Time for Concern—Not for Panic—Over EU Banks

Scofflaw

Interesting article on the WSJ:

The nature of financial markets is that panic can bring about the very situation participants most fear. This is the danger right now in the European banking landscape. But this is not 2008. At least, it doesn't have to be unless you really, really want it to be. Panic, and your fears may come true. Stay calm, and they almost certainly won't.

Yes, you can argue that market realities are catching up with the unsound business model of European sovereigns, the way that they caught up with the unsound business model of a debt-fueled Wall Street.

Yes, you can argue that many European banks would benefit from a stronger capital base and will struggle to be profitable unless their funding costs come down.

And yes, you can also argue that a hard default in Greece and a really ugly fight over the future of Europe is getting more likely.

But none of this justifies the ill-informed panic-mongering that is circulating about European banks and sovereigns. The situation is far, far better now than it was three years ago, and the prophets of doom are wilfully turning blind eyes to a raft of support mechanisms that have been successfully tried over the past three years.

To start with, the system is far better capitalized than it was. Despite all the bile and scorn heaped upon the EU's stress tests, euro-zone banks alone have raised €277 billion ($399 billion) in capital and reserves since the end of 2009. Moreover, the pockets of weakness that remain are overwhelmingly among the region's smaller banks. Nomura's Jon Peace estimates the 25 largest EU banks had a core Tier 1 equity ratio of 10.6% at the end of the first half, up from a post-Lehman low of 6.4%. Loan-to-deposit ratios, meanwhile, have fallen to 116% from 126%, as banks have reduced their reliance on wholesale funding. The region's most important banks are capable of absorbing losses.

Full article here: http://online.wsj.com/article/SB10001424053111904787404576528532927285962.html

That seems reasonable to me, given that the news out of the banks really hasn't been getting any worse for some time now. Obviously, it's going to raise snorts of derision from the "we're all doooomed" crowds, but the article seems to be solidly founded in fact. Interesting, too, that the article refers to "US and UK sources" as the origin of much of the doom-saying:

Second, the evidence of stress in funding markets is at best mixed. To listen to some—almost exclusively U.S.- and U.K.-originated—talk, stress in European funding markets is at pre-Lehman levels. The evidence cited is almost invariably the same indicator: a spread between Libor and the overnight indexed swap rate of more than 70 basis points. Others have made a lot out of the increasing reluctance of U.S. money-market funds to lend to European banks.

But the Libor-OIS spread peaked at over 200 basis points around the collapse of Lehman. And, as Deutsche Bundesbank board member Alexander Dombret pointed out in a speech Wednesday, this is "a non-negligible but small part of European banks' short-term liabilities" and easily covered by central bank facilities—both the ECB's own operations, and its swap facility with the Fed, which allows it to offer dollar liquidity to European banks that can't get it from the market.

And a suggestion of liquidity rising:

At this week's operation, the number of desperate European banks seeking dollars from the ECB was—as in every other week but one in the past six months—zero (note that the ECB-Fed dollar swap operations are deliberately priced to be unattractive, to ensure moral hazard doesn't cross the Atlantic).

With U.S. markets less inclined to fund them, you would expect desperate European banks to be using the ECB's offer of unlimited lending more. The reliance on central bank facilities tends to rise as banks find themselves shut out of funding markets. It's true that gross lending by the ECB has risen to €502 billion from its low of €407 billion before the Portuguese bailout, but it's still just over half its postcrisis peak of €897 billion. Even that increase is entirely offset by a rise in banks' reserves at the ECB's deposit facility.

Moreover, that increase in precautionary reserves, squirreled away in the ECB's deposit facility, is creating an overhang of liquidity that is bringing short-term funding costs down for the region's most important banks. That has eased effective short-term funding conditions for solid banks in the same way it did in 2009. At around 0.90%, the benchmark Eonia overnight rate
is already down more than 50 basis points from its peak in July, and well below the ECB's policy rate of 1.50%.

