13/1/2012: EU27 External Trade - Greece falling out of trade picture

As German lawmakers are putting pressure on the parties in the PSI negotiations in Greece with calls for Greece to exit the Euro to devalue and regain competitiveness have some serious basis in real economic performance of the country.

Today's data on trade balance across EU27 clearly shows that Greece is unable to sustain serious debt repayments under the current arrangements. Here are the details:

The first estimate for November 2011 euro area (EA17) trade surplus came in at €6.9 bn surplus, against the deficit of -€2.3 bn in November 2010. October 2011 trade balance was +€1.0 bn, against a surplus of +€3.1 bn in October 2010.

In November 2011 compared with October 2011, seasonally adjusted exports rose by 3.9%, while imports remained unchanged.

The first estimate for the November 2011 extra-EU27 posted trade deficit of -€7.2 bn, compared with a deficit of -€16.8 bn in November 2010. In October 2011 the trade balance extra-EU27 was -€11.2 bn, compared with -€9.5 bn in October 2010.

In November 2011 compared with October 2011, extra-EU27 seasonally adjusted exports rose by 2.8%, while imports fell by 0.6%.

EU27 detailed results for January to October 2011:

• The EU27 deficit for energy increased significantly (-€317.5 bn in January-October 2011 compared with -€246.4 bn in January-October 2010)
• Trade surplus for manufactured goods rose to +€198.9 bn compared with +€136.4 bn in the same period of 2010. 
• The highest increases were recorded for EU27 exports to Russia (+28%), Turkey (+23%), China (+21%) and India (+20%), and for imports from Russia (+26%), Norway (+21%), Brazil and India (both +20%). 
• The EU27 trade surplus increased slightly with the USA (+€60.8 bn in January-October 2011 compared with +€60.1 bn in January-October 2010) and more significantly with Switzerland (+€24.1 bn compared with +€16.6 bn) and Turkey (+€21.3 bn compared with +€14.7 bn). 
• The EU27 trade deficit fell with China (-€132.2 bn compared with -€139.8 bn), Japan (-€16.1 bn compared with -€18.3 bn) and South Korea (-€3.9 bn compared with -€9.6 bn), but increased with Russia (-€76.0 bn compared with -€61.1 bn) and Norway (-€38.7 bn compared with -€29.8 bn). 
• Concerning the total trade of Member States, the largest surplus was observed in Germany (+€129.2 bn in January-October 2011), followed by Ireland and the Netherlands (both +€35.9 bn) and Belgium (+€10.1 bn). The United Kingdom (-€98.2 bn) registered the largest deficit, followed by France (-€72.5 bn), Spain (-€40.1 bn), Italy (-€24.2 bn), Greece (-€16.9 bn), Portugal (-€13.3 bn) and Poland (-€12.0 bn).

Some charts:

The charts above clearly show that:

• Of all PIIGS, Ireland is the only country showing capacity to generate significant trade surpluses, with Irish merchandise trade surplus of €2.5bn in November being the second highest in EU 27 in absolute terms and the highest in terms relative to GDP. Exactly the same is true for Irish trade surplus recorded in October. Irish trade surplus in November was almost as large as the combined surpluses of all other countries with positive trade balance, ex-Germany (€2.9bn).
• In November 2011 Ireland posted the third fastest rate of mom growth in exports in EU27 (+8.3%), the effect compounded by the 9.4% drop (4th deepest in EU27) in imports.
• In contrast, Greece posted a 14.4% contraction in its exports in November 2011 compared to October 2011 - the largest drop of all countries in EU27. Greek trade balance in October stood at a deficit €0.1 billion and in November 2011 this widened to €0.2 billion.

So in terms of trade, Ireland is not Greece, and Greece is not showing any signs of ability to sustain internal debt adjustment within the euro structure.

13/1/2012: The need for political reforms

An interesting paper from the World Bank (linked here), by Torgler, Benno, titled "Tax Morale and Compliance: Review of Evidence and Case Studies for Europe" (December 1, 2011). World Bank Policy Research Working Paper Series, 2011 (World Bank Policy research Working Paper 5922) presents an overview of the literature on tax morale and tax compliance. Perhaps unsurprisingly, it finds that accountability, democratic governance, efficient and transparent legal structures, and crucially, "trust within the society" are important in enforcing tax compliance and tax morale.

Which offers an interesting point for observation: in 2011, trust in Irish system of government as measured by the Edelman Trust Barometer stood at 20%, against the average of 52% for 23 countries surveyed in the report, making Ireland the lowest ranked country in the study. 


But things are even worse than the above number suggests: 

• Ireland ranks lowest 23rd in terms of average trust measures across four institutions of government, media, business and NGOs
• The above result is driven by: high trust in NGOs at 53%, although this is still below global trust in NGOs at 61%, high trust in business at 46% against global trust in business at 56%, low trust in media at 38% and abysmally low trust in government.

So may be, just may be, folks, in order to improve our fiscal performance we need deep political and leadership changes at least as much as tax increases and spending cuts? Perhaps, one of the problems with Irish fiscal crisis response to date is that the current Government and its predecessor are not doing enough to make Ireland's elites more accountable, more transparent, and better governed? There's an old Russian saying that every fish rots from the head (although Chinese, British and other nations claim the origin of this phrase as well).

