India is facing its own version of a credit crunch

Travel broadens the mind so they say so let us tale a trip to the sub-continent and to India in particular. There the Reserve Bank of India has announced this.

On the basis of an assessment of the current and evolving macroeconomic situation, the Monetary Policy Committee (MPC) at its meeting today decided to: reduce the policy repo rate under the liquidity adjustment facility (LAF) by 25 basis points to 6.0 per cent from 6.25 per cent with immediate effect.

Consequently, the reverse repo rate under the LAF stands adjusted to 5.75 per cent, and the marginal
standing facility (MSF) rate and the Bank Rate to 6.25 per cent.

The MPC also decided to maintain the neutral monetary policy stance.

So yet another interest-rate cut to add to the multitude in the credit crunch era and it follows sharp on the heels of this.

In its February 2019 meeting, the MPC decided to
reduce the policy repo rate by 25 basis points (bps)
by a majority of 4-2 and was unanimous in voting
for switching its stance to neutral from calibrated
tightening.

This time around the vote was again 4-2 so there is a reasonable amount of dissent about this at the RBI.

What has caused this?

The formal monetary policy statement tells us this.

Taking into consideration these factors and assuming a normal monsoon in 2019,the path of CPI inflation is revised downwards to 2.4 per cent in Q4:2018-19, 2.9-3.0 per cent in H1:2019-20 and 3.5-3.8 per cent in H2:2019-20, with risks broadly balanced.

That path is below the annual inflation target of 4% (+ or – 2%) so it is in line with that.

However we know that central banks may talk about inflation targeting but supporting the economy is invariably a factor and can override the former. The Economic Times points us that way quoting the Governor’s words.

“The MPC notes that the output gap remains negative and the domestic economy is facing headwinds, especially on the global front,” RBI governor Shaktikanta Das said. “The need is to strengthen domestic growth impulses by spurring private investment which has remained sluggish.”

I will park for the moment the appearance of the discredited output gap theory and look at economic growth. The opener is very familiar for these times which is to blame foreigners.

Since the last MPC meeting in February 2019, global economic activity has been losing pace……The monetary policy stances of the US Fed and central banks in other major advanced economies (AEs) have turned dovish.

I would ask what is Indian for “Johnny Foreigner”? But of course more than a few might say it in English. But if we switch to the Indian economy we are told this in the formal report.

Since the release of the Monetary Policy Report (MPR)
of October 2018, the macroeconomic setting for the
conduct of monetary policy has undergone significant
shifts. After averaging close to 8 per cent through
Q3:2017-18 to Q1:2018-19, domestic economic
activity lost speed.

So a slowing economy which is specified in the announcement statement.

GDP growth for 2019-20 is projected at 7.2 per cent – in the range of 6.8-7.1 per cent in H1:2019-20 and 7.3-7.4 per cent in H2 – with risks evenly balanced.

That is more likely to be the real reason for the move and the Markit PMI released this morning backs it up.

The slowdown in service sector growth was
matched by a cooling manufacturing industry.
Following strong readings previously in this quarter,
the disappointing figures for March meant that the
quarterly figure for the combined Composite Output
Index at the end of FY 2018 was down from Q3.

The actual reading was 52.7 but we also need to note that this is in an economy expecting annual economic growth of around 7% so we need to recalibrate. On that road we see a decline for the mid 54s which backs up the slowing theme.

Forward Guidance

We regularly find ourselves observing problems with this and the truth is that as a concept it is deeply flawed and yet again it has turned out to be actively misleading. Here is the RBI version.

The MPC maintained status quo on the policy repo rate in its October 2018 meeting (with a majority of 5-1) but switched stance from neutral to calibrated tightening.

So it led people to expect interest-rate rises and confirmed this in December. I am not sure it could have gone much more than cutting at the next two policy meetings. That is even worse than Mark Carney and the Bank of England.

Output Gap

Regular readers know my views on this concept which in practice has turned out to be meaningless and here is the RBI version. From the latter period of last year.

the virtual closing of the output
gap.

Whereas now.

The MPC notes that the output gap remains negative and the domestic economy is facing
headwinds, especially on the global front. The need is to strengthen domestic growth impulses by
spurring private investment which has remained sluggish

Yet economic growth has been at around 7% per annum. I hope that they get called out on this.

The banks

We have looked before at India’s troubled banking sector and since then there has been more aid and nationalisations. Here is CNBC summing up some of it yesterday.

Over the last several years, a banking sector crisis in India has left many lenders hamstrung and impeded their ability to issue loans. Banks and financial institutions, a key source of funding for Indian companies, hold over $146 billion of bad debt, according to Reuters.

That may be more of a troubled road as India’s courts block part of the RBI plan for this.

But such things do impact monetary transmission.

Analysts said the transmission of the previous rate cut in February did not materialise as liquidity remained tight. Despite the central bank’s continued open market operations and the dollar-rupee swap, systemic liquidity as of March-end was in deficit at Rs 40,000 crore.

The tightness in liquidity was visible in high credit-deposit ratios and elevated corporate bond spreads.  ( Economic Times)

Putting it another way.

What is holding them back is higher interest rate on deposits and competition from the government for small savings.

The RBI is worried about this and reasonably so as it would be more embarrassing if they ignore this rate cut too.

Underlining the importance of transmission of RBI rate cuts by banks to consumers, Governor Shaktikanta Das on Thursday said the central bank may come out with guidelines on the same.

