynamics of EU governance evolution, focusing on the specifically more integrated group of countries – the Euro area. Using data from the World Bank Governance Indicators for 1996-2009 (latest available) we can draw some interesting conclusions on the topic.
Before we begin, however, note that WB data is lagged in some cases up to 2 years. In addition, many variables are "sticky" - in a sense that they do not change dramatically year on year as institutional reforms take time to feed through to actual delivery on metrics. Hence, the period from 1996 through 2002 is really covering a period of data closer to 1985 through 2001, on average. Thus, I separate the data into 2 periods: the period prior to the Euro area creation (1996-2002) and post Euro area creation (2003-2009). In addition, note the following two facts: that help support this division:
- I tested the results for the period split 1996-2001 against 2002-2009, for split 1996-2000 vs 2001-2009 and for split 1996-2003 vs 2004-2009. All came back with very similar, qualitatively, results.
- A number of Euro area states were in a mode of EU accession prior to 2004, thus splitting the sample at 2002-2003 makes some logical sense to capture better the average effects of governance reforms coincident with the euro period.
So to summarize - a table
What the above clearly shows is that Governance scores improvements across the euro area were driven primarily by improvements in the Accession States. In 4 out of 6 criteria, Core euro area member states have, on average, posted deterioration in the scores. Thus, overall euro area scores improved in 3 out of 6 criteria, remained unchanged in 2 criteria and deteriorated in 1 criteria.
Pretty poor performance for the group of states that set out as their core agenda to achieve transparency, good governance, government effectiveness, etc. And even worse for the idea that more integration yields better policy outcomes. Clearly, in the case of governance at least, it does not.
Saturday, September 3, 2011
3/09/2011: Returns to Beauty
A fascinating study by Daniel S. Hamermesh and Jason Abrevaya, titled "BEAUTY IS THE PROMISE OF HAPPINESS?" was released yesterday by the NBER (Working Paper 17327 http://www.nber.org/papers/w17327). This is, folks, economics at its best: great question, great analysis and something that is way more relevant to life than banks, property and/or Obama's administration again blasting through the debt ceiling (oh yeah, they did that this week too - here).
Here's what I am talking about: "We measure the impact of individuals’ looks on life satisfaction/happiness. Using five data sets, from the U.S., Canada, the U.K., and Germany, we construct beauty measures in different ways that allow placing lower bounds on the effects of beauty. Beauty raises happiness: A one standard-deviation change in beauty generates about 0.10 standard deviations of additional satisfaction/happiness among men, 0.12 among women. Accounting for a wide variety of covariates, particularly effects in the labor and marriage markets, including those that might be affected by differences in beauty, the impact among men is more than halved, among women slightly less than halved."
"There are two main general mechanisms through which people’s looks could affect their satisfaction/happiness. The first is through the many channels that have been shown in the beauty literature to offer routes by which beauty affects economic outcomes. These indirect effects may be at least as important as the direct effects of beauty on satisfaction/happiness — the halo that good looks might impart to a person independent of the effects of beauty on any market-related outcomes. In the main economic exercise in this study, ...we decompose any measured impact of beauty on satisfaction/happiness into its direct and indirect components and thus examine the extent to which any beauty-happiness relation works through markets."
Hence, "The main economic question in this study is whether the effect of beauty on
satisfaction/happiness works through markets:
Yep, being beautiful pays. And hence, investing in beauty is a big business.
One other interesting point - notice that men-women differential in 'returns' to beauty are 0.1:0.12 - not exactly a massive one. "The results ...show only slightly greater gross effects of beauty among women than among men. The direct effects, however, are larger among women, with relatively less of the impact of beauty on women’s satisfaction/happiness working through markets. This gender difference may explain why, although most of the studies measuring the impact of beauty on earnings find larger effects among men than among women, laypeople believe that looks matter more to women."
I will have to add this to my reading lists for Investment Analysis and Economic Risk courses... Simply brilliant!
Here's what I am talking about: "We measure the impact of individuals’ looks on life satisfaction/happiness. Using five data sets, from the U.S., Canada, the U.K., and Germany, we construct beauty measures in different ways that allow placing lower bounds on the effects of beauty. Beauty raises happiness: A one standard-deviation change in beauty generates about 0.10 standard deviations of additional satisfaction/happiness among men, 0.12 among women. Accounting for a wide variety of covariates, particularly effects in the labor and marriage markets, including those that might be affected by differences in beauty, the impact among men is more than halved, among women slightly less than halved."
"There are two main general mechanisms through which people’s looks could affect their satisfaction/happiness. The first is through the many channels that have been shown in the beauty literature to offer routes by which beauty affects economic outcomes. These indirect effects may be at least as important as the direct effects of beauty on satisfaction/happiness — the halo that good looks might impart to a person independent of the effects of beauty on any market-related outcomes. In the main economic exercise in this study, ...we decompose any measured impact of beauty on satisfaction/happiness into its direct and indirect components and thus examine the extent to which any beauty-happiness relation works through markets."
Hence, "The main economic question in this study is whether the effect of beauty on
satisfaction/happiness works through markets:
- How much of the effect is direct—with people who are otherwise identical in every respect being happier/more satisfied than their less good-looking peers?
- How much is due to the fact that beauty enhances one’s outcomes in various markets, including the labor and marriage markets?"
Yep, being beautiful pays. And hence, investing in beauty is a big business.
