Monte Paschi symbolises the economy of Italy

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Italy’s Economy

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

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

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

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

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

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

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

Comment

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

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

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

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

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

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

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

 

 

 

 

 

Italy needs to adjust to the lack of economic growth

One feature of the ongoing pandemic is the way that it has a habit of making existing issues worse.

Evidence suggests the coronavirus is deterring would-be parents from conceiving in most of Europe, but especially in the southern countries – from Italy to Greece – where safety nets are weakest and the birth rate was already in strong decline.

Looking at Italy specifically we are told this.

Maria Vicario, president of Italy’s National Order of Midwives, said she expected the crisis to have a “clear impact” on births next year.

“Women in Italy have children when they feel secure from a work, economic and health point of view. All that has been disrupted by the pandemic,” she said.

And the story has also had an especially grim feature.

The Lazio region around Rome has seen still births triple this year because pregnant women are scared to go to hospital for checkups, she added.

This reminds me of the work of Ed Hugh around demographics and the problems facing countries in southern Europe. Italy had to some extent adapted to the issue by having quite of lot of immigration boosting the population to over 60 million. But that did not provide the economic boost promised by advocates of such policies and remained in economic terms a girlfriend in a coma. Perhaps the ECB could introduce QE for children. Or the country could be the first to really adjust to a static/ declining population.

Economic Growth

This has been in short supply for the whole era of Euro area membership and 2020 has exacerbated that. From yesterday.

In the third quarter of 2020 the seasonally and calendar adjusted, chained volume measure of Gross
Domestic Product (GDP) increased by 15.9 per cent with respect to the previous quarter and decreased by
5% compared to the third quarter of 2019.

In terms of the breakdown this is the picture.

With respect to the third quarter of 2019, final consumption expenditure decreased by 5.7 per cent, both imports and exports decreased, respectively by 11.9 and 9.1 per cent, whereas gross fixed capital formation increased by 0.7 per cent.

So there is a flicker of hope from the investment numbers but otherwise a pretty grim picture as we wonder if Italy has now gone backwards in the Euro era? Let us now look ahead and we can start with a not entirely auspicious consequence of the numbers above.

 The carry-over annual GDP growth for 2020 is equal to -8.3%.

The OECD told us yesterday that the outlook had brightened. In which case I do not want to know what they would say if they thought times were grim! This is because they think the Italian economy will shrink by 9.1% this year and grow by 4.3% next year and by 3.2% in 2022. So as I have warned along the way the optimism in official forecasts for a sharp recovery next year has waned in spite of the fact the vaccine news has brightened. But also the economy will not be singing along with Maxine Nightingale until 2023 at best.

Ooh and it’s alright and it’s coming ‘long
We got to get right back to where we started from

Even that relies on Italy achieving economic growth rates well above anything it has seen for years and indeed decades.

If we switch to yesterday’s Markit business survey there was a lack of seasonal cheer to be found.

“The Italian manufacturing sector continued to recover
in November, although the rate of improvement softened
noticeably on the month.
“Output growth eased to a marginal pace amid a
renewed decline in total new orders, linked by panellists
to stricter lockdown measures.

What we could find came from some vaccine hopium.

Nonetheless, firms’ continued to increase staff numbers
during November, attributed to greater production
requirements and expectations of a surge in demand
once restrictions are loosened. This was reflected in
the survey’s principal forward looking indicator, which
signalled ongoing optimism with regards to output in 12
months.

Looking at the wider economy then Italy gets lumped in with the rest of the periphery and this is not optimistic.

Elsewhere, business activity fell for a fourth month
in succession, with the pace of decline running at
the fastest since May 2009 barring the recent
collapse seen between March and June. A near-stalling of manufacturing output growth was
exacerbated by an increasingly severe drop in
services activity, pushing the flash composite PMI
down from 47.2 to 42.4.

Labour Market

We can start with a concern highlighted by the OECD that noted it feared for youth unemployment in Italy accompanied by a chart pointing out that it was a bit under 21% in 2007 and more like 29% in 2019.So a clear lost decade. This morning’s official update tells us it was 30.3% in October which was up 2.6% on a year before. Actually the rise is due to shifts in the labour market rather than a rise in unemployment ( which is ridiculously optimistic at 6,000) so we are back to a problem I have pointed out often in this pandemic that the international definition of unemployment is not fit for purpose. So we get a better guide I think from the youth employment numbers which show a fall of 115,000 to 971,000 in the year to October.

The wider unemployment numbers are mostly useless.

In the last month, the growth of unemployed people (+0.4%, +11 thousand) involved only men (+2.2%, +28
thousand), whereas among women a drop was recorded (-1.5%, -17 thousand). The unemployment rate
was unchanged at 9.8% while the youth rate rose to 30.3% (+0.6 p.p.)

Back on the 3rd of June I pointed out that I thought the Italian unemployment rate was of the order of 11% when 6.3% was being published so I guess they are slowly catching up with me.

The banks

This topic is a hardy perennial if ever there was one. From Reuters.

UniCredit is back in the spotlight in Italy’s latest banking drama. Chief Executive Jean Pierre Mustier announced abruptly on Monday he would resign at the end of his mandate next year. He will probably go sooner. A boardroom showdown on Sunday exposed a rift over M&A and strategy between the French executive and other directors. His successor will have to navigate a tricky potential merger with state-backed Banca Monte dei Paschi di Siena and make up lost ground in Italy.

An undercut in that Unicredit is seen as a rose among thorns a theme Reuters runs with.

in 2016 the bank was close to breaking point. He convinced shareholders to subscribe to a monster 13 billion euro capital increase while launching a deep balance sheet cleanup and turnaround.

Such a triumph it has now surged to, oh hang on….

Four years on, the 19 billion euro UniCredit has replenished its capital base

I am not quite sure where they get 19 billion from either as Investing.com has it as 17.6 billion. So we get a perspective from the fact that even the better Italian banks are a case of good money after bad.

Meanwhile Monte Paschi is on ots own road to nowhere and if parmapress24 is any guide more trouble is brewing,

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

Comment

There is much of this which is familiar especially about the Italian banks. But there is a strategic issue that whilst a pandemic can be described as unexpected something was always likely to turn up as time passed. Or switching to our central banking theme they were unable to stop recessions forever, in spite of the machinations I discussed yesterday.

Italy needs a new approach and one way out is something I hinted at earlier. They could genuinely embrace population and green issues by accepting population stagnation and dealing with it rather than hoping for economic growth that never arrives.  In some ways like Japan which with the savings culture does have similarities with Italy. Of course the Japanese establishment has never fully accepted this which is why we have seen Abenomics. So Italy could take a lead.

