2/12/2011: Euro crisis: wrong medicine for a misdiagnosed patient

There's been much talk about the fiscal union and ECB money printing as the two exercises that can resolve the euro area crises. The problem is that all the well-wishers who find solace in these ideas are missing the very iceberg that is about to sink the  Eurotanic.
 (image courtesy of the ZeroHedge.com):

Let's start from the top. Euro area's problem is a simple one:

• There is too much debt - public and private - as detailed here, and
• There is too little growth - including potential growth - as detailed here.

Oh, and in case you think that discipline is a cure to debt, here's the austerity-impacted expected Government debt changes in 2010-2013, courtesy of the OECD:

In other words, it's not the lack of monetary easing or fiscal discipline, stupid. It's the lack of dynamism in European economy.

Let me explain this in the context of Euro area policies proposals.

• The EU, including member states Governments, believes that causality of the crisis follows as: Loss of market confidence leads to increased funding cost of debt, which in turn causes debt to become unsustainable, which in turn leads to the need for austerity and thus reduces growth rates in the Euro area economies.
• My view is that low growth historically combined with high expectations in terms of social benefits have resulted over the decades in a build up of debt, which was not sustainable even absent the economic recession. Economic recession caused the tipping point in debt sustainability beyond which markets lost confidence in European fundamentals both within the crisis environment, but also, crucially, beyond cyclical recession. My data on structural deficits (linked above) proves the last point.

So while Europe believes that its core malaise is lack of confidence from the markets, I believe that Europe's real disease is lack of growth and resulting high debt levels. Confidence is but a symptom of the disease. 

You can police fiscal neighborhood as much as you want (and some policing is desperately needed), but you can't turn European economy from growth slum to growth engine by doing so. You can also let ECB buy all of the debt of the Euro area members, but short of the ECB then burning the Government bonds on a massively inflationary pyre, you can't do away with the debt overhang. Neither the Euro-bonds (opposed by Germany) nor warehousing these debts on the ECB balance sheet (opposed by Germany & the ECB) will do the trick. Only long-term growth can. And in that department, Europe has no track record to stand on.

Take Italy as an example. Charts below illustrate the country plight today and into 2016. I use two projections scenarios - the mid-range one is from the IMF WEO for September 2011, the adverse one is incorporating OECD forecasts of November 2011, plus the cost of funding Italian debt increasing by 100bps on the current average (quite benign assumption, given that it has increased, per latest auctions by ca 300bps plus).

As chart below shows, Italy is facing a gargantuan-sized funding problem in 2012-2016. Note that the time horizon chosen for the assessment of fiscal sustainability is significant here. You can take two assumptions - the implicit assumption behind the Euro area policy approach that the entire problem of 'lack of markets confidence' in the peripheral states can be resolved fully by 2013, allowing the peripheral countries access to funding markets at costs close to those before the crisis some time around 2013-2014. Or you can make the assumption I am more comfortable with that such access to funding markets for PIIGS is structurally restricted by their debt levels and growth fundamentals. In which case, that date of regaining reasonable access to the funding is pushed well past 2015-2016.

Government deficits form a significant part of the above debt problem in Italy (see below), but what is more important is that even with rosy austerity=success model deployed by the IMF, the rate of decline in Italian public debt envisioned in 2013-2016 is abysmally small (again, see chart below). This rate of decline is driven not by the lack of austerity (deficits are relatively benign), but by the lack of economic growth that deflates debt/GDP and deficit/GDP ratios and contributed to nominal reductions in both debt and deficits.

But the proverbial rabbit hole goes deeper, in the case of Italy. IMF projections - made before September 2011 - were based on rather robust euro area-wide growth of the first quarter of 2011. Since then two things have happened: 

1. There is a massive slowdown in growth in Italy and across the euro area (see here), and
2. Cost of funding Italian debt has risen dramatically (see the second chart below).

These two factors, imperfectly reflected in the forecasts yield my estimation for Italian fiscal sustainability parameters under the 'adverse' scenario.

The above shows why, in the case of Italy, none of the solutions to the crisis presented to-date will work. Alas, pretty much the same applies to all other peripheral countries, including Ireland.

