http://soberlook.com/2012/07/decline-in-spanish-banks-contribution.html?utm_source=BP_recent
FRIDAY, JULY 13, 2012
Decline in Spanish banks' contribution to the ECB Deposit Facility
Given that the overall Deposit Facility has been fairly static, excess reserves for other banks in the Eurosystem have gone up. Going forward these banks (in the Eurozone "core") will be turning away periphery depositors (or charging them for holding cash) because the ECB facility no longer pays interest. Moving deposits out of Spain has become more difficult.
See this link for the latest Banks of Spain balance sheet figures (h/t Kostas Kalevras).
See this link for the latest Banks of Spain balance sheet figures (h/t Kostas Kalevras).
and more on Spain and Eurozone wackiness .....
Finland Wants Spanish Bank Stocks As Collateral
The week's point of maximum absurdity was (probably) reached yesterday when Finland's finance minister Jutta Urpilainen let it be known what she wants as collateral for lending money to Spain's banks: Spanish bank equity!
„Finland is in talks to get shares in Spanish banks in exchange for the Nordic country’s contribution to a bailout agreed last month, Finance Minister Jutta Urpilainen said.“We’ve discussed the option of bank shares,” Urpilainen said in an interview on state-owned broadcaster YLE TV1 yesterday. “There are several different alternatives and it’s still impossible to say what the concrete model for collateral will be.”
This is truly bizarre for the simple reason that if Spain's banks cannot pay back the loans they are about to get from the EFSF/ESM, then these loans will be converted into equity anyway. So if Finland is eager to become a part owner of Spain's bust banking system, all it would probably have to do is simply wait a little bit. As Edward Hugh remarked to this idea:„Finland is going to become a part owner of the Spanish banking system. She should be worried about that
outcome rather than actively seeking it.“
outcome rather than actively seeking it.“
Amen.
Ireland: Barely Solvent and Already Talking 'Stimulus'
Ireland has been a model student of the bailout initiative so far, meeting its targets and implementing the 'Troika' devised austerity program very meticulously. However, since Spain is now getting 'special treatment' regarding the bank bailout, it was decided at the late June euro-group summit that Ireland would get special treatment as well. After all, the Irish bailout was primarily a banking system bailout too. Moreover, as Irish finance minister Noonan not unreasonably remarked, Ireland 'took one for the team' when it refrained from imposing losses on senior bank bondholders. The big fear at the time was that this would trigger 'contagion effects' across Europe (which were later triggered anyway by Greece).
In its summit statement the euro-group said:
„The Eurogroup will examine the situation of the Irish financial sector with the view of further improving the sustainability of the well-performing adjustment programme. Similar cases will be treated equally.“
Noonan is now hoping to clinch a deal on the €64 billion in bank debt in the course of this year, which would help bring Ireland's public debt back below 100% of GDP.
“Mr Noonan said he was pressing for a deal with European authorities for relief on Ireland’s €64bn bank debts that would reduce the country’s sovereign debt below 100 per cent of gross domestic product and help the country to re-enter international bonds markets in early 2013.“Our debt will peak at around 117-120 per cent of GDP next year and if you go above 100 per cent then it acts as a brake on growth,” he said.“If all the capital we put into the banks was removed from our shoulders it would get our debt down to 80 per cent of GDP. Now it is unlikely someone would be that generous but somewhere between 80 and 100 per cent [is the aim]. I still regard 100 per cent as too high,” he said in an interview. Mr Noonan said he would meet Mario Draghi, ECB chief, within the next two weeks for talks on the issue.Ireland’s borrowing costs have dropped to pre-bailout levels since EU leaders agreed a deal at last month’s summit that could see the European Stability Mechanism, the eurozone’s €500bn bailout fund, take over a chunk of its bank-related debt on its balance sheet.Mr Noonan said Dublin deserved a deal on its bank debt because the ECB had blocked the previous government from burning senior bondholders in Irish banks for fear of contagion spreading across Europe during the early stages of the eurozone crisis.“We are saying we took the hit for the team and if the rules are now changing then we need to negotiate a deal with you,” said Mr Noonan. “Moral hazard should not just apply to those who borrow recklessly but also those who lend recklessly,” he said.
(emphasis added)
As the article notes, Ireland's bond yields have already declined sharply in anticipation of the deal. So what does the Irish government plan to do with its newly-won financial flexibility? Why, enact 'economic stimulus' of course (i.e., waste scarce economic resources). This is to be done in a manner that does not impair the deficit targets, by way of 'off balance sheet financing'.
