Commentary on the economic , geopolitical and simply fascinating things going on. Served occasionally with a side of snark.
Thursday, February 14, 2013
Eurozone slips further into recession - good thing the crisis is over , right ? As far as Monti Paschi , that crisis just starting to hit boiling over stage ...
News of the day for Bankia and Monte Paschi banks.....
Protesters holding banners reading "Bankia costumers scammed, fight for your rights" during a protest march in Madrid. Photograph: Andres Kudacki/AP
Small retail clients who invested in Spain's nationalised Bankia face substantial losses, with the bank's shares temporarily suspended on the Madrid stock exchange on Thursday morning amid rumours that existing stock would be declared almost worthless.
The Frob, the country's bank restructuring fund, was forced to admit that the price it will set for swapping debt into shares at the bailed-out bank would be low – but denied reports that it would value shares at just 1 eurocent each.
Spain's Expansión newspaper had reported that the Frob had set the 1 cent level for shares that, when floated amid an aggressive marketing campaign in 2011, were valued at €3.75 (£3.23) each.
About 350,000 retail investors are thought to have bought at up to that price. A valuation of 1 cent would in effect wipe out their investments.
"The worst is going to happen," the newspaper said in an editorial. "This cold dose of reality, partly a result of the obligations acquired with theEuropean Union when it was rescued, contrast with what has been happening to Bankia's share price." The share price fell by more than 22% after a trading suspension was lifted on Thursday morning following the media report, though it later rose again. By late in the day it was trading at €0.41 – still more than 40 times the value reported by Expansión.
Bankia asked to be rescued last year as it drowned in a sea of toxic real estate left over from a residential construction bubble that burst five years ago, leaving a million new properties unsold.
The bank took €18bn of European aid, which went via the Frob and was added to Spain's national debt.
Formed by the merger of seven provincial savings banks, Bankia was devastated – along with many of its Spanish peers – by the property market collapse, and a government-enforced clean-up of real estate exposures left it short of capital last year.
The complex recapitalisation of Bankia will see parent group BFA, now controlled by the Frob, subscribe to €10.7bn of Bankia-issued bonds that will then be converted into shares.
But the Frob insisted on Thursday that, although Bankia's debts outweighed assets by €4.2bn in December, the conversion price had not yet been fixed.
"The entity's negative valuation and its end-2012 projected results indicate that the price at which the Frob [will participate in Bankia] via BFA will entail a big reduction in the shares' nominal value," it said in a statement.
Unfortunately for the apparently not quite big enough to not fail Italian bank's former leaders, the Monte Paschi derivative debacle just won't go away. As Reuters reports today, the first (or many) arrests have been made. Gianluca Baldassarri and four other people suspected of criminal conspiracy to commit fraud were arrested after police seized EUR40mm of apparently ill-gotten gains. The alleged fraud and bribery case charges Baldassarri (who left shortly after the arrival of the new CEO in Jan 2012) of misleading regulators over the true nature of a secret derivative contract that was found in a safe by the bank's new management in October 2012. Echoing JPM's London Whale, they uncovered a 'systematic overshooting of risk limits' in the management of the group's EUR24bn prop book. Baldassarri was arrested quickly after the police found evidence that he was trying to cash in securities worth over EUR1mm soon after the funds were seized.
Italian police arrested on Thursday the former head of Monte dei Paschi's finance department, who is at the center of a probe into alleged fraud and bribery at Italy's third largest bank, prosecutors said.
Gianluca Baldassarri is the first person to be arrested in a widening scandal that has rocked the world's oldest bank and triggered a financial and political storm ahead of Feb 24-25 national elections.
Prosecutors in the Tuscan city of Siena, where the 540-year-old bank is based, said Baldassarri was accused of helping mislead regulators over the true nature of a secret derivative contract that was found in a safe by the bank's new management in October 2012.
Baldassari left Monte dei Paschi shortly after the arrival of new chief executive Fabrizio Viola in January 2012.
...
HIDDEN IN A SAFE
Italian prosecutors seized some 40 million euros ($54 million) last week as part of their investigation. The prosecution seizure order, seen by Reuters, said the funds belonged to Baldassarri and four other people suspected of criminal conspiracy to commit fraud.
...
Internal documents obtained by Reuters show an audit of the department in August and September 2009 had uncovered a"systematic overshooting of risk limits" in the management of the group's 24-billion euro proprietary portfolio.
Last week, the lender put losses stemming from three derivatives trades at 730 million euros and said it may have to restate previous accounts.
One of the structured finance transactions under scrutiny is a complex 2009 trade between Monte dei Paschi and Japanese bank Nomura, known as "Alexandria".
