1/12/2012: Ireland - still the second worst banking sector in EA

Another Euromoney risk survey on and the results for the banking sector are out:

Ireland's banking sector zombies are ranked as 4th least safe in the entire Europe of 37 countries. Next to Greece (3rd least safe), and Macedonia (1 place ahead of Ireland - 5th least safe). Iceland, having defaulted and demolished its banks, ranks 7th least safe. Note, Ireland remains the second weakest banking sector in the EA17.

Of course, our 'leaders' would say that yes, things are bad, but they are improving... hmm...

Are they? Well, sort of. Ireland's score (higher score, greater systemic stability) have risen in 11 months of 2012, but the rise was far from spectacular. Ireland's improvement in the score is 7th largest in the sample, behind that for Iceland.

Ireland's gap to the peers (Advanced Small Open Economies) in overall score is about 4.4 points. 11 months of heroic Government reforms have yielded a gain of 0.2 points in Irish position, and the deterioration in the overall euro area climate has resulted in a decline in the average ASOE score of 0.07 points. This means the spread improved in favour of Ireland by less than 0.3 points in 11 months - a rate of 'reforms' that can close the current gap, assuming continued deterioration in ASOE average, over  161 months. In other words, unless the 'reforms' in Ireland's banks start bearing fruit much faster than they have done in 11 months of 2012 so far, it will take us 13.4 years to reach ASOE average levels of banking system stability.

1/12/2012: Irish Government deposits with Zombie Banks

On the foot of the analysis of deposits from Irish Residents, one might ask a question if the Irish Government deposits within the Irish banking system are significantly skewed in favour of the Covered Group of banks (Irish domestic banks largely owned by the Government).

The hart below plots the ratio of Irish Covered Banks Deposits from Irish Residents as a percentage of all same category deposits within the Domestic Banks group:

And the subsequent chart plots Government deposits in Domestic group and within Covered group:

Per first chart above, it is pretty clear that Irish Government deposits are biased in favour of the Covered banks and that this bias has risen dramatically during the current crisis (since the beginning of 2008). Of course, the effect of this bias is two-fold:

1. This represents a direct subsidy from the Exchequer to the Covered Banks at the expense of non-Covered banks, and
2. This results in lowering the deposit rates that Covered Banks must charge to attract depositors.

Now, some more detailed stats on the same subject:

• In October 2008, 75.49% of all Resident Deposits within the Domestic System were banked at the Covered Institutions. This represented a decline of 0.505% on September 2012 and a drop of 3.67% on October 2011.
• Share of Covered Banks in total Domestic Resident deposits was down on 3mo average basis (q/q and y/y) and on 6mo average basis
• In October 2012, share of Covered Banks in total Domestic banking system resident deposits was down 3.67% on October 2011, down 7.44% on October 2010 and down 6.56% on October 2009.
•  While total share of Covered Banks in domestic deposits has declined, in Government deposits their share has risen. In October 2012 Covered Banks' share of Government deposits rose to 91.992% (up 1% m/m and 0.8% y/y). The said share is no up 1.92% on October 2010.

Let's take a look at longer term series:

• Prior to 2008, average share of Covered Banks in total resident deposits was 78.7% and this fell to 75.3% for the average from 2008 through present, with 3mo average through October 2012 share now at 75.7%.
• Prior to 2008, average share of Covered Banks in Private Sector resident deposits was 75.7% and this fell to 73.6% for the average from 2008 through present, with 3mo average through October 2012 share now at 72.8%.
• Prior to 2008, average share of Covered Banks in Government deposits was 81.5% and this rose to 92.4% for the average from 2008 through present, with 3mo average through October 2012 share now at 90.9%.

While Private Sector seemingly is diversifying away from Irish banking zombies, Irish Government is increasingly subsidizing them. Given the Government simultaneously deposits with the banks that it owns and guarantees, one wonders if such apparent and blatant subsidization of the domestic covered institutions through deposits holdings by the Government is (1) consistent with competition rules present in the EU, and (2) consistent with good practices of risk management.