Which means that the latest round of euro area policies activism from Merkozy is simply equivalent to administering wrong medicine in greater doses to the misdiagnosed patient. What can possibly go wrong here?

1/12/2011: Manufacturing PMI for Ireland - November

Manufacturing PMI for November has signalled renewed downward pressure in sectoral activity.

Having posted a surprise, EU-wide trend-breaking increase from 47.3 in September to 50.1 in October (a reading above 50 is consistent with expansion, albeit a reading between 50 and roughly speaking 52.5 is statistically insignificantly different from 50), the core Manufacturing PMI fell again into the contraction territory in November, posting 48.5.

More ominously, 3 mo average through November is now 48.6 and 3mo average through August is at 49.2, so last six months on average have posted a contraction in Manufacturing activity. Thus, Manufacturing PMIs are now firmly flashing recession warning signs. A year ago, 3mo average through November 2010 stood at 50.2. 12 mo MA is remaining above 50 at 51.8 due to solid gains achieved in January-April 2011.

Output reading is now also below 50 with November Output measure coming in at 48.3, down from 52.7 in October. 3mo average through November is barel above 50 at 50.3 and 3mo average through August is at 50.5. November 2011 reading is the lowest since January 2010.

Like the main indicator, New Orders sub-index has posted average below 50 readings in 6 months through November. The sub-index is now at 49.7, down from 51.4 in October. New exports orders sub-index remained just below 50 for the third month in a row at 49.9 in November, compared against 49.8 in October. And backlogs of existent orders continued to contract at 44.2 in November - 9th month of straight declines.

Output prices accelerated factory gates deflation at 48.2 in November compared to 49.2 in October - for the fourth consecutive month. Meanwhile input prices index signalled continued strong inflation at 55.2 in November, unchanged from October. This trend is present in the data since January 2010 uninterrupted. Thus profit margins in manufacturing continued to decline at accelerating pace (more on this in a separate blog post once we have PMIs for services as well).

Stocks of purchases declined rapidly at 41.3 in November - deeper contraction than 44.5 registered in October. Meanwhile rate of decline in stocks of finished goods (46.1 against 45.4 in October) has slowed down, suggesting build up of inventories and putting potential pressure on one of components of GDP and GNP down the line.

Employment also posted third consecutive month of declines - November reading is 48.3 against 47.1 in October. 3mo average through November is 47.3 - well below already contractionary 3mo average through August at 49.5. In 2010, 3mo average through November stood at a less sharply contracting 47.9.

Overall, pretty brutal data for Manufacturing.

1/12/2011: Sunday Times, 27 November 2011

Here is the unedited version of my article in the Sunday Times, November 27, 2011.

Since the collapse of the bubble, Irish perceptions of the residential and commercial property markets have swung from an unquestioning adoration to a passionate rejection.

As the result of the bubble, the overall share of property in average household investment portfolio is likely to decline over time from its Celtic Tiger highs of over 80% to a more reasonable 50-60%, consistent with longer term averages in other advanced economies. But housing will remain a significant part of the household investment for a number of good reasons.

While providing shelter, housing wealth also serves as a long-term savings vehicle and an asset for additional borrowing for shorter-term investments. Security of housing wealth in normal times acts as an asset cushion for family-owned start up businesses and a convenient tool for regular savings. Over the lifetime, as demand for housing grows with family size, we increase our savings, normally just as our life cycle earnings increase. We subsequently can draw down these savings throughout the retirement when income from work drops.

In short, in a normal economy, housing and household investment are naturally linked. In this light, the grave nature of our economic malaise should be apparent to all. Ireland is experiencing a continued and extremely deep balance sheet recession, with twin collapses in property prices and investment that underlie structural demise of our economy.

The latest Residential Property Price Index, released this week, shows that things are only getting worse on the former front. Overall, residential property price index fell to 71.2 in October from 72.8 in September. The latest monthly decline of 2.2% is the sharpest since March 2009 and the third fastest in the history of the index. Relative to peak prices are now down 45.4%. Take a look at two components of household investment portfolios: owner-occupied and buy-to-let properties. For the majority of the middle class families, the former is represented by a family home. The latter, on average, is represented by apartments. Nationwide, per CSO, prices of these assets are respectively down 43.7% and 57.9% relative to the peak.