One other interesting point - notice that men-women differential in 'returns' to beauty are 0.1:0.12 - not exactly a massive one. "The results ...show only slightly greater gross effects of beauty among women than among men. The direct effects, however, are larger among women, with relatively less of the impact of beauty on women’s satisfaction/happiness working through markets. This gender difference may explain why, although most of the studies measuring the impact of beauty on earnings find larger effects among men than among women, laypeople believe that looks matter more to women."
I will have to add this to my reading lists for Investment Analysis and Economic Risk courses... Simply brilliant!
Friday, September 2, 2011
2/09/2011: Competitiveness in the long run: did the euro help?
Another look at the evolution of euro area competitiveness: in the chart below I plot ECB’s Harmonized Competitiveness Indicators for the euro area since 1995 as measured by the average annual HCIs deflated by unit labour costs. The higher the value of the index, the lower is competitiveness.
Here are some interesting points to observe, based on the data:
Overall influence of impressive German economic performance over the 2000s in terms of competitiveness can be clearly seen from the chart below.
But what the two charts above clearly suggest in terms of analysis for Ireland is really rather disturbing. Despite significant gains in competitiveness, Ireland remains well behind its peers in terms of absolute levels of HCIs – according to the latest data, we are lagging behind Germany, France, Italy, Spain, Finland, the Netherlands, Greece, Cyprus, Luxembourg, Malta, Austria, Portugal and Slovenia.
More importantly, delivering a similar magnitude decline over the next 2 years (a task that will either require unemployment rising to over 22% or a gargantuan effort in terms of productivity growth not seen in modern history of any state) will get us to the level of competitiveness comparable to 2001 – achieving HCI of ca 96.2.
It might be not bad, but should the trends across the other euro area countries also remain identical to those over the last 2 years, Ireland (with projected HCI under this scenario reaching 98.8) will be still less competitive than the euro area as a whole (92.9), Germany (82.8), the Nordics and Austria (98.7). If anyone expects this type of miracle to occur, good luck to them, but if anyone expects the result of this miracle to be a huge boost to our economic growth, let me point out the last little factoid that the data reveals: back in the 1990s our average HCI was 102.7 – below the euro area average of 104.2. With two consecutive ‘miracles’ we are not even aiming to get to parity of the euro area average.
Here are some interesting points to observe, based on the data:
- The period since introduction of the euro witnessed deterioration or no improvement in overall competitiveness in all countries, save Germany, once the lags are accounted for (note, there is strong path dependency in many countries’ wages/labour costs due to long term contracts and generally sticky wages). Hence, for the period 1995-2001, euro area HCI averaged at 98.8, while for the period 2002-2010 the HCI averaged 99.8. Similarly, for France, HCI averages for the two sub-periods were 99.1 against 101.7, for Italy: 97.0 against 107.1, for Spain 98.4 against 108.3, for Finland, the Netherlands (Nordics) & Austria: 99.91 against 99.94 (statistically identical), for Ireland: 100.2 to 117.5 and for the rest of the euro area: 99.2 to 113.0.
- The period of highest competitiveness for all countries, except Germany, coincides with the period when pre-euro qualification period forces of improving competitiveness reach their peak: 2001-2002. This overall euro area competitiveness peaks in 2001, France’s competitiveness peaks in 2001, Italian, Spanish, Nordics’ & Austrian, Irish and Rest of euro area competitiveness peaked in 2001.
- After 2001, losses of competitiveness become pronounced across all economies, except Germany, with lowest competitiveness post-2000 points reached around 2008 (France, Spain and Ireland) or 2009 (all other countries, plus euro area as a whole).
- Since the onset of the crisis (again, accounting for lags) there have been significant gains in competitiveness. As I noted elsewhere, in some cases (Ireland and Spain, for example) these gains came primarily due to a wholesale destruction of a number of non-competitive domestic sectors (construction and retail).
- Gains in competitiveness have been very shallow in France (decline in HCI off the local pre-crisis peak of just 2.4%) and Italy (-3.2%), moderately weak in Germany (-5.22%), Nordics + Austria (-4.69%), Rest of Europe ex-Ireland (4.5%). Gains were close to euro area overall average (-9.2%) in Spain (-7.2%) and spectacularly strong in Ireland (-17.1%). It is worth noting once again that Irish gains in competitiveness came to a large extent from destruction of jobs in sectors that were least competitive before the bust (construction and domestic retailing and hospitality).
Overall influence of impressive German economic performance over the 2000s in terms of competitiveness can be clearly seen from the chart below.
But what the two charts above clearly suggest in terms of analysis for Ireland is really rather disturbing. Despite significant gains in competitiveness, Ireland remains well behind its peers in terms of absolute levels of HCIs – according to the latest data, we are lagging behind Germany, France, Italy, Spain, Finland, the Netherlands, Greece, Cyprus, Luxembourg, Malta, Austria, Portugal and Slovenia.
More importantly, delivering a similar magnitude decline over the next 2 years (a task that will either require unemployment rising to over 22% or a gargantuan effort in terms of productivity growth not seen in modern history of any state) will get us to the level of competitiveness comparable to 2001 – achieving HCI of ca 96.2.
It might be not bad, but should the trends across the other euro area countries also remain identical to those over the last 2 years, Ireland (with projected HCI under this scenario reaching 98.8) will be still less competitive than the euro area as a whole (92.9), Germany (82.8), the Nordics and Austria (98.7). If anyone expects this type of miracle to occur, good luck to them, but if anyone expects the result of this miracle to be a huge boost to our economic growth, let me point out the last little factoid that the data reveals: back in the 1990s our average HCI was 102.7 – below the euro area average of 104.2. With two consecutive ‘miracles’ we are not even aiming to get to parity of the euro area average.
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