Saturday, 31 July 2010

Eurozone problems impact BIS Basle and Greece. UKIP remains oblivious

Currently the bankers at  the BIS meetings on bank regulatory reform are successfully watering down all proposals for international regulatory reform to a point that there will be no effective difference between Basle II CAD rules before and after. How on earth are they able to do this less than two years after they brought our economic system to its knees, cost Joe Public trillions of dollars to bail the out and became the most loathed group of people in the Western world?

Well its politics dear boy. The Eurozone banks are in such a mess that much stiffer new regulations would make this public especially in the homeland of the main proponent of stiffer regulation Dr Frau Merkel. In order to keep this away from the voters gaze all meaningful discussion has been shifted into BIS committees which are inaccessible to the public but are open doors to the bank lobbyists. Bankers have much longer time horizons and more intelligence than pin brained politicians whose horizon never extends past the next election. Its no contest! The bankers will have their way and in five years time all will be forgotten and a new generation of Millipedes will be telling us  how they have solved the bank problem, we have learned lessons, its different now we are in charge blah, blah blah.

Back in Greece trouble is starting even earlier than I opined. Greek fuel drivers are on strike in the holiday season. The tourists are cancelling bookings big time so no Euros there for Greece. The police cannot cope. The Greek army and Navy have been called in to deal with the strikers. It's all going to happen to us except our Army is in Afghan, our Navy is all admirals and our police only know how to fill in forms and as Private Eye pointed out have an Acting Chief Constable who bears an uncanny resemblance to Alice Tinker from the Vicar of Dibley.

As for UKIP, well its still celebrating shooting itself in both feet with Elco and thus handing millions of funds back to LibLabCon to use against UKIP in the next election.

Friday, 30 July 2010

Supreme Court judgement on UKIP v Electoral Commission

I seldom write on UKIP these days. There is no point while it is controlled by the sordid self seeking Cabal that have hijacked UKIP to further their own interests. The portrayal of the recent Supreme Court judgement by 4 to 3 in favour of UKIP not requiring UKIP to repay the whole Alan Bown donation of £300k as a great UKIP victory is utter nonsense. This was a battle that gained UKIP nothing and could, if one judge had voted differently, have bankrupted UKIP. It was the ultimate no win battle undertaken solely to massage Farage's desire for personal publicity following the Magistrates Court original ruling requiring UKIP to forfeit £18k. Remember all that rubbish Farage spouted on the steps of the Court about bullying the smallest boy in the playground!

After this pyrrhic 'victory'  UKIP is at best no better off financially and depending on the costs ruling may well be worse off. It was a huge, unnecessary and avoidable distraction at a time when the Lisbon Treaty was passed! If Farage's UKIP had devoted their time and energy to opposing that treaty in the UK rather than this pointless fight with Elco UKIP and our country would have been far better off .

David Abbott argued at the time with Del's support that UKIP should simply pay the forfeit, promise to tidy up its administrative procedures and move on, the common sense approach. The UKIP Cabal however does not do common sense!

The main beneficiaries will turn out to be LibLabCon who have all suffered financial penalties at Elco's hands and who will as a result of this Supreme Court judgement  be trying to reclaim the many millions they forfeited! Who needs enemies when you have the UKIP Cabal?

As a result of posting my above views on the Democracy Forum as my alter ego Somerset Yokel I was subject to the usual spiteful and inaccurate attack by Denny regarding my time on the UKIP NEC. He claimed I was the only person ever kicked off the NEC. He has obviously forgotten about David Abbott! They were of course scared to tackle Del because of possible claims of racism. It just shows how they attribute their own sordid thinking to others. Del would never stoop to that sort of thing!

Denny's main charge against me was that I had been rude to Duffy. The truth is of course the exact opposite and I copy my reply below.

Fact: Duffy accused me of having an ' alternative agenda'. I pointed out to her that I had only every had one agenda, to get us out of the EU in my lifetime. If Duffy wishes to make nasty unfounded allegations then she must accept the consequences of having her lies pointed out at the NEC.

Ditto with Denny's various unfounded allegations and hysterical behaviour. He never could produce any evidence! I found this unacceptable.


I also found it unacceptable to find Bannerman, someone whom I was expected to work with, was attempting by the most sordid underhand devices attempting to entrap David Abbott. You cannot work with people who behave like Bannerman or Denny.


Fact: Farage set up Martin Haslam, one of the nicest and most honest men you could ever meet, with an Independent newspaper journalist so Farage could accuse Martin of going behind his, Farage's, back to the press. Completely untrue! I challenged Farage at the NEC on this, he admitted it was true, I got up and said 'I refuse to continue to sit at the same table as someone like you whose main purpose is to entrap honest decent men'


The same tactics were used to entrap Del and remove him as head of young Independence and replace him with Duffy!


The malignant behaviour came from Duffy, Bannerman, Farage and Denny not me. Denny's hysterical behaviour when Mottram turned up at a NEC meeting was quite unbelievable!


I have never been on the UKIP payroll. I and David Abbott have always paid our own expenses because we believed in our cause of leaving the EU. In David's case that was considerable as he had to travel back from the US to find on one occasion Nuttall had cancelled the meeting!


