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Showing posts from October, 2011

Magical thinking in Euro Wonderland

After a tense few days, EU leadership have finally come up with a draft proposal for easing Greece's debt problems, recapitalising banks and helping other debt distressed countries to finance their debt more easily. The full text of the EU leadership's statement is here (downloadable pdf).

The devil will be in the detail, of course, which is pretty sketchy at the moment. But my initial impression of the report is that it contains far too much magical thinking. External agents will apparently willingly provide money to distressed Eurocountries when the ECB won't; growth will somehow appear in highly-indebted countries despite severe spending cuts and lack of inward investment; countries with uncompetitive business sectors and large trade deficits will somehow balance their budgets. And financial conjuring tricks will create the amount of money the report says will be available. How these will work in practice remains to be seen.

Media interest in this report has focused on …

That 9% bank capital requirement may not be quite what it seems

From the FT this evening (26th October 2011):

Is the European bank recapitalisation a done deal? Not if you ask the Germans and Spanish. A broad agreement on raising the capital bar for banks has been announced this evening. But some technical details — that make a big difference to some banks – have been left open.

Berlin and Madrid are mounting a last-ditch bid to lower the bar by allowing a broader range of capital to be used as part of the “temporary buffer”. German and Spanish banks in particular will have a lot more work to do to reach the new, 9 per cent core tier one capital ratio if they are not allowed to count some hybrid forms of capital.

This is reopening a highly-charged (and tremendously technical) debate that overshadowed the European Banking Authority stress tests last summer. After a long fight, the EBA overruled the Germans and Spanish and imposed a relatively narrow definition of capital that excluded so-called convertible debt.

This time around, there is a chance ther…

The cold hard truth

On Friday 21st October 2011, a group of economists working for the so-called Troika produced a devastating report. This report was leaked to the press, notably the FT, which promptly produced an article analysing it, and the BBC. Paul Mason, BBC Newsnight's economics editor, gave a 10-point analysis of the report on Twitter which I reproduce here. And the Telegraph released the full text of the report the following day.

European politicians have been fighting ever since. Germany's Merkel and France's Sarkozy had an argument loud enough to be heard in the EU concert hall. The Belgian finance minister left early and refused to attend the press conference. Merkel and Sarkozy jointly turned on Italy's Berlusconi, demanding that he implement fiscal reforms he has so far failed to deliver. And Sarkozy slapped down the UK's Cameron when he complained about the lack of any credible resolution plan for the Eurocrisis.

Entertaining though the politicians' antics are, the…

Reality strikes the EU at last?

Paul Mason's Twitter feed, Friday 21st October 2011

I am tweeting a series of quotes from the Troika Debt Sustainability Assessment. They say Greek debt peaks at 186% of GDP evn with 21 J deal
Troika report basically says current Greek debt dynamic entirely reliant on massive haircut AND total support from EU/IMF
Troika: "Making Greek debt sustainable requires an appropriate combination of new official support on generous terms and additional debt relief from private creditors
The Trokia's logic is to say: without help Greece gonna need E359bn bailout. With 50% haircut it needs E220bn - from p7 of Troika doc
Troika; however they also moot a 60% haircut - this brings official financing down to 216bn
OK to recap. Some insiders now saying my doc is not Troika but ECB+. However: debt dynamics only sustanable with haircut + further bailout.
Okay - now I have gotten thru the basics of the doc I will analyse and do an orderly twitter splurge. From 1 to 10
1) A debt analysis sent out to…

Banks and bird food

It seems appropriate that the "Occupy London" protest currently going on should base itself on the steps of St. Paul's Cathedral.

Devotees of Disney films will of course have watched the classic "Mary Poppins". Featured in that film is an old lady who sells bags of bird food on the steps of St. Paul's. Mary Poppins, nanny to the Banks children whose father works at a dusty old bank close to those steps, sings of the plight of the birds and their desperate need for food. At tuppence a bag, the food is just the right price for a rich but neglected child to buy with his pocket money.

I've long thought that it's not the birds that are hungry, but the old lady who is selling bird food in order to earn enough money to live. Juxtaposed in the film are ostentatious wealth, represented by the bank, and grinding poverty, represented by the bird lady. Michael Banks, the younger child, must choose what to do with his pocket money. Should he put it in the bank, …

The fear that paralyses

One evening back in June 2011, four people were discussing on Twitter the possibility of a second global financial crisis. They had been having similar conversations most evenings for several weeks. Now, anyone who knows Twitter will realise that tagging in three people to tweets all the time doesn't leave much room for comment. So those four people created a hashtag to enable them to discuss more easily using a TweetChat application.  That hashtag is the now-famous #gfc2 - Global Financial Crisis 2.0

I was one of those four people.  And in my post Black Thursday, on 5th August 2011, I told the world that the second Global Financial Crisis had started.

Since then, global markets have crashed again and again, banks and sovereigns have suffered ratings downgrades, yields on the debt of countries perceived as being "risky" have soared - together with CDS spreads.  Countries have introduced a range of monetary and fiscal measures to attempt to stabilise the financial system …

Downgrade, what downgrade?

This morning, the credit rating agency Moody's downgraded 12 UK banks and building societies. Understandably, people have been asking whether this means that these financial institutions are unsafe, and whether the overall credit rating for the UK is in danger - even though S&P, another credit rating agency, affirmed the UK's AAA rating only two days ago.

The statement from Moody's makes it clear that the reason for the downgrade is the expectation of less support from government for these financial institutions: 

"...announcements made, as well as actions already taken by UK authorities have significantly reduced the predictability of support over the medium to long-term."

Moody's still expect some support from government for the large systemically-important banks such as Lloyds TSB and RBS, although they believe that even this may be withdrawn in the medium to long-term, so the ratings for these banks are on negative watch.  But their view is that smal…