The bank's new management says Monte dei Paschi's board never reviewed the trade for approval, and its true nature only came to light in October last year after a secret contract was found in a safe.
FLIGHT RISK
In their statement on Thursday, the Siena prosecutors said they had feared Baldassarri may be seeking to leave the country because they had evidence he was trying to cash in securities worth more than 1 million euros after the February 7 fund seizure.
...
The Bank of Italy has faced increasing questions over its supervision, and Mario Draghi, who was governor of the Italian central bank before becoming president of the European Central Bank in November 2011, has also been drawn into the criticism.
It started overnight in Japan, where Q4 GDP posted a surprising and disappointing 3rd quarter of declines, then quickly spread to France, whose Q4 GDP declined -0.3% Q/Q missing expectations of a -0.2% drop, down from a +0.1% increase, then Germany, whose GDP also missed expectations of a -0.5% drop, declining from a +0.2% increase to a -0.6% drop, then on to Italy (-0.9% vs Exp. -0.6%, last -0.2%), Portugal (-1.8%, Exp. -1.0%, last -0.9%), Greece (down -6.0%, previously -6.7%), Hungary (-0.9%, Exp. -0.3%), Austria (-0.2%, down from 0.1%), Cyprus (-3.1%, last -2.0%), and so on.
To summarize: Eurozone GDP dropped far more than expected, or posting a -0.6% decline in Q4, worse than the -0.4% expected,which was the largest drop since Q1 2009, and down from the -0.1% posted in Q3. And since this was a second consecutive negative quarter of GDP decline for the Eurozone, the technical recession (double dip? triple dip? is anyone even counting anymore?) in Europe too is now official.
Who could have possibly foreseen this disappointing development for Europe? Maybe all those who were warning that for the frail and weak continent the last thing it needed was a surge in the currency, which is precisely what it got in Q4. Sure enough, the EURUSD has tumbled over 100 pips overnight, with more fuel added to the flames courtesy of the ECB's Constancio who added out of the blue that negative interest rates are always possible, and the ECB is technically read if needed - hardly the statement one makes if one wants to push their currency higher.
Sure enough, the EURUSD was trading at just about 1.330 at last check, and likely to test recent support levels.
And since the US futures trade in lockstep with the EURUSD, please don't adjust your monitors: that odd non-green color of the futures is not a malfunction.
Some more from Goldman on the European economic collapse in Q4:
Broad-based negative surprise in largest EMU economies. The country breakdown showed that outturns in Germany, France and Italy were all weaker than expected.
Germany: -0.6%qoq in Q4 after +0.2%qoq in Q3. The statistical office does not provide a breakdown by expenditure components (which will be released on February 22), but suggested that domestic demand was mixed: both private and public consumption increased slightly, while investment probably declined strongly. The contribution from net trade to GDP was negative, with the decline of exports outpacing the decline in imports.
France: -0.3%qoq in Q4 after +0.1%qoq in Q3. The breakdown by expenditure components was somewhat more positive than the headline GDP reading. Private consumption remained resilient, growing by 0.2%qoq, and public consumption continued to support activity (+0.4%qoq). However, investment declined at a faster pace than in Q3 (-1.0%qoq in Q4 after -0.5%qoq). Overall, the contribution of total domestic demand (excluding inventory changes) was flat in Q4, down from +0.1ppt in Q4. Net trade contributed positively to growth for the second consecutive quarter (+0.1ppt after +0.3ppt in Q3), with the contraction of imports (-0.8%qoq) outpacing the contraction of exports (-0.6%qoq). Changes to inventories shaved 0.4ppt off French GDP in Q4, dragging the aggregate figure into negative territory.
Italy: -0.9%qoq in Q4 after -0.2%% in Q3. The pace of contraction of 0.9%qoq (after -0.2%qoq in Q3) in Italy was significantly more acute than expected (Cons:-0.6%qoq, GS: -0.3%qoq). A detailed breakdown of the data will not be available until March 11. The surprisingly weak GDP data come at a sensitive time in the election campaign and could potentially damage support for the existing austerity/reform programme. The parliamentary elections will be held on February 24 and 25.
Spain: -0.7%qoq in Q4 after -0.4%qoq in Q3 (already published on January 29). The outturn was also slightly weaker than Consensus and our expectations for -0.6%qoq. The preliminary data release provides no breakdown in terms of output by sector or by expenditure component (to be published on February 28). A weak quarter was, however, expected on the basis of the consumer spending response to September's VAT rise.
Smaller economies - including core countries - in negative territory. Q4 GDP in Portugal was particularly weak: it contracted sharply by 1.8%qoq after -0.9%qoq. Finnish GDP contracted 0.5% in Q4, after -0.3% in Q3, while both Dutch and Austrian outputs were down 0.2%qoq.