“We hope to come out with guidelines for rate cut transmission by banks,” Das said, interacting with the media after the monetary policy committee (MPC) meet.

 

Comment
There is a fair bit here that will be familiar to students of the development of the credit crunch in the west. I think one of my first posts as Notayesmanseconomics was about the way that official interest-rates had diverged from actual ones. Also we have a banking sector that is troubled. Next we have quick-fire interest-rate cuts following a period when rises were promised. So there are more than a few ticks on the list.
As to money supply growth it is hard to read because of the ongoing effects of the currency demonetisation in late 2016. So I will merely note as a market that broad money growth was 10.4% in February which is pretty much what it was a year ago.

 

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Deutsche Bank and Royal Bank of Scotland continue their zombie bank march

We find ourselves in yet another version of banking Monday and let me immediately note an issue highlighted by moves at the UK’s main zombie bank which is Royal Bank of Scotland or RBS. From the BBC.

A UK payment processing firm that used to be owned by Royal Bank of Scotland has been sold in a deal worth $43bn (£32bn).
WorldPay has been bought by Florida-based Fidelity National Information Services (FIS) for $35bn in cash and shares, plus WorldPay’s debt.

FIS chief executive Gary Norcross said “scale matters in our rapidly changing industry”.

WorldPay was sold by RBS as a condition of the bank’s financial crisis bailout.

The value of the FIS purchase means Worldpay is worth about £8bn more than RBS.

Some perspective is provided by the way WorldPay is worth much more than RBS. It also means that if it has kept it UK taxpayers would have done a lot better as we see yet another shambles delivered by our political establishment.

This is from Finextra in August 2010.

RBS was told to sell off WorldPay – or Global Merchant Services – by the European competition authorities last year as a condition for joining the UK government’s asset protection scheme.

Meaning RBS got this.

Royal Bank of Scotland has inked a deal to sell just over 80% of its WorldPay payments processing unit to private equity firms Bain Capital and Advent International.

The agreement is for an enterprise value of up to £2.025 billion including a £200 million contingent consideration, with RBS keeping a 19.99% stake in the business.

As you can see whilst money was earnt at the time it was much, much less than would have been received today. Oh and the remaining part was sold in 2013. Seems inevitable really doesn’t it? We will never fully know whether the private equity owners of WorldPay drove it forwards or just surfed the wave nor whether RBS ownership would have held it back or worse. But we can see that as the UK and European establishment’s mixed the one part of the RBS business that has charged ahead and would have made a return for taxpayers was flogged off and the loss making dregs were kept. Also we know from experience that it will be nobody’s fault and could not possibly have been foreseen ( makes you wonder why anyone bought it…).

Deutsche Bank and Commerzbank

Reuters was on the case yesterday and they opening with something breathtaking.

Deutsche, the largest bank in Germany, Europe’s biggest economy, emerged unscathed from the financial crash but later lost its footing.

Really? So the share price fall from 94 Euros to 24 Euros in eighteen months was a sort of unfortunate piece of timing! Or maybe not.

Deutsche and other European banks have taken longer to recover from the financial crisis, losing ground to stronger rivals from the United States.

Anyway as we expected last week the story continues to gain momentum.

Berlin wants a reliable national banking champion to support its export-led economy, known for cars and machine tools.

Deutsche Bank is hardly a champion and has been the opposite of reliable unless you are counting unexpected losses. But here is the Sunday news.

Deutsche Bank and Commerzbank confirmed on Sunday they were in talks about a merger, prompting labour union concerns about possible job losses and questions from analysts about the merits of a combination.

Germany’s two largest banks issued short statements after separate meetings of their management boards, a person with knowledge of the matter said, indicating a quickening of pace in the merger process, although both also warned that a deal was far from certain.

The choice of Commerzbank reminds me of the bit in the film Zulu when the Colour Sargeant Bourne answers the question why?

Because we are here lad. There’s nobody else, just us

Or as Reuters put it.

Other than Deutsche, Commerzbank is Germany’s only remaining big bank, after a series of mergers.

You would have thought that a series of mergers would have created other big banks as we already see signs of past trouble. Still why stop a plan which is performing badly? Also Commerzbank has its own issues.

Commerzbank, like Deutsche, has struggled to rebound, and German officials say it is vulnerable to a foreign takeover. If an international rival snapped it up, that would increase competition for Deutsche on its home turf.

Berlin also wants to keep Commerzbank’s speciality – the funding of medium-sized companies, the backbone of the economy – in German hands.

Problems

On the 11th I pointed out I was dubious about large losses in bond markets. But it would appear that the people we are regularly told are highly talented and worth large bonuses continue to do things like this.

Commerzbank, for example, has about 30.8 billion euros of debt securities such as Italian bonds that now have a value of 27.7 billion euros – a drop of 3.1 billion euros. A tie-up could crystallise this loss. Deutsche has such securities at market value in its accounts.

To make a loss in bond markets when they in general have seen surges and what the Black Eyed Peas would call “Boom!Boom! Boom!” is something else to look into. Also the government is caught in something of a spider’s web from it past actions concerning Commerzbank.

The government holds a 15 percent stake after bailing it out during the crisis, giving it an important voice.

If we move to the statement from Christian Sewing the CEO of Deutsche Bank we are left wondering “economic sense” for who?

What is also important to me is that we will only pursue options that make economic sense, building on the progress we made in 2018.

