Thursday, July 31, 2014

31/7/2014: Deflationary Trap: Eurocoin Signals Slowing Euro Area Growth in July

July Eurocoin - higher frequency gauge of economic activity in the euro area published by CEPR and Banca d'Italia - is out. Headline number posted a decline from 0.31 in June to 0.27 in July, consistent with slower growth in the first month of Q3 2014.

As chart above shows, July reading is barely above the statistical significance line, suggesting that the slowdown is quite pronounced. As Eurocoin release indicates: "The negative impact of the fall in industrial production in May and of the weak performance of the stock market in July was partially offset by the flattening of the yield curve." In other words, save for the excessive exuberance in the bonds markets, the economy is showing substantial weaknesses going into Q3.

This means that while Q2 2014 projection is now for stronger growth at around 0.31-0.34% q/q, up on officially estimated Q1 2014 growth of 0.2%, Q3 2014 took off with a growth outlook of around 0.26-0.28%.

Current economic activity is sitting at around the rates compatible with November-December 2013. Barring any significant changes in HICP (although indications are, HICP will fall to 0.65% for July data), the ECB remain in the proverbial 'deflationary risks' corner:

To-date, while growth moved into positive territory over the last 12 months, inflationary dynamics have pretty much collapsed.

If July trend (falling activity) remains into August and September, we are looking at further worsening in the overall activity in the euro area and more pressure on inflation to the downside.

Wednesday, July 30, 2014

29/7/2014: Pause that hype about Russian reserves draining... for now

There is a lot of media 'noise' around Russia's foreign exchange reserves and the alleged links to sanctions as a causative driver for, what some report as dramatic, declines in Russian reserves.

Here is analysis of the official data.

Two charts first:

Total reserves:

As of the week of July 18, 2014, these stand at 472,500 million USD, down 4.2% on March 1, 2014 (20 days before the first round of sanctions announcements) and down 7.3% on January 1, 2014 (time around which the crisis in Ukraine started to take on sinister character, threatening directly the previous regime and drawing Moscow into it). Year on year the reserves are down 8%, which means that:

  1. Only around 1/2 of the entire decline in reserves can be linked to sanctions; and
  2. The declines down to sanctions were hardly dramatic.
The above (and below) does not deal with changes in foreign exchange valuations or gold price valuations, which can be significantly more than 4-8% swings in the recorded reserves.

Now, onto composition of reserves:

Table below summarises movements in all reserves (we only have official data through July 1, 2014 so far):

Note that while Russian reserves declined on foreign exchange side, they rose on gold side, so the net (combined) effect is shown in the last column of the table. At very worst, sanctions can account for roughly 3% decline in reserves. Again, hardly 'dramatic'.

I will update the above once August 1 data is out.

Update: Here is a chart plotting evolution of Russia's gold reserves:

29/7/2014: Vera Graziadei Interview: Ukraine, Russia, Maidan...

This is a very insightful, personal-level interview with Vera Graziadei, who is a British TV presenter with Russian and Ukrainian roots, born in Donetsk, raised first in Eastern Ukraine, then in the UK, educated in LSE and so on...

Many personal feeling she narrates in the interview are shared by other people who have personal and familial ties to Ukraine and Russia. I would count numerous instances where reading her interview led me to think: "Me too! I felt the same." As an analyst, I too often hide behind the numbers, stats, expert opinions. But to all of us, there is also a personal connection that Graziadei develops strongly in her interview.

30/7/2014: Some Simple Maths Around Live Register Numbers

There are some positive news on Live Register front today, which you can read about here:

My friend, Marc Coleman noted in his commentary that:

Progress of sorts, I agree. However, several caveats apply:

  1. The above figures quoted by Marc omit outflows from LR due to expiration of benefits (e.g. two-earners household where one earner becomes unemployed, draws unemployment supports, but then runs out of benefits due to high income of the other earner, etc);
  2. The above reductions also reflect outflows of working age population out of Ireland;
  3. The above reductions reflect exits from LR due to entry into Activation Programmes (e.g. JobBridge) and general tightening of LR access (e.g. people made self-employed before they lost jobs etc).
Let's take a look at the numbers we do know:

  • July 2011: Live Reg total = 470,284;  Unem. rate = 14.3% (estimated at the time, not 14.5% - adjusted later); and State Training Programmes Participants = 54,287 (June - these numbers are reported with a lag of one month, so to make them comparable to currently available data, I took June numbers for 2011).
  • July 2014: Live Reg total = 404,515; Unem. rate = 11.5%; and STPs = 65,709 (June).
  • So STPs difference = 11,422
  • Net emigration 2011-2013 (25-64 years old only, so I exclude 15-24 year olds - the largest category - this gives me some comfort on relating these emigrants to unemployment or underemployment) = 28,900

And we have:

  • Net emigration 2011-2013 and net change in STPs = 40,322
  • Add 2013-2014 emigration at 1/2 rate of 2012-2013 rate for 25-64 year olds = 6,900
  • Live Reg total July 2011 relative to July 2014 change: -65,769
  • Net emigration and STPs change 2011-2013 (estimated): - 47,222
  • Not in the above: exits from LR due to expiration of benefits.

So even without exits from LR, potential improvement in LR for June-July 2014 compared to June-July 2011 is at maximum 18,547, over 3 years or roughly 6,180 per annum.

Reminder, Live Register supported numbers are at 404,515 (LR) +65,709 (STPs) = 470,224. Do the maths as to whether this rate of improvement is really significant enough…

My view is that it is great to see reductions in LR and (not in the current release) there are some good news from the QNHS side that covers new employment. But we need much, much more rapid reductions in unemployment and increases in jobs creation (especially jobs creation at domestic economy levels, not just in MNCs- dominated sectors) to even start talking about any significant 'progress' here.

Good thing, Marc agrees, somewhat:

Tuesday, July 29, 2014

29/7/2014: Latest Round of EU Sanctions: Mirroring the U.S. and upping the ante...

EU finally agreed on the new round of sanctions against Russia - the full document is available here:

"In order to restrict Russia's access to EU capital markets, EU nationals and companies may no more buy or sell new bonds, equity or similar financial instruments with a maturity exceeding 90 days, issued by state-owned Russian banks, development banks, their subsidiaries and those acting on their behalf. Services related to the issuing of such financial instruments, e.g. brokering, are also prohibited." This is basically symmetric to the previous US sanctions (see: note: updated link to US sanctions here: though EU sanctions are covering all "state-owned Russian banks, development banks, their subsidiaries" not just those covered in the US sanctions.

"In addition, an embargo on the import and export of arms and related material from/to Russia was agreed. It covers all items on the EU common military list." These involve military equipment and equipment modified for military use, albeit some Mercedes G-Wagon retrofits, favoured by Russian vintage mafiosi, might qualify as well. Maybachs with protective plating will probably escape, unless someone orders an all-wheel-drive one...

"…prohibition on exports of dual use goods and technology for military use in Russia or to Russian military end-users." These are problematic as the lists are more ambiguous and broader. I am not an expert on this subject, but overall, such blanket prohibitions under what often amounts to relatiist testing procedures can have a much broader impact than intended.

