It is always the banks isn’t it?

Perhaps the most regular theme of the credit crunch era is the problems of the banks and the finance sector. This is quite an (anti ) achievement as we note that if we count from problems at Bear Sterns the credit crunch is now into its second decade. In only a couple of months or so it will be ten years since Northern Rock began its collapse. We are regularly told by our establishment that there has been reform and repair along the lines of this from Alex Brazier of the Bank of England that I analysed only on Tuesday,

The financial system has been made safer, simpler and fairer.

Banks, in particular, are much stronger. British banks have a capital base – their own shareholders’ money – that is more than 3 times stronger than it was ten years ago.

They can absorb losses now that would have completely wiped them out ten years ago.

Lloyds Banking Group

I pointed out on Tuesday that it was hard to know whether to laugh or cry at the “simpler and fairer” claim and this morning there is this announcement to consider.

This was after taking additional provisions for PPI and other conduct related issues which was disappointing. The Group is also currently undertaking a review of the HBOS Reading fraud and is in the process of paying compensation to the victims of the fraud for economic losses, ex-gratia payments and awards for distress and inconvenience.

Later we got some details on the monetary amounts involved.

The £1,050 million charge for PPI includes an additional £700 million provision taken in the second quarter reflecting current claim levels, which remain above the Group’s previous provision assumption. The additional provision will now cover reactive claims of around 9,000 per week through to the end of August 2019,

The good news from this is that the UK economy will get another £700 million of PPI style Quantitative Easing which seems to be much more effective than the Bank of England version.  The bad news is that the saga goes on and on and on in spite of us being told so many times that it is now over. Indeed the rate of provision has doubled from last time around. This means that in total Lloyds either has or is about to provide this in terms of PPI style QE. From Stephen Morris of Bloomberg News.

Lloyds Bank takes ANOTHER £700m in charges today, taking their total since 2011 to 18.1 BILLION POUNDS………This is the 17th time the bank has increased its provisions for the scandal.

This is a feature of the ongoing banking scandal where we are drip fed the news as a type of expectations management as another bit is announced and we are told it is the last time again and again. The issues are legacy ones from the past but the management and response cycle has not changed. Actually if we look at the total numbers for misconduct New City Agenda has some chilling ones.

has now set aside £22.5 bn for misconduct since 2010

If we go wider to the whole industry it calculates this.

Total amounts set aside for PPI redress now stand at £42.1 billion – around 4.5 times the cost of the London 2012 Olympics. Banks have proved hopeless at estimating the total cost of their misconduct – with some increasing their PPI redress provisions 10 times over the past 3 years. Legitimate complaints have been rejected and banks have delayed writing to customers, meaning that the scandal has taken years to be resolved and cost billions in administrative costs.

If we return to the QE style impact it does make me wonder how much of the UK economic recovery has been due to this as we note for example its possible contribution to car sales. If we throw in every type of miss selling the total comes to £58.1 billion.

Before we move on there was also this. From the Financial Times.

The bank has also set up a £300m compensation scheme to repay 600,000 mortgage customers as a result of failings in its arrears policies between 2009 and 2016,

How can there be recent failings when everything is supposed to have been reformed?

Lending

On Tuesday Alex Brazier warned about looser lending standards. But according to Lloyds Bank in the Financial Times it is everybody else.

 

Mr Horta-Osório said the bank has been increasing its consumer lending — comprising credit cards, personal loans and car finance — at less than 4 per cent a year over the past six years, and remains under-represented in the sector versus its size.

I am very cautious about anyone who uses this sort of swerve “over the past 6 years” as no doubt 2011 and 12 are included ( remember the triple dip fears?) to get the number down. Still the Alex Brazier should be alert to that as it is exactly the sort of swerve the Bank of England uses itself.

Royal Bank of Scotland

We cannot look at UK banks and miss out RBS can we?! It did make BBC News earlier this month.

Royal Bank of Scotland has agreed a £3.65bn ($4.75bn) settlement for its role in the sale of risky mortgage products in the US before the financial crisis.

Also there is the on-going saga about the on and now off sale of Williams and Glyns. If I recall correctly around £1.8 billion was spent on this and the bill is rising yet again.From the BBC.

The European Commission has accepted a UK government plan to free Royal Bank of Scotland from an obligation to sell its Williams & Glyn division……..Under the new deal, which the EU has accepted “in principle”, RBS would spend £835m to help boost competition.

Deutsche Bank

My old employer has seen plenty of scares in the credit crunch era. For the moment it seems to mostly be in the news via its likes to both the Donald and his circle. From the New York Times.

During the presidential campaign, Donald J. Trump pointed to his relationship with Deutsche Bank to counter reports that big banks were skeptical of doing business with him.

After a string of bankruptcies in his casino and hotel businesses in the 1990s, Mr. Trump became somewhat of an outsider on Wall Street, leaving the giant German bank among the few major financial institutions willing to lend him money.

Well as this from the Wall Street Journal points out today’s results have brought both good and bad news.

The German lender said Thursday net income was €466 million ($548 million), compared with €20 million for the same period a year earlier. Deutsche Bank’s companywide revenues declined 10% from the year-ago period, to €6.6 billion.

Comment

There is much here that seems familiar as the claimed new dawn looks yet again rather like the old one. There has been a reminder of this from another route today as the establishment reform agenda has led to this.