The impact of these price movements is significant and, contrary to the assertions of the Government and official analysts, real and painful. House price declines imply real capital losses to households and these losses have to be offset, over time, with decreased consumption and falling investment elsewhere. Absent normal loss provisioning available to professional financial sector investors and businesses, households suffer catastrophic collapses on the assets side of their balance sheet, while liabilities (value of mortgages) remain intact. Decades-long underinvestment and low consumption spending await Ireland.

Dynamically, things are not looking any brighter today than a year ago. House prices have fallen 14.9% year on year in October, the worst annual drop since February 2010. Apartments prices are down 19.8% over the last 12 months – the worst annualized performance since April 2010.  Given the price dynamics over the last three years, as well as the current underlying personal income, interest rates and rental yields fundamentals, Irish property prices remain at the levels above the short-term and medium-term equilibrium. This means we can expect another double-digit correction in 2012 followed by shallower declines in 2013.

Not surprisingly, the collapse of the property markets in Ireland is mirrored by an even deeper crash in overall investment activity in the economy. The latest National Accounts data shows that in 2010, gross fixed capital formation in Ireland declined to €19 billion in constant prices. This year, data to-date suggests that capital formation will drop even further, to ca €17 billion or almost 58% below the peak levels. In historical terms, these levels of investment activity are comparable only with 1996-1997 average. If we assume that the excess investments in the property sector were starting to manifest themselves around 2002, to get Irish economy back to pre-boom investment path would require gross fixed capital investment of some €26.9 billion per annum or more than 60% above current levels.

Between 2000 and 2009, Irish economy absorbed some €319 billion in new fixed capital investments. Assuming combined rate of amortization and depreciation of 8% per annum, just to keep that stock of capital in working shape requires €25.5 billion of new investment. This mans that in 3 years since 2009, the Irish economy has lost some €15.5 billion worth of fixed capital to normal wear-and-tear. In short, we are no longer even replacing the capital stock we have, let alone add new productive capacity to this economy.

Looking into sectoral distribution of investment, all sectors of economic activity outside building and construction have seen their capital investment fall by between 18.4% in the case of Fuel and Power Products to 70.4% in the case of Agriculture, Forestry and Fishing sector. So the aforementioned aggregate collapse of investment is replicated across the entire economy.

The dramatic destruction of capital investment in the private sector is not being helped by the fact that Government capital expenditure is also contracting. In 2010, Voted Capital Expenditure by the Irish Government declined to €5.9 billion. This year, based on 10 months through October data, it is on track to fall even further to €4 billion – below the target of €4.35 billion and more than 53% below the peak. In fact, the entire adjustment in public expenditure to-date can be attributed to the capital spending cuts, as current expenditure actually rose over the years of crisis. Since 2008, current expenditure by the state is up 1.9% or €775 million this year, based on the data through October. Thus in 2008, Irish Government spent 17.4% of its total voted expenditure on capital investment. This year the figure is likely to be under 8.8%.

Forthcoming Budget 2012 changes are likely to make matters worse for capital investment. In addition to taking even more cash out of the pockets of those still in employment – thereby reducing further the pool of potential savings – the Government is likely to bring in the first measures of property taxation. This will reinforce households’ expectations that by 2013-2014 Ireland will have a residential property tax that will place disproportional burden on urban dwellers – the very segment of population that tends to invest more intensively over time in property improvements, making the urban stock of housing more economically productive than rural. A tax measure that would be least distorting in terms of incentives to increase productivity of the housing stock – a site-value tax – now appears to be abandoned by the Government, despite previous commitments to introduce it.

Furthermore, we can expect in the next two years abolition of capital tax reliefs, increases in capital tax rates and high likelihood of some sort of wealth taxes – direct levies on capital and/or savings for ordinary households. In the case of the euro area break up, Ireland will also see draconian capital controls.