"Finally, exports of certain energy-related equipment and technology to Russia will be subject to prior authorisation by competent authorities of Member States. Export licenses will be denied if products are destined for deep water oil exploration and production, arctic oil exploration or production and shale oil projects in Russia." This is symmetric to the US sanctions. It is interesting to note that the sanctions are designed specifically to hurt Russian energy sector in areas where the sector competes head-on with US and Canada: shale oil and arctic oil. On-shore traditional oil is not impacted.

Materially, and speaking strictly personally, I do not expect the new round of sanctions to have a direct impact on Irish bilateral trade with Russia, relating to goods, but we can see significant impact on transactions via IFSC ( You can see breakdown of goods flows with Russia here: The impact is intended, as in the case of the US sanctions, to be longer-term, restricting funding opportunities for major Russian companies and reducing their free cash flows (by forcing them to use cash flow to close off maturing debt). Ironically, also in the longer term, this can lead to Russian companies issuing more equity and debt domestically, deepening domestic financial markets, and carrying less debt overall, making their balancesheets stronger. The short-term impact is likely to be reputational and risk-related as some exporters and investors will opt to stay out of the Russian market in fear of future additional sanctions and faced with a prospect of dealing with EU and US bureaucracy (not to mention the prospect of dealing with their Russian counterparts).

On a geopolitical note, the sanctions are now starting to ramp up pressure on Russian leadership. What the reaction might be is anyone's guess, but I suspect we are not likely to see major and rapid de-escalation soon ( Which is not a good outcome for all parties concerned and especially for the Ukrainian people.

Updated: the US has now matched the broader EU sanctions: U.S. sanctions on banks remain in the area of funding, but not in the area of transactions.

29/7/2014: Are Irish Retail Sales Getting Better or Growing by Attrition?

Ah, so apparently Irish Retail sales are booming at historically record levels of increases. My view is - Retail Sales are rising, not booming, in Volume of sales and are posting basically shallow rates of increases in Value of sales.

Ok, spot the trends here:


  • Core retail sales by Volume are running below 2010 levels, below peak levels, below short-term trend, albeit the trend is rising. M/M the volumes are up +0.1% - not blistering, right? June reading is only 1.46% ahead of the crisis period average. 3mo average (Q2 average) is 4.5% up y/y - which is good. June reading is 3.6% up y/y which worse than the earlier part of the quarter. 6mo MA is up 3.4% y/y (so that is H1 2014 on H1 2013) - which is good. But sales volumes are still down 36.2% on pre-crisis peak. You do the maths as to when that recovery will get us back to pre-crisis levels of activity.
  • Core retail sales by Value (the stuff that pays wages and hires people in the sector) are running along the relatively shallow up ward trend. M/M there is zero change despite weather effects which should have driven sales up. Relative to crisis period average value of sales is down 1.1% in June 2014. Q2 2014 is up 2.6% on Q2 2013, but June 2014 is up 1.94% y/y so again, slowdown in the rate of growth toward the end of the quarter. H1 2014 is up only 1.5% y/y and Q2 2014 value of sales is down 40% on peak.
  • Meanwhile, consumer confidence is continuing to run at slightly more moderate rates than previously, albeit still well ahead of where retail sales are.
Year on year growth rates are next:

Things are healthier in H1 2014 than before, but still well below the rates of growth recorded before the crisis. Anyone claiming dramatically higher rates of growth in H1 2014 must be referencing the freakish jump in sales in April 2014. Stripping this out, we are still better off in H1 2014 than in H1 2013, but the rates of growth in 2014 are not exactly dramatic: ex-April average y/y growth in H1 2014 was 0.9% for Value and 2.75% for Volume, comparable figures for H1 2013 were (stripping out that 6mo most volatile month of April) 0.72% and 0.88%, respectively. 

So again, again and again: accelerating growth is present in Volumes sold, but not in Value of sales. If you think that Volumes of sales are creating jobs, increasing retailers' investments and rising sector contribution to the economy, good luck to you.

However, whatever increases in the retail sales might have been, as the chart below shows, we are still far away from getting back to pre-crisis peak levels of retail sector activity:

Now, when you realise that we are into seven years of the retail sales staying below their peak, you have to start wondering if 'getting better' is the same as 'growing by attrition'?..

Monday, July 28, 2014

28/7/2014: Steady decline in Russian Reserves since Q1 2013

Russia's firepower in financial terms is formidable at USD472 billion, albeit declining since the 'local' maximum at around Q4 2012-Q1 2013:

28/7/2014: Western Banks Exposures to Russia

Last week I posted two charts detailing largest FDI exposures to Russia. Here is a chart, courtesy of Bloomberg, showing banks exposure to Russia by country:

28/7/2014: Double Down or Stay Course in Ukraine: the Only Rational Alternatives for Moscow?

The latest reports from the U.S. strongly suggest that Russia is perceived as an un-yielding adversary in Ukraine and that Moscow is about to 'double-down' on its gambit in Ukraine (see here).

The point is that if so, then why and then what?

Why? Russia has currently no exit strategy from the conflict in Ukraine. Forcing complete and total closure of the separatists operations is

  1. Infeasible for Moscow (the separatists are not directly controlled troops that can be withdrawn on orders and indications are, they are not all too well coordinated and organised to be following any orders);
  2. Were it even theoretically feasible, will be immediately visible to the external observers. Note that, for Moscow, (1) means political benefits of such an action will not be immediately apparent, while (2) means political costs of such an action will materialise overnight.
  3. As sanctions escalate, the marginal returns of domestic political support become more important, since external economic benefits from cooperation vanish, but marginal costs remain (see below).
On marginal external benefits: it is absolutely uncertain what exact conditions Russia must fulfil to completely reverse the sanctions: is it

  • (a) compel the rebels to surrender unconditionally to Kiev troops? 
  • (b) compel them to surrender to either official troops or pro-Kiev militias, unconditionally? 
  • (c) compel them to surrender conditionally - without any conditions set and without any mechanism to enforce these in place? 
  • (d) compel them to declare a ceasefire - without any conditions set and without any guarantees of enforcement by the opposite side? 
  • (e) compel the separatists to engage in peace talks - not on offer by Kiev? 
  • (f) compel the separatists to stand down - in some fashion - and enter into negotiations with Kiev on Crimea? 
  • (g) Is Crimea at all on the table? and so on...
On marginal costs: the costs of sanctions are tied to Russia delivering some sort of compliance with Western demands. Can someone, please, point to me a website where these demands are listed in full and the states that imposed sanctions have signed off on a pledge that once these conditions are satisfied, sanctions will be lifted?

Thus, in simple terms, current Western position leaves little room for Moscow not to double down in Ukraine. The only other viable alternative for Moscow currently is not to escalate. De-escalation, as much as I would like to see it take place, is not within rational choice alternatives. The core reason for this is that when one constantly increasing pressure in forcing their opponent into the corner without providing a feasible exit route for de-escalation, the opponent's rationally preferred response, at certain point in time, becomes to strike back and double down.

