European Highlights: October 30

Good morning ZeroHedgers.

The officials of the European Central Bank reported yesterday that they expect the credit crunch soon to be over. As you might have read yesterday, that is in a direct opposition with the recent ECB report in which a strong possibility of  deflation was highlighted. And to support our claims even further, Bank of England announced yesterday it will expand quantitative easing due to the unavailability of credit for mid and small sized businesses. In the report published yesterday the ECB said, based on the survey conducted among 118 banks, that the situation has dramatically improved. Of the 118 banks surveyed by the ECB, only nine of them reported worsening conditions in their loan activities for businesses and firms. It is unclear how much of the credit available will be redirected to business loans, and how much of it will be redirected towards the consumer. As stated yesterday, a giant disequilibrium in lending practices is threatening to isolate the emerging European nations and prolong the recession in their economies. It is also stated, by the ECB,  there will be no change in interest rates, and some ECB officials have seriously downplayed the threat of a strong Euro policy. As we might expect, a strong Euro undermines the economic efforts of exporting European nations and shifts the advantage to their Asian counterparties, primarily China, Vietnam and Cambodia. Even though the competitiveness of the Chinese manufacturing sector is still reasonably high, the outsourcing of production to other Asian countries has already begun. That is why the economies of the Southeast Asia are thriving even in this economic climate, and reporting high GDP growth y-o-y. The chairman of the ECB, Jean Claude Trichet, is, as always, very conservative in his monetary policy, and is refusing to follow the footsteps of his US colleague Ben Bernanke. In the past couple of days the dollar has gained some of its value against the Euro, but it is expected that the dollar will fall amid the recent GDP numbers, and thus, once again, threaten the European recovery.

In the recent regulatory development; the EU is proclaiming it will start a crackdown on the big European banks. The first bank on the panel is the Dutch banking giant ING. The EU ordered the Dutch banking behemoth to sell its insurance division for a price between 12-15 billion Euros. Let me remind you that ING shares were halted couple of days ago, and that the reason for that is still unknown, even though an illogical explanation, in the form of an electronic glitch, was given. We will monitor the future developments concerning ING and the potential breaking of the bank into smaller, and more competitive divisions. The possible plan for a crackdown on big banks can be derived from observing the recent development with Northern Rock which was nationalized in the midst of the 2007 mortgage crisis, and, as of yesterday, was decided to be broken into two separate parts and subsequently sold of to investors. It is believed that the UK will follow with the similar procedure, as seen with Northern Rock, in breaking off the other two nationalized banks, RBS and Lloyds.

Property prices in Ireland could fall as much as 45% from the peak of the market in late 2006 due the economic downturn and increased costs of funding the banks, it is claimed. Prices have already fallen 24%, according to Fitch Ratings and the average house is currently worth 7.5 times the average income, a ratio that is expected to fall to nearer 5.5 times the average individual income. ‘Tax rises, high unemployment, wage deflation and property supply overhang continue to undermine the country's property market,’ said Alastair Bigley, Head of Irish RMBS at Fitch. The ratings agency warns that despite almost three years of house price declines, prices have yet to reach a sustainable level of affordability. Rising unemployment is a particular concern. Unemployment is predicted to reach 12.5% by the end of 2009 and rise to 15% in 2011. The difficult market will be further pressured by a rise in the cost of funding to financial institutions, driven by a higher than expected cost of the European Union's guarantee of banks' debt issuance compared to the current Irish state guarantee and a rise in interbank lending rates, Fitch also says.

But good news are coming for the ME real estate. It is expected that the prices of property in Dubai will return to their 2007 level, reports the middle eastern newspaper Gulf News. The sudden wave of optimism among the investors, and recouped losses will spur a sudden surge in the demand for Dubai real estate. One of the biggest development companies in the middle east, the Abu Dhabi based, Mubadala, reported that the demand for their properties has returned,and that they expect record profits in the year 2010. Just to remind you; the Dubai sheik Muhammad bin Rashid a-Maktoum spurred a construction binge in the period of 2000-2007, which was further facilitated by the availability of credit and rising equities. Marketed as a middle eastern oasis with all the benefits of Monte Carlo and no restrictions whatsoever, Dubai shortly became a mecca for European real estate flippers and Russian money launderers. Using the high demand for oil, and its good relations with the neighboring Abu Dhabi, Dubai has leveraged with, as much as, 80 billion dollars in, mainly, construction loans. Well, we hope they pull it off, because those yachts wont buy themselves.