In short, we are now set to experience an 8-10 years period of direct and accelerating destruction of our capital base. It doesn’t matter which school of economic thought one belongs to, there can be no recovery without capital investment returning back to growth.

Box-out:

In the recent paper titled “The Eurozone Crisis: How Banks and Sovereigns Came to Be Joined at the Hip”, published last month, two IMF researchers identify Europe’s Lehman’s moment in the global financial crisis as the day when the Irish Government nationalized the Anglo Irish Bank. In contrast to the current and previous Governments’ assertions, the IMF study argues that the Anglo was not a systemically important bank worthy of a rescue. As the paper puts it: “The problems [of collapsing financial sector valuations] entered a new phase – becoming a full-blown crisis – with the nationalisation of Anglo Irish in January 2009. The relevance of Anglo is, at first, not obvious, since it was a small bank in a relatively small country. However, …it is possible that the large fiscal costs as a share of Ireland’s GDP associated with this rescue raised serious concerns about fiscal sustainability. Suddenly, the ability of the sovereigns to support the financial sector came into question.” In other words, far from helping to avert or alleviate the crisis, Anglo nationalization caused the crisis to spread. “In retrospect, the nature of the crisis prior to Anglo Irish was simple, being mostly driven by problems in the financial sector… The winding down of Anglo Irish, for example, would have been preferable to its nationalization…” In effect, the previous Government made Anglo systemically important by rescuing it. If there ever was a better example of the medicine that kills the patient.

30/11/2011: Live Register for November: Monthly Rates of Change

In a follow-up on the previous post, here are monthly changes in Live Register for the duration of the crisis. It is worth noting that Live Register volatility has markedly improved during the last 23 months. Standard deviation in monthly changes in LR for the entire pre-crisis history is 6,935, for the period of the crisis (January 2008-present) it stands at 7,511 (statistically significantly above the pre-crisis levels), but since January 2010 it stands at 2,587 (estimate is small-sample adjusted). Historical STDEV is 7,723, indistinct from the crisis period volatility.

So that chart:

20/11/2011: Live Register - November

Live Register continued a parade of weaker Irish economy performance indicators for Q4 2011. Here are the headlines and updates.

November LR-implied unemployment rate edged up by another 10bps to 14.5% getting closer to 12mo high of 14.6% back in December 2010.

In absolute seasonally-adjusted terms, there are now 448,600 people on LR, up 1,700 month on month from October 2011. Year on year, LR rose 3,700 or +0.83%, back in October, year on year LR stood at 300 down on October 2010 (-0.07%). 3mo MA through November 2011 is 0.13% below 3mo MA through November 2010. In 3 months through November 2011, LR posted zero cumulative change, which contrasts with a decline of 2,200 over 3 months through November 2010 and 4,500 increase in LR for 3 months through August 2011. In 6 months through November 2011 LR rose 4,500, while in January-November LR rose 2,500.

Overall, seasonally adjusted LR number currently stands at the second highest level in history (same level was also attained in August this year and the highest level of 449,400 was attained in September 2010.

Numbers of casual and part-time workers rose once again from 85,029 in October to 86,612 in November or 1,583 mom (+1.86%). Year on year the number of part-time workers rose 6,404 (+7.98%). 3mo MA through November 2011 is up 8.79% year on year.

percentage of non-Irish nationals on LR rose from 17.43% in october to 17.58% in November as decline of 1,347 Irish nationals on LR mom was offset by an increase of 482 non-Irish nationals over the same period. Year on year, numbers of non-nationals on LR is up 737 or 0.99% while number of Irish nationals is up 3,828 or +1.09%. However, last 3mo saw an increase of 0.051% in non-Irish nationals on LR and an increase of 0.033% for Irish nationals.

