Despite doing (basically) everything right, Spain’s membership in the euro has left it at the mercy of forces far stronger than anything even the most competent and responsible national institutions can handle.
That was our main reaction to a fascinating conference hosted by the Spain-US Chamber of Commerce, and it suggests that the single currency will not be able to survive without significant changes. Read more
Maybe so, according to JP Morgan’s Flows & Liquidity team:
This week’s release of euro area bank balance sheet data for the month of October is reinforcing a picture of expanding balance sheets and a partial reversal of the deleveraging that took place over the previous two years. In particular the aggregated Euro area bank balance sheet has expanded by €700bn YTD compared to a sharp €2.3tn contraction in 2013 (Figure 1). Although a large part of this year’s €700bn increase likely reflects valuation effects of derivative books as we explain below, we see clear and encouraging signs that the deleveraging of the previous two years has at least stopped.
The best way to get less of something is to tax it, so nobody should have been surprised when Japanese GDP cratered after the sales tax was raised from 5 per cent to 8 per cent in April.
What the government didn’t expect, and what is encouraging Prime Minister Abe to delay (if not renege on) the plan to raise the tax rate to 10 per cent, was the economy’s failure to snap back. For example, the latest data show that real household consumption, excluding imputed rent, plunged by 3.5 per cent over the past 12 months to its lowest level since the Tohoku earthquake hit in 2011:
In this round we have Paul Fisher of the MPC, who recently said that (our emphasis):
In the near term, whatever the source of the changes in perceptions of permanent income, it is likely that growth will continue to be below the previous trend until more of the real adjustments to balance sheets across the economy have been made. That includes households, the public sector, banks and other businesses.In my view we are maybe two thirds to three quarters of the way through in each case, varying both across and within sectors. There is nothing scientific or ‘official’ in that assessment! It’s just a personal best guess on the back of how the economy is behaving plus some direct knowledge of the progress of the banks with their deleveraging plans.
And he’s up against Citi’s Michael Saunders and Ann O’Kelly who suggest that, no… we aren’t that far along at all. Read more
Nomura’s Richard Koo is back, suprising us with another note following quickly on his last. But we can see how it happened. Heck, some people are suggesting that the West’s balance sheet recession is over. Read more
Nowadays, the idea of not having an independent central bank is seen as being a bit backward. One could even say that central bank independence is widely accepted as the optimum set-up for any country’s monetary system, a reflection of its developmental status.
“Independent central bank? Check.”
“This country must be civilised. ”
Yet, can we really be so absolute about the matter? Read more
Nothing like systemic risk to bring the banks together. The crisis at times left little between them. Eventually though, the market will start to differentiate more. As Huw van Steenis and his colleagues at Morgan Stanley put it in a recent note Read more
From Citi’s Michael Saunders and Ann O’Kelly: Read more
What happened with all that European bank deleveraging?
Some of it is over with, says Barclays — leaving, by our estimates of their estimates, about €650bn* of deleveraging yet to be carried out among the major European banks they cover**. Quite big, but much less than the €1.5tn – €2.5tn being discussed late last year. Read more
Matt King, Citi credit strategist, strikes again in a new presentation — this time on capital preservation and making ‘risky’ assets ‘safe’. Full note in the usual place. Click to enlarge…
Another notable increase in US consumer credit, this time for May…
Spanish bank write-downs on residential mortgage loans, eh.
It’s something that had been vexing analysts before last week’s stress-test results from Oliver Wyman and Roland Berger, though these tests haven’t dived into individual bank loan books. That comes later. Read more
Back in December, the FT’s Tracy Alloway and Robin Wigglesworth explained how that which was financed by collateralised loan obligations was no longer going to be so financed. This will lead to a credit crunch for sub-investment grade companies that looks set to kick off in earnest in a couple of years.
