Tuesday, September 9, 2014

9/9/2014: An IMF Loans Deal Can Be a Win-Win for EU and Ireland

Earlier today I was covering the topic of Ireland seeking an early repayment of the IMF loans on the CNBC (@CNBCWEXhttp://video.cnbc.com/gallery/?video=3000309131. Here is a quick note summarising my views on the topic.


DEAL: The Irish Government is hoping to refinance the IMF portion of the Troika debt to achieve annual savings of some EUR375 million due to lower bond yields enjoyed by Ireland today compared to the IMF interest charges. The Government is looking to pay down EUR15 billion of the EUR22.5 billion total the country owes to the IMF.

IMF loans come with 4.99% interest rate against 1.80% marketable yield on Irish Government 10 year bonds. Back in July, Irish Finance Minister, Michael Noonan said he aims to refinance the first EUR5 billion of IMF loans before end of December, with the same tranche going for refinancing in the first half of 2015 and a final EUR5 billion in 2016.

Since then, following the ECB’s latest rate cut last week, Irish Government yields hit negative territory and yields on 10 year paper are currently trading at yields of under 1.7%.

The Government also has EUR20.6 billion in cash reserves that can be used to fund IMF loans buy-out. And the fiscal performance in 8 months through August 2014 has been surprisingly strong, even stripping out one-off payments.


INCENTIVES: The Irish Government interest in refinancing IMF loans is driven by both political and economic considerations.

On political front, the Coalition Government suffered heavy defeats in the European and Local elections earlier this year. So the Government needs to deliver new savings in Exchequer spending to allow for a reduction in austerity pressures in Budget 2015. Savings of few hundred millions of euros will help. And an ability to claim that the IMF loans have been repaid, even if only by borrowing elsewhere to fund these repayments, can go well with the media and the voters tired of the Troika. Optics and reality are coincident in the case of refinancing IMF borrowings, creating a powerful incentive to deliver.

Additional consideration is provided by the Government failure to secure a deal on legacy banks’ debts (see below), which de facto aligns Irish Government political interests with those of the EU.

On economic incentives side, the Government clearly is forwarding borrowing and re-profiling its bonds/debt maturity timings to minimise short-term pain of forthcoming repayments and to safeguard against the potential future increases in the rates and yields. Especially since the latest Exchequer figures are pointing to Ireland significantly outperforming the Troika targets for 2014-2015 and the economy is showing signs of recovery.

All-in, this is a smart move for the Irish Government and a win-win for the economy, the EU and the governing Coalition.


SUPPORT:  In August, the Economic and Monetary Affairs Commissioner Jyrki Katainen said that in his view, Irish plan to pay down IMF portion of the Troika loans ahead of schedule makes sense.

The EU Commissioner statement came on foot of the letter by the IMF mission head to Ireland, Craig Beaumont in which he said that the Fund will not impose early repayment penalty on Ireland, were the Government to refinance its debt.

Last week, Mario Draghi cautiously commented on the deal. When asked about his position on it, Draghi said that the ECB “took note” of the proposal and will monitor “very, very closely what is being done with the sale of assets so that monetary financing concerns are being properly and significantly addressed.” In other words, Draghi explicitly linked the IMF refinancing deal with the IBRC-legacy bonds held by the Central Bank of Ireland. The ECB has always signalled that it is interested in seeing Irish Government disposing of these bonds at an accelerated schedule. The accelerated disposal of the bonds means that the Irish Government sells these bonds in the markets to private holders and the coupon payments on these bonds become payable not to the Central Bank (which can recycle payments back to the Exchequer) but to private bondholders. On the other hand, however, the value of these bonds is now likely to be over par, implying that disposing of them today can generate capital gains for the Exchequer. At any rate, Mr Draghi’s statements does signal the ECB willingness to deal on the prospect for refinancing of the IMF loans.

Regardless of Mr Draghi’s comments, we had more statements in support of the deal so far in the last few days with unnamed EU Commission sources indicating further EU support.

As the decision remains with the Euro area governments on whether such a repayment will trigger automatic repayment of other multilateral loans, these are more important than Mr. Draghi’s position. As long as the ECB does not actively object to the deal, Minister Noonan is likely to secure an agreement without triggering automatic repayment of the remaining loans.

