Saturday, January 17, 2015

17/1/2015: Is QE permanent and do we need a Government debt 'deletion'?


In a far-reaching comment on the QE and its true nature, published back in 2013 (see here: http://www.telegraph.co.uk/finance/comment/ambroseevans_pritchard/9970294/Helicopter-QE-will-never-be-reversed.html),  Ambrose Evans-Pritchard took the arguments of several economists and drew, with them, a very far reaching set of conclusions.

To summarise these:
1) QE is permanent - it cannot be undone. I agree.
2) Better than that, QE should be used to cancel legacy Government debts, providing deficit financing ex post facto. I agree only partially.
3) QE should be expanded to a stand by facility to fund aggregate demand via funding future deficits. I disagree.

Why would I disagree with the 2 latter points?

Reason 1: Government debt is not the biggest problem shared by all economies today. In some economies, such as Greece, Italy and US, for example, it is the main problem. But in other economies, such as Ireland and Spain, for example, it is secondary to household and corporate debts. This means that even if economic growth restarts on foot of the above 3-points plan, the reversion to 'normalcy' in interest rates will simply crash legacy debt-holders. No amount of fiscal stimulus will be able to undo this damage.

Reason 2: Government deficits and debts did not arise from purely automatic stabilisers (or in simple terms solely from the disruptions caused by the Global Financial Crisis) in all economies. In some countries they did, as, for example in Italy and France. In others, they came about as the result of imbalances in the economy that drove large asset bubbles, e.g. Ireland and Spain. In yet other countries they were systemic, e.g. Greece and Italy. The 3-points plan can help the first set of countries. Can do damage to the second set of countries (via interest rates channel and/or by generating another bubble) and will provide no incentives for change for the last set of countries.

There are other arguments as to the fallacious or partially fallacious nature of points 2 and 3. These include the arguments that public spending creates own bubbles - those in wages and salaries, employment and practices in the public sector, or those in rates of return for politically connected businesses or those in public infrastructures that will have to be maintained and serviced over decades to come, irrespective of the economic returns they might generate. They also include the arguments that public spending and investment can crowd out private spending and investment. As well as arguments that in a number of countries, especially within the euro area, public spending as already hefty enough and priming it up using monetary financing today is setting us up for creating a permanent future liability to continue funding the same out of tax revenues into perpetuity after the QE funding is completed.

The key, however, is the problem of total debt distribution, not just of Government debt volumes. A 'delete' button must be pushed, I agree. But what we will be deleting has to be much more complex than just the Government debt. In some countries it will have to also include private debts. And for that, we have not had a QE devised, yet...

17/1/2015: Russian Capital Flight: What Western 'Analysts' Forget


Central Bank of Russia released full-year 2014 capital outflows figures, prompting cheerful chatter from the US officials and academics gleefully loading the demise of the Russian economy. 

The figures are ugly: official net outflows of capital stood at USD151.5 billion - roughly 2.5 times the rate of outflows in 2013 - USD61 billion. Q1 outflows were USD48.2 billion, Q2 outflows declined to USD22.4 billion, Q3 2014 outflows netted USD 7.7 billion and Q4 2014 outflows rose to USD72.9 billion. Thus, Q4 2014 outflows - on the face of it - were larger than full-year 2013 outflows.

There are, however, few caveats to these figures that Western analysts of the Russian economy tend to ignore. These are:
  • USD 19.8 billion of outflows in Q4 2014 were down to new liquidity supply measures by the CB of Russia which extended new currency credit lines to Russian banks. In other words, these are loans. One can assume the banks will default on these, or one can assume that they will repay these loans. In the former case, outflows will not be reversible, in the latter case they will be.
  • In Q1-Q3 2014 net outflows of capital that were accounted for by the banks repayment of foreign funding lines (remember the sanctions on banks came in Q2-Q3 2014) amounted to USD16.1 billion. You can call this outflow of funds or you can call it paying down debt. The former sounds ominous, the latter sounds less so - repaying debts improves balance sheets. But, hey, it would't be so apocalyptic, thus. We do not have aggregated data on this for Q4 2014 yet, but on monthly basis, same outflows for the banking sector amounted to at least USD11.8 billion. So that's USD 27.9 billion in forced banks deleveraging in 2014. Again, may be that is bad, or may be it is good. Or may be it is simply more nuanced than screaming headline numbers suggest.
  • Deleveraging - debt repayments - in non-banking sector was even bigger. In Q4 2014 alone planned debt redemptions amounted to USD 34.8 billion. Beyond that, we have no idea is there were forced (or unplanned) redemptions.

So in Q3-Q4 2014 alone, banks redemptions were scheduled to run at USD45.321 billion and corporate sector redemptions were scheduled at USD72.684 billion. In simple terms, then, USD 118 billion or 78 percent of the catastrophic capital flight out of Russia in 2014 was down to debt redemptions in banking and corporate sectors. Not 'investors fleeing' or depositors 'taking a run', but partially forced debt repayments. 

Let's put this into a slightly different perspective. Whatever your view of the European and US policies during the Global Financial Crisis and the subsequent Great Recession might be, one corner stone of all such policies was banks' deleveraging - aka 'pay down of debt'. Russia did not adopt such a policy on its own, but was forced to do so by the sanctions that shut off Russian banks and companies (including those not directly listed in the sanctions) from the Western credit markets. But if you think the above process is a catastrophe for the Russian economy induced by Kremlin, you really should be asking yourself a question or two about the US and European deleveraging policies at home.

And after you do, give another thought to the remaining USD 33 billion of outflows. These include dollarisation of Russian households' accounts (conversion of rubles into dollars and other currencies), the forex effects of holding currencies other than US dollars, the valuations changes on gold reserves etc.

As some might say, look at Greece… Yes, things are ugly in Russia. Yes, deleveraging is forced, and painful. Yes, capital outflows are massive. But, a bit of silver lining there: most of the capital flight that Western analysts decry goes to improve Russian balancesheets and reduce Russian external debt. That can't be too bad, right? Because if it was so bad, then... Greece, Cyprus, Spain, Italy, Ireland, Portugal, France, and so on... spring to mind with their 'deleveraging' drives...

17/1/2015: Russia is not Greece...


On foot of sovereign downgrade of Russian debt back on January 10, Fitch cut ratings for some Russian regions and banks last night.

Here's Interfax link to banks downgrades: http://www.interfax.ru/business/418387 and regional ratings downgrades: http://www.interfax.ru/business/418377.

Note: Moody's also issued a sovereigns bet downgrade for Russia - details here: http://trueeconomics.blogspot.ie/2015/01/1612015-moodys-get-double-moody-on.html

Meanwhile, another downgrade is coming - S&P said yesterday that it will review Russian ratings before the end of January. Interfax report here: http://www.interfax.ru/business/418357

The season of 'Get Russia' continues. With uninterrupted success… oh yes, the dim sum markets will be fun in 2015.

Note: I must say I have not seen such rapid fire downgrading any time in my memory, with exception of Greece and Cyprus where, in both cases, the ratings agencies were literally racing each other and themselves to catch up with the reality.

Friday, January 16, 2015

16/1/2015: Moody's Get Double Moody on Russia


As I predicted at a briefing earlier today, Moody's downgraded Russia's sovereign debt (expect downgrades of banks and corporates to follow in due course). This was inevitable given the outlook for growth 'dropped down' on us by the agency in their note on Armenia (see here).

Full release on downgrade is here: https://www.moodys.com/research/Moodys-downgrades-Russias-government-bond-rating-to-Baa3-on-review--PR_316487.

The point is - if you believe Moody's outlook for the risks faced by the economy - you should expect full, open (as opposed to partial and 'voluntary') capital controls and debt repayments holidays (for corporate and banks' debts for entities directly covered by sanctions) before the end of the year.

And, you should still expect a good 75%+ chance of a further downgrade upon the review as Moody's struggle to push ahead with projecting a more 'robust ratings' stance to the markets.

Even the best case scenario is for another downgrade and 12-18 months window of no positive reviews.

The impact of these downgrades is narrow, however. Russian Government is unlikely to become heavily dependent on new debt issuance and thus is relatively well insulated against the fall out from the secondary bond market yields spikes. Russian banks can withstand paper losses on sovereign bonds they hold. At any rate they have much greater headaches than these - if oil prices follow Moody's chartered course, who cares what sovereign ratings are assigned. The impact of sovereign ratings and yields on private debt issuance is a bit more painful, as it will hit those entities issuing new debt in dim sum markets, but again, the overall impact is secondary to the bigger issues of sanctions and the freezing of the debt markets for Russian entities.

On the other hand, were the downgrades and markets reaction to push Russians over the line into direct capital controls and suspension of debt redemptions and servicing for entities affected by the sanctions, the impact on Western debt holders will be painful. And the sovereign deficits and debt positions will be fully covered by sovereign reserves.

So the more real the Moody's risks prognosis becomes, the more pain will be exported from Russia our way.

16/1/2015: Universal Basic Income v Unemployment Insurance


The idea of a universal basic income (UBI) has been in the news recently primarily because of the Swiss referendum on the topic, but also because it is gang traction as a functional substitute for the existent systems of social welfare provision.

An interesting recent paper by Fabre, Alice and Pallage, Stephane and Zimmermann, Christian, titled "Universal Basic Income versus Unemployment Insurance" (December 18, 2014, CESifo Working Paper Series No. 5106: http://ssrn.com/abstract=2540055) compared "…the welfare effects of unemployment insurance (UI) with an universal basic income (UBI) system in an economy with idiosyncratic shocks to employment."

On positive side, both policies "provide a safety net in the face of idiosyncratic shocks. While the unemployment insurance program should do a better job at protecting the unemployed, it suffers from moral hazard and substantial monitoring costs, which may threaten its usefulness." Much of these effects are addressed through rather disruptive and painful 'labour market activation reforms' that commonly coincide with periods of elevated unemployment, thus inducing even greater personal, social and economic hardship.

The authors conjecture, in line with much of theoretical and empirical literature, that "The universal basic income, which is simpler to manage and immune to moral hazard, may represent an interesting alternative in this context."

The study calibrates an equilibrium model with savings to data for the United States for 1990 and 2011. The results "…show that UI beats UBI for insurance purposes because it is better targeted towards those in need."

16/1/2015: Where did Greek 'bailout' funds go?


Given the gyrations of the Greek crisis or crises, it might be handy to get a handle on where all the bailout funds extended to Greece have gone. Here are two charts illustrating the said:



Update: source for the charts data: http://www.macropolis.gr/?i=portal.en.the-agora.2080 and my own calculations based on the same.

So in simple terms, Government debt 'solutions' took up 133 billion euros of 'rescue' funds - much of this going to the private sector foreign holders of bonds (PSI) and to private investors in bonds (many foreign) via interest and redemptions. Banks chewed through another 83 billion euros. Total of 81 percent of the funds went to these liabilities.

The fabled Greek deficits (careless spending meme et al) got only 6 percent of the total allocations, of which a small share went to, undoubtedly, support the 'most vulnerable'.

16/1/2015: Moody's expect Russian GDP growth of -5.5% in 2015


Moody’s Investors Service, expects Russian GDP to post a decline of 5.5 percent in 2015.

The forecast comes via Moody's note on Armenia in which the agency downgraded Armenian debt to Ba3 from Ba2 and cut outlook from stable to negative.

Per Moody's: "The key drivers for the downgrade are the following:

1) Armenia's increased external vulnerability due to declining remittances from Russia, an uncertain outlook for foreign direct investment (FDI), an elevated susceptibility to exchange rate volatility, and expected pressure on foreign exchange (FX) reserves;

2) The country's impaired growth outlook, compounded by negative growth spillovers from Russia, weak investment activity, and constraints on trade with countries outside the Eurasian Economic Union (EEU) that are expected from Armenia's recent EEU accession."

Moody's note: https://www.moodys.com/research/Moodys-downgrades-Armenias-government-bond-rating-to-Ba3-from-Ba2--PR_316326

According to Moody's "Remittances represent about 15% of GDP, with over 90% of the total stemming from Russia."

More on the remittances from Russia to other CIS and former USSR states here: http://trueeconomics.blogspot.ie/2015/01/1312015-remittances-from-russia-big.html

16/1/2015: S&P Capital IQ Global Sovereign Debt Report: Q4 2014


S&P Capital IQ’s Global Sovereign Debt Report is out for Q4 2014, with some interesting, albeit already known trends. Still, a good summary.

Per S&P Capital IQ: "The dramatic fall in oil prices dominated the news in Q4 2014, affecting the credit default swaps (CDS) and bond spreads of major oil producing sovereigns which have a dependence on oil revenues. Venezuela, Russia, Ukraine, Kazakhstan and Nigeria all widened as the price of oil plummeted over 40%. Separately, Greece also saw a major deterioration in CDS levels as it faces a possible early election."

And "Globally, CDS spreads widened 16%."

No surprises, as I said, but the 16% rise globally is quite telling, especially given CDS and bond swaps for the advanced economies have been largely on a downward trend. The result is: commodities slump and dollar appreciation are hitting emerging markets hard. Not just Russia and Ukraine, but across the board.

Some big moves on the upside of risks:

  • "Venezuela remains at the top of the table of the most risky sovereign credits following Argentina’s default in Q3 2014, resulting in its removal from the report, with spreads widening 169% and the 5Y CDS implied cumulative default probability (CPD) moving from 66% to 89%." 
  • The only major risk source, unrelated to commodities prices is Greece where CDS spreads "widened to 1281bps - an election as early as January could see a change of government and fears over a possible exit from the Eurozone have affected CDS prices." 
  • "Russia enters the top 10 most risky table as CDS spreads widened around 90% following the fall in oil price which is adding more pressure to an economy already subject to continued economic sanctions." 
  • "Ukraine CDS spreads also widened by 90%." 
  • "CDS quoting for Nigeria remained extremely low throughout the last quarter of 2014. Bond Z-Spreads widened 150bps for the Bonds maturing in January 2021 and July 2023 but remained very active." 


Venezuela and Ukraine are clear 'leaders' in terms of risks - two candidates for default next.


Other top-10 are charted over time below:


Again, per S&P Capital IQ:

  • "The CDS market now implies an 11% probability (down from 34% in Q3 2014) that Venezuela will meet all its debt obligations over the next 5 years, as oil prices dropped 40% in Q4 2014." 
  • "Russia and Ukraine CDS spreads widened 90% during Q4 2014. The Russia CDS curve also inverted this quarter with the 1Y CDS level higher than the 5Y. Curve inversion occurs when investors become concerned about a potential ‘jump to default’ and buy short dated as opposed to 5Y protection." This, of course, is tied to the risks relating to bonds redemptions due in H1 2015, which are peaking in the first 6 months of the year, followed by still substantial call on redemptions in H2 (some details here: http://trueeconomics.blogspot.ie/2014/11/24112014-external-debt-maturity-profile.html). As readers of the blog know, I have been tracking Russian and Ukrainian CDS for some time, especially during the peak of the Ruble crisis last month - you can see some comparatives in a more dynamic setting here: http://trueeconomics.blogspot.ie/2014/12/16122014-surreal-takes-hold-of-kiev-and.html and in precedent links, by searching the blog for "CDS".
  • "Greece, which restructured debt in March 2012, returned to the debt markets this year. CDS spreads widened to 1281bps and the 4.75Y April 2019 Bonds, which were issued with a yield of 4.95%, now trade with a yield of over 10%, according to S&P Capital IQ Bond Quotes." 

By percentage widening, the picture is much the same:


So all together - a rather unhappy picture in the emerging markets - a knock on effect of oil prices collapse, decline across all major commodities prices, dollar appreciation and the risk of higher US interest rates (the last two factors weighing heavily on the risk of USD carry trades unwinding) - all are having significant adverse effect across all EMs. Russia is facing added pressures from the sanctions, but even absent these things would be pretty tough.


Note 1: latest pressure on Ukraine is from the risk of Russia potentially calling in USD3 billion loan extended in December 2013. Kiev has now breached loan covenants and as it expects to receive EUR1.8 billion worth of EU loans next, Moscow can call in the loans. The added driver here (in addition to Moscow actually needing all cash it can get) is the risk that George Soros is trying to get his own holdings of Ukrainian debt prioritised for repayment. These holdings have been a persistent rumour in the media as Soros engaged in a massive, active and quite open campaign to convince Western governments of the need to pump billions into the Ukrainian economy. Still, all major media outlets are providing Soros with a ready platform to advance his views, without questioning or reporting his potential conflicts of interest. 