Update: interestingly, Reuters editorial today (29/7/2014: provides very similar lines of argument on costs and incentives for Moscow to de-escalate the situation in Eastern Ukraine.

28/7/2014: Germany: Independent Views on Russian Sanctions

Two research institutes covering economic policy in Germany on Russia sanctions:

28/7/2014: Russia's Budgetary Framework 2015-2017

This month, Russian government approved the 2015–2017 Budgetary Framework, BOFIT issued a good summary of this and here are some of the main details.

The multi-annual framework is subject for frequent adjustments, but serves the purpose of introducing at least indicative / directional targets to fiscal policy.

Over the 3 years horizon, Russian Government aims for total (federal and regional budgets and social funds) revenues increasing at 6‒6.5% pa, slightly ahead of inflation forecasts. Oil and gas production taxes and export duties revenues are projected to rise in 2014, but remain flat thereafter. The Framework assumes roughly USD100/barrel price of Urals-grade oil.As the result, revenue share of GDP is expected to fall from 36.5% of GDP in 2013 to 35% in 2017.

One innovation - discussed for some time and yet to be adopted - is that the Government is considering given local (regional) authorities power to introduce local sales taxes.

The Framework projects government deficit rise slightly to around 1.5‒2% of GDP, driven primarily by regional not federal deficits. Federal budget deficit is projected at around 0.5% of GDP, well below the 1% Budget Rule ceiling.

Between 2014 and 2016, the Framework expects a rise in Government expenditure, but rates of increases are set below inflation rate. From 2016, spending as a share of GDP is forecast to fall gradually below 37% against 38% in 2013.

Capital investment spending will be funded by long-term lending from the National Welfare Fund - cumulative spending between 2015 and the end of 2017 will involve close to 1/4 of the National Welfare Fund (roughly 1% of GDP).

Federal debt (including government guarantees) is expected to rise closer to 15% of GDP by end-2017, of which debt will amount to around 10% of GDP. On net debt side, assets in Federal Reserve Fund are forecast to increase slightly. The combined value of the Federal Reserve Fund and the National Welfare Fund will stay just below 10% of GDP.

BOFIT provides a chart summarising the Budgetary Framework 2015-2017:

28/7/2014: Of Savings, Cash and Hedge Funds...

The current crisis, on monetary aggregates side, can be characterised by the rising prevalence of cash over savings. In other words: shrinking stock of credit and deposits relative to cash.

The current crisis, on media commentary side, can be characterised by the endless talk about high savings rates in the private sector.

Here is the problem: savings = inflows into stock of savings (aka, deposits) or investment or divestment out of loans (including forced restructurings, bankruptcies, insolvencies and foreclosures). We know that Irish investment is not growing at the rates worth even mentioning. Which means that Either deposits should be growing to reflect 'high savings' or debt should be shrinking.

Take a look at the difference between M3 money supply and M1 money supply.

By definition:

  • "Money Supply (M1) to euro area -M1 is the sum of overnight deposits and currency issued (this comprises the Central Bank's share of euro banknotes issued in the Eurosystem, in proportion to its paid-up shares in the capital of the ECB, plus coin issued by the Bank less holdings of issued euro banknotes and coin by the MFI sector). " 
  • "Money Supply (M2) to the euro area -M2 is the sum of M1 plus deposits (with agreed maturity of up to 2 years; redeemable at notice of up to 3 months and Post Office savings bank deposits)."
  • M3 is M2 plus deposits with maturity over 2 years.
So the gap between M1 and M3 is deposits.

The M3-M1 gap has fallen since the onset of the crisis. It has fallen along the steady trend line, with some volatility around the dates of banks recapitalisations. And it continues to fall. In fact, between December 2013 and May 2014 we have the longest uninterrupted decline in deposits in history of the series. Current level of the gap is sitting only EUR7 billion above the all-time historical record low. In fact, during this 'historically high savings rates' period, Irish monetary system has managed to reduce the stock of deposits, compared to pre-crisis levels, by EUR85.91 billion.

But while savings (deposits) are falling, 'savings' (debt deleveraging) is all the rage:

You can see what has been happening in the Money Supply territory and private credit here:

With all of these 'high savings' promoted by the official statistics and 'new lending' promoted by the Banking Federation, the Central Bank is now officially giving up on getting those 'repaired and recapitlaised banks' to lend into the real economy (something they were supposed to do since early 2009 - based on the promise of the October 2008 Guarantee, then since early 2010 - based on the various Government programmes, then since first half 2011 - based on the banks recaps and PCARs, then since 2012, based on Government programme agreed with the Troika, then since early 2013, based on Government spin of a turnaround in the economy...). Instead of hoping for the Pillar Banking System to miraculously come back to life, the Central Bank is opening up the floodgates for the hedge funds (here courtesy of fire sales of assets by Nama) to lend into economy, despite the fact that such lending is considered to be a high-risk activity. Nothing like selling pennies on the euro and then celebrating euros on pennies debt reload...

Sunday, July 27, 2014

27/7/2014: TrueEconomics' Scariest Chart Covered by ZeroHedge

Nice to see my 'New Scariest Chart in America' making its way to ZeroHedge:

Honoured, as always.

27/7/2014: "Kragle!"... Lord Business' Prescription for the Irish Economy

There is an interesting and mildly entertaining article in the Sindo (, penned by the Governor of the Central Bank, Professor Honohan.

Now, before I make few comments on the article, a disclosure: I like reforms and changes Professor Honohan brought to the Central Bank. And I think Professor Honohan has done an excellent job in the past to subtly highlight major bottlenecks in the Irish economic policies.

With that in mind, here are few quotes and some of my comments:

"Managing domestic demand, ensuring the banks are healthy, and offering advice to Government: these are the tasks of the Central Bank, and our measured approach to all three over the past few years has, I believe, borne fruit. Recovery remains slow and partial," said Professor Honohan.

So where are we on these tasks?

Per Professor Honohan, on the banks health: " is still not possible to describe them as being fully restored to health and delivering the services needed by the economy." In other words, ensuring the banks are healthy is still unfinished business. Central Bank either walks away from the test on this, or gets a poor grade - you choose.

On domestic demand: "…the total number at work and average living standards are both still well below the peak reached at the top of the bubble. And the elevated debt levels remain a lasting legacy." Now, wait, this also doesn't look like the Central Bank's finer moment, is it?

That was just Professor Honohan's own admissions. Now, here's a chart plotting evolution of domestic demand, 'managed' by the Central Bank:

You wouldn't be calling this 'managing' unless your management job is in demolition business...