The reason for this is simple. In June 2012, the EU promised to review sustainability of Irish public debt in light of potential retroactive recapitalisation of the Irish banks. However, with subsequent developments, it became painfully clear that the Euro states had no intention of providing any significant support for Ireland. In order to back out of the proverbial corner, the EU will look favourably on any debt restructuring or refinancing deal the Irish authorities can design that does not imply retrospective recapitalisations.

Letting Ireland have a EUR375 million annual breathing space is a cheap solution to the EU's dilemma of issuing promises, without any intention of following through on them. 


REALITY: The truth, however, remains simple. EU and ECB insistence in 2008-2011 on paying in full on Irish banks debts has derailed Irish economy and is costing this country in terms of lower economic growth, high unemployment, high burden of taxation and dysfunctional banking system saddled with legacy debts. EUR375 million savings - welcome as they might be - is a proverbial plaster applied to a gaping wound left on Irish public finances by the crisis.


IMPACT: In the short run, refinancing IMF loans will provide improvement in the sovereign cash flow, but can cause the rebalancing of some private portfolios of Irish government debt.

In the longer run, the direct effect of a successful refinancing of the IMF loans can lead to a small, but a positive change in the Government debt dynamics. The definitive point here is what the Irish Government is likely to do with any savings achieved through the debt restructuring.

If the funds were to be used to fund earlier closing off of other official loans or closing off the remaining (and still large) deficit gap, there is likely to be a positive impact in terms of markets expectations and this will support better risk assessment of the sovereign debt dynamics. However, this is unlikely, due to the strong political momentum in favour of spending the new savings on reversing, in part, public sector spending cuts and state wages moderation. The problem is that in this case, interest costs reductions achieved under the deal will simply be consumed by remaining inefficiencies within the public sector. Such a move would likely be detrimental to Ireland's debt sustainability in the longer run.


It is worth noting that in 8 months through August, the Government took in EUR971 million more in tax revenues (UER700 million if one-off measures are netted out) than it planned in the Budget 2014, so some tax rebate is overdue, given the hefty burden of taxes-linked austerity on Irish economy. But the state is still borrowing EUR800 million per month to fund its spending. And we spent around EUR5.5 billion so far this year on funding interest payments on the debt.

9/9/2014: iPhone 6 Dilemma for Ireland?..


And so it comes... the iPhone 6 is about to be launched, and Apple has a major dilemma. Hype in the market suggests bumper sales for the new phone. But sales mean profits. And profits, for Apple, mean growing a pile of cash stashed in off-shore locations, including Ireland that the company can't do much with. Get the dilemma? The Guardian did: http://www.theguardian.com/technology/2014/sep/07/apple-iphone-6-cash-pile-tax-avoidance-us?curator=MediaREDEF.

I covered this earlier: http://trueeconomics.blogspot.ie/2014/06/2562014-imf-on-corporate-tax-spillovers.html as well as within the context of the overall position of Ireland as a corporate tax non-haven (you can track the topic from the links starting here: http://trueeconomics.blogspot.ie/2014/08/2682014-betting-on-corporate-tax.html).

Lest we forget: in the last 12 months through Q1 2014 (the latest for which data is available), Irish economy shipped out EUR26.678 billion in net factor payments abroad (these are, roughly, profits paid out to foreign entities out of Ireland, net of profits from Irish investments abroad). In the same 12 months period of 2012-2013, the amount was EUR28.517. Which means that in the 12 months through Q1 2014, cash repatriation out of Ireland was EUR1.839 billion lower than a year before. This contributed positively to our GDP. But our GDP over the same period rose by EUR1.953 billion. So if profits repatriation was running in 12 months through Q1 2014 at the same rate as in 12 months through Q1 2013, our GDP would have risen not by EUR1.953 billion (+1.13%) but by EUR114 million (+0.07%).

Let's take a look at Apple, again: the company has USD140 billion worth of cash stashed around the world, with much of this - by various reports between USD60 and USD90 billion via Ireland. Take a lower envelope and start repatriating... there can be a risk of a serious recession in Ireland were this to happen.

Ah, all the worries of the FDI-rich Ireland, the best little country to do tax business from...