Comment

We are seeing ever more consequences of the zombie bank culture. In the UK the RBS saga has reminded us today that the rhetoric of the bailout which claimed that taxpayers would get their money back put a smokescreen over the reality that it involved selling what has turned out to be the most profitable part of it. That echoes as we note a bank worth less than half of what was poured into it. The “privatistaion of profits and socilaisation of losses” them gets turned up to 11 one more time.

Moving to the Deutsche Bank merger with Commerzbank let me open with the obvious issue that solving the Too Big To Fail or TBTF issue is not going to be done by making it even larger. They did manage a cosmetic name change to  G-Sifs or Globally Significant banks but that is it. Also arrows will be flying in the direction of Mario Draghi and the ECB about how its negative interest-rate policy has helped trap the banks in the zombie zone. They get help ( TLTRO is coming) in a liquidity sense but not in a solvency sense.

Also we are told the banks support the economy and yet this keeps turning up.

 A merger with Commerzbank would face opposition from unions, which expect as many as 30,000 jobs to be lost. And the combined bank would probably lose some business from German companies keen to diversify their sources of funding. ( Reuters)

For it to work we need plenty of smoke and mirrors as @jeuasommenulle points out.

Finally, an “amusing” one for the geeks: a very large part of the financials of the deal rely on the regulatory treatment of the negative goodwill the deal would generate (we’re possibly talking of 15-20bn€!)…….Positive goodwill is deducted from CET1, but negative isn’t – which does not make any sense if you ask me. Why is that ? Because when the CRR was drafted nobody thought of that so the wording is vague.

 

The economic depression in Greece looks set to continue

A feature of the economic crisis that enfolded in Greece was the fantasy that economic growth would quickly recover. It seems hard to believe now that anyone could have expected the economy to grow at 2% ot so per annum from 2012 onwards but the fans of what Christine Lagarde amongst others called “shock and awe” did. I was reminded of that when I read this from the International Monetary Fund on Tuesday.

Greece has now entered a period of economic growth that puts it among the top performers in the eurozone.

That is to say the least somewhat economical with the truth as this from the Greek statistics office highlights.

The available seasonally adjusted data
indicate that in the 4th quarter of 2018 the Gross Domestic
Product (GDP) in volume terms decreased by 0.1% in comparison with the 3rd quarter of 2018.

So actually it may well have left rather than entered a period of economic growth which is rather different. Over the past year it has done this.

in comparison with the 4th quarter of 2017, it increased by 1.6%.

What this showed was another signal of a slowing economy as 2018 overall was stronger.

GDP for 2018 in volume terms amounted to 190.8 billion euro compared with 187.2 billion euro for 2017 recording an increase of 1.9%.

There is a particular disappointment here as the Greek economy had expanded by 1% in the autumn of last year leading to hopes that it might be about the regain at least some of the ground lost in its depression. Now we find an annual rate of growth that is below the one that was supposed to start an up,up and away recovery in 2012. Nonetheless the IMF is playing what for it is the same old song.

We expect growth to accelerate to nearly 2½ percent this year from around 2 percent in 2018. This puts Greece in the upper tier of the eurozone growth table.

Money Supply

This has proved to be a good guide of economic trends in the Euro area so let us switch to the Bank of Greece data set so we can apply it to Greece alone. The recent peak for the narrow money measure M1 was an annual rate of growth of 7.3% in December 2017 and then mostly grew between 5% and 6% last year. But then the rate of growth slowed to 3.8% last December and further to 2.7% in January.

I am sorry to say that a measure which has worked well is now predicting an economic slow down in Greece and perhaps more contractions in the first half of this year. Looking further ahead broad money growth has slowed from above 6% in general in 2018 to 4.2% in December and 3.3% in January. This gives us a hint towards what economic growth and inflation will be in a couple of years time and the only good thing currently I can say is that Greece tends to have low inflation.

The numbers have been distorted to some extent by the developments mentioned by the IMF below but they are much smaller influences now.

 For example, customers are now free to move their cash to any bank in Greece, and the banks themselves have almost fully repaid emergency liquidity assistance provided by the European Central Bank.

The Greek banks

Even in the ouzo hazed world of the IMF these remain quite a problem.

Third, we are urging the government to do more to fix banks, which remain crippled by past-due loans. This will help households and businesses to once again be able to borrow at reasonable interest rates.

They have another go later.

Directors encouraged the authorities to take a more comprehensive, well-coordinated approach to strengthening bank balance sheets and reviving growth-enhancing lending.

There are two issues with this and let me start with how many times can the Greek banks be saved? Money has been poured again and again into what increasingly looks like a bottomless pit. Also considering they think bank lending is weak – hardly a surprise in the circumstances – on what grounds do they forecast a pick-up in economic growth?

Back on the 29th of January I pointed out that the Bank of Greece was already on the case.

An absolutely indicative example can assess the immediate impact of a transfer of about €40 billion of NPLs, namely all denounced loans and €7.4 billion of DTCs ( Deferred Tax Credits).

So the banks remain heavily impaired in spite of all the bailouts and are no doubt a major factor in this.

vulnerabilities remain significant and downside risks are rising……………. If selected fiscal risks materialize, the sovereign’s repayment capacity could become challenged over the medium term.

That would complete the cycle of disasters as about the only bit of good news for the Institutions in the Greek bailout saga is this.

The government exceeded its 2018 primary fiscal balance target of 3.5 percent of GDP,

Moving out of the specific area of public finances we see that money is being sucked out of the economy to achieve this which acts as a drag on economic growth.

