The biggest (non) news of the day was Oliver Wyman ("OW") conducting an "independent" audit of the Spanish banking system to validate the previously disclosed funding needs of Spain's banks which were announced back in June (just a week after Mariano Rajoy "insisted" no bank bailouts are needed). What OW really did was exercise 1 in a financial analyst's playbook: to goal seek a number in excel using a variety of input variables, especially several fudge factors that are tangential to the matter at hand, yet which provide the biggest bang for the buck. In this case the target of the goalseeking exercise was to get a final headline number for bank capital needs to be just as expected, or €60 billion. Sure enough it the number was €59.3 billion, just a little bit less than consensus. This is the total number of cash the bank system will need in order to be considered viable, and unless something has changed drastically, the cash will come from new debt issued by Spain, which in turn funds its bank bailout fund, the FROB (a process explained here). While it is a given that several months from now we will go through this whole entire exercise to find out how much more cash Spain's banks will need, for now what is curious is to understand what the fudge factor was that OW abused to allow it to get the desired result. That fudge factor is what is known as "excess capital buffer", whose usage in the model to plug a major capital shortfall gap is non-sensical and shows that the real funding needs of Spain's banks will be far greater, even absent future deterioration.
Spanish stress test results are out. Surprise - Oliver Wyman's audit finds that Spanish banks have an approximate EUR60bn shortfall - as expected - see below for pass/fails.
- *SPAIN SAYS 7 BANKS HAVE NO CAPITAL NEEDS :SAN SM, BBVA SM
- *SPAIN STRESS TESTS SHOW CAPITAL SHORTFALL OF EU59.3 BLN :SAN SM
- *SPAIN BANKS HAVE EU53.7 B CAPITAL SHORTFALL AFTER TAX IMPACT
- *BANKIA STRESS TEST SHORTFALL AFTER TAX EFFECT IS EU24.74 BLN
- *SANTANDER, BBVA, CAIXABANK, KUTXA PASS STRESS TEST :SAN SM
- *SABADELL, BANKINTER, UNICAJA PASS STRESS TEST :SAN SM, BBVA SM
The discrete needs are: Bankia: 24.7; Catalunya Caixa: 10.8; Novagalicia 7.2; Banco de Valencia: 3.5; Banco Popular 3.2; Banco Mare Nostrum: 2.2
The "mañana" approach to fiscal management, that Spain is known for, presented what is generally perceived as overly optimistic growth forecasts for 2013 and lacked details on structural reform resulted in another risk off session. As a result, Spanish stocks continued to underperform (IBEX seen lower by over 5% on the week), with 10y bond yield spread wider by around 12bps as market participants adjusted to higher risk premia. The state is due to sell 2s and 5s next week, which may also have contributed to higher yields. As a reminder, Moody’s review on Spain is set to end today, however there is a chance that the ratings agency may extend the review for another couple of months or wait until the stress test results are published to make an announcement. In other news, according to sources, Greece could return to its European partners for a Spanish-style rescue of its banking sector, as the country is looking to ease the burden via another writedown of its debts or a strong recapitalisation of its banks (no official response as yet). Going forward, the second half of the session sees the release of the latest PCE data, as well as the Chicago PMI report for the month of September.
Those confused by yesterday's rapid move higher in stocks, which fizzled by day's end, which was catalyzed by the non-event of the Spanish budget declaration which will prove to be a major disappointment as all such announcement are fated to be, can take solace in the following summary by DB's Jim Reid: "Yesterday's risk rally on the back of the 2013 budget announcement coincided with a trend seen over the last couple of years of rallies into month and quarter ends. We'll probably get a clearer picture of underlying sentiment by early next week with the new quarter starting, especially as it commences with a bang with the Global PMI numbers on Monday." In this vein, tonight's overnight sentiment showing weakness confirms yesterday's move was one which merely used Spain as a buying catalyst without reading anything into it. Because an even cursory read through shows major cracks. Sure enough the sellside readthroughs appeared this morning: "In our view the Spanish 2013 budget is based on a too optimistic GDP growth assumption" from Citi. Once again, the market shot first, and asks questions later, as the weakness in the futures confirms, EURUSD retracing all overnight gains, and Spain now 1.6% lower on this, as well as uncertainty of today's latest non-event - the local bank stress test vers 304.2b - whose results will be announce at noon NY time, and which just may find Bankia (and its Spiderman towel collection) is quite solvent once again.
The crux of the "pain for Spain" was exposed in August, when the world learned that despite all attempts to the contrary, Spanish banks are no longer perceived as safe by the locals, and the result was a record 5% deposit outflow in one month from local banks: cash that was promptly redeposited elsewhere in the Eurozone. And as money flow theorists know all too well, if cash is exiting the Spanish banking system - i.e., if the confidence is just not there, not only is growth impossible, not only are any austerity plans or otherwise to push GDP higher futile, but all attempts to save the local banking system - which is now reliant on the ECB for funding to the tune of a record €412 billion, and which means the country has already been bailed out by the ECB - are futile and merely sunk, literally, costs. In short: the deposit outflows continued, and while not at the record July 5% pace, a whopping €17 billion, or 1.1% of total, deposits left the country for good and is unlikely to come back.
Rolling up community banks with mid-single digit ROEs and flat to up small revenue growth does not strike this analyst as a very compelling opportunity
Europe took August off. Today, it is America's turn, as the country celebrates Labor day, although judging by recent trends in the new 'Part-time" normal, a phenomenon we have been writing about for years, and which even the NYT has finally latched on to, it would appear the holiday should really be Labor Half-Day. After today the time for doing nothing is over, and with less than one month left in the quarter, and trading volumes running 30% below normal which would guarantee bank earnings in Q3 are absolutely abysmal, the financial system is in dire need of volume, i.e. volatility. Luckily, things are finally heating up as the newsflow (sorry but rumors, insinuations, innuendo, and empty promises will no longer cut it) out of various central banks soars, coupled with key elections first in the Netherlands and then of course, in the US, not to mention the whole debt-ceiling/ fiscal cliff 'thing' to follow before 2012 is over. So for those who still care about events and news, here is the most comprehensive summary of the key catalysts over the next week and month, which are merely an appetizer for even more volatile newsflow in October and into the end of the year.
Presented in the usual manner of challenging the ENTIRE sell side of Wall Street to offer analysis anywhere near as cogent, honest, straightforward, accurate, complete and credible. Or put more succinctly, the Goldman and Morgan Stanley clients can tell their advisers that Reggie Middleton advised them to kiss his As
Far be it from us to reflect Schadenfreude here but at the time of the squeezefest leading up to and after the announcement of the lipstick-on-a-pig US Stress Tests in mid-March, when CDS were remaining wide and hardly budged, we questioned the reality of the assumptions and the lack of contagion comprehension. Most critically, in the 4 months since that wondrous day when all was proved great in the world of US banking, the major financials are down a stupendous 25% on average with Wells Fargo taking over the mantle of least used bed-pan in the E-Coli ward - at an unimpressive unchanged since 3/13.
It is a quiet session so far with risk in the Off position (for now - we have yet to see the sinusoid HFT stop triggering function which rises stocks artificially as yesterday demonstrated so very well to nobody's surprise). All eyes are once again focusing to Europe, pushing the EURUSD lower for at least a few more hours until Europe closes and the repatriation resumes. In terms of key European events, today is the EU finance minister’s conference call on Spain today. As DB summarizes, officials are expected to approve the EU100 billion Spanish bank rescue plan however the exact size of the loan will probably only be determined in September pending the result of a bank-by-bank stress test. This will then pave way for restructuring plans for the sector in October which is broadly consistent with the timeline set out in the leaked draft MoU. At the previous meeting finance ministers agreed to first disburse EU30bn to Spain by the end of July so we will watch out for further confirmation of this today. We may also get the terms of the loan today. The conference call is expected to start at 10am GMT. What is odd is that unlike before when the mere possibility of a European catalyst was enough to push risk higher, this is no longer the case, and Spanish spreads to Bunds just hit another all time wide, with the Spanish 10 Year plunging to 7.11%, another post-summit high, this time dragging the Italian 10 Year which was at 6.10% at last check. Will the world once again be able to ignore the once-again imploding European reality (and American: Of the 35 S&P 500 firms that reported results yesterday, about 74% of those came ahead of market consensus but only 57% of those topped sales forecasts.), and send the ES to a green close on the day? Or is today the day when reality comes back with a vengeance? Stay tuned and find out.
