26/1/2012: IMF's latest statement on Greece

Here's an interesting statement:

Given widespread press speculation and rumors regarding IMF views, the following can be attributed to an IMF spokesman, William Murray:

"To ensure debt sustainability for Greece, it is essential that a new program be supported by a combination of private sector involvement and official sector support that will bring debt to 120 percent of GDP by 2020. The Fund has no view on the relative contribution of private sector involvement and official sector support in achieving this target. In line with this view, the IMF has not asked the ECB to play any specific role."

So IMF is making a pre-emptive announcement of 'neutrality' on the issue of the day - who'll be blamed when Greek PSI talks eventually end up in the courts and Greek debt/GDP ratio shoots past 150% mark.

And here's IMF own December 2011 report on Greece (available here)"

Page 13:
"The previous July 21 financing package [agreed for Greece] would not work. Public debt would peak at 187 percent of GDP in 2013 and fall to 152 percent of GDP by 2020. Net external debt would peak at 128 percent of GDP in 2012 and fall to 96 percent of GDP by 2020. These already weak downward trajectories would not be robust to shocks.

The precise outcome of the PSI exercise has an important bearing on public debt dynamics and how robust any improvement would be (the external debt sustainability analysis shows a similar pattern):

• With near-universal participation in a debt exchange targeting a 50 percent face value haircut and offering a low coupon, and European support at an interest rate of about 4 percent, debt could be brought to 120 percent of GDP by 2020 (the maximum level considered sustainable for a market access country). The trajectory would also be less susceptible to shocks (including to the official sector funding cost), although a longer period of time would be required to bring debt-to-GDP below 120.
• However, with low participation in the debt exchange and a significant amount of hold outs to be amortized with European support—a real risk under a purely voluntary approach (i.e., an approach not involving any measures to induce higher participation levels)—debt could stick above 145 percent of GDP in 2020. Moreover, the trajectory would no longer be robust to the usual range of shocks.  

Thus, securing a sustainable debt position will depend on whether PSI negotiations deliver the targeted €100 billion in debt reduction, in particular on the ability of the features of the exchange to deliver near-universal participation."

So in other words, why issue pre-emptive statements now? Because a month ago IMF has already washed its hands on Greece, basically saying that, 'look, if all goes really well, things might get to sustainable scenario (assuming Greece delivers on all structural reforms and privatizations and there are no slippages in growth and external balances, etc), but we don;t quite believe they will...'

25/1/2012: Return to the Bond Markets

According to the report in FT Alphaville (link here) Ireland has 'returned' to the bond markets by carrying out a swap of a 4% coupon 2014-maturing bond for a 4.5% coupon 2015-maturing bond. This reduces 2014 outgoings on redemption of maturing bonds and forces more maturity into 2015, which has more benign profile. But the switch comes at a price - the coupon is up 12.5% on previous.

In effect, if this is less of an Ireland's 'return to the bond markets', more of Eddie 'The Eagle' Return to the Olympics type of an event. Much pomp (official announcements and Government statements to follow), no circumstance (Ireland still cannot fund itself outside the Troika agreement), and even less real substance (avoiding a total blowout in 2014 is now clearly an objective for policy measures). But hey, let it be a much needed 'green jerseying' distraction, as FT Alphaville suggests, to the gruesome reality of Ireland torching another €1.25 billion worth of taxpayers' funds on that pyre called IBRC/Anglo.

24/1/2012: Residential property prices - 2011 highlights

Latest Residential Property Price Index (RPPI) from CSO posts another monthly decline in the price series and marks deep drops in the property prices in 2011. Here are top of the line figures - end of year readings:

And updated Nama valuations referencing:

So to summarize (note - there will be more detailed analysis of this data coming up in later posts):

• All properties index is now 31.1% below January 2005 levels
• Houses are now down 28.3% below January 2005 levels
• Apartments are now down 46.5% below January 2005 levels
• Dublin all properties are now down 39.3% below January 2005 levels
• Rates of decline (monthly) are greater than 1.5% (12mo average) for 3 months in a row for all properties and for houses.

24/1/2012: Europe's Latest Non-Leadership on ESM/EFSF

Another heated non-debate is sweeping Europe. In the latest round of bizarre, outright Kafkaesque rhetorical contortions, European leaders are now engaged in a heated discussion on the 'enlargement' of ESM. Alas, the whole thing is clearly heading for the same outcome as Europe's previous rounds of 'solutions'. Here's why.

Recently, as reported in German press (here) Angela Merkel started to yield on the idea that the 'permanent' ESM fund should be increased from €500 billion to closer to €1 trillion by, among other things, allowing for concurrent running of existent €250 billion EFSF facility and the setting up of the new ESM.

Sadly, this 'solution' is really a complete red herring, despite all the hopes the EU is pinning onto it. In fact, it so much of a fake, the markets are simply likely to laugh their way through it.

The EFSF is designed to run out of time in the end of 2013. ESM is designed to start the earliest in mid-2012. Which means that even in theory, combined ESM/EFSF can last not much longer than 12 months. In practice, however, even this is not going to happen.

Firstly, EFSF is becoming increasingly funded through short term debt issuance and this means that as we hit 2013, the rate of EFSF paper maturing is going to accelerate. To roll this into longer-dated paper will require more than just re-writing the statutes of the EFSF. It will require EFSF raising funding at the same time as ESM is raising funding. The likelihood of this being a successful market funding strategy is zero.

Secondly, ESM capital basis of (meagre) €80 billion is not going to be fully invested on the initiation of the fund. Which means ESM even in theory is not going to come out on day 1 and borrow full €500 billion capacity. In practice, it can't be expected to raise even 1/4 of that in the first year of operations.

Which means that even running concurrently, EFSF+ESM duo will not constitute a fund with anything close to €750 billion capacity. And this means that European leadership is clearly in line for winning the Global Non-Leadership Prize again this year. IMF, insisting on the concurrent running of EFSF/ESM as well, is going to be a runner up.

23/1/2012: Extreme Events

Going through 2 charts and mapping the big themes of the ongoing crises, one has to be in awe of the volatility. Here are the maps of extreme (3-Sigma-plus) events with 'directionality' reflected:

Lovely, aren't they? But the trick in the above is: we are not at the decay stage of volatility on the sovereigns re-pricing stage. This, to me, suggests that once the sovereign crisis re-pricing draws to conclusion (whenever that might happen - isa different story), there will be the need for finding that 'new normal' (reversion-to-the-trend target) for the markets valuations overall. And that is the whole new game, dependent less on the previous equilibrium that should have followed the Great Bursting period, but more on the future risks and trends in post-debt economies. Which, itself, really depends on whether any given market can sustain growth without endless supports (implicit and explicit) from the Government borrowings.

Just thought I'd throw few thoughts out there...

22/1/2012: An update to Euribor risk premium post

On the foot of the previous post, I recomputed risk premia for 3 maturities: 12, 9 and 6 months euribor. Here's the chart:

And some top of the line numbers:

To compare against rates dynamics: