IFR Editor-at-large Keith Mullin
IS IT JUST me or has endlessly hyped-up analyst and media chatter recently become far more of a hindrance than a help? As a long-standing and proud member of the media, I ask this question with some trepidation and a certain amount of hesitancy.
We had more bank earnings out and of course Greece keeping the channels busy last week, but I’ve got to say the constant barrage of news had a distinctly “so what” quality that ended up confusing as it informed. Thank God I don’t run money. I know a lot of people who do and they’re fed up with what they see as white noise around some of the critical issues of the day.
An incredible flurry of headlines around Greece once again dominated the week’s financial news. But the news flopped back and forth with positive bias followed by negative bias towards the deal, with the “markets traded up” and “markets traded down” tedium following one another in quick succession.
Both sides in the Greek saga certainly traded remarks all week. Ideas and work-arounds were leaked, rumoured, maybe discussed (who knows?), some were dropped; some remain on the table. And in the meantime, the on-again, off-again bailout lurched from disaster to triumph and back again on a daily basis.
My short summary of the past 120 hours of Greek news? Blah blah blah, blah blah. Noise. Dealers, as usual, dicked around with screen prices and the media fell for it. Did serious market professionals trade the intra-day news flow in volume? Not those I spoke to.
OK, HERE’S MY less flippant summary. Greece found the austerity savings the European Union was looking for. Shock horror: in a cratering economy with no remedial monetary tools to its name, Greece won’t hit the 2020 120% debt to GDP target.
On the bond swap element of Bailout 2.0, the ECB will ring-fence itself away from financial and political harm; the Troika and Greece will find some way of compromising on budgetary oversight that will be uncomfortable for the Greeks but on paper at least will fall short of a sovereign takeover; the Greeks will (nominally) decide when to hold their elections, not Wolfgang Schaeuble.
The likelihood of a disorderly Greek default in March has receded. But the current bailout, however big it ends up being, won’t be the last
Should the Troika trust Greek politicians to keep their word on austerity deliverables? Of course not. (Big clue: they’re politicians). Will the bond swap get done? I reckon it will. Have vulture funds cornered some of the bonds written under English Law, and will they cause trouble? Probably on both counts. But will they scupper the PSI deal? I don’t see it.
Hold-outs have always been an essential part of the drama of sovereign restructurings (who remembers the Dart family re Brazil; Elliott Associates re Peru; and the several bondholder groups acting for years against the Argentina deal?) Net-net: the likelihood of a disorderly default in March has receded. But the current bailout, however big it ends up being, won’t be the last. I still can’t see the EU cutting Greece adrift. Deal done, bar the shouting. And there’ll be plenty of that before the ink is dry.
WRITING DOWN GREEK DEBT formed a big part of results chatter, around Societe Generale in particular. The bank’s corporate and investment posted a €482m fourth-quarter loss, owing to a €1.3bn hit. The media and analyst communities were, once again, shocked by unexpected write-downs and revenue reversals, reporting that the bank’s results were “hit” by toxic assets and further write-downs, missed earnings forecasts, etc. This misses the point.
There’s an industry context here that you need to understand in all of its dimensions to read the signs. If you understand the fierce headwinds that parts of the global economy and the whole of the global investment banking industry are confronting but accept that they’re temporary; if you bear in mind that bank management is invariably opting to meet those headwinds head-on by taking pain up-front rather than later; if you factor in that banks are cutting risk-weighted assets, downsizing or exiting unprofitable businesses or businesses where they can’t add value or achieve critical mass; if you take the view that they’re attempting and partially succeeding in stabilising sources of funding; if you buy the fact that writing up provisions is a component of prudent risk management; if you factor in that most banks are, despite all of the troubles, meeting statutory capital adequacy requirements as well as on a Basel III basis, don’t you come to the conclusion that they’re on the way to becoming leaner and more efficient? And that they will benefit very quickly from a cyclical upswing in business activity?
The significant run-rate reductions across all capital markets and trading segments are a fact of life today, but forecasts are rosier into the second half of 2012 and into 2013. Investment banking moves in cycles. Those cycles can be unpredictable but they can also turn on an accelerated basis.
Banks confronting issues today won’t be distracted by internal issues when clients return to the fray tomorrow. If banks are hit by unforeseen and unexpected events beyond their control, I can go along with the emotive and sensational language used by analysts and the media. But it looks to me like what we’re seeing now is partially at least within the purview of management control. Time to layer in those longs.