Per CSO: "The number of long term claimants on the Live Register in November 2011 was 179,890. The number of male long term claimants increased by 19,939 (+18.1%) in the year to November 2011, while the comparable increase for females was 9,624 (+24.1%) giving an overall annual increase of 29,563 (+19.7%) in the number of long term claimants. This rate of increase in long term claimants has been slowing through the year with an annual increase of 57,597 (55.9%) having been recorded in January 2011." I am quite puzzled by CSO's apparent selective interpretation of this data, which appears to present the "positive" side of statistics. The slowdown in the rate of increases in long term claimants appears to be in line with overall slowdown in the rate of increase in the series for unemployment. January 2011 transition rates referenced Q3 2009-Q4 2009 net signees - of which there were, you guessed it, 25,400. But November 2011 transition rates are referencing net signees for Q2 2010-Q3 2010 - of which there were 10,200. So some better analysis would have done here for CSO.

29/11/2011: Retail Sector Activity Index: October 2011, Ireland

In the previous post I detailed the latests retail sales stats for Ireland. Here, I am updating my own Index of Retail Sector Activity - a weighted average of value of sales, volume of slaes and leading consumer confidence indicator. The index reflects changes in employment and profit margins conditions in the sector.

Table below summarizes the changes in all three components, and charts below illustrate:

A large jump ion consumer confidence in October (to 63.7 from September reading of 53.3) is the core driver of improvement in the  overall Index od Retail Sector Activity, which now stands at 102.2 - above the expansion level of 100. This means that we can expect a small uplift in retail sector activity in months ahead, but this uplift can manifest itself through improved volumes of sales (value static, so margins declining) or improved value of sales (inflation) or both (more demand-driven uplift).

As charts below show, RSAI still remains consistent with actual retail sales volume and value performance at below the levels consistent with medium-term consumer confidence reading:

29/11/2011: Retail Sales for October: Ireland

Irish retail sales continue on downward trend, with no respite.  I will be updating my exclusive Retail Sector Activity Index in the follow up post (so stay tuned), but here are the core headlines:

• The volume of retail sales index rose by 0.1% in October 2011 mom but is down 3.8% yoy. The volume of sales is now down 21.67% on peak. The index reading of 91.1 in October compares against 91.3 3mo AM and 92.1 6mo MA. In 2010 index average was 93.3 and 2011 to-date average is 92.0.
• There was no change in the value of retail sales on a monthly basis, however the annual change was -3.7%. The value index is now 25.6% below its peak. 3mo MA is at 86.7 against current reading of 86.5 and 6mo MA is at 87.5. 2010 annual average is 88.8 against 2011 average to-date of 87.7.

Charts below illustrate:

Focusing on core sales (ex-Motors):

• The volume of retail sales decreased by 0.2% in October 2011 mom, while there was an annual decrease of 3.6%. Core retail sales are now down 16.1% on the peak and 3mo MA is at 98.4 against October reading of 98.2, 6mo MA is at 98.8 and 2010 average is at 102.25 against 2011 average to-date of 99.5.
• There was a monthly decrease of 0.1% in the value of core retail sales and an annual decrease of 2.8%, with the value index now 20.6% below the peak. 3mo MA is 94.3, against current October reading of 94.2, and 6mo MA is 94.7. 2010 annual average is 97.6 against 2011 average to-date of 95.5.

Charts below illustrate:

So we are now in month 49 of core retail sales below pre-crisis peaks in both value and volume terms and no sustained bounce in sight. One can only wonder how on earth we still have functioning retailers left.

In October, Books, Newspapers & Stationery (-2.8%), Department Stores (-1.9%) and Electrical Goods (-1.7%) were amongst the categories that showed month-on-month decreases in the volume of retail sales. But have a closer look: seasonally adjusted sales excluding motors, fuel, bars and food are down 1.0% mom and 6.6% yoy in value and down 0.8% mom and 5.3% yoy in volume. So, basically, everything we buy that cannot be substituted for purchases in the Northern Ireland (though motors and food can, with some caveats) has tanked.

And in case you wondered: here's a chart showing annual rates of change in volume of sales for Ireland v EU27 and EA17

Clearly, things are turning around...

