26/8/2014: Betting on Corporate Tax Inversions? Ireland almost made the top of this strategy...

These haven't been slow-days-of-summer on the Irish corporate tax reputation front.

Few weeks ago, the story of Microsoft admission of holding a USD92bn large stash of cash in locations, including Ireland, has been put out to air: http://billmoyers.com/2014/08/23/microsoft-admits-keeping-92-billion-offshore-to-avoid-paying-29-billion-in-us-taxes/

And today, an interesting disclosure on foot of Ireland-free tax inversion deal by the Burger King popped up: a fund investing in tax inversion companies https://www.motifinvesting.com/motifs/tax-inversion-targets#/overview where Ireland is the second largest exposure after the UK...

These folks should list on Irish Stock Exchange... oh, poor Bermuda and Bahamas, obviously lacking in that skills-and-talent competitiveness we have so much of.

Time for another 'We Are Not a Tax-Haven' white paper from one of the Departments...

You can track my notes on the topic starting from here: http://trueeconomics.blogspot.ie/2014/08/382014-this-week-in-corporate-not-tax.html

26/8/2014: Ukraine: Road-Map toward De-Escalation

There are several major roadblocks for devising and implementing a functional road map to deliver peaceful de-escalation and ultimately resolution of the conflict in the Ukraine. Some are quite directly logistical (this does not make them any less important, although this does imply different approach to dealing with them). But some are policy-related. One of the more frustrating aspects of the conflict to-date is the apparent lack of understanding and bridging between Russian position, Ukrainian position and the Western position. The three positions differ both on the desired objectives and the potential means for achieving them.

To-date, there has been no credible or functional plan to bridge the gaps, with possible exception of the February 2014 agreement that was derailed (under the EU and US cheers) by the Ukrainian side.

This is why the following initiative, outlined in The Atlantic today is of such a huge importance: http://www.theatlantic.com/international/archive/2014/08/a-24-step-plan-to-resolve-the-ukraine-crisis/379121/

Here is a summary of the plan in 24 steps, which actually does bridge the gap between the parties' positions, albeit at the expense of symmetric losses across all parties' positions:

Russia loses ex-ante 'federalisation' position, but gains strong assurances and supports for the ethnic Russian-speaking minorities and immediate cessation of hostilities. Moscow also gains in assurances that Ukraine is not going to join Nato and that normalisation of trade and investment regime with EU can happen sooner rather than later.

Ukraine loses a chance to go 'scorched earth'-style on separatist territories, preparing them for re-Ukrainisation over time. It also loses on Ukrainian nationalists' staunch insistence on treating Russian language as a secondary language. Some in Kiev administration also lose out on the potential for joining Nato. Kiev does gain, however, external, independent monitoring of its border with Russia and the situation in the East, alongside the disarmament and demilitarisation of the separatists. Kiev also gains a chance to build up, gradually, the region to win back its allegiances. Ukraine wins a chance to formally engage with Russia on Crimea, aided by the EU and US within the new international structure.

And both Moscow and Kiev can benefit from restoring trade flows and Ukraine's access to the Customs Union trade.

Nato gains: it no longer has to face the unwelcome prospect of having to deal with Ukraine's possible application for membership.

EU gains: it no longer has to face unilateral subsidisation of the  new 'client state' as vast as Ukraine and the risks of gas and energy flows disruptions will be minimised.

Is the plan above 'perfect'? Of course not. But it is pretty good.

26/8/2014: On that 'tax optimising' shift in Pharma Sector

To clarify my previous comment (see post: http://trueeconomics.blogspot.ie/2014/08/2682014-irish-trade-in-goods-h1-2014.html), here is the chart showing 6mo cumulative evolution of the ratio of exports to imports for pharma and pharma-related sectors:

You can see the three recent trends in exports ratio to imports ratios:

1. Based on purple line, there is one regime operating through H1 2008 - with shallow decline in ratio of exports to imports roughly from H2 2002 through H1 2008 pointing to relative rise of imports in overall trade. This is the consumption and construction boom. In H2 2008 we have a sharp rise in exports/imports ratio peaking at H2 2010: the period of collapsed imports relative to exports. Thereafter we have a decline in the ratio.
2. Based on Organic Chemicals (blue line) and Other chemical products (green line) we have two regimes: between H1 2004-H1 2005 and H2 2008 the two lines are broadly counter-moving. Red line includes some of the inputs into the blue line, but also domestic consumption component. This does not directly imply, but can indicate, rising amount of imports of inputs and rising (even faster) amount of outputs in the pharma sector. The evidence is weak, so not to over-draw any conclusions, it should be qualified. The second period - post H2 2006 through H1-H2 2009 we have a flattening and then peaking in exports of pharma relative to imports of pharma inputs. This is aggressive booking of profits (margin between exports and imports).
3. After H1-H2 2009 we have rapid decline in the ratio of exports to imports in pharma sector itself, and more gentle decline in related sectors. This, with caveats once again, can signal re-balancing of tax and operational efficiencies away from Ireland being a profit-booking centre to Ireland becoming a cost-booking centre.

There are many various schemes for optimising tax exposures for pharma firms, as well as other MNCs. Based on the aggregate data, it is virtually impossible to tell, which one is operating across the entire sector. But one thing is very clear from the above data - value added in the broader Organic Chemicals sector is collapsing. Worse, it is collapsing at a faster rate between H2 2013 and H1 2014 than in any period since H1 2009. It would have been good if the CSO were to publish more detailed data on this and produce an in-depth study. Somehow, I doubt they can and/or will, however.

26/8/2014: Irish Trade in Goods: H1 2014 results

Time to update H1 results for Irish external trade in goods. As a note: CSO does not provide any information on trade in services except as a part of quarterly national accounts.

Irish exports of goods in H1 2014 stood at EUR44.096 billion, down 0.54% on H2 2014 and up 1.45% y/y. Compared to 3 years average, exports are down 2.27%.

Compared to other H1 records, H1 2014 is up on H1 2013, but down on H1 2011 and 2012. Current reading is slightly behind EUR44.142 billion average H1 reading for 2000-2014 period and well below EUR45.077 billion H1 average for 2009-present.

Irish imports of goods rose in H1 2014 to EUR26.189 billion an increase of 7.8% on H2 2013 and a rise of 5.96% y/y. Imports are now up 7.28% on 3 year average and are at their highest level since H2 2008.

As the result of these trends, Trade surplus (for goods trade alone) has fallen to EUR17.907 billion, down 10.65% on H2 2013 and down 4.49% y/y. Compared to 3 year average, trade surplus is down 13.53%. H1 2014 trade surplus now stands at its lowest level in 6 years.

Charts below illustrate the above trends.

As profit-taking in the pharma and chemicals sectors is shifting toward tax optimisation based on off-shoring (as opposed to booking profits into Ireland), ratio of exports to imports continues to fall from the pre-patents-cliff peak:

Chart to illustrate:

However, a welcome sign of return to growth in exports in H1 2014 compared to H1 2013 means that our trade in goods regime is now out of the 'Pain Spot' of simultaneously shrinking trade balance and contracting exports that it occupied in 2010, 2012 and 2013. Down to continued decline in trade surplus, however, it is still not in the 'Sweet Spot' of exports-led recovery:

So overall, trade in merchandise is providing negative contribution to GDP growth y/y so far in 2014. Let's hope H2 will reverse this.

25/8/2014: Ifo Surveys of Business Climate & Expectations: Germany & Euro Area

Earlier today, Ifo Institute published its survey of business sentiment in Germany. Here is the latest analysis of their data alongside the previously released euro area sentiment.

Euro area economic climate survey returned index reading of 118.9 at the start of Q3 2014, down sharply on Q2 2014 reading of 123.0 and the lowest reading in 3 quarters. Present situation reading remained unchanged at 128.7 which is identical to Q4 2011 reading and the highest reading since Q1 2012. However, expectations 6 months out index slipped to 113.1 from 119.7 3 months ago and is now at its lowest level for 4 quarters running.

With all of this, the expectations gap relative to current conditions reading - the metric that signals the expected contraction if below 100 and expansion if above 100 - has fallen to 87.9 from 93.0, marking the third consecutive quarter of decline and the third consecutive quarter of staying below 100.

That said, the error direction - the difference between previous expectation for current period and current conditions - remains negative at -9.0 points, for the fourth consecutive quarter running.