1/12/2012: Much Hype on Little Signs: Private Sector Deposits in October

Much hoopla is doing rounds these days about the 'rise in October deposits' in irish banking system. Head of the Department of Finance has referenced the 'welcome news' in his most recent speech and the Central Bank has cheerfully noted as much in the release published last night. Alas, as usual, the reality is not as encouraging as the 'Green Jerseys' crowd might suggest it is.

Let's cut some fog of numbers here.

First, Domestic Group of banks:

• Total Deposits in Domestic Group of banks (covering all banks registered to operate in Ireland) rose from €206,363mln in September to €208,633mln in October. In other words, deposits rose 1.1% m/m (reversing a -0.19% contraction m/m in September 2012).
• However, total deposits in Domestic Group are down 16.6% y/y in October 2012, oops... volatility in m/m figures seems to be clouding the minds at the 'Green Jerseys' clubhouse. And worse:
• More worrying: 3mo average deposits through October 2012 are down 7.9% on 3mo average deposits through July 2012, and are down 16.8% on 3mo average through October 2011. 
• Likewise, 6mo average through October 2012 is down 10.0% on 6mo average through April 2012 and is down 15.4% on 6mo average through October 2011.
• Some might say that these averages are down because of some exits of banking institutions from Ireland, but that is simply false, as data for Covered Banks (see below) shows an even more disastrous trend.
• Now, October 2012 levels of total deposits from Irish Residents are down 16.6% on October 2011, down 31.2% on October 2010 and down 32.8% on October 2009. Only Borat would cheer these trends with a 'Good news' headline.

Much of the above data trends is driven by the Monetary & Financial Institutions deposits changes. Much, but not all. 

• Government deposits with Domestic Banks rose 25.9% m/m in October having posted a 6.0% rise in September 2012. Year on year, Government deposits are up 44.8% in October 2012 and they were up 2.4% in September 2012. Virtually all trends on Government deposits are up.
• In contrast, Private Sector deposits with Domestic banks grew only 1.16% m/m in October 2012 and 2.2% in September 2012. 
• In longer term trends, Private Sector deposits didn't fare that well: 3mo average through October 2012 rose 0.06% on 3mo through July 2012, while it was up 0.73% y/y. 6mo average was up 1.2% in October 2012, compared to 6mo average through April 2012, but down 1.25% in y/y terms.
• Now, for dysmal science analysis of the Private Sector deposits: in october 2012, Private Sector Deposits in Domestic Group of banks were up 2.2% on October 2011, down 13.0% on October 2010 and down 18.0% on October 2009.
• Borat back, please.

Let's take a look at the levels of change in Domestic Group deposits:

• Cheerful increase in total Irish residents' deposits in Domestic Group of banks amounted to €2,270mln in October compared to September 2012, with only €923mln of that - less than half - accumulating in Covered Banks. Looks like foreign banks are beating Irish zombies in the deposits gathering game.
• There was a rise of €1,663 million in Private Sector deposits in the Domestic Group of banks in October, compared to September. Of this, only €574mln - roughly one third - landed in Irish banks, with 2/3rds going to foreign banks.
• Borat would say that the above shows success in restructuring Irish banking system. More even-headed analysis suggests success in foreign banking system operating in Ireland.

Now, Covered Banks (aka Irish Banking Zombies):