Professor Honohan credits the ECB for providing 'some insulation' to mortgagees "who can currently just afford to pay" in the form of "exceptionally low interest rates". But there is a problem with this from the Central Bank's point of view. ECB rates did drop. Significantly. From 3.1% pre-crisis average to 0.15% today - a swing down of 2.95 percentage points. Yet, with all the trackers in, current retail interest rates for outstanding loans have declined (compared to pre-crisis average) by only 0.86 percentage points for mortgages with original maturity between 1 and 5 years, and by only 1.14 percentage points for mortgages with maturity over 5 years. Short term consumer loans rates and overdrafts rates have actually risen. Things are even worse if we are to measure the average rates to peak property lending around 2006, omitting 2007. So 'insulation' might have been provided by the ECB, but as far as Irish Central Bank actions go, these have ensured that the banks can extract more blood out of the economy, not that the banking system supports households in trouble.

There is a bigger problem for Professor Honohan here: if these borrowers 'can currently just afford to pay', what happens to their ability to pay when rates do rise? Or is Central Bank's 'managing banks and domestic demand health' not including looking into the near-term future?

Finally, on something from the Central Bank's own frontline: the mortgages arrears. "At the same time, far too many cases persist where no adequate cooperation between bank and borrower has been achieved. It is mainly for these cases that the banks have gone down the legal path towards repossession. ...I would urge borrowers who have not been cooperating to recognise that that is a hazardous course of action: bear in mind that banks can get court approval for repossession if borrowers are not cooperating."

Professor Honohan is correct - there are many cases in which borrowers in arrears fail to cooperate with the banks. But Professor Honohan neatly omits thousands of cases where certain banks - two of which are Irish Government-rescued and form the 'Pillars' of the 'new banking system' here - are not cooperating with the borrowers. Presumably, criticising the borrowers is Central Bank's job, but criticising the lenders is not…

To sum up, the Central Bank has done quite a bit of a good heavy-lifting job on all fronts. But this is hardly the right time to start talking up its achievements to-date. As Governor Honohan points out himself: "our measured approach to all [policies areas] over the past few years has, I believe, borne fruit." That fruit is: "Recovery remains slow and partial". Not exactly commemorative medals time, yet, eh?..

Saturday, July 26, 2014

26/7/2014: This Week in Corporate 'Not Tax Haven' News

Earlier today I wrote about the round of 'assert-deny' salvos fired across Ireland's deck by German economic policy adviser and the Department of Finance ( This was hardly the only defensive that Ireland Inc had to run this week. A much larger one came on foot of the US President Barak Obama singling Ireland out as the key global player in the dirty game of corporate tax inversions.

Newsflow was not too generous to Ireland on this front (corporate tax evasion and optimisation) this week.

It started with a report by Reuters ( on how Irish legal eagles are leading the way in advertising this land of human capital and regulation arbitrage riches as a [not a] tax haven. Singled out in the report are: Arthur Cox, A&L Goodbody, and Matheson. But other firms are into this game too. And not just in the US. In fact, there are plenty 'country specialists' employed in the legal offices in Ireland and around the world, tasked with 'selling' Ireland's 'unique competitiveness points' to potential clients interested in optimising their tax exposures.

Obama weighted in later in the week and, of course, the Government had to weigh in with a hefty doses of 'we deny we do it': and

The problem is that denying direct Government involvement is hardly a defence. Facts are: Ireland is being promoted as a tax optimisations destination and not solely on foot of our headline 12.5% tax rate. This promotion is known, brazen and visible, and it comes via law firms with direct links - contractual and advisory - the the Government and the State.

And the stakes, relating to the above promotion, are high: on policy side and on business side:

In short, things are ugly and are going to get even more ugly as OECD is preparing road maps for addressing more egregious abuses, while the US, UK, EU, European member states and even Australia and Japan are now firmly in the need to 'do something' about losses of Government revenues arising from sharp tax optimisation practices. Irish Government can put as many junior ministers as it wants onto RTE to talk about Ireland being 'unfairly singled-out' or 'misunderstood' or whatever else, but

  1. Fact remains fact: tax arbitrage policies of this state are starting to cost us dearly in reputation and actual economic costs ( and and and
  2. We are but a small open economy caught (due to our own fault) in between the irate giants who not only set global policies, but also control our access to markets and investment

Time for us to stop playing ostriches with our ministers, but to get into the game of leading the reforms at home and internationally.

26/7/2014: Of Germans Bearing the Ugly Truth?..

German experts and analysts have an un-Irish capability of speaking their own mind... and when they do (and they do it anywhere, including when visiting this country of ours), they don't mince words. Behold the latest 'visitor' from the land of 'Nein!': Dr. Joachim Pfeiffer, the economic policy spokesman for the parliamentary group of the ruling Christian Democrats. Dr. Pfeiffer was in Dublin this week. Somewhere between a nice dinners and customary ritual of witnessing the Irish 'craic' in a pub, the learned Doktor sneaked a few minutes to tell us that "Ireland has “no chance” of securing a deal on its legacy bank debt" and that "the euro zone’s new bailout fund had not been established for nor would be it used for retroactive bank recapitalisation."

Quoted in the Irish Times: “There is no chance Ireland’s legacy assets will be paid by the European Stability Mechanism (ESM). This instrument is only an instrument for emergency.”

R. Pfeiffer was in Dublin to speak at the German-Irish Chamber of Industry and Commerce, the same Chamber that recently sponsored a cheerful book on Ireland & Germany being the best pals in economic and policy terms. The best pals, alas, do not help each other all too much, and one of them has no problem telling the other that 'your mess is your mess': "Dr Pfeiffer said the financial meltdown in Ireland “did not fall from heaven . . . there were bubbles in the real estate sector, there were bubbles in the banking sector and all of this was home-made”."

As to the reasons why ESM cannot be used for retroactive assistance to the Irish state, Dr Pfeiffer evoked the same logic that I advanced for some years now: "If the ESM was to be used retroactively to compensate Ireland, he said other countries such as Greece, Spain, Portugal and potentially Italy would want similar compensation."

Needless to say, Department of Finance immediately chipped in with a denial of denial that denial is possible as a denial. I am certain Dr. Merkel in Berlin was all ears...

26/7/2014: An Ethno-Linguistic Map of Ukraine

A neat summary of ethno-linguistic mess that is Ukraine:


The problem is not multiplicity of languages and their concentrations in specific, defined and often contiguous areas. The problem is not even the fact that many such areas are defined by different and distinct historical and cultural identities that variably place the dominant groups within each region either with Russia, or Ukraine, or Poland, or Romania, or Moldova...

The problem is that the only way to address such divisions is via a federal structure of governance - something that Kiev and Western Ukraine fear and loath.

Friday, July 25, 2014

25/7/2014: WLASze: Weekend Links on Arts, Sciences and zero economics

The is WLASze: Weekend Links on Arts, Sciences and zero economics

Admittedly, the WLASze has become a rather irregular feature on this blog. Still, occasionally, I come across some interesting reading on a variety of arts and sciences subjects worth sharing… lighter and heavier alike.

On a heavy side of thing, Rupert Read and Nassim Nicholas Taleb essay "Religion, Heuristics, and Intergenerational Risk Management" (ECON JOURNAL WATCH 11(2) May 2014: 219-226:

As anything Taleb puts his mind to, this is worth a read. It is short, fundamentally cohesive and, although not new as far as thinking is concerned, certainly novel in exposition of the argument.

