Monday, September 26, 2011

Rebecca Wilder is moving to the EconoMonitors

I've decided to migrate News N Economics over to my new blog, The Wilder View, on the Roubini EconoMonitors platform.

Really, I jumped at the opportunity to contribute as part of the EconoMonitors blogging network! Both the audience and the blogging community there are geared toward international macroeconomics and finance.

EconoMonitors, while it is a Roubini Global Economics Project, is free. All you have to do is change your RSS feed and you're good to go. There's no difference to any normal blogging site (like News N Economics). I'll continue to post all matters related to Europe and the global economy at The Wilder View, so it's really no different to what we've got here at News N Economics.

The only drawback from my readers' perspective is that you will no longer receive Emails of my latest posts. I would recommend that you follow me on Twitter as an alternative!

Here is the critical information:

New blog address: The Wilder View at the EconoMonitor platform.

New RSS feed for The Wilder View

And as always, please contact me via Email with any concerns, questions, or just salutations! (

Thank you for all of your support since 2007 at News N Economics! But it's not over - The Wilder View will be even better!

Rebecca Wilder

Monday, September 12, 2011

The European debt crisis in charts

I present some basic statistics to highlight the problem in Europe. In short, there exists a deleterious positive feedback loop between overly leveraged banks and their sovereigns in key markets.

Exhibit 1: European Banks are overly levered. Spanning 2006 through the latest data point, key European banking systems - France, Germany, and Italy - increased leverage.

The chart above illustrates the ratio of bank assets to capital (see the IMF's Financial Soundness Indicators for the data and description of 'capital'). The countries are ranked by largest % drop in bank leverage spanning the period 2006 to current (Greece, Austria, and Belgium) to the largest % surge in leverage spanning the same period (France, Italy, and the UK). Note: the 2006 data is taken from the 2007 IMF Global Financial Stability Report.

The level of leverage is not strictly comparable across countries due to differences in national accounting, taxation, and supervisory regimes. However, while the US banks have delevered over the period, the big European banks - Germany, Italy, and France - have increased leverage. Assets need to be written down.

Exhibit 2. While leverage is too high, asset quality is dropping. The banks are increasing exposure to government loans and securities relative to traditional loans.

The chart illustrates the nominal stock of loans held on the bank balance sheets of the Monetary Financial Institutions in Europe. The data are from the ECB. Loans to governments and holdings of government securities are increasing more swiftly than traditional lending.

Exhibit 3. The asset quality of that rising stock of loans to the government sector is deteriorating...quickly. Italian and Spanish 10yr bonds are 1.5% and 1.2% higher, respectively, since the beginning of 2010, while German 10-yr yields are 1.5% lower.

The chart illustrates the 10-yr bonds across the euro area bond markets. The latest data point (today around 12pm) is listed in the legend.

Bond investors are clearly differentiating between the riskier bonds - Spain, Portugal, and Belgium - from the 'core' - Germany, Netherlands, Austria, Finland, and yes, France. Whether or not bond markets are right to regard Finland or France as 'core' is a different matter entirely. But the point is clear: bond markets are in crisis mode, and there's a stark segmentation in yields across the region.

Cross border exposure dictates that some of these highly levered banking systems are exposed to the same government securities currently trading at distressed levels. A case in point is France with outsized exposure to Italy and Greece (see Table 9B). This is a helpful graphic by Thomson Reuters .

Rebecca Wilder

Monday, September 5, 2011

The ECB data do not support the view that European banks are moving cash assets out of Europe and into the U.S.: it the Fed's QE2, that's all

Update: I modified this post since original publishing. I am sorry for that; but I came to some broader conclusions.

Kash Mansori published complimentary articles that received quite a bit of attention in the blogosphere. Using data published by the ECB and the Fed, Kash Mansori argued (here and then here) the following:
monetary financial institutions (MFIs) in Europe have been moving their deposits out of European banks. Where is that money going?

It looks like much of it is being placed with US banks instead. The following chart shows the total deposits at domestically chartered commercial banks in the US.
Clearly, something is going on -- the recent rise in deposits with US banks has been dramatic, with an above-trend increase in deposits of approximately $500 billion over the past 6 months.

I have a pretty simple problem with this analysis - the two posts span two different time periods, 1.5 years and 6 months.

In this post, Kash argues that deposits of monetary financial institutions (MFIs) with other MFIs declined by € 461 billion spanning the period January 2010 to July 2011 (using freely available ECB data), implying that they must be moving their cash somewhere else (bolded by yours truly):
with an above-trend increase in deposits of approximately $500 billion over the past 6 months.

Who is responsible for this sudden inflow of deposits into the US banking system? The answer is non-US banks, as illustrated in the following picture, which shows the cash assets of domestically chartered banks alongside the cash assets of foreign-owned banks in the US.
Rebecca: The problem is, that spanning the last six months MFI deposits with other MFIs (in Europe) has INCREASED by € 26.3 billion (see Table below).