• Total Residents' deposits in Covered Banks were up €923 million in October 2012 (+0.59%) m/m, reversing a -0.01% decline in September. Y/y deposits are down 19.63% - worse performance than in September 2012 (-19.26%).
• Let's put things into perspective: in a year to October 2012, Irish Residents' deposits in Covered Banks shrunk €38.5 billion. In the 'cheers inducing' month of October 2012 they rose €923mln. Simple math suggests that it will take us 48 months of these 'improvements' to get back to where Irish Residents' deposits were back in October 2011.
• But there's more: Total Residents' deposits in Covered Banks in October 2012 were -19.63% below October 2011, -36.35% below October 2010, -37.64% lower than in October 2009. You get my point - Covered Banks (which were supposedly reformed, repaired, recaped per Department of Finance & CBofI, ages ago) are still performing woefully worse than foreign banks operating in Ireland.
• Government deposits with Government-owned banks rose €695 million m/m in October (+27.2% m/m and +45.92% y/y), outstripping increases in private deposits of €574mln (+0.55% m/m and +3.3% y/y).
• Private Sector Irish Residents' deposits with Covered Banks fell -0.75% on 3mo average basis through October 2012 compared to 3mo average through July 2012, although these are up 2.80% y/y. On another positive note, 6mo average for Irish Residents' Private Sector deposits with Covered Banks rose 1.8% on 6mo average through April 2012.
• Nonetheless, Irish Residents' Private Sector deposits with Covered Banks in October 2012 were still down 15.8% on same period of 2010 and down 20.7% on same period 2009.
• Switching back to more positive bit of news: Private Sector deposits with Domestic Banks were up €3.121bn in October 2012 y/y, and up €3.379bn for deposits with Covered Banks, which means that y/y Irish Covered Banks are generating stronger activity in attracting Private Sector Residents' deposits than foreign banks.

Here are some charts illustrating the above trends:

1/12/2012: US birth rate hit an all-time record low in 2011

The 2011 preliminary data for the US released this week showed 3,953,593 births in the US, a 1% decrease (-45,793) compared to 2010. The US fertility rate of 63.2 per 1,000 women age 15-44 years has now "declined to the lowest rate ever reported for the United States."
Full release here: http://www.cdc.gov/nchs/data/nvsr/nvsr61/nvsr61_05.pdf

In other words, the US birth rate is now below where it was during the WW2 years and the Great Depression.

Per release:

• The number of births declined for most race and Hispanic origin groups in 2011, whereas the rate declined only for Hispanic, non-Hispanic black and AIAN women. 
• The birth rate for teenagers 15-19 years fell 8 percent in 2011 (31.3 births per 1,000 teenagers 15-19 years), another record low, with rates declining for younger and older teenagers and for all race and Hispanic origin groups. 
• The birth rates for women in their twenties declined as well, to a historic low for women aged 20-24 (85.3 births per 1,000). 
• The birth rate for women in their early thirties was unchanged in 2011 but rose for women aged 35-39 and 40-44.  
• The birth rate for women in their late forties was unchanged in 2011. 

The worrisome trend here is not the decline in teenage births, obviously, but a combination of dramatic fall-off in the birth rates for 20-24 and 25-29 age groups. In addition, increases in 40-44 age group and 35-39 age group are associated with smaller family sizes.

 

• The first birth rate in 2011 (25.4 births per 1,000) was the lowest ever recorded for the United States. 
• The birth rate, the number of births, and the percentage of births to unmarried women each declined for the third consecutive year.  
• The birth rate was 46.1 birth per 1,000 unmarried women aged 15-44 and the percentage of births to unmarried women was 40.7. 

There are two trends working through here:

1. The birth rate in the US has declined in every year since 2007 when the total number of births reached over 4.3 million - an effect attributable to the severity of the economic crisis. As the top chart clearly shows, this is similar to what was experienced during the Great Depression, albeit at a shallower scale. Same took place in the 1970s. The effect of the Great Recession is now more moderate than in the earlier years of the crisis, with 1% decline y/y in 2011 following on 2% drop in 2010 and 3% drop in 2009.
2. Long-term trend to the downside in overall birth rates - the trend clearly present since the late 1950s. The rate of this long-term decline in the US is still benign compared to Europe. In Germany, birth rate currently stands around 1.36 children per woman, while in the US it is at 1.9.

30/11/2012: Moody's downgrade ESM and EFSF

Moody's downgrade of ESM and EFSF: here.