"… we believe that religion has traditionally performed a powerful risk-management function at the level of the individual and the collectivity, particularly in preventing the accumulation of debt in systems and in preventing some kinds of experimentation with natural systems, ones that produce errors with irreversible effects. We argue that religion transmits heuristics of risk control across generations, and that religion does so in modes that only it can."

Big enough? Not for Taleb. He takes the argument beyond simple 'demand-supply' relationship: "It is not just that religion is a helpful source of sound heuristics for resisting gambler’s ruin and similar hazards. More strongly, we should say that we humans actually don’t know whether human beings can live sustainably without something like religion."

If so, then society's devolution from religious belief systems can be a risk. Not to hold back Read and Taleb oblige: "Modernity is in this sense a dangerous uncontrolled experiment. The amount of historical time that any significant number of humans have lived without religion is infinitesimal compared to the sweep of history. Given that, the amount of time that we have sought as societies, as a species, to live without religion is almost nil. It is a symptom of chronic short-termism and over-optimism that people now assume that living in such a way is sustainable."

Over-optimism? Why not - we had Age of Determinism before, Age of Engineering, Machine Age and so on - all were based on solid assumptions that world can be made deterministic and thus manageable. All blew up in the face of history, under the impact of 'Black Swans' that were un-programmable, un-manageable ex ante.

"Just as nature is ‘wiser’ than us (in a statistical, risk-management sense) with regard to a vast swathe of threats, illnesses, etc., just as our knowledge only surpasses nature’s in unusual and rare circumstances, so religious man is wiser than irreligious and non-religious man with regard to a vast swathe of threats, moral and spiritual illnesses and problems, etc. The knowledge of irreligious and non-religious man surpasses that of religious man only in rare and unusual circumstances."

Exciting stuff… And to add to it, here's another example of Read's thinking: "Why There Cannot be Any Such Thing as “Time Travel”"

Read contributes to a fantastic blog that is worth a read… ok, not a read, a follow.

On a more visual side of things (you would not call it 'lighter' by any means), Tate is showing Malevich's retrospective:

On the opposite side of the spectrum to philosophy and art, rests technology. Except on some occasions when new tech enters old art - the figurative art - without first becoming established in new art - the conceptual fields. Thus, the question of this decade for tech v art geeks: 3-D Printing Wait till the boffins of high art learn about 4D-Printing and other toys Pentagon is funding… (see link on 4D printing here:

Update: an absolutely amazing and fascinating discovery just 'printed': the creation of the first ever synthetic leaf with all core properties of a living photosynthetic cellular structure - a major breakthrough that is now reaching beyond 4D printing.

And figurative artist Jeff Koons is probably one of those who can use 4D printing in his works. I am not a fan, but he is worth studying, if only as a counterpoint to one's biases.

"Critical opinion is divided, to say the least, over Koons’s work. He is castigated for the slickness of his product, and the pretentious claims he makes for it; but he is also lauded for his cleverness in combining the monumental effect of high art with the cheap pleasures of the banal. He has, according to veteran critic Robert Hughes, “the slimy assurance … of a blow-dried Baptist selling swamp acres in Florida”. But even this denigrator-in-chief admits: “The result is that you can’t imagine America’s singularly depraved culture without him.”" Here is an LAesque in its size and comprehensiveness collection of material on him:

“the slimy assurance … of a blow-dried Baptist selling swamp acres in Florida” I love it!...

Thursday, July 24, 2014

24/7/2014: DB's Worst Case Scenario for Ukrainian Crisis

Earlier this week, Deutsche Bank Research published its 'worst case' scenario for acceleration in the Ukrainian conflict. Here's the slide:

Some of the points are in overlap with concerns I expressed here. Investment interlinks between Europe and Russia covered here. My roadmap for solutions is here. And you can read my note on changes in Russian geopolitical strategy here.

24/7/2014: Residential Property Prices: June 2014 Detailed Breakdown

In the previous post I covered Residential Property Prices Index data from the point of view of the 'bubble' dynamics. Monthly data is covered in the CSO report here. So to avoid doing what every one else in media is doing (regurgitating the press release), here is the analysis of data based on quarterly aggregates and longer-term changes. This strips-out some of the monthly-level volatility and is probably better suited to comparatives across time.

Starting with the RPPI nationwide:

  • Q2 2014 average is at 76.9 which is well ahead of 69.4 average for Q1 2014 - a rise of +3.55%. 
  • Cumulated 24 months growth is now at 13.9% or 6.72% annualised. This is robust, but very much in line with what can be expected in a recovery phase, given the rates of market collapse during the crisis.
  • Compared to Nama valuations, we are still down 24.8%
  • Compared to pre-crisis peak we are down 43.5% and compared to crisis trough we are up 15.1%.
Here are the annual growth rates in the series:

  • National Houses series are driving the overall National Index. Houses series are up 3.55% - same as National - in Q2 2014 compared to Q1 2014. 24 months cumulated gain is 13.6%, slightly below National gains. Compared to crisis peak, National Houses index is 41.8% lower, while compared to crisis trough it is 15% up.
  • Apartments up 3.62% q/q in Q2 2014 and cumulated gains are 19.8% over the last 24 months. Relative to peak these are down 54% and relative to crisis period trough they are up 24.7%. There is a lot more volatility in Apartments Index than in the Houses Index.


  • Ex-Dublin Properties Index is up only 0.1% q/q in Q2 2014. There is basically no growth in the series. Over the last 24 months, series rose just 2.35% cumulatively. Compared to peak, ex-Dublin national prices are 45.8 down and compared to crisis-period trough they are up only 5.6%. This is very anaemic. 


  • Dublin All-Properties Index is up 7% in Q2 2014 compared to Q1 2014. This is fast. Cumulated gains over last 24 months are 29.1% (annualised rate of 13.6%) which is also very fast. Compared to peak, prices in Dublin are down 44.5%, which is worse than National (-43.5%) and relative to crisis period trough prices are up 30.2% (which is better than National at 15.1%).
  • Nama valuations are off 17.2% in Dublin, which is much better than outside Dublin.
  • Dublin Houses Index is up 7.2% q/q in Q2 2014 - very fast rise. Cumulated gains over 24 months are 28.9% (annualised rate of 13.5% - also very fast increases). Compared to peak, Dublin Houses prices are off 42.7% and compared to trough they are up 30%.
  • The above dynamics are starting to concern me - we are witnessing very fast increases from very low levels, so while we are not yet in over-pricing territory, we are converging toward long-term equilibrium prices at a break-neck speed. The next 3 months data will be probably non-representative due to two late-Summer months, but September-December data will be crucial. 
  • If we witness gradual de-acceleration in growth rates, things are out of excessive exuberance zone - for that we need rates of growth y/y to decline to 7.5-14% range.
  • If we witness stabilisation in rates of growth in excess of 14% we are likely to see serious risk of over-pricing emerging in the medium term.
  • So watch this space... especially the last chart below...