That seems much more likely to have a real impact than simply pumping up this.

According to preliminary estimates, in the second quarter of 2020 the HPI (see Italian IPAB) increased by 3.1% compared with the previous quarter and by 3.4% compared with the same quarter of the previous year (it was +1.7% in the first quarter).

 

 

 

The banks of Italy face another crisis

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

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

Monte dei Paschi di Siena

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Merger Mania

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

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

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

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

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

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

Considering the record this looks like very faint praise.

UBI is the best run medium-sized bank in Italy

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

Unicredit

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

Comment

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

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

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

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

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

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

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

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

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

What else could go wrong for the Banks of Italy?

We are overdue a look at the state of play for an old and familiar friend. Except it is the sort of friend written about by Paul Simon.

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

It has been like a game of snakes and ladders except without the ladders. Ironically the Deputy Governor of the Bank of Italy chose March 18th as the day to rebut this. Yes the day central bankers around the world were crossing their fingers that the US Federal Reserve was going to step in and rescue the world financial system. That was in line with the time when Prime Minister Renzi told investors that shares in Monte Paschi would be a good investment. Anyway let me hand you over to Deputy Governor Luigi Federico Signorini who wrote to the New York Times to say.

Plenty of evidence points to a substantial strengthening of Italian banks in the recent years.

The collapses? The bailouts? The share price falls?

I must credit him in one regard as it takes a lot of chutzpah to mention “Asset Quality” when discussing the Italian banks. Also the sharper-eyed maybe be wondering where the problem was moved too?

The share of NPLs in banks’ total loans continues to fall, also thanks to large-scale disposals made by a large number of banks.

That game of pass the parcel must have seen the music stop.

Also the ECB had to buy off someone and it is still a lot.

Sovereign exposures. At the end of January banks’ holdings of sovereign bonds amounted to €316 billion, or 9.8 per cent of total assets; in early 2015 they peaked at €403 billion.

Is it rude to point out that with the surge in the Italian bond market ( the ten-year is 1.1%) that the banks have been partially deprived of the one area where they could have made some money?

Profitability. In 2019 the profitability of Italian banks was broadly in line with that of European peers

That bad eh?

The next bit has been highlighted by me in parts.

While the annualized ROE, at 5.0 per cent net of extraordinary components, is still below the estimated cost of equity, benefits are expected from ongoing restructuring and consolidation. The process is especially string among small cooperative banks, and the new framework is expected to strengthen their capacity to attract investors.

As the whole sector is extraordinary I am not sure what excluding it leaves you. Also we have been expecting benefits from “restructuring and consolidation” for a decade now. Finally their ability to attract investors could hardly get much worse…..

Bringing it up to date

On Tuesday the ratings agency DBRS Morningstar took a look. How are the profits our Deputy Governor was so keen on doing?

In H1 2020, Italian banks (UniCredit, Intesa Sanpaolo, Banco BPM, Banca MPS, UBI Banca, Credito
Valtellinese, and BP Sondrio) reported an aggregate net loss of EUR 464 million compared to a net profit
of EUR 6.2 billion in the same period of 2019.

Next we find something really rather familiar from the overall banking saga.

For the time being, the bulk of LLPs ( Loan Loss Provisions ) is still related to Stage 1 and Stage 2 loans, as the relief measures currently in place have been preventing the build-up of new NPLs. However, when these support
measures began to ease, we would expect a more significant migration of Stage 1 loans into Stage 2
(i.e. credit risk has increased significantly since initial recognition) and Stage 3 loans.

So bad loans become sour loans, NPLs and now LLPs. That is revealing in itself. The process leaves the ratings agency worried about next year.

When comparing with some European peers with higher provisioning levels, we consider it
possible that larger provisions may be required for Italian banks, should default rates from performing
loans increase more than expected.

So that’s a yes then.

The situation is complicated as we wait for the government Covid response plays to wind down.

Based on the latest data released by the Bank of Italy, as of July 24, the applications for a debt
moratorium from households and companies reached 2.7 million, up from around 660,000 requests
reported in early April, but not significantly changed compared to end-May and mid-June . The outstanding loans under moratoria amounted to EUR 297 billion, equivalent to around 15% of the total
performing loans at end-2019.

Plus this.

In contrast, we have observed the requests for loans backed by a State guarantee surging remarkably in
the same period. As of August 4, the requests for State-guaranteed loans amounted to over 944,000,
corresponding to a total consideration of around EUR 77 billion, or approximately 4% of the total net
customer loans at end-2019.

I know there are elements of stereotyping here so apologies for that, but can anyone genuinely say that they are not wondering how many of these loans are fraudulent? Like the way the Mafia took control of the extra virgin olive oil market, basically if you bought some from Italy your chances of actually getting it were 50/50.

Here is the explicit view on what is expected to happen next.

Whilst the combination of moratoria and State guaranteed loans represent strong relief measures in the
near term, we still believe that the currently challenging scenario will result in a rise in NPLs starting
from 2021, once the moratoria have expired. We note that in Q2 2020 some of loans under moratoria
moved to Stage 2 from Stage 1.

The Financial Times

It produced a long read on banking and seemed to try to avoid Italy but from time to time it popped up.

Centuries-old national champions Barclays (€17.4bn), Deutsche Bank (€15.6bn) and Italy’s UniCredit (€17.2bn) are collectively worth less than Zoom, the $72bn (€61bn) videoconferencing company founded in 2011.

Unicredit had been presented as a type of national champion and there was also a rather familiar development.

 In July, Italy’s largest retail lender Intesa Sanpaolo succeeded in a €4.2bn hostile takeover of local rival UBI Banca, marking the largest European banking deal since the financial crisis.

Which financial crisis please?

Comment

Let us take a look at what Queen might describe as “you’re my best friend” in this saga which is Monte Paschi. According to Johannes Borgen it plans this.

1) Sell defaulted loans to AMCO (with the EC’s blessing, hum.)

2) Take a capital hit and risk being below cap requirement. 3) But that’s ok, because there will be less loan losses because of the sale of defaulted loans to AMCO

Please hold fire on the issue of there being yet another rescue vehicle for the Italian banks for now and stay with Monte Paschi.

Sounds good? Well, there’s a slight problem here. In H1 2020, Monte took a total 520m€ of loan losses. Of the 520m, only 95m were from defaulted loans. Can anyone explain how the sale to AMCO will significantly reduce provisions? Because I’m missing something here.

In a nurshell that is the Monte Paschi saga because if you go through the numbers you are always missing something and sometimes quite a lot.