The above trends were also reflected in the EU Commission business sentiment surveys. Based on July data, Q3 sentiment is on the declining side, with July reading of 105.8 for EU27, down from Q2 2014 end of quarter reading of 106.4. For the euro area the index remains basically unchanged at 102.2 in July compared to 102.1 in June 2014.

Chart to illustrate

For Germany, Ifo Business Climate Survey for August 2014 came in with rather negative results. Index for industry and trade fell in August to 106.3 points from 108.0 in July. German companies are also more sceptical than in the previous month. As Ifo release states: "The German economy continues to lose steam". Current reading is at the lowest level since mid-2013 and the last time index increased was back in April 2014 with a significant rise last clocked in March 2014.

Chart to illustrate

24/8/2014: Italy: A Lifeless Liner on Economic Growth Rocks: Part 2

This is part 2 of two-parts series on Italian economy. Part one is available here: http://trueeconomics.blogspot.com/2014/08/2482014-italy-lifeless-liner-on.html?spref=tw


In Italy, SMEs represent over 80% share of the total economy in terms of employment and almost 70% of value added. In North-East, family businesses hold an even larger share of economic activity. But SMEs credit performance for the economy as a whole is third worst in the euro area, as highlighted in the July note by the IMF:

A baker running three busy shops in the area raises as his first complaint high taxes on business, second - high taxes on households and third - lack of credit. For generations, his family owned the bakeries that supply local communities with fresh goods, working from 3 am through evening 6 days a week. Now, the banks with which they have been dealing over the decades are no longer lending, equipment is starting to experience more frequent failures, and customers are slipping into arrears. He holds a ledger of customers credit, like many other shops around, and says majority of businesses in towns are bartering food for small work.

Overall debt levels in the Italian economy are relatively high, as noted in the chart below from the IMF (2014):

And deleveraging is slow (same source):

Which means that the current state of affairs (tight family budgets, lack of discretionary spending and dire lack of investment) is here to stay. With it, as IMF shows, there is a negative relationship between total private sector debt and subsequent growth rates in the economy:

But this relationship in Italy's case also shows that structural problems in the economy (as in the case of Slovenia, Finland and to a lesser extent Ireland and Portugal) compound the adverse effects of debt overhang. In other words, private sector debt overhang appears to account for smaller share of growth pressures in Italy than in other EU states. Which is, actually, bad news for two reasons:

1. It is bad news because it implies that much of the deleveraging-related pain is yet to come; and
2. It is bad news because Italy is not very good at structural reforms front. Historically and currently.

One of the structural drivers for slower growth in Italy, as opposed to other comparable economies is labour cost competitiveness:

Charts above clearly show that crisis-related improvements in Italian economy's labour cost competitiveness are lagging those in other 'peripheral' countries in absolute terms. In relative (to EA17) terms, the country has posted a loss in productivity over the years of crisis that is deeper than for any other country covered in the IMF sample above. This loss in productivity was not offset by the declines in direct labour costs. Thus, in the nutshell, while Italian labour became less productive it also became lower paid - a twin problem, as the former reduces economy's capacity to compete in the international markets, while the latter hammers domestic demand (consumption and investment). It is a tale of 'head sinks, tail sinks' dynamic.

The relationship between high private sector debt levels and weak economic performance, alongside financial and fiscal repression measures suggests that Italian corporate default rates would be somewhere around, but below, those of Spain and Portugal. This is supported by the data:

And the above does not reflect credit deterioration in trading sector that can be expected under the Russian sanctions. One of the largest producers of prosciutto in the famed city of San Daniele spots rows and rows of ham legs drying out labelled for the Russian market. The curing facility stretches over 1/4 of a mile and 'Russia-bound' ham is about as dominant as that set for the U.S. The final destination of the former is now highly uncertain, but trade and production credits used to fund it are going to come due.