FCA say Li(e)bor is to end in 2021 citing that the bank benchmark is untenable  ( @Ransquawk)

Good job there is no rush to do this like a big scandal destroying any credibility it had or something like that.  We need a modern benchmark for new trades starting now whilst a sort of legacy Libor is kept for the existing contracts that cannot be changed.

Still there is always an alternative perspective on it all as this headline from Reuters indicates.

Lloyds bank posts biggest half-year profit since 2009

 

 

 

How can the UK adjust to a world of lower interest-rates and yields?

One of the features of the credit crunch era has been the fall and if you like plunge in both interest-rates and bond yields. This first started as central banks cut official interest-rates sharply as the crisis hit. When that did not seem to be working ( the modern word covering that is counterfactual) they then moved to policies such as Quantitative Easing to reduce longer-term interest-rates and yields. Next came more interest-rate cuts and the advent of Qualitative Easing which for a while was called credit easing in the UK. This now comes under the banner of the Term Funding Scheme in the UK, or actual support for loans at the Bank of Japan or the TLTROs and securities purchases by the ECB ( European Central Bank).

So we saw official rates fall and then central banks realised the consequence of controlling rates which run from overnight to one month money. This is that there are plenty of other interest-rates such as bond yields and mortgage rates so our control freaks moved to lower them as well. After all their Ivory Tower economic models predicted economic triumph if they did. To ram all this home some places also went into negative territory for interest-rates from which no-one has yet returned with Denmark briefly giving it a go before preferring another ice bath. For the UK we were reassured that we were at the bottom of the cycle as Bank of England Carney told us that a Bank Rate of 0.5% was the lower bound. Of course he later cut to 0.25% and then told us that the lower bound was near to but just above 0%. This of course was silly on two fronts. Most obviously it ignored the fact that much of Europe and of course Japan already have negative interest-rates and it also led to the really silly expectation of a cut to 0.1%.

The rise of the zombies

It was only a few days ago that I pointed out that in my opinion the rise of zombie companies and businesses was strangling productivity growth. That reminded me of my description of Unicredit in Italy as a zombie bank around 5 years ago and of course it still is. But in the meantime thank you to @LadyFOHF for pointing out this from FT Alphaville.

It quotes the Bank for International Settlements or BIS on this subject.

One potential factor behind this decline is a persistent misallocation of capital and labour, as reflected by the growing share of unprofitable firms. Indeed, the share of zombie firms – whose interest expenses exceed earnings before interest and taxes – has increased significantly despite unusually low levels of interest rates (right-hand panel).

That bit could not have been written by me clearly as if it had “despite” would have been replaced by “because of”. This bit might have though.

Weaker investment in recent years has coincided with a slowdown in productivity growth. Since 2007, productivity growth has slowed in both advanced economies and EMEs

There are dangers in assuming that correlation does prove causation but look at the right zombie company chart. Just as growth was fading the central banks gave it another push and rather than the reforms we keep being promised we in fact got “more, more, more”. More worryingly the line continues to head upwards.

In case you are wondering here is their definition of a zombie company.

The BIS dubs a zombie company any firm which is more than 10 years old, listed and has a ratio of EBIT to interest expenses below one.

If you are wondering ( like me) that others could be on the list then so was Izzy at the FT.

This means Uber, which is now eight years old, only has two years and a public listing ahead of it, before it too can be classified a zombie.

That I find fascinating as Uber and similar companies are a modern era triumph supposedly.In my part of London I regularly pass people holding up their mobile phone as they track down their Uber taxi. To be fair it has usually arrived in the time it takes me to walk past and in fact if it takes longer than that some seem to get upset. So here we really have a quandary which is a zombie which is apparently extremely efficient!

The FT poses an issue here.

why does profitability not matter anymore? And where does the extended patience with unprofitable companies lead us in the long run? Surely, nowhere good?

I will go further as on this road we see strong hints as to why productivity growth has been so low ( in fact more or less zero in the UK) which will hold back wage and real wage growth. All of them together mean that economic growth will be restricted as we are reminded of 2% being the new normal on any sustained basis. If we throw in the official under measurement of inflation we then find we have little if any economic growth at all. Is that enough as a consequence of low interest-rates where the “cure” has in fact become part of the disease? Perhaps Tina Arena was right.

I pretend I can always leave
Free to go whenever I please
But then the sound of my desperate calls
Echo off these dungeon walls
I’ve crossed the line from mad to sane
A thousand times and back again
I love you baby, I’m in chains
I’m in chains
I’m in chains
I’m in chains

The banks

The official story is that low interest-rates are bad for the banks. But if this from @grodeau about Swedish banks is true in the UK which I believe to be so we may have been sold a pup.

In terms of margin they are doing better than before the credit crunch as we find we are feeding a whole field of zombies like this is some form of new Hammer House of Horror series. Or to answer the question posed by Obruni in the FT. Yes.

The ROEs of most major banks have been below their costs of capital since 2008. Are these zombies too?

The UK should not issue more index-linked Gilts

There are suggestions that we should do this and as ever I will avoid the politics and just look at the economics and finance. I spotted this yesterday from Jonathan Portes.

Failing to borrow long-term at negative real rates to fix roofs (& other things) over last 7 years an act of deliberate economic self-harm

This reminds me of the online debate he and I had a few years back. The issue he  is apparently glossing over can be summed up in the use of the word “real”. In a theoretical Ivory Tower world it is clear but beneath the clouds where the rest of us live it has changed a lot in modern times. Let me summarise some issues.

  1. Imagine inflation were to stay at around 4% ( these are based on RPI inflation) for a while. Our negative real rate would in fact be very expensive as we paid it.
  2. We do not know what we will pay as our commitment is in fact open-ended depending on inflation. As it is so I am dubious about negative real rate calculations.
  3. If we switch to wages growth we see that something has changed. If that persists then the real rate versus wages may turn out to be very different.

If I was borrowing I would borrow in terms of conventional Gilts where the 30 year cost at 1.9% is extraordinarily cheap and a known cost as in we know what we will be paying from the beginning. Putting it another way index-linked Gilts are tactically cheap but I fear they will be strategically expensive.

Comment

As we look at the new economic world we see that some are trying to escape but that progress for them has been slow. After all the US has merely nudged its rates to a bit above 1% and Canada has only moved to 0.75% this week. So it seems that we will have to get used to low interest-rates for a while yet as we note that they have come with lower productivity, wage growth and economic growth. Not quite what we were promised is it?

Can Portugal escape its economic history?

It is time for us to take a trip again to the Iberian peninsular and indeed to the delightful country of Portugal. Back on January 16th I highlighted the economic issues facing it thus.

When we do so we see that Portugal has also struggled to sustain economic growth and even in the good years it has rarely pushed above 1% per annum. There have also been problems with the banking system which has been exposed as not only wobbly but prone to corruption. Also there is a high level of the national debt which is being subsidised by the QE purchases of the ECB as otherwise there is a danger that it would quickly begin to look rather insolvent. In spite of the ECB purchases the Portuguese ten-year yield is at 3.93% or some 2% higher than that of Italy which suggests it is perceived to be a larger risk. Also more cynically perhaps investors think that little Portugal can be treated more harshly than its much larger Euro colleague.

The mentions of Italy come about because there are quite a few similarities between the two twins. Both had similar weak economic growth in the better times, both have seen banking crisis which were ignored for as long as possible, and both have elevated national debts currently being alleviated by the bond buying of the ECB. Actually bond markets seem to have caught onto this since we last took a look as Portugal has seen an improvement with its ten-year yield at 3.03% only some 0.86% over that of Italy. This has been happening in spite of the fact that the ECB has in relative terms been buying more Italian than Portuguese bonds. Although sadly for Portugal’s taxpayers the gain from this has been missed to some extent as it issued 3 billion Euros of ten-year debt with a coupon of 4.125% back in January.

What about economic growth?

Back in January the Bank of Portugal was expecting this.

the Portuguese economy is expected to maintain the moderate recovery trajectory that has characterised recent years . Thus, following 1.2 per cent growth in 2016, gross domestic product (GDP) is projected to accelerate to 1.4 per cent in 2017, stabilising its growth rate at 1.5 per cent for the following years.

Actually Portugal managed to nearly meet the 2017 expectations in the first quarter of this year.

In comparison with the fourth quarter of 2016, GDP increased 1.0% in real terms (quarter-on-quarter change rate of 0.7% in the previous quarter). The contribution of net external demand changed from negative to positive, driven by a strong increase in Exports of Goods and Services………Portuguese Gross Domestic Product (GDP) increased by 2.8% in volume in the first quarter 2017, compared with the same period of 2016 (2.0% in the fourth quarter 2016).

As you can see there was strong export-led economic growth to be seen. This had a very welcome consequence.

In the first quarter 2017, seasonally adjusted employment registered a year-on-year change rate of 3.2%,

This makes Portugal look like its neighbour Spain although care is needed as a couple of strong quarters are not the same as 2/3 better years. Also the Portuguese economy is still just over 3% smaller than it was at its pre credit crunch peak. A fair proportion of this is the fall in investment because whilst it has grown by 5.5% over the past year the level in the latest quarter of 7.7 billion Euros was still a long way below the 10.9 billion Euros of the second quarter of 2008.

The National Debt

A consequence of the lost decade or so for Portugal in terms of economic growth has been upwards pressure on the relative size of the national debt which of course has been made worse by the bank bailouts.

This means that Portugal has a national debt to GDP ratio of 133%. Whilst this is not currently a large issue in terms of funding due to low bond yields it does pose a question going forwards. There are two awkward scenarios here. The first is that the ECB continues to reduce or taper its purchases and the second is that it runs up to its self-imposed limit on Portuguese bonds. Actually the latter was supposed to have already happened but the ECB has shown what it calls flexibility as we have a wry smile at all the previous proclamations of it being a “rules based organisation”.

The banks

The various bailouts have added to the debt issue in spite of the various machinations and manipulations to try to keep them out if the numbers. There is also a sort of never-ending story about all of this as we mull that Novo Banco was supposed to be a clean good bank  Let us step back in time to what the Bank of Portugal told us just under 3 years ago,

The general activity and assets of Banco Espírito Santo, S.A. are transferred, immediately and definitively, to Novo Banco, which is duly capitalised and clean of problem assets

Sorted? Er not quite as I note this news from Reuters yesterday,

The sale of Portugal’s state-rescued Novo Banco to U.S. private equity firm Lone Star should be concluded by November following a 500 million euro ($566 million) debt swap that will be launched soon, deputy finance minister said on Wednesday.

That was yet another kicking of the can into the future as we discovered that November is the new August. Meanwhile somethings have taken place such as a 25% cut in the workforce and a 20% cut in branch numbers.

Bank Lending

The recent economic improvement does not seem to have been driven by any surge of bank lending as we peruse the latest data from the Bank of Portugal.