Now let me return to the subject of rescue vehicles. Here is a @gianluca1 describing one effort.

In 2016 Ita banks created a fund (Atlante) to help few bad banks clean their loan book from NPLs It was funded by all banks pro rata

Result: catastrophic risk of 2/3 banks was extended to all good banks due to perceived unlimited underwriting of risk of bad banks.

Then there was Atlante2 as well. More recently as he points out there has been Amco.

few years ago…it is the former SGA used to liquidate Banco di Napoli NPL

Fitch Ratings looked at Amco at the end of May and I think we have found someone with a sense of humour.

AMCO is a debt purchaser and servicer with nearly EUR25 billion of assets under management and a leading position in the unlikely-to-pay (UTP) loans sector.

Also.

Support Incentives: Government incentives supporting AMCO are underpinned by the fact that AMCO’s viability is central to its “patient approach” to the management of non-performing loans.

Patient approach sums up the whole episode really……Or to put it another way the can they kicked landed in the middle of the next crisis. I guess it would be like some sort of time warp meaning Apollo 13 landed in the middle of the Covid-19 pandemic.

 

Oh France! Oh Spain! Oh Italy!

After yesterday’s update from Germany we move onto the second, third and fourth largest economies in the Euro area, who rather curiously have produced their figures in that order this morning. So as we mull the fact that Germany accelerated the release of its GDP ( Gross Domestic Product) numbers at exactly the wrong time we also need to be ready for bad news.

In Q2 2020, GDP in volume terms declined: –13.8%, after –5.9% in Q1 2020. It is 19% lower than in Q2 2019.  ( Insee of France)

That is like two explosions going off with the 5.9% being credit crunch like but then it being followed by a much louder bang. The total of -19% is somewhat chilling.

We know the cause.

 GDP’s negative developments in first half of 2020 is linked to the shut-down of “non-essential” activities in the context of the implementation of the lockdown between mid-March and the beginning of May

But the beginning of the recovery seems understated.

The gradual ending of restrictions led to a gradual recovery of economic activity in May and June, after the low point reached in April.

In terms of the detail well everything in the domestic economy fell with one of the components being rather curious.

Household consumption expenditures dropped (–11.0% after –5.8%), as did total gross fixed capital formation in a more pronounced manner (GFCF: –17.8% after –10.3%). General government expenditure also stepped back (–8.0% after –3.5%).

I wonder how they managed to find a category of government spending that fell?! Maybe it was stuff they could not buy as it was out of stock. But it rather sticks out as does this.

 Food expenditure slightly decreased (–0.5% after +2.8%).

In the UK we still seem to be spending more on food whereas France seems to have stocked up and then begun to de-stock.

Although the numbers are larger trade turns out to be a much smaller factor which reminds us that trade numbers are unreliable at the best of times and maybe nearly hopeless right now.

In Q2 2020, imports declined strongly (–17.3% after –10.3%), notably in manufactured goods. Exports fell in a more pronounced manner (–25.5% after –6.1%), in particular in transport equipment. All in all, foreign trade contributed negatively to GDP growth this quarter (–2.3 points after –0.1points).

Make of that what you will.

Spain

This starts especially grimly as the opening page tells us there has been a 22.1% fall in GDP. So let us look more deeply at the state of play.

The Spanish GDP registers a variation of -18.5% in the second quarter of 2020 compared to the previous quarter in terms of volume. This rate is 13.3 points lower than that registered in the first quarter.

which brings us to this.

The year-on-year change in the GDP stood at −22.1%, compared to −4.1% for the quarter
preceding.

That is a bit of a “Boom! Boom! Boom!” moment although notin an economic sense and the breakdown is as follows.

The contribution of domestic demand to year-on-year GDP growth is −19.2 points, 15.5 points lower than that of the first quarter. For its part, external demand represents a contribution of −2.9 points, 2.5 points lower than that of the previous quarter.

We get a sort of confirmation from all of this from the hours worked numbers which at the same time provide a critique of the unemployment data.

In year-on-year terms, hours worked decreased by 24.8%, rate 20.6 points lower than in the first quarter of 2020, and full-time equivalent positions down 18.5%, 17.9 points less than in the first quarter, which represents decrease of 3,394 thousand full-time equivalent jobs in one year.

Some areas saw not far off a collapse in demand, because of past issues the construction numbers stood out to me.

Household final consumption expenditure experiences a year-on-year decrease of 25.7%, 19.9 points less than in the last quarter. For its part, the final consumption expenditure of the Public Administrations presented an inter annual variation of 3.5%, one tenth less than that of the preceding quarter.
Gross capital formation registered a decrease of 25.8%, 20.5 points higher than that of previous quarter. The investment in tangible fixed assets decreases at a year-on-year rate of 30.8%, which it represents 22.4 points more than in the previous quarter. By components, the investment in homes and other buildings and constructions decreased 22.6 points, going from −8.3% to -30.9%, while investment in machinery, capital goods and weapons systems it decreases 23 points when presenting a rate of −32.3%, compared to −9.3% in the previous quarter.

The reason why that sector stands out is the way it affected the economy and the banks as the credit crunch rolled into the Euro area crisis.

Italy

We advance on Italy nervously because of its past record but the fall was in fact the smallest of these three.

 In the second quarter of 2020 the seasonally and calendar adjusted, chained volume measure of Gross
Domestic Product (GDP) decreased by 12.4 per cent with respect to the previous quarter and by 17.3 per
cent over the same quarter of previous year.

As to the breakdown well it was everything if we skip over a slightly bizarre focus on farming.

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

Farming is of course very important but it hardly the main player in this context.

Comment

There are a lot of contexts to this so let us start with the national ones. Spain was the main “Euro Boom” beneficiary with annual economic growth reaching 4.2% in early 2015 but now we are reminded that it can be the leader of the pack in down as well as upswings. Italy has lost less but it is hard not to think that is because it has less to lose and this from  @fwred is rather chilling.

As the morning has developed we can now look at the overall picture for the Euro area.

In the second quarter 2020, still marked by COVID-19 containment measures in most Member States, seasonally
adjusted GDP decreased by 12.1% in the euro area and by 11.9% in the EU, compared with the previous quarter,
according to a preliminary flash estimate published by Eurostat, the statistical office of the European Union.
These were by far the sharpest declines observed since time series started in 1995. In the first quarter of 2020,
GDP had decreased by 3.6% in the euro area and by 3.2% in the EU.

We can use the numbers to compare with the United States as the annual decline of 15% of the Euro area is larger than the 9.5% there. I think this is outside the margin of error but potential errors right now will be large.