The downgrade was driven by two factors:

1. Moody's downgrade of France - the second largest provider of callable capital in the case of the ESM and as a guarantor country in the case of the EFSF.
2. "Moody's view that there is a high correlation in credit risk among the entities' supporters is consistent with the evolution to date of the euro area debt crisis and the close institutional, economic and financial linkages among the major euro area sovereigns. As a result, the credit risks and ratings of the ESM and the EFSF are closely aligned to those of its strongest supporters."

Another point of interest: "Moody's acknowledges that the ESM benefits from credit features that differentiate it from the EFSF, including the preferred creditor status and the paid-in capital of EUR80 billion. However, in Moody's view, these credit features do not enhance the ESM's credit profile to the extent that it would warrant a rating differentiation between the two entities."

Update: here's a good take on some of the issues involved in the downgrade: http://dealbreaker.com/2012/11/efsf-conveniently-downgraded/

30/11/2012: Greek debt distribution

Updated Greek debt shares based on latest 'deal' (to my post on impossibility of 120% debt/GDP target http://trueeconomics.blogspot.ie/2012/11/15112012-impossibility-of-greek-2020.html)

via MacroMonitor

30/11/2012: Eurocoin continues to signal EA17 downturn in November

In November euro area leading growth indicator Eurocoin stood at -0.29 % which is the same level as in October. This reading "reflects the opinions of households and businesses, as recorded by the surveys, which overall remain still unfavourable, though signs of an easing of pessimism emerged in some euro-area countries less affected by the sovereign debt tensions". Some details can be found at http://eurocoin.cepr.org/index.php?q=node/148 .

Reading below zero signals contraction in economic activity and the Eurocoin is now under water for 14 months in a row. The reading of -0.29 is the 3rd lowest the indicator reached during the current downturn. 

Consistent with the current slowdown, the price-growth dynamics suggest that there is an opening for further ECB easing:

Per above, it is quite obvious that we are stuck in the quick sand of being very near the zero-rate bound and no improvements in growth.

Per below, current inflation is still above the target, but the direction of change is encouraging:

In particular, latest inflationary pressure easing appears to be in line with ECB expectations and suggest that inflation is relatively well anchored, although still ahead of the ECB formal target.

Furthermore, 3-mo MA for Eurocoin through November 2012 is at -0.3 and 6mo MA at -0.273, both close to -0.31 average for the crisis period of 2008-2009.

The mixed bag of indicators is firmly shifting toward some action from the ECB soon.

30/11/2012: 'Other' European SOE is back in growth

While the euro area zombie economy continues to contract (more on this later tonight) that shrunk 0.6% y/y in Q3, Swiss economy is expanding, after posting a contraction in Q2 2012. That's right - that 'other Europe' SOE is expanding despite the fact CHF is tied to the sick euro. Swiss economy grew 0.6% q/q in Q3 2012 at annualized rate of 2.3%, beating consensus expectations (+0.2% q/q). In Q2 2012 Swiss economy contracted 0.5% annualized.

Today’s GDP data were encouraging but other indicators including the manufacturing PMI (see chart below) have remained weaker recently. Overall, our forecasts for Swiss GDP growth remain unchanged: 1.0% for the full year 2012 and 1.5% for 2013. Y/y growth was +0.3% in Q2 2012 (a downward revision from +0.5% estimate) and +1.4% in Q3 2012.

Swiss growth was driven by exports which rose 1.2% y/y in Q3 2012 and domestic consumption which was up 2.5% y/y. However, fixed investment fell on quarterly basis, although remaining up 1.4% on y/y basis.

Switzerland recorded an increase of 2.8% in foreign resident population (inward migration) between 2010 and 2011 - a trend that is most likely remained in 2012. In Q3 2012 employment grew at 1.9% y/y and is now 1.9% above the pre-crisis peak levels. Meanwhile, euro area employment is 2.6% below the pre-crisis peak levels, while in the US employment is still 3.1% down on pre-crisis levels.