In the sudden spur of madness and insanity, the Brazilian central bank is offering to repurchase the dollars in the spot foreign exchange market. The bank has already purchased 20.78 billion dollars in the spot market since May, and its planning to repurchase another 6.518 billion dollars this month to soak up the dollars which flow into the Brazilian economy. While on the short run, this repurchase may be beneficial for the dollar and for the Brazilian economy, it is not expected to have much influence on the long run. If the monetary policy conducted by the FED remains unchanged the Brazilian purchase of the dollars will be insignificant. While we are on the topic of insanity and dollar purchasing, it is important to mention the decision made by the UAE. High UAE officials said the country will continue to price its oil in dollars. A smart decision by the UAE, given that the price of oil has been, unusually, high for this economic climate, and it is expected that the future inflation in the dollar will be beneficial to the UAE oil economy.

Following the path of servitude and slavery, Polish central bank announced it will peg the Zlot to the Euro. The country is expected to completely shift to using the Euro by the mid of 2011. What the potential investors in the Polish economy need to notice is the " strong currency " policy which the Polish central bank will conduct in order for the country to gain more funds and direct investments. The peg will also signal a downfall for the Polish industry, given that the polish industrial output will become uncompetitive due to the strong Zlot.

These are some of the more important headlines, concerning the non-US economies

• Credit crunch almost over, says ECB (EurActiv.com)
• New EU lobbying rules (EurActiv.com)
• Banks not buying into single payments area (EurActiv.com)
• UAE to strengthen its business ties with India (Gulf News)
• UAE not planning to return to Gulf Money Union (Bloomberg)
• Hungary faces budget deficit risk (Bloomberg)
• Evraz says steel pipe order my signal the re-opening of Oregon plant (Bloomberg)
• UK; quantitative easing set to be expanded (Guardian)
• Fitch may downgrade Eastern Europe amid deficit worries (Bloomberg)
• EU warns Britain about the rising debt (Boston.com)
• Swiss bank to lose European Clients (WSJ)
• EU orders Spain to end tax brakes (WSJ)
• London Stock Exchange Chief says market needs dark pools (Bloomberg)
• Nationwide house prices gain for the first time in 19 months (Bloomberg)
• Central banks chill asset rally (Telegraph)
• BP fined 87 million $ over Texas refinery explosion (Bloomberg)
• Dubai property chief arrested over suspicion on embezzlement (Bloomberg)
• NYSE Euronext loses market share, profit plunges due to low volume (Business Standard)
• Spain: The hole in Europes balance sheet (Investors Insight) (hat tip  heatbarrier)

These were the most important news regarding the world economies. We will closely monitor any further development with Eastern Europe and potential regional downgrade. If any further news come out about the Lat devaluation we will also report on that. Pay attention to the EU regulatory crackdown on big EU banks. The success of it will strongly depend on how the braking and selling of Northern Rock, RBS and Lloyds go. European equities could enter a tribulation if those developments do not go smooth. Also pay close attention to ING. Rumors about the banks weakness are circulating for some quite time now, and it would be no surprise if the bank was insolvent.

Thank you for reading. 

Comments

[trx]

Stocks down only 1,9% today :-)

Thanks for the euro-thread, CB !

Greetings from Norway:  http://www.youtube.com/watch?v=Xy9CnqGBkxc

[BorisTheBlade]

But good news are coming for the ME real estate. It is expected that the prices of property in Dubai will return to their 2007 level, reports the middle eastern newspaper Golf News.

I believe it's Gulf News, but nevertheless - the expectations are likely justified as much of the growth in the property sector was due to the weak dollar (dirham is pegged to it at a 3.67 rate). Oil of course is a huge factor for this region, but it is also closely tied to the dollar value, so that just doubles overall effect. So, if the dollar will continue to devalue, then property prices will go up there. If we see major a rebound in dollar, then the market can go down just as it did in the second half of 2008 - first half of 2009.

[Careless Whisper]

We could use some of that big bank crackdown over here.

Oh, and Fitch puts Eastern Europe on credit watch because of high debt to GDP ratios? The numbers in USA are much worse. Looks like 70% debt to GDP ratio for USA while Poland is at 56%, CR 40%.