Monday, September 8, 2014

8/9/2014: Some Pretty Good Services Data from Ireland



Irish services sectors have been at the forefront of the latest recovery for over two years now, posting booming figures and rosy PMIs. Underlying trends, however, are less often voiced. So let's take a look at the latest data here:

Overall, by value indices, Irish Services sectors posted a reading of 113.2 in July 2014, which is 1.34% up m/m. In previous month, June, m/m rate of increase was 1.45% which suggests slower growth in the sector overall. However, taking longer-range reading provides for a more encouraging picture. 3mo average through April 2014 was up 2.23% compared to same period 2013 and this rose in the 3mo period through July 2014 to 3.20%. 6mo average through July 2014 is also robustly up: +2.72% y/y.

So the above are encouraging trends and visible in the following chart:


As per composition of Services:

  • Wholesale Trade services rose 1.42% m/m in June 2014 but fell 7.10% in July. Volatility aside, 3mo average through April 2014 was up 4.07% y/y and 3mo average through July was up 3.04%, while 6mo average was up 3.54% y/y. All healthy figures even though volatility is worrying.
  • Combined Wholesale and Retail Trade sectors, however, were performing slightly less encouragingly. In June 2014, m/m growth was 0.27% and in July this fell to -0.27%. Again, monthly fall-off is down probably to heavy declines in Wholesale Trade area. But 3mo average through April 2014 was up 4.02% y/y and in 3 months through July this fell to 1.8% - a much more significant decline in growth compared to Wholesale trade alone. 6mo average through July was up 2.89% y/y which is again weaker than 3.54% for Wholesale Trade alone.
  • Transport and Storage posted zero growth in July 2014 in m/m terms, having posted growth of 1.67% m/m in June. 3mo average through April 2014 posted a y/y decline of 1.96% and 3mo average through July posted a rise of only 0.88% y/y, which means that 6 months average through July was down 0.53% on same period in 2013.
  • Accommodation and Food Services activity posted a significant m/m decline of 4.22% in June but managed a small comeback of 0.67% in July. Still, 3mo average through April 2014 was up 3.89% y/y and this moderated to 2.28% growth y/y in 3mo period through July 2014.
  • Information & Communications Services sub-sector is booming. Up 3.73% m/m in June, followed by a rise of 3.52% m/m in June. The sector activity was up 6.88% y/y in 3 months through April 2014 and is now up 9.9% y/y in 3 months through July 2014. Much of this is down to MNCs booking massive revenues through Ireland on their way toward tax optimisation.
  • Professional, Scientific and Technical Activities sector posted a disappointing m/m rise of just 0.62% in May-June 2014, but followed this with a strong 4.03% rise m/m in July 2014. Still, the sector 3mo average activity through April was down 9.35% y/y and it is down 2.17% for the 3 months through July too. The knowledge is not booming, apparently, in the Smart Economy.
  • Administrative & Support Services - another backbone of the ICT services sector and international financial services as many of jobs in the MNCs operating from here have more to do with administration and sales - posted a rise of 1.80% m/m in July 2014 which is an improvement on 1.16% growth in June 2014. The sector is now down 1.85% y/y on the 3mo average basis through July 2014 and is down 0.74% y/y for 6 months through July.


Charts below illustrate trends:




Lastly, a summary of 3mo average moves, with current referencing period of May-July 2014 and previous referencing February-April 2014 period:


All in, the numbers are getting positive, and we have now much greater convergence between the Services PMIs and Services Index performance, suggesting that recent uptrend in Services PMIs (http://trueeconomics.blogspot.ie/2014/09/392014-services-pmi-for-ireland-august.html) is going to lead to continued uptrend in actual sector activity.


8/9/2014: Russia's Agrifood Sector: In Need of Serious Investment


In a recent note on the state of Russian economy (http://trueeconomics.blogspot.ie/2014/08/2882014-state-of-russian-economy.html) I wrote about the need for significant increases in investment in logistics and SCM in agri-food sectors in Russia. Here is the latest Government view on the subject: http://en.itar-tass.com/economy/748513

My estimation is that to effectively develop production of substitutes for banned imports, Russia will require much more significant allocations. Production supports alone will have to rise by USD2.3 billion by Russian Ministry of Agriculture estimates starting with 2015 (Minister Nikolai Fyodorov's own estimate back in late August was for USD3.8 billion), on top of USD5.4 billion already budgeted for annual supports for 2013-2020 development. But investments in food processing, storage and transport capabilities will also be required. My estimate is that the rate of investment in auxiliary capabilities to accompany production expansion will have to run at least at 50% of the agricultural supports and this implies annual investment of ca USD3-4 billion. This comes on top of recent surveys, conducted prior to the onset of the sanctions, which put Russian logistics and SCM markets at the top of global growth curve (here is a slide on the sector potential from my earlier presentation deck):



The opportunity space in these areas is huge. And the market itself offers so much potential that faced with imports bans, producers are still attempting to maintain their long-term relations, as suggested by this article: http://en.itar-tass.com/economy/748296.