The Eurogroup

It does not seem quite so sure that things are going well as it refrains for putting its money behind it at least for now. From Monday.

The finance ministers of the 19-member Eurozone have decided to postpone disbursing 1 billion euros ($1.12 billion) to Greece.

The reason for postponing the payment is that Greece has not yet changed the provisions of a law protecting debtors’ main housing property from creditors to the EU’s satisfaction. ( Kathimerini).

Euro area

The problem with saying you are doing better than the general Euro area is twofold. If we start with the specific then it was not true in the last quarter of last year and if we move to the general Greece should be doing far, far better as it rebounds from the deep recession/depression it has been in. That is not happening.

Also beating the Euro area average is not what it was as this from earlier highlights. From Howard Archer.

Muted news on as German Economy Ministry says economy likely grew moderately in Q1 & warns on industrial sector. Meanwhile, institute cuts 2019 growth forecast sharply to 0.6% from 1.1%, citing weaker foreign demand for industrial goods.

Some have been pointing out that this matches Italy although that does require you to believe that Italy will grow by 0.6% this year.

Comment

Let me shift tack and now look at this from the point of view of how the IMF used to operate. This was when it dealt with trade issues and problems rather than finding French managing directors shifting its focus to Euro area fiscal problems. If you do that you find that the current account did improve in the period 2011-13 substantially but never even got back to balance and then did this.

The current account (CA) deficit was wider than anticipated, reaching 3.4 percent of GDP (though in part due to methodological revisions). Higher export prices and strong external demand were more than offset
by rising imports due to the private consumption recovery, energy price hikes, and the large import share in exports and investment. The primary income deficit widened due to higher payments on foreign investments.

That is quite a failure for the internal competitiveness model ( lower real wages) especially as we noted on January 29th that times were changing there. So the old measure looks grim in fact so grim that I shall cross my fingers and hope for more of this.

The tourism and travel sector in Greece grew 6.9 percent last year, a rate that was three-and-a-half times higher than the growth rate of the entire Greek economy, a survey by the World Travel and Tourism Council (WTTC) has noted.

The survey illustrated that tourism accounted for 20.6 percent of the country’s gross domestic product, against a global rate of just 10.4 percent.

This means that one in every five euros spent in Greece last year came from the tourism and travel sector, whose turnover amounted to 37.5 billion euros. ( Kathimerini ).

The Investing Channel

 

 

Deutsche Bank and Commerzbank will soon be telling us bigger is best

The weekend just gone has seen a surge in speculation about a matter we have been expecting for some time. It is this issue of solving the problem of a bank that is too big to fail by making it even bigger! Why might this be? Well let us go back a little more than two years to February 2nd 2017.

The bank’s net loss narrowed to 1.89 billion euros in the three months through December, from a loss of 2.12 billion euros a year earlier. Analysts had expected a shortfall of 1.32 billion euros.

As I pointed out it was not supposed to be like that as the background for banking was good.

As I look at this there is the simple issue of yet another loss. After all the German economy is doing rather well with economic growth of 1.9% in 2016 and the unemployment rate falling to 5.9% with employment rising. So why can’t Deutsche Bank make any money?

It has continually blamed “legacy issues” but we find if we advance two years and a bit in time that it is still in something of a morass. Actually in terms of those willing to back its future with their money things look much worse as the share price in February 2017 was 16.6 Euros according to my monthly chart as opposed to the 7.85 Euros as I type this. So one option which is a(nother) rights issue faces the problem that to do any good existing shareholders would be diluted substantially.

What is happening?

From Reuters.

Berlin is so worried about the health of Deutsche Bank that it pushed for a merger with rival Commerzbank even though it could open up a huge financial shortfall, a German official told Reuters.

As we wonder how huge is “huge”? Let us remind ourselves that the German public finances are in strong shape. Germany is running a fiscal surplus and has been reducing its national debt in both absolute and relative terms. Indeed as the last relative number of 61% of GDP (Gross Domestic Product) was for the third quarter of last year Germany may now qualify under the Maastricht Treaty rules. So it could borrow more to cover even a “huge” amount and as we stand can do so very cheaply with the ten-year bund yield a mere 0.07%.

I cannot say I have much faith in the explanation for the losses though as the QE bond buying of Mario Draghi and the ECB has created large profits for most European sovereign bondholders.

The German official said that any tie-up would likely result in a multi-billion-euro hole because a switch in bank ownership legally triggers a revaluation of assets such as government bonds.

They would be revalued at a market price which is typically lower than the one registered on the accounts. A second source, who is familiar with the talks, said they also expected a shortfall after the potential merger.

I think we will find it is other assets which will be causing the trouble and the explanation is something of a smokescreen. It also looks like there has been some “mark to fantasy” going on in the accounts which seems most likely to have taken place in illiquid bonds and derivatives.

As we continue our look don’t they mean 2008 (and maybe 2011/12) as well as 2016?

“In 2016 … Deutsche went to the brink,” said the first official. “They haven’t really got out of that hole…It’s legitimate to ask:… how dangerous is that with systematic relevance?”

This contrasts with the official rhetoric.

Deutsche Bank has said it is stable. Last month, as it announced a return to profit in 2018, its chief executive Christian Sewing said it was “on the right track” for growth and lower costs.

It would appear that Herr Sewing is unaware of the meaning of the phrase “the right track” provided by the Greek crisis where it led to people singing along to AC/DC.

I’m on the highway to hell
On the highway to hell
Highway to hell
I’m on the highway to hell.

Also as a reminder the IMF ( International Monetary Fund ) reported this back in the summer of 2016.

Among the G-SIBs, Deutsche Bank appears to be the most important net contributor to systemic risks, followed by HSBC (HSBA.L) and Credit Suisse (CSGN.S)………..The relative importance of Deutsche Bank underscores the importance of risk management, intense supervision of G-SIBs and the close monitoring of their cross-border exposures.

The story of the last decade is that the problems of Deutsche Bank have never really gone away and in fact have got worse when the economy got better. Should the present period of economic weakness continue then the heat will be not only be turned up a notch or two. As to the legality of all this then surely it should be blocked on competition grounds but when “the precious” is involved matters like that seem to disappear in a puff of smoke.

Meanwhile as Johannes Borgen pointed out at the end of last week maybe the ground has been tilled a little.

I have just realised that Germany passed a law to make redundancies easier for high earners. Those fat cat bankers at Deutsche must feel slightly nervous. How bad must the government want this deal, to make a law only to facilitate it…

The economy

This morning has brought more information on the ongoing economic slow down. From Germany Statistics.

 In January 2019, production in industry was down by 0.8% from the previous month on a price, seasonally and calendar adjusted basis and -3.3% on the same month a year earlier.

December was revised higher but in return January saw another fall meaning that the word temporary is being stretched again. As to the cause well here is a brake on things.

Automobile production fell by 9.2 percent on the month in January, separate data from the Economy Ministry showed. ( Reuters)

Also whilst the world economy will welcome a reduction in one of its imbalances the German one will be slowing because of this.

The foreign trade balance showed a surplus of 14.5 billion euros in January 2019. In January 2018, the surplus amounted to 17.2 billion euros.

According to BreakingTheNews this is hitting official forecasts.

Germany’s government lowered its gross domestic product (GDP) projections for the country in 2019 to 0.8%, Handelsblatt reported on Monday, quoting a confidential note sent by the Ministry of Finance.

Comment

This year has seen more than a few zombie banks return to the news like a financial version of hammer house of horror. We have seen Novo Banco ( Portugal) leaching from the state and a row of Italian banks as well as NordLB of Germany. But Deutsche Bank has returned and the situation is in many ways dominated by this from Reuters BreakingViews.

Lastly, how will a combined bank achieve a 10 percent return on its capital? Deutsche made a piddling 0.5 percent return in 2018 and Commerzbank a paltry 3.4 percent.

Putting it simply Deutsche Bank has not only lost its mojo it lacks any real form of business model. Commerzbank has made a little progress but only by escaping the supermassive black hole of investment banking as we note that a merger would bring it back within that area’s event horizon.

Or to put it another way it is hard to keep a straight face when this is presented as a way of helping with the issue of too big to fail

Deutsche Bank’s chairman Paul Achleitner is also an advocate for a merger that would create the eurozone’s second-largest bank with close to €1.9tn in assets. ( Financial Times)

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The NordLB crisis and the problems of the German banks

Today what we are going to be taking the advice of the Jam and Going Underground. Specifically we are looking into the problems and travails of the German banking system. One factor in this is the deteriorating economic situation which the German IFO has kindly elaborated on this morning.

As you can see according to them the German economy has gone from strong boom to slight down swing and is now moving into down swing. That will not be good for the banking environment. Some wry humour can be provided by the comparison with Italy as a 0.1% fall for it put it in “deep recession” in the third quarter of last year but a 0.2% decline for Germany apparently only put it in a “slight down swing”! Also surely the French strong boom was in 2017 rather than last year, but we get the picture that generally there has been not only a slowing but an expectation of harder economic times across the Euro area which will affect international banking.

Landesbanken

The Frankfurt Rundschau looked at things back on the 24th of May last year.

Most of the Landesbanks belong to the federal states and savings banks associations, with the exception of Landesbank Berlin, which is the sole property of the savings banks.

The ownership structure is complicated by they are mainly owned by German states and cities. Also the credit crunch ending up crunching some of them.

Before the financial crisis, there were still eleven central institutes of the savings banks and the central savings bank fund provider Deka in Frankfurt. In the meantime there are only seven – after the privatization of HSH Nordbank six – and the Deka.

Even back then one of them was in particular trouble.

The capital base of Nord LB is rather modest. CEO Thomas Bürkle therefore stated in April that the bank and its owners – the states of Lower Saxony and Saxony-Anhalt as well as three savings banks associations – were examining “various options” in order to get fresh money. This includes the inclusion of a private investor. For if the state owners inject capital, that would be an aid case and would call the European Commission on the plan.

I do not know if they meant outright modest or in comparison to the troubled loan book but we do know the situation was already worrying enough that a road to Damascus style move as in accepting private capital was looking likely.

So we move on with a reminder that whilst there were hopes that ownership structures might influence banking behaviour. But just like the hopes for the mutuals were dashed in the UK the state backed Landesbanken continue to be trouble.

NordLB

The particular case of Nord LB has gone from bad to worse in 2019. On January 3rd the Financial Times reported that a regular establishment gambit had come something of a cropper.

Frankfurt-based public lender Helaba has terminated merger talks with stricken state-owned rival NordLB, reducing the possibility of a public sector rescue of the Hanover-based lender that aims to raise €3.5bn in additional capital………A merger between Helaba and NordLB would have created a lender with about €320bn of assets and could have been a first step towards a wider consolidation of Germany’s Landesbanken — the regional lenders co-owned by federal states and local savings banks.