And at least this is not someone's finance minister telling us we've turned a corner - those do look like genuine indications of a reviving solidity. Of course, I would say that, because I'm a notorious optimist - but this is the WSJ saying it rather than me.

cordially,
Scofflaw

Sand

True, concerns about the banks and their liquidity are overdone and overstated. The banks are in a far better position than ill-informed and panicked market activity would indicate.

swampgas

"Can Ireland's Growth Defy Keynesian Wisdom?"

http://online.wsj.com/article/SB10001424053111904875404576530613971799994.html

More positive news from the WSJ.

Scofflaw

Sand wrote: »

True, concerns about the banks and their liquidity are overdone and overstated. The banks are in a far better position than ill-informed and panicked market activity would indicate.

Yes, I'm sure that anything positive that anyone might think is the outcome of exactly the same false optimism that characterised Ireland's banking industry back in the day. We will be in a bad place forever and never get out.

amused,
Scofflaw

Scofflaw

Anglo Irish May Hand Back Capital to State, CEO Aynsley Says

Anglo Irish Bank Corp., whose lending to real-estate developers helped drive the country’s financial system to the brink of collapse, may hand capital back to the state as it winds down within a decade.

Speaking to reporters in Dublin today, Chief Executive Officer Mike Aynsley said he expects the final bill for rescuing the bank will be between 25 billion euros ($36.1 billion) and 28 billion euros. The government poured 29.3 billion euros into Anglo Irish since nationalizing the lender in January 2009.

The government is moving to close the bank by 2020 after its rescue contributed to the state having to see an international bailout last year. The bank is selling assets, with Aynsley saying an auction of its U.S. loans has drawn “enormous” interest.

“We are only interested in sales that will not require more capital injections,” Tom Hunersen, head of corporate development, told reporters today. He said the bank will work through its loans “intelligently.”

JPMorgan Chase & Co. and Wells Fargo & Co. are among banks that made final bids to buy portions of its $9.65 billion U.S. real-estate loans, said three people with knowledge of the sales yesterday.

http://www.bloomberg.com/news/2011-08-26/anglo-irish-may-hand-back-capital-to-state-ceo-aynsley-says.html

cordially,
Scofflaw

aindriu80

very interesting. lets hope the banking sector is fixed for good

Sand

Scofflaw wrote: »

Yes, I'm sure that anything positive that anyone might think is the outcome of exactly the same false optimism that characterised Ireland's banking industry back in the day. We will be in a bad place forever and never get out.

amused,
Scofflaw

Alternatively, we wont be out of a bad place because a nice man in the newspaper runs a positive article. If weve learnt anything since 2007 its that economic growth depends on more than hope and spin...

Sheer, desperate, white knuckle hope is no substitute for actual positive conditions for economic growth. The Germans arent noted for boundless optimisim - indeed "angst" is of German roots - and yet theyre one of the 20th centuries miracle economies.

Scofflaw

Sand wrote: »

Alternatively, we wont be out of a bad place because a nice man in the newspaper runs a positive article. If weve learnt anything since 2007 its that economic growth depends on more than hope and spin...

Sheer, desperate, white knuckle hope is no substitute for actual positive conditions for economic growth. The Germans arent noted for boundless optimisim - indeed "angst" is of German roots - and yet theyre one of the 20th centuries miracle economies.

The question, though, is whether what is being reported is fact, or "hope and spin". These are outside commentators, not anyone with a vested interest in "hope and spin" - and commentators that were widely quoted during the first part of the crisis for exactly that reason. Now they're being slightly positive, they're apparently to be included in the axis of "hope and spin" - but what exactly has changed about those commentators apart from their apparently unacceptable lack of negativity?

amused,
Scofflaw

Sand

Fact? Or hope and spin. Scoff - its an opinion piece. Written by a commentator with an opinion (not the WSJ - its not an editorial, and even it was itd still be the editors opinion), which like assholes are in pretty common circulation. Its full of opinion. Not fact.

The article starts with the old: "Markets are being irrational". To which the old and wise adage is that "The markets can stay irrational for longer than you can stay solvent". Its also worth noting that in that article from 2008 the common wisdom was that Irish banks were different and that they were "unfairly" being cast in with Northern Rock. Thos damn irrational markets again. Apparently markets have been getting it wrong since they stopped giving the expedient answer.