There is a collective assumption that these things will bounce back and I am sure that some areas will. But there are others where it will not and if we think of the “girlfriend in a coma” it never seems to do that. Quarterly economic output in Italy was 417 billion Euros at the beginning of 2017 rising to 431 billion and now falling to 356 billion.

In the end this is the problem with all the can kicking. We have arrived at the next storm without fixing the damage caused by the last one. Where do you go when the official interest-rate is -0.6% and of course -1% for the banks?

The Euro area unemployment rate is much higher than the 7.4% reported today

A clear feature of the economic landscape post the Covid-19 pandemic is mass unemployment. We should firstly note that this is and will continue to create quite a bit of suffering and angst. Also that all the easing policies of the central banks over the past decade or so were supposed to avoid this sort of thing. But if the system was a rubber band it had been stretched towards breaking point and now all they can do is pump it all up even more. But for our purposes there is another issue which is that we have little idea of either how much unemployment there is or how long it will last. Let me illustrate by looking at the numbers just release by Italy.

The Italian Job

As you might expect employment fell in May.

On a monthly basis, the decline of employment (-0.4%, -84 thousand) concerned more women ( 0.7%, 65 thousand) than men (-0.1%, -19 thousand), and brought the employment rate to 57.6% (-0.2 p.p.)…….With respect to the previous quarter, in the period March – May 2020, employment considerably decreased (-1.6%, 381 thousand) for both genders.

 

Also unemployment rose.

In the last month, also unemployed people grew (+18.9%, +307 thousand) more among women (+31.3%, +227 thousand) than men (+8.8%, +80 thousand). The unemployment rate rose to 7.8% (+1.2 percentage points) and the youth rate increased to 23.5% (+2.0 p.p.).

Now the problems begin. Firstly I recall that last time around we were told the unemployment rate was 6.3% which has seen a substantial revision to 6.6%. There my sympathy is with the statisticians at a difficult time. But for the next bit we have to suspend credulity.

In the last three months, also the number of unemployed persons decreased (-22.3%, -533 thousand), while a growth among inactive people aged 15-64 years was registered (+6.6%, +880 thousand).

If we look further back we just compound the issue.

On a yearly basis, the decrease of employed people was accompanied by a fall of unemployed persons (-25.7%, -669 thousand) and a growth of inactive people aged 15-64 (+8.7%, +1 million 140 thousand).

As I pointed out last month the issue is how unemployment is defined.

Unemployed persons: comprise persons aged 15-74 who:
were actively seeking work, i.e. had carried out activities in the four week period ending with the reference week
to seek paid employment or self-employment and were available to start working before the end of the two
weeks following the reference week;

The definition fails when you have a lockdown as some cannot go to work and others quite reasonably think that there is no point. If we assume that the rise in activity is all a type of hidden unemployment then we get an unemployment rate of 12.4% in Italy. Our estimate will be far from perfect so let us say we think it has risen from ~11% last in April to more like 12% in May.

An even grimmer situation is shown by youth unemployment. The official reading is bad enough.

the youth rate increased to 23.5% (+2.0 p.p.).

But if we apply the same methodology we get to a rather chilling 46.3%. The inactivity category here is huge at 4.6 million which I hope is pretty much students. I have to confess that I am reminded of the Yes Prime Minister quote from the 1980s that education was mostly extended to reduce the unemployment numbers. Anyway it is a blunt number but frankly will be much nearer than the official one. Also there will be many young Italians who have had little hope of a job post credit crunch as it was and it just got worse.

What we do learn is how few people are surveyed for these numbers.

The number of interviewed households for May 2020 is about 17,000 (almost equal to 35,500 individuals) and is
approximately 10% lower than the average number of interviews used for the production of estimates related to a
four-weeks month.

Spain

If we switch to the Ministry of Labour we get a barrage of numbers.

Unemployment is reduced in all sectors except agriculture and among claimants “without previous employment”
There are fewer unemployed registered in ten autonomous communities
In June 308,985 more contracts were signed than in the previous month
Almost six million people received SEPE benefits in May.

These numbers look both more useful and realistic. Things started to get better last month with around 309,000 new jobs but the Furlough scheme count in May of 6 million gives a perspective. Also unemployment edged higher.

The registered unemployment in the offices of the State Public Employment Service (SEPE) has increased by 5,107 people compared to the previous month. This represents an increase of 0.1%, which deepens the trend of slowing down the growth rate of unemployment that began in May.

So we end up with this.

The total number of unemployed persons registered in the SEPE offices amount to 3,862,883.

There is an irony in using registered unemployment numbers as they fell into disrepute due to the way they can be manipulated and fiddled. But right now they are doing better than the official series. El Pais summarises it like this.

The total number of jobseekers in Spain has risen to 3.86 million, the highest figure registered since May 2016……The rise in unemployment for June is the first increase seen since 2008, just months before the fall of Lehman Brothers and the year of the financial crisis. The increase in contributors to the Social Security system for the month is also the smallest since 2015.

So we see that there are also still around 2.1 million people on the furlough scheme. In total these benefits were paid out.

In May, the SEPE paid 5,526 million euros in benefits, of which 3,318 million were dedicated to paying ERTE benefits and 2,208 million to unemployment benefits, both at the contributory and assistance level.

If we use these numbers are plug them into the official unemployment series we end up with an unemployment rate of 16.8%.

Euro Area

This morning’s official release tells us this.

In May 2020, a third month marked by COVID-19 containment measures in most Member States, the euro area seasonally-adjusted unemployment rate was 7.4%, up from 7.3% in April 2020……..Eurostat estimates that 14.366 million men and women in the EU, of whom 12.146 million in the euro area, were unemployed in May 2020. Compared with April 2020, the number of persons unemployed increased by 253 000 in the EU and by 159 000 in the euro area.

Unfortunately we do not have an update on inactivity so we can have a go at getting a better picture. We are promised more but not until next week.

To capture in full the unprecedented labour market situation triggered by the COVID-19 outbreak, the data on
unemployment will be complemented by additional indicators, e.g. on employment, underemployment and potential
additional labour force participants, when the LFS quarterly data for 2020 are published.

Comment

As you have seen earlier this is a “Houston we have a problem moment” for unemployment data as it rigorously calculates the numbers on the wrong football pitch. It creates problems highlighted by this tweet from Silvia Amaro of CNBC.

#unemployment in the euro zone came in at 7.4% in May. At the height of the debt crisis it reached 12.1%. #COVIDー19

That creates the impression things are much better now when in fact they may well be worse. Without the furlough schemes they certainly would be. What we fo not know is how long it will last?

 

The Italian Job covers unemployment.zombie banks and industrial production

Sometimes economic news makes you think of a country via its past history.

