Ebenezer Draghi sighed. These bank books would never come out right, and it was Christmas Eve already. As he struggled, the numbers began to swim before his eyes. So many hundreds of billions of euros, so many classes of security, collateral, refinancings… He started to doze. He found himself back a decade, in that glad, confident morning when the world was fresh and new, and the first currency to be entirely illustrated by pictures of fantasy bridges was sprung on a delighted world.

How wonderful life was then! Those perfidious Brits had, predictably, declined to join the euro, but we’d show ‘em! The single currency would be the cement that held Europe together, financially as well as symbolically, and would soon threaten the greenback as the world’s premier medium of exchange. Knocking the Yanks off their perch while leaving Britain in the slow lane. What’s not to like? Within a decade the economies of north and south would have converged into one magnificent powerhouse. The euro would have become a deutschemark with a suntan.

Ebenezer couldn’t smile at the thought for long. He was jolted awake by noises outside. There were two men at the door, a Spaniard and an Italian, in dire need of money. In the spirit of Christmas, couldn’t Draghi tide them over in return for a promise to mend their spendthrift ways? Bah! Humbug! Be off with you! Did they think he could just print money? That was for his perfidious rival in another counting house, and was the road to ruin.

Draghi began to doze again. But it was fitful, and curious visions of a tiny Greek boy, whose parents were not allowed to give him the medicine he desperately needed, kept flitting through his head. He decided that this was just his mind playing tricks, a distraction from the task of finding a way to balance the books. More than once he thought he’d found the money he needed, only to jerk awake to find that the discrepancy was even bigger than before. If only we’d tackled this problem when it first arose, he thought wistfully, we wouldn’t be in this mess now.

It was no good. He had to go home. It was late, and he slumped exhausted into bed. Almost at once he was dreaming. There was the tiny Greek boy again, and his parents, dressed in rags, were grieving. The boy had died, as if he was merely a character in some penny-dreadful melodrama! This can’t be happening, thought Draghi. Then he saw the date: December 24, 2015. He was seeing into the future. If only he could see the stock prices page of that day’s paper, he’d make a fistful of euros.

Pulling himself together, he started thinking about the boy rather than his wretched currency. If Tiny Timeus did not die until 2015, there was still time to save him. What was the problem he had to solve? The medicine was there, and had been tried many times. Although it was not a sure cure, and needed big efforts from the patient, it had usually worked. There was nothing else for it: if the tiny Greeks were to be saved, they would have to be allowed to leave his precious euro and (dread word!) devalue.

As he started to work out how to do it, he dozed off again. There was Tiny Timeus! How happy and healthy he looked, playing on the beach. Behind him were thousands of tourists enjoying sunshine and ouzo at bargain prices, courtesy of Ryanair’s new routes to the Greek islands. He might even go there himself, he thought, as he fell into a wonderful sleep and did not wake until Christmas morning.

Not very Co-operative

It rather looks as though Lloyds Banking Group has found a buyer for the 630 branches that the European Commission has obliged it to sell. The only name left in the frame is the Co-Operative Bank, which is said to have won – if that’s the word – preferred bidder status. It’s in danger of finding itself the proud owner.

The Co-Op has had rather a good credit war, so far. It stayed out of the worst of the derivatives madness, quietly rescued the Britannia Building Society and felt no urge to conquer the world outside the UK. The result is comfortably manageable bad debts and a decent-looking balance sheet.

One legacy of the Britannia takeover was its PIBS, which were converted into Co-Op Bank 13 per cent perpetual subordinated bonds. I’ve got a small holding dating from that takeover and have enjoyed the 10 per cent yield on the purchase price. Now I’m getting worried, and I’m not the only one. The price had risen to £156 per cent in May this year, as the market appreciated the resilience of the co-operative model. As the rumours of the Lloyds bid started, the price started to sink.

It’s now back down to my purchase price of £130 per cent. The Co-Op may be about to pay £1.5 billion for the Lloyds cast-off branches, and it’s far from obvious how the bank, with no access to the equity markets, will pay for them without severe damage to its balance sheet. It’s still not to late to gazunder Lloyds, which richly deserves it, and cut the price to bargain sub-basement levels, or even walk away.

This entry was posted by Neil Collins on Friday, December 23rd, 2011 at 11:45 and is filed under Capital markets, M&A, People. Tagged with Co-operative Bank, Draghi, euro, germany, Greece, Italy, Lloyds Banking Group. Edit this entry.