Back in the piazza of the regional capital - at the junction of the North and South main streets mentioned in the first post - five banks once stood opposite of one another. Two branches are gone completely, the third one has shrunk to about 1/4 of its original footprint. All remaining beaches' windows are peppered with offers of mortgages and business loans at seemingly benign rates of around 2-2.5% above the 3mo EURIBOR. None, according to the local business people and ordinary homeowners I spoke to are actually lending. While diffusion index for lending standards in Italian banks has finally posted some signs of easing at the end of Q2 2014 (see chart below based on Banca d'Italia data), overall conditions remain tight and the recent easing itself is statistically weak. Meanwhile, Banca d'Italia lending surveys show that aside from nominal pricing of the loans, loans approvals conditions continued to tighten at the end of Q2 2014 for collateral requirements, and remained unchanged for margins, non-interest costs and charges, size of loans issued and covenants.

All of which is showing up in the aggregate credit supply statistics:

As the chart above shows, domestic resident enterprises stock of credit has failed to recover from the crisis-period decline that set on in late 2011, while domestic households loans (relating to consumption) have remained on the gently declining trajectory since early 2012.


Lacking consumer spending, suffering from high taxes and prohibitive regulatory environments, credit-less and wanting for structural reforms, majority of which, even when enacted, are not followed through, Italian economy is now an ageing liner listed lifeless on the rocks with no tide coming in to lift it off and no repair crews dispatched to make it right.

Per latest Eurostat estimates, Italy's real GDP H1 2014 was 9.1% below its pre-crisis peak  and 9.2% below the levels registered at the end of 2006. Country real GDP index now stands at a historical low - performance only comparable to that of Cyprus with every other euro area economy having seen at least modest increases in real GDP compared to the crisis trough.

A telling sign of the decline is a small piazza in the regional town, sporting a busy local cafe previously frequented by the local families with kids drawn to a small pet shop next to it, a fountain, previously a focal point for migrants' families working in nearby factories producing luxury goods and high value-added manufactures, and a quiet small grocery store, beloved by the older families and the retired folks. Today, the piazza is quiet: migrant families gone. Local residents tell me that the 'Indians' have moved out, leaving behind falling rents and family-friendly social vibe they helped to define. The cafe is nearly completely empty, with no traditional noise and bustle of local families under the big umbrellas. The grocery store - in place since the 1970s - has gone out of business. One can, for the first time ever, hear the water trickling in the fountain and enjoy a glass of local, brilliantly unique, wines in solitude and calm... a somehow sad calm... a calm of something something gone, something irreparably missing...

Either a heavenly slice of economic hell or a hellish corner of cultural haven, Italy is a society which is facing into a prospect of economic non-future within the euro area. That this conclusion is obvious in the heart of its once vibrant corners - the proudly work- and family-centric North East - is simply damning and infinitely sad.

24/8/2014: Italy: A Lifeless Liner on Economic Growth Rocks: Part 1

This is part 1 of the two-parts post on the current economic conditions in Italy.


A North-Eastern Italian provincial capital - a normally buzzing and lively medieval city with proud Roman history and previously vibrant high value-added industries and high tech services sits quiet and semi-deserted on the weekend afternoon. This August, a slow month by normal metrics of shoppers numbers and restaurants and cafe's patrons counts, is marked by the waves of recent closures of small businesses across the province. It is also marked by the official return of Italy to a recession - its third one since 2008.


The two halves of the pedestrianised main street tell the tale of the country-wide economic demise.

On the South side of the old piazza, the main street is dotted with few empty shop fronts. Established as a trading centre of the city centuries ago, this section of the city centre is primarily occupied by shops and businesses that owned their buildings over generations. No rent to pay means the businesses remain open, even as international and Italian brands are shutting down their local operations. The vacancy rate of shopfronts is running at around 10% here.

The Northern side of the street is smarter, better designed and more modernised. It was 'regenerated' in the mid-2000s and populated by trendier shops and eateries catering to Yuppie customers. Back in 2007-2008, the street was abuzz with activity: well-dressed patrons, predominantly under the age of 40 browsing in the cutting edge designer stores and boutiques, while visitors from the province and beyond soaked in the atmosphere of the new social hub in cafes, enoteche and trattorie. This year, more than three out of four businesses are shut, empty windows and closed doors greet a rare passerby. Unable to fund rents, as well as high taxes and charges, smaller business owners have gone under. Those supplying locally-demanded daily goods, such as fresh groceries, are trading elsewhere, some dealing exclusively in cash with their established customers. Majority are simply gone.