27/11/2012: Neural Data and Investor Behavior

Fascinating stuff... really: a new study, titled "Testing Theories of Investor Behavior Using Neural Data" by Cary Frydman, Nicholas Barberis, Colin Camerer, Peter Bossaerts and Antonio Rangel (link) finds that "...measures of neural activity provided by functional magnetic resonance imaging (fMRI) can be used to test between theories of investor behavior that are difficult to distinguish using behavioral data alone."

How so? "Subjects traded stocks in an experimental market while we measured their brain activity. Behaviorally, we find that, our average subject exhibits a strong disposition effect [the robust empirical fact that individual investors have a greater propensity to sell stocks trading at a gain relative to purchase price, rather than stocks trading at a loss] in his trading, even though it is suboptimal."

More so: "We then use the neural data to test a specific theory of the disposition effect, the “realization utility” hypothesis, which argues that the effect arises because people derive utility directly from the act of realizing gains and losses. [Note to my Investment Theory (TCD) and Financial & Business Environments (UCD) students - we talked about direct utility derived from actual transactions, plus indirect utility effects of learning from same... remember?..] Consistent with this hypothesis, we find that

• activity in an area of the brain known to encode the value of decisions correlates with the capital gains of potential trades, 
• that the size of these neural signals correlates across subjects with the strength of the behavioral disposition effects, and that 
• activity in an area of the brain known to encode experienced utility exhibits a sharp upward spike in activity at precisely the moment at which a subject issues a command to sell a stock at a gain."

Awesome! We might not be wired for living in the world of uncertainty, but we might be somewhat wired for deriving utility out of uncertain gambles?

Now, that's what I call taking investment to MRI and getting results... well, might be not investable results, but...

25/11/2012: Irish Current Account and Government Debt

In the previous post I highlighted the problem presented by the EU Budget changes in the near future to the sustainability of Irish debt dynamics. I referenced expert opinions on the role of current account surpluses in determining these dynamics. here is an example from early 2011 (emphasis is mine):

"... this dependency [2010 bailout] of Ireland on foreign support is difficult to understand given that the country has not lived continuously above its means in the past.  Ireland has run a current account deficit (which means the country uses more resources than it produces) only for a few years; and if one totals the current account balances over the last 25 years, one arrives at a foreign debt of about €30 billion.  This should not be too difficult to finance given that it represents only about 20% of the country’s GDP of €150 billion. Moreover, Ireland is on track to run a current surplus this year and should thus not have any need for additional foreign funds."

Here's a problem - the above, as I noted in the previous post is based on some rather unpleasantly non-sustainable assumptions. Here's the arithmetic, based on IMF WEO data.

As chart above shows, Irish cumulated current account balances for the period 1980-2009 totalled -€39 billion, that's where the 'about €30 billion' miracle figure coming from. Alas, over the same period of time, Ireland received €39.4 billion worth of net transfers from the EU, which counted as a positive addition to the current account. Netting these out, Irish real 'external balance' cumulative for 1980-2009 was -€78.4 billion. Worse than that, net of EU subsidies, Ireland have run external deficits in every decade from 1980 through 2009. In other words, using the expert turn of phrase, Ireland used more resources than it produced in every decade through 2009. 

Now, was it true that Ireland 'has run a current account deficit only for a few years'? Why, here's a chart plotting Ireland's current account balances:

Gross of EU transfers, Ireland run current account deficits in 1980-1986, 1989-1990, and 2000-2009, which means that it run deficits over 19 out of 30 years between 1980 and 2009, which is more than 63% of the time. Ireland run current account deficits almost 58% of the time in the period of 1980-2012. Hardly 'a few years'. More importantly, removing EU net subsidies, Ireland has managed to run current account deficits every year between 1980 and 2012 except in 1996 and 2010-2012. That means that Ireland was using more resources than it produced in 29 out of 33 years since 1980, or 88% of the time.