12/1/2012: Q4 2011 Sovereign Bonds performance

Four charts covering Q4 2011 sovereign bonds (CDS) performance:

Data sourced from CMA Global Sovereign Risk Report Q4 2011

12/1/2012: Q4 2011 Sovereign Bonds Report

CMA released their Quarterly Global Sovereign Risk Report Q4 2011 which makes for an interesting reading. Here are some highlights:

"The Eurozone debt situation continued throughout Q4, with the region widening 9% overall. A bail out of Dexia at the beginning of the quarter was followed by continued concerns on Italy’s debt in November and risk of an S&P downgrade of the entire Eurozone in December.

"Nearly all global CDS prices widened during November’s volatile period, clearly indicating the significance of Western Europe to the global economy and the importance of finding a permanent resolution to the debt crisis.

• Italy’s austerity measures failed to move the market tighter in Q3, and the spread widened to a high of 595bp in-mid November. This prompted the end of the Bersculoni era, a new president [obviously, they mean PM] and a new set of austerity measures aimed at reducing the 2 trillion dollars of debt and 120% debt-to-GDP ratio. Implied FX devaluation from a default in Italy is around 17% according to CMA DatavisionTM Quantos.
• Spain and Belgium’s charts were a mirror image of Italy’s.
• Ireland remained relatively stable throughout the quarter, perhaps indicating a balance between a well capitalised banking sector and IMF concerns about the prospects for growth in exports to Europe."
• Greece was the worst performer worldwide (see tables below charts), while Portugal outperformed Ireland

Charts:

Summary of 10 highest and lowest risk sovereigns:

 

So despite our 'gains' in the bond markets, Ireland moved into 6th highest risk position in Q4 2011 from 7th in Q3 2011. 

And amongst the safest bond issuers there are just 2 euro zone countries: Finland and Germany (an improvement on Q3 2011 where only Finland was there).

Here's the summary of our performance since Q1 2009.

11/1/2012: Great Moderation or Great Delusion

A recent (December 2011) paper published by CEPR offers a very interesting analysis of the macroeconomic risks propagation in the current crisis. The paper, titled Great Moderation or Great Mistake: Can rising confidence in low macro-risk explain the boom in asset prices? (CEPR DP 8700) by Tobias Broer and Afroditi Kero looks at the evidence on whether the period of Great Moderation in macroeconomic volatility during the period from the mid-1980s (the decline in macroeconomic volatility that is unprecedented in modern history) had an associated impact on the rise of asset prices that accompanied this period, setting the stage for the ongoing crash.

In recent literature, this rise in asset prices, and the crash that followed, have both been attributed to "overconfidence in a benign macroeconomic environment of low volatility" or to excessively optimistic expectations of investors that the lengthy period of macroeconomic stability and upward trending is the 'new normal'. 

The study introduced learning about the persistence of volatility regimes in a standard asset pricing model of investor decision making. "It shows that the fall in US macroeconomic volatility since the mid-1980s only leads to a relatively small increase in asset prices when investors have full information about the highly persistent, but not permanent, nature of low volatility regimes." In other words, in the rational expectations setting with no errors in judgement and perfect foresight (investors are aware that volatility reductions are temporary), there is no bubble forming.

However, when investors "infer the persistence of low volatility from empirical evidence" (in other words when knowledge is imperfect and there is a probabilistic scenario under which the moderation can be permanent, then "Bayesian learning can deliver a strong rise in asset prices by up to 80%. Moreover, the end of the low volatility period leads to a strong and sudden crash in prices."

Specifically, calibrated model generates pre-collapse rise in asset prices of 77% and overvaluation of assets by 79% over the case of no learning. The subsequent collapse of asset prices is 84% in the case of imperfect information learning.

A pretty nice result! 

11/01/2012: Risk-off or 'Grab that Straw, Man'?

Another day, another historical marker falls under the weight of the euro area mess:

US Treasury auctioned off USD21bn of 10 year notes today achieving the yield of 1.90% - lowest on record for an auction. Cover was 3.19 times the offering, slightly ahead of 3.15 average for previous four 10 year notes auctions. Direct bidders demand was up to 17.4% of sales against the average 10%. 10 year secondary markets yields sliped to 1.91% from 1.97% pre-auction.

Here's the IMF illustration (all charts below are from Cottarelli November 2011 presentation) of the evolution of holdings of US debt:

Which, funnily enough, is pretty diversified when compared to that found in Europe:

But the US yields are, of course, purely irrational:

Then, again, not as irrational as those found in Japan:

Altogether elsewhere, vast... German bund auction - 5 year, €4 billion - attracted cover of 2.24 and the average yield of 0.9%. That is well below inflation - however measured - and even below expected inflation, accounting for the potential slowdown. In other words, investors are now so scared, they are paying German government money to store their cash. In the secondary markets, German 1 year bonds turned negative yield back at the end of November, for the first time in history. German 10-years are currently trading in the 1.87% yield territory. According to FT, 10 year bund yields fell from 3.49% in April 2011 to a low of 1.67% in September last year.

Risk-off raging as EU vacillates... or rather, as its leaders consider how to by-pass Belgian General strike that has derailed their January 30 summit.


Nice one, folks. The insolvent Rome burns, the leaders are having summits galore and the unions are demanding more insolvency, while country output shrinks due to striking.


We are no longer in risk-aversion or even loss-aversion world, we are in a grab-anything-that-might-float world.