The Swiss mixture of negative interest-rates, currency intervention and equity investing

Today brings an opportunity to look at a consequence of several economic themes. The opening one is related to the way that in both economic and currency terms the Euro is something of a super massive black hole. This accompanies and has exacerbated issues caused by what was called the carry trade in the years that preceded the credit crunch. Back then borrowers both individual and corporate decided to take advantage of cheaper interest-rates abroad and in particular used the Swiss Franc and the Japanese Yen. This meant that both currencies soared and in the early days on here I christened them the currency twins for that reason. Both currencies were bounced around by this as at first as the trade was put on they were depressed but later as the credit crunch hit and nerves replaced greed both currencies soared. This showed how even national economies were to this extent the playthings of international currency flows and meant that Switzerland had elements of the Japanese experience.

Thus it should be no great surprise to see a country with elements of the Euro and the Yen experience finding itself in the cold icy world of negative interest-rates, From the Swiss National Bank earlier.

The Swiss National Bank (SNB) is maintaining its expansionary monetary policy, with the
aim of stabilising price developments and supporting economic activity. Interest on sight deposits at the SNB is to remain at –0.75% and the target range for the three-month Libor is unchanged at between –1.25% and –0.25%.

This goes through to some extent on the nod these days but if we look at the economic situation we see something that is increasingly familiar.

In Switzerland, GDP grew in the fourth quarter at an annualised 2.4%. This growth was again primarily driven by manufacturing, but most other industries also made a positive contribution. In the wake of this development, capacity utilisation in the economy as a whole
improved further. The unemployment rate declined again slightly through to February. The SNB continues to expect GDP growth of around 2% for 2018 and a further gradual decrease in unemployment.

We set yet again that expansionary monetary policy coincides with economic expansion and there is a contradiction. We are told by the SNB that manufacturing is leading the charge whilst it also tells us that the Swiss Franc is at too high an exchange-rate.

The Swiss franc remains highly valued. The situation in the foreign exchange market is still fragile and monetary conditions may change rapidly. The negative interest rate and the SNB’s willingness to intervene in the foreign exchange market as necessary therefore remain essential. This keeps the attractiveness of Swiss franc investments low and eases pressure on the currency.

In other words perhaps the currency is not as big a deal for an area you might think would be price competitive and no doubt the situation below is a factor in this.

The international economic environment is currently favourable. In the fourth quarter of 2017,
the global economy continued to exhibit solid, broad-based growth. International trade
remained dynamic. Employment registered a further increase in the advanced economies,
which is also bolstering domestic demand.
The SNB expects global economic growth to remain above potential in the coming quarters.

So is the Swiss Franc too high as the SNB keeps telling us? If you think of foreign exchange markets as being “fragile” in one of the better periods for the world economy when can you ever leave the party?As you can see below the rhetoric is still the same.

The SNB will remain active in the foreign
exchange market as necessary, while taking the overall currency situation into consideration.

The Swiss Franc

Actually the indices of the SNB also pose a question about its policy as it has various real exchange rate indices and they are between 104 and 110 now if we set 2000 as 100. This is different to the nominal measure which is at 153. So the situation is complex as the carry trade pushed it down and then sucked it back up. Of course the SNB would say its policies have helped ameliorate the situation.

Hedge Fund alert

The enthusiasm of the SNB for currency intervention especially in the period running up to the 20th of January 2015 has led to it becoming one of the world’s largest investors. This is because in an unusual situation – from the Uk’s perspective anyway – it has intervened to keep its currency down rather than up so it has bought foreign currencies. this meant that it needed some sort of investment strategy.

The majority of the SNB’s foreign currency investments are in government bonds, bonds issued by foreign local authorities (e.g. provinces and municipalities) and supranational organisations, as well as corporate bonds, or are placed at other central banks. The proportion of equities is one-fifth. Two-fifths of the foreign currency investments are denominated in euros, and more than one-third in US dollars. Other important investment currencies are the pound sterling, yen and Canadian dollar.

As there were some 790 billion Swiss Francs of reserves as of the end of last year this is a big operation. With equity markets rising it has been profitable and of course over time so has the bond investing even allowing for recent tougher times. This has led to this.

Another important project was the renewal of the profit distribution agreement  between the Federal Department of Finance (FDF) and the SNB, which defines the amount of the annual profit distribution to the Confederation and
the cantons.

Yet as I pointed out on the 3rd of October last year there are also private shareholders.

Cantons own 45% of stock, cantonal banks 15% and private investors (individuals or institutions) the remaining 40%.

This has led to quite a lot of speculation that one day the private shareholders might get a share so to speak. This is how it looked back in October.

Less than a month after its stock smashed through the 3,000-franc-a-share barrier, SNB shares hit an intraday high of 4,324 on Wednesday and were trading as high as 4,600 on Thursday. The stock has tripled in value from a year ago, repeatedly confounding market watchers by regularly hitting records.

The price is now as of the last trade 5640 Swiss Francs so the rumours continue. We get many stories about central banks being privately owned which are usually not true whereas here there is some truth  to it.


There is a lot to consider about the present Swiss situation where we again see negative interest-rates and a different type of balance sheet expansion combined with recorded economic growth that is solid. We also see some familiar risks.

Imbalances on the mortgage and real estate markets persist. While growth in mortgage lending remained relatively low in 2017, prices for single-family houses and owner-occupied apartments began to rise more rapidly again. Residential investment property prices also rose,
albeit at a somewhat slower pace. Owing to the strong growth in recent years, this segment in particular is subject to the risk of a price correction over the medium term.

Things take a further step forwards when we note their line of thinking.

The SNB will
continue to monitor developments on the mortgage and real estate markets closely, and will
regularly reassess the need for an adjustment of the countercyclical capital buffer.