Some comments on the EURUSD response, and other currency pairs, after the ugly economic data via Bloomberg:
ING:
EUR/USD correcting, with outside risk to 1.3260 area, ING’s Chris Turner and Tom Levinson say after GDP data; 1.3430/60 should be the sell area
Widening European sovereign CDS spreads may also prove mild EUR negative; watch for interest in short EUR cross trades again with short EUR/NZD increasingly popular
Signs of independent weakness in EUR may weigh on EUR/JPY, USD/JPY; break of 93.00 in USD/JPY risks losses to 92.00/92.20 area
Danske Bank:
Fundamental case for weaker JPY remains, though pace of weakening may “slow substantially” vs recent months
Cites likely candidate for new BOJ governor comments that inflation targets wouldn’t be attainable without JPY correction; USD/JPY in the 90-100 range would mark return to equilibrium
May see additional easing linked to April 3-4 BOJ meeting with possible new dovish majority on board
Looks for G-20 to affirm that countries’ current policies don’t represent exchange-rate manipulation
Deutsche Bank:
Market underestimating negative impact of BoE monetary policy on medium-term GBP outlook, note to clients says
EUR/GBP PPP adjusted for CPI 0.81 vs 0.75 a few years ago, wedge between unit labor costs in U.K. and euro zone increasing at even faster pace; with costs in euro zone collapsing on debt crisis, EUR/GBP PPP likely to rise “even faster” in coming years
Gilt market/GBP correlations recently have been turning
Targets another 5% move in trade-weighted index, looks for EUR/GBP to reach low 0.90s, GBP/USD to eventually drop to low 1.40s by year end
A more comprehensive recap of the overnight action from DB as usual:
We can't help wondering whether the G-20 summit in Moscow over the next few days will be a case of from Russia with no love to those countries that are being seen as engaging in currency de-basement. One country that is slipping slightly under the radar at the moment is the UK. Sterling continues to slide (-6.2% and -4.4% against the Euro and Dollar in 2013 and -10.4% vs the Euro since last summer's peak) with yesterday's BoE inflation report not helping.
The bank now forecasts that inflation will remain above target for three more years. DB's George Buckley points out that if this is correct it will mean a decade where its overshoots its target for 37 out of 40 quarters. Indeed since the worst global financial crisis in history starting in 2008, UK inflation has now averaged 3.3%. This is perhaps a lesson that if you have control over the printing presses and a flexible currency then inflation is always possible almost regardless of the natural deflationary forces present.
The UK has often been ahead of other countries in this cycle (and not necessarily always in a good way) and it might be the first country to test whether bond investors will tolerate a seemingly weaker inflation anchoring from the central bank. Indeed the continued regulatory demand for fixed income and the prospect of future central bank bond buying might battle it out against fears of constantly higher inflation over the months ahead. This will be a great test case for the rest of the world as to whether financial repression can continue to work in this cycle. Don't underestimate such a force but it’s fair to say that the UK continues to be an economic laboratory for the rest of the world. For the record 10 year Gilt yields rose 11bps yesterday to 2.209% and are now 77bp off last year’s lows. On the currency as much as it feels like this is a recipe for a weaker Sterling (as our FX guys think), after a month of travelling round Europe I can't help thinking that the UK is fairly cheap on a PPP basis - at least in terms of my shopping basket.
Perhaps my McDonalds on the Champs-Elysees wasn't very representative! Also currencies often overshoot for long periods so PPP can be meaningless in the short-term.
Staying on the theme of monetary policy, the Nikkei has managed to hold onto overnight gains of 0.7% after the BoJ announced that it would be keeping the pace of asset purchases and rates unchanged. This was largely expected but in its commentary, the BoJ noted that the Japanese economy had appeared to stop weakening with exports and industrial production showing signs of bottoming. The BoJ also upgraded its outlook and now expects a moderate recovery path, although near term inflation is expected to be around zero. Earlier in the session former BoJ deputy governor Kazumasa Iwata said in a statement that the Yen needs to correct for the BoJ to reach its 2% price target which helped the Yen reverse some of the earlier gains. The USDJPY is now around 93.55 as we type, off the lows of 92.83 about 24 hours ago but still off the highs of 94.46 at the start of the week as we head into the G20 meeting later today.
Iwata, who has been hailed as one of the possible successors to Shirakawa, also said there are many ways for monetary policy to boost the economy including through longer-term JGB purchases.
Elsewhere in Asia, equities are trading with a positive tone with the majority of indices a quarter to half a percent higher on the day. The KRW (+0.24%) is moderately stronger against the USD after the Bank of Korea decided to keep rates on hold overnight. The BoK governor did note that South Korea faces uncertainty due to Japan’s monetary policies. Asian credit is also trading with a firmer tone helped by the lack of new supply in the holiday-shortened week.
