Commentary on the economic , geopolitical and simply fascinating things going on. Served occasionally with a side of snark.
Thursday, January 31, 2013
Europe " fixed " meme falling apart - German and Greek retail sales plummet - likewise check the fall from grace of megabanks Deusche Bank and Santander , Spain sees the scandal touching upon the present ruling party spreading as now Prime Minister Rajoy is alleged to have received secret funds.....Italy sees more detail emerge for its banking scandal at Monte dei Paschi as Mario Draghi hints he may veto long term EU budget ,,,, additional news and views from Asia and Europe overnight.....
Back to Germany, where Deutsche bank posted a surprise net loss of €2.2bn for the fourth quarter.
Germany's biggest bank was hit by hefty litigation and restructuring charges as the bank slims down, in light of the changing investment banking environment.
Deutsche is being investigated for alleged manipulation of benchmark interest rates. Today it announced €1bn in litigation charges in the fourth quarter, which it said reflected "adverse court rulings and developments in regulatory investigations".
Co-chief executives Juergen Fitschen and Anshu Jain said:
We embarked upon the path of deliberate but sometimes uncomfortable change in order to deliver long term, sustainable success for the bank. Simultaneously, we set the bank on course for fundamental cultural change. This journey will take years, not months.
Last week Germany's second-biggest lender, Commerzbank said it was planning to cut as many as 6,000 jobs, or more than 10% of its workforce.
FSA finds banks mis-sold swaps in 90% of cases
Meanwhile, Britain's big four high street banks could be forced to pay millions of pounds in compensation to small businesses after the Financial Services Authority found they mis-sold complex insurance products in more than 90% of cases.
The Financial Services Authority said the banks will conduct a review of small business accounts to determine the extent of the mis-selling that dates back to 2001.
As many as 40,000 so-called interest rate swaps could have been mis-sold to small businesses in the latest scandal to hit the banking industry.
The regulator has already forced banks to pay more than £10bn in compensation and admin costs following the mis-selling of payment protection insurance and is conducting an inquiry into the full extent of the Libor interest rate setting crisis.
This early investigation only looked at 173 test cases, but the implications of its findings suggest further pain lies in store for the banks.
Rajoy accused of taking €250,000 in secret payments
Over to Madrid, where the scandal engulfing Spain's ruling party is deepening.
Secret Monte dei Paschi document found in 14th-century palace
At the risk of sounding flippant, Italy's Monte dei Paschi scandal has to be one of the more colourful banking scandals.
For a start, it deals with the world's oldest bank, established in 1472 to lend to "the poor or miserable or needy". Now it seems the secret document at the heart of the scandal lay for months in a concealed safe in a 14th-century Tuscan palace.
Silvia Aloisi and Stefano Bernabei of Reuters report:
Chief executive Fabrizio Viola said he learned about the safe's contents only last October, a full 10 months after he had been called in to sort out Italy's third biggest bank.
The 2009 document revealing derivatives deals that have run up huge losses for Banca Monte dei Paschi (BMPS.MI) came to light in the office of Viola's predecessor at the bank's headquarters in Siena.
'The document was in a safe, moreover in an office that was no longer mine,' said Viola. 'I don't think that the person who put it there had been trying to hide it. But there is no doubt that the document had not been used in the bank's accounting.'
The document found at the 540-year-old bank's head offices – which are appropriately in a restored ancient fortress – was a contract mandating Japanese bank Nomura to carry out deals on behalf of Monte dei Paschi.
People's party denies all knowledge of secret accounts
More from Spain, ahead of the ruling People party's press conference at 11.30am, where it will answer accusations about secret payments.
As reported earlier, the PP has denied reports in the Spanish daily El País that it maintained a secret accounting system, or made undeclared payments to the prime minister, Mariano Rajoy.
The newspaper today published excerpts from handwritten accounts it claims were maintained by PP treasurers over almost two decades, showing donations from companies and regular payments of thousands of euros to Rajoy and other party leaders.
But the PP denies any knowledge of the documents …
The People's party has no knowledge of the handwritten notes that were published and of their content, and it cannot be recognised, in any case, as this political party's books.
El País has been careful to say that the alleged slush fund is not necessarily illegal. Until recently, Spanish political parties were allowed to receive anonymous donations. If the party leaders then declared the income to the taxman, the payments could still pass as legal.
The allegations raise serious ethical questions about party operations, especially because many of them occurred during Spain's building boom, in which politicians granted large numbers of development
contracts.
Monti says EU budget rebates need review
In the meantime, Italian PM Mario Monti has dashed from Brussels to Berlin in a matter of moments and is now giving a press conference alongside the German chancellor, Angela Merkel.
