Yesterday turned out to be a day dominated by my two main topics. As the day progressed we saw selling pressure in the peripheral euro zone government bond markets which was in the main caused by concern about the banking and property sectors in the relevant countries. There is of course an element of groundhog day about this. However if we return to early May I do not think that this is what Elena Salgado the Spanish Finance Minister meant by “shock and awe” as she announced the 750 billion Euro support package which was combined with the European Central Bank’s commencement of debt purchases in its version of Quantitative Easing or QE which it called the Securities Markets Programme. According to Reuters ten-year government bond yields closed at 6.08% in Ireland,5.89% in Portugal and a whopping 11.89% in Greece. These compare with the equivalent German bund which closed at a yield of 2.27% for those who like to look at relative comparisons.
If one is looking for the success of the shock and awe programme one might,for example, like to take a look at the equivalent yields after it had settled in for which I have used the closing values for the week in which it was announced. Ireland 4.64%,Portugal 4.93% and Greece 8.28% are the values so they have risen since by 1.44%,0.93% and a whopping 3.61% respectively. One might think that the advance billing has led to a disappointing result particularly if you are a taxpayer in one of these countries facing debt interest payments which look likely to rise (in case you are thinking Greece is fully covered by her individual rescue plan she is in fact still issuing short-term debt).
Did anybody benefit from shock and awe?
Actually somebody certainly did as you see German ten-year bund yields were 2.85% at the end of the week whereas as I stated earlier they are now 2.27%. The other core euro nations such as France whose equivalent yields were 3.11% then and are 2.57% now have benefitted too which is not quite what was advertised on the tin was it? Of course other influences have been at play in the meantime as there has been a flood of money going into what are perceived to be safe havens in a worldwide trend and this has benefitted many government bond markets. However for whatever the reason it remains true that as it turns out the biggest beneficiaries are the countries who were supposed to be the ones contributing. Not everything turns out as it seems.
One caveat I would like to add is that we only know what has happened with the shock and awe plan so it is not possible to say what would have happened without it.
What about the Securities Markets Programme?
This was the name for the European Central Bank’s version of QE where it was told by euro zone politicians to purchase debt in the peripheral euro zone countries supposedly because these markets were in disequilibrium. This dissembling was required as otherwise such a plan would be illegal under the ECB’s constitution. Some members of the ECB were always against the plan,for example the head of the Bundesbank Axel Weber has publicly stated that he voted against it. In practice the SMP started with a bank as some 16.5 billion Euros of debt was purchased in the opening week but as time has passed it has purchased smaller and smaller amounts such that it has now bought a total of 61 billion Euros worth.
I have often mused as to whether the declining purchases reflect declining problems or the fact that some of the ECB were never really in favour of this programme (even its President Mr.Trichet had in the past described the post-crisis regime at the ECB as being superior to QE,which to those with a memory must now bring a wry smile). Anyway the problems are now longer declining and there have been several rumours recently that the SMP is in operation again.
One factor that is rarely discussed is that if you look at the purchases and current yield levels the ECB must be losing money on them at this time. I guess officials must be hoping it will have profits from its other operations to offset this problem. On this topic there are quite a few issues for the ECB as it has also accepted securities with a lower credit rating as collateral for liquidity than the other main central banks. Losses and assets with a low credit rating do not make for a strong financial position and I have written before about the ECB’s risky position in this regard. It is not impossible that one day the headlines will be can a central bank go bust?
An irony,Germany and her banks
Having highlighted that recent trends have been to Germany’s benefit there is a certain irony to this. Not about her manufacturing or exporting which in spite of weaker numbers yesterday remain strong, the irony is the state of her banking sector. I am reminded of my report on her banking sector yesterday and the fact that they have indulged in risky lending on a large-scale in US mortgages and peripheral euro zone debt but it is also true that under prospective Basel 111 rules they are undercapitalised to make an unhealthy combination. So as we move onto the next stage of the credit crunch which is revolving around Europe’s banks we can see that German banks have as many problems as the Anglo-Saxon ones which does contradict some of the rhetoric that comes from Germany. Further to this Germany in terms of government bond yields is seen as a paragon of stability which no longer looks quite so true.