We were not there for the money as many UKIP MEPs are, but for our beliefs. I am proud that David, Del and I stood up for our cause against a group who have subsequently besmirched our party's name by allying UKIP with neo-Nazi racists.


Bannerman's attempted entrapment of David Abbott was silly and incompetent and completely in character. Farage attempted to defend his entrapment of Martin Haslam as  "Testing his loyalty", loyalty clearly to himself was of course also completely in character. Sad indeed that UKIP is controlled by such characters

Thursday, 29 July 2010

Its getting the patient off life support that's the tricky part

Putting a patient on life support be it a ventilator or cardiac support is a well established and generally successful medical procedure. The reverse operation is not. I know how difficult it can be to get premature babies off ventilator support to breathe by themselves. If it works the prognosis is good but if the patient has to go back on the ventilator the prognosis worsens.

As it is with humans in failing health so it is with Euroland banks. In Greece these are currently kept afloat by the ECB buying or lending to Greece against roughly 140 bn € of Greek bonds as collateral. That's around twice BP's highest estimated liability in the Gulf. BP also has lots of assets that can and some will be sold at decent prices on the open market worldwide something Greece does not have. In Spain banks  have a huge exposure of one trillion private debt secured on one asset class property.

These countries banks have been rolling over their funding in the market at three month maturity but when the countries themselves have to go to those same markets for money there just won't be enough to go round and the price, i.e. the interest rates, of money will rise dramatically and some patients, sorry banks will die or go back on ECB life support again. Its called crowding out. It has happened many times before in financial markets and its about to happen again in Euroland. Step forward the King Canutes of the EU!

Wednesday, 28 July 2010

Stress tests, Alex, Reuters & Nikki

Today's Alex cartoon in the DT says it all. Alex is sitting interviewing a young job applicant who says to the great man ' So Mega bank passed its easy peasy, EU, stress test but what guarantee do I have it wont go bust before I actually start a job here? Quite. Says it all about these non-tests.

Yesterday, the DT published Reuters own stress test results which tested bank's entire holdings of sovereign debt not just that on their repo trading book and on that basis 23 not just 7 were found wanting. Much more believable in my view. They also examined core tier one capital effectively equity and found most German landesbanks struggling. All have state guarantees and none failed the official test. Six German banks failed to disclose enough information to run the Reuter's test so things in the Fatherland could be even worse. Watch the OIS Libor or Euribor spreads to see what the market thinks.

On UKIP  I applaud Nikki Sinclaire's ambitious 100,000 ‘People’s Petition’ in Birmingham and Stoke calling on the coalition government to hold a referendum on European Union membership.

Would we had more MEPs like Nikki and less useless Faragistas like Clarke. 

Tuesday, 27 July 2010

Why the Libor OIS spread measures stress in the banking system

AEP's piece in todays DT business notes the above. It was a measure much favoured by Alan Greenspan when he ran the Fed. To understand it you obviously have to know what Libor and OIS are so here goes for a concise explanation.

Libor stands for London Inter Bank Offered Rate and is the rate at which London banks will lend in size, say £100mn to £500mn, to other London Banks at various tenors from overnight to one year. The most important are the 1 month and 3 month rates. It is compiled daily by the BBA at 11:00 each day for a wide range of currencies by phoning 16 panel member banks for their rates. They then discard thetop 4 and bottom 4 and take the average of the middle 8 and that is the Libor rate they publish at 12:00. Simples!

OIS stands for Overnight Index Swap. It is a OTC market based swap rate over 1 week to 1 year tenors that settles against the geometric average of the published daily overnight rate between large banks. It is a huge market particularly in Euro dominated by less than 10 of the very largest banks in the world. The size of deals are in billions so roughly 10 times bigger than Libor deals and the figures are compiled by the ISDA. Again the most traded is the 3 month rate. It is a rate at which deals are actually done and is a proper weighted average. Positions in this instrument can be daily marked to market if needed.

So Libor is an unsecured offered rate between most banks calculated from a sample response so in that sense it can be manipulated. OIS is a harder market rate between the very biggest most credit worthy banks in the world. Hence Libor will trade above OIS usually by around 10 basis points representing the credit difference between the biggest and best run banks and the second division banks. At times of stress when lending to the second division is seen as more risky the spread widens and has gone out to 364 bps in October 2008 at the height of the credit crunch! So its worth watching. Click on this link to see a Bloomberg chart of this effect.

Well done AEP for reminding us of this and also for noting Spanish 10 year sovereign bond yield dropped 11 bps yesterday as the market felt Spain was starting to sort out its banking problems. The German banks who have been obscure about the amount of Eurocrap they hold are the bad boys this week and as I noted yesterday their bond yields have gone up.

Monday, 26 July 2010

Stress tests effect - watch the money

The market focus has switched from the seven sacrificial banks to those that just scraped through. Nobody is as yet fingering any particular one of these banks as dodgy but the market rates for 10 year sovereign bonds, widely held by such banks, are starting tell a story.

Bund rates have increased by 10 bps to 2.75%, remember a German bank was found wanting, Greek rates are now 11.6% an absolute increase and a blow out of their spread to Bunds and Spanish rates are now 4.52%. These are just precautionary moves in bond prices, so far!