So as my late father would have put it, that would have muddied the accountancy picture for a couple of years. As to what they would have been trying to cover up and hide?

With €155bn in assets, Hanover-based NordLB is the fourth-largest German Landesbank and was singled out as the weakest link in Germany’s banking system in the European Banking Authority’s stress test in November. Its balance sheet is creaking under €7.3bn in toxic shipping loans.

The reminds us of how we got here which was via some disastrous lending to the shipping sector and also a reminder of the size of NordLB. This is a problem for the local area.

The state of Lower Saxony, which holds a 59 per cent stake in NordLB, is negotiating with three different private equity investors — including Cerberus and Apollo — over minority investments that would also include the state authority putting more money into the bank.

Apparently it is always just about to turn a corner, which is a familiar theme.

“I am confident that we will find a solution in January,” Lower Saxony’s finance minister Reinhold Hilbers said in a statement on Thursday. His initial plan was to fix the issue by the end of 2018.

Oh and whilst we are thinking in terms of groundhog days, the bits which aren’t losing money are always okay.

A person close to the bank stressed that all of NordLB’s units besides shipping finance are profitable,

What has happened now?

As ever big developments often happen at a weekend and the one just passed was one of those. From the Shipping Tribune.

Germany’s NordLB will be bailed out by public-sector savings banks and the state of Lower Saxony at a cost of as much as 3.7 billion euros ($4.2 billion), thwarting a bid by Cerberus Capital Management and Centerbridge Partners for a stake in the struggling lender.

The restructuring package, which Lower Saxony Premier Stephan Weil called “the best of all possible options,” involves as much as 1.2 billion euros from the savings banks group and up to 1.5 billion euros in capital from Lower Saxony. An additional contribution from the state — NordLB’s main shareholder — could add another 1 billion euros.

In this situations “could add” is invariably a done deal as the news is doled out in bite-sized chunks. As to the significance of this Johannes Borgen is on the case on Twitter.

That’s obviously state resources, but is it state aid ?

He sums up the case for it being state aid here.

Arguing for state aid is the fact that they are owned by the Lander, the cities etc. So fully public owned and this has been the case forever. It’s easy to argue that they serve a public policy goal.

But that is awkward for the German and Euro area establishments for this reason.

I honestly don’t know where this will end. But if the Sparkassen end up being consider public entities for state aid rules, it’s an enormous pack of worm because every single loan they grant could be considered state aid!

Thus there will be a large effort to avoid this is in the way that the ECB calls itself a “rules-based organisation” as it indulges in monetary policies which suggest it instead does “Whatever it takes”.

A possible route is to argue that this has taken place on market terms. That is not really true because the state has offered better terms than the two US hedge-fund alternatives but if we return to the Shipping Tribune maybe the effort has already begun.

The deal with the savings banks will, over time, cost the state less than if NordLB had accepted the offer from the private equity companies, said Reinhold Hilbers, the finance minister of Lower Saxony and head of the company’s supervisory board.

That is a familiar political strategy as by the time we catch up with this particular kicked can we my well have forgotten about this statement and its forecasts and anyway Herr Hilbers will probably have moved on. Oh and it is an implicit admittal that it is costing the state more now.

Comment

We see today that there is far more to the current German banking crisis than the decline or Deutsche Bank or to that matter Commerzbank. Also there are more similarities with the troubles in Italy than many would like to admit. But as we observe this from @macroymercados we are left wondering how the NordLB accounts have been approved for the last decade?

– Agreed to sell loans to Cerberus Capital Management, according to a person familiar with the transaction, while the German lender expects a loss of about €2.7b for 2018.

If we move to the states involved then the figures quoted today will be a minimum for their involvement but that may take some time to be revealed as the proposed cash injection will oil the wheels for some time.

As to whether this will turn out to be a bailout or bail-in only time will tell? This looks like a bailout thus breaking the spirit at least of EU banking rules but we will have to see. We could see some wild swings in the price of Nord LB bonds. As to Germany as a whole even if this gets added to the national debt then there is a clear difference with Italy as it has a 0.17% ten-year bond yield and has reduced its gross national debt by around 52 billion Euros over the past year. Real trouble there would need involvement in Deutsche Bank.

 

 

 

Italy may be in a recession but more importantly its depression never ended

The last 24 hours have brought the economic problems and travails of Italy into a little sharper focus. More news has arrived this morning but before we get there I would like to take you back to early last October when the Italian government produced this.

Politics economy, reform action, good management of the PA and dialogue with businesses and citizens will therefore be directed towards achieving GDP growth of
at least 1.5 percent in 2019 and 1.6 percent in 2020, as indicated in new programmatic framework. On a longer horizon, Italy will have to grow faster than the rest of Europe, in order to recover the ground lost in the last
twenty years.

This was part of the presentation over the planned fiscal deficit increase and on the 26th of October I pointed out this.

If we look back we see that GDP growth has been on a quarterly basis 0.3% and then 0.2% so far this year and the Monthly Economic Report tells us this.

The leading indicator is going down slightly suggesting a moderate pace for the next months.

They mean moderate for Italy.So we could easily see 0% growth or even a contraction looking ahead as opposed some of the latest rhetoric suggesting 3%  per year is possible. Perhaps they meant in the next decade as you see that would be an improvement.