LONDON/FRANKFURT (Reuters) – European Central Bank officials are drawing up a scheme to cope with potentially hundreds of billions of euros of unpaid loans in the wake of the coronavirus outbreak, two people familiar with the matter told Reuters.

After all the Italian banks have plenty of expertise, if I may put it like that, in this area. So perhaps a growth area for them in more ways than one.

The amount of debt in the euro zone that is considered unlikely to ever be fully repaid already stands at more than half a trillion euros, including credit cards, car loans and mortgages, according to official statistics.

There is a conceptual issue though as we mull why we always need “bad- banks” and whether the truth is that ordinary banks are bad? Also the Irish banking crisis taught us that the numbers are fed to us on a piece of string with notches and are driven by what they think we will accept rather than reality. So get ready for the half a trillion to expand and that may get a little awkward if this from Kathimerini proves true.

Enria said the ECB was studying how banks could cope were the crisis to worsen. He said banks had more than 600 billion euros ($680 billion) of capital and this would probably be enough, unless there were a second wave of infections.

If we focus now on the Italian banks there is of course the issue of the Veneto banks and Monte Paschi in particular. Let me take you back 3 days over 3 years.

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.

Back then I also pointed out the problems for the bailout vehicle called variously Atlante and Atlas. Looking at Monte dei Paschi the share price is 1.4 Euros which if we allow for the many rights issues and the like compares to a pre credit crunch peak of around 8740 Euros according to my chart.. Some quite spectacular value destruction as we again mull what “bad bank” means and recall that in 2016 Prime Minister Renzi told people it was a good investment. That is before we get to this from January 2012 on Mindful Money.

In October, Shaun Richards outlined a 13-step timeline for the collapse of a bank . He appeared on Sky News yesterday suggesting that Unicredit, Italy’s had now reached stage 3 of that process – i.e. “The Bank tries to raise more private capital in spite of it having no need for it”.

It was worth 19 Euros then and as it is worth 8.24 Euros now my description of it as a zombie bank was right, especially if we allow for all the aid packages and subsidies in the meantime.

Oh and in case we had any doubts about the story I see this from ForexLive.

European Commission says no formal work is underway for an EU ‘bad bank’

So they are informally looking at it then….

The Economy

This morning’s official release was always likely to be bad news.

In April 2020 the seasonally adjusted industrial production index decreased by 19.1% compared with the
previous month. The change of the average of the last three months with respect to the previous three
months was -23.2%.

The theme was unsurprisingly continued by the annual picture.

The calendar adjusted industrial production index decreased by 42.5% compared with April 2019 (calendar
working days being 21 versus 20 days in April 2019).
The unadjusted industrial production index decreased by 40.7% compared with April 2019.

If we compare to 2015 we see that the calendar adjusted index was at 58.4. The breakdown shows that pharmaceuticals were affected least ( -6.7%) and clothing and textiles the most ( -80.5%). The latter was a slight surprise as I though the manufacture of masks and other PPE might help but in fact it did even worse than the transport sector ( -74%).

On Monday Italy’s statisticians reminded us of our Girlfriend in a Coma theme.

At the end of 2019, the Italian economy was in stagnation with few recovery signals coming from industrial production and external trade at the very beginning of 2020.

Which was followed by this.

Eventually, the conventional economic indicators assessing the dramatic fall of GDP in the first quarter 2020 (-5.3% q-o-q) were published.

They point out it is difficult to collect data right now but were willing to have a go at a forecast.

Under these assumptions, we forecast a strong GDP contraction in 2020 (-8.3%) followed by a recovery in 2021 (+4.6%, Table 1). This year, the fall of GDP will be determined mainly by domestic demand net of inventories (-7.2 p.p.) due to the contraction of household and NPISH consumption (-8.7%) and of investments (-12.5%). Net exports and inventories will also contribute negatively to GDP growth (respectively -0.3 p.p. and -0.8 p.p.).

I wonder how much of what is called domestic demand reflects the fall in tourism as the summer is already well underway and it is a delightful country to visit? Here is the OECD version from earlier this week that highights the tourism issue.

GDP is projected to fall by 14% in 2020 before recovering by 5.3% in 2021 if there is another virus outbreak
later this year (the double-hit scenario). If further outbreaks are avoided (the single-hit scenario), GDP is
projected to fall by 11.3% in 2020 and to recover by 7.7% in 2021. While Italy’s industrial production may
restart quickly as confinement measures are lifted, tourism and many consumer-related services are
projected to recover more gradually, weighing on demand

As we know so little about what is happening right now the forecasts for 2021 are about as much use as a chocolate teapot in my opinion.

Switching back to Italy’s statisticians they seem to have doubts about their own unemployment numbers. perhaps they read my post on the third of this month.

The trend of unemployment rate will be different because it reflects the ricomposition between unemployed and inactive people and the fall in hours worked.

Anyway they have reported the unemployment rate at 6.3% and I think it is more like 11%.

Comment

Now we need to switch tack to one of the consequences of all this which relates to the fact that Italy already had a large national debt in both relative and absolute terms. If we use the OECD data as a framework we see that the debt to GDP ratio will be of the order of 160 to 170% at the end of this year which looks rather Greek like, Now we see the real reason for the forecasted bounce back in 2021 which reduces the number to 150% to 165%. The establishment assumption that we will see a “V-shaped” recovery has nothing to do with believing in it,rather it is to make the debt metrics look better. Again there are echoes of Greece here when Christine Lagarde was talking about “Shock and Awe” back in the day. Remember when we were guided to a debt to GDP ratio of 120%? That was to protect Italy ironically ( as well as Portugal).

That was then and this is now. The game-changed in the meantime has been the fall in bond yields due mostly to the policies and buying of the ECB. So a benchmark yield that rose to 7% in the last crisis is now 1.45% as I type this. Thus the previous concept of debt vigilante’s has been neutered and debt costs are low. The catch is that the debt burden will soar and that does seem to have an impact if we think of the issue of Japanification. Italy has already had its “lost decade” since it joined the Euro and the lack of economic growth has been the real issue here. For it to change I think we need reform of its structure and especially its zombie banks but instead we are being guided towards yet another bailout in what feels like a never-ended stream. Let me leave you with some humour on the issue of bad banks from GreatLakesForex.

They should correct that statement to the actual fact that they are desperate to create a Good bank in the Eurozone.