It seems as though rather than stepping back they might intervene even more reminding me of the words of Joe Walsh.

I go to parties sometimes until 4
It’s hard to leave when you can’t find the door

Me on Core Finance TV


Euro area monetary policy heads for a new frontier

The issue of monetary policy in the Euro area is of significance on several levels. Obviously it affects the Euro area itself but also it affects many countries around it as in a nod to the sad departure of Stephen Hawking overnight it is time to sing along with Muse.

Into the supermassive
Supermassive black hole
Supermassive black hole
Supermassive black hole
Supermassive black hole

This has been demonstrated by the way that zero and then negative interest-rates ( a deposit rate of -0.4%) in the Euro has forced others in the locale to follow suit. It was and is a factor in the -0.5% of Sweden the -0.65% certificate of deposit rate in Denmark and the -0.75% of Switzerland amongst others. It is also a factor in the UK still remaining with a Bank Rate of 0.5% after so many years have passed and not following the more traditional route of aping the moves of the US Federal Reserve.

What next?

This is the question on many lips both inside for obvious reasons but also outside the Euro area for the reasons above. Why? Well the President of the European Central Bank Mario Draghi explained this earlier today in Frankfurt.

The economy has been growing consistently above current estimates of potential growth, by more than a percentage point last year. All euro area confidence indicators are close to their highest levels since the start of monetary union, even if the latest readings came in slightly below expectations.

This as I regularly point out means that monetary policy is facing a new frontier. This is because it is procyclical where it is expansionary in an existing expansion. Mario has in fact gone further than me in one area as in his view it is even more procyclical leading to output being more than 1% above potential. If that sounds a little mad I will return to it in a moment.  But another factor in this new frontier is the way that both negative interest-rates and QE have been deployed.

We’ll open up the doors and climb into the dawn
Confess your passion your secret fear
Prepare to meet the challenge of the new frontier ( Donald Fagen)

Potential Output?

Looking at what output has been allows us to figure it out.

Over the whole year 2017, GDP rose by 2.3% in the euro area ( Eurostat)

That would mean that potential output is only 1% per annum but I suspect Mario really means the 2.7% if you compare the last quarter of 2017 with a year before so 1.5%. That is rather downbeat which is very common amongst central bankers these days as for example Governor Carney and the Bank of England used different language “speed limit” for the UK but also came to 1.5%. Due to demographic pressures the Bank of Japan is even more downbeat for Nihon at 1%.

We will see how the media treat that as they make a big deal of the UK situation but let is move onto what causes them to think this? We come to something which is genuinely troubling.

Second, the degree of slack itself is uncertain. Even if slack is now receding, estimates of the size of the output gap have to be made with caution. Strong growth may be leading to higher potential output, as crisis-induced hysteresis may be reversed in conditions of stronger demand. And the effects of past structural reforms, especially in the labour market, may now be showing up in potential output.

As you can see the certainty of earlier has gone as this clearly points out they do not know. We are back to imposing theory on reality again and even worse a failed theory as later we get this.

Phillips curve decompositions find that past low inflation dragged down wage growth from its long-term average by around 0.2 percentage points each year between 2014 and 2017.

If we step back we see that according to the Phillips Curve wages should be soaring as we are above potential output whereas in fact they are doing this.

 The unexplained residuals in the model – which in the past were sizeable – are diminishing, suggesting the link between unemployment and wages should improve.

As in there is no link visible yet but if you inhale enough hopium it will be along at some point! Also I hope you enjoyed the reference to labour market reforms from Mario as we mull the contrast between that and his policy press conferences which every time without fail have a section calling for economic reform.

More! More! More!

It is somewhat awkward when you are telling people the economy is running hot and implying it is overheating if you also say it may be about to run faster.

Non-essential purchases – which make up around 50% of household spending in the euro area – tend to be postponed during recessions and then to catch up as the business cycle advances. Such purchases are currently only 2% above their pre-crisis level, compared with 9% for essential ones. This implies that discretionary household spending still has scope to support the expansion.

So it is below potential Mario? Also an area central bankers love to see boom also seems to be below potential.

Moreover, housing investment is still 17% below its pre-crisis level and is only now starting to pick up, which will likely add an extra impulse to the recovery dynamic.

What about inflation?

This if you look at a Phillips Curve world should be on the march in both senses as wages and prices should be heading upwards and yet.

Wage growth has been trending upwards for the euro area as a whole, rising by 0.5 percentage points from the trough in mid-2016.

Not much is it? As to be fair Mario points out.

But consistent with the weakening of the relationship between slack and inflation, the adjustment of wages during the recovery has so far been atypically slow.

The trouble is the analysis seems to be based on pure hopium.

That said, our analysis suggests that, as the cycle advances, the standard wage Phillips curve should hold better for the euro area on average. The unexplained residuals in the model – which in the past were sizeable – are diminishing, suggesting the link between unemployment and wages should improve.

So when you really want it to work ( in a crisis) it fails and in calmer times it does not seem to work either. But they will continue with it anyway like someone who s stuck in the mud.


Actually I think that Mario Draghi is more intelligent than this as we see several themes come together. Back in the dim and distant days when I began Notayesmanseconomics I offered the opinion that central bankers would dither when it became time to reverse course on their stimuli. This became a bigger factor as the stimuli grew. Now we see a central banker telling us.

But we still need to see further evidence that inflation dynamics are moving in the right direction. So monetary policy will remain patient, persistent and prudent.

This works nicely for Mario as the inflation forecasts remain below the 1.97% inflation target defined by a predecessor of his ( Monsieur JC Trichet).

The latest ECB projections foresee a pickup in headline inflation from an average rate of 1.4% this year to 1.7% in 2020.

Thus as he has hinted at in past speeches which more than a few seem to have forgotten Mario Draghi may depart as ECB President without ever raising interest-rates. In fact it seems to be his plan and it is something he will leave as a “present” for whoever follows him. Another form of stimulus may have slowed but is still around as well.

