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Saturday, 17 August 2019

2011: Crisis and fatigue

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We’ve reached the end of a pretty momentous year in the markets. It’s been fascinating and captivating, but at the same time it’s also been incredibly frustrating, occasionally frightening, and certainly confounding. Here, Keith Mullin, IFR’s editor-at-large, gives a Mullin’s eye view of a turbulent year.

I penned more than 70 blogs and columns throughout the year with about the same number of words as it takes to write a short novel. With one difference: no one could possibly believe the plot or the twisted story-line of my story.

I tried to make sense – in my own personal and idiosyncratic way – of a lot of moving targets across the inter-linked areas of investment banking and capital markets, financial markets and bank regulation. I provided a hopefully entertaining, hopefully credible, but definitely alternative view.

In terms of telling my story, my transformational moment came in April, when I discovered the addictive world of Twitter. Being a bit of a grumpy old technophobe and techno-contrarian (I told someone a few months ago I reckoned the world of “Apps” was a trivial and passing fad), I was impressed with my own abilities to interact with the kids of the Internet generation. I’m not a serial Tweeter, but I’ve posted more than 800 items and it’s become an incredibly useful information medium. (You can follow me at @ifr_keithmullin.)

During the year, in order to provide an outlet for general silliness and incompetence, I created the European Court of Shame, originally formed for the board of Dexia as the only bank in the world to fail twice in three years. But I also put the governors of the European Banking Authority in the dock for their bizarre and preposterous approach to EU bank stress tests. Had I created the Court in January, there would have been a constant flow of defendants.

Re: the EBA, let’s not forget that almost everyone basically passed the first set of stress tests because they ignored the impact of sovereign debt write-downs. The tests had to be done again after someone whispered in their ears that we were in the midst of a sovereign debt crisis. The second attempt allowed for the impact of some distress but only came up with a shortfall of €106bn, less than half most estimates. By mid-November, there was talk of the tests being done yet again to take account of stress in the levels of core European sovereign debt exposure.

Because the whole effort was such a farce, I figured there was no reason to believe the results, so after the first set of tests, I put on a “trade”: buy the banks that failed and sell the G-SIFIs. As well as ignoring sovereign distress, the EBA also ignored a swathe of items such as general provisions, mandatory convertibles, silent participations, deleveraging and in-process restructurings. So I reckoned the failures were worth a punt. I didn’t track the trade, so can’t say if it paid off, but it seemed like a good idea at the time.

Talking of trades, surely my best during the year was aggressively selling CDS protection on Greek sovereign debt and using the proceeds to hoover up short-dated Greek bonds (yielding more than 100%) on the basis that if the EZ was as hell bent as it said it was on backstopping Greece, the trade was a dead cert. I did add the rider that if the trade failed, to send the bill to Olli Rehn, EU Commissioner for Economic and Monetary Affairs. Not sure if this one’s above water, but wait and see.

Gossip rules

Looking back at the year, the first thing that struck me about my reportage, commentary and analysis is that I seemed to spend a large part of the year either incredibly irritated or just plain angry. No wonder I feel so knackered. It was a year in which to stand any chance of keeping up to speed you had to keep your eyes glued to the screens.

That for me was one of the year’s defining characteristics. There wasn’t a single let-up in the entire year; uncertainty and fear reigned supreme. The markets were perennially skittish, nervous, worried, afraid and volatile. They traded exaggeratedly up or down on the smallest of rumours, gossip or comments around the European sovereign debt crisis; the impact of regulatory reform; the real or imagined impact of a real or imagined lack of bank capital or access to debt funding; regulatory investigations; lawsuits etc etc.

People tended to speak in confused and often contradictory terms about panic-stricken banks and investors “dumping” assets in the same breath as acknowledging the fact that sellers couldn’t take a big hit on their positions because of the capital shortfall it would create. People complained about lack of liquidity, of wide bid-offer spreads, of people sitting on their hands and of market-makers not carrying inventory and not making markets.

It was less a case of information asymmetry (no one had any real advantage in the information stakes), more a case of fear versus ignorance versus applied guesswork. It certainly wasn’t a year of big proprietary position-taking; partly for regulatory reasons but mainly because the chance of losing your shirt was higher than any time since the back-end of 2008 or early 2009.

All about the EZ crisis

Obviously, the big story was and continues to be the eurozone sovereign debt crisis. What was referred to for most of the year as the Greek debt crisis ended up encapsulating pretty all of the euro club as others, notably Italy, got pulled into the mess.

One reason I spent so much of the year irritated and frustrated was the massive dithering, indecision and double-talk by European politicians, policymakers, officials and technocrats. We’re now at the end of almost two years or wrangling and hand-wringing around Greece and we’re just entering – maybe – the beginnings of some semblance of a solution.

People tended to speak in confused and often contradictory terms about panic-stricken banks and investors “dumping” assets in the same breath as acknowledging the fact that sellers couldn’t take a big hit on their positions because of the capital shortfall it would create

Other reasons for my irritation were the continuing fog of financial regulation, the absence of global harmonisation; the complete failure of G20 summits, and continued disillusionment about politicians ability to do anything other than publicly bicker.

If politicians, ECB governors and EU or EC officials had: a) figured out what the hell they were talking about in the first place and b) conferred with one other to ensure they had a plausible story, we’d all be in a better place. For sure, solving the debt crisis is a tricky, intricate and seriously challenging affair, and we shouldn’t under-estimate the complexity of their task. But officials’ ability and willingness to engage in double-talk and contradiction was seemingly endless and led ultimately to market fatigue.

The cascading impact of the crisis on the bond yields of France, Netherlands, Austria and Finland was, in my view, a bit ridiculous; I also think the Italy dimension was overdone. But the reality is that the crisis forced out two governments (Greece and Italy) and changed the political complexion in Spain, culminating in the conservative Partido Popular under Mariano Rajoy sweeping to power in mid-November elections.

As for the solution, after so many false dawns, it now appears there are two options on the table that have a chance of working: the ECB lending to the IMF, which will on-lend to stricken eurozone governments as part of orthodox IMF programmes, with BRIC support given comfort by the strict conditionalities of Fund programmes; or the ECB finally bites the bullet and backstops eurozone government bonds. Whether either works is another question, but both are certainly more plausible than attempting to sell senior and mezzanine tranches of a sub-prime EFSF CDO.

2012 beckons but I fear we will continue with a re-run of most of the themes of the past year. Time to recharge the batteries.

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