Christine Lagarde and the ECB have switched from monetary to fiscal policy

The Corona Virus pandemic has really rather caught the European Central Bank (ECB) on the hop. You see it was not supposed to be like this on several counts. Firstly the “Euro Boom” was supposed to continue but we now know via various revisions that things had turned down in Germany in early 2018 and then the Trumpian trade war hit as well. So the claims of former ECB President Mario Draghi that a combination of negative interest-rates and QE bond buying had boosted both Gross Domestic Product ( GDP) and inflation by around 1.5% morphed into this.

First, as regards the key ECB interest rates, we decided to lower the interest rate on the deposit facility by 10 basis points to -0.50%……..Second, the Governing Council decided to restart net purchases under its asset purchase programme (APP) at a monthly pace of €20 billion as from 1 November. We expect them to run for as long as necessary to reinforce the accommodative impact of our policy rates, and to end shortly before we start raising the key ECB interest rates.

As you can see the situation was quite problematic. For all the rhetoric who really believed that a cut in interest-rates of 0.1% would make a difference when much larger ones had not? Next comes the issue of having to restart sovereign bond purchases and QE only 9 months or so after stopping it. As a collective then there is the issue of what all the monetary easing has achieved? That leads to my critique that it is always a case of “More! More! More” or if you prefer QE to Infinity.

Next comes the issue of personnel. For all the talk about the ECB being independent the reclaiming of it by the political class was in process via the appointment of the former French Finance Minister Christine Lagarde as President. This of course added to the fact that the Vice President Luis de Guindos had been the Spanish Finance Minister. Combined with this comes the issue of competence as I recall Mario Draghi pointing out he would give Luis de Guindos a specific job when he found one he could do, thereby clearly implying he lacked the required knowledge and skill set. It is hard to know where to start with Christine Lagarde on this subject after her failures involving Greece and Argentina ( which sadly is in the mire again) and her conviction for negligence. Of course she has added to that more recently with her statement about “bond spreads” which saw the ten-year yield in Italy impersonate a Space-X rocket until somebody persuaded her to issue a correction. Although as the last press conference highlighted you never really escape a faux pas like that.

Do you now believe that it is the ECB’s role to control the spreads on government debt?

The Present Situation

This was supposed to be one where monetary policy had been set for the next year or so and President Lagarde could get her Hermes slippers under the table before having to do anything. Life sometimes comes at you quite fast though as this morning has already highlighted. From Eurostat.

In April 2020, the COVID-19 containment measures widely introduced by Member States again had a significant
impact on retail trade, as the seasonally adjusted volume of retail trade decreased by 11.7% in the euro area and
by 11.1% in the EU, compared with March 2020, according to estimates from Eurostat, the statistical office of
the European Union. In March 2020, the retail trade volume decreased by 11.1% in the euro area and by 10.1%
in the EU.
In April 2020 compared with April 2019, the calendar adjusted retail sales index decreased by 19.6% in the euro
area and by 18.0% in the EU.

As you can see Retail Sales have fallen by a fifth as far as we can tell ( normal measuring will be impossible right now and the numbers are erratic in normal times). Also there were large structural shifts with clothing and footwear down 63.5% on a year ago and online up 20.9%. Much of this is due to shops being closed and will be reversed but there is a loss for taxes and GDP which is an issue for ECB policy. Other news points out that May has its troubles as well.

Germany May New Car Registrations Total 168,148 -49.5% Y/Y – KBA ( @LiveSquawk)

Policy Response

For all the claims and rhetoric is that the ECB has prioritised the banks and government’s. So let us start with The Precious! The Precious!

Accordingly, the Governing Council decided today to further ease the conditions on our targeted longer-term refinancing operations (TLTRO III)……. Moreover, for counterparties whose eligible net lending reaches the lending performance threshold, the interest rate over the period from June 2020 to June 2021 will now be 50 basis points below the average deposit facility rate prevailing over the same period.

For newer readers this means that the banks will be facing what is both the lowest interest-rate seen so far anywhere at -1% and also a fix for the problems they have dealing with a -0.5% interest-rate more generally. It also means that whilst the bit below is not an outright lie it is also not true.

In addition, we decided to keep the key ECB interest rates unchanged.

In fact for those who regard the interest-rate for banks as key it is an untruth. Estimates for the gains to the banking sector from this are of the order of 3 billion Euros. Yet another subsidy or if you prefer we are getting the Vapors.

I’m turning Japanese, I think I’m turning Japanese, I really think so
Turning Japanese, I think I’m turning Japanese, I really think so

Fiscal Policy

This is what monetary policy has now morphed into. There is an irony here because one of the reasons the ECB has pursued such expansionary policy is the nature of fiscal policy in the Euro area. That has been highlighted in three main ways. the surpluses of Germany, the Stability and Growth Pact and the depressive policy applied to Greece. But that was then and this is now.

Chancellor Angela Merkel said Wednesday that Germany was set to plow 130 billion euros ($146 billion) into rebooting an economy severely hit by the coronavirus pandemic.

The measures include temporarily cutting value-added tax form 19% to 16%, providing families with an additional €300 per child and doubling a government-supported rebate on electric car purchases.

The package also establishes a €50 billion fund for addressing climate change, innovation and digitization within the German economy. ( dw.com )

Even Italy is being allowed to spend.

Fiat To Use State-Backed Loan To Pay Italy Staff, Suppliers ( @LiveSquawk)

This is the real reason for the QE and is highlighted below.

FRANKFURT (Reuters) – The European Central Bank scooped up all of Italy’s new debt in April and May but merely managed to keep borrowing costs for the indebted, virus-stricken country from rising, data showed on Tuesday.

The ECB bought 51.1 billion euros worth of Italian government bonds in the last two months compared with a net supply, as calculated by analysts at UniCredit, of 49 billion euros.

Comment

Thus President Lagarde will be mulling the words of Boz Scaggs.

(What can I do?)
Ooh, show me that I care
(What can I say?)
Hmmm, got to have your number baby
(What can I do?)

Plainly the ECB needs the flexibility of being able to expand its QE bond buying so that Euro area governments can borrow cheaply as highlighted by Italy or be paid to borrow like Germany. We could see the PEPP plan which is the latest emergency one expanded as it will run out in late September on present trends, also the German Constitutional Court has conveniently given it a bye. But she could do that next time. So finally we have a decision appropriate for a politician!

As to interest-rates we see that the banks have as usual been taken care of. That only leaves the rest of us so it is unlikely. We will only see another cut if they decide that like a First World War general that a futile gesture is needed.

The problems posed by mass unemployment

A sad consequence of the lock downs and the effective closure of some parts of the economy is lower employment and higher unemployment. That type of theme was in evidence very early today as we learnt that even the land “down under” looks like it is in recession after recording a 0.3% decline in the opening quarter of 2020. The first for nearly 30 years as even the commodities boom seen has been unable to resist the effects of the pandemic. This brings me to what Australia Statistics told us last month.

