There is much to consider in the changes and fallout after the UK voted to leave the European Union on Thursday. However there are international perspectives and one of the themes of this blog has been singing along to ABC this morning already.
Shoot that poison arrow though to my heart
Shoot that poison arrow
Yes the Italian banking sector which I warned about again only on Friday posting a chart from Sober Look showing the share price declines seen recently including 22% that day. So far this morning there has been a small rally so panic over? Well when you see why they have stabilised there is a clear issue. From Bloomberg.
The government is weighing measures that may add as much as 40 billion euros ($44 billion), said one person, asking not to be identified because the talks are private. Italy may support lenders by providing capital or pledging guarantees, said the person.
Well not that private! We are reminded one more time that official vessels are leaky ones. I also note the “pledging guarantees” which is usually a scheme to try to keep the money off-balance sheet and therefore out of the national finances. An obvious issue if you are a country with slow economic growth and a national debt of 132.7% of GDP (Gross Domestic Product) at the end of last year. Another issue here is the way that private losses ( the Italian banks have around 360 billion Euros of bad debts) look like they might be socialised and handed over to the Italian taxpayer. We have seen before that the estimates of such a move rise ever higher in what is presented as a “surprise”.
Regular readers will recall that I have long argued that Mario Draghi will use some of the ECB monetary easing to help the banks he used to supervise. Friday brought some news about this as Reuters reports.
Italy’s top thirteen banks took up over a quarter of the 399 billion euros ($442 billion) in super-cheap loans allotted by the European Central Bank in the initial round of Targeted Long-Term Financing Operations……….Net additional liquidity injected by the TLTRO on Friday was equal to 32 billion euros and Italian banks took up over half of it, or 16.25 billion euros.
As we look at such numbers we can look for comparison at the still relatively new bad bank called Atlante. It raised some 4.25 billion Euros of capital which looks rather thin compared to the challenges ahead to say the least. Also before all of this it was being asked for help again. From Bloomberg last week.
Veneto Banca SpA’s shareholders spurned its initial public offering, signaling that Italy’s new rescue fund will probably be called upon to assume control of a second lender.
Retail investors bought just 2.2 percent of 1 billion euros ($1.1 billion) in stock, the Montebelluna, Treviso-based lender said in a statement Thursday.
There was a chance that institutional investors would buy on Friday but of course in that days melee they would have regretted it if they had. I will move on but just point out that the situation is frenetic as share prices which were up are now down which frankly just like the rumour mill is a sign of what a mess this is.
The UK day opened with various statements from Japan. There were of course plenty of issues pre-existing there including the new stronger phase for the Yen with the Brexit result gave a push to. So far it has mostly been open mouth operations but one bit seems to be building in volume.
Japan Govt Mulls Boosting Stimulus Package To Over JPY 10 Tln — RTRS ( @livesquawk )
Oh and some are pressing for more monetary easing which of course has a credibility problem with the implication that the enormous amount provided so far was and is not enough. What we are seeing is how tightly strung the supposedly recovered world economy is.
This is something that like the 0% yield for the benchmark German 10 year bond yield has felt like it has been coming for a while.
UK 10-year yield drops below 1% for the first time ever ( @FerroTV )
If we move to longer dated yields we see that the 30 year yield is now 1.82%. Both of these are SIMPLY EXTRAORDINARY and the use of capitals is deliberate. I can recall the benchmark UK Gilt yield which back then was between the two (15/20 years) being 15%. It reminds me of the discussion on the 10 th of June. I was writing about negative yielding bonds then but much of this applies to the very low yields the UK now has.
Negative yielding bonds provide quite a windfall for fiscal policy. There is a flow one which the media mostly ignores but there is the opportunity for a capital one should the 3 main beneficiaries use it. It is not quite a “free lunch” although it would be for a while a lunch that you were paid to eat. What I mean by that is that the national debts would rise and also the bonds would as a minimum have to be refinanced in the future and maybe in some sort of alternative universe – the sort of place where Spock in Star Trek has emotions – be actually repaid.
Such yields will also spiral through the economic system so let us remind ourselves of two of the main consequences. Firstly there is the problem for the business model of pensions and longer-term contracts which has been oiled for years by positive interest-rates which have shrunk dramatically. On the other side there are mortgage-rates which have been falling and if this position is sustained look set to fall again.
Whilst Brexit has been the trigger here in the short-term it is also true that yields have been falling across much of the world for some time now. Indeed if you look at really long-term trends for around 30 years or so.
So often we find ourselves returning to the banks which we keep being told have recapitalised and are in central banker speech resilient. From Bank of England Governor Mark Carney on Friday.
These adjustments will be supported by a resilient UK financial system – one that the Bank of England has consistently strengthened over the last seven years.
The capital requirements of our largest banks are now ten times higher than before the crisis.
As a result of these actions, UK banks have raised over £130bn of capital, and now have more than £600bn of high quality liquid assets.
Yet we find that each time there is financial market trouble they are at the forefront of it.
Overall I think that he did the right thing on Friday morning as a central banker should in response to a clear change in so many areas. However there is a sub-plot which is like with the Forward Guidance debacle where reality undermines bluster. From the Financial Times.
Shares in RBS and Barclays were briefly suspended this morning after falling more than 8%.
Ah yes the RBS which needs fixing every year and has been about to turn a corner for at least 6 years now. But as we look around the financial world we see so many names familiar to my analysis on here. Let us pick one which is down 7% today.
Deutsche Bank shares are down 57% over 12 months. ( h/t Patrick McGee )
This reinforces this from Friday.
Charlie Bilello, CMT @MktOutperform Jun 25
Deutsche Bank ADR, Friday
1) All-Time Low
2) 88% below ’07 peak
3) 2nd highest volume
4) Worst decline since Jan ’09
As Taylor Swift would put it.
I knew you were trouble when you walked in
But here is another factor which is that Deutsche Bank expects that it will always be bailed out by Germany. So there is a sort of stop-loss for it but of course there are all sort of problems as I was reminded earlier.
EU’s Bank Recovery & Resolution Directive – outlaws further state-funded bailouts of failing banks Ref
@Ian_Fraser p514 ( h/t Mervyn Randall )
Rock meet hard place.
There is so much at play and as ever let me avoid any specific politics. However the UK political establishment has managed to under-perform even my very low expectations. Of course they are intertwined these days with the banks and the bailouts and I would point out again how fragile the confidence is in the banking system that we keep being told is fixed or rather “resilient”. But take care as the central bankers have backed the banks at every turn so far and I cannot help thinking of the “no limits” phrase of Mario Draghi.
Also I have seen market panics before like for example as a young man when the UK left the ERM and one thing I do know is that proclamations of certainty about the future are often out of date that week if not day. I also know that it will not stop people from making them. Just like markets so often re-test their lows.