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Friday, May 15, 2009

We Could Not Control Our Mad Craving For Arugula

After further reflection, I think that the NY Times has, as usual, shown us the way forward. We will blame the following results on Europe's sincere commitment to healthy living:

Eurozone Q1 GDP -2.5%. YoY: -4.6%.
EU 27: Q1 GDP -2.5%. YoY: -4.4%
(Note: a quarterly drop of -2.5% equates to an annualized drop of 9.63%)
Industrial production YoY (as of March) (ex-construction):
Eurozone: -20.2%
EU 27: -18.8%
Retail sales YoY (as of March)
Eurozone: -4.2%
EU 27: -3.1%
Q1 GDP: -1.2%. Annualized -4.71%
Q4 GDP was revised down to -1.5%.
Q1 GDP: -3.8%. Annualized -14.36%
Q4 GDP was revised down to -2.2%.
Germany and France are the biggest EU economies. See further notes on Germany below.
Q1 GDP: -2.8%. Annualized -10.74%
YoY: -3.6%.
Q4 GDP: -0.4%.
See further notes on Austria below.
Q1 GDP: -2.4%. Annualized -9.26%
YoY: -5.9%
Q4 GDP: -2.1%.
Q1 GDP: -1.8%. Annualized -7.01%
YoY: -2.9%
Q4 GDP: -1.0%

Notes: The EU's rather sharp drop is bearing far more heavily on manufacturing and export-led economies. For example, as of January 2009, Finland's YoY GDP had dropped 9.8%. When recovery comes, these same economies will be the first out unless they are pulled down by debt problems.

Germany: Germany's household debt and government debt are still low. Of most concern in Germany is commercial debt. German businesses tend to rely on banks for more of their capital than businesses in many other countries. The Bundesbank's April Lending Survey showed that commercial lending standards were still tightening and spreads were widening. The Bundesbank publishes a monthly report which is very good, and in their last report, they noted that consumer spending had been successfully stimulated in the first quarter. Thus the -3.8% is a disappointing result. The report also noted that Germany had experienced far more of a drop in export orders for the area outside of the EU. The rather disappointing Q1 EU results would tend to suggest that there is further to drop on the EU orders. Given weakening consumer spending and EU order expectations, it is hard to see the second quarter as very good, and the earliest hope for a return to growth is probably 4th quarter. There is a tremendous amount of commercial debt in Germany that is maturing and must be rolled over this year, and after these results, I think the German government might need to step in and help with some of it.

Austria. Austria. What can one say? Austrian bank and credit union (Raiffeisen (both a generic name for credit-union like institutions and the name of a major financial) lending to consumers, businesses and countries in eastern Europe has created an awesome risk profile for Austria's banking sector. This is a cash-flow issue.

The case of the Eastern European countries is interesting. Consider Poland. Current estimates are relatively optimistic for 09, but with direct investment halved, export orders dropping and much higher debt payments looming, I cannot see it. Poland is the EU's seventh largest economy, but it seems to me that there are sharp limitations as to how long a deep European slump can run before the accumulated effect of foreign currency loans, currency devaluation and associated CPI increases, the industrial slump, and the sharp retraction in FDI cause a much sharper downturn. So this is now a race against time, IMO. But current estimates are that the Polish economy grew in Q1.

Poland is still the star of Eastern Europe. Hungary is contracting sharply (-5.8% on the year in Q1, quarterly GDP estimated at -2.3% or an annualized -8.89%. The Czech Republic is in similar but slightly better shape. However Q1 was supported by the cash-for-clunkers deal in Germany, and Q2 could be considerably worse. Again, the crucial factor is time, and no, this is not "unexpected":
"The Czech economy has sharply slowed down unexpectedly," said Helena Horsk√°, an economist in Raiffeisenbank in Prague.
The -3.4% in Q1 is a YoY estimate. Analysts with a little more distance are now projecting -3% in 2009. We'll see. Czech imports and exports are down about 20%.

Bloomberg's Eastern European summary is worth a read. Then consider Raiffeisen International's Q1 results:
At the same time, the banks said its provisions for non-performing loans, mainly in Ukraine, Russia, Hungary and Serbia, rose by 379 percent year-on-year to -445 million ($605 million), up from -93 million ($126 million) during the first quarter of 2008.

"In the wake of the economic downswing and the currency situation, there was a significant increase of overdue loans in the first quarter of 2009, especially in the case of foreign currency loans, which meant provisions had to be increased sharply," Raiffeisen said in a statement.
It is hard to see precisely where this will end, but the sharp constriction in credit implied indicates that expected recovery trajectories in many of these countries might be quite disappointing, and that property values may fall for some time.

Wall Street Journal published an excellent article on this topic - read it quickly while it's free, if you don't have a subscription. Since about half of the banks in emerging Europe are owned by old European banks, the problem is not confined. Current chargeoff rates on loans in quite a few EE countries look more like credit card default rates than loan loss rates. The problem is very large and deeply significant to the European Union as a whole. Growth in Europe over the last decade has depended heavily on growth in these countries.

Either credit in these countries is sharply constrained, which would inevitably lead to massive collateral devaluations and a sharp retraction in internal growth, or Europe as a whole must greatly expand temporary funding to these countries and even some support of consumer credit in these countries. We are now seeing the leading edge of the problem.

Have you thought about using the comment system
in use at the Calculated Risk blog ? Turns out to be
pretty good.
It seems very good, but I think it was written just for CR. I'm too lazy to write my own.
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