Only the Far East markets have really had a chance to digest the stress test results. Reuters report, "On the surface, if anything, you have to take these tests with a pinch of salt," said Jonathan Cavenagh, currency strategist at Westpac, Sydney. "Sovereign debt problems remain, funding constraints for their banks are still there and these have the potential to weigh on the euro."

Economic news has been better than expected in Euroland and the UK leading to a recovery by the Euro and Sterling against the US dollar. Remember however budget cuts have yet to bite in both areas and the Club Med tourist season is in full swing. Mid September, things may look a lot different. 

Saturday, 24 July 2010

EU stress tests get thumbs down from the market

The results of the EU sponsored stress tests were as expected found wanting because of the numerous politically motivated omissions. As was widely leaked, five Spanish property banks, cajas, one German property bank and a general Greek bank were found to have failed these tests, a total of 7 out of the 91 tested, less than 10%! The negative market reaction comes from a number of omissions.

First on political grounds the possible sovereign default scenario was omitted. Linked to that is the lack of information on which banks are actually holding these Greek bonds. We are none the wiser on this issue now than we were before but it is rightly crucial, in the markets view, in assessing a bank's credit worthiness.

Second much of the sovereign debt held by banks was omitted  if they claim they were holding to maturity. Risible! Why or how long you intend to hold the dodgy bonds is irrelevant. Let AIDS you have got them and can't get rid of them.

Third, how on earth do you value these repossessed properties on bank's books. A problem we have in the  UK with NRock.

Fourth, the tests assume problems will be evenly spread over the EU. Cloud cuckoo land  thinking!

The end result is that the capital needed to recapitalise will have to come from EU governments, not  as happened in the US, from private investors. Investors simply do not see EU banks as a good investment.  The corollary is the EU bank sector will have to shrink creating yet more political problems for the EU especially in countries like Italy where there is over 1000 small regional banks!

Friday, 23 July 2010

EU Bank Stress tests out at 5pm today

This EU stage managed exercise will be published at 5pm, after the EU markets close, but unfortunately the US markets will still be open to give an instant verdict on the results of these tests designed to reassure the markets. Some banks are expected to fail, mainly the small Spanish cajas and a larger German property lending bank. Property lending will be the common factor in failing banks.

Personally I find this exercise unbelievable for small club Med banks. I once tried to find out from the Banca d'Italia how many banks there were in Italy. The answer was they did not know but certainly over 1000! Difficult to stress test banks you don't know about.

The big hole in the tests will be the exclusion of sovereign default by Greece or Spain. The standard regulatory response is if we put it in the markets would think we knew something bad secret about these banks. True in part but the real reason is it would be disastrous for the great EU project to even admit the possibility of a sovereign default.

Most of the bad results, Spanish cajas etc, have already been leaked to massage public expectations. How will the market react? I don't know. Its usual to say the devil will be in the detail or in this case the detail of what is omitted.

Thursday, 22 July 2010

Swiss currency is safest and IMF doubt EU none shall fail stress tests

I have a strong sense of deja vu on these two topics. The Swiss Franc, Swissie in the City, has always been the ultimate safe haven currency. Its backed by a relatively small economy so cannot absorb the funds others wish to transfer into Swiss Francs in stressful times. For a while the Japanese Yen  was perceived as a safe haven backed by a huge economy but  unfortunately Japan is now also drowning in debt so has lost its safe haven appeal.

There are currently huge flows into the Swissie from the Euro particularly Germany. The SNB tried to absorb this by selling SF for Euro but like the UK in 92 they were swamped by the market volume. The last time this became critical for the Swiss in the 70s they imposed negative interest rates on foreign holders of their currency. They may yet have to do this again.

My annual ski jaunt to Switzerland is starting to look very expensive!

The IMF is making increasingly concerned noises about the less than stressful Eurozone bank stress tests. In particular the lack of a sovereign default test and a transparency of how much such Eurocrap the Eurozone banks are holding. Transparency on the former is political poison to the Eurocrats and we have not yet seen any transparency from the banks on the amount of US trailer trash toxic debt they hold.

Why do the Yanks go Scot free after deliberately polluting the whole world financial system and BP get trashed for an accident? Phrases like too big to fail and only those with US votes count come to mind.

In the UK educational system we have seen the results of the none shall fail policy, an inexorable decline in standards. Thus will it be with banks and the money markets will decide between good and bad banks just as UK parents with money can decide between good and bad schools.

Wednesday, 21 July 2010

Alex Salmond puts the record straight on Megrahi

I watched Alex last night on Newsnight with Kirsty Wark and heard him on Radio 4 with Evan Davies. It made me proud to be Scottish. Alex is by far the ablest politician in the UK because he has integrity and consistency unlike LibCon and NuLabour.

When I worked for the civil service during the Heath administration I suffered the usual patronising snide remarks about Scots from English public school Oxbridge types along the lines, 'You Scots are so uncompromising'. I always replied I take it you mean I have an integrity that you seem to have lost.

Alex annihilated every one of the Wark/Davies questions in his defence of the Scottish government's decision to release Megrahi on compassionate grounds. Nothing to do with BP or deals in the desert. I recommend watching and listening on the links below to learn how politicians can answer questions properly and fully if they have integrity. ability and stick to due process which 99% don't!