The cumulative redemptions under the asset purchase programme between March 2018 and February 2019 are expected to be around EUR 167 billion. And reinvestment amounts will remain sizeable thereafter.

So now we see that policy has been decided and a theory ( Phillips Curve ) has been chosen which is convenient. Mario may not believe it either but it suits his purpose as does claiming their has been labour market reform. This is the same way that we have switched from the economic growth of the “Whatever it takes” speech to inflation now both suggest the same policy which allows Mario to give himself a round of applause.

 Considering all of the monetary measures taken between mid-2014 and October 2017, the overall impact on euro area growth and inflation is estimated, in both cases, to be around 1.9 percentage points cumulatively for the period between 2016 and 2019.

So another masterly performance from Mario Draghi but it should not cover up the many risks from advancing onto a new frontier of procyclical monetary policy.





What is it about RBS and the banks?

A major feature of the credit crunch was the collapse of more than a few banks as a combination of miss pricing, bullish expansionism and arrogance all collided. This led to the economic world-changing as for example the way we now have extremely low ( ZIRP) and in more than a few places negative interest-rates and of course all the QE bond purchases which are ongoing in both the Euro area and Japan. So lower short and long-term interest-rates and that is before we get to the cost of the bailouts themselves. The US and UK acted early but others took longer as my updates on Italy for example explain and describe. It’s Finance Minister ( Padoan ) even had the cheek to boast about not helping its banks which then created ever larger bad loans.

The essential problem is that this is still ongoing as the news from Royal Bank of Scotland overnight tells us.

Royal Bank of Scotland on Tuesday agreed a $500m settlement with New York State over mis-selling residential mortgage-backed securities in the run-up to the financial crisis………..The agreement requires the bank to pay $100m in cash and to provide $400m of consumer relief in New York. It is the latest in a series of settlements with US authorities that has resulted in banks handing over $150bn in payments and fines since the crisis.

This is yet another in a series that feels like rinse and repeat but we are now a decade on from things heading south for RBS as on the 22nd of 2008 what was the largest rights issue ever in the UK took place. The £12 billion cash from that did not even last 6 months as on the 13th of October the UK government stepped in. In other words the documents from that rights issue look to have been about a misleading as they could be along the lines of Sir Desmond Glazebrook in Yes Prime Minister who when asked about the rules replied “They didn’t seem quite appropriate”.

So we have ended up with something that looks like a bottomless pit although as ever it is put PR style.

Ross McEwan, chief executive, said: “We have been very clear that putting our remaining legacy issues behind us is a key part of our strategy.”

Legacy issues indeed and of course a much larger one is on its way.

RBS, part-owned by the UK government, has set aside $4.4bn to deal with residential mortgage-backed security claims in the US and recently revealed its first annual profit in nine years.

This poses its own question as we mull the latest development which is for only one state.

Ian Gordon, an analyst at Investec, said the deal with New York was “a disturbingly large single-state settlement ahead of the main event”.

Any new settlement would add to this.


RBS has been trying to close the door on misconduct issues from the crisis and in 2017 agreed to pay £4.2bn to the US Federal Housing Finance Agency in relation to mortgage-backed securities.

What about the law?

This seems to have been missing from the banking sector and especially in the case of the 2008 rights issue of RBS. However this morning has brought news that you can be jailed for financial crimes. From the BBC.

A group of fraudsters who conned UK consumers out of £37m by selling passports and driving licences through copycat websites have been sentenced to more than 35 years in jail.

The six people, led by Peter Hall and including his wife Claire, operated websites that impersonated official government services.

Perhaps the establishment was upset by the way they were impersonated but we are left with the thought that as the crime was compared to the banks small-scale it could be punished. Along the way something seemed rather familiar though.

 “This was a crime motivated by greed. This group defrauded people so they could enjoy a luxury lifestyle.”

If we actually move to banking crime a somewhat different set of rules seem to apply. Yesterday the Financial Conduct Authority finally banned the man called the Crystal Methodist due to his drug taking proclivities but of course Chair of the Co-op Bank which nearly collapsed.

Mr Flowers was Chair of Co-op Bank between 15 April 2010 and 5 June 2013. The FCA found that Mr Flowers’ conduct demonstrated a lack of fitness and propriety required to work in financial services.

So our first thought is to sing along with the Doobie Brothers.

Gotta keep on pushin’ Mama
‘Cause you know they’re runnin’ late

After all most of us knew there was “trouble,trouble,trouble” as Taylor Swift would out it in June 2013. However when you see what he was banned for it is hard not to let off some steam.

The FCA found that while Chair Mr Flowers:


used his work mobile telephone to make a number of inappropriate telephone calls to a premium rate chat line in breach of Co-op Group and Co-op Bank policies;

and used his work email account to send and receive sexually explicit and otherwise inappropriate messages, and to discuss illegal drugs, in breach of Co-op Group and Co-op Bank policies despite having been previously warned about his earlier misconduct.

In addition, after stepping down as Chair, Mr Flowers was convicted for possession of illegal drugs.

As you can see destroying a bank and causing losses in some cases substantial to a large number of people does not appear on the charge sheet whilst calling a premium rate chat line does.

Helping the economy

We were told the economy would not be able to survive without the banks yet as time has gone on they are still deleveraging. From Which.

In December last year, RBS/Natwest announced that it was closing a staggering 259 bank branches in 2018 – a quarter of its branch network. That included 62 RBS and 197 NatWest branches, plus 11 Ulster Bank branches which were previously announced.

The UK taxpayer will also be grimly observing this as the share price falls another 5 pence at the time of typing this to £2.59 as opposed to the £5.02 paid for its holding.