Sunday, September 7, 2014

7/9/2014: Scotland's Financial Services and the UK


Here is an interesting tweet on the size and inter-links between Scottish Financial Services and the UK:


But here are some other facts:

  • Financial Services contributed £8.8bn to the Scottish economy in 2010 or over 8% of Scottish onshore economic activity.
  • Financial Services direct supported 85,000 employees and indirectly provided jobs for 100,000 more, accounting for around 7% of total employment.
  • Banking, as a sub-sector of the Financial Services is the largest contributor to the Scottish economy adding over £4bn, or nearly half of the total financial services contributions.
  • Adding to the financial services the associated professional services combined broader financial services sector employs a total of 148,600 people, or 6.1% of total Scottish employment, contributing over £14bn to the economy, 13.1% of Scottish GDP.
  • More than 40% of Scottish postal services & almost 30% of Scottish accountancy services are sold to the Scottish financial sector. Almost 19.4% of all 'other business services' in Scotland are supplied to the financial services contractors, 18.7% of all advertising, 18.2% of computing services, 18.1% of real estate services, 17.6% of printing and publishing, 20% of research services, 16.3% of legal activities, 16% of telecommunications, and 13.4% of air transport services.
  • The Scottish banking sector (a subset of Financial Services sector) is huge. The assets of the whole UK banking sector (including Scotland) are ca 490-500% of UK GDP. Scottish banks assets total around 1,254% of Scotland’s GDP, not counting any effects on the GDP from a vote for independence. In comparison, at the end of 2007, Icelandic banks had assets were around 800% of GDP, while Cypriot banks assets amounted to around 700% (450% for domestic banks). Irish banking system reached around 894% of GDP at the peak of pre-crisis boom.
  • Scottish banking system is heavily concentrated (a factor that played significant role in the Cypriot banking crisis): the two largest banks – the Bank of Scotland and the Royal Bank of Scotland (RBS). As the UK Government report (see link below) of May 2013 notes, "There could be questions about an independent Scotland’s ability to stabilise its banking system in the event of a future financial crisis. In 2008, the UK Government spent £45 billion recapitalising the RBS in order to protect the deposits and savings of households and small business. In addition, the bank received £275 billion of guarantees through the UK Government’s Asset Protection Scheme. This combined support from the UK Government to RBS is equivalent to some 211 per cent of Scottish GDP in 2008." The later accounts for Scotland's geographical share of North Sea oil revenues.
  • Quoting from the same report: "The Scottish financial services industry estimates that 90 per cent of its customers are located in the rest of the UK, and the market is highly integrated for most financial products. For example, 89 per cent of stocks and shares Individual Savings Accounts (ISAs) provided by Scottish firms are sold to customers based in the rest of the UK, and 33 per cent of the Individual Savings Accounts (ISAs) opened by Scottish consumers were with non-Scottish firms."
  • Two main banks in Scotland control 70% share of the market for SMEs lending in 2011, Lloyds: 36% and RBS 34%.


On the opposite side of trade: 

  • 70 per cent of all pension products bought by Scottish consumers are from firms based in the rest of the UK.
  • 48 per cent of adults in Scotland currently have an ISA, which attract UK tax relief. Per UK Government report: "ISAs would cease to be available in the current form if Scotland separated from the rest of the UK."
  • 24 per cent of employment in the UK life and pensions sector is based in Scotland, but 91% of pensions products originating in Scotland are for non-Scottish residents.
  • Funds management is a big business in Scotland, with an estimated £750bn of assets under management and an estimated 3,600 people employed (directly and in related services). The Scottish share of the UK asset management sector was 6.4% in 2010. Two of the UK’s top 10 asset management firms: BlackRock International Ltd (the largest in the UK) and Standard Life Investments (the ninth largest) were based in Scotland.
  • 90% of Scottish Financial Services customers reside in the rest of the UK. 84% of mortgages issued in Scottish institutions are to customers outside Scotland. 
  • 58% of total exports and 71% of total imports in Scotland are with the rest of the UK.