The FT article reports on the matter:
* * *Dublin is to unveil a multibillion euro stimulus package later this month in an effort to kickstartits flagging economy and curb unemployment as it presses the eurozone to take over a large chunk ofbank-related debts to aid its recovery.Michael Noonan, Ireland’s finance minister, said on Wednesday that the troika of international lenders – the European Central bank, European Commission and the International Monetary Fund – had approved the stimulus measures as long as Dublin does not breach its spending limits.“It will be like a parallel capital budget geared towards projects that enhance the capacity of the economy to be more productive, including road and school projects,” Mr Noonan told the Financial Times in an interview.”(emphasis added)As we have often pointed out, it is not possible to 'kickstart' an economy. It would be possible if the economy were a stalled car engine, but that is not what the economy is: it is not a car engine.As reasonable as the projects the government wants to spend funds on sound at first blush – who can be against schools and roads after all! – the fact remains that the economy's pool of real resources and capital is finite. There is no way whatsoever to determine whether the resources to be expended on a new school or a new road would not have been better employed in alternative uses, where they may have satisfied more urgent consumer wants. The government just 'spends', but there is no economic calculation taking place. There is no way to gauge the success or failure of these projects because they are not subject to profit and loss accounting. Their opportunity cost will forever remain a mystery. But hey, 'roads and schools' must be good, right?Well, in this case, consider the entire train of thought as formulated in the excerpt of the FT article above. No-one is actually saying that schools and roads are really needed. In fact, we strongly suspect that Ireland is well supplied with both and that no particularly urgent need to add to them actually exists. No, very likely the sole aim of the project is the 'kick-start' exercise. It is Keynesian ditch-digging, masquerading as useful investment for propaganda reasons. He might as well have said 'new hospitals and airport improvements', or whatever.It does not matter to them what they spend it on, they just want to spend it. The erroneous assumption underlying such plans is that they somehow must be economically beneficial. After all, government spending automatically 'adds' to GDP, and a number of ditch-diggers, sorry, road construction crews, will be employed for a while. So why doesn't anyone stop to wonder for a moment how it comes that the same exercise is now in its 23rd year of continuous failure in Japan, or why president Obama's 'shovel-ready' deficit-financed ditch digging exercises in the US have resulted in what economists far and wide now admit remains the weakest recovery of the entire post WW2 era?In spite of these and countless other, similar examples, the myth that all government spending is 'good for the economy' regardless of how many scarce resources it wastes on useless projects lives on. What is especially fascinating in this particular case is that the would-be spender is presiding over the treasury of what remains at this point a de factobankrupt government.A First Positive Result of Monti's Reforms: ISTAT Threatens to Stop Publishing Economic Statistics
What is the purpose of governments gathering and publishing economic statistics? There is only one: they supply a fig leaf for government meddling in the economy.In an unhampered free market economy, no-one would need to know anything about 'unemployment statistics' or 'CPI' or 'GDP' and a great many other 'macro' data (many of which are nonsensical data to begin with). What for? Private enterprise would of course still have use for economic statistics, but they would be of a more micro-economic nature, such as for instance the type of statistics that Gartner publishes on technology spending trends.The former governor of Hong Kong, Sir John Cowperthwaite famously sent a delegation from Britain back home without supplying it with Hong Kong's unemployment statistics. He simply couldn't provide these statistics because he didn't think it necessary to compile them. He felt that collecting such data would be a bane rather than a boon, for precisely the reason we mentioned above: it would only invite government meddling in the economy. It is no great surprise to us that Hong Kong became one of the fastest growing economies on the planet, turning from a poor backwater into the hustling and bustling metropolis it is today in an amazingly short period of time.Italy may soon be on the right track as well, if for reasons that have little to do with the desire to put obstacles in the way of government intervention:“Italy's national statistics body ISTAT threatened on Thursday to cease issuing data on the economy, saying it had been crippled by government spending cuts aimed at reducing national debt and righting public finances.The euro zone's third biggest economy, whose statistics are closely watched as the country's huge state debts put it at the center of the bloc's financial crisis, would face stiff European Union fines if the flow of data is cut off, ISTAT President Enrico Giovannini