Consumer demand is weak. As the result, Italy's HICP inflation is down to 0.0% in July 2014 - the fifth weakest inflation performance in the euro area and down from 1.2% in July 2013 and 12 months average of 0.6% for the 12 months period through the end of last month. At -2.1% monthly rate of HICP inflation in Italy is the worst of all euro area states. Aptly, Italy's retail sales PMI remains below 50.0 line without interruption since Q2 2011. July reading was 43.4 down from 43.8 in June. Since January 2014, through May 2014, retail sales have risen by 0.1% cumulatively, with may posting 0.3% m/m decline. In real (inflation-adjusted) terms, turnover index in the retail trade in May 2014 stood at 92.6 below 93.8 recorded in June 2011 (based on working day adjusted non-seasonally adjusted data), but ahead of June 2013 level of 88.9.

Few kilometres down the road, another wealthy Northern Italian town is showing the same signs of decline. A builder, having completed an apartment block in 2009, was forced out of business by the city authorities saddling his business with the staggering cost of rectifying a planning error committed by… you guessed it, the city authorities. After sitting on the market for 4 years with no takers, the apartments went for auction  earlier this spring. Guiding prices ranged from EUR20,000 for a one-bedroom to EUR46,000 for three bedroom flats. Back in 2004-2006 these properties would be sold off-plans for around EUR150,000 one-beds and EUR280,000 for three-beds. The auction flopped: out of 21 properties on the market, only 9 sold. Prime city-centre retail space on the ground floor of the building remains only 1/5th occupied.

Country construction sector activity is still down 43% on the pre-crisis peak (the sixth largest decline in the euro area) with Q1 2014 reading marking all-time low, the only country in the euro area with construction posting historical low in 2014. And housing markets are singing blues. From the beginning of Q2 2013 and through the end of Q1 2014, Italian house prices fell 4.43%, while euro area as a whole experienced house price deflation of just 0.3%. Within the euro area, only Cyprus and Slovenia posted worse 12 months cumulative performance.


Four internationally trading factories, including two suppliers of high-tech household equipment with export markets around the world, have shut doors since the onset of the Great Recession - all employed more than 200 people each at the peak and all have been in business for decades. In a telling sign of the times, one smaller family firm, counting five generations in business and trading with some exports, closed down while the proprietors continue to trade on a highly reduced volume. New trade is all local and cash-only. Across the area, work supplied directly to consumers is now being routinely quoted priced 'with receipt or without' and in many cases, even registered sales of goods and services are openly under-declared on invoices to avoid VAT and profit taxes.

Italy's industrial production stood at 106.6 in H1 2011, by H1 2014 this fell to 97.2. On average, industrial production fell in Italy at an annual rate of 2.98% between the first half of 2011 and the end of June 2014. Italian Manufacturing PMIs fell from 52.6 in June to 51.9 in July although index remains above 50 line continuously since Q3 2013. Ditto for services PMI which fell from the 43-month high of 53.9 in June to 52.8 in July.

Activity down and margins are slipping. Industrial production prices rose 0.1% in June 2014 m/m marking the first month of positive inflation after four consecutive months of producer prices deflation. Since January 1, 2014, industrial producer prices are down 0.5% cumulatively, which is not helping companies profitability or their ability to sustain debt servicing and employment. How bad profitability margins are? In June 2014, index of industrial producer prices for domestic market in Italy stood at 106.5. This is below June 2012 reading (109.2) and June 2013 reading (108.6). Industrial producer prices excluding energy sector are virtually flat in June 2014 compared too June 2013.

Industrial parks strewn across rural countryside - once sporting new buildings and full parking lots for staff cars - are half-empty, with weeds taking over front gardens and previously carefully landscaped lots. Empty crates, unsold inventories and rusting machinery still sit around the worker-less buildings bearing the names of larger family businesses.

An area once a magnet for labour migrants from Italian South, Eastern Europe and Asia is now once again sending emigrants to Germany, the UK, US and Australia.


