'Twas a grand day. It started with Cameron back from Brussels where reports had it that he had been battered...and everyone ignored the reports. Up went the market and by the time things got going in New York, things were really rolling. The DOW close up 285 points and everything else followed. The realization that the UK was not going to sink beneath the sea grabbed everyone and the geniuses who predicted disaster were fewer and fewer to be found. Of course the July 4th. weekend is coming up so a lot of them might have been off to the Hamptons, having gotten square, where they could count their losses and blame them all on the stupidity of the British voter. As Richard Haass of the Council on Foreign Relations said the other day--in public, mind you--"These issues should never be left to a referendum." I'm sure he'll convince everyone at Donut du Jour in Sag Harbor this weekend...if the place still exists. After a few, he might consider a little swim in Plum Gut. Glub, glub.
But wait! It got better. After the bell, Big Danny and his mob announced that from their standpoint 33 out of 35 major bank had paid the vig, got the numbers right and passed the capital plans on their stress test. Announcements of raised dividends and buy-backs immediately followed. In after hours trading, the entire sector was up. Keeping in mind that it was this sector that suffered the heaviest losses on Friday and Monday, tomorrow's opening could be through the roof--keeping in mind that I don't know a damn thing about the stock market.
Oh, the two banks that did not pass? The U.S. units of DeutscheBank and Santander; which is indicative of what the Euros are facing. After 8 years, their financial sector still hasn't gotten itself out of the deep do-do in which it has been mired. Frankly, I'm a bit surprised at Santander but NOBODY is surprised at Deutsche and I suspect that there are many others in the same boat who simply don't operate in size Over Here. Not to panic, however, as DeutscheBank has its Angie. Anybody know the German for bailout?
So, what's it all about, Alf? Back to original prediction. The howling will die down, July will come and go and all of the Continent will shut down for August. While this is going on, the Conservative Party will choose a new P.M. from, I suspect, a goodly number of applicants for the job--more than people expect. He or she will take control when Cameron decides to leave. Boris is odds-on but there is a reasonable chance that a REMAIN member might get the nod and this could be important. Cameron's time-table will come to pass as many in the leadership realize that time is on their side and the Euros can't do a thing until the UK invokes article 50, all the time watching as things get nastier both politically and financially. There will be rumblings to declare Mario Draghi a Living Saint but look out for Greece in this whole thing. Their bargaining position has just traded on a major up-tick and it will be interesting to see how far they are prepared to push it. I believe that the time is now for them to get the best possible deal even if a bit has to come direct from the Bundesbank--which is a total no-go, but in times of stress a way could be found. Anyway, this is a day to day proposition, so let's wait to see what happens tomorrow. Fascinating, truly fascinating.
Showing posts with label European Banking. Show all posts
Showing posts with label European Banking. Show all posts
Wednesday, June 29, 2016
Wednesday, August 5, 2015
JOINING THE CHORUS
How fun. It was great to see today on the op ed page of the WSJ, a piece by Andrew Atkeson of UCLA and John Cochrane Of Stanford's Hoover Institute. The subject? Why a banking fix in Greece. I quote from the second paragraph:
Greece's banking crisis revealed the main structural problem of the Eurozone: A currency union must isolate banks from sovereign debt...Europe must open its nation-based banking system and recognize that sovereign debt is risky and stop letting countries use national banks to fund national deficits.
I couldn't have said it better myself...well, actually I could and I have. Unfortunately, Andy and Johnny get all caught up in nonsense about which they are wrong anyway as to where and how Greeks can deposit money out side of Greece and start babbling about how the Euros should recapitalize Greek banks as FDR did in 1933 and move on to the Spanish and Italians and all will be well in a short period of time. In a nutshell, they point out the problem with academics; most are clueless as to the workings of the world.
There is probably a multiple of the former total prior primary capitalization of the Greek banking system, owned by Greek citizens sitting somewhere outside of Greece. We're talking BILLIONS of Euros, guys. Citizens of southern Europe have always hedged their bets; that's just the way they have always lived as the stability of financial systems and especially of governments has dictated this way of life. The mere recapitalization of a system by the Eurozone will not move a penny back to Greece. The restoration of confidence will...after an appropriate period of time..with new management and higher incentives (better than average returns to the depositor) and a business plan of commercial banking not deficit financing. There is plenty of money around for that exercise. Indeed, it was already attempted as witnessed by the American financier Wilbur Ross reportedly having invested somewhere in the neighborhood of $1.5 billion in the Bank of Athens which he is about to lose unless something very wrong is cooked up. Mr. Ross' timing was awful and his advice worse, but if at first you don't succeed...it will not be as costly the next time as there will be no illusions about the bail-out of Greece. Yes, Toto, there will be a write-down of some sort.