was quoted as saying."Spending cuts are putting ISTAT at risk. From January onwards we will not issue any statistics," Giovannini told daily La Repubblica in an interview.Prime Minister Mario Monti's government has unveiled plans to cut public spending by 4.4 billion euros ($5.38 billion) in 2012, 10.6 billion euros ($12.95 billion) in 2013 and over 11 billion euros ($13.44 billion) in 2014, to be mainly achieved through a planned 10 percent reduction of public administration staff.Planned government cuts would reduce financing to ISTAT to 150-160 million euros ($182.2 – $195.5 million) by 2013 from 176 million euros ($214.99 million) currently, Giovannini said. He said that was half what is set aside for national statistics in France and one-third of what available in Nordic countries. Giovannini called the planned cuts "unsustainable".He said ISTAT produces 300 sets of data a year, up 25 percent from two years ago and 2,000 smaller reports. Seventy percent of ISTAT's output is aimed at meeting obligations with the EU."We will not issue data on inflation, deficit, household income, job data. That will trigger very high EU fines for our country for every day of delay," Giovannini said. "I do not think the government and the parliament will want to get to that point."(emphasis added)Well, hallelujah! What's the problem? Just look at the inflation at ISTAT itself – its reportage is up 25% from two years ago. Once gain one must wonder, what for?Let's get this straight: Mario Monti orders spending cuts of €4.4 billion in a country that is sitting on a €2 trillion public debt-berg, and the statistics minions can suddenly no longer produce their statistics? Even if the eurocracy insists on getting 70% of the data produced by ISTAT, surely there must be something that can be chucked from '300 sets of data and 2,000 smaller reports' produced every year without risking the end of civilization.The output of these paper production factories in the Western world – which includes all legislatures and bureaucracies – should be cut back anyway. It is simply astonishing what an endless flood of useless regulations, laws and statistics documenting everything down to the curvature of bananas and cucumbers is produced every year. We probably could stack all this stuff to Pluto by now. No-one has the time to read any of this, never mind enforce all the crazy regulations (for instance, in the EU one is not allowed to change a light bulb if this requires climbing a ladder. Instead one must call in the help of 'professionals'. This is just one of a plethora of similar nonsensical rules). The main reason for this prodigious output of printed paper is that the various bodies producing it constantly seek not only to justify their own existence, but if possible try to enlarge themselves, while eating up ever bigger budgets in the process.
http://soberlook.com/2012/07/3-reasons-eurozones-investors-love.html?utm_source=BP_recent
FRIDAY, JULY 13, 2012
3 reasons Eurozone's investors love Danish bonds
Would you pay Denmark's government 0.6% to hold your money for two years? Sounds strange, but that's exactly what investors are now doing. Denmark's government paper yields just hit new lows. And it's not only the short-term bills with the negative yield (short term bills sometimes go negative when investors seek immediate liquidity). The 2 and 3-year notes are now also comfortably in the negative territory as Eurozone's investors simply can't get enough.
 | ||
| Denmark's 2 and 3-year government yields Why do the Eurozone investors love Demark's bonds so much that they are willing to lock in negative yields for 2-3 years? Here are 3 key reasons: 1. Eurozone based investors are not taking much FX risk because Denmark keeps EUR-DKK exchange rate tightly pegged.
2. Investors love Denmark's economic fundamentals, particularly the relatively low government debt and deficit. |
 |
| Source: Bloomberg/BW |
3. Keeping funds outside the Eurozone may provide a hedge against potential problems associated with the monetary union's stability.
Bloomberg/BW: - If the euro crisis worsens, foreign capital may keep pouring in, negative rates or no. Says Ian Stannard, chief European currency strategist at Morgan Stanley in London: “For an international investor with euro zone exposure, buying Danish assets can be a hedge against the extreme scenario of the euro breaking up.”
http://www.telegraph.co.uk/finance/debt-crisis-live/9396185/Debt-crisis-live.html
12.33 At 11.57, we mentioned the Bank of America-Merrill Lynch research that used game theory to conclude that Italy and Ireland have more incentive to quit the euro than Greece, while Germany has limited room to prevent departures from the currency union.
SImon Nixon of the Wall Street Journal has also written about this Merrill research, which suggests that the risk of a eurozone break-up might be rising:
In game theory, the most likely outcome isn't always what economists call "Pareto optimal," one that will bring maximum benefit to all players. Instead, the "Nash equilibrium" for the eurozone—the situation in which no player has an incentive to change strategy because to do so unilaterally would leave them worse off—is that Italy refuses to undertake the overhauls needed to enable its economy to grow and Germany refuses to provide the bailouts to persuade it to stay.