On the good news side, Italy's trade surplus (goods only) is up from EUR8.2 billion in January-May 2013 to EUR14.1 billion in January-May 2014, but more than half of this improvement (EUR3.7 billion) was down to decline in imports, with exports increases accounting for just EUR2.2 billion. On a seasonally-adjusted basis, Italian exports were down 3% m/m in June 2014 and country trade balance has deteriorated from EUR1.9 billion surplus in May 2014 to EUR1.7 billion in June.

These figures are not reflective of the Russian sanctions against the EU that came into effect in July 2014. In my conversations with a number of local residents, sanctions loom large. Local area businesses supply higher-end luxury household goods to Russia and via Russia, the rest of the CIS. Some - such as producers of luxury bathtubs and bathroom equipment - are impacted only indirectly, via general slowdown in Russian demand. Others - such as suppliers of premium food and wine - are fearing for their business in the wake of Russian government retaliatory sanctions of agricultural and food imports from EU. All are worrying about energy costs impact of the Ukrainian mess.


Then there's Italian Government. The country fiscal problems are epic even by already stretched euro area standards. IMF forecasts 2014 General Government debt to reach 134.5% of GDP even before the latest data pointing to a possible economic contraction for the full year GDP. That is the second highest public debt burden in the common currency area after Greece. Between 2012 and 2014, Italy's Government debt is forecast to increase by EUR144.2 billion with cumulated Government deficits amounting to EUR193.9 billion in 2011-2014, of these EUR105 billion is structural deficits. Country structural deficits are rising, not falling, up from EUR5.5 billion in 2013 to the projected EUR13.3 billion in 2014. At current bond yields, Italy needs ca 2.5% annual growth in GDP just to stay on a flat debt trajectory. Based on its current outstanding debt mix (referencing maturities and associated yields), this number rises to over 3.3%.

While on debt topic, corporate indebtedness is not improving either, despite years of austerity and financial repression. Here's the latest summary from the IMF (July 2014) covering leveraging levels across main euro area economies. Italy's corporate leverage is getting worse faster than any other euro area economy, save Greece and Portugal.

And while the nominal cost of capital to corporates has declined over time from the crisis peak levels, owing to extraordinary monetary accommodation by the ECB, real cost of capital is now trending above the crisis peak and well above long-term averages:

This means two things: firms are having difficulties funding replacement and expansion capital, technological modernisation stalled productivity across factors of production is going nowhere; and employment is unlikely to improve as cash flows are constrained by the need to sustain amortisation and depreciation in the environment of the high real cost of funding capital (which in part reflects also depressed margins).

Continued in the second part http://trueeconomics.blogspot.ie/2014/08/2482014-italy-lifeless-liner-on_24.html

23/8/2014: WLASze: Weekend Links on Arts, Sciences & zero economics

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

First to start with - a major scientific breakthrough in physics coming from Yale. As the official website claims, "It’s official. Yale physicists have chilled the world’s coolest molecules. The tiny titans in question are bits of strontium monofluoride, dropped to 2.5 thousandths of a degree above absolute zero through a laser cooling and isolating process called magneto-optical trapping (MOT). They are the coldest molecules ever achieved through direct cooling, and they represent a physics milestone likely to prompt new research in areas ranging from quantum chemistry to tests of the most basic theories in particle physics."

Link: http://news.yale.edu/2014/08/20/yale-s-cool-molecules-are-hot-item

MOT jargon - for those inclined - here: http://www.nature.com/nature/journal/v512/n7514/full/nature13634.html

Meanwhile, in Australia, same cooling method is reportedly being used to improve performance of super-high resolution microscopes: http://www.wallstreetotc.com/laser-microscopes-20-times-more-sensitive-and-advanced-scientists/27412/

All in one week of cooling… and it is still summer...


Super cooling in physics, is not as cool as super structures in architecture, especially nostalgically grandiose (even when small enough to be just a summer camp for kids) architecture of the USSR. Here's a site that compiled some of the lesser-known examples: http://geliopolis.su/data.shtml

My favourite: the said camp, built in Vladivostok in 1975… it's human and ambitious and unorthodox at the same time…

And while on the same site, check out their 'Timeline' page http://geliopolis.su/time.shtml it is simply brilliant.


While architectural relics of ideologically-anchored aesthetics might be heftily cool, and super cool particles might be air-like brilliant, sometimes merging science, tech and creativity produces flashes of brilliant horror. And more often than not these can be found on wordlessTech website where editors have a never ending penchant for grotesque, macabre and outlandish without a moderating dose of taste.