There are various problems with the state of play. The first is the way that the law pretty much only applies one way regarding the banks. If we misbehave we can expect to be punished sometimes severely. I have no axe to grind with that until we note that it at best intermittently applies to the banks themselves and even less to those at the top of the food chain. For example whilst Santander is perfectly at liberty to pay bonuses which Nathan Bostock would have received at RBS this raises hackles to say the least when it was from the GRG section which wrecked havoc amongst so many small businesses. It seems that bank directors are even more an example of the “precious” than the banks themselves. If we do not make changes how can we expect matters to improve?

When a bank is bailed out we are never told the full truth as this emerges later and sometimes much later as the news today is around a decade after the event. When the truth requires drip feeding well that speaks for itself. Also I note that in the intervening decade this issue goes on and on. From the Financial Stability Board.

The activity-based, narrow measure of shadow banking grew by 7.6% in 2016, to $45.2 trillion for the 29 jurisdictions……..Monitoring Universe of Non-bank Financial Intermediation (MUNFI) – This measure of
all non-bank financial intermediation grew in 2016 at a slightly faster rate than in 2015 to an aggregate $160 trillion.

We need to take care as one day that will rise to a lot of money! Also wasn’t this supposed to have been a problem pre credit crunch?



Portugal hopes to end its lost decade later this year

It is time for us once again to head south and take a look at what is going on in the Portuguese economy? The opening salvo is that 2017 was the best year seen for some time. From Portugal Statistics.

In 2017, the Portuguese Gross Domestic Product (GDP) increased by 2.7% in real terms, 1.1 percentage points higher than the rate of change registered in 2016, reaching, in nominal terms, around 193 billion euros. In nominal terms, GDP increased 4.1% (3.2 in 2016),

So both economic growth and an acceleration in it from 2016. In essence the performance was an internal thing.

The contribution of domestic demand to GDP growth increased to 2.9 percentage points (1.6 percentage points in 2016), mainly due to the acceleration of Investment. Net external demand registered a negative contribution of 0.2 percentage points (null in 2016),  with Imports of Goods and Services accelerating slightly more intensely than Exports of Goods and Services.

It is hard not to feel a slight chill down the spine at the latter section as it has led Portugal to go cap in hand to the IMF ( International Monetary Fund) somewhat regularly over the past decades. But to be fair the last quarter was better on this front.

The contribution of net external demand to GDP quarter-on-quarter growth rate shifted from negative to positive, due to the significantly higher acceleration of Exports of Goods and Services than of Imports of Goods and Services.

Indeed the last quarter was good all round.

Comparing with the previous quarter, GDP increased by
0.7% in real terms.

Also whilst it fell from the heady peaks of earlier in the year investment had a good year.

Investment, when compared with the same quarter of
2016, increased by 5.9% in volume in the last quarter of
2017, a 4.4 percentage points deceleration from the
previous quarter.

This was particularly welcome as it needed it as I pointed out on the 6th of July last year the economic depression Portugal has been through saw investment collapse.

 A fair proportion of this is the fall in investment because whilst it has grown by 5.5% over the past year the level in the latest quarter of 7.7 billion Euros was still a long way below the 10.9 billion Euros of the second quarter of 2008.


The national accounts brought a hopeful sign on this front too.

In the fourth quarter of 2017, seasonally adjusted
employment registered a year-on-year rate of change of
3.2%, (3.1% in the previous quarter)

Of course this does not have to mean unemployment fell but in this instance as we learnt at the end of last month the news is good.

The December 2017 unemployment rate was 8.0%, down by 0.1 percentage points (p.p.) from the previous month’s
level, by 0.5 p.p. from three months before and by 2.2% from the same month of 2016…………The provisional unemployment rate estimate for January 2018 was 7.9%.

This means that the statistics office was able to point this out.

only going back to July 2004 it
is possible to find a rate lower than that.

The one area that continues to be an issue is this one.

The youth unemployment rate stood at 22.2% and
remained unchanged from the month before,

Is Portugal ending up with something of a core youth unemployment problem?

The latest Eurostat handbook raises another issue as it has a map of employment rate changes from 2006 to 2016. For Portugal this was a lost decade in this sense as in all areas apart from Lisbon (+1.1%) it fell from between 2.5% and 3,8%. Rather curiously if we divert across the border to a country now considered an economic success Spain it fell in all regions including by 7.2% in Andalucia. So whilst both countries will have improved in 2017 we get a hint of a size of the combined credit crunch and Euro area crises.

Is Portugal’s Lost Decade Over?

No it still has a little way to go and the emphasis below is mine. From the Bank of Portugal economic review.

economic activity will maintain
a growth profile over the projection horizon,
albeit at a gradually slower pace (2.3%, 1.9%
and 1.7% in 2018, 2019 and 2020 respectively)
. At the end of the projection horizon,
GDP will stand approximately 4% above the level
seen prior to the international financial crisis.

So it will be back to the pre credit crunch peak around the autumn. We will have to see as the Bank of Portugal got 2016 wrong as I was already pointing out last July that the first half of 2016 had the economic growth it thought would arrive in the whole year. Maybe its troubles like so many establishment around the world is the way it is wedded to something which keeps failing.

Projected growth rates are above the average
estimates of potential growth of the Portuguese
economy and will translate into a positive output
gap in coming years.

Actually that sentence begs some other questions so let me add for newer readers that the economic history of Portugal is that it struggles to grow at more than 1% per annum on any sustained basis. In fact compared to its peers in the Euro area 2017 was a rare year as this below shows.

interrupting a long period of negative annual
average differentials observed from 2000
to 2016 (only excluding 2009).

This is unlikely to be helped by this where like in so many countries we see good news with a not so good kicker.

The employment growth in the most recent
years, which was fast when compared with activity
growth, has resulted in a decline in labour
productivity since 2014, a trend that will continue
into 2017. ( I presume they mean 2018).