But the guys have it right as to the change of rules regarding sovereign lending. And change they must unless...and this is a real issue...the template of European government since the end of WW II does not change. As Frau Merkel has stated, Euroland is responsible for 50% of welfare spending in the world today, a hint perhaps at agreement with Ms. Thatcher who memorably remarked that eventually you run out of other people's money. In fact, change is in the air. In Spain and even in Italy, work rule changes are underway. More and more politicians are prepared to run on reducing the safety net and in Greece Mr. Tsapris remarked just last week that it didn't seem to make sense to pay people not to work in reference to Greek laws that make it possible for workers in certain professions to retire below the age of 60 with full benefits.
I make no moral or value judgement on any of this but it certainly seems to make sense. What I think will be as equally important if labor and social reforms advance is the acknowledgement as to what banks should NOT be doing as we have discussed. Nevertheless, governmental financing will still be required which will undoubtedly result in the far more rapid development of a European Capital Market which has been sorely lacking. Ironically, the continued presence of the Euro which has been the cause of so much mischief might be one of the greatest advantages to sound governmental financing throughout the zone. Unlike the United States which can always print it's way out of financial default (at a cost to be sure), Euro-participating countries will not have that luxury, and when the debt holders are taxpayers and voters there might well be a perceived requirement for fiscal sensibility that goes a bit further than the vault of the local politically connected bank. The Euros could start running banks like banks again. Goodness, what might come of that.
So it is good that our two heroes of today did call attention to this most important issue and even if they didn't get it all right they are to be congratulated for the effort. Get the banks out of the deficit financing business and get management who want to be bankers not quasi-politicians into the running of the system. Restructure the Greek banks with private money, not taxpayer money. It is available. And don't over-regulate them (remember, following regulations contributed mightily to the problems) while making very clear that it is the job of central banks to contribute liquidity but not solvency support. Who knows, it might even work.
Greece's banking crisis revealed the main structural problem of the Eurozone: A currency union must isolate banks from sovereign debt...Europe must open its nation-based banking system and recognize that sovereign debt is risky and stop letting countries use national banks to fund national deficits.
I couldn't have said it better myself...well, actually I could and I have. Unfortunately, Andy and Johnny get all caught up in nonsense about which they are wrong anyway as to where and how Greeks can deposit money out side of Greece and start babbling about how the Euros should recapitalize Greek banks as FDR did in 1933 and move on to the Spanish and Italians and all will be well in a short period of time. In a nutshell, they point out the problem with academics; most are clueless as to the workings of the world.
There is probably a multiple of the former total prior primary capitalization of the Greek banking system, owned by Greek citizens sitting somewhere outside of Greece. We're talking BILLIONS of Euros, guys. Citizens of southern Europe have always hedged their bets; that's just the way they have always lived as the stability of financial systems and especially of governments has dictated this way of life. The mere recapitalization of a system by the Eurozone will not move a penny back to Greece. The restoration of confidence will...after an appropriate period of time..with new management and higher incentives (better than average returns to the depositor) and a business plan of commercial banking not deficit financing. There is plenty of money around for that exercise. Indeed, it was already attempted as witnessed by the American financier Wilbur Ross reportedly having invested somewhere in the neighborhood of $1.5 billion in the Bank of Athens which he is about to lose unless something very wrong is cooked up. Mr. Ross' timing was awful and his advice worse, but if at first you don't succeed...it will not be as costly the next time as there will be no illusions about the bail-out of Greece. Yes, Toto, there will be a write-down of some sort.
But the guys have it right as to the change of rules regarding sovereign lending. And change they must unless...and this is a real issue...the template of European government since the end of WW II does not change. As Frau Merkel has stated, Euroland is responsible for 50% of welfare spending in the world today, a hint perhaps at agreement with Ms. Thatcher who memorably remarked that eventually you run out of other people's money. In fact, change is in the air. In Spain and even in Italy, work rule changes are underway. More and more politicians are prepared to run on reducing the safety net and in Greece Mr. Tsapris remarked just last week that it didn't seem to make sense to pay people not to work in reference to Greek laws that make it possible for workers in certain professions to retire below the age of 60 with full benefits.
