Since the intervention by the Spanish authorities in the Banca Popular situation and its being subsumed by Banco Santander along with the wiping out of shareholders and subordinated bondholders it has looked to be only a matter of time until the Italian powers that be would step forward to lance the boil that have been Veneto Banca and Banca Popolare di Vicenza.
And this weekend they did just that; well, kind of….for that is where the similarities with the Popular wind-down end.
The headlines read that the two banks are gone, that Intesa Sanpaolo will take over the good bits as well as the ongoing client services while the government will own the “bad bank” assets against which it will provide €7bn of capital with a standby facility of a further €12bn in case things prove to be worse than estimates suggest. The big difference is that Popular was wound down under the eurozone-wide template of Single Resolution Board rules with all the concomitant bailing-in of creditors.
The Veneto/Vicenza resolution is not being driven by these rules but is very clearly being executed under Italian banking law. There is a lot of subtly in the wording of the various authorities’ statements but if one cuts through the bull, the bottom line is that the principal of single rules for a single market have been flouted and the Italians, as is their wont, are doing exactly as they like and the rest of the currency union is watching on without comment.
Look at the following: Intesa Sanpaolo has in effect been furnished with a cost-free put option so that if any assets that are held within the “good bank” go sour, the government picks up the tab. This confirms the long-held belief that even the division between good and bad assets within the Italian banks’ balance sheets is still full of smoke and mirrors. More worryingly, one of the authorities’ statements included the wording that a failure to resolve the Veneto/Vicenza situation would have been systemically dangerous for the Italian banking system.
La punta dell’iceberg
Hang on a moment; are they telling us that two tin-pot regional lenders represent the keystone holding together the nation’s financial system? One cannot but get the impression that there is much more out there that will be surfacing in the future and which will confirm the doubts of those who have long held the belief that we have been and still are being lied to with respect to the underlying state of Italy’s financial edifice.
All senior creditors, including depositors, are fully protected but is seems as though some of the holders of junior debt will also be made whole, although it might take a bit of clarification during Monday’s trading day to work out who ends up with what. What is clear, however, is that the standard eurozone bailing-in rules will not be applied.
So there we are. While Mutti Merkel and Young Macron are dancing around in front of the cameras promising a bright new future based on further integration, existing initiatives are being flouted left, right and centre. As one journo correctly pointed out this morning, nearly nine years after Lehman, European banking is still trying to sort itself out.
Regular readers will know that I have a serious problem with GDP as a measure of growth and that I would much prefer value added to be the key figure. To add to my general discomfort with what we are telling ourselves about growth and productivity came a conference call I was involved in last week. During this, the question arose as to what organic growth in the economy is. By organic growth, I mean growth that is being generated by excess value added and not simply by consuming on borrowed money. If deficit to GDP is 6% but GDP is only growing by 2%, then the assumption must be that the organic economy is shrinking. Of course this thinking is wrong for it does not include trade flows but the principal question is what would be happening in the economy if it were not spending tomorrow’s earnings – for that is what debt in effect is – today?
Another question posed to myself in the same conference call was whether the proposal to permit a faster depreciation of plant and equipment would foster accelerated capital investment. If I was a manufacturer and I owned a machine with a 10-year productive life-span, would I throw it out earlier if I had been permitted to write down its value faster? Of course I wouldn’t. I’d take the profit of the accelerated depreciation up front, pay myself a bigger bonus but I would not kick a perfectly good machine into touch simply because of a change in accounting rules.
Benefit of hindsight
The further into the past that the global financial crisis drifts, the clearer it is becoming what critical errors were made at the time by not taking the pain there and then. The authorities’ pathological fear of the consequences of economic readjustment led them to foster, encourage, perpetuate and even accelerate a moribund system of debt-driven growth. Jean-Claude Juncker, the muppet-in-chief, nailed it at the time when he said: “We all know what to do, we just don’t know how to get re-elected after we’ve done it”.
That’s easy to say when you’re sitting on a copper-bottomed, gold-plated taxpayer-funded pension promise but will be a lot harder to live with if half of your retirement savings are wiped out when the chickens come home to roost.
While on the subject of regaining control of the free-wheeling machine, the head of the San Francisco Fed, John Williams, spoke in Sydney today. “Gradually raising interest rates to bring monetary policy back to normal helps us keep the economy growing at a rate that can be sustained for a longer time,” he said. He sees inflation rising above the 2% target by next year and warned of the risks of letting unemployment fall too low. “The very strong labour market actually carries with it the risk of the economy exceeding its safe speed limit and overheating, which could eventually undermine the sustainability of the expansion.” Another 25bp on Fed Funds in December? Why not?
I also understand that there is a paper from the IMF in the offing warning that the next financial crisis, when it hits, will be significantly more severe than the one we have just emerged from. Perhaps the time really is coming for cryptocurrencies to begin to play their own role as they are a clean and unbiased means of exchange that cannot be manipulated by politicians who need to be re-elected. Bitcoin might be the most visible of the many hundred of cryptocurrencies in circulation but only a flat-earth idiot would refuse to take the time to read into the subject. I have done. As yet I don’t think I’ve understood a third of what I’ve been told but even the journey of a thousand miles begins with one step. Thanks for the support, Lao Tzu.
Have a good week and stay long. Not because it’s right but because everybody else thinks it is.