House Prices

It would appear that there is indeed something going on here. From Portugal Statistics.

In the third quarter of 2017, the House Price Index (HPI) increased 10.4% in relation to the same period of 2016 (8.0% in the previous quarter). This rate of change, the highest ever recorded for the series starting in 2009, was essentially determined by the price behaviour of existing dwellings, which increased 11.5% in relation to the same quarter of 2016………….The HPI increased 3.5% between the second and third quarters of 2017

The peak of this was highlighted by The Portugal News last November.

Portugal’s most expensive neighbourhood is, perhaps unsurprisingly, the heart of Lisbon, where buying a house along the Avenida da Liberdade or Marquês de Pombal costs around €3,294 per square metre; up 46.1 percent in 12 months.

Time for the Outhere Brothers again.

I say boom boom boom let me hear u say wayo
I say boom boom boom now everybody say wayo

The banks

Finally some good news for the troubled Portuguese banking sector as their assets ( mortgages) will start to look much better as house prices rise. If we look at Novo Banco this may help with what Moodys calls a “very large stock of problematic assets” which the Portuguese taxpayer is helping with a recapitalisation of  3.9 billion Euros. Yet there are still problems as this from the Financial Times highlights.

Portuguese authorities last year launched a criminal investigation into the sale of €64m of Novo Banco bonds by a Portuguese insurance firm to Pimco that occurred at the end of 2015. A week later, the value of the bonds sold to Pimco were in effect wiped out by the country’s central bank.

This is an issue that brings no credit to Portugal as Novo Banco as the name implies was supposed to be a clean bank that was supposed to be sold off quickly.


So we have welcome economic news but as ever in line with economics being described as the “dismal science” we move to asking can it last? On that subject we need to note that an official interest-rate which is -0.4% and ongoing QE is worry some. Also Portugal receives quite a direct boost in its public finances from the QE as the flow of 489 million Euros  of purchases of its government bonds in February meaning the total is now over 32 billion means it has a ten-year yield of under 2%. Not bad when you have a national debt to GDP ratio of 126.2%.

To the question what happens when the stimulus stops? We find ourselves mulling the way that Portugal has under performed its Euro area peers or its demographics which were already poor before some of its educated youth departed in response to the lost decade as this from the Bank of Portugal makes clear.

The population’s ageing trend partly results from
the sharp decrease in fertility in the 1970s and

So whilst some may claim this as a triumph for the “internal competitiveness” or don’t leave the Euro model 2017 was in fact only a tactical victory albeit a welcome one in a long campaign. Should some of the recent relative monetary and consumer confidence weakness persist we could see a slowing of Euro area economic growth in the summer/autumn just as the ECB is supposed to be ending its QE program and considering ending negative interest-rates. How would that work?





What is going on with the banks of Italy?

Yesterday saw something of a familiar theme as we were told this by Fabrizio Pagani, the chief of staff at Italy’s Ministry of Economy and Finance.


You would be forgiven for thinking not only what again? But also experiencing some fatigue after being told it so often. Less than twelve hours later something else that is rather familiar turned up.


So they weren’t fixed for long it would seem! According to Bloomberg who had the interview we had another hostage to fortune as well from him.

“The story of Italian non-performing loans is over,” Pagani said.

He sounds so much like Finance Minster Padoan doesn’t he? In reality even those who are friendly to such ideas have doubts.

As you can see even Spain which was criticised for acting slowly in fact was 3/4 years ahead of Italy we note that the Italian problem got worse during this period. In fact Spain is in the process of repaying the ESM ( European Stability Mechanism) the money it borrowed for this.

Spain made the request for the repayment on 30 January 2018. One repayment will be for €2 billion, and is planned for 23 February 2018. The size of the second repayment will be €3 billion, and is scheduled for May 2018.

So in total this has happened.

Between December 2012 and February 2013, the ESM disbursed €41.3 billion to the Spanish government for the recapitalisation of the country’s banking sector……….Following the two repayments, Spain’s outstanding debt to the ESM will stand at €26.7 billion.

So Spain is exiting the procedure as Italy begins it and as is so usual Italy is doing it in its own way. For example in the tweet picture above the phrase bail in is used when in fact what it has done have had the features of bailouts as well. Also is this good or simply kicking the can somewhere else?

Investors also snapped up more than 100 billion euros ($123 billion) in non-performing Italian bank loans last year, which has helped reduce the level of net bad debt across the sector by more than a third.

Some may think that this may be more like vultures on their prey.

This month, Bob Diamond and Corrado Passera, the former bosses of Barclays Plc and Intesa Sanpaolo SpA, joined forces to shop for a lender to smaller Italian companies.

Monte Paschi

It too was in the news yesterday as Bloomberg told us this.

Fabrizio Pagani, the chief of staff at Italy’s Ministry of Economy and Finance, told Bloomberg News that Monte Paschi is in the picture for mergers after taking substantial steps to clean up its balance sheet since its rescue and introduce new management practices.

Who wants to merge with a zombie? I am reminded of what my late father used to tell me which is that more than a few takeovers and mergers only exist because the muddle the figures for a year or to. I can see why the Italian state might be keen as they did this.

A sale of Monte Paschi would cap a saga that saw Italy’s third-biggest bank, an icon of national finance, become engulfed by bad debts, criminal cases, and 6.7 billion euros in losses in the last two years. The government salvaged it as part of a 8.3 billion-euro recapitalization that strained ties between the country and the European Union over bailout rules.

Italy paid some 6.49 Euros a share as opposed to the 3.18 as I type this as we mull how the “substantial steps” have been ignored by the market which has more than halved the share price? We also learnt something from its bond issue in January. From the Financial Times.