Mind you, when the yield on Irish bonds starts going down suddenly the markets are getting it right. Right? Notice the little old correlation between there between things people believe and things people need to believe?

The article then goes on to grudgingly admit that perhaps throwing the taxpayer under the bus for all the huge banking losses over the past few years had a few unintended consequences when it came to the sovereigns own credit worthiness. Well - better late than never I guess. It worth remembering that the ultimate guarantor of any banking system is the sovereign - The ECB hates the very idea of being a recognisable central bank. The broke sovereigns cant back up their guarantees. And the solvent sovereigns do not want to bailout the broke sovereigns. Thats a reality that confronts us in 2011, which was not relevant in 2007-2008. At that point, people were utterly convinced that sovereign creditworthiness was limitless and couldnt be tarnished. The idea that the banks were too big for a small sovereign to save simply escaped them. In that light, the banks are in a far worse position than they were in 2007. Theres no "Get out of Jail" card left to play.

The article then goes on to make a rather bold declaration - that the banks are better capitalised than ever before. For starters, when you start from insolvency, its not hard to reach a better capitalised postion. Especially when the taxpayer is being thrown under a bus to facilitate this. Secondly, this is hinged on a claim that "euro-zone banks" have raised 277 billion in capital. Okay - thats nice in average terms, but what about the banks particularly exposed to junk sovereign debt or awful loan books? How much capital have those banks in particular raised? How much better capitalised are they today? Capital is easy to raise when you dont need it to absorp huge losses, its much harder to raise when you desperately do.

He then talks about "bile and scorn" being thrown on the EU banking stress tests, in an obvious attempt to discredit dissent from the official line that everythings fine in European banking. Its not "bile and scorn" to point out that banks like AIB that passed the EU banking reviews later had to be bailed out - with BOI escaping by the skin of their teeth and to the great disadvantage of the Irish taxpayer - nor is it bile and scorn to note that the tested rules around capitalisation had a heavily political focus to ensure that German banks in particular didnt fail.

Its also worth noting, given youve invested so much into the factual nature of this commentator and his fact based opinions that he issued a similar "Calm down, calm down!" piece only a few months earlier. In which he noted:

This is not denying the risk of default. The debt ratios of Greece and Ireland, at the very least, look unsustainable to most eyes under the current framework that forces them to regain competitiveness by deflation. As everyone has grasped by now, this only magnifies the debt burden.

The guy seems to have a patent on the "Markets are irrational until they agree with my own views" dogma which I suppose fills an article in the WSJ. He might think European banks are going to be fine, but hes pretty certain we're ****ed.

So, eh, what do you think of your "outside commentators, not anyone with a vested interest in "hope and spin" - and commentators that were widely quoted during the first part of the crisis for exactly that reason." now?

Is he still a trusted, objective, disinterested observer now that he acknowledges that the Irish debt situation is unsustainable?

No wait, hes wrong about that right?

He claims it would be political suicide for Germany to force a restructuring of Greek debt, but discounts that it would be political suicide for Germany to force their citizens to cover Greek debts. He claims that both the Greeks and Irish will be willing to accept practically any conditions Germany might demand because they place such value on the EU. Given EU membership is not actually up for debate, and given even you admitted that you couldnt see any sort of EU treaty being passed here for the next few years how valid do you think his "opinions" are? Do you really agree that the Irish mood is such that even *if* Germans were to agree to bite down and pay for everyone ( not going to happen) that the Irish would bite down and agree to take fiscal orders from Berlin?

What Im trying to say here is...there is no short cuts. If we want to achieve economic properity then we need to earn it by applying common sense policies. We wont be given economic properity just because some nice man writes a positive spin in his opinion piece or we really, really, really believe in economic prosperity. You cant pursue dumb, self defeating policies for 4 years and then expect economic growth will suddenly fall out of the sky on us. Belief has nothing to do with it - if Ireland pursues prudent policies then it will prosper regardless of anyones optimisim or pessimism. If it pursues dumb policies, then it will not, regardless of anyones optimism or pessimism.

