In this guest post, law professors Mark Weidemaier & Mitu Gulati evaluate the risk that euro area sovereign debt could be redenominated into new local currencies. The places to worry about are France and Italy, not Greece. Our work centers around questions related to sovereign debt, and lately we have heard from a number of industry friends who wanted to talk about redenomination risk for Euro area sovereigns.
The tendency toward restriction that runs through the tone of the presentation seems to me to be quite problematic. It seems to me to support a wide variety of misguided policy impulses. –Larry Summers, Jackson Hole 2005 You might think Summers had changed his mind in the eleven years since he called Raghuram Rajan a “Luddite” for daring to suggest the financial system had gotten riskier since the 1970s thanks to competition and the rise of performance-based pay. After all, in a new paper, Summers and graduate student Natasha Sarin not only cited Rajan’s work approvingly, they concluded lenders are still too vulnerable to panics. You would, however, be wrong.
Brexit was one of the biggest events of 2016, and has naturally triggered a fair bit of contemplation in the hedge fund industry, where money managers are now pondering the short and long term implications. Here is a selection of some of the Brexit points made in the second-quarter letters sent to investors by a batch of hedge funds. Most were sent out in July, but many of their thoughts remain very current.
Or moved into riskier assets by the ECB’s corporate bond buying machine (CSPP to its friends). Resistance may be futile but we’ll have to wait to make sure. To move into those riskier assets you’d like to think that eventually the search for yield will become a real, worthwhile thing in Europe again. And not everyone buys that – Credit Suisse for example point out that over the last 2.5yrs in particular government bonds (bunds) have outperformed both high and low yielding credit assets. Their point is that “the time to hunt for yield as a dominant strategy (rather than as a short-term trade) might actually be when yields start to rise.” But BofAML’s European credit team think it’ll maybe happen a bit sooner:
Post-Brexit sterling slump hits airline group IAG, Pearson revenues down, post-Brexit gloom at Foxtons. FT Opening Quote, with commentary by City Editor Jonathan Guthrie, is your early Square Mile briefing. You can sign up for the full newsletter here.
This is a guest post from Richard Koo, chief economist of the Nomura Research Institute and, amongst many other things, author of “The Holy Grail of Macroeconomics, Lessons from Japan’s Great Recession”, which lays out his balance sheet recession thesis in detail. The post is an updated extract from his most recent note for Nomura and reproduced here, with his permission, for your arguing pleasure… The US, the UK, Japan, and Europe all implemented quantitative easing (QE) policies, but the understanding of how those policies work apparently differs greatly from country to country, leading to very different outcomes. With the US economy doing better than the rest, there has been some debate in Europe as to why that is the case.
Until relatively recently, academics and Western policymakers overwhelmingly supported the official position of the European Union. Nowadays we live in a world where the head of the International Monetary Fund — who also happens to be the former Finance and Economy Minister of France — publicly says the “inherent volatility” of cross-border capital movements is a problem.
This crisis originated in North America. Many of our financial sector were contaminated by… how can I put it… unorthodox practice from some sectors of the financial market. But we are not putting the blame on our partners… Frankly, we are not coming here to receive lessons in terms of democracy… we are certainly not coming here to receive lessons from nobody. – José Manuel Barroso, then President of the European Commission, speaking at the G20 summit in Los Cabos, Mexico in 2012, at the height of the eurozone debt crisis.
Italian banks are a problem. Post-Brexit they’re a serious problem. A full recap of said banking sector and its estimated €200bn of gross non-performing loans would, according to JPM, “require up to €40 billion (less than 2.5% of GDP)”. Manageable, say JPM again, “given the current Italian fiscal position and sovereign cost of funding.” Only problem is…
Wholesaler Booker has seen like-for-like sales slip 2.9 per cent in the first quarter. This is mostly due to tobacco sales falling 7.7 per cent following a ban on small stores displaying packs of gaspers. A 0.7 per cent drop in sales of non-tobacco products reflects deflationary pressure in the retailing industry. Other data released today reflects the gloomy mood in the run up to the Brexit vote. New car registrations fell slightly last month, according to the Society of Motor Manufacturers and Traders. The British Retail Consortium reports that shop prices in early June were down 2 per cent.
Fresh from the inbox, first from Goldman: We expect the BoE to implement policy actions aimed at maintaining market functioning (in difficult circumstances), by activating swap lines with other major central banks and by announcing additional liquidity operations, including the provision of term funding for UK banks.
The replacement of market funding with increasingly concessional loans from the “official sector” may have reduced the Greek government’s balance sheet debt by as much as €200bn, yet the headline numbers haven’t captured any of this alleged gain. In our previous post we looked at whether this was reasonable, focusing on several sets of accounting guidelines to see how they might apply to Greek sovereign obligations: International Financial Reporting Standards (IFRS), International Public Sector Accounting Standards (IPSAS), the European System of Accounts (ESA 2010), and Eurostat’s Manual on Government Deficit and Debt (MGDD).
Ashtead and Crest Nicholson have built some strong profits from the construction sector, Premier Farnell has agreed to a £615m Swiss takeover. FT Opening Quote, with commentary by City Editor Jonathan Guthrie, is your early Square Mile briefing. You can sign up for the full newsletter here.
We’ve raised the possibility Greece’s sovereign debt burden is far lower than the headline figures — and the potential significance of this — in previous posts. Now it’s time to dig in. (The idea was brought to our attention by Paul Kazarian, whose Japonica Partners has a position in Greek government bonds and would stand to profit from a compression in risk premiums. His interest in the outcome doesn’t necessarily mean he’s wrong.)