Employment decreased by 594,300 people (-4.6%) between March and April 2020, with full-time employment decreasing by 220,500 people and part-time employment decreasing by 373,800 people.Compared to a year ago, there were 123,000 less people employed full-time and 272,000 less people employed part-time. Thischange led to a decrease in the part-time share of employment over the past 12 months, from 31.5% to 30.3%.

I have opened with the employment data as we get a better guide from it in such times although to be fair it seems to be making a fist of the unemployment position.

The unemployment rate increased 1.0 points to 6.2%and was 1.0 points higher than in April 2019. The number of unemployed people increased by 104,500 in April 2020 to 823,300 people, and increased by 117,700 people from April 2019.

The underemployment rate increased by 4.9 pts to 13.7%, the highest on record, and was 5.2 pts higher than in April 2019.The number of underemployed people increased by 603,300 in April 2020 to 1,816,100 people, an increase of almost 50% (49.7%), and increased by 666,100 people since April 2019.

As you can see they have picked up a fair bit of the changes and it is nice to see an underemployment measure albeit not nice to see it rise so much. The signal for the Australian economy in the quarter just gone is rather grim though especially if we note this.

Monthly hours worked in all jobs decreased by 163.9 million hours (-9.2%) to 1,625.8 million hours in April 2020, larger than the decrease in employed people.

Italy

In line with our “Girlfriend in a coma” theme one fears the worst for Italy now especially as we note how hard it was hit by the virus pandemic. Even worse a mere headline perusal is actively misleading as I note this from Istat, and the emphasis is mine.

In April 2020, in comparison with the previous month, employment significantly decreased and unemployment sharply fell together with a relevant increase of inactivity.

The full detail is below.

In the last month, also the remarkable fall of the unemployed people (-23.9%, -484 thousand) was recorded for both men (-17.4%, -179 thousand) and women (-30.6%, -305 thousand). The unemployment rate dropped to 6.3% (-1.7 percentage points) and the youth rate fell to 20.3% (-6.2 p.p.).

Yes a number which ordinarily would be perceived as a triumph after all the struggles Italy has had with its economy and elevated unemployment is at best a mirage and at worst a complete fail for the methodology below.

Unemployed persons: comprise persons aged 15-74 who:
were actively seeking work, i.e. had carried out activities in the four week period ending with the reference week
to seek paid employment or self-employment and were available to start working before the end of the two
weeks following the reference week;

Some would not have bothered to look for work thinking it was hopeless and many of course would simply have been unable to. We do find them elsewhere in the data set.

In April the considerable growth of inactive people aged 15-64 (+5.4%, +746 thousand) was registered for
both men (+6.0%, +307 thousand) and women (+5.0%, +438 thousand), leading the inactivity rate to
38.1% (+2.0 percentage points).

If we look back we see that there was a similar issue with the March numbers so a published unemployment rate of 6.3% looks like one of over 11% if we make some sort of correction for the April and March issues.

We get a better guide to the state of play from the employment position which as we observe from time to time has become something of a leafing indicator.

On a monthly basis, the decline of employment (-1.2%, -274 thousand) concerned both men (-1.0%, -131 thousand) and women (-1.5%, -143 thousand), and brought the employment rate to 57.9% (-0.7 p. p.)…….With respect to the previous quarter, in the period February – April 2020, employment considerably decreased (-1.0%, -226 thousand) for both genders…….Compared to March 2019, employment showed a decrease in terms of figures (-2.1%, -497 thousand) and rate (-1.1 percentage points).

Oh and in the last sentence they mean April rather than March. But looking ahead we see a 1.2% fall for employment in April alone which has implications for GDP and of course it is before the furlough scheme.

 Italy has furloughed 7.2 million workers, equivalent to 31% of employment at end-2019; ( FitchRatings )

Germany

This morning has also brought news about the state of play in Germany.

WIESBADEN – Roughly 44.8 million persons resident in Germany (national concept) were in employment in April 2020 according to provisional calculations of the Federal Statistical Office (Destatis). Compared with April 2019, the number of persons in employment decreased by 0.5% (-210,000). This means that for the first time since March 2010 the number of persons in employment decreased year on year (-92,000; -0.2%). In March 2020, the year-on-year change rate had been +0.2%.

For our purposes we get a signal from this.

According to provisional results of the employment accounts, the number of persons in employment fell by 161,000 in April 2020 on the previous month. Normally, employment rises strongly in April as a result of the usual spring upturn, that is, by 143,000 in April on an average of the last five years.

Perhaps the headline read a lot better in German.

No spring upturn

Switching to unemployment the system seems less flawed than in Italy.

Results of the labour force survey show that 1.89 million people were unemployed in April 2020. That was an increase of 220,000, or 13.2%, on March 2020. Compared with April 2019, the number of unemployed persons increased by 515,000 or +38.0%. The unemployment rate was 4.3% in April 2020.

There is a clear conceptual issue here if we return to Fitch Ratings.

Germany has enrolled more than 10 million workers on its scheme, representing 22% of employment at the end-2019. This number ultimately may be lower because some firms that have registered employees as a precaution may decide not to participate.

Germany employed the Kurzarbeit to great effect during the global financial crisis when its implementation prevented the mass lay-offs that were seen elsewhere in Europe. While unemployment in Germany remained broadly unchanged in 2008-2009, other countries reported significant increases.

Comment

There are deep sociological and psychological impacts from these numbers and let me give my sympathies to those affected. Hopefully we can avoid what happened in the 1930s. Returning to the statistics there are a litany of issues some of which we have already looked at. Let me point out another via the German employment data.

After seasonal adjustment, that is, after the elimination of the usual seasonal fluctuations, the number of persons in employment decreased by 271,000 (-0.6%) in April 2020 compared with March 2020.

The usual pattern for seasonal fluctuations will be no guide this year and may even be worse than useless but it will still be used in the headline data. But there is more if we switch to Eurostat.

In April 2020, the second month after COVID-19 containment measures were implemented by most Member
States, the euro area seasonally-adjusted unemployment rate was 7.3%, up from 7.1% in March 2020. The EU
unemployment rate was 6.6% in April 2020, up from 6.4% in March 2020.

We have the issue of Italy recording a large rise as a fall but even in Germany there is an issue as I note an unemployment rate of 4.3%. Well after applying the usual rules Eurostat has published it at 3.5%. There is no great conspiracy here as the statisticians apply rules which are supposed to make things clearer but some extra thought is requited as we note they are in fact making the numbers pretty meaningless right now, or the opposite of their role.