Dannyboy83

The bit I don't understand is how/why the system is supposed to have mysteriously started to correct itself.

The system went into meltdown because of a certain set of flaws which were built in from day 1. This is what we are told.
There has been little in the way of change to correct these flaws.

Yet the system has mysteriously corrected itself?
Even if that were the case, why would anyone have faith in a system which is still prone to the same set of flaws?

Scofflaw

Dannyboy83 wrote: »

The bit I don't understand is how/why the system is supposed to have mysteriously started to correct itself.

The system went into meltdown because of a certain set of flaws which were built in from day 1. This is what we are told.
There has been little in the way of change to correct these flaws.

Yet the system has mysteriously corrected itself?
Even if that were the case, why would anyone have faith in a system which is still prone to the same set of flaws?

I don't think the system has corrected itself, particularly. It's still full of bad debt, and still contains years worth of dragging misery. All that's really been said here is that the situation is not unsustainable - something on which the commentator in question, amongst others, has changed their mind.

As to why they've changed their mind - good question. As Sand points out, none of the basic facts seem to have changed - but then, in my view, the basic facts have never supported the "we're all doomed!" view anyway. So, while this outbreak of non-pessimism appears to supporters of the view that we're all doomed as sudden irrational optimism (not 'spin', because spin implies a vested interest that's unlikely here), it appears to me simply as another emotional position being held by market commentators. And, sure, the "markets can stay irrational for longer than you can stay solvent" - that doesn't make them rational, though.

cordially,
Scofflaw

Scofflaw

Sand wrote: »

Fact? Or hope and spin. Scoff - its an opinion piece. Written by a commentator with an opinion (not the WSJ - its not an editorial, and even it was itd still be the editors opinion), which like assholes are in pretty common circulation. Its full of opinion. Not fact.

As were the wide variety of other such articles which were cited earlier in the crisis.

Sand wrote: »

The article starts with the old: "Markets are being irrational". To which the old and wise adage is that "The markets can stay irrational for longer than you can stay solvent". Its also worth noting that in that article from 2008 the common wisdom was that Irish banks were different and that they were "unfairly" being cast in with Northern Rock. Thos damn irrational markets again. Apparently markets have been getting it wrong since they stopped giving the expedient answer.

Not really - the markets have overdone the panic, that's all.

Sand wrote: »

Mind you, when the yield on Irish bonds starts going down suddenly the markets are getting it right. Right? Notice the little old correlation between there between things people believe and things people need to believe?

There's a strong element of pot and kettle there, though - according to the pessimists, the yields were important when they were going up, and now they're falling they're suddenly irrelevant.

Sand wrote: »

The article then goes on to grudgingly admit that perhaps throwing the taxpayer under the bus for all the huge banking losses over the past few years had a few unintended consequences when it came to the sovereigns own credit worthiness. Well - better late than never I guess. It worth remembering that the ultimate guarantor of any banking system is the sovereign - The ECB hates the very idea of being a recognisable central bank. The broke sovereigns cant back up their guarantees. And the solvent sovereigns do not want to bailout the broke sovereigns. Thats a reality that confronts us in 2011, which was not relevant in 2007-2008. At that point, people were utterly convinced that sovereign creditworthiness was limitless and couldnt be tarnished. The idea that the banks were too big for a small sovereign to save simply escaped them. In that light, the banks are in a far worse position than they were in 2007. Theres no "Get out of Jail" card left to play.

At the end of the day, even the EFSF represents only a fraction of eurozone GDP. What's been mostly lacking is the political will to apply it.

Sand wrote: »

The article then goes on to make a rather bold declaration - that the banks are better capitalised than ever before. For starters, when you start from insolvency, its not hard to reach a better capitalised postion. Especially when the taxpayer is being thrown under a bus to facilitate this. Secondly, this is hinged on a claim that "euro-zone banks" have raised 277 billion in capital. Okay - thats nice in average terms, but what about the banks particularly exposed to junk sovereign debt or awful loan books? How much capital have those banks in particular raised? How much better capitalised are they today? Capital is easy to raise when you dont need it to absorp huge losses, its much harder to raise when you desperately do.