In May 2017 the annual rate of change (a.r.) in loans granted to non-financial corporations stood at -3.3%, ……In May 2017 the a.r. in loans granted to households stood at -1.0%, reflecting a positive change of 0.1 p.p. compared with April

So we see that neither all the easing from the ECB nor the improved economic growth situation have got lending into the positive zone. Mind you the numbers below suggest that the banks have their own problems still.

The share of borrowers with overdue loans decreased by 0.1 p.p., to 27.1% ( companies)……… The share of borrowers with overdue loans in the household sector declined by 0.1 p.p. from April, to stand at 13.2%.

Mind you the Portuguese banks do seem to have learned something from British visitors.

The consumption and other purposes segment also posted a positive change of 0.2 p.p., standing at 4.6%

House prices

Is there a boom here responding to the easy monetary policy?

In the first quarter of 2017, the House Price Index (HPI) increased 7.9 % when compared to the same quarter of the previous year, 0.3 percentage points (p.p.) more than in the last quarter of 2016…….When compared with the last quarter of 2016, the HPI increased 2.1%, 0.9 p.p. higher than in the previous period.

Turning British? Maybe in a way as there is something familiar in the way that house prices began to rise again in late 2013.

Comment

One very welcome feature of the improved economic situation in Portugal has been the much improved situation regarding unemployment.

The April 2017 unemployment rate stood at 9.5%, down by 0.3 percentage points (p.p.) from the previous month’s level and by 0.6 p.p. from three months before….. and is the lowest observed estimate since December 2008 (9.3%).

If it can keep this up it may move into the success column but there are also issues. Portugal has briefly done this before only to then fade away. The banking sector still has problems and we now know ( post 2007) that readings like this can swish away like the sting of a scorpion’s tale.

The Consumer confidence indicator increased in June, resuming the positive path observed since the beginning of 2013 and reaching a new maximum level of the series started in November 1997.

Let us wish Portugal well as it needs to get ahead of the game as we note another issue hovering on the horizon.

Since 2010 Portugal lost 264,000 Inhabitants……..In 2016, the mean age of the resident population in Portugal was 43.9 years, an increase of about 3 years in the last decade.

Let us not be too mean spirited though as some of the latter is a welcome rise in life expectancy.

Me on FXStreet

The economic problems of Italy continue

We have become familiar with the economic problems which have beset Italy this century. First membership of the Euro was not the economic nirvana promised by some as the economy ony grew by around 1% per annum in what were good years for others. Then not only did the credit crunch  hit but it was quickly followed by the Euro area crisis which hit Italy hard in spite of the fact that it did not have the housing boom and bust that affected some of its Euro area colleagues. It did however not miss out on a banking crisis which the Italian establishment ignored for as long as it could and is still doing its best to look away from even now. This all means that the economic output or GDP ( Gross Domestic Product) of Italy is now pretty much the same as it was when Italy joined the Euro. If we move to a measure which looks at the individual experience which is GDP per capita we see that it has fallen by around 5% over that time frame as the same output is divided by a population which has grown.

There is an irony in this as looking forwards Italy has a demographic problem via its ageing population but so far importing a solution to this has led to few if any economic benefits. That may well be why the issue has hit the headlines recently as Italy struggles to deal with the consequences of the humanitarian crisis unfolding in and around the Mediterranean Sea. But we have found oursleves so often looking at an Italian economy which in many ways has lived up or if you prefer down to the description of “Girlfriend in a Coma”.

Good Times

One thing which has changed in Italy’s favour is the economic outlook for the Euro area itself. It was only last week that the President of the ECB Mario Draghi reminded us of this.

If one looks at the percentage of all sectors in all euro area countries that currently have positive growth, the figure stood at 84% in the first quarter of 2017, well above its historical average of 74%. Around 6.4 million jobs have been created in the euro area since the recovery began…… since January 2015 – that is, following the announcement of the expanded asset purchase programme (APP) – GDP has grown by 3.6% in the euro area.

This was backed up yesterday by the private sector business surveys conducted by Markit.

The rate of expansion in the eurozone manufacturing
sector accelerated to its fastest in over six years in
June, reflecting improved performances across
Germany, France, Italy, the Netherlands, Ireland,
Greece and Austria.

Later they went even further.

At current levels, the PMI is indicative of factory output growing at an annual rate of some 5%, which in turn indicates the goods producing sector will have made a strong positive contribution to second quarter economic growth.

Good news indeed and if we look in more detail at the manufacturing detail for Italy it looks to be sharing some of this.

Italian manufacturers recorded a strong end to the
second quarter, with output growth picking up on
the back of robust export orders……Survey evidence indicated that higher demand from
abroad was a principal driving factor, with new
export orders rising at the fastest pace for over two
years in June.

Ah export-led growth? Economists have had that as a nirvana for years and indeed decades albeit that of course not everyone can have it. But the situation described set a hopeful theme for economic growth in the quarter just past.

The Italian manufacturing sector continued its
recent solid performance into June. At 55.2, the
PMI remained below April’s recent peak (56.2), but
its average over the second quarter as a whole was
the best seen in more than six years.

There were even signs of hope for what has become a perennial Italian problem.

New staff were taken on during the month to help
deal with the additional production requirements
that resulted from new orders. The rate of job
creation remained strong by historical standards
despite easing to the weakest seen since January.

The Unemployment Conundrum

Here we found disappointment as yesterday’s release struck a different beat to the good times message elsewhere.

Unemployed were 2.927 million, +1.5% over the previous month…….. unemployment rate was 11.3%, +0.2
percentage points over the previous month, and inactivity rate was 34.8%, unchanged over April 2017.
Youth unemployment rate (aged 15-24) was 37.0%, +1.8 percentage points over the previous month and
youth unemployment ratio in the same age group was 9.4%, +0.4 percentage points in a month.

The data for May saw a disappointing rise in unemployment and an especially disappointing one in youth unemployment. If these are better times then a grim message is being sent to the youth of Italy with more than one in three out of work and even worse the number rising. With inactivity unchanged this meant that employment also disappointed.

In May 2017, 22.923 million persons were employed, -0.2% over April 2017…….Employment rate was 57.7%, -0.1 percentage points over April 2017, unemployment rate was 11.3%.

The annual data does show a fall of 0.3% in the unemployment rate over the past year but that compares poorly with the 0.9% decline in the Euro area in total. Of the European Union states Italy now has the third worst unemployment rate as Croatia has seen quite an improvement and in fact has one even higher than that in Cyprus. If we move to youth unemployment then frankly it is hard to see how a country with 37% youth unemployment can share the same currency as one with 6.7%, Germany?

The banks

There are continuing issues here as I note that there are rumours of some of the problem loans of Monte Paschi being sold. The problem with that is we have been told this so many times before! Then last night we were told this.

italian regional lender banca carige approved a capital increase of 500 million euros and asset sales of 200 million euros ( h/t @lemasebachthani)

This added to this from the end of last month.

DBRS Ratings Limited (DBRS) has today placed the BBB ratings on the obbligazioni bancarie garantite (OBG; the Italian legislative covered bonds) issued under the EUR 5,000,000,000 Banca Carige S.p.A. Covered Bonds Programme (Carige OBG1 or the Programme), guaranteed by Carige Covered Bond S.r.l., Under Review with Negative Implications. There are currently 20 series of Carige OBG1 outstanding under the Programme with a nominal amount of EUR 3.08 billion.

Today has seen an example of never believe anything until it is officially denied in the Financial Times.

One of the eurozone’s senior banking supervisors has defended her institution’s role in handling the failure of two Italian lenders but said her watchdog needed new tools to protect taxpayers better from bank failures.

Comment

Let us hope that these are indeed better times for the Italian economy and its people. However whilst the background gives us hope that it will be running with the engine of a Ferrari fears remain if we look at the banks and the employment data that it may instead be using the engine of a Fiat. It is hard not be a little shocked by this from the Telegraph.

Italy’s chronic unemployment problem has been thrown into sharp relief after 85,000 people applied for 30 jobs at a bank – nearly 3,000 candidates for each post.

The 30 junior jobs come with an annual salary of euros 28,000 ($41,000). The work is not glamorous – one duty is feeding cash into machines that can distinguish bank notes that are counterfeit or so worn out they should no longer be in circulation.

The Bank of Italy whittled down the applicants to a short-list of 8,000, all of them first-class graduates with a solid academic record behind them.

 

It is all about the banks yet again

If there is a prime feature of the credit crunch in the financial world it is the woes and travails of the banks. That is quite an anti-achievement when you consider that if you count from the first signs of trouble at the mortgage book of Bear Stearns we are now in out second decade of this period having lost one already. Before we come to today’s main course delightfully prepared first by chefs in Italy and then finished off in Brussels I have a starter for you from the UK.

The Co-op Bank

Back on the 13th of February I gave my views on this institution being put up for sale.

So the bank is up for sale and my immediate thought is who would buy it and frankly would they pay anything? Only last week Bloomberg put out some concerning analysis……..Co-Operative Bank Plc, the British lender that ceded control to its creditors three years ago, has plunged in value to as little as 45 million pounds ($56 million), according to people familiar with the matter.

Since then we have had regular reports in places like the Financial Times that a deal was just around the corner whereas I feared it might end up in the hands of the Bank of England. This morning has come news that the ill-fated sale plans have been abandoned and replaced by a doubling-down by the existing investors. From Sky News.

The beleaguered Co-operative Bank is closing in on a £700m rescue deal with US hedge funds amid ongoing talks about the separation of the vast pension scheme it shares with the Co-op Group.

Much of the issue revolves around funding the pension scheme and if I was worker at the Co-op I would be watching that like a hawk. Also the name may need some review as the shareholding of the Co-operative group falls below 5%.

We have also seen in the UK how a bailed out bank boosts the economy in return for taxpayers largesse. From Reuters.

British lender Royal Bank of Scotland (RBS.L) is planning to cut 443 jobs dealing with business loans and many of them will move to India, the bank said

The Veneto Banks

As we move from our starter to the main course we find ourselves facing a menu which has taken nearly a decade to be drawn up. The Italian response to the banking crisis was to adopt the ostrich position and ignore it for as long as possible. Indeed for a while the Italian establishment boasted that only 0.2% of GDP ( Gross Domestic Product) had been spent on bank bailouts compared to much higher numbers elsewhere. Such Schadenfreude came back to haunt them driven by one main factor which was the rise and rise of non-performing loans in the Italian banking sector which ended up with more zombies than you might expect to see in a Hammer House of Horror production. Even worse this was a drag on the already anaemic Italian rate of economic growth meaning that its economy is now pretty much the same size as when it joined the Euro.