Political rhetoric suggesting 3% economic growth is a regular feature of fiscal debates because growth at that rate fixes most fiscal ills. The catch is that in line with the “Girlfriend in a Coma” theme Italy has struggled to maintain a growth rate above 1% for decades now. Also as we look back I recall pointing out that we have seen quarterly economic growth of 0.5% twice, 0.4% twice, then 0.3% twice in a clear trend. So we on here were doubtful to say the least about the fiscal forecasts and were already fearing a contraction.

Yesterday

All Italy’s troubles were not so far away as the statistics office produced this.

In the fourth quarter of 2018 the seasonally and calendar adjusted, chained volume measure of Gross
Domestic Product (GDP) decreased by 0.2 per cent with respect to the previous quarter and increased by
0.1 per cent over the same quarter of previous year.

Whilst much of the news concentrates on Italy now being in a recession the real truth is the way that growth of a mere 0.1% over the past year reminds us that it has never broken out of an ongoing depression. If we look at the chart provided we see that in 2008 GDP was a bit over 102 at 2010 prices but now it has fallen below 97. So a decade has passed in fact more like eleven years and the economy has shrunk. Also I see the Financial Times has caught onto a point I have been making for a while.

Brunello Rosa, chief executive of the consultancy Rosa and Roubini, has pointed out that, on a per capita basis, Italy’s real gross domestic product is lower than when the country adopted the euro in 1999. Over the same period Germany’s per capita real GDP has increased by more than 25 per cent, while even recession-ravaged Greece has performed better than Italy on the same basis.

On that basis Italy has been in a depression this century if not before. Indeed if you look at the detail it comes with something that challenges modern economic orthodoxy, so let me explain. In 1999 the Italian population was 56,909,000 whereas now it is just under 60.5 million. Much of the difference has been from net migration which we are so often told brings with it a list of benefits such as a more dynamic economic structure and higher economic growth. Except of course, sadly nothing like that has happened in Italy. As output has struggled it has been divided amongst a larger population and thus per head things have got worse.

Meanwhile this seems unlikely to help much.

Italy’s statistical institute will soon have a new president, the demographer Gian Carlo Blangiardo. He has recommended calculating life expectancy from conception – rather than birth – so as to include unborn babies. ()

Also population statistics in general have taken something of a knock this week.

Pretty interesting – New Zealand just found it has 45,000 fewer people than it thought. In a population of 4.9 million (maybe), that means economists might have to start revising things like productivity and GDP growth per capita. ( Tracy Alloway of Bloomberg).

Can I just say chapeau to whoever described it as Not So Crowded House.

The banks

I regularly point out the struggles of the Italian banks and say that this is a factor as they cannot be supporting the economy via business lending so thank you to the author of the Tweet below who has illustrated this.

As you can see whilst various Italian government’s have stuck their heads in the sand over the problems with so many of the Italian banks there has been a real cost in terms of supporting business and industry. This has become a vicious circle where businesses have also struggled creating more non-performing loans which weakens the banks as we see a doom loop in action.

What about now?

The GDP numbers gave us an idea of the areas involved on the contraction.

The quarter on quarter change is the result of a decrease of value added in agriculture, forestry and fishing
as well as in industry and a substantial stability in services. From the demand side, there is a negative
contribution by the domestic component (gross of change in inventories) and a positive one by the net
export component.

The latter part is a bit awkward for Prime Minister Conte who has taken the politically easy way out and blamed foreigners this morning. As to the industrial picture this morning;s PMI business survey suggests things got worse rather than better last month.

“January’s PMI data signalled another deterioration in Italian manufacturing conditions, with firms struggling in the face of a sixth consecutive monthly fall in new business. Decreases in output, purchasing activity and employment (the first in over four years) were recorded, marking a weak start to 2019.”

The spot number of 47.8 was another decline and is firmly in contraction territory.

Comment

This is as Elton John put it.

It’s sad, so sad (so sad)
It’s a sad, sad situation
And it’s getting more and more absurd

Italy has been in an economic depression for quite some time now but nothing ever seems to get done about it. Going back in time its political leadership were keen to lock it into monetary union with France and Germany but the hoped for convergence has merely led to yet more divergence.

One of the hopes is that the unofficial or what used to be called the black economy is helping out. I hope so in many ways but sadly even that is linked to the corruption problem which never seems to get sorted out either. Oh and whilst many blame the current government some of that is a cheap shot whilst it has had its faults so has pretty much every Italian government.

 

Podcast

A bond issue does little for the problem of plunging investment in Greece

Today brings a development which will no doubt be trumpeted across the media and it is explained by this from Reuters yesterday,

Greece will return to bond markets with a five-year issue “in the near future, subject to market conditions”, authorities said on Monday.

The sovereign has mandated BofA Merrill Lynch, Goldman Sachs International Bank, HSBC, J.P. Morgan, Morgan Stanley and SG CIB as joint lead managers for the transaction, according to a regulatory filing to the stock exchange.

The near future is today as we mull that in spite of its role in the Greek economic crisis Goldman Sachs is like the Barnacles in the writings of Charles Dickens as it is always on the scene where money is involved. As to why this is happening the Wall Street Journal explains.

Greece‘s borrowing costs have dropped to a four-month low, and Athens plans to raise up to $3.4 billion in a bond sale.

Although it is not turning out to be quite as cheap as the 3.5% hoped for.