Newsnight

About 15 mins in and lasts about 10 mins

Today

About 10 mins, mainly Alex

I loved Alex's put down of the last patronising question about was not Alex glad the Scots were not responsible for Foreign policy. I won't spoil it just listen to collapse of snide gnome.

If Cameron really wanted to help BP he should have sent that other Scot George Galloway who went across on his own without embassy support to face down the US Senate on their illegal Iraq war.

Tuesday, 20 July 2010

Hungary revolt against IMF augers badly for Greece. Farage flounders on Newsnight

As I opined yesterday thus reads the headline to AEP's piece in today's DT business. Hungary has been taking the IMF medicine for four years and its people have just had enough. They have seen no pay back for their sacrifices, a point that will not be lost on the Greek, or indeed the UK, populace. The markets do not seem to be rewarding good boys, as Ireland are currently finding out, but are certainly punishing the bad boys. The Greek bund spread pushed out to over 9% this morning a rise of around 30bps since yesterday.

Worse, it now seems the IMF is running out of money and may have to raise its resources to one trillion US dollars, 'as a precaution' is how Strauss Kahn described it! The IMF is not a central bank. It cannot manufacture its own money. It only has what national governments subscribe to it and they can only get money by borrowing, taxing or printing.

I switched on Newsnight last night to find Farage's features leering out at me. It quite curdled my cocoa. It was a discussion chaired by Kirsty Wark on banning the burka and as well as Farage there was a heavyweight Islamic intellectual and from New York and a well educated, articulate nice looking Islamic feminist. Where was UKIP's burka expert Lord Pearson? Farage was well out of his depth. K Wark quickly picked up on this and pretty well sidelined Farage allowing the Islamic feminist to do a good job demolishing the Islamic conservative intellectual or the Islamic right wing as she labelled him.

Farage's only contribution was to describe Belgium as a democracy rather than his usual description of it as a joke country. All goes to show a certain inconsistency of view verging on hypocrisy from Farage. Entirely in character some would say.

Monday, 19 July 2010

Mid European problems for the Euro folk

The IMF pulled the plug on Hungary's 20 bn € loan over the weekend. I cannot recollect this ever happening before. The Hungarians must have been very bad boys and not taken their austerity medicine. Hungary today Greece tomorrow?

In Euroland the authorities are currently inflicting a three medicine concoction of fiscal, monetary and currency tightening. Not the right medicine mix at all opines Tim Congdon. The accepted mix is fiscal tightening and monetary loosening. It looks like bad times are coming in Euroland or as AEP puts it, a 'deflationary vortex'. Fiddled bank stress tests are increasingly a side issue.

Worries are the Club Med disease could spread like the Black Death over north west Europe. So far only one country, Slovakia, has agreed to cough up for EU/IMF support package now entitled EFSF with the SF standing for the politically correct Stability Facility. Given Spain looks like it will be tapping this fund big time we have to ask who will be subscribing the money to the EFSF? Italy is down for a fair chunk. I don't think the markets will buy any more Italian paper, in fact I would say sell your BTPs now and buy Bunds and Oats.

Sunday, 18 July 2010

Consumer sentiment falls in Euroland

Thus reports US market research group Nielsen. They report sentiment in euro zone states Spain, France and Italy falling between the first and second quarters as European countries drew up austerity measures to tackle debt amid fears of contagion from Greece's debt crisis. In comparison in Asia consumer confidence is on the rise. Things will get worse in Euroland after the equinox.



10 year bond rate spreads to bunds remains close to 8%  for Greece and 2% for Spain. I don't expect much movement in these rates until the September equinox.as we are now entering the holiday season and can expect silly stories from the media until end August so I may not write as frequently until September. We can of course always rely on UKIP to provide plenty of silly stories peaking at the party conference in early September in Torquay the spiritual home of Basil Fawlty.

BP have done a superb engineering job in capping the Gulf oil well but that still does not satisfy Obama who now wants more work that will inevitably cause more oil spill. Its a shame BP 's problems arrived at this stage of the US electoral cycle with a president in deep political trouble and like General Galteri with Mrs Thatcher looking for a convenient foreigner to distract his voters attention from his own incompetence.

The Boy goes off this week to see big O and 'to fight BP's corner'. Bad luck BP you need a Mrs Thatcher not a third rate PR man. This morning brings news of 4 more British fatalities in Afghanistan. Its time to exit an unwinnable war we should never have got in to. The Russians who defeated Adolf Hitler lost there. It is delusional to think a bunch of Chicago crooks can win. As for us we have lost there since 1839. Concentrate on defending our countries borders and incarcerating and expelling those already here who seek to destroy us. 

Friday, 16 July 2010

UKIP truths emerge. EU bank truths won't

Today Junius named the anonymous Septic forum poster and blogger as one Martin Jay whom I have never met. Jay is named by Junius as an associate of Croucher, Fuller and Towler and is Brussels based. This ties in with my deductions that from the times of his posts that he was clearly Brussels based and from the content obviously an associate of Croucher but according to Junius not liked by Andreasen. I congratulate Junius. It says it all about EUKIP that their spin doctors are all based in, and paid by Brussels. Strange indeed for an avowedly EU withdrawal party.