Turning back to yesterday it was mostly a day of consolidation for equities as the S&P 500 (+0.06%) closed marginally higher in the absence of any major catalyst. The January retail sales report was encouraging to some as the headline managed to inch +0.1% (in line with consensus) despite the significant tax increase at the start of the year. There were a few Fed speakers overnight. Plosser said that asset purchases should be tapered before interest rate rises. Lacker said that evidence of a credit market bubble arising from current Fed policy of holding long-term interest rates low with asset purchases is “ambiguous and inconclusive”. Bullard sounded more upbeat about growth and house prices but was concerned about a farmland price bubble.
In Fixed Income markets there was further selling bias in the Treasury market yesterday after a mediocre 10-year auction performance. The UST 10-year yield rose 5bp yesterday to 2.028% after the new notes were priced at a yield of 2.046% and attracted a lower bid/cover ratio of 2.68x (vs 2.83x previously). The $16bn 30-year auction later today is probably worth keeping an eye on. Elsewhere in credit the CDX IG finished the day 1.5bps tighter with the street being net sellers of bonds yesterday according to FINRA TRACE. In European credit ISDA declared two credit events yesterday. The first was a Restructuring Credit Event for SNS Bank NV and the second was Bankruptcy Credit Event with respect to Irish Bank Resolution Corp. The news didn’t affect the European senior or sub financial credit indices though, which closed 8.5bp and 14bp tighter respectively.
Looking at the day ahead, the first Q4 Euroland GDP print will be the main European economic release. Market forecasters are expecting the euro area to contract -0.4% QoQ/- 0.7%yoy versus -0.1%QoQ/-0.6%YoY in Q3. Looking at individual countries, Q4 GDP is expected to shrink -0.5%, -0.2%, -0.6% and -1.0% QoQ in Germany, France, Italy and Portugal, respectively. These are weaker numbers compared to +0.2%, +0.0%, -0.2% and - 0.9% for these countries in Q3.
Turning to the second most important event in Russia today, Bloomberg news has reported that the G20 officials will pledge in a joint statement to avoid policies that will lead to competitive currency devaluations and will also oppose trade protectionism. The ministry of finance in South Korea has also issued a statement saying that the G-20 will discuss the effectiveness of the quantitative easing measures in advanced countries and its spill over impact and policy responses by emerging countries. Elsewhere in the US we have initial and continuing jobless claims but the main focus will likely be on Euroland growth numbers and the G20 event in Russia.
Greek unemployment figures tell a similar story, with the jobless rate hitting a new high of 27% in November, from a revised 26.6% in October. That's more than double the eurozone's average rate of 11.7% in November.
The Social Insurance Institute in Thessaloniki, Greece, where over 500 workers are being laid off. The banner reads OCCUPY. Photograph: Konstantinos Tsakalidis/Demotix/Corbis
Portugal, Greece and Cyprus mired in crippling recessions
And for the really bad news...
Portugal's economy shrank 1.8% in the fourth quarter, compared with a 0.9% decline in the third.
That was a much sharper decline than expected (economists were forecasting a 1% drop) and shows a country struggling under the weight of a biting austerity regime demanded by Portugal's international lenders.
Greek GDP was 6% lower in the fourth quarter from the previous year (no quarterly figures given).
And Cyprus' economy shrank 1%, compared with a 0.7% decline in the third quarter.
Eurozone sinks deeper into recession
Eurozone GDP dropped 0.6% in the fourth quarter of 2012. That's worse than forecasts for a 0.4% decline and only adds to the gloom this morning, with data showing Germany, France, Netherlands and Italy all contracting.
Netherlands Q4 GDP -0.2%; France -0.3%; Germany -0.6%; Hungary -0.9%; Italy -0.9%; Portugal -1.8%. Makes UK's -0.3% look a little less bad
Greek protestors stage sit-in at finance ministry
More protests over in Greece, with anti-austerity demonstrators staging a sit-in at the office of the Greek finance ministry's general secretary, according to local reports. ekathimerini writes:
The demonstrators, described as members of SYRIZA's youth organization, were protesting controversial comments made by Giorgos Mergos earlier this week.
On Tuesday Mergos suggested that Greece's basic salary was too high. He later said his comments were misinterpreted.
“The only answer to those who are planning to impose new measures designed to impoverish workers and young people is collective and defiant struggles to overturn the government and the memorandums,” the protesters said in a statement.
Riot police have been sent to the scene, the reports said.
Finance Minister Yannis Stournaras on Wednesday insisted that there are no plans to reduce the minimum wage.
Submitted by Tyler Durden on 02/14/2013 09:22 -0500
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