Wednesday, 11 January 2012
Pensions. Auctions. Banks.
Well, well, well. I have given a couple of presentations in Copenhagen and Stockholm about the Euro crisis. One of my points is that the current situation regarding government finances also has a lot to do with the fact that Europe’s baby boomers are retiring in large numbers these years. It has been pre-programmed for years (about 60 years to be specific) but politicians have too short an attention span to focus on it. Now the story has been picked up by Bloomberg. Chapeau!
It goes to confirm that we have a number of different problems occurring at the same time: Debt cycle reversal, cyclical slowdown, badly capitalised banks, inadequate institutional design in Europe, and the pension squeeze. If anybody wants to receive the slides from my presentation, let me know.
Tomorrow and Friday Spain and Italy will sell up to 22bn of short and medium term bonds. The yields in that part of the yield curve have dropped sharply since the beginning of December, meaning that the refinancing costs will not increase as dramatically as the markets believed just 3 months ago. In fact, the refinancing costs are far from being bad.
So I cannot understand why the headlines continue to focus so much on the 10-year yields?? They have been volatile but on average moving sideways for three months. Why is it that the headlines need to focus on that as a sign of impending disaster when things are getting better in the auctions? Sensationalism!
I wrote in November that place to watch is exactly the Spanish and Italian bond auctions. As long as those two countries can issue all the bonds they need at reasonable yields, we do not have a real euro-crisis. We may still have a crisis, but it is not one driven by the euro.
If it were to happen that those two countries cannot refinance their debts or that the yields they would pay increased to a point where they cannot stabilise their debt/GDP ratio, we should all head for the hills.
Banks - again
As the pressure is easing on the euro and the sovereigns, it mounts on the European banks. Presumably, The ECB saw the 3-year loans to banks as a way of helping the banks to buy some government bonds from Spain/Italy. It has worked. But now it appears that the banks also want to use that money to refinance some of their own bond issues. It is another sign that the region’s banks prefer to solve their lack of Tier 1 capital by shrinking their balances.
They prefer to shrink their activities instead of raising new capital. UniCredito’s bungled rights issue is certain to scare other banks from trying the same.
It will only undermine Europe’s growth if the current credit shortage continues. At some point in time politicians will have to understand that the banks do not play along as long as it is not in the interest of their management and/or their shareholders. With an essentially insolvent bank sector, I cannot understand that European politicians do not begin to use some muscle. The banks are already dependent on government support in one form or another. This is the moment to seize and to force fundamental changes. The Swedish experience from the ‘90s still beckons as a good example.
The quote “Once You Got Them By The Balls, Their Hearts and Minds Will Follow” is ascribed to Teddy Roosevelt. Barack Obama missed his moment in 2009. Europe, anyone?