Note 2: Not being George Soros, I should probably disclose that I hold zero exposures (short or long) to either Ukrainian or Russian debt. My currency exposure to Hrivna is nil, to Ruble is RUB3,550 (to cover taxi fare from airport to the city centre on my next trip). Despite all these differences with Mr Soros, I agree that Ukraine needs much more significant aid for rebuilding and investment. Only I would restrict its terms of use not to repay billionaires' and oligarchs' debts but to provide real investment in competitive and non-corrupt enterprises.

Thursday, January 15, 2015

15/1/2015: Upbeat German Data Might Not Be a Boom Signal for Europe


So German economy expanded 1.5% in 2014 and managed a budget deficit of just 0.4% of GDP. That's the latests numbers and they are beating performance since 2011. Which is good news.

Except for the bad news. Take a look at CES-Ifo data on current economic conditions and forward 6 months expectations.

Chart 1:

Per chart above, euro area assessments of own performance over 2014 were upbeat compared to Germany. The outrun is euro area economy under-performed Germany in the end. And forward:

Chart 2:

Euro area forward expectations remain also upbeat through Q3 2014 on 6 months forward basis. Which turned into downbeat print in Q4. But they remain upbeat through Q1 2015. And taking in the economy print for Germany for 2014, this suggests that euro area will be disappointing on growth over the next 3 months. Thereafter, either Germany will reignite euro area growth (option 1) or continue expanding without much of a response from the euro area (option 2)

What's more likely? Since 2010 through present, 6mo forward expectations in the euro area have been posting much shallower correlation with 6mo forward expectations in Germany (+0.56) than over pre-crisis period (0.66 for 2000-2007 and 0.70 for 1991-2000).  And these are taking Germany into account in euro area data.

Which suggests option 2 is likelier.

So it's Germany 1: Rest of EMU 0.5. Things are more worrying than 1.5% growth 2014 for German economy might imply.

15/1/2015: 2015 Outlook for Ireland: Domestic Bliss & Foreign Squeeze


This is an unedited version of my article for the Village Magazine, January 2015 (link here)


December data on Irish economy is painting a picture of a major slowdown in growth momentum and once more highlights the troubling nature of our national accounts statistics. With that in mind, and given the spectacular tremors rocking the global economy outside the well-insulated doors of our Department of Finance, Irish economy is set for an eventful 2015.

Let’s take stock of the prospects awaiting our small haven for tax-optimising MNCs and regulations-minimising foreign investors in the New Year.

Domestic Bliss

On domestic front, three drivers of economic recovery are offering some fireworks over the next 12 months. Here they are, in order of their importance.

The ongoing shift in MNCs activities here from profit-booking to cost-based transfer pricing, colloquially known as ‘contract manufacturing’. In simple terms, this means unprofitable low margin activities are outsourced by MNCs to their subdivisions and other MNCs located abroad, and resulting revenues are booked into Ireland. Official GDP rises here, while our domestic economy stands still. In H1 2014 this game of accounting shells has accounted for 2.5 percent of the 5.8 percent recorded growth in Irish GDP. In other words, some 43 percent of the growth ‘miracle’ that is Ireland Inc. was bogus. We don’t have detailed analysis of Q3 2014 data to determine the broader impact of ‘contract manufacturing’ yet, but the National Accounts data is not encouraging. The gap between the National Accounts-reported exports of goods and the same exports reported in our Trade Statistics is growing once again. Over Q2 and Q3 2014, this stood at a whooping EUR7 billion more than what a historical average implies. That is, roughly, 7.65 percent of our entire GDP over the same period. If we correct National Accounts data for this discrepancy, cumulative Q2-Q3 2014 GDP in Ireland would have posted a 0.4 percent decline year-on-year, not a rise of 5.4 percent recorded in the official statistics.

As the trend accelerates in 2015, Irish economy is likely to post greater paper gains and lower real activity amidst continuously deteriorating quality of our economic data.