More analysis and facts on the interlinks between the UK and the Financial Services in Scotland available here:
https://www.gov.uk/government/publications/scotland-analysis-financial-services-and-banking

7/9/2014: The Neighbourhood We Are In: Dublin as Global Financial Centre


Look who ranks as an offshore financial centre as opposed to regional or global or niche / specialist centre? Why... of course it is...


And what a neighbourhood we occupy... Lux, Guernsey, Caymans, Bermuda and Isle of Man... all, presumably, trading on their human capital, skills, world class education, innovation, R&D, state policies for development of entrepreneurship, rigorous world class quality regulations. etc, etc, and strictly transparent benign taxation regime...

7/9/2014: What do PMIs Signal on Global Growth?..


Here's an interesting point raised recently by @phil_waechter: the global growth that is supposed to accelerate in H2 2014 is really not happening and worse, compositionally, the prospect of such growth is heavily reliant on one country's fortunes: the U.S.


Things are not pretty, but they are not as ugly as the above chart shows, at least in the short run of the last 2 months. Here are the summaries for global growth by index:


In Services, there is weakening growth, but still levels are relatively robust, with New Business accelerating, marginally, while Future Activity expectations moderating.

And in Manufacturing, there is marginally stronger growth, with new orders slipping by just 0.1 points.

Composite indicator shows some pressures to the upside in growth forward: backlogs indicator showing a rise, new orders similarly showing some very modest support up.

Emerging markets are generally improving in August, with exception of Brazil. Russia breaking downward trend, but this remains to be confirmed in September-October before any serious turnaround can be called. South Africa is weak, Brazil weak, although net is still more positive than in May-July:

So the longer term trends are weak, when it comes to the likes of the euro area, but are reasonably ok. The real weakness is in the euro area. Here is the summary of just how much the euro area performance across all PMIs is weighing down on the global growth:


Just another reminder, this is supposedly the European Century...

7/92014: WLASze: Weekend Links of Arts, Sciences & zero economics


This is WLASze: Weekend Links of Arts, Sciences & zero economics… Enjoy… a random selection not exactly unified by any singular theory...

A fantastic selection of cityscapes from Instagram collections: http://nymag.com/daily/intelligencer/2014/08/outlaw-instragrammers-of-new-york-city.html

Some are intimately epic


Some are epically intimate


Yet many are amazingly absolutely stunningly compositional. See more here: http://instagram.com/humzadeas?utm_source=partner&utm_medium=embed&utm_campaign=photo


Looking at the Big with an eye for the Small - as Humza Deas does above - goes well beyond just art. Here's a - perhaps surprising in comparative terms, yet fundamentally similar - example of applying statistical (simple Bayesian to boot) tools to searching for a needle in a massive haystack:
http://www.technologyreview.com/view/527506/how-statisticians-found-air-france-flight-447-two-years-after-it-crashed-into-atlantic/#.U_l7qFL1u_I.delicious

But needle in the haystack is nothing compared to a microbe on a continent… problems get bigger, but the intimate dimension always remains. Take for example the search for extraterrestrial civilisations. Feeling lonely ain't good thing for humanity, but applying our self-image to the search for others might have a set of values of its own, an intrinsic utility, including that of understanding the bounds to our own world. Here's a good example: http://www.technologyreview.com/view/530211/the-search-for-extraterrestrial-civilizations-waste-energy/ Do note the point (logical transition) of moving from own galaxy search to other galaxies search as linked to energy.

Sometimes, of course, by their very property, needles do stand out in space… here's one: http://www.cbc.ca/news/technology/meteorite-creates-brightest-flash-on-moon-ever-recorded-1.2549588
Or in more scientific display: http://www.space.com/24789-moon-meteorite-impact-brightest-lunar-explosion.html

Aside from searching for small in large, what about the large itself? Finding the haystack and unwiring, uncoupling, sorting through the strands of hay… ArsTechnica's "The never-ending conundrums of classical physics"  http://arstechnica.com/science/2014/08/the-never-ending-conundrums-of-classical-physics/ doesn't quite accomplish the full task of cataloguing the  haystack of classical physics, but it does provide a glimpse of how rich the field of inquiry really is. To those, I must confess myself including, who were bored to death by endless 'classical' problems of "An object traveling at speed X, hits a mass Y under the angle Z positioned on the slope with an angle A…" variety in high school, this is quite enlightening… As soon as MiniG is couple of years older, we shall revisit this all…