For the last bit, let us recall that back in the 1990s (the period of Ireland's rapid recovery from debt overhang of the 1980s) Irish current account surpluses relative to General Government Debt stood at 26.8% (using 1999 level of General Government Debt and the cumulated current account surpluses, inclusive of EU transfers throughout the decade of 1990-1999). For the period of 2010-2017, the IMF projections imply the same ratio of less than 17.5%. 

Let's take a closer look at these comparatives. Irish debt peaked (for 1980-1999 period) in 1987 at 109.24% of GDP and was deflated on foot of a current account surpluses cumulated at 26.8% ratio to 1999 debt trough. For the period of 2000-2017, the debt will peak at 119.31% of GDP in 2013 and is expected to deflate at a maximum surplus rate of 17.5% (all based on IMF projections) before we allow for EU budgetary reductions for 2014-2022 period (which can bring this number closer to 14%). 

Again, one has to wonder if the argument that current account surpluses can really be viewed as a serious enough potential source for wrestling Ireland out of the debt trap. And that is before we start worrying about the potential drivers for these surpluses, such as:

• The 1990s exports boom driven by a combination of very robust US and UK growth expansions during the 1990s;
• The 1990s convergence race for Ireland to catch up with the EU capital and income levels - something that is now firmly exhausted as the potential for growth; and
• Significant net transfers from the EU during the 1987-1999 period that totalled some €12.6 billion which in 2014-2022 are likely to turn into net contributions to the EU from Ireland.

24/11/2012: EU Transfers to Ireland - boom or bust?

There's been some debate recently as to the size and importance of EU subsidies to Ireland and the EU budgetary allocation in the context of Irish economic growth. Here are the facts.

First up, the summary of EU subsidies, contributions and net subsidies:

Next, using the IMF WEO database, the netting of the EU Net Receipts out of of our GDP and GDP per capita:

Factoring in the net receipts into growth equation:

The above clearly shows that lower volatility in receipts has contributed to smoothing of the GDP growth rates in most periods, but exacerbated 1991 and 2001-2002 slowdowns. EU net receipts also helped fuel (not significantly, though) 2004-2006 bubble and failed to provide any support for the economy in 2008-2010 collapse.

The reason for small effect of supports in recent years is very clear from the charts below:

However, the most dramatic effect the subsidies had was registered on the side of our external balance. Recall that international 'experts' love the idea of Irish Current Account surpluses as the driver for sustainability of our debt. Herein, however, rests the problem:

The logic of 'experts' arguments is that Ireland can sustain current levels of Government debt because we have potential to generate current account surpluses vis-a-vis the rest of the world. And their evidence of that rests on their reading of past (1991-1999) current account positions. Alas, once we net out net transfers from EU from these... the picture changes. In the entire pre-2010 history, Ireland generated current account surplus (net of EU subsidies) in only one year, namely 1996. When one realises that debt sustainability for Ireland requires current account surpluses to be in excess of 3% on average over the next 10-15 years, one has to be slightly concerned by the prospect (as 2014-on suggests under the current EU Budget proposals) that Ireland will no longer be a net recipient of EU subsidies. Here's what happens were Ireland to become net contributor to the EU budget in 2014-on at a rate of 1/2 of 2009-2011 annual subsidy received. Our average annual CA surplus (per IMF projections for 2013-2017) should run at 3.585% of GDP, but factoring in EU potential budgetary changes it is likely to run at 2.825% of GDP. And since the path of the CA surpluses is expected to decline (as IMF projects) in 2016-2017, then it is unlikely that the CA surpluses will be in excess of 3% over the period through 2022. So what about that 'sustainability' of Irish debt levels, then?

23/11/2012: France's fall from economic Olympus

 Charting France's descent into the newsflow hell:

So the current state of economic affairs is now:

1. Structural downturn (see grey-shaded turning point indicator in the first chart above) 
2. Worse than current crisis period average (from January 2008 through today)
3. Comparable to Q1 2010 reading at levels and to Q4 2008 reading levels
4. Worse than the lowest reading for 2002-2003 downturn period
5. Worse than the average for the early 1990s recession
6. Almost as bad as the lower points of the 1980s recession