Greece Opens Books For New 5 Year Bond, Initial Guidance For Yield 3.75-3.875% – RTRS Source ( @LiveSquawk)

Why are investors buying this?

The obvious objection is the default history of Greece but in these times of ultra low yields ~3.8% is not be sniffed at. This is added to by the Euro area slow down which could provoke more ECB QE and whilst Greece does not currently qualify it might as time passes. In the mean time you collect 3.8% per annum.

Why is Greece offering it?

This is much more awkward for the politicians and media who trumpet the deal because it is a bad deal in terms of financing for Greece. It has been able to borrow off the European Stability Mechanism at not much more than 1% yield for some time now. Actually its website suggests it has been even cheaper than that.

0.9992% Average interest rate charged by ESM on loans (Q1 2018)

Past borrowing was more expensive so the overall ESM average is according to it 1.62%. So Greece is paying a bit more than 2% on the average cost of borrowing from the ESM which is hardly a triumph. Even worse the money will have to be borrowed again in five years time whereas the average ESM maturity is 32 years ( and may yet be an example of To Infinity! And Beyond!).

So there is some grandstanding about this but the real reason is escaping from what used to be called the Troika and is now called the Institutions. The fact the name had to be changed is revealing in itself and I can understand why Greece would want to step away from that episode.
As we move on let me remind you that Greece has borrowed some 203.8 billion Euros from the ESM and its predecessor the EFSF.

The economy

We can see why the Greek government wants to establish its ability to issue debt and stay out of the grasp of the institutions as we note this from Kathimerini.

Greek Prime Minister Alexis Tsipras announced an 11 percent increase in the minimum wage during a cabinet meeting on Monday, the first such wage hike in the country in almost a decade.

Actually the sums are small.

The hike will raise the minimum wage from 586 to 650 euros and is expected to affect 600,000 employees. He also said the government will scrap the so-called subminimum wage of 518 euros paid to young employees.

There are two catches here I think. Firstly in some ways Greece is competing with the Balkan nations which have much lower average wages than we are used to. Also this reverses the so-called internal competitiveness model.

The standard mimimum monthly wage was slashed by 22 percent to 586 euros in 2012, when Greece was struggling to emerge from a recession.

A deeper cut was imposed on workers below 25 years, as part of measures prescribed by international lenders to make the labour market more flexible and the economy more competitive.

Productivity

Here we find something really rather awkward which in some ways justifies the description of economics as the dismal science. Let me start with a welcome development which is the one below.

The seasonally adjusted unemployment rate in October 2018 was 18.6% compared to 21.0% in October 2017 and 18.6% in September 2018 ( Greece Statistics Office)

But the improving labour market has not been matched by developments elsewhere as highlighted by this.

we documented that employment had started to lead output growth in the early days of the SYRIZA government. Since such a policy is unsustainable, we have to include in any consistent outlook that this process reverses and output starts leading employment again – hence restoring positive productivity growth. ( Kathimerini)

That led me to look at his numbers and productivity growth plunged to nearly -5% in 2015 and was still at an annual rate of -3% in early 2016. Whilst he says we “have to include” an improvement the reality is that it has not happened yet as this year has seen two better quarters and one weaker one. We have seen employment indicators be the first sign of a turn in an economy before but they normally take a year or so to be followed by the output indicator not three years plus. This reminds us that Greek economic growth is nothing to write home about.

The available seasonally adjusted data
indicate that in the 3rd quarter of 2018 the Gross Domestic
Product (GDP) in volume terms increased by 1.0% in comparison with the 2nd quarter of 2018, while
in comparison with the 3rd quarter of 2017, it increased by 2.2%.

If it could keep up a quarterly rate of 1% that would be something but the annual rate is in the circumstances disappointing. After all the decline was from a quarterly GDP of 62 billion Euros at the peak in 2009 whereas it is now 51.5 billion. So the depression has been followed by only a weak recovery.

More debt

I looked at the woes of the Greek banks yesterday but in terms of the nation here is the Governor of the central bank from a speech last week pointing to yet another cost on the way to repairing their balance sheets

An absolutely indicative example can assess the immediate impact of a transfer of about €40 billion of NPLs, namely all denounced loans and €7.4 billion of DTCs ( Deferred Tax Credits).

Comment

Whilst I welcome the fact that Greece has finally seen some economic growth the problem now is the outlook. The general Euro area background is not good and Greece has been helped by strong export growth currently running at 7.6%. There have to be questions about this heading forwards then there is the simply woeful investment record as shown by the latest national accounts.

Gross fixed capital formation (GFCF) decreased by 23.2% in comparison with the 3rd quarter of 2017.

The scale of the issue was explained by the Governor of the central bank in the speech I referred to earlier.

However, in order to increase the capital stock and thus the potential output of the Greek economy, positive net capital investment is indispensable. For this to happen, private investment must grow by about 50% within the next few years. In other words, the Greek economy needs an investment shock, with a focus on the most productive and extrovert business investment, to avoid output hysteresis and foster a rebalancing of the growth model in favour of tradeable goods and services.

Yet as we stand with the banks still handicapped how can that happen? Also if we return to the productivity discussion at best it will have one hand tied behind its back by as the lack of investment leads to an ageing capital stock. So whilst the annual rate of economic growth may pick up at the end of 2018 as last year quarterly growth was only 0.2% I am worried about the prospects for 2019.

It should not be this way and those who created this deserve more than a few sleepless nights in my opinion.