Therefore, the 6-month increase in deposits and cash assets in foreign-related U.S. bank branches cannot be related to outflows in inter-MFI deposits in Europe. Yes "something else is going on".

In this post, I argued pretty simply that the ECB data on MFI (monetary financial institutions) deposits do not demonstrate that European banks are decreasing their cash holdings in Europe for the U.S. safe haven over the last six months. Therefore, the recent surge in the cash assets of foreign-related banks in the U.S. is not related to recent financial turmoil in Europe.

But why, nevertheless, has there been a surge in the cash assets of foreign-related banking institutions in the U.S. (i.e., Deutsche Bank offices located in the U.S., for example) since November 2010? There are two reasons, in my view. First, the surge in assets correlates perfectly with the outset of the Fed's second round of quantitative easing. But the surge in cash assets also correlates with increased net liabilities to foreign branches (illustrated below). In short: foreign banking institutions received easing reserves from the Fed AND sought the profit potential of a very steep U.S. yield curve.

The evidence

The second round of the Fed's quantitative easing program started November 2010. As illustrated below, a surge in the cash assets of foreign-related U.S. bank branches is starkly coincident with the outset of QE2 (Fed vault cash and reserves is filed under 'cash assets' in the H.8 Tables).

I cannot answer with certainty why cash assets of foreign-related US branches surged relative to the domestically chartered banks, since the level of detail is not so granular. However, I suspect that it has something to do with foreign banks making a conscious decision to transfer capital into their increasingly profitable U.S. branches.

Regarding foreign bank capital flows, the evidence of capital flows among foreign bank institutions and their U.S. branches is not in the ECB data, it's in the Fed's H.8 Table, pages 8 and 19, line 40. Line 40 shows that foreign-related bank branches in the U.S. increased their net-liabilities to offices located outside of the U.S. rather precipitously since November 2010. Better put: the head office diverted funds away from offices outside the U.S. and into affiliates within the U.S.

The chart illustrates net-foreign liabilities for both U.S. domestically chartered banks (red line) and foreign-related banks in the U.S. (blue line). For the foreign-related institutions with U.S. branches, a negative liability is effectively an asset or claim on its branches located outside the U.S. On the other hand, a positive number is a net liability, or the U.S. branch owes the foreign branch.

Net liabilities by foreign-related bank branches in the U.S. have risen sharply to branches outside the U.S. Not coincidentally, the series bottomed in November 2010, the month when the Fed initiated QE2. Since then, foreign-related banks increased net-liabilities to their local counterparts outside the U.S. by roughly $515 billion. In June 2011, the net liabilities to foreign branches by the foreign-related banks in the U.S. turned positive.

The head offices of foreign banking institutions are diverting capital to their U.S. branches relative to other foreign branches. Why would they do this? The yield curve is steep - and in banking world, a steep yield curve is highly profitable. The Fed's announcement of QE2 in November 2010 made funding in the U.S. very cheap, an input to bank earnings.

No ulterior motive - just profit seeking.

Rebecca Wilder

Thursday, September 1, 2011

Spanish consumers AND savers take a forced siesta

Recently we saw retail sales figures come out of Spain, Germany, France, and Italy. Across Europe, the seasonally-adjusted pattern of real retail sales is diverging.

The chart above illustrates the real seasonally-adjusted and working-day-adjusted (for Europe) level of retail sales across key countries in Europe and the US (for comparison). The raw data is indexed to 2007 for comparison. Euro area retail sales closely track those of Germany, so I'll speak to Germany alone in this post. The final data point for sales in Italy, France, and the euro area is June 2011, while that for Spain, Germany, and the US is July 2011. Finally, Spain's retail sales are released on a working-day but not seasonally adjusted basis. I adjust the figures for seasonal factors using a simple Census X12 ARIMA algorithm in EViews.

German and French consumers are hitting the retailers, while Italian and Spanish consumers are cutting back. In this post, I argued that the timing of the second drop in Spanish retail sales (following the recession) eerily coincides with the outset of fiscal austerity in Europe. US retail trade has outperformed that in Italy and Spain since the 2009 trough.

Spanish and US consumers have something in common: household saving rates fell in order to support retail shopping. In contrast to US consumers, though, Spanish consumers were forced to cut back both on retail spending AND savings. In Spain, there's not enough income to increase retail spending and/or saving rates.

The chart illustrates household saving ratios (saving as a percentage of disposable income). Although the levels cannot be directly compared, since each are released in either gross or net form (net being gross ex depreciation), the trends are illustrative. Spanish saving plummeted since its peak in 2009. As of Q1 2011, the saving rate is already at the level forecasted by the OECD for all of 2011.

This is not going to end well. As the Spanish government struggles to meet its deficit target amid a battered economy, it does so at the cost of the domestic saving rate. Households will be forced to draw down saving further as a share of income in order to facilitate the government's deficit objectives.

This deflationary policy is NOT sustainable.

Rebecca Wilder