For many search for extraterrestrial can always start in the tangible world of the abstract art. If you are one of them, you should be in the Tate. Previously I profiled Tate's exhibition of the works of Kazimir Malevich a Polish by ethnicity Russian painter born in Kiev region. Here are two more articles on the subject:

First, we have Atul Dodiya (a Mumbai based artist) on the relationship between his own work and that of Malevich: http://www.tate.org.uk/context-comment/articles/atul-dodiya-on-malevich. Dodiya's page at Saatchi is here: http://www.saatchigallery.com/artists/atul_dodiya.htm. His Portrait of Niko Pirosmani (another painter, Georgian this time around, from the period, Niko Porosmanishvili) actually draws on some Malevich's techniques - a combination of iconic representations and distilled chromatic and geometric interplays.


Second, an article on Malevich's Black Square: http://www.tate.org.uk/context-comment/articles/five-ways-look-Malevich-Black-Square taking the reader through the quick tour of suprematism and the political/philosophical context of the movement. But perhaps the best value in the article is the ending: "When it was exhibited people found it a strange thing and people still find it a strange object today. There’s no wrong or right way to look at it; you could say it looks like a window into the night, or you could say it is just a black shape on a white canvas, (which is more of what Malevich was intending…) but it’s like a very simple gesture. Malevich set out to forever change the idea of painting to represent reality, and its intriguing to think how doing something simple or even seemingly dull, can sometimes be revolutionary; that’s what makes the Black Square a radical thing, however you look at it."

A simple gesture…


As simple as a needle in a haystack or a haystack decomposed into an order... figurative, like classical physics, and equally deep too... Enjoy!

Friday, September 5, 2014

Шотландский Выход: Финансовый Риск для Великобритании


Here is a handful of edited notes relating to my interview this week on BBC Russian Service. In Russian.

These cover the topic of financial costs and risks to the UK from potential Scottish Independence vote.

Возможность выхода Шотландии из валютной системы Великобритании и создания собственной валюты несомненно представляет серьезные проблемы не только для Шотландской экономики, но и для Великобритании. 

В первую очередь, проблема для Великобритании будет заключаться в том каким образом долгосрочные финансовые контракты - страховые, пенсионные и инвестиционные контракты - будут расчитываться в новой валюте. Просто перевести их по начальному обменному курсу в Шотландский фунт будет слишком рисковано. Если в будущем Шотландия проведет девальвацию валюты, эти контракты понесут реальные потери. Каким образом риск таких потерь может быть покрыт на балансовых счетах банков и инвестиционных и пенсионных фондов в Сити - это не понятно. При этом, Английским банкам и банкам других стран придеться покрыть такие риски с момента изменения валюты. Это потребует серьезных средств и поглотит большой обьем капитала банков. Что может привести к новому финансовому кризису.

Один вариант - это создать еффективно две валюты: одну валюту непосредственно привязанную к фунту стерлингу, другую - независимую от фунта стерлинга. Первая валюта покроет существующие контракты, вторая будет работать в экономике. В этом случае, Шотландия примет весь риск перехода на новую валюту на себя. Однако, банкам за пределами Шотландии да и международным банкам работающим в Шотландии все равно придется искать новый капитал что бы покрыть уменьшенный риск девальвации и более высокий риск дефолта. 

Ну и, конечно, Шотландия окажется на финансовом тонком льду - Ллойдс и РБС имеют настолько гигантские активы, что Шотландия, как независимое государство, мгновенно превратиться в Новую Исландию. С рыбой и какой-то нефтью, но без вулканов и дешевой энергетики. Иначе говоря - потенциальным банкротом. А это означает еще более высокий риск дефолта и серьезные вопросы сможет ли Шотландская валюта перенести финансовый кризис и поддержать Шотландскую банковскую систему.

Опять же, вопрос не теоретический с точки зрения Сити и всей остальной Великобритании: риск дефолта в Шотландии - это риск дефолта на облигации и активы и депозитивы Шотландских банков. Цепочка финансовых контрактов и их подписчиков тянется далеко за пределы Эдинбурга.

