IFR Editor-at-large Keith Mullin
WHAT TO MAKE of the past few days? I’d already said prior to the end-week rally that I was with those who wanted to re-short Monday’s bounce. But a combination of multiple factors saw the rally consolidate over the course of the past week. For the banks, we had concerted central bank action to cheapen dollar swap lines; the Bank of Italy offering emergency cash tenders to Italian banks in dire straits [isn’t that all of them?]; progress on EU plans to offer state guarantees to long-term bank debt; and more clarity on bondholder burden-sharing around failing banks.
We had encouraging talk about the ECB loosening its purse-strings and moving closer to QE; ECB moves to make available longer-term debt to banks with looser collateral requirements; and expectations of a 25bp rate cut on December 8. Finally, we had discussions about the IMF feeding EFSF leverage euro-for-euro on top of existing cash, funded by loans from the ECB and from BRICS; accelerating talk of fiscal union; and a series of error-free EZ bond auctions. Last (and definitely least) we had hope around the outcome of the December 9 summit of EU leaders
Not bad. On the back of all of this, Eurozone bond yields saw some pretty dramatic tightening, stocks were up (tempered by some selling into strength), and pundits were once again talking of “risk on”. What a load of old tosh. The underlying issue of debt unsustainability hasn’t changed an iota. I remain unconvinced.
You can’t believe dealer prices on peripheral government debt because there’s nothing behind them. Spain 10s going from 6.80% a week ago to 6.25% ahead of the auction to 5.75% just isn’t believable – even less so in light of the new government’s talk of ring-fencing the banks’ gargantuan levels of toxic real estate debt into a bad bank it can’t afford to finance. Similarly, what changed to pull Italy 10s back through 7% to 6.75% and reverse the 2-10 inversion? Beats me. We’re living in a world of make-believe.
Sure, the dollar swap stuff did buoy sentiment but it’s hardly revolutionary. Cheaper dollars won’t help Italy fund its €400bn of bond redemptions in 2012; they won’t save Greece from certain default (in my view); and they certainly won’t do anything for growth.
YOU CAN BE sure that all eyes will be on any bank vacuuming up dollars through the swap facility. And you can be equally sure that the result of that enquiry won’t be pretty. The co-ordinated central bank move might perversely result in one or more weaker banks being hounded out of existence by equally co-ordinated sell orders. The brutal undertones out there haven’t remotely gone away. There’s still a massive stigma attached to being seen or perceived to be a taker of emergency funds.
The brutal undertones haven’t remotely gone away. There’s still a massive stigma attached to taking emergency funds
The search to root out the European bank that was supposed to be on the verge of collapse and that the market reckoned forced the timing of the central bank move was hardly a positive signal. I reckon a couple of banks fit the description. I’m tempted to name them but the last thing I want for Christmas is a nasty defamation suit!
Actually, I’m not really buying the bank rescue line, any more than I’m buying the S&P bank downgrades as the catalyst. Stock markets didn’t evidence any major stresses around individual institutions in the past week (or no more than usual), so I reckon it’s unlikely.
Moves to ease concerns around the banking sector through state guarantees on long-term bank debt aren’t going anywhere fast. The methods and modalities have more or less been agreed – guarantee fees will be based on adjusted CDS levels of individual banks – but EU finance ministers stopped way short of having the guarantees backed by all 27 EU members (aka common eurobonds by the back door). They’re going down the route of individual government guarantees, which are basically worthless in much of the eurozone.
Draft plans to force bondholder burden-sharing on long-term unsecured debtholders in failing banks, ie, protecting short-term creditors, is likely to ease concerns in the money markets. To avoid banks shortening their debt profiles to minimise the risk of bail-ins, banks will be required to maintain a minimum of 10% equivalent of liabilities in the form of one-year debt and above. We’ll have to see how this looks once the ink is dry on the rule book.
NICOLAS SARKOZY AND Angela Merkel are meeting on Monday to square away their agendas. We’ve been here before. Merkel has restated Germany’s fierce opposition to common eurobonds and said her stance is non-negotiable, even in return for progress on fiscal union. Germany’s version of this would see Germany not only assume powers to veto individual country’s budgets, but also to send transgressors to the European Court of Justice. That’s too rich even for Sarko, who’s been broadly supportive of more prescriptive rules around budget setting and management.
Hope around the EU summit thrusts to the fore the spirit of eternal optimism that defines the human psyche. But a word of advice to all the optimists out there: this is one occasion where you should separate your spirit from your cheque book.
Economic and Monetary Affairs Commissioner Olli Rehn said “we are now entering the critical period of 10 days to complete and conclude the crisis response of the European Union”, while Banque de France governor Christian Noyer reminded us “we are now looking at a true financial crisis – that is a broad-based disruption in financial markets”. Thanks for the reminders, gentlemen. No pressure then.