There has been a long program of disinformation on this subject and I am sure that regular readers will recall the claims that Monte Paschi was a good investment made by then Prime Minister Matteo Renzi. There have also been the regular statements by Finance Minister Padoan along the lines of this from Politico EU in January.

Italian Finance Minister Pier Carlo Padoan has defended the way his country dealt with its banking crisis, saying the government had “only spent €3 billion” on bailouts, in an interview with Die Welt published today.

If we are being ultra polite that was especially “odd” as Monte Paschi was in state hands but of course over this weekend came more woe for Padoan. From the European Commission.

On 24 June 2017, Italy notified to the Commission its plans to grant State aid to wind-down BPVI and Veneto Banca. The measures will enable the sale of parts of the two banks’ activities to Intesa, including the transfer of employees. Italy selected Intesa Sanpaolo (Intesa) as the buyer in an open, fair and transparent sales procedure:

I will come to the issue of Intesa in a moment but let us first look at the cost to Italy from this.

In particular, the Italian State will grant the following measures:

  • Cash injections of about €4.785 billion; and
  • State guarantees of a maximum of about €12 billion, notably on Intesa’s financing of the liquidation mass. The State guarantees would be called upon notably, if the liquidation mass is insufficient to pay back Intesa for its financing of the liquidation mass.

This has opened up a rather large can of worms and as Bloomberg points out we can start with this.

Rome will effectively by-pass the EU’s “single resolution board” which is supposed to handle bank failures in an orderly way and the “Banking Recovery and Resolution Directive,” which should act as the euro zone’s single rulebook.

Why? Well as we have looked at before there was the misselling of bonds to retail investors.

The government could have taken a less expensive route, involving the “bail in” of senior bondholders. It chose not to: Many of these instruments are in the hands of retail investors, who bought them without being fully aware of the risks involved. The government wants to avoid a political backlash and the risk of contagion spreading across the system.

Privatisation of profits and socialisation of losses yet again. Also only on the June 8th we were told this.

Italian banks are considering assisting in a rescue of troubled lenders Popolare di Vicenza and Veneto Banca by pumping 1.2 billion euros (1.1 billion pounds) of private capital into the two regional banks

Good job they said no as they would have been over 3 billion short! Oh and Padoan described the problems as “exaggerated” whereas if we return to reality this was always the real problem.

A bail in has the problem of the retail depositors who were persuaded to invest in bank bonds.

Intesa

This seems to have got something of a free lunch here provided courtesy of the Italian taxpayer. From Reuters.

The government will pay 5.2 billion euros ($5.82 billion) to Intesa, and give it guarantees of up 12 billion euros, so that it will take over the remains of the banks.

So it can clear up the mess? Er not quite.

will leave the lenders’ good assets in the hands of Intesa,

So it is being paid to take the good bits. Heads it wins if things turns out okay and tails the Italian taxpayer loses if they do not as it will use the guarantees. Also as you can see it seems to have thought of everything.

You think Santander made a killing with Pop until you realise will even make the state pay for the redundancy package of V&V staff ( @jeuasommenulle )

It may even be able to gain from some Deferred Tax Assets but chasing down that thread is only in very technical Italian.

Comment

There is much to consider here so let me open with the two main issues. The European Banking Union has just been torpedoed by the Italian financial navy. The promised bail in has become a bailout. Next comes the issue of how much all the dilatory dithering has cost the Italian taxpayer? As in the end the cost is way above the sums that Financial Minister Padoan was calling “exaggerated”. I note that BBC Breakfast called the cost 5 billion Euros this morning ignoring the 12 billion Euros of guarantees which no doubt Italy in a by now familiar attempted swerve will try to keep it out of the national debt numbers. Although to be fair Eurostat has mostly shot down such efforts.

Over the next few days we will no doubt be assailed with promises that the money will come back. For some it already has. From the FT.

Intesa Sanpaolo, the country’s strongest lender that will take over the failed banks’ good assets, was the second biggest riser on the eurozone-wide Stoxx 600 index. Shares in the bank were up 3.6 per cent at publication time, to €2.71.

 

 

 

 

 

The problems of the banks of Italy part 101

It is time to look again at a topic which is a saga of rinse and repeat. Okay I am not sure it is part 101 but it certainly feels like a never-ending story. Let us remind ourselves that the hands of the current President of the ECB ( European Central Bank) Mario Draghi are all over this situation. Why? Well let me hand you over to the ECB itself on his career so far.

1997-1998: Chair of the Committee set up to revise Italy’s corporate and financial legislation and to draft the law that governs Italian financial markets (also known as the “Draghi Law”)

It is a bit awkward to deny responsibility for the set of laws which bear you name! This happened during the period ( 1991-2001) that Mario was Director General of the Italian Treasury. After a period at the Vampire Squid ( Goldman Sachs) there was further career progression.

2006-October 2011Governor, Banca d’Italia

There were also questions about the close relationship and dealings between the Italian Treasury and the Vampire Squid over currency swaps.

https://ftalphaville.ft.com/2010/02/09/145201/goldmans-trojan-greek-currency-swap/?mhq5j=e2

But with Mario linking the Bank of Italy and the ECB via his various roles the latest spat in the banking crisis saga must be more than an embarrassment.