Cheeks, hope you can give us an eyewitness report of the race in Abu Dhabi this weekend.

[heatbarrier]

CB, I think your column should be be in the main page. I think the best way to organize main blocs information would be to have three highlights columns:

US Highlights
EU Highlights
Asia Highlights

At the moment, Daily Highlights and Frontrunning cover all blocs, some without links, but they are too broad and not well organized. I think the way you are covering the EU is the template that should be replicated for the other two blocks, the US and Asia. Pass it on to the team if it makes sense. Great job.

Heat

[fil]

Wow!! Zero Hedge has an embedded reporter in Europe. Welcome to the ZH team. Thanks Cheeky.....

[I need more cowbell]

+100, no shit, awesome.

[Anonymous]

Cheecky Thanx for the post, very insightfull. There is 1 correction to be made. The ING is a Dutch bank and not a Belgium bank.

[Gunther]

In the print version of the Frankfurter Allgemeine Zeitung is today (October 30) on page 23 a summary of approved aid to the banks in the EU relative to GDP:
country    approved        used  takeover of risk assets / liquidity help (all in % of GDP)
Denmark        259.4    0.5        0.0    0.3
Ireland        231.8    229.4    0.0    0.0    
Belgium        92        26.7        10.1    n.s.
Netherlands    52        25.4        3.9    7.5    
Sweden        50.2        8.9        0.0    0.1
Britain        41.6        26.8        0.0    16.4
Latvia        37.9        8.9        0.0    10.9
Slovenia        32.8        0.4        0.0    0.0
Austria        32.8        8.7        0.4    1.6
Finland        27.7        0.0        0.0    0.0
Germany        24.4        9.1        1.4    0.0
France        18.1        5.6        0.2    0.0

The ranking surprised me quite a bit.

Hopefully the table is readable; if the screen is wide enough it should work.

[Anonymous]

Gunther - thanks alot, good first pass. Now we must get
the next data set to complete the horrific reality.
The other day I suggested to Cheeky that what we really
need is for someone to reveal the depth of trouble each of the Austrian, Swiss, German, U.K. and Swedish banks are
in with regard to Eastern Europe and the Baltics.

These banks supplied the "Kool-Aid" to Ukraine, Hungary,
Romania, Bulgaria, and the Baltics, that then took on
massive debt, now set to lead these countries into down-
grade territory/default and implode the bank's balance sheets.

Including also, the southern "Rim" countries (Spain,
Greece & Italy) as well as Ireland would pretty much
sum up to a "Ring of Fire" that threatens to engulf
lending banks. Austria's bank's debt alone to Ukraine
and Bulgaria I believe is two or three times GDP. Yikes.

We are too focused on our own U.S. problems to see that
Europe is close to a tipping point with regard to the
enormous capital at risk to many of the East Europe
Rim and Baltic countries.

[Cheeky Bastard]

dude, not to worry, your input was put into good use ... i am currently writing a loooooooooooooooong post about that ... it will be available on monday, if not even sooner ..

[heatbarrier]

CB, These are some interesting articles on the EU Ring of Fire topic,

Failure to save East Europe will lead to worldwide meltdown -UK Telegraph

http://www.telegraph.co.uk/finance/comment/ambroseevans_pritchard/462352...

Investors Insights have several guest posts, good big picture data,

Europe On the Ropes

http://www.investorsinsight.com/blogs/john_mauldins_outside_the_box/arch...

The Recession in Central Europe, Part 2: Country by Country

http://www.investorsinsight.com/blogs/john_mauldins_outside_the_box/arch...

Europe on the Brink

http://www.investorsinsight.com/blogs/thoughts_from_the_frontline/archiv...

and the one on Spain,

Spain: The Hole In Europe's Balance Sheet

http://www.investorsinsight.com/blogs/john_mauldins_outside_the_box/arch...

I'll buy a flat in Barcelona when this is over.

[heatbarrier]

The other important aspect is the size and leverage of EU banks, "To Big to Save",

http://www.telegraph.co.uk/finance/financetopics/financialcrisis/3167438...

http://valtenbergs.com/archives/601

http://www.ft.com/cms/s/0/88cae0c4-fde3-11dd-932e-000077b07658.html?ncli...

[heatbarrier]

Good FT article on "Too Big To Save",

Are European banks too big to fail?

http://www.ft.com/cms/s/0/61d7e148-8f15-11dd-946c-0000779fd18c.html?ncli...