Monti said Italy has been contributing disproportionately to the EU budget compared to its wealth, and that rebate mechanisms need to be reviewed. He's also hoping for the next budget to look at growth and not just austerity.
It's essential that the next long-term EU budget is devoted to boosting growth, jobs and social cohesion in Europe.
Thanks to Open Europe's Vincenzo Scarpetta (@LondonerVince) for the updates.
Monti hints at vetoing long-term EU budget
Those EU budget discussions are set to start again at the next European council, on 7-8 February.
The next European council summit – entirely devoted to negotiations over the 2014-2020 EU budget – is only one week away, and the sequence of veto threats may have just begun all over again.
Guess who fired the starting gun (clue: not David Cameron)? It was Italy's outgoing prime minister, Mario Monti. He told a conference in Brussels yesterday:
'There would be no coherence between what everyone is saying about the need for growth and the adoption of an inadequate [long-term EU] budget … The orgy of cuts that certain countries want to apply is inconsistent. Therefore, I’m not sure that it would be irresponsible for a country to disagree with a budget proposal which is inadequate.'
That is, a veto threat, Monti-style.
It remains to be seen if council president Herman van Rompuy's new-found optimism (see 10.53am) can withstand another bruising round of budget talks.
Remember all those soaring German confidence indices that said ignore the negative GDP print and focus on a future so bright, ze Germans've got to wear Zeiss? Appears the confidence may have been a tad massaged upwards because following a spate of weak corporate results out of Europe's growth dynamo, the German HDE retail association said Christmas sales for November and December were down some 0.7% from the prior year. Specifically German retail sales plunged -1.7% from November on expectations of a modest -0.1% decline,while on a year over year basis December imploded a whopping -4.7% vs expectations of -1.5%. Did the Germans blame the weather of lack of government spending, or maybe say to only focus on the positive aspects of the report (if any)? No. They were not girlie men about it.
Elsewhere in Spain, inflation rose less than expected, as consumer prices rose 2.8% Y/Y - the slowest pace since August and less than the 3.1 percent increase economists predicted. This was somewhat surprising as the country posted a boost in its current account with the November surplus amounted to €1.8 billion compared with €865 million in October and a deficit of €3.9 billion a year earlier, the Bank of Spain said. That narrowed the cumulative shortfall for the first 11 months of 2012 to €13.1 billion from €33.6 billion in 2011. A big reason for this is that central banks and other banks rotated into Spanish bonds on the false assumption that Spain is fixed. Ironically, even the SNB said that it had boosted its AA rated bonds holdings, while trimming their AAA holdings in Q4.
In now traditional news, Greek retail sales in November followed suit and plunged just a tad more than in Germany imploding by some -16.8% in November. Remember: once they hit 0 they can only go up.
But the biggest news certainly was Germany, whose economy continues to deteriorate and is probably what spurred Buba president Jens Weidmann to say that ongoing bailouts could threaten the strongest members.
“If things stay the way they are, the consequences of unsound policies will be too easily passed on to others,” Weidmann said in Berlin late yesterday. “Sooner or later the economically solid countries will be weakened. Liability and control have to be brought into balance.”
Germany, Europe’s largest economy, has pledged more than 300 billion euros ($407 billion) in loans and guarantees to help shore up the finances of euro member states such as Greece, Ireland and Portugal. Weidmann, who’s also a member of the European Central Bank’s Governing Council, has argued that policies including the OMT bond-purchase program come too close to the banned practice of financing states by printing money.
Risks that have been shared via bailouts and ECB emergency measures have already reached a “substantial level,” Weidmann said. “If these risks rise, the culture of stability could be eroded as if we had explicit joint liability.”
Germany shouldn’t allow wages to rise too quickly in order to rebalance competitiveness within the euro area, Weidmann said. An increase in wages of even 5 percent would have no impact on the output of crisis-ridden countries, and would instead damage Germany.
But why would he say that if Europe was so very much was fixed?
In European market news, the picture is as follows:
Spanish 10Y yield up 2bps to 5.25%
Italian 10Y yield up 2bps to 4.33%
U.K. 10Y yield down 4bps to 2.08%
German 10Y yield down 4bps to 1.67%
Bund future up 0.37% to 141.95
BTP future down 0.39% to 112.51
EUR/USD down 0.03% to $1.3563
Dollar Index down 0.03% to 79.26
Sterling spot up 0.15% to $1.5824
1Y euro cross currency basis swap down 1bp to -18bps
Stoxx 600 down 0.29% to 287.78
Keep an eye on Italy where things are going from bad to worse, and where we will likely see even more catastrophic bank sector revalations as the local election approaches.
