Yesterday was a day which saw quite a turn-around in American equity markets. After opening up to 130 points lower after much poorer than expected figures from the Vampire Squid (Goldman Sachs) the Dow Jones Industrial Average rose 73 points. The Vampire Squid’s figures were so poor that they used the ebitda method of measuring profits in their accounts for what I understand is the first time. or as some wag put it ebitdaf where the f stands for fines! In essence ebitda (earnings before interest, taxes, depreciation and amortisation) is a method of measuring profits for firms which either do not have any or have low figures. If its powers are weakening perhaps the Vampire Squid could call for help from their fellow cephalopod Paul the Octopus if they can get him to come out of retirement well although in future their figures would of course be presented in base 8 rather than ebitda or ebitdaf!
Greece issues some 3 month Treasury Bills
Yesterday Greece went ahead with her planned sale of 3 month Treasury Bills. She raised some 1.95 billion Euros and paid a yield of 4.05% which compares with the 3.65% she paid when she last had such an auction in April. In some respects after the period she has been through any issuance is some sort of success. However it is an expensive and rather short-term way of financing things. She will have to be back in 3 months time and if you looking for comparable rates the UK last paid 0.5032% for 3 month Treasury Bills, the US pays around 0.16%, Germany pays 0.29%. Even Portugal has been able to issue 12 month Treasury Bills at a rate of just over 1%. I suppose if you are looking at the premium Greece is having to pay for this you could also look at the European inter-bank rate or Euribor the 3 month version of which was at 0.876% yesterday, or of course the funding/repo rate of the European Central Bank which is at 1%.
So put another way the cost of the crisis is at least 3% which on 1.95 billion Euros is just under 59 million Euros a year which of course assumes that 3 more issues succeed. I wish to point out again the way that Greece is funding herself with ever shorter-term paper, this is not a good move as it restricts flexibility and could end up going very wrong.
The Bank of Greece revealed yesterday how much support the European Central Bank is giving to the Greek banking system and it amounts to 93.8 billion Euros in June. This was split between 75.7 billion Euros of long-term refinancing operations and 18.1 billion Euros of main refinancing operations. The amount had risen by 4.9% from the 89.4 billion Euros of May and this is significant because we are talking about the period after the rescue package from the euro zone. It is around 20% of Greek banking assets/liabilities. Greek banks remain the biggest user of ECB funds adjusted for their size.
Earlier this month a 12 month repo from the ECB expired. We do not know the exact effect of this but there is no need for panic for Greece as the ECB is willing to supply shorter-term funds. However there is a need for concern as again the funds are “shorter-term”. So in my view the risks for Greece are increasing proportionally to the way she is funding herself even more with shorter and shorter term instruments.
If we look at Greece’s banking sector then Piraeus Bank has made a takeover offer for two state-backed lenders, Atebank and TT Postbank. As Piraeus Bank is one of the heaviest users of ECB liquidity then we can conclude that it is unlikely to be doing this from a position of strength. I am reminded of something my father often tells me which is that many takeovers take place because the complications and issues around the takeover will make it difficult to interpret company accounts for quite some time and that some take advantage of this, not always for altruistic means.
I wrote a further review on Greece on the 15th July which questioned the recent improvement in her fiscal figures. The message from today is that by using shorter and shorter methods of finding funding and liquidity then she is taking on,in my view, a risky strategy with little freedom of manoeuvre. Her ten-year government bond yield closed last night at 10.62% which is an eloquent observation in itself and also reflects a market which is very illiquid.
Spanish banking sector
Spain had quite a successful day as she issued just under 6 billion Euros of 12 and 18 month Treasury Bills. Furthermore, the average yield fell on the 12-month bill to 2.22% from 2.303 % at the previous sale on June 15, and to 2.33% from 2.83 % last time on the 18-month issue. So all in all rather successful and her ten-year government bond yield which has been falling over the past few days has now fallen to 4.35%. So perhaps Spain is seeing favourable economic winds after her successful World Cup campaign.