24/7/2014: Looking for that Property Price Bubble: Dublin, June 2014

Irish Residential Property Price Index for June is out today. Headlines are burning hot with

  • 12.5 hike in prices nationwide (y/y);
  • June m/m rise of 2.9% - faster than 2.3% in May
  • Dublin property prices up 3.3% m/m and 23.9% y/y
  • Dublin House prices up 3.1% m/m and 24.4% y/y
There is no avoiding the talk about a 'new bubble'.

In the past, I clearly said that in my view:
  1. Current levels of prices are not signalling bubble emergence in Dublin
  2. Rates of increases in Dublin prices are concerning, but levels are yet to break away from the national historical averages
  3. Trend-wise, we are way below the levels of Dublin prices consistent with normal long-term behaviour in the series.
Here are updated charts on long-term trends.

First, looking at annual series and applying two trend assumptions: actual inflation and ECB target (long-run inflation). By both metrics, we are still below (using 3mo MA through June 2014 as 2014 figure) equilibrium, but rate of convergence is accelerating:

On monthly basis, here are historical series, linking ESRI and CSO data sets:

As above clearly shows, Q2 2014 levels of prices in Dublin are barely above 2000-2002 average.

So the dynamics can signal a bit of an exuberance on the market demand side, but levels are still very much conservative compared to longer-term trends.

Tuesday, July 22, 2014

22/7/2014: Shaping a Road Map for Resolving the Ukraine Impasse

With the conflict in Ukraine is tumbling toward a breaking point (, it is heartening to see the Guardian wading into Ukrainian crisis dimension with a proposed solution that actually attempts to bridge the gap between Eastern Ukrainian separatists, Kiev, Moscow and the West:

As readers of this blog know, I have called for a staggered reforms approach based on "elections + Aid & Development Programme + referendum" formula since February this year: and

The dynamics have changed a bit since the original suggestions, but the nature of the required compromise did not. To move on from the civil war situation toward peaceful resolution of the political and economic crises Ukraine faces, the nation needs:

  1. Immediate bi-lateral ceasefire agreement backed solidly and enforced by EU and Russia; both acting as guarantors and enforcers of the agreement on the sides of, respectively, Kiev and Donetsk;
  2. Following the ceasefire, Ukraine needs structured and facilitated peace talks;
  3. Peace talks must start with the opining positions of both sides recognising ex-ante: secured national integrity of Ukrainian state, full recognition of the legitimacy of the current Government in Kiev, recognition of the need for regional-level direct democratic decision making in shaping the future political configuration of Ukraine;
  4. Kiev must, up front, recognise the need for local referenda in determining the future outlook of political institutions in Ukraine, while separatists must recognise that the future referenda cannot be held on the basis of secession, but must be grounded within the confines of the united Ukraine. Kiev also must recognise the need for full recognition of the rights of Russian and other ethnic minorities and there has to be external monitoring group set up to oversee such recognition is implemented. Much of this already enshrined in law in Ukraine, but Ukrainian laws are held in low regard in the East;
  5. The talks must produce a road map - including timings - for: A) local referenda on the structure of regional relations with Kiev; and B) constitutional - nationwide referendum - aiming to reform and confirm constitutional institutions of the state; 6) Before any referenda can be held, there is a need for a normalisation period, during which reconstruction and development of the regions can take place. Funding for this should be supplied by the guarantors of the peace process (EU and Russia) on the basis of the World Bank-administered loans with referential conditions (Marshall Plan);
  6. EU and Russia must engage in a multilateral (EU, Ukraine, Eurasian Union) coordination of trade and investment policies aiming to prevent disintegration of Ukraine's trade and investment capabilities in either market.

The above are not the only conditions for launching a successful institutions-building exercise in Ukraine, but they are the central ones.

The key point is that, as the Guardian puts it: "we cannot afford a decade of cold war. It’s time to swallow hard, and bring the region’s dominant powerbroker inside the tent, to help ensure the integrity of Ukraine – and peace in Europe."

22/7/2014: Remember that Fiscal Compact? Well, Don't Remind Europe...

Remember the Fiscal Compact? Yes, the one where debt/GDP ratio should be at 60% and the countries with ratios in excess of 60% must take 1/20th of the excess in adjustment down in debt per annum? So a country with 130% debt/GDP ratio is committed to an annual reduction of (130-60)/20=3.5% of GDP in year 1 and so on...

Oh, yes, the Fiscal Compact underpins the macroeconomic stability in the Euro area, making the euro as a currency 'sustainable'…

Oh yes, and the latest figures from the Eurostat on Government debt show that…

  1. 18 out of EU28 countries have seen increases in Government debt/GDP ratios in Q1 2014 compared to Q1 2013.
  2. 9 countries have posted increases in excess of 5% of GDP.
  3. Year on year: the highest increases in the ratio were recorded in Cyprus (+24.6 pp), Slovenia (+23.9 pp), Greece (+13.5 pp) and Croatia (+9.9 pp), while the largest decreases were recorded in Poland (-7.7 pp), Germany (-3.2 pp), the Czech Republic (-2.2 pp), Latvia (-1.4 pp) and Belgium (-0.9 pp).
  4. 15 EU28 countries had Government debt/GDP ratio in excess of 60%
  5. EA18 Government debt in Q1 2013 stood at EUR8.793 trillion or 92.5% of GDP. In Q1 2014 this was EUR9.056 trillion or 93.9% of GDP. That is excluding intergovernmental debt. Adding this, Q1 2013 debt/GDP ratio was 94.6% and this rose to 96.3% in Q1 2014.

Good to see the Fiscal Compact holding so much better than the Maastricht Criteria.

So in the Age of European Austerity, savage cuts to public spending are resulting in rising debt at a rate of 1.7 percentage points of GDP per annum. One might wonder, were it not for the savage Austerity, where the debt levels might have been?

Full Eurostat release here:

Monday, July 21, 2014

21/7/2014: Conflict Over Ukraine is Now Heading for a Breaking Point

So far in the Ukrainian civil war, my view of the Russian economy has been that
  1. We are witnessing a structural slowdown in economic growth that has little to do with Ukraine;
  2. Sanctions imposed on Russia have been largely indifferent to the Russian economy;
  3. Reputational damage from the Ukraine conflict was manageable; and
  4. Despite the above, Russian economy is starting to show stress arising from the country increasing isolation in the advanced economies' markets (finance and trade).
Events of last week - the downing of MH17, most likely by the Eastern Ukrainian separatists, and prior to that a new set of escalating U.S. sanctions, based on what may or may not be reasonable demands for more Kremlin pressure on separatists - are changing the overall risk outlook.

Specifically, the economic and geopolitical risks are now mutually reinforcing and this pushes us into the final spiral of conflict before we either see a major active de-escalation or a massive spiralling of the conflict out of control.

