28/11/2011: Average Hourly Earnings Q3 2011 Ireland

Latest earnings and labour cost figures for Q3 2011 in Ireland are providing some interesting insights. This post will deal with data for earnings and the subsequent post will highlight findings for employment levels.

Average Hourly Earnings in:

• Industry stood at €21.28 in Q3 2011, down 0.47% qoq and unchanged yoy. AHE in Industry are up 1.77% on Q1 2008.
• Construction stood at €18.93/hour in Q3 2011, down 2.82% qoq and 4.30% yoy. AHE in Construction are down 1.82% on Q1 2008.
• Wholesale and Retail Trade and repairs of vehicles and motorcycles are now at €16.39/hour, down 1.50% qoq, up 1.93% yoy and up 0.06% on Q1 2008.
• Transportation and Storage AHE are at €19.18/hour, down 1.59% qoq,  -1.39% yoy and -3.76% on Q1 2008.
• Accommodation & food services AHE are at €12.87/hour, up 2.71% qoq, +3.21% yoy and +2.88% on Q1 2008 (highest rate of increase in AHE on Q1 2008).
• Information and Communication AHE are now at €27.36/hour, up 3.87% qoq, down 0.04% yoy and down 0.15% on Q1 2008 (currently third highest AHE).
• Financial, insurance & real estate AHE are at €28.42/hour, down 2.27% qoq, up 3.12% yoy and down 14.60% on Q1 2008 (currently second highest AHE and highest decrease in AHE since Q1 2008).
• Professional, scientific & technical AHE are now at €23.59/hour, down 0.08% qoq, down 2.64% yoy and down 3.52% on Q1 2008.
• Administrative & support services AHE stands at €16.22/hour, down 0.61% qoq, up 5.39% yoy and up 1.44% on Q1 2008.
• Public administration and defence AHE  down 0.95% qoq, up 0.31% yoy and down 6.44% on Q1 2008, currently at €25.99/hour (fourth highest AHE, but also second highest decrease in AHE since Q1 2008).
• Education AHE are at €34.58/hour (highest AHE), down 0.83% qoq, up 4.06% yoy and up 2.46% (second highest increase) since Q1 2008.
• Human health & social work AHE are at €23.54/hour, donw 0.63% qoq, up 0.09% yoy and up 1.90% on Q1 2008.
• Arts, entertainment, recreation and other services AHE at €16.26/hour, up 1.12% qoq, down 1.22% yoy and up 1.31% on Q1 2008.

Charts below illustrate:

Private sector AHE are now at €19.22/hour compared against Public sector AHE of €28.54/hour. Total economy AHE are at €21.64/hour. QOQ, public sector AHE declined 0.972%, while private sector AHE fell 0.979% (virtually identical falls), while YOY public sector AHE is up 1.06% and private sector AHE is up 1.64%. However, relative to Q1 2008, public sector AHE is down 0.35% against private sector AHE down 1.13%.

As the result, AHE gap between public and private sector now stands at 48.49%, slightly up qoq on 48.48% in Q2 2011 and slightly down on 49.34% in Q3 2010.

27/11/2011: Even with IMF's €600bn - Italy is too big to bail

There are some interesting reports in the media over the weekend, speculating that the IMF is preparing a super package for Italy, rumored to reach €600 billion. Here's a link from zerohedge that outlines the details of these rumors (here). There are several reasons to be skeptical as the feasibility of such a package and the potential effectiveness of it.

Here are these reasons.

Firstly, the IMF is a rules-based organization that normally can lend only 4-5 times (400-500%) of the country quota. Italy's country quota is SDR7.8823 billion or €10.7bn which can allow IMF to lend under normal arrangements up to €53.5 billion (at a severe stretch, I must add as the fund prefers not to lend to the full leverage of 500%).