The devil is in the details and we finally have the Spanish Bank rescue details. The cost is not mentioned. We do not know the cost of the borrowing or how long it will last for. That ultimately will be key. Short dated, high coupon loans will not help much. Long dated, low coupon loans will help. The seniority issue doesn’t seem too bad but reading the documentation it looks like it must have been extremely contentious as it can’t help but say it is going to Spain time and again where it was unnecessary. The other reason the seniority doesn’t look too bad is because it doesn’t look like much money will get doled out. The timing seems far too long. This is a political fix and one where they live in some bankers world rather than a traders world. We are VERY concerned about the long timeframe for implementation. The immediate availability of €30 billion is good, but as TF Market Advisors' Peter Tchir confirms, we have our doubts that it will be distributed. However, as we noted earlier, even if fully implemented there would be well under EUR200 billion by year-end anyway and now with the German Court stalling implementation further, the devil in the details may just be overwhelmed by the god of reality.
All of the time wasted on firewalls and great deceptions worked in the short term but the height of a fence does nothing to help a horse or a nation which is sick inside them. Europe has vastly overspent and tried their best to whitewash the financials of the countries and the European banks and now, and each quarter out for some time; we are going to see a worsening financial landscape for the European nations and their banks. This will not be Armageddon or the end of the world but it is going to be quite painful and have a decided impact on the United States and perhaps the scaring may be deep. In Europe that have mouthed so much nonsense for such a long period of time that they have come to believe in what they have manufactured. This is not uncommon historically but the depth and breadth of it is without comparison. Germany says one thing to placate France and Italy believes the drivel that is touted by the Netherlands and now Greece wants the ECB to forgive their $238 billion in Greek debts on the basis of a united Europe, which would bankrupt the ECB, and then it becomes clear that someone has to pay for all of this and countries start banging on the doors of the asylum to get out. Listen carefully; the banging has begun and will grow loader and more raucous during the balance of the year.
There is a saying that it is better to remain silent and be thought a fool than to speak out and remove all doubt. Today, the San Fran Fed's John Williams, and by proxy the Federal Reserve in general, spoke out, and once again removed all doubt that they have no idea how modern money and inflation interact. In a speech titled, appropriately enough, "Monetary Policy, Money, and Inflation", essentially made the case that this time is different and that no matter how much printing the Fed engages in, there will be no inflation. To wit: "In a world where the Fed pays interest on bank reserves, traditional theories that tell of a mechanical link between reserves, money supply, and, ultimately, inflation are no longer valid. Over the past four years, the Federal Reserve has more than tripled the monetary base, a key determinant of money supply. Some commentators have sounded an alarm that this massive expansion of the monetary base will inexorably lead to high inflation, à la Friedman.Despite these dire predictions, inflation in the United States has been the dog that didn’t bark." He then proceeds to add some pretty (if completely irrelevant) charts of the money multipliers which as we all know have plummeted and concludes by saying "Recent developments make a compelling case that traditional textbook views of the connections between monetary policy, money, and inflation are outdated and need to be revised." And actually, he is correct: the way most people approach monetary policy is 100% wrong. The problem is that the Fed is the biggest culprit, and while others merely conceive of gibberish in the form of three letter economic theories, which usually has the words Modern, or Revised (and why note Super or Turbo), to make them sound more credible, they ultimately harm nobody. The Fed's power to impair, however, is endless, and as such it bears analyzing just how and why the Fed is absolutely wrong.
The 'real' results from Oliver Wyman's stress tests are out, via Bloomberg, and there are some skeptical conclusions at best. The expected loss for Spanish banks under the adverse stress test scenario is €253-274 billion (and EUR 173-194 billion under the base-case). The announced capital deficit under the stress scenario of €51-62 billion assumes some rather interesting items: The expected loss is offset by €98 billion of exiting provisions (which will have to be offset by something and if deposit outflows continue, instead of reverse, then this merely accelerates the under-capitalization); and New profit generation of €64-68 billion seems remarkable for a banking system which is inextricably tied to its sovereign and entirely bust itself
It seems clear that adjusting these for any sense of reality means the real loss (or capital deficit) will be well north of the EUR 100 billion assigned to the country. We only wonder if Oliver Wyman was paid, as they should be, in stock of Spanish bank STD, vesting over the next 3 years.