The solution as ever is to ask for the can to be kicked down the road. Germany’s banks are happy to accept Basel 111 except the time is not quite right….
Portugal and her banks
Here there is less news but two facts do come to mind. Portugal’s banks continue to have to rely heavily on liquidity provided by the ECB. According to the Bank of Portugal Portuguese bank borrowing from the ECB rose by 0.6 per cent in August from July, to register a fresh record of 49.1bn Euros. Adding to this are the facts that if one looks back at Portugal’s economic history she has struggled to grow over the past twenty years and her level of unemployment has trended upwards. Adding the effects of the credit crunch to this does not make for an inspiring mix. This can be added to by the fact that at a time of supposed austerity Portuguese public expenditure rose by 4% in the year to July.
Ireland and her banks
As well as rumoured purchases by the ECB of Irish debt the Irish government stepped in to try to calm bond markets down. The Minister for Finance, Mr Brian Lenihan, announced that the Government guarantee for short-term bank liabilities, including corporate and interbank deposits as well as debt securities would be extended from its current expiry date of 29 September to 31 December 2010. So more time is bought although in the current atmosphere it is likely to make people wonder as to when Ireland can withdraw state support for her banks. Perhaps the most extreme version of this is that Ireland is in fact a bad bank with a country attached.
In my view the situation that is hurting Ireland the most is the doubt over the likely property-related losses at Anglo-Irish bank and to a lesser extent the Irish Nationwide building society. This needs to be sorted quickly to stop the drip-feed of bad news from these sources. Tomorrow Ireland has some debt to issue and it will interesting to see how this goes as markets have been successful at time recently in pushing yields up before debt issuance and then lowering it later in moves which are good for those investors but bad for taxpayers.
Greece and her banks: more cash is needed
This morning has seen a cash call from the National Bank of Greece which has announced plans for a 2.8 billion Euro fundraising or ”
a comprehensive capital strengthening plan”. Those who relying on official statements might be a little confused by this as we have been told time and time again what good shape Greek banks are in and only one of them failed the euro zone banking stress tests and not this one! Indeed if you read the banks statement about this you might reasonably wonder why it is doing this as it tells you it is in great shape. If we may return to reality this will lead to questions as to why it needs the money and whether other Greek banks will need to raise capital too.
There has been a fascinating article on Greece by Michael Lewis and some of it realises people’s worst fears. Here is his account of a discussion with a senior IMF official.
“Our people went in and couldn’t believe what they found,” a senior I.M.F. official told me, not long after he’d returned from the I.M.F.’s first Greek mission. “The way they were keeping track of their finances—they knew how much they had agreed to spend, but no one was keeping track of what he had actually spent.”
“I’m all for reducing the number of public-sector employees,” an I.M.F. investigator had said to me. “But how do you do that if you don’t know how many there are to start with?”
It is interesting to see what he was told and much of it contradicts the official view of Greece and her attempts to avoid default or restructuring of her debt. At the end a very relevant question is posed and I will be interested to see readers thoughts on this.
Even if it is technically possible for these people to repay their debts, live within their means, and return to good standing inside the European Union, do they have the inner resources to do it?
One would have to be hiding under a stone in the UK to have avoided the news that Mr.Diamond is to take over as Chief Executive of Barclays Bank. However I think that much of the comment on this is misplaced. For a start nearly everyone thought he was in control anyway as his Barclays Capital represents around two-thirds of Barclays profits.
My problem is that if this means that Barclays will become even more of an investment bank then there is a clear risk for UK taxpayers. Even though Barclays chose not to draw funds from the UK taxpayer it did benefit from the implicit guarantee that in extremis we would bail it out. I can see plenty of reasons to support retail banking and depositors but very few to support investment banking in this way. We are back to the dangers of privatising profits and the salaries and bonuses they produce and socialising potential losses and sadly I have to report that in the two years of the credit crunch period we appear to have learnt nothing at all. This is not Mr.Diamond”s fault he is a symbol albeit a well paid one.