28/11/2011: Updated data for 2007-2010 Government Debt: Ireland

The CSO issued today updated - revised - figures for General Government Debt for Ireland. here's the core changes:

As you can see, the error due to the DofF double counting has been now rectified and the adjusted 2010 GGD now stands at €144,269 million. This, to remind you, does not include Nama liabilities, but it does include the promissory notes issued to Anglo & INBS. Table below details holdings of the Irish Government debt (as of May 2011):

28/11/2011: Employment in Irish economy: Q3/Q2 2011

The previous post (here) focused on the latest data for earnings across Irish economy, covering data through Q3 2011. Here, I provide the latest stats on employment numbers. Please note, CSO reports these only for Q2 2011 the latest, but sub-division of data for public sector is provided through Q3 2011.

Here are the core data points for Q2 2011

• In Q2 2011, there were 195,900 employed in Industry, down 1.36% yoy and up 0.82% qoq. The number is down 14.49% on Q3 2008 (third steepest rate of decline) despite the fact that industry is experiencing a pronounced exports boom.
• Construction sector employment is at 65,600 in Q2 2011, up 1.55% qoq, down 10.63% yoy and down 51.44% on Q3 2011 (the steepest drop of all series, and also the sharpest decline yoy).
• Wholesale & retail; repairs to vehicles and motorcycles sector employment stood at 276,600 in Q2 2011, down 1.18% yoy, up 2.29% qoq and down 11.71% on Q3 2008.
• Transportation and storage employment was at 65,700 in Q2 2011, up 0.77% qoq, up 6.31% yoy and down 5.06% on Q3 2008.
• Accommodation & food services employment was at 113,600, up 4.60% qoq,. down 9.84% yoy and down 24.06% on Q3 2011 (second sharpest contraction of all sectors on 2008 and also the second sharpest decline in yoy terms).
• Information & communication employed 53,400 in Q2 2011, up 5.12% qoq, down 2.73% yoy and down 10.40% on Q3 2008.
• Financial, insurance & real estate employment is at 91,000, up 3.88% qoq, down 1.09% yoy and down just 5.01% on Q3 2008, presumably they are selling more homes and financing more loans (of course, IFSC continues to perform strongly, in contrast to domestic services that are running excessive employment against continued business losses, to appease their largest shareholder - the Government).
• Professional, scientific & technical services are employing 72,100 in Q2 2011, dow 2.44% qoq, down 1.37% yoy and down 12.92% on Q3 2011.
• Administrative & support services employed 79,200 in Q2 2011, up 5.18% qoq, up 7.03% yoy and down 12% on Q3 2008.
• Public administration & defence employment stood at 112,100 in Q2 2011, down 5.72% qoq, down 6.74% yoy and down 6.97% on Q3 2008. This category posted the third sharpest decline yoy. It is also worth noting that figures for public sector reported here include census employees., although this distorts Q2 2011 data, but not Q3 2011 (as reported below).
• Education employment stood at 131,400 in Q2 2011, down 1.35% qoq, down 2.23% yoy and up 1.94% on Q3 2008.
• Human health and social work sector employment was 219,400 in Q2 2011, up 1.95% yoy, up 3.49% qoq and up 5.43% on Q3 2008.

Charts below illustrate:

Chart below summarizes Q2 2011 differences by two core sectors:

• Public sector employment rose to 404,300 in Q2 2011 up 0.02%qoq and up 0.55% yoy, but down 2.11% on Q3 2008.
• Private sector employment stood at 1,118,300 in Q2 2011, up 1.60% qoq, but down 2.60% yoy and down 15.43% on Q3 2008.
• Ratio of private sector workers to public sector wrokers has egnerally declined during the last 3 years, but improved slightly qoq in Q2 2011.

Chart below summarizes changes in employment for Q2 2011 compared to Q3 2008 listed above

CSO provides Q3 2011 data for employment in subsectors of the public sector and these are shown below compared to Q3 2008. This data is netted out for temporary census jobs that were recorded in Q2 2011, so no distortion there.

 On thing that stands out in the above. Ex-semi-states (-5.74%) and with semi-states (-5.78%) jobs losses in the public sector have been shallower in Q3 2011 than in private sector (for which we only have Q2 2011 data so far showing decline of 15.43% on Q3 2008). Even in the worst impacted Regional Bodies category, employment losses at -12.08% have been less severe than those in the private sector.

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.