David Abbott and I will be grateful if anyone can supply an address for Mr Jay so our representatives can contact him.

Meanwhile the chairman of the EU Finance ministers, J C Juncker said re stress tests "I am not expecting any big catastrophes," he told Austrian newspaper Kurier. "But there cannot be any glossing over, the tests are based on reality." This was then further qualified by the usual weasel words so I think we can deduce the tests have been fixed and I expect that will be the market judgement as well.

I am glad BP have announced some good news. It was an outstanding engineering achievement to cap the well allbeit temporarily. It puts motor mouth politicians like Obama in their place. I just wish, as a BP shareholder, that Peter Sutherland was still chairman of BP and not the useless Swede.

The Greek bund spread remains stuck at almost 9% despite huge amounts of EU hot air.  The Spanish spread of 2% plus is really worrying. Greece was always considered a basket case but Spain was thought to be a well run serious economy. Well maybe not.

Thursday, 15 July 2010

Spain taps the ECB for funds and EU advances to Nationhood

Apologies for this late composition, I was watching the Open Golf from St Andrews most of today.

The DT reports Spain calling on the ECB for a trifling 126.3 bn € last month, a 45% jump on the May figure. Nobody wants to lend to Spain so the ECB fulfils its central bank role of lender of last resort. It cannot go on indefinitely hence the urgency to get the Euro banks signed off with a clean bill of health after the non stressful stress tests. I and the markets shall be interested to see who fails these tests!

Reuters reports, 'The test scenario will assume a 3 percentage point deviation of the EU's gross domestic product from the EC's forecasts over a two-year horizon. It will also assume a "sovereign risk shock" in which some government bond prices would be marked down further from the depressed levels of early May. The size of such haircuts has not been officially announced and conflicting reports about them suggest national regulators may not be applying them consistently. A banking source told Reuters on Tuesday that the haircut on Greek sovereign bonds was 23 percent off "current market prices'.

I am not clear how the GDP part of the tests works. It was not in any stress test I ever saw. What about falls in equities or property? Far more relevant I would have thought.

Reuters also reports, "The outcome of the tests will be published on July 23, with results for some subsidiaries of large banking groups coming about two weeks later.
It is not clear where the results will be published and whether they will be released in one lot or piecemeal by national regulators."

All very vague and unlikely to satisfy the markets. Who fixes the failing banks by lending to them. Only the Gertmans have a national fund to do this. The ECB better keep printing the Euros.

Meanwhile on the political front the EU goes from strength to strength and has been accorded nation status and a seat at the UN.

Mr Farage said: "This is the thin end of the wedge. How long before David Cameron concedes our seat at the UN Security Council?"
 

For the record and Mr Septic Tank I agree with Mr Farage on this one but if he really believes his statement why did he encourage via Lord Pearson UKIPers to vote for Tory MPs?

Wednesday, 14 July 2010

Spanish councils cannot pay their bills or workers

So runs the report in this morning's DT despite the previous days report of Chinese support for Spanish sovereign bonds the majority of councils in Andalucia are insolvent or in deep crisis. One mayor claimed he and his councillors had not been paid for two years. If that is true then you don't have to look far for the cause of bribery and corruption in Spanish land deals.

A large part of the reason is that the slump in construction and property development has led to a 30% drop in council revenue. Total council debt is a small, 3%, fraction of GDP but as AEP points out and I have flogged to death the real danger is political. Prolonged slumps cause social tensions and breed extremism.

Also in Spain an RBS report claims Spanish banks need  at least 50bn€ of fresh capital to pass the most lenient stress test. Psst, wanna buy shares in a Spanish bank? It looks like Spain will have to start soon drawing on the much trumpeted EU/IMF package but hold on that was for Greece a much smaller economy.

As AEP reports, and I have often opined, 'What matters in the end is how club Med copes with the pain of wage cuts and debt deflation year after year.'

To finish on a cheerful note wee George reports a triumph over the EU. The Ecofin council yesterday decided that the banking regulator will be based in London. This was always the plan except nobody told our useless MEPs who voted yesterday to site it in Frankfurt. Ah well that's one thing we can all agree on, MEPs are a waste of space.

Tuesday, 13 July 2010

Greece finds it difficult to raise cash on the market & more stress test problems

The FT reports today that Greece had to scale back its proposed bond issuance yesterday from 12 months to 6 months tenor and roughly halving the quantity. Even at this short maturity the Greeks are paying 4.55% up from 1.38% in January. They would have liked to issue at 12 months but were not prepared to pay the rate the market would demand. Postponing the day of reckoning till next month I would say. Existing Greek 10 year bonds yield about 10.5% slightly down following 'helpful' ECB Greek bond purchases. More worrying is the report that Greek tax revenues are falling as the EU/IMF fiscal reforms start to bite.

The FT also reports the Chinese State Administration of Foreign Exchange, SAFE, bought 400mn € of 10 year Spanish government bonds last Tuesday. The offer was oversubscribed with the Chines bidding for up to 1bn€ of these bonds. Clearly Spain is still able to fund itself at 10 years all be it at 2% over bunds, not sustainable over any length of time in my view.