More from DB:
Credit markets extended their relative underperformance yesterday in what is becoming an increasingly monitored theme by other asset classes. The CDX IG 19 index widened by a sharp 4.5bp overnight to 90.25bp bringing the series to the widest since the fiscal-cliff agreement reached at the beginning of the year. We highlighted this theme yesterday but to again give some context to the relative underperformance in credit, when CDX IG was last at these levels the S&P 500 was at around 1460. We are now about 2.8% above those levels.
We’ve also heard some comments about an increasing outflow from corporate bond ETFs lately and also more chatter about the ‘great rotation trade’ from FI to equities for a variety of possible reasons (eg. low yields, a growth rebound, relative tight spreads to yields, event risk concerns and credit supply indigestion).
It does feel that the strong technicals in fixed income are now being tested. While the technical picture may change at some point we are not sure it will be a 2013 story. The fact there is huge reliance on keeping over indebted entities funded and the fixed income market generally solvent will ensure that authorities and Central Banks keep yields artificially low for some time yet. So our feeling is that despite the recent wobbles, flows will still come into FI in 2013 which will limit the sell-off.
Away from the US it was similarly a weak day for markets in Europe. We saw major bourses finish the day lower with Italian equities being the notable underperformer. Indeed the FTSE MIB (-3.36%) suffered its biggest decline in about 6 months driven by a 34% fall in Saipem after announcing a big profit warning. The company said it expects a very significant reduction of about 80% in EBIT this year from its onshore business leading to a wave of broker downgrades. A regulatory investigation on a share sale transaction the day before the profit warning has also been launched. Peripheral bond yields also spiked higher overnight with Italian and Spanish 10-year bonds closing +15bp and +6bp higher at 4.317% and 5.225%.
In other news flow, Moody’s has placed Monte Paschi’s Ba2 rating on review for possible downgrade reflecting the considerably uncertainty over the impact of legacy structured trades entered into by prior management. Italian prosecutors are investigating the bank’s former management for bribery over a series of structured finance trades. Monte Paschi’s shares fell -9.5% yesterday which also didn’t help the moves in Italian equities.
Asian markets are trading weaker overnight with most bourses trading lower across the region. The Nikkei, Hang Seng and the KOSPI are down -0.23%, -0.35% and -0.25%, respectively. Asian credit spreads are also trading wider although the Asia iTraxx index is now off the wides at 115bp , still +3bp on the day. The 10-year UST yield is steady at around 1.98%.
In terms of today we can expect initial jobless claims, the Chicago PMI and Personal Income/Spending in the US. We have a fairly packed data day in Europe featuring retail sales, unemployment and inflation numbers from Germany. We also have PPI and retail sales from France, CPI in Spain and PPI from Italy.
Spanish bank Santander, the biggest in the eurozone by market value, said its net profit plunged in 2012 as it wrote off nearly 19 billion euros ($26 billion) on bad loans and property assets in Spain.
The charges slashed net profit last year by nearly 60 percent but left Santander's balance sheet looking more secure.
The group said it made 12.7 billion euros in provisions for non-performing loans in Spain and another 6.1 billion euros for Spanish real estate exposure -- 18.8 billion euros in total.
A property market collapse in 2008 left Spain's banks awash with bad loans and destroyed millions of jobs.
The banking sector as a whole is expected to book more than 80 billion euros in new provisions on their 2012 accounts under a Spanish government drive to clean up their books.
The provisions in 2012 left Santander with 73 percent of its bad loans in Spain covered, up from 61 percent previously. They also allowed the bank to meet new Spanish legislation requiring better coverage of real estate exposure.
The bank said that net profit dropped 59 percent from the level the previous year to 2.2 billion euros, after declining by 35 percent in 2011.
Stripping out the huge charges in Spain, however, Santander said its would have boosted net profit by 2.0 percent to 23.6 billion euros.
"Profits reached a turning point in 2012," chairman Emilio Botin said in a statement.
"In 2013, with the exceptional write-offs behind us, we should see a marked increase in earnings based on the group's recurrent revenues and cost control," he said.
Net interest income in 2012 rose 3.6 percent to 30.2 billion euros while gross income climbed 2.2 percent to 43.7 billion euros.
Spain last year won agreement for a rescue loan of up to 100 billion euros from the eurozone to finance a banking sector clean-up.
Four Spanish banks and a so-called bad bank that has taken over many risky loans have received 39.5 billion euros so far from the European Union credit.
Santander and another bank BBVA are among the few that have not had to ask for outside aid.
Santander said its doubtful loans rose to 4.54 percent of total loans in 2012 from 3.89 percent a year earlier.
In Spain, the bad loan ratio was higher -- at 6.74 percent, down from 5.49 percent a year earlier -- but well below the industry average, the bank stressed.
Submitted by Tyler Durden on 01/31/2013 07:08 -0500
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