Opening Quotes: Putting in the FIX

For me the critical feature of this, apart from its absolute necessity,  is that it could be done.

And for ‘the creditors’ – it’s a cheaper option than getting dragged towards underwriting Eurobond issuance.

FT Editorial: ‘Banking Union and the Euro’s Future’

The fixes the eurozone needs may be less radical than feared. The near-term priority must be to avoid bank runs. A sovereign debt crisis becomes devastating if it is allowed to bring down the banking system. When this happens, the entire economy suffers a cardiac arrest.Perhaps the best way out now is to sever the link between the sovereign and the banking system by moving to a eurozone-wide banking union.

True, this would involve a substantial pooling of sovereignty, albeit less than what would be required for full fiscal union. But it should be sufficient to stabilise the currency area. It would, for instance, make it easier to let over-indebted states such as Greece default within the eurozone rather than be forced out.

Opening Quotes: Optimistic Symmetries

I blame Wednesday’s ‘ESM-Bank Recapitalization’ balloon, but – in the face of horrendous $SPX price action – last week I found myself becoming way more optimistic about Europe.

I wrote about the ‘why’ last week – and please be careful as I’ve a desperate (& painful) habit of getting on the right side of the ‘macro strory’ before the technicals fall into line  ……

But this morning I unexpectedly found my favorite <long-time uber bear> Eurozone commentator offering a similarly <surprising optimistic> analysis.

It is now or never (again?) but – from an Irish perspective – I absolutely believe the seeds of the Eurozone crisis were sown in the everyone for themselves botched response to the Lehman collapse in September 2008.

Huge problems remain, but any sort of fully fledging BANKING UNION would be a seriously BIG DEAL and more importantly  – its ACHIEVABLE!!

Wolfgang Munchau (FT):

“Unlike six months ago, officials now realise there is no alternative to a banking union. The biggest danger now is that eurozone leaders change their minds. Ms Merkel has not made the case back home. A proper banking union would come as a shock to many Germans, including those in the media. It is still easier to be a pessimist, but I am not yet quite ready to give up what will probably be the last chance to save the euro.”

Opening Quotes – Its Not My Fault!!

First quarter German GDP +.5%.

But some little boys still looking for someone – anyone -to blame.

FT: ‘Faith fades in eurozone firewall’

UK chancellor George Osborne, arriving for a finance ministers’ meeting, said the British recovery has been damaged over the last two years not by Britain getting a grip on its public finances but by uncertainty in the eurozone.

“It is that uncertainty, not austerity, that is doing the real damage to the European recovery, and indeed the British recovery.”

Opening Quotes: Losing faith all over again?

Euro-zone banks sliding – inevitably – towards next funding crisis.

The ECB is going to come under pressure to loosen ‘collateral’ requirements – may/may not …..

But ‘solvency’ not ‘liquidity’ is THE ISSUE.

“The first LTRO was powerful, the second was less powerful and a third one could be even less so as markets lose faith the measures will bring lasting change,” said Philippe Bodereau, London-based head of European credit research at Pacific Investment Management Co., the world’s largest bond investor. “The main benefit was to avoid a refinancing crisis in European banking, but the issue is the systemic nature of Spain and Italy and their government bond markets and how you stabilize that.”

http://www.bloomberg.com/news/2012-04-24/rising-italy-to-spain-yields-keep-banks-on-life-support.html

 

Opening Quotes – Yield Curves Matter

Despite yards of buying …..

“Marc Chandler, currency strategist at Brown Brothers Harriman, noted Italian 10-year yields have fallen 180bp so far this year while Spain’s have risen by 39bp.

“That is after two LTROs,” he said. “That definitely concerns me. When the bonds rally it helps the banks’ balance sheets. But when yields start rising it hurts the banks even more. It is a vicious circle.”

 http://www.ft.com/intl/cms/s/0/575cf306-7405-11e1-bcec-00144feab49a.html#axzz1pfGt9OGG

Zero Bound Policies

According to Jürgen Stark – he who last year resigned from the ECB’s governing board in a huff over its bond buying program – “The balance sheet of the ECB is not only of gigantic dimensions, it is also of shocking quality.”

Hardly surprising.

But in conjunction with Mr. Weidmann’s public disquiet over loosening LTRO2 collateral, a growing Germanic pre-occupation with the inherent (or imagined?) riskiness of balooning ‘Target 2’ balances, and inflation now stuck above 2% for the foreseeable future – with or without the potential for an oil shock – and I think the ECB’s liquidity drip has been squeezed dry.

So what? The banks are pre-or is that permanently-funded through 2014 and sovereign debt yields have tumbled down the yield curve. Job done?

I doubt it.

To state the obvious- the problem is and will continue to be growth – the lack of.

Post the Greek ‘restructuring’ where will it come from?  Spain have brazenly (but admirably) ignored their ‘deficit target’ for 2012 in the realization you cannot slash your way out of a recession. Others will follow.

And with the ECB tapped out – the politics of stability (pacts) played out – the Eurozone is now left with a ‘zero bound policy’ to fiscal consolidation &/or economic recovery.

 

What Market? Whose Risk?

Payrolls Friday – the first Friday of the month – why not today? Always a spectacle of over-analyisis and dubious conclusions. But the ‘market’ loves it.

Question is – with much more to follow – what ‘market’ even exists?

This morning I read ‘risk assets are consolidating near their highs.’ And I wondered – apart from my PNL – who or what was exactly at risk? I also caught a line about ‘the trend for authoritorial market interference.’ And thought of Orwell.

