Monday, 23 July 2018

On the ECB's hard line

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  • Peters 475px June 2014

Peters:  Saint Mario tells the Greeks that salvation begins at home.

Whatever the Frankfurt equivalent is of a Gallic shrug, that is what the ECB offered up, facing Brussels, after its meeting with the new Greek minister of finance, Yanis Varoufakis. It seems happy to let the members of the eurozone glitterati dance around their handbags reiterating the political will while it sits at the bar pondering the economic and monetary realities of a member country on its uppers.

Greece is possibly, cost-wise, one of the most attractive places in Europe to develop manufacturing capacity but foreign inward investment remains as good as non-existent. Thus, the ECB wants to see what plans the new government has to improve the overall position of the economy. It will help those who help themselves but it will not give anything away without a strong commitment to give something back. Of that, it would appear, the ECB has so far seen, at worst, nothing and, at best, not enough.

The decision by Saint Mario and his merry men to no longer allow Greek government debt to be used as collateral for LTRO or TLTRO has thrown down the gauntlet to Athens. It doesn’t quite close down the Greek banking sector but it makes it quite clear whom it regards to be responsible for sorting it out and that begins with “You” and not “Us”.

Since the beginning of the eurozone crisis, the ECB has again and again tried to pass the onus of responsibility for turning the structural corner to national governments. Letting them use cheap ECB funding as a means of postponing reforms was not its intention and this morning markets are a tad shocked that it has finally made good and has quite publicly returned its wallet into its back pocket.

Missing the point in China

Excitement in China where the PBoC has cut the reserve ratio by 50bp to 19.5%. That means that banks can reduce the amount they need to keep locked up against deposits that increasing their lending capacity. Yippee, more lending, more growth. How good is that! How good is that? I am neither impressed nor am I happy. Nor, it appears, is McKinsey.

The FT reports in a piece titled “Debt mountains spark fears of another crisis” that the aftermath of the debt-fuelled boom and subsequent collapse of first the banking system and then the Western economy has been nothing else that a significant increase in debt. McKinsey estimates that global indebtedness has risen by US$57trn since 2007 to around US$200trn pushing it from 270% of global GDP to 286%. In its report it writes “Overall debt relative to gross domestic product is now higher in most nations than before the crisis” and goes on to observe, “Higher levels of debt pose questions about financial stability”.

It could of course be argued that throughout the crisis related recession governments were obliged to pump up deficit spending in order to make up for shortfalls in fiscal revenues. Hair of the dog? Best cure for a thumping hang-over is a large vodka and tonic? Wrong. Best way of dealing with hang-overs is surely not to get drunk again. But don’t be complacent; it’s not just governments as household debt is also rising faster than GDP, especially in developing countries.

McKinsey pulls no punches when it suggests that “There are few indications that the current trajectory of rising leverage will change. This calls into question the basic assumption about debt and deleveraging and the adequacy of tools available to manage debt and avoid future crises.

The big problem area, though, is of course China where total debt is now 282% of GDP, higher even than in the USA. McKinsey is worried about all the usual suspects in China – the property sector, local government and the much discussed but poorly understood area of shadow banking.

So why is everybody so excited that the PBoC has decided to ease lending conditions? The Peking government seems to have decided that it would rather pump up risk in the financial sector than see the economy miss its declared growth targets. If that were happening in any other country, its credit ratings would be dropping like a stone, red lights would be flashing and foreign investors would be hitting the panic button. In the case of China everyone is high-fiving, patting the central bank on the back and getting very excited.

Look under the bonnet

One can of course carry the thought further to the powerful US car sales figure. Sure it is nice to see that GM, Ford and Chrysler back in the black and powering ahead but we should never forget that car sales in the US are more a function of the availability of financing than they are of anything else. GM and Ford have long been consumer credit companies with a side-line in producing vehicles which is conveniently used to generate loans. The main source of the companies’ profits are their finance groups and not the production lines – volume car-making is not inherently a profitable business.

If one lifts the carpet which covers the auto loan business, one finds an ever increasing proportion of sub-prime lending. I understand that up to 25% of newly approved loans are to sub-prime borrowers. Thank you Yogi Berra: Deja vu, all over again.


Alas, it is that time of the year again and I am packing up and preparing to drag away my old bones and creaking joints for a few weeks of winter sun. Thus, I will be missing the rest of February. Normally, this is a bit of a mechanical month but I suspect the current once could come close to matching January in terms of interesting developments and volatility. Too late for me to change my plans. Thus I depart wishing you all the best of luck through the next three weeks; I’m not sure skill alone will do. Has it ever?

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