Here is an example: http://wordlesstech.com/2014/08/12/faraday-cage-dress/

She looks cool, she looks super-techy-geeky-beautiful in that sense that just might get the entire Dublin WebSummit stop scratching and tapping their iPads for a minute… but don't try wearing this outfit on your local bus, or to a date… unless you want to fry an entire neighbourhood.

There is no point of asking why on earth would anyone want to make a 1 million volt outfit statement. It is neither abstract nor conceptual enough to be art and it is certainly not forward-thinking enough to be haute couture. It is, in fact, like merging a DNA of a dinosaur with GM corn - it won't roar and it won't taste good either... not cool enough and over-laboured…

23/8/2014: Real Cost of Capital: Euro 'Periphery' Dilemma

Staying on the topic of debt (see earlier post: http://trueeconomics.blogspot.ie/2014/08/2382014-that-pesky-problem-of-real-debt.html) here is IMF research on real cost of corporate capital (linked to the cost of debt) in the Euro area 'periphery' (this is from an IMF July 2014 publication that accompanied its Article 4 paper on Euro Area).

I highlighted with the red the range of recent capital costs range in each country to trace out historical comparatives.

Starting with the Euro area as a whole:

Two points:

• Current real cost of capital across the euro area is relatively benign, compared to both 1990s - early 2000s period and shows low volatility in recent (crisis) years post 2009 peak
• 2009 peak is pronounced but moderate compared to the one found in some 'peripheral' countries.

In basic terms, this means that euro area's capital costs are benign - above the 2004-2007 trough, but historically well below those observed in the 1990s.

Spain:

 Two points:

• Current capital cost levels are consistent with crisis peak 
• Capital today is as expensive in real terms as in the pre-euro era.

Which means that Spanish real cost of capital is now as bad as in the pre-euro period and is much worse than during the credit boom of the late 1990s-early 2000s.

Italy:

 Two points:

• Just as in Spain, real capital costs in Italy are comparable with peak of the crisis and 
• Capital costs today are more expensive than in the 2000s, but less expensive than in pre-euro era.

Italy's overall real cost of capital is currently comparable to the one observed in the late 1990s, and is higher than the one experienced in the credit expansion period of the early 2000s. That said, the cost uplift on 2000s is relatively moderate.

Portugal:

Two points:

• Capital costs today is below the peak levels of the crisis in real terms, but is severely elevated relative to 2000s and on-par with pre-euro era costs;
• Capital cost volatility is high and it was high during the entire euro era.

Thus, Portugal's real cost of capital is highly volatile, but on average is higher today than in the entire period from 1997 through 2010.

Ireland:

Ireland is clearly 'unique' compared to both the Euro area and the rest of the 'periphery' when it comes to the real cost of capital.

• The crisis peak in real cost of capital is massively out of line with historical trends.
• Ignoring the crisis peak, current real cost of capital is running well above the pre-crisis historical levels;
• Since the introduction of the euro, real cost of capital in Ireland trended above the pre-euro period levels

In summary, real cost of capital across the euro area 'periphery' shows one simple thing: investment is still a very costly proposition for businesses, especially compared to the pre-crisis period. Worse, it is now as expensive than (or comparable to) the cost averages for the pre-euro area period.

The above puts stark contrast between the cost of funding the banks (low) and Governments (historically low today) and real businesses (high).

23/8/2014: That Pesky Problem of Real Debt...

Again, revisiting IMF's Article 4 consultation paper for Euro Area, published in July 2014, here is a summary of the Euro area 'peripheral' countries debt overhang.

First real economic debt (debt of non-financial companies, households and public sector):

 Points of note:

1. Ireland's debt overhang is severe. More severe than of any other 'peripheral' country. Bet you forgot that little bit with all the 'best-in-class' growth performance droning in the media. Ah, and worse, remember, not the level alone, but the rate of debt increases over time, also matters. And by this metric, we too are the worst in the group, both for debt increases on 2003 levels and debt increases on 2008 levels.
2. Ireland's households' debt has declined over 2008-2013, more so than in Portugal and Spain. But it remains second highest after the Netherlands' and this decline masks true extent of debt problem because 2013 figure no longer counts household debts issued by banks that left Ireland and books of loans sold to investment funds. This also excludes some securitised debt.
3. Ireland's corporate debt problem is potentially overstating true extent of real debt in the economy, as it includes a small share of MNCs debt - debt issued by Irish institutions. This is likely to be relatively minor, in my view, as MNCs largely do not do debt intermediation via Irish domestic institutions. 

