Monday, 25 June 2018

Caja mia: The cheque is in the mail

“I’m not pregnant; I’m only with child.” “I wasn’t defeated, I only lost.” “We weren’t bailed out; we’re only going to take the €100bn we don’t have in order to shore up our banks.” Please, do me a favour!

Anthony Peters, SwissInvest Strategist

Although we are about to experience a significant relief rally – how many of those have we seen in the past three years? – the fact remains that the eurozone has once again undertaken an action of rearranging the deck chairs on the Titanic whilst behaving as though it had found a patent method of melting the iceberg.

Perhaps the most irksome of moments was watching the Spanish government declare how it had avoided being lumbered with the sort of conditions which the other troubled Eurozone recipients of support have had to submit themselves to. They did well to hold off until after the Irish referendum – if I were a Paddy, I’d be deeply hurt by preferential way in which Spain has been treated – but I wonder what the Greeks will be making of this just a week ahead of their election re-run?

If the aim of injecting new money into the cajas is to offer them flexibility again, all fine and good. But that does not remove the problem of real estate prices continuing to fall and the lack of anything which might help the economy to grow again.

This is not a gift to the people of Spain. It is a further loan of however much which the Spaniards will owe to whoever raises the money. It doesn’t seem to be clear yet whether the funds will be disbursed through the EFSF or the ESM or whether it will be distributed in the form of petrol coupons and all of this is still subject to the completion of an audit of the institutions in question.

Napoleon I coined the phrase of “the Spanish ulcer” which, in the fullness of time, was to lead to his downfall, not least of all due to the fact that he thought he had the Spanish issue resolved after a bit of personal intervention and that he significantly underestimated how problematic Spain was going to remain while he was busily letting himself be distracted by other matters. Bit by bit it defeated his armies and eventually dragged him and his European dream onto the abyss.

To push that analogy just a little but further, it all ended in tears on the outskirts of Paris and, after a brief revival, came to a final end at a location which the French call Belle Alliance outside the gates of Brussels and each time he was tripped up by a perfidious Englishman who was actually Irish. Oh dear!

Whatever valuations are placed on the troubled property assets of the Spanish banks which are to be rescued, they are bound to be wrong. How do you mark a price on a property for which there is simply no bid? And how do you generate growth in your economy and begin to repay the loans when most of your industry is focused on building more of what you already have too much of? Those who have been eyeing up the opportunities which Spanish property should be offering have been frustrated by the refusal of the banks to accept the stop-out bids which they are being shown. Evidently, they can’t afford to.

Each distressed disposal sets a new, lower price with which the value of the portfolio of repossessed assets falls further; the vicious circle of falling asset values and depleting capital is hard to stop. If the aim of injecting new money into the cajas is to offer them flexibility again, all fine and good. But that does not remove the problem of real estate prices continuing to fall and the lack of anything which might help the economy to grow again.

Tricky business

As if this is not enough, the authorities seem to be intent of pursuing their policy of enforced bail-ins for senior bondholders - I refer to my esteemed colleague at the IFR, Keith Mullin, and his article on the subject (Farewell senior debt … it’s been fun ) – which could lead to lending to banks becoming a tricky business wrapped in uncertain risks.

To me it smacks of another case of the basic rules of borrowing and lending which have worked quite successfully since the days of Hammurabi being re-written by Brussels. They’ve already redefined what constitutes a “default”. Now they have done the same to “bail-out”. They are now planning to put a new meaning on “repayment in full”. I wonder what will be next? Maybe “interest” will become interchangeable with “raison d’État”.

I wrote a few weeks ago that I would thump the next person to talk of “kicking the can down the road” and I can happily report that I did in fact hit myself while watching the news yesterday morning. Next will be my other bug-bear which is “risk on/risk off”. Will today be a “risk on” day or merely a “risk off off” day? Methinks the short covering continues; I reckon it is too early to really seek a return of proper risk appetite and the conviction or even hope of rosy times ahead.

Let’s look forward to the probability that some of the mark-downs on our existing equity, credit and commodity positions will be bit less painful by the close of business tonight and be grateful for small mercies.

Readers' comments (2)

  • P.S. (via email from Anthony Peters)

    Thanks to my old friend Mike Bailey of Lionhart who lives in and works out of Spain and who writes in response to my morning comment:

    "Spot on, problem in Spanish properties, example, small 3 bed town house about a kilometre from me, I know the construction company started selling them 6 yers ago at 150k euros, (so they were making money there) , some idiots paid up to 270k a year or so later, there are still unsold houses there so I bid 150k a month or so ago and got laughed at ????

    'nough said.

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  • P.P.S. (via email From Mr Raja Visweswaran)

    A few points:

    a. There is no apparent logic for the figure "100bn". It could as easily have been "500bn" as "40bn". 40bn is what they estimated as recap requirements of the banks. I don't think the IMF did anything other than rubber stamp whatever figure looked aggressive enough. Reminds me of Paulson's bazooka comment except of course that Europeans are playing with pea shooters.

    b. Total lending to Res. and CRE is 1.6 Trn, in an economy of 1Trn or thereabouts. That, plus the 25% unemployment rate basically highlights the size of the whack finally. If one used examples from other countries, the final bill would be around 40% of the bank book after taking into account can't pay and won't pay (strategic defaulters).

    c. You make a point about distressed sales but from what I understand there have been too few of those, not too many. That's because the banks own the property assessment companies (valuers) and property is the single biggest exposure of all banks. Remember the mighty Caja Madrid went from being the superstar among European banks to being bust within 12 months.

    d.All of the above only pertains to sunk costs i.e. money already lost that people are finally beginning to appreciate has been actually lost. The problem with Europe is that no one thinks about the actual future costs viz. bank runs, failing provinces (both of which are relevant in Spain
    already) and the like.

    Enjoy the relief rally - it's for duffers.

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