The second driver to the upside is also MNCs-focused. Budget 2015 introduced massive incentives for the MNCs to book into Ireland intellectual property. Instead of the notorious Double Irish we now have an even more generous Knowledge Development Box. This reinforces already absurd change to the National Accounts estimation practices that re-labels R&D spending into R&D investment. The combined effect of both factors is likely to be more R&D ‘imports’ into Ireland. Latest data shows that overseas-originating patents filled in Ireland rose 22.4 percent year on year in Q3 2014. And that is before the ‘Knowledge Development Box’ opened its welcoming lid. As 2015 rolls on, expect more GDP supports from the new ‘investment’ products to hit the market here. Just don’t count on new jobs and higher domestic incomes to materialise out of this ‘smart economy’ any time soon.

The third force likely to propel Irish growth to new highs is the ongoing squeeze on building and construction sector imposed by a combination of a credit crunch, Nama assets-disposal strategy and woefully poor regulatory reforms that de facto cut down supply of buildable land and redevelopment sites, funding for development and dried out planning applications pipeline. The result is rising rents (GDP-additive) and prices (so-called ‘investment’ side of the national accounts) amidst deepening misery of rising business costs and escalating cost of living. Added up, Irish property sector ‘revival’ is now yet another force that simultaneously transfers money from the households and firms into the pockets of rent-seekers and the Government, whilst gilding with fools gold national accounts.



Foreign Squeeze

The domestic bliss of GDP growth described above will be severely challenged in 2015 by the continued deterioration in the global economic conditions. Here we have some serious flash points of risks, trailing back from 2013-2014 and some new ones that are likely to emerge in 2015 on their own right.

Back at the beginning of 2014, expectations for global growth recovery in 2015 were driven by rosy forecasts for North America and the Emerging Markets.

Euro area was expected to post rather sluggish, but nonetheless above 1 percent recovery in 2014 and rise to close to 2 percent annual growth rate in 2015. Fast forward to today. Latest forecasts suggest near-zero growth in 2014 followed by ca 1 percent growth in 2015. So Europe’s prospects are bleak. That’s roughly 35 percent of our indigenous exports trade in the bin. But at least low growth is likely to delay the inevitable rise in interest rates, giving our heavily indebted households another stay on execution.

The U.S. miracle of economic recovery is heavily dependent on interest rates policy not reverting back to rising rates and in all likelihood, the U.S. Fed might just oblige. Should the Fed change its mind, all bets are off: we might see a slowdown in the U.S. recovery and with it – a fall-off in the U.S. demand for Irish exports, both indigenous ones and MNCs’.

The UK is a great example of the fragility also present in the U.S. economy. Like the U.S., the UK is heavily dependent on supportive monetary policy. And, ahead of the U.S., its economy is starting to hit serious bumps. Latest data shows continued declines in house prices, while demand is stagnating and inflation is slipping to long-term lows. Last time we saw UK inflation at current levels was in 2002 – amidst the dot.com bubble-induced recession.

Take U.S. and UK markets and we have over 50 percent of demand for Irish indigenous exports put under rising risk.

Which leaves us with the rest of the world. Here, the Emerging Markets are tanking, fast. Brazil is in an outright recession. Russia is slipping into one at a speed of a rock falling through the foggy ravine. China is on the brink of a major de-acceleration in growth, and that is under rather rosy predictions. India is enjoying some warm afterglow of expansionary monetary policies, but the question is – for how long. South Africa is moving sideways: a quarter of contraction is followed by a quarter of anemic growth.

Irish Government Budget 2015 projections were based on following assumptions:
-       Irish GDP growth of 3.9 percent or 0.85 percentage points above the IMF forecast from October and 0.6 percentage points below November forecasts by the OECD
-       Euro area growth of 1.1 percent or bang on with IMF and OECD forecasts, as well as the EU Commission, but the risks are still to the downside in all of these forecast.
-       U.S. growth of 3.1 percent, virtually identical to the IMF forecast and current consensus amongst the economists, but some business surveys suggest growth closer to 2.4-2.5 percent.
-       UK growth of 2.8 percent or 0.1 percentage points above the IMF forecast from October and OECD forecast from November. More recent forecasts published in early December suggest UK economy might expand by 2.4-2.6 percent in 2015.