However the Bank of Spain issued some data on Monday which is the cloud in her silver lining. What she calls Dudosos or non-performing loans in the Spanish banking system totalled some 100.372 billion Euros at the end of May. There have been plenty of questions raised about this amount and how Spain and her banking system intend to deal with them. Rather curiously whilst non mortgage lending is now falling in Spain at 5% per annum mortgage lending is broadly flat which of course combined with the moribund state of Spain’s property markets leads to the thought that real estate developers may well be being bailed out. Another curiosity in the figures is that Spain;s savings banks or cajas are reporting improvements in their non performing loans whilst her listed banks report a deterioration. It is unlikely that both are true. Just to add to the size of the problem loans which have been restructured fall out of the numbers and estimates of this tend to feel that another 50 billion Euros could be accounted for here making 150 billion in total.
So we are back to the Cajas and how viable they are. Many eyes will be on the stress test figures for the Cajas when the come out on Friday and I suspect that some will be restructured by Monday in response. However remember that CEBS the body overseeing the stress tests is essentially a group of around 25 officials who have as far as I can tell no experience in this area so surprises are possible due to their inexperience. The essential Spanish tactic has been to make some provisions against bad debts and then wait and hope for better times, in essence repeating their tactics which worked in the last recession. However this recession is deeper and longer and austerity is delaying when the good times return,so this “kicking the can down the road” has serious risks particularly as this tactic has become very common around the world, meaning that risks in the future are higher and higher.
A measure of the strains in the system is that Spanish banks are now the biggest borrowers from the ECB. They have borrowed some 129.94 billion Euros at the end of June which was up some 32 billion on the month. This means that 26% of all borrowing from the ECB comes from Spain.
Ireland issues government debt too
Ireland has adopted a different attitude to the crisis as she has with her “bad bank” NAMA tried to get on top of things rather than hoping for the best. The fly in this particular ointment has been Anglo-Irish Bank whose property portfolio looks worse and worse. However Ireland came to the market yesterday to issue some 1.5 billion Euros of debt and the National Treasury Management Agency (NTMA) said the country was fully funded into the second quarter of 2011 after selling a targeted 750 million euros of paper maturing in 2016 and 750 million of debt due in 2020. The average yield for the 2016 bond fell slightly to 4.496 percent from 4.521 percent from the last comparable auction in June, but the average yield on the benchmark 2020 bond rose to 5.537 percent from the 4.688 percent paid in April.
So we have a country which is trying not to exist in the short-term and I wish them the best in difficult times for Ireland. Her banks too are very reliant on ECB funding having some 94.79 billion on their books at the end of June.
The United States and further Quantitative Easing
There is a lot of debate going on at the moment about how the Federal Reserve might implement a further round of quantitative easing or QE mark 2. I notice that there is very little debate about what I see as a fundamental point which is that as it would only be implemented if it is considered that QE 1 has failed than one has to in my mind consider first whether QE mark 2 is likely to do any better. However there are a few curious concepts being suggested and many of them seem to be based around lowering long-term yields sometimes at the expense of raising short-term yields. For example the US Treasury could sell short-term debt and use the money to buy longer-term debt.
To my mind this suggested proposal is a strange beast and I can think of several flaws.
1. Raising short-term rates is hardly likely to encourage a recovery at a time when by definition events must be taking a grim turn.
2. Talk of cutting long-term rates seems to ignore where they are. For example US government bonds yield 2.93% at the ten-year maturity and 3.98% at the thirty-year. Exactly where do they want rates to go too? Please read my article on the under-reporting of US inflation on the 2nd July to reinforce this.
3. As by definition this process will only begin if the manipulation of short-term rates (the ZIRP I talked about yesterday) has failed a logical person might well wonder if manipulating long-term rates and thereby distorting yet another economic instrument will do any better.
4.Actually the US has been operating on an ever shorter term in the debt markets in recent times and this is in its own way as risky as Greece’s actions now. Just because it has not gone wrong yet does not mean that it is not a potentially serious problem.
My main themes for today have a disturbing message. Many other issues in addition to Spain’s problems with property loans have been dealt with by “kicking the can down the road” as in into the future. At the same time many bodies in particular the United States government are borrowing on an ever shorter basis. If these two trends collide they will do so badly.