He then talks about "bile and scorn" being thrown on the EU banking stress tests, in an obvious attempt to discredit dissent from the official line that everythings fine in European banking. Its not "bile and scorn" to point out that banks like AIB that passed the EU banking reviews later had to be bailed out - with BOI escaping by the skin of their teeth and to the great disadvantage of the Irish taxpayer - nor is it bile and scorn to note that the tested rules around capitalisation had a heavily political focus to ensure that German banks in particular didnt fail.

And it's worth pointing out that all those remarks apply to the first round of stress tests rather than the second.

Sand wrote: »

Its also worth noting, given youve invested so much into the factual nature of this commentator and his fact based opinions that he issued a similar "Calm down, calm down!" piece only a few months earlier. In which he noted:

I haven't invested very much at all! I regard it as interesting, and a potential positive straw in the wind, that previously negative market commentators are now saying positive things. I don't regard them as factually any more trustworthy, though.

Sand wrote: »

The guy seems to have a patent on the "Markets are irrational until they agree with my own views" dogma which I suppose fills an article in the WSJ. He might think European banks are going to be fine, but hes pretty certain we're ****ed.

So, eh, what do you think of your "outside commentators, not anyone with a vested interest in "hope and spin" - and commentators that were widely quoted during the first part of the crisis for exactly that reason." now?

Is he still a trusted, objective, disinterested observer now that he acknowledges that the Irish debt situation is unsustainable?

No wait, hes wrong about that right?

No, he's just a commentator writing something positive, which appears to be anathema. Let me put it to you this way - is he a "trusted, objective, disinterested observer" to you because he thinks the Irish debt situation is unsustainable?

Sand wrote: »

He claims it would be political suicide for Germany to force a restructuring of Greek debt, but discounts that it would be political suicide for Germany to force their citizens to cover Greek debts. He claims that both the Greeks and Irish will be willing to accept practically any conditions Germany might demand because they place such value on the EU. Given EU membership is not actually up for debate, and given even you admitted that you couldnt see any sort of EU treaty being passed here for the next few years how valid do you think his "opinions" are? Do you really agree that the Irish mood is such that even *if* Germans were to agree to bite down and pay for everyone ( not going to happen) that the Irish would bite down and agree to take fiscal orders from Berlin?

What Im trying to say here is...there is no short cuts. If we want to achieve economic properity then we need to earn it by applying common sense policies. We wont be given economic properity just because some nice man writes a positive spin in his opinion piece or we really, really, really believe in economic prosperity. You cant pursue dumb, self defeating policies for 4 years and then expect economic growth will suddenly fall out of the sky on us. Belief has nothing to do with it - if Ireland pursues prudent policies then it will prosper regardless of anyones optimisim or pessimism. If it pursues dumb policies, then it will not, regardless of anyones optimism or pessimism.

You're attacking a position I don't hold, though. My view remains that with all the dross that needs to be purged from the Irish - and more broadly the global - financial system, we're probably looking at years of sluggish and/or sporadic economies. But we're almost certainly not looking at a dramatic collapse, because the system has been shored up to stave off that possibility - and that very shoring up has ensured some of the sluggishness.

So, from my perspective, articles like this are interesting, because they suggest to me that in at least some quarters, broad market sentiment may be beginning to move away from "we're all doomed, it cannot be sustained!" to "huh, it's going to be sustained, and things will be pretty bleh for the next several years", which seems more realistic to me. In my view, market sentiment over-reacted drastically, and may now finally be correcting. The outlook is still bad, but recession/depression bad, not global-collapse bad.

cordially,
Scofflaw

1776

Time for Concern—Not for Panic—Over EU Banks?

Gonzalo Lira argues for panic. ("Reality is that which, when you stop believing in it, doesn't go away."--Philip K. Dick)

http://gonzalolira.blogspot.com/2011/08/sequel-how-2011-is-repeat-of-2008only.html#more