Один пример: во время последнего финансового кризиса, Ллойдс поглотил 20.5 миллиардов капитала, предоставленного Банком Англии. Банковская группа РБС поглотила 46 миллиардов фунтов. Где Шотландия сможет найти такие деньги если будет новый кризис? Сможет ли страна с 130 миллиардами валового дохода буквально напечатать 67 миллиардов фунтов новой валюты только для того что бы покрыть риск двух банков?

Конечно нет! А значит все контракты переводимые в новую валюту будут оцениваться значительно ниже чем их оригинальная, начальная оценка в фунтах стерлинга.

Практически, переход на новую валюту это проблема новых рисков и старых долгов. Вспомните хорошо известное выражение: если вы должны банку 10,000 это твоя проблема. Если вы должны банку 10 миллионов, это уже проблема банка. Шотландская банковская система имеет активы в 12.5 раз превышающие валовой продукт страны. А Лондон практически банкир Шотландской банковской системы... Разве приходиться удивляться тому что Сити сегодня очень обеспокоен возможностью того что Шотландия выйдет из системы стерлинга?


5/9/2014: Investment and Foreign Exchange Reserves: Latest Data from Russia


Some recent news from the Russian economy's front.

In recent months we have witnessed some significant slowdown in both investment in Russia and economic growth (see here for the latest signals http://trueeconomics.blogspot.ie/2014/09/392014-russian-services-composite-pmis.html and here for the longer range data: http://trueeconomics.blogspot.ie/2014/08/2882014-state-of-russian-economy.html). But we now have some interesting data on the compositional changes in investment and the numbers are puzzling. As reported by BOFIT, aggregate decline in domestic investment in H1 2014 in Russia was driven by the smaller firms and the 'grey' economy.

This was offset, to a large extent but not fully, by a rise in investment by large and mid-size firms, households and the government which (combined) increased investment by 3%. As BOFIT noted, "the situation differs from 2012 and 2013, when investments of large firms stumbled". On private sector side, large and mid-sized companies investments rose in energy sector, industry, manufacturing, transport and food processing.

Construction and real estate investments rose on foot of new building activity with new apartments completions in H1 2014 up over 30% y/y in terms of numbers and floor area. This is puzzling, as household credit (ex-housing) fell, while housing loans demand remained strong. This suggests a rush to completions associated with the bust dynamics and I would be surprised if this activity carries over into H2 2014-H1 2015 without a major slowdown.

On an outright negative side, investment in machinery and equipment continued to shrink, following the beginning of the strong downward trend that started back in 2013.

Meanwhile, also this week, Russia and China launched the construction of the first section of the Power of Siberia pipeline which is set to deliver 4 trillion cubic meters of gas from Russia to China over the 30 years period, starting in 2019. The pipe was launched from Yakutian Chayanda gas field (which will start production in 2015 and has estimated reserves of 1.2 trillion cubic meters of gas and 93 million tons of liquid hydrocarbons with planned daily production of 25 bcm of gas and 1.5 million tons of oil) and will run 3,968 km and is expected to cost, in the end, some USD20 billion (including USD7.5 billion of associated investments relating to the pipeline to be allocated across the Siberia). But the pipeline will also enable access to other Yakut and Krasnoyarks fields.

Comparative market figures are massive. Europe purchases from Russia some 160 billion cubic meters (bcm) of gas in 2013. China's annual consumption is 170 bcm and this is expected to rise to 420 bcm by 2020.

While China and Russia both build and co-finance the project, steel pipe for the project will be supplied by the Russian company TMK.

Here is map - via @RT - of the new pipelines systems in works for Russian South-East:



Note: I covered in depth the geopolitical changes in Russian oil and gas development in the earlier note here: http://trueeconomics.blogspot.ie/2014/07/1772014-geopolitics-of-russian-gas-oil.html

Finally, time to update the data for International Reserves position for Russia based on data through the end of August, published today.

Total Foreign Reserves of the Russian Federation at the end of August 2014 stood at USD465.228 billion, down EUR44.446 billion year on year (-8.7%). Relative to the pre-sanctions period (March 2014), reserves are down USD28.1 billion (-5.7%).

Excluding IMF SDRs and other IMF-held reserves, actual foreign exchange and gold reserves stood at USD452.24 billion, down USD44.28 billion on the same period 2013 (-8.9%). Virtually all of this reduction came since January 2014 (USD44.04 billion), but from March 1, 2014 levels, the reduction has been USD27.76 billion (-5.8%).

