The Bank of England will be vigilant in its efforts to ignore house price rises

This morning has been one where a little known committee has emerged blinking into the spotlights. It is the Financial Policy Committee (FPC) of the Bank of England and just to prove that they are central bankers they got straight to what is the beating heart of their concerns.

he UK banking system has the capacity to continue to provide that support. The FPC continues to judge that the banking sector remains resilient to outcomes for the economy that are much more severe than the Monetary Policy Committee’s central forecast. This judgement is supported by the interim results of the 2021 solvency stress test.

We have learnt to be more than suspicious about the use of the word “resilient” especially after noting how across the Irish Sea what was labelled the best bank in the word suddenly collapsed in the credit crunch.  As so often it was time to throw The Precious a bone.

The FPC supports the Prudential Regulation Committee’s (PRC’s) decision that extraordinary guardrails on shareholder distributions are no longer necessary, consistent with the return to the Prudential Regulation Authority’s (PRA’s) standard approach to capital‐setting and shareholder distributions through 2021

How many civil servants does it take to let the banks pay dividends again? As you can imagine it has gone down well with bank shareholders.

Whilst they are there I guess they felt they also needed to help keep the lending taps open.

To support this, the FPC expects to maintain the UK countercyclical capital buffer rate at 0% until at least December 2021. Due to the usual 12‐month implementation lag, any subsequent increase would therefore not be expected to take effect until the end of 2022 at the earliest.

What about the real economy?

Some businesses have been hit hard.

The increase in indebtedness has not been large in aggregate, but has been more substantial in some sectors and among small and medium‐sized enterprises (SMEs)…..companies with weaker balance sheets, particularly in sectors most affected by restrictions on economic activity and SMEs, may be more vulnerable to increases in financing costs.

But it is not going to worry about them because others have not.

UK businesses’ aggregate interest payments as a proportion of earnings did not increase over 2020, and are around historic lows.

Such statements can hide a lot of woes especially for businesses where earnings have been hit hard.

As to households things are not as bad as when things collapsed last time.

The share of households with high debt‐servicing burdens has increased slightly during the course of the pandemic, but remains significantly below its pre‐global financial crisis level

Pumping up house prices was one of the few things we could do.

House price growth and housing market activity during 2021 H1 were at their highest levels in over a decade, reflecting a mix of temporary policy support and structural factors.

We need to find a way that people can borrow even more.

However, so far, there has only been a small increase in mortgage borrowing relative to income in aggregate, and debt‐servicing ratios remain low.

It has been good to see that low equity mortgages are back but in case that backfires again we had better cover ourselves.

The FPC’s mortgage market measures are in place and aim to limit any rapid build‐up in aggregate indebtedness and in the share of highly indebted households. The FPC is continuing its review of the calibration of its mortgage market measures.


This is an awkward area for central bankers. After all their main policy lever these days is pumping up asset prices via purchases of government bonds. The Bank of England will do another £1.15 billion of that this afternoon. So we get this sort of buck passing statement.

Risky asset prices have continued to increase, and in some markets asset valuations appear elevated relative to historical norms. This partly reflects the improved economic outlook, but may also reflect a ‘search for yield’ in a low interest rate environment, and higher risk‐taking.

Ah the very yields the central banks have set out to take away! This is also why those who set interest-rates and have previously been so busy cutting them are always in a rush to blame secular trends. It wasn’t their fault you see. Of course if it had worked it would have been their triumph.

It gets worse in the next bit. The Bank of England piled into the Corporate Bond market in spite of the fact that previously it had got into a mess in doing so. This is because UK businesses of that size are mostly international and thus often choose to issue in Dollars and Euros to match currency risk. Thus the £ sterling market is smaller than you might think and it ended up being like The London Whale in there. Also it was so desperate to find bonds to buy it bought the ones of Apple. Exactly what support did the richest company in the world need? Yet it tries to point put what is below as if it had nothing to do with it.

The proportion of corporate bonds issued that are high‐yield is currently at its highest level in the past decade, and there is evidence of loosening underwriting standards, especially in leveraged loan markets.

Encouraging that was official Bank of England policy. Below is as close to admitting they have stored up trouble for the future as they will ever get.

This could increase potential losses in a future stress, and highly leveraged firms have also been shown to amplify downturns in the real economy.

Next is even more classic central banker speak which completely ignore their role in creating this.

Asset valuations could correct sharply if, for example, market participants re‐evaluate the prospects for growth or inflation, and therefore interest rates.

Even Bloomberg pointed this out last week. What did central bankers think would happen in response to this?

Central banks in the U.S., Europe and Japan have become ultimate market whales during the pandemic, with combined assets of $24 trillion.

Is there any market-based finance left after all their interference?

Any such correction could be amplified by vulnerabilities in market‐based finance, and risks tightening financial conditions for households and businesses.

Many reviewing this will think The Beatles were rather prescient here about QE.

You never give me your money
You only give me your funny paper

Especially if their situation is like this.

Out of college, money spent
See no future, pay no rent
All the money’s gone, nowhere to go


There are a couple of contexts here. I have critiqued the FPC as being a waste of space where people you have mostly never heard of are selected because they have the “right” views. The official view was that the FPC would set macroprudential policies which would keep house prices under control. Remember macropru as it became called? Where are all its supporters now as they seem to have disappeared?

“Over the last twelve months, our index has shown the average price of a home sold in England and
Wales has increased by some £32,500, or 10.7%. If we exclude London from this then the figure is a
very considerable 14%. Nevertheless, even including the capital, this is the highest annual rate since
February 2005. It is now fourteen months since any of the areas in our index have recorded a fall in
house prices, and this is while the UK economy has been under the severest pressure it has faced in
living memory.” ( Acadata)

So where are they then?

Still it looks as though one member has been checking his own position.



banks will be banks as Archegos Capital shows one more time

One of the features of a banking crisis is that there is so much that is familiar each time. Even if I may be permitted to leap into the future the inevitable enquiry that tells us it will not be allowed to happen again. Also it is quite rare that a blow up is alone as bankers are pack animals and copycats and if they see business elsewhere will rush to mimic iy So right no now doubt teams are being dispatched to make sure that other banks keep out of the news headlines if they can. As the story unfolds were see another issue which is a blow up like Archegos puts others in the firing line as it liquidiates

Archegos Capital

Let us open with a note of the scale of the issue here.

Losses that triggered the liquidation of positions approaching $30 billion in value bring to light complicated financial instruments used by European investors that are effectively banned in the U.S. but could still have spillover effects domestically. ( MarketWatch )

Okay so even in these times US $30 billion is a chunky sum to try and liquidate in one go. I also note the use of “effectively banned in the US”. It sounds as if they are not quite so sure.

There is an issue with the trades in that they were a type of over the counter or OTC product where you deal direct with someone. This poses issues as what if one side cannot pay? Anyway below is a description of hat was taking place. CFDs are Contracts for Differences.

CFDs are a kind of derivative instrument that allow traders to place a directional bet on the price of a security without actually buying or selling the underlying instrument, Julius de Kempenaer, senior technical analyst at, explained to MarketWatch via email.

“It works much like a futures contract on, say, an index. The buyer and the seller agree on the price of a transaction sometime in the future. At the end-date, or earlier if they decide to unwind the position beforehand, only the difference between the actual and the agreed price will be settled.”

“If the price went up the seller pays the buyer the difference, and vice versa,” the analyst wrote. ( MarketWatch )

The issue here is the differences between this and a futures contract, It will have standardised rules and as well will have clearers that in the event of a failure will protect trades in the market. Who you trade with does not matter whereas in the case of a CFD it matters a lot.

That gets added to when we note this.

The analyst explained that CFDs are leveraged bets, where investors can use borrowed money at a fraction of the cost of the underlying asset, “typically around 10-20% depending on the volatility of the underlying market.”

“This means that you can get a position worth $1 million and only need $200,000 in margin. That allows building big positions very rapidly without a lot of market impact,” he said. ( MarketWatch)

Hang on as that is not quite right. You can build a big position without having to put up much cash as in this instance you are geared five times. So five times the profit if times are good but also five times the losses if things go the other way. Returning to market impact that is a risk transferred to the counterparty. Depending on how they hedge whether it be by stock purchases or options you could have a rather large market impact if they hedge a position with a delta of five. If you have followed the story of GameStop you will know that this sort of thing was supposed to increase market impact as those dealing with geared customers ( in this instance options) went and hedged the position. As an aside GameStop is at US $181 so something if still going on there.

There is another risk here and we get this if someone has geared five times but is at that limit with that counterparty. If they then go elsewhere there is an obvious issue.

On top of the leverage, sources reported that Hwang may have been able to obscure his investment fund’s exposures by using multiple banks to execute the firm’s trades. ( MarketWatch )

Reuters are keen to emphasise the leverage here.

Archegos had assets of around $10 billion but held positions worth more than $50 billion, according to the source, who declined to be identified.

The Banks

The issue here is that they are on the other side of the gearing so have five times the risk. Also their risk is with only one counterparty unlike on an exchange where risks are pooled and managed via the clearing system. On the other side they get commission and take a spread from the CFD trading. So it starts well on the income side and should a fund trade actively then the income rises and those responsible look towards big bonuses. But at the same time risk is rising in two ways. The first is that to get that income the bank is taken an ever bigger risk with one counterparty. The next as it continues to grow is that the stock or equity invested in can get swamped too. We see that from what happened to one.

The sales approached $30 billion in value, some of the people said, and fueled a 27% plunge Friday in shares of ViacomCBS—an unusually large decline in a widely held, large-capitalization stock on a day with no significant company-specific news.  ( Wall Street Journal)

There are all sorts of issues here because we have a case of the Grand Old Duke of York as the share price for Viacom is US $45 as opposed to the peak of US $101 last week. So we see the liquidation effort tumbling the price. But as the share has been as low as US $11.92 in the last year what is a fair price? Archegos has pumped and dumped the price leaving some investors with Blood Sweat and Tears.

What goes up must come down
Spinning Wheel got to go ’round
Talkin’ ’bout your troubles
It’s a cryin’ sin
Ride a painted pony
Let the Spinning Wheel spin
You got no money, you got no home
Spinning Wheel all alone

So in a sense Viacom is a sort of victim although it has at times been a beneficiary. Oh what a tangled web and all that….


Due to the way the financial week opens the first news came from Japan.

Nomura is currently evaluating the extent of the possible loss and the impact it could have on its consolidated financial results. The estimated amount of the claim against the client is approximately $2 billion based on market prices as of March 26.

Next up came an organisation that seems to have set Deutsche Bank as its role model. Credit Suisse got itself into rather a mess with Greensill Capital and the losses this time around seem to be mounting.


This brings in another feature where we get the news like it has notches on a rope as @Rifleamp points out.

Last friday, they said 2 billion loss. Monday 4 billion. Now 7 billion. What is wrong? Market is up everyday.

Someone may also have come up with a “cunning plan” for hedging the loss. I have seen one or two of these in my time. What happens then is a situation that you think cannot get any worse does. For example I once saw a US $250,000 loss converted into a US $1 million one via that route.

There will be a litany of smaller casualties of this particular war as well.



There is a familiar list of issues every time. Let me start with one I have not mention so far is that one should always get nervous when an investor or hedge fund gets lauded. Obviously some are better than others but that is not the only reason for out performance. Then there is the issue of trading in size with one counterparty where apparently both are winning. Next we get leverage where you get a position you cannot afford but also by that definition can lose more than you can afford. Unlike with buying a call option where there is a stop loss provided by the option price.

Switching to the banks they have the issue of balancing income ( fees and commission) with risk. This so often hits the issue that when someone is encouraged to get more income the risk goes up to. That is fine until it isn’t when it is usually too late.

So we are left wondering how many share prices have been pumped up by this sort of leverage? Then how many will go wrong? That matters because whilst these schemes inflate bankers bonuses when they go right, when they go wrong in scale they tend to end up with the taxpayer footing the bill.


Where next for the economy of Spain?

It has been a while since we have taken a look at the economy of Spain so let us take a moment to reflect on the background here.

The Spanish GDP registered a variation of 0.4% in the fourth quarter of 2020 compared to the previous quarter.

Year-on-year GDP variation stood at ─9.1%, compared with -9.0% in the previous quarter.

Throughout 2020, the GDP at current prices was 1,119,976 million euros, 10.0% lower than in 2019. In terms of volume, the GDP registered a variation of −11.0% in 2020
compared to the previous year. ( INE)

So the economy grew at the end of 2020 but was still 9.1% smaller than when the year began and there had been a sharp dip as we note that if we look at the whole year it was 11% weaker.

This means that as we stand the last decade has turned into a lost one. If we look back to 2010 we see that the economy is now about 1% larger after what has been a tumultuous decade. The Euro area crisis saw a loss of 5% of GDP which was replaced by a strong period with average annual growth peaking at 3.8% and the economy being around 16% larger than at the nadir or 11% from the beginning. So it has been quite a journey.

We can add an extra bit by noting that the construction sector was hit hard again at the end of last year.

The gross value added of Construction varied by -18.2% compared to the same quarter of
2019, which is 7.2 points less than in the previous quarter.

Also let me give INE credit for emphasising this as the impact on the labour market.

In year-on-year terms, the number of hours
actually worked decreased one tenth to -6.3%.

Looking Ahead

Yesterday Markit produced a strong business outlook report.

Spanish companies showed in February a much
greater degree of confidence with regards to the future,
with activity, profitability and employment prospects all
brightening since last year.
“Underpinning the optimism are genuine hopes that the
worst of the pandemic – and the associated economic
restrictions – is coming to an end, with firms widely
expecting a strong economic bounce-back.

However there were worries about tourism.

“That said, there remains inevitable uncertainty on how
the next few months will evolve, especially around
foreign tourism, an important contributor to the Spanish

Regular readers will recall that when the pandemic began my major fear for Spain’s economy was tourism. Earlier this month we got a further update on how that was playing out.

Spain received in January the visit of 434,362 international tourists, 89.5% less than in the same month of 2020. ( INE)

So quite a difference to the previous pattern which was for 4.1 to 4.2 million in the two preceding years. Was there a Brexit impact? At first it looks like that as the fall of UK visitors was the largest at 96.7% but it is also true that the Nordic and US falls we very similar so on the end definitely maybe.

In terms of the pandemic Spain has been doing better than other parts of Europe with numbers falling. It was also making better progress with vaccinations but now of course we wait for the implications of this.

MADRID (Reuters) – Spain will stop using AstraZeneca’s COVID-19 vaccine for at least two weeks, the government said on Monday, joining a growing list of European countries putting the brakes on the shot over concerns about possible side effects.


This is a hope for the economy going forwards and the Bank of Spain has been looking into the state of play.

Indeed, from January to September 2020 (the latest available figure), household saving was around 3.5 pp of GDP higher than observed, on average, in the first three quarters of the last five years both in Spain and the euro area.

However they are relatively downbeat on the prospects so let us analyse their thinking.

First, a major portion of unsatisfied consumption in recent
quarters attributable to the restrictions is spending on
services, which generally cannot be deferred.

So it seems they at least will not be making extra restaurant and bar visits.

Second, the extraordinary saving reservoir built up since
the onset of the pandemic is concentrated mainly in
higher incomes, whose marginal propensity to consume is

I give them credit for this because central bankers normally run away from this sort of thing. Perhaps it is because we are looking at research rather than the pronouncements of leaders. They also have the courage to point out that some will have been hurt badly in economic terms.

Lower-income households do not only have a
lower saving capacity; in fact, the increase in saving over
recent quarters might have been more limited or even, in
some cases, non-existent despite the fact that the public
support measures may have contributed to sustaining
these households’ incomes.

Also there may be concerns that there will be a price to pay.

Lastly, the economic literature also emphasises the
possibility that households may decide to maintain a
relatively high level of saving because they foresee future tax rises in response to the notable increase in public debt
in this crisis (the Ricardian channel)

The whole  position has been really rather like the Helicopter Money we have thought about other the years with one exception.The case for Helicopter Money was that it would be seen as a windfall and  immediately spent.In this instance people have been given the money and stopped from spending it

The Spanish Banks

There is another curiosity from the above.

A significant portion of this excess saving has built up in the
form of bank deposits

In a world of negative interest-rates when the banks can get funding from the ECB at -1% they do not particularly want deposits but have ended up with a bit of a tsunami of them.

They are not getting much relief from house prices.

The annual variation rate of the Housing Price Index (HPI) decreased by two tenths to 1.5% in the fourth quarter of 2020. This is the lowest since the first quarter of 2015.

After the previous boom and bust it may be a case of once bitten and twice shy. Also even those numbers may be flattering as this bit look s odd.

By housing type, the rate of new housing reached 8.2%, seven tenths below that registered in the previous quarter.

I am no expert in the exact details of the Spanish property market but can tell you there have been issues in the UK in dealing with new houses. With an old house you have the benchmark of past prices but new ones of course do not.


This is an issue we have noted before has a banking element and the Bank of Spain has been looking into this.

Turkey has been identified as a material country for the Spanish banking system by virtue of BBVA Group’s ownership interest in the Turkish bank Garanti
(49.85% of its capital). Garanti is Turkey’s second largest private bank and the fifth largest if State-owned banks are included. In 2020, Garanti accounted for 8.1% of total BBVA Group assets, while its €563 million contribution to BBVA Group net profit represented 14.3% of total profit generated by the Group’s business areas as a whole (€3.9 billion), excluding the corporate centre.


As you can see we were in a situation where the outlook looked relatively bright for Spain.The pandemic was improving and the vaccine roll out was progressing raising hopes for tourism later this year. Whilst Spain had a deeper fall than many of its peers we know that it can grow at what is a fast rate for these times. A question mark has been placed against this with the new vaccine decision.

If we now switch to a longer-term analysis though I was reminded of the work of the late Ed Hugh warning about the demographics by this.

While the number of births has shown a constant downward trend for several years now, this
decline was further accentuated nine months after the confinement of the Spanish population
during the first state of alarm due to COVID-19.
Thus, in November 2020 the interannual birth rate fell by more than 10%, reaching decreases
of more than 20% in December 2020 and in January 2021, according to INE estimates.

They went further here.

Specifically, only 23,226 children were born in the month of December 2020. This was 20.4% less than in the same month of 2019 and the lowest monthly value since the INE statistical series began, in the year 1941.




Italy’s banking sector woes continue to undermine it’s economy

This week so far has brought is up to date with the economic state of play in Italy, so let us open with this morning’s official release.

In the fourth quarter of 2020 the seasonally and calendar adjusted, chained volume measure of Gross
Domestic Product (GDP) decreased by 2 per cent with respect to the previous quarter and by 6.6 per cent
over the same quarter of previous year.

Some parts of the Euro area have managed to escape much of an end of year downturn but sadly not Italy. Also the detail is of a widespread decline.

The quarter on quarter change is the result of a decrease of value added in all main economic sectors, i.e.
agriculture, forestry and fishing, industry and services. From the demand side, there is a negative
contribution by both the domestic component (gross of change in inventories) and the net export

In fact the annual comparison is flattered a little by the fact that the end of 2019 saw a quarterly decline of 0.4%. This reminds us of our “Girlfriend in a Coma” theme highlighted by the chart below.

As you can see from the screen shot our theme was established because Italy’s economy never recovered from the impact of the credit crunch. There was a nascent recovery in 2010 and 11 but that was torpedoed by the Euro area crisis. This was followed by a period of stagnation before what has become known as the Euro area boom around 2017/18. For Italy that was essentially 2017 with quarterly growth of 0.4% or 0.5% and an annual rate of growth which peaked at 1.9%. After that the next two years saw quarterly growth if you add them up of 0.2%, so Italy had returned to stagnation at best and maybe worse as we note the -0.4% at the end of 2019.

Looking Ahead

If we now move forwards the OECD is producing a weekly tracker that up to the 23rd of January has the GDP of Italy some 9.1% below a year before. So more grim news although we do get some relief from the Markit PMI business survey.

Italy’s manufacturing recovery continued into 2021, according to the latest PMI® data, with conditions improving at the sharpest rate since March 2018. Output growth was the fastest for three months, while the upturn in inflows of new work quickened to a solid pace.

Indeed according to the PMI there is hope for the rest of this year.

“Goods producers remained confident of higher output
over the coming year during January, and indeed the
manufacturing sector remains in relatively good stead
as we enter 2021, with the recovery gathering further
momentum in spite of ‘red zone’ restrictions in some

There is something of a curiosity in at least part of the cause.

Gains in sales also came from abroad during the first month of 2021, as new export orders rose for the fourth time in five months and solidly, amid reports of stronger demand from both Europe and north America.

Italy does in general trade well if I may put it like that.Some of it is due to tourism to a delightful country but there is more to it than that as the data below shows.

In 2020 the trade balance with non-EU27 countries registered a surplus of 57,036 million euro compared to
the surplus of 52,339 million euro in 2019; excluding energy, the surplus was equal to 79,542 million euro,
down compared with a 90,427 million euro surplus in 2019.

That is just the trade balance for goods but economics 101 would project strong GDP numbers from this.The problem is that the apparently competitive country never grows much and in fact has shrunk in the credit crunch era.

The Labour Market

Here again the PMI was hopeful for manufacturing.

Meanwhile, firms continued to take on additional staff into
January, with the latest rise in employment attributed to a
surge in sales. The rate of job creation was unchanged from
December’s 29-month high and moderate.

But that has not been backed up by the wider economy as yesterday’s official release showed.

On a monthly basis, the decrease of employment (-0.4%, -101 thousand) concerned women and all age
classes, with the exception of over50 people, while men were substantially stable. Overall, the
employment rate dropped to 58.0% (-0.2 p.p.).

This meant that employment was lower than a year ago.

Compared to December 2019, employment showed a decrease in terms of figures (-1.9%, -444 thousand)
and rate (-0.9 percentage points).

Actually the decline began pre pandemic as the employment level peaked at 23.4 million in the summer of 2019 and then started to fall which the pandemic accelerated. Now it is falling again and has slipped below 22.9 million.With the various furlough schemes the trend is more important than the absolute number at the moment.

Switching to unemployment we learn little from the absolute numbers for the reasons I have discussed before. But it does appear to be rising again.

In the last month, the number of unemployed people returned to grow (+1.5%, +34 thousand) and the
increase was generalized for both genders and all ages: only among people aged 15-24 years a decrease
was registered. The unemployment rate rose to 9.0% (+0.2 p.p.) and the youth rate to 29.7% (+0.3 p.p.).

Also I note that in spite of the various schemes youth unemployment is recorded at around 30%. If trade shows the good side of the Italian economy then youth unemployment shows the bad side.

Social Media

After all the hard data above I am sure you were all wondering, what does Twitter think? Well do not worry as the Italian Statistical Office has been on the case.

On average, this procedure elaborates through sentiment analysis techniques about 58,000 tweets per day……..The first three weeks of November saw an upturn in the trend, followed by a more marked downturn that continued until Christmas. The month of December then closed with a stabilization of the trend.

Round and Round we go

Andrea Orcel is on his way to being the next CEO of Unicredit and is described as a “master deal maker” by Bloomberg.What deals did he do?

As global head of Merrill Lynch’s financial institutions team and later global origination, Orcel advised Britain’s Royal Bank of Scotland, Santander and Belgium’s Fortis in the ruinous 71 billion euro ($86 billion) takeover of ABN Amro.

RBS and Fortis were both later nationalised, with the deal in part blamed for their fate as the financial crisis brought banks across the region to their knees. ( Reuters)

Yes an absolute disaster. But wait there is more.

Before that deal closed, Orcel advised Monte dei Paschi on buying ABN Amro’s Italian business Antonveneta from Santander. The Tuscan bank paid 9 billion euros, even though Antonveneta had been valued at about 6.6 billion euros in the broader ABN Amro deal just months before.

Monte dei Paschi later admitted it had done no due diligence. ( Reuters)

Monte dei Paschi collapsed as a result of this but Andrea.

The following year, as Europe’s banks battled to survive the crisis, Orcel received a bonus of some $33.8 million.

This is classic Yes Prime Minster stuff with an Italian twist. In any sane world he would never get a job in banking again. In reality I expect him to absorb Monte dei Paschi into Unicredit and to be a “safe pair of hands” for the state. After all he has skin in that particular game.


The last section is I think revealing as to why the Italian economy has struggled so much. The same old crew run the banking sector in spite of the fact that it goes from bad to worse.You might reasonably think that even Monte dei Paschi cannot get worse and then something like this pops up again.

To be able to cut its 64% stake in MPS, Italy still needs to find a solution for the 5 billion euros in residual risks……..

If that plan doesn’t work, the government would revert to a previous scheme where the legal risk itself would be spun off to another, unspecified entity, a source said.

Actually I thought it was 10 billion Euros. Also do not forget that the legal structure for the banking system is call the (Mario) “Draghi Laws”.

Returning to the real economy the collective economic decline is worse on an individual basis. The population grew by around 1.1 million between 2010 and 2020.



Monte Paschi symbolises the economy of Italy

There is a saying that history does not repeat but it does rhyme. Well it faces a challenge from the world’s oldest bank where we keep facing the same situation. You might think that after all the bailouts  Monte Paschi Di Siena is done, but as ever another twist arrives.

LONDON/MILAN (Reuters) – Italy is working on a plan to take on about 14 billion euros ($17 billion) of UniCredit’s impaired loans to make a takeover of state-owned Monte dei Paschi more attractive for the country’s second-biggest bank, sources told Reuters.

This is all rather familiar as we look back as there never seems to be quite enough money to cover the problems. Reuters summarises the most recent bailout before this one.

Rome spent 5.4 billion euros in 2017 to rescue the loss-making Tuscan bank, which now needs up to another 2.5 billion euros, giving fresh urgency to efforts to cut Italy’s 64% stake as agreed with European Union authorities.

After warning its capital reserves would breach minimum thresholds in the first quarter, MPS must tell the ECB by the end of January how it plans to address the shortfall.

For the Italian taxpayer there is an element of robbing Peter to pay Paul about all of this.

Bad loan manager AMCO, which is backed by Rome and run by former UniCredit executive Marina Natale, is looking to hoover up around 60% of UniCredit’s problem debts while also ridding Monte dei Paschi of some high-risk loans, two sources said on condition of anonymity.

The plan is part of measures being readied by the Treasury in order to press ahead with the sale of MPS, whose plight has come to symbolise Italy’s long-running banking crisis.

Yes we have another bank bad loan manager in Italy which to be fair is a booming business. Regular readers will recall Atlante I and II which were sometimes called Atlas and to be fair the image of trying to hold up the whole world must have been how they felt. Things there just went from bad to worse. Or rather from declared triumph to bad to worse. So the banking private sector effort turned into a state backed one.

AMCO, a state-backed bad loan manager, has gone from bit player to one of the leading forces in Italy’s 330 billion euro ($390 billion) bad debt market in the space of three years with over 33 billion euros in assets under management.

Swamped by bad debts from the last financial crisis, Italy in 2016 put the Treasury in control of AMCO, expanding its remit beyond managing the problem loans of failing Banco di Napoli for which it had been created two decades earlier.

This is not the last of the problems here as back on December 2nd we looked at this from parmapress24.

WHO CAN ASK FOR DAMAGES  – Apart from those who were constituted in the process (and who will not have to – for now – do anything), all those who are or have been holders of shares in Banca Monte Paschi di Siena can make a claim  between 2008 and 2015 and those shareholders who resold the bank’s securities in the period in question , accusing a significant loss of assets.

I have to confess the first thought that brings to mind was the claim by the previous Prime Minister Matteo Renzi that Monte Paschi was a “good investment”. Anyway there is another issue for the Italian taxpayer from this.

To address the costly legal risks stemming from MPS’s ill-fated acquisition of rival Banca Antonveneta in 2007, the Treasury is working with its advisers on three options.

These would entail either a “guarantee scheme” or alternatively some kind of “insurance contract” with cash as collateral, one of the sources said.

Another option is a subordinated loan whose principal could be wiped off under certain circumstances, the source added.

Interesting as “certain circumstances” have so far happened 100% of the time where Monte Paschi is concerned. Reuters pins down an amount.

Sources have said the foundation and MPS could consider a settlement that would see 3.8 billion euros in damage claims dropped in exchange for shares in the bank.

I have seen 10 billion Euros quoted before and again the track record is that the higher amounts come into play and sometimes they are not high enough.

This will also drove a Jose Mourinho sized bus through the European Union banking and competition rules. But it is the same EU via the European Central Bank which is pressing Italy to sort this out.

Along the way Unicredit will get quote a few billion Euros of sweeteners. Also as more banks are merged into it then it will become exactly the Too Big To Fail or TBTF institution we are supposed to be trying to avoid.

Italy’s Economy

We can look at this as a case of this was then and that is now. The then was Italy’s statistical office on the 22nd of December.

In December 2020, the respondents became more optimistic again, so the consumer confidence bettered from 98.4 to 102.4……..As for the business confidence climate, compared to the previous month, the index (IESI, Istat Economic Sentiment Indicator) showed a new significantly improvement, rising from 83.3 to 87.7.

Whereas yesterday’s Markit PMI business survey told a very different story.

The Composite Output Index* posted 43.0 in December to
signal a third successive contraction in Italian private sector output. The index figure was little-changed from November’s 42.7 and signalled another marked decline overall, which was again driven by the services sector.
A further reduction in new orders at Italian companies
was also recorded in December. The rate of decline eased
noticeably on the month, but was still sharp.

There was a minor rally in construction reported this morning but frankly a reading of 50.5 means treading water.

As you can see below the further slow down is also affecting the labour market.

Amid ongoing weakness in demand, firms made further
cuts to their staffing levels during December, extending the
current sequence of falling employment to ten months. That
said, the rate of job shedding eased since November and was modest.


As Elton John would say this is a sad.sad situation ( the economy) and it’s getting more and more absurd ( the banks). If we start with the former then the official Italian forecast for the Euro area is below.

GDP in the euro area is expected to fall again in Q4 by -2.7% with a decline by -7.3% in 2020 compared to the previous year. Given the assumptions mentioned above, GDP should recover by +0.7% in Q1 and +3.0% in Q2.

As events have moved on we now face another contraction in Q1 as we see something I have consistently warned about. When forecasters do not know they automatically predict growth/ Sadly in line with our “Girlfriend in a coma” theme Italy looks set to under perform.

Switching to the banks they do not even get any particular asset based relief from house prices.

According to preliminary estimates, in the third quarter of 2020, the HPI (see Italian IPAB) decreased by 2.5% compared with the previous quarter and increased by 1.0% compared with the same quarter of the previous year (it was +3.3% in the second quarter)………The decrease on quarterly basis of HPI was only due to the prices of existing dwellings (-3.2%), while prices for new dwellings increased (+1.1%).

In many ways this is admirable as younger Italians do not face the house price surges seen elsewhere as prices are below those of a decade ago with an index now of 105.6 as opposed to the 118.1 of 2010. Although they would need a job.

From the point of view of the ECB though this is a complete disaster as we have official interest-rates at -0.5% and -1% for the banks as well as a QE driven five-tear yield of -0.1%. But house prices do not respond.






Could the US economy contract at the opening of 2021?

The US is in a rather awkward interregnum period between Presidents which is more noticeable at times of change. One way of looking at this is through the plans for another fiscal stimulus. Back on the 5th of November we looked at the plans of the now President elect Biden.

Vice President Biden has proposed a wide
range of changes to the tax code and government spending. In total, he is calling for $4.1 trillion in tax increases and an additional $7.3 trillion in government spending over the next decade.

So a US $3.2 trillion boost was the plan back then and it had the advantage that President Trump has been a fan of fiscal policy and the Federal Reserve was happy to oil the wheels.

Federal Reserve Chairman Jerome Powell called Tuesday for continued aggressive fiscal and monetary stimulus for an economic recovery that he said still has “a long way to go.”

Noting progress made in job creation, goods consumption and business formation, among other areas, Powell said that now would be the wrong time for policymakers to take their foot off the gas. ( CNBC on the 6th of October).

So on the surface everyone was singing along with David Bowie.

Fashion, turn to the left
Fashion, turn to the right
Ooh fashion
We are the goon squad and we’re coming to town
Beep-beep, beep-beep

The Deal

From the New York Times yesterday.

WASHINGTON — Congressional leaders on Sunday reached a hard-fought agreement on a $900 billion stimulus package that would send immediate aid to Americans and businesses to help them cope with the economic devastation of the pandemic and fund the distribution of vaccines.

As you can see that is almost a PR release a theme which continues here.

While the plan is roughly half the size of the $2.2 trillion stimulus law enacted in March, it is one of the largest relief packages in modern history.

The agreement also meant they could stop doing this which was frankly embarrassing. From CNBC on Friday.

JUST IN: House passes two-day funding bill to prevent government shutdown

As to the details here is the New York Times again.

Although text was not immediately available, the agreement was expected to provide $600 stimulus payments to millions of American adults earning up to $75,000. It would revive lapsed supplemental federal unemployment benefits at $300 a week for 11 weeks — setting both at half the amount provided by the original stimulus law.

That makes you wonder what people have been doing in the meantime and I guess the pictures of long queues at US food banks have given us at least a partial answer. There is help for businesses too.

The measure would also provide more than $284 billion for businesses and revive the Paycheck Protection Program, a popular federal loan program for small businesses that lapsed over the summer. …….The agreement is also expected to provide billions of dollars for testing, tracing and vaccine distribution, as well as $82 billion for colleges and schools, $13 billion in increased nutrition assistance, $7 billion for broadband access and $25 billion in rental assistance.

The Precious! The Precious!

Whilst all this was going on the US Federal Reserve was able to focus on its main priority.

In light of the ongoing economic uncertainty and to preserve the strength of the banking sector, the Board is extending the current restrictions on distributions, with modifications. For the first quarter of 2021, both dividends and share repurchases will be limited to an amount based on income over the past year. If a firm does not earn income, it will not be able to pay a dividend or make repurchases.

Sounds as if they are being tough doesn’t it? But then there was this via CNBC.

JPMorgan Chase, the largest U.S. bank by assets, announced in the minutes after the Fed’s test results that its board had approved a new share repurchase program of $30 billion starting in 2021.

Bank share prices joined the new party.

Bank stocks rose across the board in after-hours trading with JPMorgan up 5.3%, Goldman Sachs up 4.4% and Wells Fargo up 3.5%.

House Prices

We are kind of staying with the banks again as we note a consequence of all the Federal Reserve easing. From CNBC.

Mortgage rates set yet another record low last week — the 15th this year and the second record in as many weeks…….

The average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances ($510,400 or less) decreased to 2.85% from 2.90%, with points decreasing to 0.33 from 0.35 (including the origination fee) for loans with a  20% down payment.

Which has led to this.

As prices rise, home equity multiplies. In the past year, homeowners with mortgages, representing about 63% of all properties, have seen their equity increase by 10.8%, according to CoreLogic.

That equates to a collective $1 trillion in gained equity, or an average $17,000 per homeowner, the largest equity gain in more than six years.

Bond Market

There has been quite a change from the 3.15% of the benchmark ten-year yield to the 0.9% as I type this. This has been a road accompanied by a balance sheet expanded to US $7.3 trillion including over US $4.6 trillion of government bonds ( US Treasuries). That seems set to continue for the forseeable future.

In addition, the Federal Reserve will continue to increase its holdings of Treasury securities by at least $80 billion per month and of agency mortgage-backed securities by at least $40 billion per month until substantial further progress has been made toward the Committee’s maximum employment and price stability goals.

US Dollar

I though I would add it to the list as maybe we are seeing a change. What I mean by that is the US Federal Reserve has been pursuing a policy of benign neglect towards the US Dollar and it had been weakening. For example the broad index hit 123.6 in April but in November was 114.4.

But driven by the new Covid variant in the UK it has rallied over the weekend by 1% versus the Euro and by 2% versus the UK Pound. Although there is an undercut which is that it seems the UK has detected it in scale first because it tests much more in this way that others. So there may well be a catch up elsewhere…..


So far I have mostly noted the financial world. So let us now look at what is called main street where we have already noted the food bank issue and can now add in this.

New US unemployment claims for the week that ended Saturday totaled 885,000, the Labor Department said Thursday. It was the highest reading in 14 weeks. ( Business Insider)

So a signal of another downturn heading in the opposite direction to the current consensus as show below.

The GDPNow model estimate for real GDP growth (seasonally adjusted annual rate) in the fourth quarter of 2020 is 11.1 percent on December 17, up from 11.0 percent on December 16.  ( Atlanta Fed)

I am not sure how they got to that number even when things looked better. But with the Covid pandemic apparently worsening I fear for the first quarter of next year. Could we see another contraction? From @Covid19tracking on Friday.

Our daily update is published. States reported 1.9 million tests, 242k cases, 3,438 deaths, and 114k people currently hospitalized with COVID-19 in the US. Both case and hospitalization counts from today are all-time highs.





The ECB faces problems from the Euro area banks as well as fiscal policy

This morning has brought us up to date on the state of play at the European Central Bank. Vice President De Guindos opened his speech in Frankfurt telling us this about the expected situation.

The pandemic crisis has put great pressure on economic activity, with euro area growth expected to fall by 8% in 2020. ……The tighter containment measures recently adopted across Europe are weighing on current growth. With the future path of the pandemic highly unclear, risks are clearly tilted to the downside.

So he has set out his stall as vaccine hopes get a relatively minor mention. Thus he looks set to vote for more easing at the December meeting. Also he rather curiously confessed that after 20 years or so the convergence promises for the Euro area economy still have a lot of ground to cover.

The severity of the pandemic shock has varied greatly across euro area countries and sectors, which is leading to uneven economic developments and recovery speeds……..And growth forecasts for 2020 also point towards increasing divergence within the euro area.

Looking ahead that is juts about to be fixed, although a solution to it has been just around the corner for a decade or so now.

The recent European initiatives, such as the Next Generation EU package, should help ensure a more broad-based economic recovery across various jurisdictions and avoid the kind of economic and financial fragmentation that we observed during the euro area sovereign debt crisis.

He also points out there has been sectoral fragmentation although he rather skirts around the issue that this has been a policy choice. Not by the ECB but bu governments.

 Consumers have adopted more cautious behaviour, and the recent tightening of restrictions has notably targeted the services sector, including hotels and restaurants, arts and entertainment, and tourism and travel.

Well Done the ECB!

As ever in a central banking speech there is praise for the central bank itself.

Fiscal support has played a key role in mitigating the impact of the pandemic on the economy and preserving productive capacity. This is very welcome, notwithstanding the sizeable budget deficits anticipated for 2020 and 2021 and the rising levels of sovereign debt.

This theme is added to by this from @Schuldensuehner

 Jefferies shows that France is biggest beneficiary of ECB’s bond purchases. Country has saved €28.2bn since 2015 through artificial reduction in financing costs driven by ECB. In 2nd place among ECB profiteers is Italy w/savings of €26.8bn, Germany 3rd w/€23.7bn.

Care is needed as QE has not been the only game in town especially for Greece which is on the list as saving 2,2 billion Euros a year from a QE plan it was not in! It only was included this year. But the large purchases have clearly reduced costs for government and no doubt makes the ECB popular amongst the politicians it regularly claims to be independent from. But there is more.

While policy support will eventually need to be withdrawn, abrupt and premature termination of the ongoing schemes could give rise to cliff-edge effects and cool the already tepid economic recovery.

It is a bit socco voce but we get a reminder that the ECB is willing to effectively finance a very expansionary fiscal policy. That is why it has two QE programmes running at the same time, but for this purpose the game in town is this.

 The Governing Council will continue its purchases under the pandemic emergency purchase programme (PEPP) with a total envelope of €1,350 billion.

There was a time when that would be an almost unimaginable sum of money but not know as if government’s do as they are told it will be increased.

The purchases will continue to be conducted in a flexible manner over time, across asset classes and among jurisdictions.

Oh and there is a bit of a misprint on the sentence below as they really mean fiscal policy.

This allows the Governing Council to effectively stave off risks to the smooth transmission of monetary policy.

The Banks

These are a running sore with even the ECB Vice President unable to avoid this issue.

The pandemic has also weighed on the long-term profitability outlook for banks in the euro area, depressing their valuations. From around 6% in February of this year, the euro area median banks’ return on equity had declined to slightly above 2% by June.

Tucked away in the explanation is an admittal of the ECB’s role here so I have highlighted it.

The decline in profitability is being driven mainly by higher loan loss provisions and weaker income-generation capacity linked to the ongoing compression of interest margins.

The interest-rate cuts we have seen hurt the banks and this issue was exacerbated by the reductions in the Deposit Rate to -0.5% as the banks have been afraid of passing this onto the ordinary saver and depositor. Thus the Zero Lower Bound ( 0%) did effectively exist for some interest-rates.

This is in spite of the fact that banks have benefited from two main sweeteners. This is the -1% interest-rate of the latest liquidity programmes ( TLTROs) and the QE bond purchases which help inflate the value of the banks bond holdings.

Then we get to the real elephant in the room.

Non-performing loans (NPL) are likely to present a further challenge to bank profitability.

We had got used to being told that a corner had been turned on this issue even in Italy and Greece. Speaking of the latter Piraeus Bank hit trouble last week when it was unable to make a bond payment.

The non-payment of the CoCos coupon will lead to the complete conversion of the convertible bond, amounting to 2.040 billion euros, into 394.4 million common shares.

It is noted that the conversion will not involve an adjustment of the share price and simply, to the 437 million shares of the Bank will be added another 394.4 million shares at the price of 0.70 euros (closing of the share at last Friday’s meeting). ( Capital Gr).

There is a lot of dilution going on here for private shareholders as we note that this is pretty much a nationalisation.

The conversion has one month after December 2 to take place and the result will be the percentage of the Financial Stability Fund, which currently controls 26.4% of Piraeus Bank, to increase to 61.3%.

Meanwhile in Italy you have probably guessed which bank has returned to the news.

LONDON/MILAN/ROME (Reuters) – Italy’s Treasury has asked financial and legal advisers to pitch for a role in the privatisation of Monte dei Paschi BMPS.MI as it strives to secure a merger deal for the Tuscan lender, two sources familiar with the matter told Reuters on Friday.

The equivalent of a Hammer House of Horror production as we mull how like a financial vampire it keeps needing more.

Italy is seeking ways to address pending legal claims amounting to 10 billion euros (£9 billion) that sources say are the main hurdle to privatising the bank.

Even Colin Jackson would struggle with all the hurdles around Monte dei Paschi. Anyway we can confidently expect a coach and horses to be driven through Euro area banking rules.

If we look at the proposed solution we wonder again about the bailouts.

Although banks have stepped up cost-cutting efforts in the wake of the pandemic, they need to push even harder for greater cost efficiency.

So job losses and it seems that muddying the waters will also be the order of the day.

The planned domestic mergers in some countries are an encouraging sign in this regard.

A merger does reduce two problems to one albeit we are back on the road to Too Big To Fail or TBTF.

There is of course the ECB Holy Grail.

Finally, we also need to make progress on the banking union, which unfortunately remains unfinished. Renewed efforts are urgently required to improve its crisis management framework.

Just as Italy makes up its own rules….


We are now arriving at Monetary Policy 3.0 after number one ( interest-rates) and number two ( QE) have failed to work. In effect the role of monetary policy is to facilitate fiscal policy. It also involves a challenge to democracy as the technocrats of the ECB are looking to set policy for the elected politicians in the Euro area. However there are problems with this and somewhat ironically these have been highlighted by the Twitter feed of the Financial Times which starts with an apparent triumph.

Italy’s bond rally forces key measure of risk to lowest since 2018

So on a financial measure we have convergence. But if we switch to the real economy we get this.

‘There is no money left’: the pandemic’s economic impact is ‘a catastrophe’ for people in southern Italy who were already in a precarious situation

Switching to the banks we are facing the consequences of the Zombification of the sector as the same old names always seem to need more money. Although there has been more hopeful news for BBVA of Spain today albeit exiting the country where banks seem to be able to make money.

PNC to buy U.S. operations of Spanish bank BBVA for $11.6 billion ( @CNBC )

Although the price will no doubt if the speech above is any guide will be pressure to give a home to a Zombie or two.





Hard times for the economy and banks of Spain

We have an opportunity to peer under the economic bonnet of one of the swing states in the Euro area. We have seen Spain lauded as an economic success followed by the bust of the Euro area crisis and then it move forwards again. But 2020 has proven to be another year of economic trouble and that theme has been added to by this morning’s data release.

The monthly variation of the seasonally and calendar adjusted general Retail Trade Index (RTI)
at constant prices between the months of September and August, stood at −0.3%. This rate was 1.7 points lower than the previous month. ( INE)

So we have a fall when if we follow the official view of recoveries from the pandemic we should be seeing the opposite. Then we note that relative to August there has been a much larger decline. The breakdown is below.

By products, Food remained the same (0.0%) and Non-food products declined by 0.6%. If the latter is broken down by type of product, Household equipment decreased the most (−3.7%).

The one category which rose was personal equipment which was up 2.3%.

If we switch to the annual picture we see this.

In September, the General Retail Trade Index, once adjusted for seasonal and calendar effects, registered a variation of −3.3% as compared with the same month of the previous year. This rate was four tenths lower than the one registered in August.

In a by now familiar pattern car fuel sales are down by 9.2% and after them the breakdown is as follows.

If these sales are broken down by type of product, Food
decreased by 2.7%, and Non-food products by 3.1%.

So unlike in the UK the Spanish are not eating more. After the news we have looked it sadly it is no surprise that jobs are declining.

In September, the employment index in the retail trade sector registered a variation of −3.0%
as compared to the same month of 2019. This rate was three tenths above that recorded in August. Employment decreased by −4.9% in Service stations.

If we look at the structure of the sales we see that small chain stores have been hit hard with sales down 14.3% on a year ago meaning they are only 88.3% of what they were in 2015. There has been a switch towards large chain stores who are 2.4% up in September on a year ago and some 17% up on 2015.

Looking at the overall picture the “Euro Boom” has pretty much been erased as we note that retail sales in September are only 2.2% above 2015. These numbers are not seasonally adjusted and may give the best guide because if there has been a year not fitting regular patterns this is it. We get another clue from the numbers from the Canary Islands where volumes are 13.5% below a year ago and the overall index is at 87,5. I am noting that because it gives us a proxy for the tourism effect, or in this instance the lack of tourism effect. Regular readers will recall we feared that this would be in play when the Covid-19 pandemic started and we can see that it has.

Housing Market

The Bank of Spain and the ECB would of course have turned to these figures first.

The number of mortgages constituted on dwellings is 19,825, 3.4% less than in August 2019. The average amount is 134,678 euros, an increase of 4.0%.

They will have been disappointed to see the number of mortgages lower but pleased to see an increase in mortgage size which offers the hope of more business for their main priority which is the banks and may even offer a hint of house price rises.

One factor of note is that if we look at the remortgage figures we see a different pattern in terms of fixed to floating mortgage rates than we have become used to.

After the change of conditions, the percentage of mortgages
fixed interest increases from 19.0% to 31.2%, while that of variable rate mortgages decreases from 80.4% to 59.7%.

As to house prices these are the most recent numbers.

The annual rate of the Housing Price Index (HPI) decreased one percentage point in the
second quarter of 2020, standing at 2.1%.
By housing type, the rate of new housing reached 4.2%, almost two points below that
registered in the previous quarter

So we still have growth and the central bankers will be happy with an index that is at 126.8 when compared with 2015. Their researchers will be busy enhancing their career prospects by finding Wealth Effects from this whilst nobody asks why all the emails from first-time buyers saying they cannot afford anything keep ending up in the spam folder.

Looking Ahead

Last month the Bank of Spain told us this.

Under these considerations, the economy’s output would fall by 10.5% on average in 2020 in scenario 1, and by up to 12.6% in the event that the less favourable epidemiological situation underlying the construction of scenario 2 were to
materialise. That said, the pickup in activity projected for the second half of this year, following the historic collapse recorded in the first half, would have a positive carry-over
effect on the average GDP growth rate in 2021, which would reach 7.3% in scenario 1, while remaining at 4.1% in scenario 2,

With the pandemic storm clouds gathering around Europe we look set for scenario 2 of a larger decline in GDP followed by a weaker recovery. Also if you are in an economic depression then how long it lasts matters as much as how deep the fall is.

In any event, at the end of 2022, GDP would stand some 2 percentage points (pp) below its pre-crisis level in
scenario 1, a gap that would widen to somewhat more than 6 pp in scenario 2.

It is a bit like wars which are always supposed to be over like Christmas and like a banking collapse where we are drip fed bad news. Speaking of the banks there is plenty of bad news around. We can start with the Turkish situation.

Turkish debt held by European banks via BIS – $64 billion in Spanish banks. – $24 billion, in French banks. – $21 billion, in Italian banks. – $9 billion, in German banks. ( DailyFX )

Then there was also this earlier this week. The Spanish consumer association took th banks to court over past mortgage fees.

Those affected do not need to initiate an individual lawsuit, with the costs and time that this entails, but can directly benefit from the success of the Asufin class action lawsuit.

So, as previously indicated, those 15 million mortgages may recover up to an average of 1,500 euros without the need to litigate. ( El Economista)

I doubt that is the end of the story but it is where we presently stand.


The situation looks somewhat grim right now and it has consequences.If we look at the labour market we have learned that unemployment as a measure is meaningless so here is a better guide.

Total hours worked would fall very sharply on average in 2020: by 11.9% in scenario 1 and 14.1% in scenario 2. Although the rise in this variable, which began
with the easing of lockdown, would continue over the rest of the projection horizon, the total number of hours worked at the end of 2022 would still be 4.5% and 8.3% lower than before the COVID-19 crisis under scenarios 1 and 2, respectively. ( Bank of Spain)

Also the public finances will be doing some heavy lifting.

.As regards public finances, it is estimated that the general government deficit will increase sharply in 2020, to stand at 10.8% and 12.1% of GDP in each of the two scenarios considered…….Public debt, meanwhile, would increase in 2020 by more than 20 pp in scenario 1 and by
some 25 pp in scenario 2, to stand at 116.8% and 120.6% of GDP, respectively.

Of course debt affordability fears are much reduced when some of your bonds can be issued at negative yields and even the ten-year is a mere 0.17%.

As to the banks the eyes of BBVA and Banco Santander will be on developments in Turkey right now.

Me on The Investing Channel

The banks of Italy face another crisis

2020 has been quite a year and something of an annus horribilis.What such events reveal if we borrow the words of Warren Buffet is those who have been swimming with swimming trunks. If there is a group anywhere in the world that has been doing this it has been the Italian banks who had enough problems before the Covid-19 pandemic started. So much so that at least in one case I am reminded of the famous words of Paul Simon.

Hello darkness, my old friend
I’ve come to talk with you again

Monte dei Paschi di Siena

If there is a bank that deserves that lyric it is Monte Paschi which has had bailout after bailout but still rather resembles the walking dead in banking terms.

MILAN (Reuters) – Italy’s clean-up scheme for Monte dei Paschi di Siena BMPS.MI is set to be approved by shareholders of the state-owned bank on Sunday after two years’ in the planning, but it is unlikely to be enough to attract a buyer.

The last bit raises a grim smile after all nobody wanted Monte Paschi even in what were considered to be the good times of the “Euro boom” so who would want it now? Along the way the Italian taxpayer has taken quite a hammering.

The government rescued Monte dei Paschi (MPS) in 2017, paying 5.4 billion euros ($6.3 billion) for a 68% stake now worth 1 billion euros, which it must sell next year under the terms of the 8.2 billion euro bailout.

I think that rescued is the wrong word as it implies a sort of permanence, whereas the reality has been that Monte Paschi rather like Oliver! is always asking for more. Indeed one route involves the Italian taxpayer taking another hit.

To boost the appeal of the world’s oldest bank still in business, Italy has been working on a scheme to cut MPS’ problem loan ratio below the industry average, offloading 8 billion euros in soured debts to state-owned bad loan manager AMCO.

The repeating problem for Monte Pasch is that it needs more money but getting it from shareholders is shall we say problematic when you have a track record like this.

MPS has been laid low by years of mismanagement, an ill-advised acquisition and risky derivatives deals.

It faces 10 billion euros in legal claims, mostly from disgruntled investors who lost money in a string of cash calls worth 18.5 billion euros in the past decade.

Now if we do some back of the envelope maths we have at least 23 billion Euros lost in the deals above to which is added risk on another 8 billion. Against that we have a bank valued at 1 billion Euros. It was only a few years ago that the then Italian Prime Minister Matteo Renzo told us MPS was a good investment. Surely that must come under the Italian version of the trade descriptions act?

We can also note something of an Alice In Wonderland world.

To authorise the clean-up, which shaves 1.1 billion euros off MPS’ capital and must be completed by Dec. 1, the European Central Bank has demanded MPS raises fresh capital via costly issues of Tier 1 and Tier 2 debt.

MPS paid 8.5% for the Tier 2 issue, and analysts say Additional Tier1 (AT1) debt is a non-starter for a bank that expects to remain loss-making through 2022 and would not be allowed, as such, to pay a coupon on it.

Paying 8.5% for your debt hardly helps your profitability and wait for the original estimates of what it would have to pay on riskier debt.

The ECB has asked the bank to prove that private investors would be ready to buy 30% of a potential Tier1 issue but broker Equita estimated such debt could cost Monte dei Paschi as much as 15% a year, further weakening its finances.

The only way I can see this circle being squared is a new ECB asset purchase programme which will allow investors to buy such debt and then pass it on.

Merger Mania

This is another way of kicking the can if you have a problem. My late father used to argue that many mergers were driven by the reality that such an event makes the accounts pretty opaque for a couple of years. Thus something like this was little surprise.

Intesa Sanpaolo’s public tender offer for UBI Banca shares, launched on February 17, 2020, ended on 30 July, with acceptance by 90.2% of UBI’s shareholders.

Following a five-month process, Intesa Sanpaolo successfully surpassed the two-thirds acceptance by UBI Banca shareholders needed to ensure the merger of UBI into Intesa Sanpaolo.

That really defines bad timing doesn’t it? Whilst it is hard to think of a good time to buy an Italian bank buying this year is bad even on that perspective. But according to Intesa it is something of a triumph.

In a statement following the announcement of the provisional results, Intesa Sanpaolo CEO Carlo Messina said that a new European banking leader had been created.