Global headwinds are not favourable to Ireland, although we do have some aces in our sleeve. These aces are: aggressive tax optimisation and already suppressed domestic demand, the two drivers that might, just might return that 3.9 percent expansion in 2015.

Still, for now, the forecasts arithmetic suggests that the Government really did miss a major opportunity in Budget 2015. You see, the pesky problem is, as the Irish Fiscal Advisory Council estimates show, Irish growth at 3.5 percent in 2015 will mean the Government missing on the illusive 3 percent deficit target. As the above forecasts slip back over time, the 3.9 percent growth assumption is likely to be revised closer and closer to that critical point at which the Government risks losing face in front of the proverbial International Markets. And that won’t go too well in the Government buildings.

Add to the above some other silly assumptions made in the Budget, such as static current expenditure for 2015-2018 horizon and zero policy change, and you get the idea. Over recent months, the Government has revised its spending plans in relation to Irish Water by some EUR300 million. And over the next 12 months it will have to revise its agreements with the Trade Unions on public sector costs moderation. Then, there is the political cycle that simply commands that the Government unleash a torrent of budgetary giveaways onto electorate itching to send the FG/Labour coalition into the proverbial recycling bin of history.

All told, the real economy is likely to continue underperforming into 2015, just as it did in 2014. In the first 3 quarters of this year, total domestic demand (a sum of private and public consumption and investment, plus changes in the stocks of goods and services in the economy) was up just 2.18 percent year on year in real terms. Over the last three years, covered by the current Government policies, total domestic economic activity has expanded by a miserly 0.29 percent in real terms. That is less than half the rate of growth in GDP over the same period. And the latest quarter has been even less impressive, with domestic demand falling 0.3 percent year on year, same as in Q3 2013.

So tighten those belts for one more year of pain: the slimming down of Irish economy is not over yet.


Wednesday, January 14, 2015

14/1/2015: European Banks: Permanently in the International Isolation Ward


My blog post on the declining fortunes of European banking for Learn Signal blog is available here: http://blog.learnsignal.com/?p=143

14/1/2015: Gazprom to Europe: See You in Turkey


And we have it... from the mouthpiece of Moscow, the Rossiyskaya Gazeta (link to Russian version here).

Head of "Gazprom" Alexei Miller announced new strategy in response to the changes to the EU energy policy. This involves:
1) South Stream pipeline is dead. Permanently.
2) South Stream is to be replaced by Turkish Stream, crossing Black Sea and landing in Turkey, with no plans for connecting to Europe.
3) If Europe wants Russia gas, it will have to build its own connection from Turkey.
4) All gas supplied via Ukraine - currently 63 bcm of gas going to Europe via Ukraine transit - will be shipped via Turkish Stream.
5) Shipments of gas via non-Ukraine transit will continue (in 2013 total Russian gas supplies to Europe were 161.5 bcm and in 2014 these were down roughly 10 percent).

All of this is a response to the EU plans to monopolise purchasing of energy from outside the EU. The EU is aiming to increase its bargaining power both vis-a-vis prices of delivery and delivery channels (pipelines access). Understandably, Russian objective is to retain some pricing power and control over transit systems (remember, these systems are built either using Russian funds or a combination of funds involving Russian funds).

The implications of Miller's announcement are wide-ranging. In effect, Russia is calling Europe's bluff on both Ukraine and Energy Union.

If Ukraine is shut out of transit of Russian gas, Kiev will be forced to lock into European supply systems. The risk of non-payments - a very material risk given Kiev's track record over the 1990s and 2000s - will fall squarely onto European system. Alternatively, Ukraine will be exposed to the risk of Gazprom dictating its terms on gas supplies to Ukraine. Ukraine will also lose lucrative billions in transit fees (ca USD3bn in 2013 alone) and will face new costs for shipments of gas - cheaper via direct route from Russia, more expensive via European system link up.

Turkey is a big winner here as it gets to become the dominant key hub (ahead of Nord Stream) for transit of gas to Europe (including Central Asian gas).

EU is not necessarily a loser in this, however. Owning the pipe from Turkey to Europe, the EU will be able to negotiate transit of Central Asian gas as a substitute for Russian gas with minimal capital expenditure.