[Cheeky Bastard]

heatbarrier

i plan on posting a big and detailed overview of the crisis which hit eastern and central europe. and you can be damn sure ill sign you as a co-writer ... these links have been immensely productive for my writings. thank you for taking some of your time and posting here. 

much appreciated. 

[heatbarrier]

You are welcome, CB, no need for co-authorship, I'm just delighted you opened this column in ZH. The Austrian banking crisis in May 1931, which precipitated the second leg down during the Great Depression, has been in my mind since I realized the state of the EU financial system. Few people realize the seriousness of this risk, one of those large EU bank goes and the EU won't be able to save it, that would be a killer blow to the global financial system due to their interconnections, the event would be like 10x Lehman.

Heat

[heatbarrier]

Sorry, can't find how to delete this double post. 

[heatbarrier]

Another EU ranking of banks support as of June, bottom of the article,

United Kingdom 781.2
Denmark 593.9
Germany 554.2
Ireland 384.5
France 350.1
Belgium 264.5
Netherlands 246.1
Austria 165
Sweden 142
Spain 130

All figures are in billions of euros and include capital injections, guarantees granted, effective asset relief and liquidity interventions.

http://www.bloomberg.com/apps/news?pid=20601109&sid=aI.TvvSBYXBM

[Gunther]

Without taking the size of the economy into account the numbers do not tell a lot; except someone assumes that the losses will somehow be taken by Europe as a whole.

Something does not add up if Spain is not in the actual list.

BTW, the numbers in my post above are published today but the source is European commission,  as of July 17, 2009.

[heatbarrier]

Point well taken,Gunther. More than bank support figures I'm looking for evidence of a liquidity trap because that would make monetary policy ineffective, that's the killer.

This is on the US, WSJ a few days ago,

"Then there's the government involvement in the U.S. financial sector. Over the past two years the federal government is estimated to have lent, spent or guaranteed around $11 trillion to the financial sector, broadly defined. This is due to Washington's slavish adherence to the absurd notion that financial institutions can be "too big to fail," be they called Fannie Mae, AIG or Citicorp.

All of the above behavior invites legitimate comparisons with post-bubble Japan, where banks took years to be cleaned up as a result of regulatory forbearance. The same kind of forbearance is preventing America's increasingly distressed commercial real-estate market from clearing. Similarly, as was the case with Japan, monetary-base growth has exploded in the U.S. over the past year courtesy of the Fed, while bank lending is declining. This is why there is every reason to fear that America is already in a Japanese-style liquidity trap."

http://online.wsj.com/article/SB2000142405274870422400457448953075379499...

[DaveyJones]

"All of the above behavior invites legitimate comparisons with post-bubble Japan, where banks took years to be cleaned up as a result of regulatory forbearance

"regulatory for/bear/ance" (ance suff. State or condition: absorptance. Action: continuance. [Middle English, from Old French, from Latin -antia , n.

[Cheeky Bastard]

Gunther. I hope they put it up later. I will post it tomorrow if they do. Ill browse trough other EU paper, maybe some of them have this analysis in the e-editions .... thank you for this ..

[Anonymous]

It's extremely interesting that Norway is not on the list given that they raised interest rates. Only the second country in the world to do so, along with Australia.

What does that say?

[Anonymous]

Well, for one thing, Norway is not an EU country...

[heatbarrier]

EU real estate has a way to go, Price/Rent ratios are still too high. Ireland ratio bounced due to falling rents, so prices will continue to chase rents down.

http://1.bp.blogspot.com/_Et4TQ-a0gGU/Sg7WE-vBCII/AAAAAAAACEM/FQKqA_G5XO...

This is a good analysis of the US market, about 10-15% to go based on Price/rent,

http://www.youtube.com/watch?v=BRW1IJ7Un3s

[Cheeky Bastard]

the EU will be caught in the deflationary spiral, and IF the Eastern Europe gets a downgrade it will be a bloodbath there ... thanks for the links man ..

[heatbarrier]

Agreed, CB. Eastern Europe and Spain are the two main potential sources of shock to the EU financial system. Spain real estate has not adjusted, Price/Rent is way too high, this is a background note on why that could be so,

http://www.investorsinsight.com/blogs/john_mauldins_outside_the_box/arch...