12.24 The European Commission has expressed some doubts regarding the wisdom of Moody's downgrading of Italy, bearing in mind it came just before a bond auction. SImon O'Connor, a Commission spokesman, said:
I do think one can legitimately and seriously question the timing of it, whether the timing was appropriate. We consider that Italy's policy actions to ensure sound public finances address long-standing structural weaknesses and have been both determined and wide ranging.
11.57 Bank of Amerca-Merrill Lynch has published some thoughts on the eurozone's predicament. Its strategists reckon that Italy and Ireland have more incentive to quit the euro than Greece, while Germany has limited room to prevent departures from the currency union.
In a report dated July 10, which Bloomberg has seen, the bank uses cost-benefit analysis and game theory to conclude that investors “may be underpricing the voluntary exit of one or more countries” from the bloc.
Italy, the euro area’s third-largest economy, would enjoy a higher chance of achieving an orderly exit than others and would stand to benefit from improvements in competitiveness, economic growth and balance sheets, they said.
While Germany is the nation deemed able to leave the eurozone most easily, it has the least incentive of any country to quit because it would face weaker growth, possibly higher borrowing costs and a negative hit to its balance sheets, Bloomberg cites the strategists as saying. Austria, Finland and Belgium also have little reason to quit, they said, while Spain has the weakest case for leaving among economies most directly affected by the crisis.
11.36 At 09.09, we mentioned that according to ECB data, Spanish banks borrowed €365bn in June versus €325bn in May - a new record. Analysts suggested that the data provides more evidence that Spanish lenders remain largely shut out of the interbank market. Juan Pablo Lopez, banking analyst at Espirito Santo, said:
It was widely expected that the data would reflect the growing loss of confidence towards Spain's banking sector. Local banks are shut out of the wholesale markets, small investors and savers are losing confidence in their banks and the high yields offered on bonds means the Treasury has become a direct competitor for funds.
11.03 Italy's treasury undersecretary has also taken umbrage at Moody's downgrade. He has told Reuters that it was an "incomprehensible" decision and that Rome would respect its commitment to achieving a structural budget surplus even if the economic cycle worsens. Gianfranco Polillo said:
I am very perplexed by the Moody's decision because of the weakness of the reasoning and above all by the size of cut. They are very weak reasons. On the one hand, they're talking about political reasons, which is quite arbitrary. I don't think anyone is able to explain how the Italian political situation will evolve.
10.44 Further to the auction of three-year bonds, Italy also sold three bonds due in 2019, 2022 and 2023 for a total of €1.75bn.
The March 2022 bond fetched a 5.82pc yield and the August 2023 was sold at an average 5.89pc rate.
10.35 Initial reaction to the Italian three-year bond auction is fairly positive. Nicholas Spiro of Spiro Sovereign Strategy writes:
This was a challenging enough auction without the downgrade which makes the result look all the more impressive. The cut to Italy's credit rating had been more or less priced in. Once again, the Treasury was able to get its debt out the door which, right now, is the overriding priority. Domestic banks continue to hold the fort at Italian actions. The concession, however, is still hefty and reflects the increasing risks in Italy.
But he adds:
Italian government debt remains under considerable pressure. Practically nothing was done at the last EU summit to help shore up the Italian sovereign. The current firepower of the eurozone's rescue funds is woefully inadequate to shield Spain and Italy. There needs to be a much more credible ECB-backed backstop in place to help restore confidence in Italian sovereign debt.
Nick Stamenkovic, bond strategist at RIA Capital Markets, says:
The new three-year BTP auction achieved maximum target ... demand was decent with the average yield falling modestly compared to previously. The concession following Moody's double notch downgrade of Italy helped auction to be absorbed comfortably. With overseas investors shifting out of sovereign paper domestic investors were probably the main buyers particularly Italian banks. All in all, a bit of relief for Italian bonds but this is likely to prove short-lived given the poor fiscal outlook.
10.26 Results from Italy's debt auction are coming through. It has sold €3.5bn of three-year bonds at an average yield of 4.65pc. That's much lower than the 5.3pc it had to pay in June.
The yields on Italy's 10-year bonds have managed to ease back below 6pc. Just. They're now at 5.95pc.
10.17 Yesterday, the IMF said it had found policy implementation delays in a "number of areas" in Greece's international bailout during recent talks. Today, German daily Rheinische Post cites unnamed government sources suggesting that the preliminary report from the 'troika' has turned up some serious shortcomings in Greece's efforts to implement reforms.
The troika - comprising the European Central Bank, the European Union Commission and the International Monetary Fund - apparently found that the Greek government has failed to fulfill 210 of the 300 budget savings requirements.