The inspection at Banca Popolare di Vicenza that began in 2015 was launched at the request of the Bank of Italy and was conducted by Bank of Italy personnel. Any subsequent decisions were not the responsibility of the Bank of Italy but of the European Central Bank, because in November 2014 Banca Popolare di Vicenza had become a ‘significant’ institution and was subject to the European Single Supervisory Mechanism (SSM). ( h/t @FerdiGiugliano )

So we can see that the Bank of Italy is trying to shift at least some of the blame for one of the troubled Veneto banks to the ECB. At this point Shaggy should be playing on its intercom system.

It wasn’t me…….It wasn’t me

An official denial

At the end of last month the Governor of the Bank of Italy gave us its Annual Report.

At the end of 2016 Italian banks’ non-performing loans, recorded in balance sheets net of write-downs, came to €173 billion or 9.4 per cent of total loans. The €350 billion figure often cited in the press refers to the nominal value of the exposures and does not take account of the losses already entered in balance sheets and is therefore not indicative of banks’ actual credit risk.

Indeed he went further.

Those held by intermediaries experiencing difficulties, which could find themselves obliged to offload them rapidly, amount to around €20 billion.

I suppose your view on this depends on whether you think that 20 billion Euros is a lot or a mere bagatelle. It makes you wonder why the problems at the Veneto banks and Monte Paschi seem to be taking so long to solve does it not?

Meanwhile he did indicate a route to what Taylor Swift might call “Trouble, trouble,trouble”.

At the current rate of growth, GDP would return to its 2007 level in the first half of the 2020s.

An economy performing as insipidly as that is bound to cause difficulties for its banks, but not so for the finances of its central bank.

The 2016 financial year closed with a net profit of €2.7 billion; after allocations to the ordinary reserve and dividends paid to the shareholders, €2.2 billion were allocated to the State, in addition to the €1.3 billion paid in taxes.

The QE era has seen a boom in the claimed profits for central banks and as you can see they will be very popular with politician’s as they hand them over cash to spend.

The ECB is pouring money in

The obvious problem with telling us everything is okay is that Governor Visco is part of the ECB which is pouring money into the Italian banks. From the Financial Times.

According to ECB data as of the end of April, Italian banks hold just over €250bn of the total long-term loans — almost a third of the total.

There is a counter argument that the situation where the Italian banks rely so much on the ECB has in fact simply kicked that poor battered can down the road.

“Some of them [Italian banks] are unprofitable even with the ECB’s cheap funding,” adds Christian Scarafia, co-head of Western European Banks at Fitch.

Fitch also observes that the TLTRO funding is tied up with Italy’s management of the non-performing loans that beset its banks. “The weak asset quality in Italy is certainly the big issue in the country and access to cheap ECB funding has meant that banks could continue to operate without having to address the asset quality problem in a more decisive manner,” says Mr Scarafia. (FT)

It was intriguing to note that the Spanish bank BBVA declared 36 million Euros of profits in April from the -0.2% interest-rate on its loans from the ECB. A good use of taxpayer backed money?

The Veneto Banks

For something that is apparently no big deal and according to Finance Minister Padoan has been “exaggerated” this keeps returning to the news as this from Reuters today shows.

Italian banks are considering assisting in a rescue of troubled lenders Popolare di Vicenza and Veneto Banca by pumping 1.2 billion euros (1.1 billion pounds) of private capital into the two regional banks, sources familiar with the matter said.

Good money after bad?

Italian banks, which have already pumped 3.4 billion euros into the two ailing rivals, had said until now that they would not stump up more money.

As you can see the ball keeps being batted between the banks, the state , and the Atlante fund which is a mostly private hybrid of bank money with some state support. Such confusion and obfuscation is usually for a good reason. A bail in has the problem of the retail depositors who were persuaded to invest in bank bonds.

Monte Paschi

On the 2nd of this month we were told that the problem had been solved and yet the saga like so many others continues on.

HEDGE FUND SAID IN TALKS TO BUY $270 MILLION MONTEPASCHI LOANS ( h/t @lemasabachthani )

Seems odd if it has been solved don’t you think? Mind you according to the FT the European Banking Authourity may have found a way of keeping it out of the news.

The EBA said it would be up to supervisors to decide whether to include any bank in restructuring within the stress tests, and European Central Bank supervisors have decided not to include Monte dei Paschi, people briefed on the matter said.

So bottom place is available again.

Comment

This has certainly been more of a marathon than a sprint and in fact maybe like a 100 or 200 mile race. The Italian establishment used to boast that only 0.2% of GDP was used to bailout Italian banks but of course it is now absolutely clear that this effort to stop its national debt rising even higher allowed the banking sector to carry on in the same not very merry way. This week the environment has changed somewhat with Santander buying Banco Popular for one Euro. Although of course the capital raising of 7 billion Euros needs to be factored into the equation. I guess Unicredit has troubles enough of its own and could not reasonably go for yet another rights issue!

Me on TipTV Finance

http://tiptv.co.uk/living-extraordinary-times-not-yes-man-economics/

 

The British and Irish Lions

I have been somewhat remiss in not wishing our players well on what is the hardest rugby tour of all which is a trip into the heart of the All Blacks. I am thoroughly enjoying it although of course we need to raise our game after a narrow win and a loss. Here’s hoping!

 

 

 

The economics of the 2017 General Election

Tomorrow the United Kingdom goes to the polls for a General Election. Yesterday’s anniversary of the D-Day invasion of Normandy in France reminded us that the ability to vote is a valuable thing that people have fought and died for. Let me repeat my usual recommendation to vote albeit with the realisation that as far as I can see it has been an insipid and uninspiring campaign. Time for “none of the above” to be on the ballot box I think.