S&P have warned UK debt may be downgraded and interest rates therefore rise despite Osborne's measures to curb the national debt.  Worrying when put alongside the latest ONS figures showing a 1.6% drop in exports in the 3 months ending March and that the 0.3% increase in GDP over the same period was caused by a 0.4% boost from Labour's death throw unfunded spending spree. Hard times are coming.

Reuters have just reported that the EU Economic affairs commissioner, Otto Rehn as saying, "It is fully in the self interest of ... every bank for there to be full disclosure of the results of the stress tests, that is the best way of restoring confidence to the banking sector." Fine words but the EU Finance ministers can't agree on this full disclosure. Sources said France was questioning the need to publish the exposure of banks to sovereign debt and underlined the difficulties of having a harmonised tier one capital ratio which would enable comparisons across the EU. Ah so now we know who has a lot of Greek debt on the books.

Monday, 12 July 2010

PIIGS may yet fly

Thus starts the title for Roger Bootle's regular Monday morning piece in the DT but it goes on to add, "but not while they're trapped in this rickety eurozone. His piece contains a surprising amount of common sense for an economist, "Debt problems are usually helped by inflation and made worse by deflation" is the truest and most memorable but he also notes that as an economy moves into deflation the real rate of interest rises as interest rates cannot be negative.

Meanwhile in Euroland Mm Lagarde is mangling Churchill by saying, ""We are in the middle of the beginning of the end." The financial powers that be in Euroland, J C Trichet et al, believe the publication of their positive stress test results for EU banks will restore confidence and lending by banks and slowly things will improve as they did in the US following their publication of bank stress test results. It really all depends on how much Eurozone sovereign default risk is included in the tests. Even to admit such risk is significant is anathema to Brussels. But not to include it is unacceptable to the markets who recognise that the Eurozone's problem overall is a sovereign debt not a banking crisis. There are numerous PIIGS banks looking dodgy but they are not Lehmans.

Bootle correctly links the debt problems to lack of competitiveness of the PIGGS economies compared with other Euroland economies principally Germany and he goes on to list some unpalatable choices for Euroland:

1. Higher rates of inflation in Germany would make lower rates of inflation easier in Club Med

2. Default by some or all of the PIGGS inevitably leading to them leaving the eurozone


3. Germany leaves the Eurozone


The EU politicians will continue to try and push water up the hill but inevitably they will start to lose the battle and have to reach for their nuclear option of full fiscal and political union, the Fourth Reich final soluition to the EU problems you might say. This will take place against a backdrop of major civil unrest, riots, strikes death on the streets in Club Med land as the EU/IMF cuts start to bite. We will see the same thing here in the UK.

Something has to give soon in the Eurozone as currently constituted. Now does anyone know what that octopus Paul is doing this week or have the Dutch turned him into calamari.

Sunday, 11 July 2010

Eurozone regulators and othodoxy challenged

The Sunday Telegraph carries two interesting pieces today on the Eurofolk. Our esteemed and useless MEPs have voted for all three of the proposed EU financial regulators to be based in Frankfurt. Do these clowns not realise that Sarky Merkel set up three regulators so everyone can have one?

Wee George is going to give these MEPs a piece of his mind this week and demand one of these regulators be London based. I think he might get the support of Sarky and Merkel for this demand and thus polish up his Europhile credentials as well. A win-win situation for wee George. More difficult will be his demand that the EU super regulators will not be able to over-ride the decisions of national financial regulators because when they cock it up, as they surely will, it will be the national governments that will have to cough up and clean up the resulting mess just like last time.

Then there is the vexed question of who will appoint the head honchos of these regulators. At present it will be the Commission. Wee George wants national governments to have a say. Oh dear, I see more jobs for van Rumpoys and Cathy Whos. Non-entities preferably with no knowledge of finance please submit your CV to M Barroso, Brussels.

Meanwhile back at the ranch Capital Economics, aka Roger Bootle, have produced a report saying 'breaking up the Eurozone would benefit Europe'. These smart economists make a lot of money out of opining the bleeding obvious. The problem Mr B is as you should remember from your PPE course the first P stands for Politics. The break up of the Eurozone would be an economic, the E in PPE, win-win situation for all the peoples of Europe. Only one group would lose out, the European political class. Ah well  another great, if not original, idea bites the dust.

Friday, 9 July 2010

Greeks strike against pension reform plan, UK next?

Yesterday Greek workers went on strike against government plans to raise the pension age and reduce benefits as demanded by the EU/IMF package. Despite it being the start of the high season for tourism, 20% of Greek GDP, the strikers shut airports, railways and ferries. The latter are of course the core of the Island tourism business.

The work longer for a smaller pension is now appearing as a core LibCon policy. The change from RPI, which tracks the cost of living, to CPI which does not is worthy of the former great leader, GB, at his best. Note no attempt to reverse Gord's 97 tax grab from the pension funds that set the whole mess up.

As the BoE's former market mathematician I note the point all the media experts have missed that RPI is an arithmetic average and CPI a geometric average. All Greek to you? Well there is one clear mathematical fact that holds on the planet Zog as well as LibCon land, a geometric mean of a set of numbers is always less than the arithmetic mean unless all the numbers are the same.