Despite the low rating, the bond sale was three times subscribed and priced at a yield of just 5.375 per cent, confirming Monte Paschi’s ability to tap markets after its 2017 recapitalisation,

“Just 5.375%”? As in Europe these days that feels like riches beyond imagination! Especially if you note this.

The Italian government will provide a guarantee to the investment grade rated senior notes in this securitisation, which Monte Paschi will “retain” on its books.

I also thought that the bailout fund Atlante was pretty much out of cash.

It is able to derecognise the non-performing loans, however, because the riskier “mezzanine” and junior notes are being sold to the Italian Recovery Fund………..
While this fund — formerly known as Atlante — is private, it is part of a government-led initiative to clean up the Italian banking sector, and has far lower return targets than typical distressed debt buyers.

Anyway the share price reflects something rather different from the rhetoric as I note that according to Il Populista our old friend Finance Minister Padoan is on the case again.

The state will remain in Mps “for a few years”. Economy Minister Pier Carlo Padoan told the unions to add that “giving a number would be wrong and counterproductive for the markets”.

Giving wrong numbers has never bothered him before as I note this description of him which may be a quirk of Google translate.

The Minister of Economy, without shame,


Today has brought news that swings both ways for the Italian banks as we have got the data which determines the interest-rate for TLTRO II so it was not a surprise to see this.

The annual growth rate of adjusted loans to non-financial corporations increased to 3.4% in January, from 3.1% in December.

Of the new 24 billion Euros some 20 billion was for less than a year but presumably long enough to fulfil the ECB criteria with the Italian banks to the fore.

January net lending flows to the non-financial private sector were particularly strong in Germany and Italy (second largest in over 10 years). ( @fwred )

Yet so far they have gained little as the annual gain from this according to @fwred is 769 million Euros for the Spanish banks but 0 for the Italian ( Portuguese and Dutch) ones. Perhaps the last-minute dash will make a difference.

Veneto Banks

The collapse of Veneto Banca and Banca Popolare di Vicenza. last year led to many financial problems in the area. In banking terms this happened.

The two Veneto banks were wound down in June, with the state guaranteeing losses of up to €17bn, after the European Central Bank declared the lenders as failing. Intesa was handed as much as €4.8bn to help preserve its capital ratios from any adverse impact from the deal. ( FT)

Yet as this from  in January shows the pain for many businesses and savers continues.

He finally gave up. But it took six hours of negotiation because the former Romanian bricklayer Marin Halarambie, 59, agreed to move his car from the entrance of the historic Veneto Banca headquarters in Montebelluna. Christmas Day had arrived to stage a very personal protest, as the bankruptcy of the bank cost him a loss of about 125 thousand euros.


This is a particularly Italian saga where official boasting about the lack of bank bailouts met a brick wall of bank collapses later. Even worse the problem deteriorated as they looked the other way. On this road equity investors suffered – who can forget Prime Minister Renzi telling people Monte Paschi was a good investment ? – and so did the savers who were encouraged to invest in the “safe” bank bonds.

Now the economic outlook is better we wait to see what happens next. But there is a clear distinction between my subject of yesterday the Netherlands and Italy and it is this. From January 11th.

According to preliminary estimates, in the third quarter of 2017: the House Price Index (see Italian IPAB) decreased by 0.5% compared with the previous quarter and by
0.8% in comparison to the same quarter of the previous year (it was -0.2% in the second quarter of 2017);

For all the machinations that have gone on Italy has so far been immune from the suggested cure seen so often elsewhere which is to make the banks mortgage assets look stronger via higher house prices. How very Italian! Still the winners here are Italian first time buyers if they can get a mortgage.

Last week Bank of Italy Deputy Governor Panetta gave a speech which in one way suggested he must know some incredibly pessimistic people.

During the financial crisis, Italy’s banking system proved much more resilient than expected by many observers.

But intriguingly he does agree with me that if the buyers of bad loans are getting a good deal this must weaken and not strengthen the banks?

A generalized sale of NPLs on the market would imply a large transfer of resources from banks to buyers.

No wonder Diamond Bob is on the case! Also this is yet again rather familiar.

While the secondary market for NPLs is showing signs of rapid growth, it is still opaque and relatively oligopolistic.


Simultaneous, blanket sales would further depress
market prices, magnifying the gap between the book and market values of NPLs. The result
for banks would be significant losses and reduced capital. This could have unintended effects
on individual banks as well as macroeconomic consequences through a contraction in credit
supply in countries where high NPL stocks are a concern for several banks.





The Netherlands house price boom is yet another form of bank bailout

It has been a while since we have taken a look at the economic situation in what some call Holland but is more accurately called the Netherlands. On a cold snowy morning in London – those of you in colder climes are probably laughing at the media panic over the cold snap expected this week – let us open with some good news. From Statistics Netherlands.

According to the first estimate conducted by Statistics Netherlands (CBS), which is based on currently available data, gross domestic product (GDP) posted a growth rate of 0.8 percent in Q4 2017 relative to Q3 2017. Growth is mainly due to an increase in exports. With the release of data on Q4, the annual growth rate over 2017 has become available as well. Last year, GDP rose by 3.1 percent, the highest growth in ten years.

Indeed the economic growth was something of a dream ticket for economists with exports and investments to the fore.

GDP was 2.9 percent up on Q4 2016. Growth was slightly smaller than in the previous three-quarters and is mainly due to higher exports and investments.

The trade development provides food for thought to those who remember this from 2015.

In a bid to boost trade links with Europe, on the back of the ‘One Belt, One Road’ initiative, the Port of Rotterdam has established a strategic partnership with the Bank of China,  (jpvlogistics )

The idea of Rotterdam being a hub for a latter-day Silk Road is obviously good for trade prospects although in terms of GDP care is needed as there is a real danger of double-counting as we have seen in the past.