Moving to economics there have been a couple of reminders over the past 24 hours that some themes remain the same. From BBC News.

RBS has finally reached a £200m settlement with investors who say they were duped into handing £12bn to the bank during the financial crisis.

The RBS Shareholders Action Group has voted to accept a 82p a share offer.

The amount is below the 200p-230p a share that investors paid during the fundraising in 2008, when they say RBS lied about its financial health.

If you look at the sums you see that the compensation is nowhere near the problem if you feel that there was a misrepresentation back then. Also as there was a 1:10 stock split back in 2012 is this not really an 8.2p offer? As to the theme of there being no punishment for bank directors there is also this.

A settlement means that the disgraced former chief executive of RBS, Fred Goodwin, will not appear in court.

Of course the UK is not alone in such machinations as I note this from Spain today. From Bloomberg.

Banco Popular Espanol SA was taken over by larger Spanish competitor Banco Santander SA after European regulators determined that the bank was likely to fail…..

The purchase price was 1 euro, according to the statement.

Santander plans to raise about 7 billion euros ($7.9 billion) of capital as part of the transaction. ( Bloomberg ).

That much? The situation has been summed up rather well in a reply to the article.

Santander could be buying a time bomb filled with bad debt. What is the CEO thinking? Why should shareholders bail out Popular?! ( @ ken_tex )

We are left with a general theme that the banking sector carries on regardless and simply ignores things like elections. Democracy has not reached the banking sector. There is a British implication as of course Santander is a big player in UK banking and as an aside this sees the first bail-in of a so-called Co-Co bond.

How is the economy doing?

We have the Bank of England with its foot hard down on the monetary policy pedal with a Bank Rate of 0.25% which as far as I can recall has barely merited a mention in the campaign! Amazing how that and £445 billion of QE ( including the Corporate Bonds) can be treated as something to be pretty much ignored isn’t it? Partly as a result of this we are facing a spell of higher consumer inflation which will lead to a contractionary effect on the economy due to the way it seems set to reduce real wages. But again this seems to have been ignored. Of course the Bank of England will be happy to be outside of the political limelight but when it is such a major part of economic policy there should at least be a debate.

Fortunately the edge has been taken off things by the decline in the price of crude oil back towards US $50 in Brent Crude terms and the rally of the UK Pound to US $1.29. This is a factor in the Markit business survey telling us this on Monday.

The three PMI surveys are running at levels that are historically consistent with GDP growing at a robust 0.5% rate, albeit with the slowing in May posing some downside risks to the near-term outlook.

So the economy continues to grow but at a slow pace overall. Of course the Bank of England will be concerned about this reported this morning by the Halifax.

House prices in the last three months
(March-May) were 0.2% lower than in
the previous three months (DecemberFebruary).

The mood of Bank of England Governor Mark Carney will not be improved by this as it refers back to a time before it began its house price policy push in the summer of 2013.

Prices in the three months to May
were 3.3% higher than in the same
three months a year earlier. This was
lower than April and is the lowest annual
rate since May 2013 (2.6%). The annual
rate is around a third of the 10.0% peak
reached in March 2016.

The Bank of England will also be worried by this signal that emerged yesterday. From Homelet.

UK rental price inflation fell for the first time in almost eight years in May, new data from HomeLet reveals. The average rent on a new tenancy commencing in May was £901, 0.3% lower than in the same month of 2016. New tenancies on rents in London were 3% lower than this time last year…….This is the first time since December 2009 the HomeLet Rental Index has reported a fall in rents on an annualised basis. The pace of rental price inflation across the UK has been slowing in recent months, having peaked at 4.7% last summer.

Of course whilst there will be concern and maybe some panic at the Bank of England that the £63 billion of the banking subsidy called the Term Funding Scheme has run out of puff. Meanwhile over at HM Treasury someone will be having a champagne breakfast as they slap themselves on the back for starting a rush to get rents in the official UK consumer inflation measure ( CPIH) last Autumn.

Fiscal policy

Back on the 23rd of May I looked at this.

Labour promised £75 billion a year in additional spending and £50 billion of additional taxes. The Liberal Democrats are also aiming for tens of billions of pounds in extra spending partially funded by more tax. Yesterday’s Conservative manifesto was much more, well, conservative………The Conservatives do not appear to have felt the need to spell out much detail. But they have left themselves room for manoeuvre.

Whoever wins we seem set for a period of higher taxation and higher expenditure but we remain in a situation where there is a lot of smoke blowing across the battlefield. There is of course also this from Labour.

we will establish a National Investment Bank that will bring in private capital finance to deliver £250 billion of lending power.

Comment

This has been an election where the economy has been out of the limelight. In a way this is summarised  by the fact that we have heard so little from the current Chancellor of the Exchequer Phillip Hammond. This means that many important matters get ignored such as the apparent devolution of so much economic power to the Bank of England. An issue which is important as in my opinion it was captured by the UK establishment and now pursues policies that politicians would be afraid to implement.

Other important issues such as problems with productivity and real wages which have bedevilled us in the credit crunch era get little debate or mention. To that list we can add the ongoing current account deficit.

Yet some markets are at simply extraordinary levels and it is hard not to raise a wry smile at the ten-year Gilt yield being a mere 0.99%! Whatever happened to pricing an election risk? It also provides quite a boost over time to the fiscal numbers as it is well below the rate of inflation.