10.06 The head of Italy's business association, Confindustria, has hit back at Moody's downgrade. Giorgio Squinzi said:
This is just Moody's opinion. I think our country, and our manufacturing system, is much stronger than the Moody's evaluation suggests. As president of Confindustria, as an employer and as a private citizen, I think our country is stronger than that.
09.47 Some reaction is starting to trickle through to Moody's decision to cut Italy's credit rating to just above junk. Investec say:
In Europe, Moody’s cut Italy’s rating by two notches to Baa2, citing an increased risk that funding costs could rise further possibly leading to a “sudden stop in market funding”. The Euro remains under pressure although its reaction to this news was subdued suggesting it wasn’t a great surprise as the cut leaves Italy’s rating two above junk and one above Spain’s rating. Italy is on track to bring its budget deficit within the European Union limit this year but its 10-year bond yields have risen above 6 per cent in recent weeks after Spain sought a bailout fuelling concerns that Italy is next.
The euro slipped towards two-year lows on Friday, dipping to $1.2190 at one point. It is now trading around $1.2200.
Beat Siegenthaler, currency strategist at UBS, said:
The Italian downgrade means demand from international investors for the bonds on auction today will suffer. While there is a risk of a short squeeze that could push the euro higher, we expect more selling into a bounce. We also expect the ECB to lower rates and launch unconventional measures in coming months, all of which will keep the euro under pressure
09.39 Still on those China figures, Simon Denham, head of Capital Spreads was sceptical:
Manufacturing in China is suffering and the official numbers always seem to be at odds with other independent readings and there is no doubt that sectors are contracting speedier than the data will tell you. China’s economy is slowing because its biggest customers are not buying its goods and whilst they are trying to replace the lost demand from the West with their own domestic demand, it isn’t taking up the slack yet. We’ve seen indications of this earlier this week when imports took a dive.
So why aren’t the markets taking this data badly? Most likely because of the grey areas surrounding the figures and that whilst GDP may be slowing more than expected in the world’s second largest economy, it is not as bad as it could have been and China is still growing at a fair lick.
09.35 At 08.38, we mentioned that China’s economy grew at 7.6pc in the second quarter, its slowest expansion since the aftermath of the financial crisis. But Ilya Spivak, currency strategist at DailyFX, reckons this was broadly in line with exepctations:
On balance, the outcome appeared to have a net neutral impact on sentiment, offering no additional fodder to drive risk aversion. This opened the door for growth-geared assets to stage a corrective recovery following yesterday's blood-letting. S&P 500 stock index futures are pointing higher in late Asian trade, arguing for more of the same into the week-end.
09.26 There have been murmurings in recent days that Silvio Berlusconicould be poised to return to power. Italian news agencies are this morning quoting a senior official in Berlusconi's PDL party, who says that the former prime minister will return to frontline politics as the centre-right candidate in next year's general election.
Fabrizio Cicchito, PDL parliamentary leader told Italian news agencies after a meeting of the party leadership at Berlusconi's Rome residence:
Yes, Berlusconi is the candidate for premier
Berlusconi has given several hints of late that he was planning a return to politics, complaining about his successor Mario Monti's austerity policies and musing openly about the possibility of Italy exiting the euro.
09.09 According to ECB data, Spanish banks borrowed €365bn in June versus €325bn in May - a new record.
09.02 German Economy Minister Philipp Roesler feels the Troika is "at the end of its patience" with Greece.
08.51 European Union Competition Commissioner Joaquin Almunia has said he’s investigating alleged rigging of Libor rates.
The story is quite shocking. We are focusing our investigations on suspected cartel arrangements involving financial derivatives related to these benchmark rates, including possible collusion over the setting of the rates.
08.49 We are hearing that Italian final inflation figures for June have been delayed for an hour due to strike action by statistics agency staff. They will now be released at 10am.
08.48 Italy faces a key bond auction of €5.25bn today, just hours after it was downgraded by Moody's.
08.42 Spain's inflation rate has risen to 3.6pc in June from 3.4pc the month before.
08.38 China’s economy grew at 7.6pc in the second quarter, its slowest expansion since the aftermath of the financial crisis.
08.20 Michel Barnier, the EU commissioner responsible for the single market and regulation, said yesterday that Europe needs a central finance minister answerable to national parliaments and EU politicians to pave the way for closer integration:
My conviction is that we should have an EU finance minister, subject to strong democratic control from the European Parliament and national parliaments.
At some point in the future, I also believe that we should combine the role of the President of the European Commission and the President of the European Council
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