Exports of goods and services grew by 5.5 percent in 2017……….Re-exports (i.e. exports of imported products) increased slightly more rapidly than the exports of Dutch products.

If we look back for some perspective we see that the Netherlands is not one of those places that have failed to recover from the credit crunch. Compared to 2009 GDP is at 112.7 which means that if we allow for the near 4% fall in that year it is 8/9% larger than the previous peak. Although of course annual economic growth of around 1% per annum is not a triumph and reflects the Euro area crisis that followed the credit crunch.

Labour Market

The economic growth is confirmed by this and provides a positive hint for the spring.

In January 2018, almost 8.7 million people in the Netherlands were in paid employment. The employed labour force (15 to 74-year-olds) has increased by 15 thousand on average in each of the past three months.

Unemployment is falling and in this area we can call the Netherlands a Germanic style economy.

There were 380 thousand unemployed in January, equivalent to 4.2 percent of the labour force. This stood at 4.4 percent one month previously………, youth unemployment is now at a lower level than before the economic crisis; last month, it stood at 7.4 percent of the labour force against 8.5 percent in November 2008.

After the good news comes something which is both familiar and troubling.

Wages increased by 1.5 percent in 2017 versus 1.8 percent in 2016. There was less difference between the increase rates of consumer prices and wages in 2017 than in the two preceding years.

Wage growth fell last year which of course is more mud in the eye for those who persist with “output gap” style economics meaning real wages only grew by 0.1%. 2016 was much better but driven by lower inflation mostly. So no real wage growth on any scale and certainly not back to the levels of the past. One thing that stands out is real wage falls from 2010 to 14 in the era of Euro area austerity.

House Prices

There were hints of activity in this area in the GDP numbers as we note where investment was booming.

In 2017, investments were up by 6 percent. Higher investments were mainly made in residential property.

Later I noted this.

and further recovery of the housing market.

So what is the state of play?

In January 2018, prices of owner-occupied houses (excluding new constructions) were on average 8.8 percent higher than in the same month last year. The price increase was the highest in 16 years. Since June 2013, the trend has been upward.

So much higher than wage growth which was 1.5% in 2017 and inflation so let us look deeper for some perspective.

House prices are currently still 2.0 percent below the record level of August 2008 and on average 24.8 percent higher than during the price dip in June 2013.

One way of looking at this is to add something to the famous Mario Draghi line of the summer of 2012 “Whatever it takes” ( to get Dutch house prices rising again). What it means though is that house prices have soared compared to real wages who only really moved higher in 2016 due ironically to lower consumer inflation. Tell that to a first time buyer!

Wealth Effects

This view has been neatly illustrated by Bloomberg today as whilst the numbers are for Denmark we see from the data above that they apply in principle to the Netherlands as well.

Danes have another reason to be happy: they’re richer than ever before………After more than half a decade of negative interest rates, rising property values in Denmark have left the average family with net assets of 1.9 million kroner ($314,000), according to the latest report on household wealth.


The last time Denmark enjoyed a similar boom was in 2006

If we switch back to the Netherlands its central bank published some research in January as to how it thinks house price growth has boosted domestic consumption.

From 2014 onwards, house prices have been steadily climbing again. The coefficient found for the Netherlands implies that some 40% of cumulative consumption growth since 2014 (i.e. around 6%) can be attributed to the increase in real house prices.

We can take the DNB research across national boundaries as well at least to some extent.

The first group comprises the Netherlands, Sweden, Ireland, Spain, the United States and the United Kingdom, and the second group includes Italy, France, Belgium, Austria and Portugal.

In economic theory such a boost comes from a permanent boost to house prices which is not quite what we saw pre credit crunch.

Between 2000 and 2008, average real house prices went up by 24% in the Netherlands. Between 2008 and 2014, as a result of the financial crisis, they went down again by 24%.


This is an issue in the Netherlands.

 As gross domestic product (GDP) rose more sharply than debts, the debt ratio (i.e. debt as a percentage of GDP) declined, to 218.8 percent. Although this is the lowest level since 2008, it is still far above the threshold of 133 percent which has been set by the European Commission.

If we look at household debt.

After a period of decline, household debts started rising as of September 2014, in particular the level of residential mortgage debt. The latter increased from 649 billioneuros at the end of September 2014 to 669 billion euros at the end of June 2017.

There is also this bit highlighted by the DNB last October.

Almost 55% of the aggregate Dutch mortgage debt consists of interest-only and investment-based mortgage loans, which do not involve any contractual repayments during the loan term. They must still be repaid when they expire, however. Such loans could cause frictions, for example if households are forced to sell their home at the end of the loan term.


There are a litany of issues here as we see another example of procyclical monetary policy where and ECB deposit rate of -0.4% and monthly QE meet economic growth of around 3%. This means that in spite of the fact that real wages have done little house prices have soared again. The problem with the wealth effects argument highlighted above is that much if not all of it is a wealth distribution and who gave the ECB authority to do this?

Those who own homes in a good location have it made. While other people – especially people who rent their homes and people with bought homes in less favorable locations – fall behind. ( NL Times)

Those who try to be first time buyers are hit hard but a type of inflation that does not appear in the CPI numbers.

The truth is that the biggest gainers collectively are the banks. Their asset base improves with higher house prices and current business improves as we see more mortgage borrowing both individually and from the business sector. We moved from explicit bank bailouts to stealth ones as we see so many similar moves around the world. Banks do not report that in bonus statements do they? This time is different until it isn’t when it immediately metamorphoses into nobody’s fault.






What is happening with fiscal policy?

A feature of the credit crunch era has been the way that monetary policy has taken so much of the strain of the active response. I say active because there was a passive fiscal response as deficits soared caused on one side by lower tax revenues as recession hit and on the other by higher social payments and bank bailout costs. Once this was over the general response was what has been badged as austerity where governments raised taxes and cut spending to reduce fiscal deficits. Some care is needed with this as the language has shifted and often ignores the fact that there was a stimulus via ongoing deficits albeit smaller ones.