Messina also underlined that Intesa Sanpaolo has become the first bank in Europe to launch a new consolidation phase that will strengthen the Continent’s banking sector.

Considering the record this looks like very faint praise.

UBI is the best run medium-sized bank in Italy

Putting it another way the Intesa share price went above 2.6 Euros when the deal was announced and is 1.58 Euros now.


This is desperately trying to avoid being a white knight for Monte Paschi. It has enough of its own problems with a share price of 7 Euros which is half that of what it was as recently as February.


This has been something of a slow motion car crash. I am not surprised that we see legal claims being enacted because whilst the Covid-19 pandemic came out of the blue, it is also true that money has been raised whilst the truth has not been told. The official view of the Bank of Italy from April reflected this.

Italian banks are facing the new risks from a
stronger position than at the start of the global
financial crisis. Between 2007 and 2019, the
ratio of the highest loss-absorbing capital to
risk-weighted assets almost doubled, loans are
now funded entirely by deposits, and there are no
signs of a weakening of depositor confidence in

There are certainly plenty of signs of weakening shareholder confidence in banks. This comes in spite of the fact that they have been handed another freebie.

#Italy‘s 10-year bond #yield down to new record-low of just 0.79%… ( @jsblokland )

For newer readers Italian banks hold a lot of government bonds ( around 400 billion Euros) so the rise in price driven by ECB buying allows them to sell at a high price or at least to put such prices in their accounts. Although of course they did have a scare earlier in the year after the “bond spreads” statement made by ECB President Christine Lagarde.

We have seen various fund emerge to take on the bad debts and regular readers will recall the private-sector Atlante and Atlante II. The latter got renamed as the Italian Recovery Fund which I think speaks for itself. These days there is a state backed vehicle described by Fitch in May like this.

AMCO is a debt purchaser and servicer with nearly EUR25 billion of assets under management and a leading position in the unlikely-to-pay (UTP) loans sector. While operating at market conditions the government’s backing makes AMCO the reference company for direct or indirect state-led bail-outs of distressed banks.

So with “unlikely-to-pay” we have yet another new phrase and change of language.

What we have seen is in fact the consequence of kicking the can into the future and discovering that the future is worse than the present. We look back on a pile of losses for shareholders and taxpayers for what exactly? At the same time a bus has been driven through Euro area rules.

Another hint of negative interest-rates from the Bank of England

The weekend just gone has provided another step or two in the dance being played out by the Bank of England on negative interest-rates. It was provided by external member Silvana Tenreyro in an interview published by The Telegraph on Saturday night. Perhaps she was unaware she was giving an interview to a media organisation with a paywall but this continued a poor recent trend of Bank of England policymakers making some more equal than others. As a recipient of a public salary interviews like this should be available to all and not some but it is not on the Bank of England website.

As to her views they were really rather extraordinary so let us investigate.

LONDON (Reuters) – The Bank of England’s investigation into whether negative rates might help the British economy through its current downturn has found “encouraging” evidence, policymaker Silvana Tenreyro said in an interview published late on Saturday.

It is not the fact that she may well vote for negative interest-rates that is a surprise as after all she told us this back on the 15th of July.

In June I therefore voted with the majority of the MPC to increase our stock of asset purchases. Lower gilt
yields and higher asset prices induced by QE will lead to some aggregate demand stimulus, although the low
prevailing level of the yield curve may reduce the impact somewhat, relative to some of the MPC’s previous
asset purchase announcements. As with the rest of the committee, I remain ready to vote for further action
as necessary to support the economy and ensure inflation returns to target.

So she voted for more QE ( Quantitative Easing ) bond purchases in spite of the fact that she felt the extra £100 billion would have a weaker impact than previous tranches. This means that with UK bond or Gilt yields continuing to be low and in some cases negative ( out to around 6/7 years in terms of maturity) then in any downturn that only really leaves lower interest-rates. As they are already a mere 0.1% that means a standard move of 0.25% would leave us at -0.15%

Something Extraordinary

I am pocking this out as even from a central bank Ivory Tower it is quite something.

Tenreyro said evidence from the euro zone and Japan showed that cutting interest rates below zero had succeeded in reducing companies’ borrowing costs and did not make it unprofitable for banks to lend.

Let me start with the latter point which is about it being profitable for banks to lend in a time of negative interest-rates. This is news to ECB Vice-President De Guindos who told us this last November.

Let me start with euro area banks, which have been reporting persistently low profitability in recent years. The aggregate return on equity of the sector slightly declined to less than 6% in the 12 months to June 2019. This weak performance is broad-based, with around 75% of significant banks generating returns below the 8% benchmark return demanded by investors for holding bank equity.

He went further that day and the emphasis is mine

The recent softening of the macroeconomic growth outlook and the associated low-for-longer interest rate environment are likely to weigh further on their profitability prospects. Many market analysts are concerned about the drag on bank profitability that could result from the negative impact of monetary policy accommodation on net interest margins. And net interest margins are indeed under pressure.

If we fast forward to last week there is this from Peter Bookvar on Twitter.

A chart of the Euro STOXX bank stock index. Record low. Please stop calling central bank policy ‘stimulus.’ It is ‘restrictive’ if it kills off profitability of banks.

Or there was this.

PARIS (Reuters) – Societe Generale (PA:SOGN) is considering merging its two French retail networks in an attempt to boost profitability, after two consecutive quarterly losses due to poor trading results.

We do not often look at the French banks who have mostly moved under the radar but there is “trouble,trouble,trouble” ( h/t Taylor Swift) here too.

Shares in SocGen were up 1.2% to 11.9 euros at 0843 GMT, just above their lowest level in 27 years of 11.3 euros, after it said the review would be completed by the end of November.

So profitability is fine but share prices have collapsed? I guess Silvana must have an equity portfolio full of banks waiting for her triumph. Remember the ECB is presently throwing money at the banks by offering them money at -1% in an attempt to offset the problems created by negative interest-rates.

Another way of looking at bank stress was the surge in access to the US Federal Reserve Dollar liquidity swaps post March 19th. We saw the ECB and Bank of Japan leading the charge on behalf of banks in their jurisdictions. Intermediaries were unwilling to lend US Dollars to them as they feared they were in trouble which again contradicts our Silvana.

As to companies borrowing costs they have fallen although there have been other factors at play. For example the bond purchases of the ECB will have implictly helped bu lowering yields and making corporate bonds more attractive. Also it has bought 233 billion Euros of corporate bonds which in itself suggests more was felt to be needed. Actually some 289 billion Euros of bank covered bonds have been bought which returns us to The Precious! The Precious!

Tractor Production is rising

Apparently all of that means this.

“The evidence has been encouraging,” she said, adding that cuts in interest rates below zero had been almost fully reflected in reductions in interest rates charged to borrowers.

“Banks adapted well – their profitability increased with negative rates largely because impairments and loss provisions have decreased with the boost to activity and the increase in asset prices,” she said.

This really is the banking equivalent of Comical Ali or in football terms like saying Chelsea have a secure defence.


The picture here is getting ever more fuzzy. I have no issue with policymakers having different views and in fact welcome it. But I do have an issue with claims that are simply rubbish like the Silvana Tenreyro one that bank profitability has not been affected by negative interest-rates. Even one of her colleagues is correcting what is simply a matter of fact.


However as is often the way with central banks he seems to be clinging to a theory that died over a decade ago.


Later we will hear from Governor Bailey who only last week was trying to end the negative interest-rate rumours that he had begun. Oh Well!

Still there is one thing we can all agree on.


Too high…..

Continuing a theme of agreement let me support one part of the Tenreyro interview.

“Flare-ups like we’re seeing may potentially lead to more localised lockdowns and will keep interrupting that V(-shaped recovery).”

Meanwhile these  days the main player are  bond yields making the official rate ever less important. Why? The vast majority of new mortgages are at fixed interest-rates and with fiscal policy being deployed on such a scale they matter directly.