Here are some links worth reading on the topic of changing risks:

The key takeaways from the above two links are the following:

  1. The entire conflict between Russia and the West at this stage is pure PR-war, with reports and information from all sides coming with heavy doses of assertions, conjectures and accusations, factual evidence un-collaborated and unverified by any third parties and even 'watchdog' organisations (usually self-appointed media and new media organisations) now trenchantly partisan or employing trenchantly partisan analysts and reporters;
  2. Russia is in a poor strategic [and moral] position to defend itself even in cases where it might be right; and
  3. The demands from the U.S. (and to a lesser extent, Europe) relating to future actions by Russia are rapidly becoming detached from reality (see below).
The reasons why the U.S. demands are starting to reach the realm of absurd are two-fold. 

Firstly, prior to MH17 downing, U.S. demanded that Russia compels the Eastern Ukrainian separatists to surrender to the Ukrainian forces. This, with no conditions, no prospect of peace talks and no constraints onto what Ukrainian forces might do to those surrendering. Ukrainian forces are currently carrying out strong military actions against the separatists and there is no peace talks on offer. In these conditions, no authority can compel them to voluntarily and unilaterally surrender. [Note: just to prevent a torrent of abuse from trolls, my view is they should surrender.] 

Secondly, we do not know if President Putin has any control over the Eastern Ukrainian separatists, irrespective of whether or not Russia served as a power base for them in the past. The separatists are fragmented, poorly organised and coordinated. It is doubtful if there is a central authority that can simply issue an order to stand down. Even if Russia had power of compulsion over the separatists at the times when peace talks were on the table (which is questionable as separatists did not seem to change their course when Russia recognised the Ukrainian Presidential election and when Russian Duma rescinded its authorisation of the President to use force to protect Russian-ethnic populations), today, cornered separatists are unlikely to listen to Kremlin unless Moscow can act as a credible guarantor of their safety at the peace talks.

The above implies that we are at a breaking point in the crisis:
  • The U.S. demands may be no longer feasible, and the U.S. is escalating these demands. 
  • Russia's opposition to these demands is becoming highly rhetorical and politically unacceptable to the U.S. 
  • Russian leadership costs of compliance with the U.S. demands is now rising and might, at some point, exceed the costs of non-compliance. 
  • In the mean time, there is absolutely no pressure from the European or U.S. side onto Kiev to offer any conditions to separatists that can guarantee their lives and a peace process. we have no reliable information what acts toward 'collaborating civilians' and separatists Ukrainian forces are carrying out. We have no reliable information as to the casualties on the ground in Eastern Ukraine. We have no reliable information how prisoners taken by the Ukrainian army are treated. We do know that Kiev counts on 'volunteer' units to participate in combat. And we were told before that these units have been at least rhetorically conditioned to kill 'Russians'. We have no idea is Kiev controls these units and what actions toward civilians and enemy combatants they take.
In simple terms, Russia is being forced into a corner by the U.S., separatists are forced into their own corner by all the parties involved; and everyone somehow expects the crisis to be resolved, while Kiev is left to carry out whatever it wants or can or both.

Someone needs to step back from the brink. My preference would be if de-escalation happened simultaneously from the U.S. and Russian sides, with both applying pressure on both Kiev and separatists to bring them to the peace talks. Guarantors of these talks should be EU, U.S. and Russia.

21/7/2014: Sources of FDI into Russia 2007-2013

An interesting chart: sources of FDI into Russia 2007-2013

Note the fifth in line: Ireland with major uplift in 2011-2013. Data is from the Central Bank of Russia.

Via @RencapMan

Update: via @QZ, a chart showing the opposite flows: Russian investments abroad:

21/7/2014: Why a Wave of Low-Pay Public Sector Jobs Applications?

Employment stats and claims have puzzled many in recent months. Government claimed variable numbers at different points in time, ranging between jobs created at 61,000 to 67,000 and so on. Much analysis has been provided of these claims and other numbers on this blog and many other, often divergent, often close-enough and so forth. All, however, points to the fact that jobs are being added in the economy and that at least some of the declines in unemployment rate are down to new positions being posted and filled.

Which raises a hugely surprising question: if private sectors jobs are being created, why is there such a huge surplus of unemployed applying for jobs in the private sector? Evidence of the latter is not systematic and not regular, but here is one snapshot:

Note that the public sector jobs being rushed-at are not at the top or even the middle of pay & perks distribution. These are roughly EUR11/hour jobs, at the bottom of the career ladder and the recruits face the prospect of:

  1. Higher taxes,
  2. Lower non-wage benefits, 
  3. Increased workloads (compared to the incumbents and past employees), and
  4. Prospect of slower career progressions (early retirements took out a large share of senior employees and their positions are being filled internally, without any prospect of younger recruits qualifying for them).
One answer is that for all the changes in employment stats we had over the recent months, we still have huge levels of unemployment and underemployment as the legacy of the crisis. On underemployment side, take the percentages of workers in working less than full-time hours as a share of total employment pool. In Q1 2008, 7.5% of all workers in employment worked less than 20 hours/week, in Q1 2014 the percentage was 8.1%. Over the same period of time, % of workers working 20-29 hours per week rose from 10.9% to 12.8%, percentage working 30-34 hours per week rose from 4.3% to 4.5%. Percentage of workers working more than 35 hours per week dropped from 66.4% to 61.9%. Counting in those working less than full-time hours and those on variable hours, 38.1% of our employment pool are not in full-time employment against 33.6% back in Q1 2008. 

In Q1 2008, there were 113,600 individuals who considered themselves underemployed, in Q1 2014 the number was 258,100. And there are 46,500 more people who are working part-time and consider themselves underemployed today compared to Q3 2008 (earliest we have data for), while numbers of working-age adults not in the labour-force are still up 121,300 on Q1 2008.

And in the core age categories, applying for these jobs, the percentage of 15-24 year old unemployed relative to total population of that age group was 9.58% in Q1 2008. This stood at 25.31% in Q1 2014.

In other words, it is easy to forget that things are still very ugly when it comes to employment situation in Ireland.

21/7/2014: Russian Economy 1995-2008: Growth Drivers and Future Potential

Very insightful paper on Russian economic growth - sources and drivers - over the period of 1995-2008. "When high growth is not enough:
Rethinking Russia’s pre-crisis economic performance" by Ilya Voskoboynikov and Laura Solanko (BOFIT Policy Brief 6/2014: looks at the role of labour productivity, capital deepening and tech/multifactor productivity contributions to growth.

Here are some of the findings:

"The Russian economy experienced a long period of growth from the mid-1990s to the 2008 financial crisis with annual GDP per capita growth averaging 3.7 % between 1995 and 2008." So spectacular growth compared to pre-1995 period and this much is known.

"According to the prevailing narrative, this growth was mainly driven by sustained increases in multifactor productivity stemming from removal of distortions created under the planned Soviet economy."

But was it?

"Using newly available, internationally comparable, data and the growth accounting methodology of Timmer and Voskoboynikov (2014), we argue that average annual multifactor productivity growth amounted to 2.6% over the period. This remarkably high growth indicates that productivity growth accounted for about 56% of Russia’s economic growth in the 13 years before to the global financial crisis."