Cheap debt

Something then happened which manages to be both an intended and unintended consequence. What I mean by that is that the continued expansion of monetary policy via interest-rate reductions and bond buying or QE was something which governments were happy to sign off because it was likely to make funding their spending promises less expensive. Just for clarity national treasuries need to approve QE type policies because of the large financial risk. But I do not think that it was appreciated what would happen next in the way that bond yields dropped like a stone. So much so that whilst many countries were able to issue debt at historically low-levels some were in fact paid to issue debt as we entered an era of negative interest-rate.

This era peaked with around US $13 trillion of negative yielding bonds around the world with particular areas of negativity if I may put it like that to be found in Germany and Switzerland. At one point it looked like every Swiss sovereign bond might have a negative yield. So what did they do with it?


This morning has brought us solid economic growth data out of Germany with its economy growing by 0.6% in the last quarter of 2017. But it has also brought us this.

Net lending of general government amounted to 36.6 billion euros in 2017 according to updated results of the Federal Statistical Office (Destatis). In absolute terms, this was the highest surplus achieved by general government since German reunification. When measured as a percentage of gross domestic product at current prices (3,263.4 billion euros), the surplus ratio of general government was +1.1%.

So Germany chose to take advantage of being paid to issue debt to bring its public finances into surplus which might be considered a very Germanic thing to do. There is of course effects from one to the other because their economic behaviour is one of the reasons why their bonds saw so much demand.

But one day they may regret not taking more advantage of an extraordinary opportunity which was to be able to be paid to borrow. There must be worthy projects in Germany that could have used the cash. Also one of the key arguments of the credit crunch was that surplus countries like Germany needed to trim them whereas we see it running a budget surplus and ever larger trade surpluses.

In the detail there is a section which we might highlight as “Thanks Mario”

 Due to the continuing very low-interest rates and lower debt, interest payments decreased again (–6.4%).


The Swiss situation has been similar but more extreme. Membership of the Euro protected Germany to some extent as the Swiss Franc soared leading to an interest-rate of -0.75% and “unlimited” – for a time anyway – currency intervention. This led to the Swiss National Bank becoming an international hedge fund as it bought equities with its new foreign currency reserves and Switzerland becoming a country that was paid to borrow. What did it do with it? From its Finance Ministry.

A deficit of approximately 13 million is expected in the ordinary budget for 2018.

So fiscal neutrality in all but name and the national debt will decline.

 It is expected that gross debt will post a year-on-year decline of 3.3 billion to 100.8 billion in 2018 (estimate for 2017). This reduction will be driven primarily by the redemption of a 6.8 billion bond maturing combined with a low-level of new issues of only 4 billion.

The UK

Briefly even the UK had some negative yielding Gilts ( bonds) in what was for those who have followed it quite a change on the days of say 15% long yields. This was caused by Mark Carney instructing the Bank of England’s bond buyers to rush like headless chickens into the market to spend his £60 billion of QE and make all-time highs for prices as existing Gilt owners saw a free lunch arriving. Perhaps the Governor’s legacy will be to have set records for the Gilt market that generations to come will marvel at.

Yet the path of fiscal policy changed little as indicated by this.

Or at least it would do if something like “on an annual basis” was added. Oh and to complete the problems we are still borrowing which increases the burden on future generations. The advice should be do not get a job involving numbers! Which of course are likely to be in short supply at a treasury………..

But the principle reinforces this from our public finances report on Wednesday.

Public sector net borrowing (excluding public sector banks) decreased by £7.2 billion to £37.7 billion in the current financial year-to-date (April 2017 to January 2018), compared with the same period in the previous financial year; this is the lowest year-to-date net borrowing since the financial year-to-date ending January 2008.

So we too have pretty much turned our blind eye to a period where we could have borrowed very cheaply. If there was a change in UK fiscal policy it was around 2012 which preceded the main yield falls.

Bond yields

There have been one or two false dawns on this front, partly at least created by the enthusiasm of the Bank of Japan and ECB to in bond-buying terms sing along with the Kaiser Chiefs.

Knock me down I’ll get right back up again
I’ll come back stronger than a powered up Pac-Man

This may not be entirely over as this suggests.

“Under the BOJ law, the finance ministry holds jurisdiction over currency policy. But I hope Kuroda would consider having the BOJ buy foreign bonds,” Koichi Hamada, an emeritus professor of economics at Yale University, told Reuters in an interview on Thursday.

However we have heard this before and unless they act on it rises in US interest-rates are feeding albeit slowly into bond yields. This has been symbolised this week by the attention on the US ten-year yield approaching 3% although typically it has dipped away to 2.9% as the attention peaked. But the underlying trend has been for rises even in places like Germany.


Will we one day regret a once in a lifetime opportunity to borrow to invest? This is a complex issue as there is a problem with giving politicians money to spend which was highlighted in Japan as “pork barrel politics” during the first term of Prime Minister Abe. In the UK it is highlighted by the frankly woeful state of our efforts on the infrastructure front. We are spending a lot of money for very few people to be able to travel North by train, £7 billion or so on Smart Meters to achieve what exactly? That is before we get to the Hinkley Point nuclear power plans that seem to only achieve an extraordinarily high price for the electricity.

One example of fiscal pump priming is currently coming from the US where Donald Trump seems to be applying a similar business model to that he has used personally. Or the early days of Abenomics. Next comes the issue of monetary policy where we could of course in the future see news waves of QE style bond buying to drive yields lower but as so much has been bought has limits. This in a way is highlighted by the Japanese proposal to buy foreign bonds which will have as one of its triggers the way that the number of Japanese ones available is shrinking.