I make no moral or value judgement on any of this but it certainly seems to make sense. What I think will be as equally important if labor and social reforms advance is the acknowledgement as to what banks should NOT be doing as we have discussed. Nevertheless, governmental financing will still be required which will undoubtedly result in the far more rapid development of a European Capital Market which has been sorely lacking. Ironically, the continued presence of the Euro which has been the cause of so much mischief might be one of the greatest advantages to sound governmental financing throughout the zone. Unlike the United States which can always print it's way out of financial default (at a cost to be sure), Euro-participating countries will not have that luxury, and when the debt holders are taxpayers and voters there might well be a perceived requirement for fiscal sensibility that goes a bit further than the vault of the local politically connected bank. The Euros could start running banks like banks again. Goodness, what might come of that.
So it is good that our two heroes of today did call attention to this most important issue and even if they didn't get it all right they are to be congratulated for the effort. Get the banks out of the deficit financing business and get management who want to be bankers not quasi-politicians into the running of the system. Restructure the Greek banks with private money, not taxpayer money. It is available. And don't over-regulate them (remember, following regulations contributed mightily to the problems) while making very clear that it is the job of central banks to contribute liquidity but not solvency support. Who knows, it might even work.
Monday, August 3, 2015
EUROLAND
Greece. Other than playing the heavy in this ongoing surreal drama, it appears that the rest of Europe receives no attention. By the by, the Athens Bourse opened again today and crashed as expected, down 16% at the close. Greek GDP has collapsed as has the manufacturing sector and the banks...one as a result of the other..or vice-a-versa. Whatever. Back to Euroland.
It may be hard to imagine at this point in time, but the Greek crisis may have more of a material, long-lasting effect on Europe than on Greece. That may not be a bad thing. We should remember that the European Union was really an exercise in politics than a political or financial union. If one is to be honest about it, it was really conceived as a way to keep Germany from roaming about outside of its fences as had been the case for the previous 100 or so years with all the unpleasant results that accrued. Would Germany emerge as a premius inter parus in this scheme? Probably was the thought but it avoided the alternative which after two wars was firmly implanted in the European mind. It really wasn't a bad idea but with the political scheme exhaustively thought out, not enough thought was given to the fiscal foundation and although warning bells were sounded literally around the world, there came the birth of the Euro, a screaming, howling child with no mother, no father and hence, no discipline. Some cleverly stayed out of the nursery like the Brits and have lived to rejoice although from time to time they have tried as hard as they might on their own to cock things up to a fare-thee-well. The common currency has caused all sorts of mischief.
Unfortunately, whilst taking this bold step, Europe remained firmly rooted in things past which has caused as much difficulty as the currency. In a world of rapid innovation and greater decentralization, Europe became more central in it's governance and more resistant to innovative change in many areas. The European Commission and Legislature took on the greatest role in rule-making to the smallest level in local economies. With that came the expected inefficiencies which seem to always connected to governmental bureaucracies. At the same time, which creating a common market larger than that of the United States, the inability to modernize probably the most important sector to a continent recovering from unbelievable destruction, the financial sector, has cost Europe dearly. The difference between the Europe of the start of the 21st Century and the Europe of the 20th Century was, in this critical area, very small, indeed. Europe's present and its future revolved around its financial sector and the financial sector was its banks. And the banks never changed. Oh, they created different products to be sure and operated in different sectors, but the one thing that never changed, for the entire history of Europe from the end of WW II, be it in periods of nationalizations or until today, was the connection of national governments to the financial system and the special relationships fostered therein. I think it is accurate to state that the condition that Greece finds itself in today is a result of that relationship.
Greece, to be sure, has been an exercise in governmental malfeasance but one made possible through the insanity of sovereign risk lending conducted as if there was not risk, encouraged by national and Euro-wide governments and regulatory bodies that supported that belief. And it was just not Greece. All of Europe and all of the European institutions and corporate entities were financed by banking sectors that were inextricably intertwined with the political forces at large, irrespective of party affiliation of philosophy. If there was to be a Greece, or an Ireland or a Portugal or a Spain it would not simply be a governmental/political crisis simply solved in a political manner by voting the rascals out, it would always be a banking crisis and solving that is no easy task.
As we have said over and over, the difference between Greece and Mexico in 1982 wasn't that great. First, you save the banks and once you do that, you figure out where to go from there. But, there are ways to do that that can create far greater problems in the future if you do it wrong and because of the relationship between European financial institution and their governments, the Euros got it wrong; they just didn't save the banks, they bailed them out substituting the European taxpayer for the bag holders in this tragedy.
I will not pretend that in the early days of the Latin Crisis that all involved knew where it was heading but I can say with perfect certainty that within a few years the unsustainability of the debt burden for most of the countries involved was readily apparent to most and the solution, though not a happy one was clear. the only question remaining was when and how much and how best to prepare one's self for the inevitable. Most of us did a pretty good job and one thing to keep in mind as well is that we learned from it. There have been sovereign risk disasters since that time but there has been very, very little cross border sovereign risk on the books of American banks. Very little. Not so in Europe and in addition, the appetite for sovereign risk in this country has been satisfied by mutual funds and hedge funds who invest their own money (well, capital levered up to the gills but that is another story). The growth of the capital markets in the United States, unmatched anywhere else in the world has made this amelioration of risk possible. This has not been the case in Europe.