This ‘trend’ is central bank interventionism has exploded since 2008 and I think its safe to say we’re way beyond the ‘Greenspan Put’ – but I’ll stick to Europe.

According to Bloomberg – ‘Draghi’s cash tonic makes banks smile.’ I bet it did. Especially the Italian & Spainish banks who once more took down almost 1/2 (Euro 250billion) of the 2nd LTRO. First time round they poured money into buying their own sovereign debt – upping their holdings by Euro 70-80billion to over Euro 500billion. Perhaps they’ll do the same again.

But this is a market?

The ECB is responsible for a functioning banking system. It is not responsible for propping up insolvent &/or over-leverged institutions. The net result is that some of the most vulnerable banks in the most fiscally challenged sovereigns are safely joined in their collective fates. But at whose risk? Who will ‘bail out’ the sovereigns &/or banks when/if the time comes? The taxpayer of course –  but of what nationality?

The banking elite is not a risk – we’ve seen first hand in Ireland that no-body goes to jail, no-body gets fired for incompetence, and all ’employment contracts (bonuses et al)’ must be honored – god forbid!

The politicians will sacrifice anything for the illusion of stability.

These markets are not free.

Opening Quotes

http://www.ft.com/intl/cms/s/0/52ed18e4-6237-11e1-872e-00144feabdc0.html#axzz1nZeGGZJa

FT: ‘Bundesbank at odds with ECB over loans’

Peter Sands, chief executive of Standard Chartered, said that the glut of central bank money risked “laying the seeds for the next crisis”. Mr Sands, whose Asia-focused bank is insulated from the eurozone crisis, said that no thought had been given to long-term consequences. “It is not clear what the exit strategy is. What happens in three years’ time when it needs to be refinanced?”

See yesterday’s post: ‘Until its Broken – Part II’

 

Until its Broken – Part II

One presumes the ECB knows what it is doing.

One assumes using the banking sector’s balance sheet  – not their own – to prop up the peripheral’s sovereign bonds was the price of Bundesbank’s acquiescence.

But in their determination to ‘firewall’ their own balance sheet the ECB risks setting dangerous precedents.

Their refusal to participate in the Greek PSI ‘debt swap’ – elevating themselves to IMF status &  booking ‘notional’ profits instead – has encouraged the EIB to follow suit, and the arbitrary distinction between ‘public’ and ‘private’ bondholders will have consequences. The rules have been changed, and all else being equal – the peripherals risk premiums – the spread they pay over the ‘AAA’s’  – will rise.

And, despite its attractions the LTRO, also adds to the problem.

First, it sub-ordninates existing bondholders. The ECB has first call on eligible collateral.

Second, it creates an unnatural dependency. Eight hundred banks took funding today. How many will use the cheap money to postpone inevitable write-downs and deleveraging?

So – for Mr. Draghi – the price for successfully circumventing the immediate liquidity crisis – for banks and governments alike – has been to alienate private sovereign bondholders and place a large part of the European banking system on a drip that might be very hard to remove. The irony is that whilst promoting necessary ‘economic structural reforms’ the ECB has hiked the risk premium on the Euro’s weakest members and helped its most vulnerable banks postpone their own day of reckoning.

Sounds very Irish. And from our experience – good luck with the growth story.

Until its Broken – Part I

As their largesse continues, John Burbank (founder of Passport Capital) believes ‘confidence in central banks is overdone.’ More specifically he also believes oil with continue to rise until it ‘breaks the US economy.’ Its a disconcerting thought with oil already back above its Euro denominated 2008 highs – back at the beginnings of the extraordinary pre/post Lehman central bank balance sheet expansion. Unsurprisingly the ECB’s balance sheet is beginning to come under more and more scrutiny. Including today’s 2nd LTRO its liabilities have balooned to Euro 3.2 trillion, and with ‘only’ Euro 80billion in capital this looks frightening. It is. And it isn’t.

With revaluation gains and enormous long-term ‘seigniore’ – basically the spread its makes on printing cash – I don’t think ECB’s solvency is the question. The ECB is way to precious to risk its own balance sheet. Rather, and far more problematic is the ECB’s unstated policy of stashing the sovereign debt risk upon the banking sectors balance sheet. As John Plender writes in today’s FT: ‘ unlike the Federal Reserve and the Bank of England, the ECB has loaded sovereign risk onto the balance sheets of undercapitalised private banks instead of taking it onto its own balance sheet. The economist Charles Wyplosz argues that this is tantamount to the ECB taking a trillion euro bet.’

European banks used the first LTRO cash in two major ways – to replace Euro 700 billion of bank debt expiring in 2012 & to buy their own sovereign debt. A large chunk has also placed back on deposit with the ECB itself – the circular logic of this knows no boundries – but lets disregard any notion this is about helping lending to the real economy. This funding helps but European banks face years (estimates of Euro2.5 trillion) of de-leveraging thier balance sheets. More interstingly we now know Italian & Spainish banks increased their (own) To some extent – sovereign holdings by 13% (to Euro 280billion) & 29% (to Euro 230billion) between December 2011 and January 2012. In the process the ‘Sarkozy spread’ was crushed in the shorter end of the curve. After today’s second slug of money – can this continue?

To some extent – whether it constitutes ‘financial repression’ or not – it makes a lot of sense for the peripheral banks to buy their guarantor’s own debt. Why not? But under the cover of imposing its own seniority (second piece follows) the ECB has created a mother load of moral hazard. And with the Euro-zone consigned to the illusion of ‘expansionary austerity’ it appears only a question of time before the stresses of solvency (not liquidity) return.