In addition, IMF has announced two new programmes last week (discussed here). The Flexible Credit Line programme - whereby IMF does not specify lending leverage to be achieved, applies only to "members with very strong track records... based on pre-set qualification criteria to deal with all types of balance of payments problems." So IMF would have to qualify Italy as a country with "strong track record" and its solvency problems as "balance of payments problem". This, of couse, is possible, though not probable, as Italy's "strong track record" is hardly that "strong". In addition, the new lending will have to take place outside the normal arrangements mentioned above, as the deployment of such arrangements would not be consistent with "strong track record" even in theory. So to raise €600 billion, IMF will have to leverage Italy's SDR allocation 6,000%.

Let's put this number into perspective. Lehman Bros TCE leverage ratio was 4,400% at the time of collapse and its average TCE leverage ratio prior to collapse was 3,100%.

At any rate, IMF is most likely to assign Italy a precautionary borrower status under Precautionary Credit Line (see link above) which allows for 24 months leveraging up to 1,000%. This, of course means Italy will be able to raise just €107 billion through IMF loans or about 1/3rd of its roll-over requirements (not to mention new borrowings demand) through 2012.

Secondly, suppose IMF does indeed lend Italy €600 billion - enough to barely cover the country refinancing needs for 2012-2013. Then, two things happen:

1. 1/3rd of Italy's total Gross Government Debt becomes overnight senior to the rest of its debt - as IMF always assumes seniority in lending. This will push existent Italian bonds yields to 15% or 18% or more. We do not know, of course, exactly where the debt will be traded, but what we do know with almost certainty is that there is not a snowball's chance in hell Italy will be able to refinance maturing debt after 2013 on its own. So IMF lending Italy today commits IMF to lend to Italy in 2014 and on.
2. €600 billion is unlikely to cover all Italian needs for 2012-2013, especially if Italian banks are to take a hit on other sovereign bonds. let me run through the EBA banks stress tests model under the following assumptions: Greece haircut 80%, Italy haircut 10%, Portugal haircut 25%, Spain haircut 10% (notice - all very benign) and CT1 ratio of 9%. Italian banks shortfall on capital is €34 billion. Now, recall that Italy also has insurance companies (e.g. A.Gen) and pensions funds - which will see some fall-outs from the haircuts as well. Say €10 billion. Italian bonds downgrade due to IMF lending (see item 1 above) is likely to cost banks and other financial sector companies another  €11 billion and €4 billion. So we are into total bill of ca €60 billion right there. Italian deficits in 2012-2014 are expected to gross €76 billion per IMF latests forecasts. As shown in the chart above, debt maturity, plus new deficits financing will consume some €453.4 billion in 2012-2014 and €630.5 billion in 2012-2016. 

So the total funding that Italy might require is in the neighborhood of €510-690 billion, depending on which period we assume the package will cover (2012 through either 2014 or 2016 respectively).

And this assumes no deterioration in GDP growth (tax revenues) or deficit spending etc. It also assumes that market funding costs IMF built into its deficit forecasts (4% 10-year average pre-November 2010) remain under the IMF lending deal. In fact, of course, that is open to speculation if IMF can lend Italy €600 billion at anything below 5.3-5.8%.

So overall, folks, I am skeptical as to the IMF's ability to conjure €600 billion for Italy. And furthermore, I am skeptical as to Italy's ability to manage cover for its deficits, banks and roll-over needs under such a package. This doesn't even begin to address my concerns as to Spain waiting in the shadows.

Now, lastly, you might suggest that the IMF loans can come in conjunction with EFSF loans. Alas, the EFSF has some serious troubles itself - the following two posts from the zerohedge amply illustrate: here and here.

You see, Italy is too big to bail. Even if it is also too big to fail.

25/11/2011: Eurocoin signals recession for the euro area

And so the euro zone is now most likely in a recession. That's right, the R word is back.

Today, CEPR released its composite leading economic indicator for November - eurocoin - and the measure has posted it second consecutive monthly negative reading on foot of six consecutive monthly declines. Here are the details.

Eurocoin fell to a recessionary -0.20 in November 2011, from -0.13 in October and +0.03 in September.  The 3mo MA is now at -0.1 and 6 mo MA declined to +0.148. A year ago, the indicator stood at +0.45. Chart below updates, including eurocoin-consistent forecast for growth.