The Investing Channel

 

 

 

 

The ECB hints at buying equities and replacing bank intermediation

A feature of this virus pandemic is the way that it seems to have infected central bankers with the impact of them becoming power mad as well as acting if they are on speed. Also they often seen lost in a land of confusion as this from yesterday from the Governor of the Bank of France highlights.

Naturally, there is a huge amount of uncertainty over how the economic environment will evolve, but this is probably less true for inflation.

Okay so the picture for inflation is clearer, how so?

 In the short term, the public health crisis is disinflationary, as exemplified by the drop in oil prices. Inflation is currently very low, at 0.3% in the euro area and 0.4% in France in April; granted, it is particularly tricky to measure prices in the wake of the lockdown, due to the low volume of data reporting and transactions, and the shift in consumer habits, temporary or otherwise.

This is not the best of starts as we see in fact that one price has fallen ( oil) but many others are much less clear due to the inability to measure them.Of course having applied so much monetary easing Francois Villeroy is desperate to justify it.

The medium-term consequences are more open to debate, due notably to uncertainties over production costs, linked for example to health and environmental standards and the potential onshoring of certain production lines; the differences between sectors could be significant, leading to variations in relative prices rather than a general upward path.

As you can see he moves from not being able to measure it to being very unsure although he later points out it is expected to be 1% next year which in his mind justifies his actions. There is the usual psychobabble about price stability being an inflation rate of 2% per annum which if course it isn’t.  #

Policy

It is probably best if you live in a glass house not to throw stones but nobody seems to have told Francois that.

Our choice at the ECB is more pragmatic: since March, we, like the Fed and the Bank of England, have greatly expanded and strengthened our armoury of instruments and in so doing refuted all those – and remember there were a lot of them only a few months ago – who feared that the central banks were “running out of ammunition”.

I will return to that later but let us move onto what Francois regards as longer-term policies.

First, in September 2019, we amended our use of negative rates with a tiering system to mitigate their adverse impacts on bank intermediation. I see no reason to change these rates now.

Actually it has not taken long for Francois to contradict himself on the ammunition point as “see no reason” means he feels he cannot go further into negative interest-rates for the general population. You may also note that he starts with “My Precious! My Precious!” which is revealing. Oh and he has cut the TLTRO interest-rate for banks to -1% more recently.

Plus.

Meanwhile, asset purchases, in operation since mid-2014, reached a total of EUR 2,800 billion in April 2020 and will continue at a monthly average pace of more than EUR 30 billion.

Make of this what you will.

We can also add forward guidance to this arsenal,….. This forward guidance provides considerable leeway to adapt to economic changes thanks to its self-stabilising endogenous component.

New Policy

Suddenly he did cut interest-rates and we are back to “My Precious! My Precious!”

The supply of liquidity to banks has been reinforced in terms of quantity and, above all, through an incentivising price structure. Interest rates on TLTROIII operations were cut dramatically on 12 March and again on 30 April and are now, at -1%

There is also this.

Above all, we have created the EUR 750 billion Pandemic Emergency Purchase Programme (PEPP)…….First, flexibility in terms of time. We are not bound by a monthly allocation…….Second, flexibility in terms of volume. Unlike the PSPP, we are not committed to a fixed amount – today, the PEPP can go “up to EUR 750 million”, and we stated on 30 April that we were prepared to go further if need be.

If we look at the weekly updates which have settled at around 30 billion Euros per week the original 750 billion will run out as September moves into October if that pace is maintained. So it looks likely that there will be more although as the summer progresses things will of course change quite a bit.

Then Francois displays even more of what we might call intellectual flexibility. You see he is not targeting spreads or “yield curve control” or a “spread control” but he is….

While there is a risk that the effects of the crisis may in some cases be asymmetric, we will not allow adverse market dynamics to lead to unwarranted interest rate hikes in some countries.

So he is trying to have his cake and eat it here.

Innovation

This word is a bit of a poisoned chalice as those have followed the Irish banking crisis will know. But let me switch to this subject and open with a big deal for the ECB especially since the sleeping giant known as the German Constitutional Court has shown signs of opening one eye, maybe.

And this brings me to my third point, flexibility in terms of allocation between countries.

He means Italy of course.

Next up is one of the sillier ideas around.

Allow me to say a final word on another development under discussion: the possibility of “going direct” to finance businesses without going through the bank channel. The truth is that we do this already, and have done since 2016, by being among the first central banks to buy corporate bonds.

He is probably keen because of this.

The NEU-CP market in Paris is by far the most active in the euro area, with outstandings of EUR 72 billion in mid-May, and the Banque de France’s most recent involvement since the end of March has been very effective and widely acknowledged by industry professionals.

Ah even better he has been able to give himself a slap on the back as well.

He is eyeing even more.

With its new Main Street Lending Program, the Fed recently went a step further by giving itself the possibility to fund the purchases of bank loans to businesses, via a special-purpose vehicle created with a US Treasury Department guarantee

If banks are bad, why are we subsidising them so much? Also why would central banks full of banks be any better?

After sillier let us have silliest.

ECB’s Villeroy: Would Not Put At Forefront Likelihood Of Buying Up Equities ( @LiveSquawk )

Comment

There is a familiar feel to this as we observe central bankers twisting and turning to justify where they find themselves. Let me start with something which in their own terms has been a basic failure.

This sluggishness in prices comes after a decade of persistently below-target inflation, which has averaged 1.3%.

This provides a range of contexts as of course the inflation picture would look very different if they made any real effort to measure  the one third or so of expenditure that goes on housing costs. In other areas this would be a scandal as imagine how ignoring a third of Covid-19 cases would be received? Also you might think that such failure after negative interest-rates and 2.8 billion Euros of QE might lead to a deeper rethink. This policy effort has in fact ended up really being about what was denied in this speech which is reducing bond yields so governments can borrow more cheaply. The hints in it have helped the ten-year yield in Italy fall to 1.55% as I type this.

Oh the subject of the ECB buying equities I am reminded that I suggested on the 2nd of March it would be next to make that leap of faith. I still think it is in the running however the German Constitutional Court may have slowed it up. The hint has helped the Euro Stoxx 50 go above 3000 today as equity markets continue to be pumped up on liquidity and promises. But more deeply we see that if we look at Japan what has been achieved by the equity buying? The rich have got richer but the economy has not seen any boost and in fact pre this crisis was in fact doing worse. So he is singing along with Bonnie Tyler.

I was lost in France
In the fields the birds were singing
I was lost in France
And the day was just beginning
As I stood there in the morning rain
I had a feeling I can’t explain
I was lost in France in love