Older CLOs* are making up for some of the slack by extending loans, but it appears that ultimately, funding will have to be obtained elsewhere or these companies will default. Read more
Quite a blow-out in March’s US consumer credit numbers…
Highlighted in the chart below… Read more
Charts via Nomura’s European bank analyst, Jon Peace:
No deleveraging because of our recapitalisation exercise, really — or if there is, you’ll hardly notice it. So says the European Banking Authority in a Thursday night release:
(Warning: pie charts follow) Read more
Dan Davies takes us to task over the ECB’s three-year liquidity to banks, and catalysing the (unsecured) funding market:
Shares in Commerzbank were up about 11 per cent at pixel time. It’s generally a strong day for European banks as well, but we suppose (bemusedly) it’s following this statement from the German lender on its €5.3bn capital hole…
The capital requirement in accordance with the EBA methodology could be reduced by the end of 2011 from EUR 5.3 billion by EUR 3.0 billion thanks to risk-weighted asset reduction (Core Tier 1 relief approximately EUR 1.6 billion), a reduction in regulatory capital deductions (some EUR 0.2 billion) and retention of earnings in the fourth quarter 2011 (approximately EUR 1.2 billion). As of year-end 2011 Commerzbank has thus already fulfilled 57 % of the EBA capital requirement. Read more
Between 2000 and 2010, European large caps underperformed mid caps by 28% and lagged small caps by 47%.
And yet, the equity strategists at Morgan Stanley recommend investing in large caps in 2012. The decade of underperformance has been reversing. Relatively, anyway, as they go on to write… Read more
(We mean martingale, the betting strategy, not the quant model!)
Here’s the thing about Hungary, as we see it anyway. If you look at things like the current account, for example, it says “fixable by the IMF”. It’s in surplus, if deteriorating. Read more
That chart is from the latest Fitch Ratings report of the biggest US prime money market funds. Read more
It must be nearly Christmas, for the last Deutsche Bank Early Morning Reid of 2011 was today.
Luckily, strategist Jim Reid and his team left us with a note on their thoughts for what the new year will hold, and reiterated their theory about how shorter business cycles will become the norm. Read more
OK — you’re sick to death of hearing about the European Central Bank’s three-year liquidity may, or may not, get banks to buy sovereign debt to pledge as collateral.
So why not hear about all the other extra trash assets the ECB will now accept? Potentially much more economically critical trash. assets. (Update — well, that’s our point about these assets being diverse and difficult to value made for us… we’re sorry for calling them trash. That is indeed unwarranted hyperbole. In truth the assets here vary widely in type, quality, etc. The main thing is their basic economic importance, which is why the ECB’s move is not to be underrated.) Read more
Update — FT Alphaville has heard that the answer to this question is in fact… yes. See below for more details.
The official EBA numbers on European bank capital shortfalls are out. In aggregate it’s €114.7bn. Read more
Looking forward to the new year yet?
After a likely outright contraction in GDP in 2012, in the creditless recovery that we envisage the pick-up in GDP growth is likely to be slow and shallow.
Nomura has a new report showing that US loan growth is having a good quarter thus far, even after accounting for the normal seasonal boost, but what caught our eye was the excellent series of charts on the activities of foreign bank subsidiaries in the US.
We already know that a combination of forces (meeting capital ratios, the withdrawal of traditional sources of wholesale funding) has European banks looking to unload, or allow to run off, a sizable amount of their USD-based holdings, and to constrain lending. A previous Nomura note estimated that these banks have about $1.8 trillion in US assets. Read more
Or as Matt King at Citi put it in his latest presentation, “Payback Time: The Coming Decade of Deleveraging”. In short, we’ve borrowed much too much, and the public sector can’t substantially reduce its debt without a corresponding increase in borrowing in the private sector, or growth will suffer. All of this being particularly painful for countries that can’t unilaterally weaken their currencies.
The charts the Citi strategist uses to make these point are enthralling… but then FT Alphaville does have a tendency to go weak at the knees at the sight of a graph that perfectly encapsulates a story. Read more
Au bout du fossé, la culbute.
Brace yourself. Here are some reasons why markets are giving France, in particular, a kicking today, according to the Banca D’Italia’s latest financial sector report on November 2: Read more
Other than what’s happening overseas, few topics have been more thoroughly scrutinised recently than the relationship between housing market activity, deleveraging and the US consumer.
James Hamilton tackled this in a post yesterday explaining the impact that sluggish spending on housing and autos is exerting on economic growth, and it reminded us of this series of charts sent to us last week by Credit Suisse economists: Read more