LTRO Smoke, OMT Mirrors, Fiscal Sledgehammers
Via Bill Blain of MINT Partners
"I propose we stop worrying about Europe and go for a “good” lunch instead…"
German business confidence y’day. France today? Pants is the only way to describe growth prospects across Europe! Which means the debt crisis goes on and on and on. So the Euro is lower, and it kind of confirms the benignsummer market that saw the Euro rally, sovereign debt tensions lessen and bank stocks recover is likely to dissolve in the autumnal rains – which we saw in bucketfuls here in London.
At the risk of sounding a broken record…, a broken record…, a broken record... Hic.. I’m reckoning the final quarter of 2012 is going to prove increasingly challenging. All the issues the EU Elites were able to bury, smooth and bluster through the summer are coming back to the fore. The immediate challenges are Spain, contagion, and banks, and who knows how many sucker punches wait in the wings?
European banks. Don’t ya just love ‘em. The papers are full of news about how they might (or might not be regulated) and how much new capital the Spanish banks might need following the Wyman audit. The question is whether the recent rally across bank stocks and bonds can be maintained. Some bank analysts believe the problems are contained – unique to Spain, a special situation and non-contagious. Don’t believe it.
Thru September we’ve seen an absolute deluge of bank primary senior and some subordinated bank debt debt. So no surprise more than one major Investment Bank has gone market positive on bank paper – after all its much easier to provide liquidity in paper you’re positive will sell. I’m always fascinated and more than a little suspicious when banks go “Market Overweight” on subordinated bank debt. I suspect the recent rally across financials looks to be a product of the benign news-less summer markets rather than a fundamental improvement in conditions for banks.
Let’s start with mean reversion – a phrase analysts love. It might be time to short the Financial Sub iTRAXX CDS index on the basis it peaked at 600 in November – it’s now tightened to around 310.
What drove that tightening? LTROs at the close of last year and then the Draghi promise to do whatever is required. But, but, and but again – nothing fundamental has been fixed regarding European banking. We’re still waiting for definitive rules on many issues and the regulatory burden on banks is growing. The highlight of the early summer was the US regulatory pop at Standard Chartered as a Rogue Bank.. Wowser.. is there nothing a politician looking to make a name will not stoop to?
But “Front Page of the FT” risks still loom large for banks. Many leading names are still implicated in the unravelling Libor farce, while news that Singapore’s Temasek is going to exit its Standard Bank stake is noteworthy. We’ve still got banks across Europe sitting on asset portfolios and commercial property valuations that are “imaginative” at best.
The banks talking up capital say the risks have lessened: Better outlook for Europe and“Burden-sharing” (ie, converting sub debt holders into stock during a crisis) is less a risk for Spain’s bad banks and therefore isn’t something holders across the rest of Europe’s rickety banks should worry about. They say burden-sharing “bail-ins” will be an absolute last resort that will only be imposed after voluntary Liability Management deals. That sounds a bit of triumph of hope over reality.
We still don’t know how bad Spanish banks are. (We’ll have a better handle on Friday.. and if anyone is expecting a pleasant upside surprise from the Wyman audit I’ve got some Bankia bonds I’d like to sell you!) If anyone is keen to invest in the new Spain bad bank – do let us know. It reeks of political compromise. To my jaundiced mind its more likely Spain’s difficulties will translate into political pressure for increased – not less – burden sharing by bank holders. And in the very worst cases I don’t expect it to stop at sub debt – look out senior holders.
And the stock rally in Banks? Well compare and contrast Europe with the US. The Fed aggressively forced banks to raise capital and address their weaknesses. In Europe we’ve seen a smorgasbord of regulatory bluster and little agreement. CRD and Basel III capital standards are somewhere down the line… 2019? Well at least there will likely be less banks to regulate. And the left hand has no idea what the right is doing – hence capital strapped banks waste time on branch sales and enforced poison liquidity rules.
In poor markets, it’s no wonder banks are de-leveraging by cutting lending (and accelaterating recession) instead of raising new capital. Well at least the Euro Elites understand it.. This morning we have Bank of Italy chief Visco saying “Italian Banks lowering Leverage Reduces Risk…” Pass me a doughnut..