More: "We found that MFP growth explained over 70 % of total value-added growth in the period 1995–2001, but less than 50% in the 2003–2008 period. As the contribution of labor held relatively constant at around 10%, our finding implies that increases in capital inputs, and, consequently, investments to fixed capital, have been even more important than previously thought for economic growth in Russia."

Capital deepening and upgrades are the core drivers on both value added and productivity growth sides. What about sectoral decomposition?

"Detailed analysis of industry-level data reveals that economic growth has been driven by two broad sectors: extended oil & gas and high-skill-intensive (HSI) services."

Per oil & gas sector: "Our analysis clearly shows that growth in the extended oil & gas has been driven by increases in capital inputs, i.e. investments into fixed capital. Given the huge investments in oil and gas pipelines, oil export terminals, and the commissioning of new gas fields commissioned in past decade, we find this quite plausible."

On High-Skill-Intensive sectors side: "Since the end of our data sample in 2008, investment growth has slowed in the wake of the global financial crisis and increased uncertainly over the general business climate in Russia. The rapid growth in HIS services such as financial services largely represented a catching up with more advanced markets. The level of multifactor productivity in relation to German levels in the high-skill intensive sectors climbed from just 12% at the start of the observation period to almost 50% at the end."

Key conclusion: "Neither rapid growth in investment in the extended oil & gas sector nor rapid catching-up in technology intensive service industries is likely to spur Russia’s growth in the next decade. This underlines the urgency of identifying and exploiting new growth drivers for Russia."

I am not sure I agree. For a number of reasons:

  1. MFP and capital productivity growth have been concentrated in high-skills services and energy sectors. Next, there is room for substantial modernisation of capital base one technological utilisation in other sectors. That is a major potential source for growth into the future decade or two.
  2. Labour productivity growth has ben sluggish and lagging the MFP growth. This is primarily down to demographic effects, which are by now being extinguished. This opens up new frontiers for growth in labour productivity in all sectors of economy, but primarily in sectors other than high-skills services and energy.
  3. Structural reforms, if enacted, can open up Russian markets as platforms for exports to the Eurasian Economic Union states - a potential that is already there and can be further enhanced with suitable reforms.

So even from the top-level view, there are at least three major growth drivers that are yet to be explored.

Sunday, July 20, 2014

20/7/2014: The New Scariest Chart in Economics: June 2014 Update

Some time ago I started tracking the New Scariest Chart of the Crisis - the one plotting duration of unemployment in the U.S. and here is the latest monthly update:

Data on which the above is based is here:

Background to the chart is here:

Saturday, July 19, 2014

19/7/2014: Trueconomics Cited in FT

Delighted and proud that FT is quoting the blog on European banks woes:

July 18, 2014 1:03 pm

Reality check for European banks

Constantin Gurdgiev at True Economics says while current monetary and investment climates remain supportive of lower yields, markets are starting to show an increasing propensity to react strongly to negative newsflows. Investors’ view of the peripheral states as being strongly correlated in their performance remains in place, especially for Spanish, Portuguese and Greek sovereigns and corporate issuers.

“The markets are jittery and are getting trigger-happy on sell signals as strong rises in bond prices in recent months have resulted in sovereign and corporate debt being overbought by investors,” says Mr Gurdgiev.

Nice birthday present for myself. Thanks, FT!

19/7/2014: Irish Roads: Worse than Chile, better than Namibia?

So... after two decades of extensive road building on foot of EU and domestic money, Ireland's road system (based in a country with mild climate, no extreme temperatures variations and no seismic activities) is ranked right below that of Chile (seismically-active, extremely mountainous and extreme weather-impacted terrain) and one place above Namibia...


They should have tried parts of Sandymount and Ballsbridge where, despite the two areas being amongst the most exclusive real estate locations in the country, cars lose tyres and damage suspension on craters and poor pavement and worn-out speed bumps. Not that there is no such evidence across the entire country, of course...

19/7/2014: Some Early Signs of Crimean Economy Suffering Sustained Slowdown

A very interesting data coming out of Crimea - early indicators of the cost of Crimea's incorporation into Russia:

Roughly translating some parts of the article:

Tourism is suffering in Crimea - the sector is the cornerstone of the regional economy, but over the first 6 months of 2014, number of visitors to Crimea fell ca 29.5% y/y at 1,772,000 visitors as opposed to the same period of 2013 when Crimea received 2,515,000 visitors. The issue, of course, is not solely down to Crimea's accession to Russia - given the state of civil war in Ukraine and the collapse of the country economy, there can be expected a massive reduction in the number of travellers to all parts of Ukraine. Given recessionary dynamics in Russia, there also can be expected to be fewer tourists visiting all Black Sea resorts over this summer.

According to Ukrainian estimates, overall number of Ukrainians travelling to the Black Sea resorts (including those in Ukraine proper) is projected to fall by some 30% this year due to deepening economic crisis and falling real incomes.

The collapse of tourism to Crimea is probably a temporary phenomena. And much of it is due to disruptions in transport routes. For example, ferry crossings from Russian mainland rose 2.8 times, air traffic rose 1.6 times. However rail transport numbers fell 2.8 times. Rail goes via Ukrainian mainland, so this is not surprising. There is no land connection to Crimea from Russia and ferry and airlines capacities are very limited, although they will be expanded over time. The bridge, linking Crimea to Russian mainland will likely take 2 years to build and estimated costs range from USD2 to 4 billion.

As the result, at the start of the tourism season, Crimea's resorts reported 63% vacancy rates.

In the past, roughly two thirds of visitors to Crimea were Ukrainian nationals, with one third being Russian nationals. While the former are understandably cancelling their plans to vacation in Crimea, the latter are finding it difficult to get to the resorts: majority of Russian visitors in the past opted to travel either by car or by rail - both of these routes are now firmly blocked. Meanwhile, airports in Crimea are too small to accommodate significant numbers of visitors and their capacity is now already stretched to the limit. Two major carriers Transaero and Dobrolet are reporting 100% and 98-99% loads on their flights.

While much of this suggests that the problems with tourism sector are temporary, there are some worrying parallels across all sectors of Crimean economy. Apparently, lack of compliance with certification relating to EU requirement that any exports from Crimea can be accepted only if they bear certification from Ukraine, is reducing industrial output in Crimea. And European sanctions that ban exports from Crimea are hitting the sector hard. In the past, EU accounted for over 35% of total exports from Crimea. Now this is down to USD5.9 million and accounts for just 10.2% of total exports. Largest shares of exports to EU go to Germany (4.5%) and Hungary (2.1%), while Austria, France, Poland, the Netherlands and Lithuania accounted, jointly for 3.6%. Exports were heavily concentrated in industrial machinery, chemicals and agricultural goods. Meanwhile, shipments to Russia are rising, but slower than the decline is exports to EU.

Overall, the problems in tourism sector appear to be much more significant than in the industrial and agricultural sectors but these problems appear to be linked to:

  1. Temporary transport links problems;
  2. Decline in travel in Ukraine and Russia due to the economic slowdown; and
  3. Much more longer term issue of Ukrainian tourists switching away from Crimea.