A simple example makes it clear. The arithmetic mean of 4 and 5 is 4.5, The Geometric mean is the square root of 4 times 5 ie square root of 20 is  4.472, less than 4.5. Misleading fund management companies used to play the same game by comparing their performance to the FT30 index, a geometric mean index of 30 shares which they could easily beat rather than the FT Actuaries All Share which as an arithmetic mean was rather more difficult to beat.

It did not take LibCon to revert to NuLab's bad old dishonest ways. I look forward to a winter of discontent made even worse by this glorious son of Witney, Richard III, Act 1, Scene 1. It ends with my kingdom for a horse. There may be a message there for CleggCam users. 

Thursday, 8 July 2010

Break up of EMU would be a disaster says ING or just talking their book

ING, the Dutch Bank that bought Barings lock stock and debt for £1, has just published a report opining that the break up of EMU would lead to financial Armageddon, the worst crisis in modern history, devastate every country in Europe even Germany and might even be worse than the Lehman's bust. They say in the event of such a break-up the new Greek drachma might crash by 80% against the new Deutschmark.

Two questions. First how much PIGS' Eurozone debt does ING hold that it can't get rid off? Second is not their motive a simple political scare aimed at Frau Merkel's increasingly anti-Euro voters?

Mr A E Pritchard who features this story large in today's DT does not pose these questions and neither does Richard North in his EU Referendum blog today. Talking your book is standard practice in every bank Its a variant on where you stand on issues depends on where you sit.

Spreads  on Greek debt have come in a bit recently from 8% to  7.5% but seem to be sticking there. Other PIGS spreads are also obdurately high even with the ECB waiving its own previous veto on purchase of PIGS bonds, which was the reason for the slight contraction in PIGS spreads.

ING is missing the big point. The Euro is, and always was, a political not an economic project. It will die on the streets of Athens, Madrid and Lisbon this autumn as national politicians increasingly will not be able to take the violent civil unrest on the streets of their capitals.

Wednesday, 7 July 2010

Bank stress tests put EU leaders in the hotspot

The above is a Reuters headline on the potential damage that could be done by how the results of such tests are published. The Spanish want results published on a bank by bank basis but the French and Germans do not. Even with the EU stress lite tests some banks will fail causing a major headache for the EU on 23rd July the publication date. Results will be published in London in the fond hope a little bit of British integrity will rub off on some of these dodgy banks.

Christine Lagarde, the French finance minister wants the methodology and assumptions published before the results as the US did. A bit dangerous when the latest story reveals a 16% to 17% haircut for Greek bonds held by banks, eyewatering, and official recognition of the dodgy state of Greece.

In an analysis of the potential outcome of the tests, assuming the application of stresses such as lower than expected GDP growth and a 10 percent decline in property prices, Swiss bank UBS identified Germany and Spain as two of the major risks.

At the same time the FT reports as I opined that hedge funds and others of their ilk are laying plans to decamp to Switzerland following the new EU regulation. Ah well its not lost what the gnomes get. 

Tuesday, 6 July 2010

New bank stress tests will be stressful for the EU

Stress testing a bank's balance sheet means calculating what would happen to it if something nasty happens for example a 30% drop in the equities market. Euro banks are stuffed with Eurozone sovereign debt so asking what would happen if one or more of Eurozone countries defaults on its debt seems a reasonable test to apply. This is a big problem for the EU as they have proclaimed no Eurozone country will default. So to include such a scenario in a stress test is to admit it could happen and is therefore politically unacceptable. The EU solution? Easy, just don't include that scenario in the test. The problem? Those nasty Anglo Saxon markets won't swallow it. Even the German media have called it  a 'stress test without stress'!

Already the delectable Madame Lagarde, the French finance minister has stated the tests will show that Europe's banks are 'solid and healthy'  before the tests have even been done. Le test c'est moi so to speak from our latter day Madame de Pompadour. Even  ECB margin or haircut levels for different countries applied in these tests will inevitably become public knowledge and the EU fears the queues at the bank doors will soon start. Even a pretty modest haircut of say 3% on sovereign debt would leave German banks with €47 bn of losses according to AEP in today's DT. He also reports a market source saying the ECB is not buying Spanish corporate bonds. Sounds like the rain in Spain is expected soon on Spanish Cajas.

Private investors are already pricing in a 50% 'haircut' on longer dated Greek bonds and something approaching 30% on similar Spanish bonds. These bonds are widely held by all Euroland banks so you can see that a stress test based on haircuts of that magnitude would leave few Euroland banks looking solvent. Worse, there would be a domino or correlation effect to transmit the contagion from one country to another and this again would not be politically acceptable to include in a stress test.

 Being helpful the EU will allow banks to run their own stress tests, a bit like marking your own exam paper. It ensures none shall fail and politicians can have their grande vaccances. Only the hair shirted Brits applied independent stress tests through their now politically discredited FSA.

 But why do Euro banks hold such high levels of sovereign debt. Well it can be sold to gullible investors as a nice low risk lucrative strategy called a carry trade. Buy a 10 year sovereign bond yielding conservatively 4% with money borrowed at 0.5% from the ECB and pocket a nice turn until the sovereign issuer stops paying the bond coupon or even worse cannot meet the capital redemption.