Now on to our household debt deleveraging in more detail:

Good news is, when it comes to our households, we are aggressively deleveraging compared to pre-crisis debt peak. As aggressively (in rate terms) as the U.S. Caveats mentioned above apply.

But there is a problem with all the debt legacy:

In the above 'PS' stands for private sector, not public sector. So private sector debt legacy is associated with negative subsequent economic growth, in general. But as above shows, for the peripheral countries, including the basket case outside Troika capture, Slovenia, and the rarely mentioned case of Finland (see chart below) it is also compounding structurally weak fundamentals other than debt alone.

So a timely reminder: that debt problem - it has not gone away. Not by any measure and most certainly not for Ireland.

Note: to see the problem in Finland consider the following chart:

23/8/2014: Labour Costs and Euro area's myth of 'productivity' gains

Looking back at July 2014 IMF Article 4 paper on Euro area (most of which I covered back when it was published), here is an interesting chart mapping changes in the euro area countries' unit labour costs.

The chart is complex, so let me point out few things in it:

Firstly: improvements in the unit labour costs (ULCs) is reflected in the vertical distance between the black dot (accumulated change in ULCs over 2000-2007 period: higher level of the dot reflects lower competitiveness or higher ULCs compared to EA17 levels) and the black bar (accumulated change in ULCs over 2008-Q3 2013 period).

1. This shows that Ireland has delivered (a) the highest ULCs deterioration of the sample of countries reported over 2000-2007 period, and (b) since 2008, Ireland has delivered the largest improvement in competitiveness (ULCs drop) of the sample. 
2. Second largest improvement in ULCs was recorded in Greece and it is comparable to, but modestly shallower than in Ireland; third and virtually indistinguishable from the second - in Spain and fourth in Portugal.
3. The above two facts suggest that improvements in the ULCs are indeed related to the rates of increases in  unemployment: all countries with significant improvements have seen dramatic rises in unemployment. Jobs destruction 'helps' competitiveness.

Secondly, coloured bars show composition of gains over two periods. Here, the following points arise:

1. Labour costs declines have been responsible for the lion's share of ULCs gains in Greece, followed by Ireland, Italy, Portugal and Spain.
2. Labour costs declines are dramatic in the case of only two countries: Greece and Ireland.
3. The above two facts suggests that jobs destruction impacted dramatically in the sectors that were employment/labour-intensive, allowing for substantial moderation of labour costs across the remaining economy on average. So 'concentrated' jobs destruction 'helps' improve competitiveness a lot.
4. Meanwhile, productivity gains in economy were significant contributors to improved competitiveness in Spain, followed - by some margin of difference - by Ireland, and Portugal.
5. Points 1-2 and 4 together strongly suggest that in Ireland and Spain (and to a lesser extent Portugal) gains in competitiveness came about not because the remaining working population suddenly became more productive, but because the new jobless were working in sectors that were less productive, plus because remaining workers got paid less on average.

One more point: of course, our (and other euro area 'peripherals') gains here are measured not in absolute terms, but against EA17 aggregate levels of competitiveness, so to a large extent, our gains in the chart above are also down to their (other euro area countries') losses in competitiveness. This is exactly what the above figure shows for Austria, Germany, Belgium and the Netherlands.

That's happy times of productivity growth in the euro area 'periphery', then... down to throwing people off the employment bus and bragging about fabled improved productivity for the remaining passengers...

23/8/2014: Two charts: US Oil

Two charts for trend spotting:

First one shows US production of oil from 1983 through today:

This shows the reversal of the 45% decline in oil output suffered from 1984-1986 through 2008 in just a few years (2009-present).

The second one maps development of oil pipelines network in the US to match this expansion of production and re-orient infrastructure toward exports:

That's shale & sands impact in just two charts...