Gold holdings alone rose in value by USD518 million in 12 months through August 2014 (up 1.1%) and are now up USD1.4 billion since March 1, 2014 (+3.1%).

Two charts to illustrate:


The above is consistent with virtual non-engagement by the Bank of Russia in FOREX markets, as outlined in this note: http://trueeconomics.blogspot.ie/2014/08/2882014-state-of-russian-economy.html.

6/9/2014: Euro Area Current Account and Growth Dynamics


Eurostat released Current Account statistics for the euro area for Q2 2014 and the numbers are not exactly pretty. Based on seasonally-adjusted data, Q2 2014 current account surplus was EUR54.5 billion, which is down on EUR55.6 billion in Q1 2014 and down on EUR61.8 billion in Q2 2013. Of the mani components:

  • Trade in goods balance slipped from EUR46.9 billion to EUR40.3 billion in Q1-Q2 2014 and is lower than EUR45.5 billion surplus delivered in Q2 2013.
  • Balance of trade in services improved significantly, rising to a surplus of EUR31.6 billion in Q2 2014 from EUR25.9 billion in Q1 2014 and compared to EUR27.1 billion in Q2 2014.
  • There was a significant drop in the balance of income from abroad, year-on-year down EUR7.9 billion, somewhat moderated by the reduction in the current transfers deficit
Table below summarises:

It is worth noting that the above trade in good statistics are coming in at a balance of EUR87.2 billion for H1 2014, while the estimates just a half a month ago (http://epp.eurostat.ec.europa.eu/cache/ITY_PUBLIC/6-18082014-AP/EN/6-18082014-AP-EN.PDF) came in with a balance of EUR79 billion balance on goods trade side for extra-EU trade. That is a massive swing that is hard to explain by ordinary revisions.

Overall, Q2 figures show some serious weakness on the trade side. Overall trade balance (goods and services) at the end of Q2 2014 stood at EUR71.9 billion, which is down on EUR72.8 billion in Q1 2014 and on EUR72.6 in Q2 2013. This means that y/y net exports made a negative contribution to the GDP (gross of factor payments), although excluding factor payments, the latest breakdown of Q2 GDP shows (http://epp.eurostat.ec.europa.eu/cache/ITY_PUBLIC/2-05092014-AP/EN/2-05092014-AP-EN.PDF see Tables T1 and T2) that net exports contributed positively to y/y growth in GDP in Q2 2014. In other words, at least 0.1% of growth registered in Q2 2014 in the euro area economy seems to be attributable to factor payments swings (delays) which presents a potential problem forward for Q3 - Q4 2014 GDP growth. If lagged factor payments come due in Q3-Q4 2014, these will act to depress any potential uplift from rebuilding of inventories (much of the Q2 2014 drop to 0% is accounted for by depletion of inventories by the firms).

5/9/2014: ECB, Zero Rates, Negative Yields and Debt... The Glorious Debt...


As I noted yesterday on twitter, the ECB policy rate change might be accommodative of the upcoming September TLTROs (by lowering the gross cost of using TLTROs to raise funds), but in reality all it is doing is continuing to push more debt accommodation for the already heavily-accommodated sovereigns. I also noted yesterday that this accommodation of banks and sovereigns has done preciously little to improve lending conditions for the real economy (http://trueeconomics.blogspot.ie/2014/09/492014-ecb-little-done-loads-more-to-be.html).

So here is a neat summary table showing the extent and spread of negative rates on 3 year government bonds - the table is courtesy of @Schuldensuehner (click on the image to enlarge):


In simple terms, if you want to lend money to Austrian, German, Belgian, French, Finnish, Dutch and Slovak Governments, you now have to pay for the privilege. It is as if there is a panic dumping of cash going on out there, under some grave threat of eminent expropriation or a meltdown of the entire financial system.

You betcha the Euro needs a traditional QE at this stage, because Belgium borrowing at negative rates is just not good enough, more debt is needed to fund more debt needs so the governments can spend more to stimulate tax revenues to sustain higher demand for debt yet... This, in a nutshell, the modern monetary policy, then.

And meanwhile, having crossed into the negative territory, bond yields opened up a new horizon for price appreciation for Government paper: higher debt supply, must equal higher price, inverting everything - from fundamentals to bounds on price appreciation. If you ever needed a sight of a bubble wobbling in the sun from the internal perturbations of hot air, give it another look... before it pops one day...