For politicians seeking re-election there is another facet to this problem. Taking bigger haircuts reduces a bank's Tier One capital that determines how much a bank can lend. Reducing tier one capital from say 10% to 8% of its deposits means not a 2% reduction in bank lending but something over 20% reduction in lending. This would push most of the Eurozone into a double dip recession and bring the workers out onto the streets seeking politicians blood. Good luck to them and vive la revolution!

Monday, 5 July 2010

Hedge Funds & the EU

The EU bureaucrats have got the hedge funds top of the list for a big dose of EU style regulation. The hedgies are clearly concerned. Their dilemma is summed up by a recent quote by one Wouter ten Brinke, head of Amsterdam-based fund of funds Theta Capital, "You're not going to make money if you're forced to sell every time something goes down. People will have to realise this when they invest in their Ucits III structures." Ucits are segregated accounts offering investors transparency and day to day control over their largely liquid funds. This is not likely to be profitable in the long run as Mr ten Brinke says, ""If you have staying power, if you're not forced to liquidate, that's where you can benefit most from less liquid strategies or instruments."

Studies have shown hedge funds with lock up provisions produce excess returns of 4% to 7% per year over their relevant liquid benchmarks, ten Brinke said and although he runs a fund that invests in illiquid instruments and is talking his book there is considerable truth in what he says. Nevertheless to attract the punters funds are going to have to promise to hold much more in liquid assets than the did previously. A recent survey of such funds showed most expect 2010 to be a 'trying' year ie much smaller profits and bonuses. These funds now they have a problem of rebuilding trust with their investors, maybe not on a BP scale, but sufficient to badly dent the bonus gusher.


The Channel Islands, another hot bed of hedge funds and not in the EU, have decided to open offices in Brussels and New York to lobby and influence proposed draconian fund regulation which would cripple their economies. Previously the Islands relied on Britain to do the diplomacy on their behalf but its clear they no longer believe the UK FO to stand up for their financial interests in the EU or US. The Islands also have a significant agriculture and fishing sector in their economies which the FO has never shown any interest in representing.

I remain convinced however the hedgies will migrate to Switzerland. The Swiss understand and love money and people with money. The have the best democracy in the world, the fewest professional politicians and binding referendums if the people don't like what the government proposes. The international schools are excellent as is the ski-ing. Add in low crime and low personal tax and it's a no brainer in my view.






Friday, 2 July 2010

EU rescue fund is not big enough

You can't fool all of the people all of the time. Eventually truth will out or in the case of Eurozone banks, bad debts and sovereign downgrades. Banking is about keeping depositors confidence so banks delay confessing to rotten apples on their balance sheet until they are forced to do so by queues of depositors wanting to withdraw their money. The evil hour draws nigh for banks in Spain, unsurprisingly, but also more surprising banks in Germany stuffed with US trailer trash debt. How will we find out? When they go running to the EU/IMF to draw down funds from the much vaunted support package.

This package was set up originally to deal with the small economies of Greece and Portugal, not medium sized economies like Spain or whoppers like Germany. The cause in Spain is the usual one that triggers bank failures, over-lending on over-valued property. Property is in economist terms an illiquid market or in every day terms you could not even sell a castle in Spain right now , there is a glut of castles on the market. German banks as I remarked above have been well and truely shafted by Yankee MBS salesmen. German Landesbanks do have a state guarantee so can call on German government funds in the last resort. Non-landesbanks have no such guarantee.

So it is scarcely surprising to read in today's DT that , as I opined some time ago, Dr Frau Merkel's coalition government is in increasing political trouble and will not stay the course. At the same time the US looks headed for a double dip recession so bad news for Mercedes etc. Obama has BP to kick and persuade his electors he is doing something but alas Merkel has no such luck. The grande vacances cannot come soon enough for Merkel, Trichet and Sarky but remember Autumn, season of mists and mellow fruitfulness, is the traditional time for financial crises.

Thursday, 1 July 2010

Bob Crow wants coordinated strikes against Oik's attack on the working class

I like Bob Crow, leader of the RMT union for his transparency and honesty. I would we had more like him in UK public life. Even arch Tory Fallon of the TSC acknowledged these qualities in Crow. So as I opined earlier this week in this blog our Union boys will not be outdone by Johnny Foreigner as England's footballers were in South Africa. The real action will start after the summer hols.

Following the end of the 12 month, 442 bn€  ECB repo demand for refinancing this week was less than expected. Yesterday's 132 bn€ of 3 month money was much less than expected and led to a reduction in PIIGS bond bund spreads and in today' one week money ops only 112 bn€ was taken up. This means rates will rise on the inter-bank market. I suspect the ECB has been taking much bigger haircuts on Euroland banks sovereign bond collateral so increasing the rate to these banks.

Worryingly for the City  the EU will restrict hedge fund bonus payments by applying the bank bonus rules to these and other funds. I predict a large geographical movement of these funds from Mayfair to Geneva. They could also think about the Channel Islands which paradoxically are not in the EU. Its seriously bad news for City lawyers. When the host disappears the parasites also die.

The Tories have of course rolled over to the EU as we all, except Lord Pearson, knew they would. Hague is waffling on about the UK being under-represented in EU officialdom. Its been like that since 1973. Its purely a distraction before the next ConLib sell out.