The following charts show the ECB decision-making inputs:

So ECB rates consistent with current growth are in the range of 1.0-1.5% - basically bang-on the current rate. However, inflation remains sticky and all indications are it will come in at around 2.7% in November, suggesting that rate expectation is for no change at beast (optimal rates consistent with this rate of inflation is in the neighborhood of 4%).

The ECB dilema continues.

25/11/201: Growth is the only solution to Europe's crisis

My latest post for Canada's The Globe and Mail is up - link here.

Please note, when I say 'growth' or 'economic growth' I obviously do not have in mind a bubble re-inflation or growth based on weak fundamentals. Hence, the concept of growth I accept and support is growth that is anchored in both demand and supply fundamentals, aka sustainable growth.

Enjoy and comment.

24/11/2011: Beggar thy citizens

Things are desperate on a new level across Euro area, folks. So desperate, the Euro leadership delusions have shifted up a notched from already feverish levels they reached before.

Until now, the talk was all about the miracle pills of first "The Firewall of EFSF" then "ECB rescue" + "Euro bonds", now the convoluted plans to underwrite the failures of the last decades are getting more esoteric and, oh so European, at the same time.

Recall the EFS 'Firewall' - launched at first with ca €275 billion in lending capacity, enlarged to €440 billion capacity, then planned for a 'leveraged' enlargement to €1 trillion capacity. Now, with realisation that (1) €1 trillion is no longer enough of a 'Firewall' once Italy caught fire and the rooftop of Chateau France is getting steamy too; and (2) There is no €1 trillion worth of international idiots (oops... err.. investors) willing to part with their money for the greater good of European 'solidarity' the EFSF 'solution' has fallen off the radar.

Next, enter the idea of the ECB rescue and Euro bonds. These too are largely problematic. The ECB 'rescue' option at this stage will have to involve €1.5-2.5 trillion worth of assets purchases - something that will be (a) costly (imagine what will happen to bonds prices if the ECB were to wade in with that sort of cash into the secondary markets) and (b) internecine to ECB's mandate and reputation (in other words, turning your Central Bank into the financial toxic waste warehouse will do to the Euro just what the PIIGS combined default can - destroy it). The Euro bonds option requires two impossible to achieve things: (1) finding idiots... err... investors willing to pony up even more cash than for the EFSF for an undertaking written against largely non-controllable borrowers with little prospect of achieving economic growth to sustain repayments of their debts, and (2) balancing the need to get another credit against the risk of destroying credit ratings (as Euro bond will in effect simply give Governments more debt and this debt will be senior to their own previously issued national debt). And, of course, the Euro bond idea requires much closer political integration first - something that will take years to deliver.

Smelling the rat... err... failure in the above magic bullets, some Governments are now desperate enough to resort to the classic European response to the crises: fleecing their own citizens to pay for their spending habits. Behold tax increases across Europe and Belgian plans to sell their unwanted bonds to their citizens (the story here). In the nutshell, the idea is that there are no idiots... err... investors out there willing to buy Belgian Government promissory notes (note: Belgium, of course doesn't even have a Government). So the solution - just as Joe Stalin did in the 1930s-1950s - is to sell these bonds to unsuspecting ordinary people of Belgium. To make the 'deal' even more egregious, the bonds are to be sold at a discount on the yields provided to banks purchasers. Not only will Belgian pople join the line of those who hold dodgy paper, cross-linked to their entire risk profile of living and working in Belgium and paying Belgian taxes, but they are expected to do so for less reward!

Priceless, really, folks. Comparable only to Irish Government 'Solidarity Bonds' and efforts to sell state junk to national pensions and insurance companies. In economics, there's a concept of policies that 'beggar thy neighbors' by shifting risks/costs/losses onto other countries via trade and investment restrictions, taxes and subsidies. In Europe, we are getting to the point of having 'beggar thy citizens' policies.

24/11/2011: Insolvent Europe

The following link is to my article on EU-wide debt crisis for presseurope.eu (and no - not just that Government debt crisis  we've heard all about): here.