What Europe now faces is the same situation we faced in the eighties except taking the place of shareholders there are voters and that is a game changer; an immediate one and one with far reaching ramifications. I hope to follow up on those thoughts as the week progresses. Hope you stick with me and offer thoughts of your own.
It may be hard to imagine at this point in time, but the Greek crisis may have more of a material, long-lasting effect on Europe than on Greece. That may not be a bad thing. We should remember that the European Union was really an exercise in politics than a political or financial union. If one is to be honest about it, it was really conceived as a way to keep Germany from roaming about outside of its fences as had been the case for the previous 100 or so years with all the unpleasant results that accrued. Would Germany emerge as a premius inter parus in this scheme? Probably was the thought but it avoided the alternative which after two wars was firmly implanted in the European mind. It really wasn't a bad idea but with the political scheme exhaustively thought out, not enough thought was given to the fiscal foundation and although warning bells were sounded literally around the world, there came the birth of the Euro, a screaming, howling child with no mother, no father and hence, no discipline. Some cleverly stayed out of the nursery like the Brits and have lived to rejoice although from time to time they have tried as hard as they might on their own to cock things up to a fare-thee-well. The common currency has caused all sorts of mischief.
Unfortunately, whilst taking this bold step, Europe remained firmly rooted in things past which has caused as much difficulty as the currency. In a world of rapid innovation and greater decentralization, Europe became more central in it's governance and more resistant to innovative change in many areas. The European Commission and Legislature took on the greatest role in rule-making to the smallest level in local economies. With that came the expected inefficiencies which seem to always connected to governmental bureaucracies. At the same time, which creating a common market larger than that of the United States, the inability to modernize probably the most important sector to a continent recovering from unbelievable destruction, the financial sector, has cost Europe dearly. The difference between the Europe of the start of the 21st Century and the Europe of the 20th Century was, in this critical area, very small, indeed. Europe's present and its future revolved around its financial sector and the financial sector was its banks. And the banks never changed. Oh, they created different products to be sure and operated in different sectors, but the one thing that never changed, for the entire history of Europe from the end of WW II, be it in periods of nationalizations or until today, was the connection of national governments to the financial system and the special relationships fostered therein. I think it is accurate to state that the condition that Greece finds itself in today is a result of that relationship.
Greece, to be sure, has been an exercise in governmental malfeasance but one made possible through the insanity of sovereign risk lending conducted as if there was not risk, encouraged by national and Euro-wide governments and regulatory bodies that supported that belief. And it was just not Greece. All of Europe and all of the European institutions and corporate entities were financed by banking sectors that were inextricably intertwined with the political forces at large, irrespective of party affiliation of philosophy. If there was to be a Greece, or an Ireland or a Portugal or a Spain it would not simply be a governmental/political crisis simply solved in a political manner by voting the rascals out, it would always be a banking crisis and solving that is no easy task.
As we have said over and over, the difference between Greece and Mexico in 1982 wasn't that great. First, you save the banks and once you do that, you figure out where to go from there. But, there are ways to do that that can create far greater problems in the future if you do it wrong and because of the relationship between European financial institution and their governments, the Euros got it wrong; they just didn't save the banks, they bailed them out substituting the European taxpayer for the bag holders in this tragedy.
I will not pretend that in the early days of the Latin Crisis that all involved knew where it was heading but I can say with perfect certainty that within a few years the unsustainability of the debt burden for most of the countries involved was readily apparent to most and the solution, though not a happy one was clear. the only question remaining was when and how much and how best to prepare one's self for the inevitable. Most of us did a pretty good job and one thing to keep in mind as well is that we learned from it. There have been sovereign risk disasters since that time but there has been very, very little cross border sovereign risk on the books of American banks. Very little. Not so in Europe and in addition, the appetite for sovereign risk in this country has been satisfied by mutual funds and hedge funds who invest their own money (well, capital levered up to the gills but that is another story). The growth of the capital markets in the United States, unmatched anywhere else in the world has made this amelioration of risk possible. This has not been the case in Europe.
What Europe now faces is the same situation we faced in the eighties except taking the place of shareholders there are voters and that is a game changer; an immediate one and one with far reaching ramifications. I hope to follow up on those thoughts as the week progresses. Hope you stick with me and offer thoughts of your own.
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