Wednesday, 9 May 2012

Overstepping the limits. Banks. US economy.

Overstepping limits
German member of ECB’s management Jörg Asmussen gave an interview in Handelsblatt that almost – almost - gave me sympathy for outgoing French President Sarkozy. Sarko once famously hissed at former ECB chief Trichet that as an unelected civil servant, Trichet’s role was not to decide on politics. That should be left to politicians.

Mr Asmussen, who is a career civil servant, clearly oversteps all limits for public statements from the ECB. He lectures Greece – where no government is formed. He lectures incoming French president Hollande. He gives rather precise policy designs – namely that the deadly austerity policy must be continued at any price. His only admission is that the austerity drive may be “complemented” with a growth initative. Mr Asmussen repeats the views of Bundesbank, and acts like a mouthpipe of the most conservative politicians in Germany. This is not the way for a high ranking member of the ECB to gain friends. Such a rant from Asmussen would have served him a stinging rebuke if there had not been a power vacuum in France and Greece.

Spain dodges an important decision
The Spanish government has apparently decided to yet again recapitalise a local savings bank, Bankia, created by merging 7 smaller regional lenders. The top management, including highly respected former central bank chief Rato, has resigned. The problem with giving the banks more money instead of nationalising them is that it does not solve the issue of the bad assets, in this case loans to real estate development. In the USA, the government gave money to the banks (without demanding a management change) and lifted a huge amount of bad debts off their balance sheets.

The bad news is that according to all statistics, Spanish property prices have nowhere fallen enough. More bad loans will arrive.

The Spanish banking crisis will not be solved until the government decides how to handle the bad debt. I still believe there is a simple solution: Package it and sell it in the markets. It may mean that the banks are insolvent. Some of them should then be allowed to fold.

Denmark enforces tougher rules on bad bank loans
The Danish banking sector – which started the banking crisis as one of Europe’s most fragmented – is reeling under new, tougher rules for loan provisions. After three years where dozens of local banks have gone belly up, the Danish regulator’s no nonsense approach is likely to force more bank closings. Prospective loan provisions are likely to exceed all market expectations and may push some more of the weaker banks into insolvency. Last year, tighter practices led to the first senior debt loan losses in Europe and it shut many Danish banks out of the interbank market.

It is ironical that the country which arguably is further ahead in the cleaning up of its bank sector is being punished by the financial markets. It compounds the problems of getting the economy going again. It proves the old adage: it is better to fail conventionally than to excel alone. It is better to pretend the problem of bad loans does not exist than to get it out in the open.

US need more QE??
A number of pundits are trying to change the tone of the economic debate in the US. Some disappointing economic data have created renewed doubts about the future growth. It is interesting to see the difference between perception and reality. The reality is that the US economy is chugging along with virtually all of the economic indicators pointing to continued growth. It is particularly good news that small and medium sized companies are getting more optimistic.

However, the perception is that data are disappointing. You cannot be disappointed if you did not have expectations. And we have seen everybody (and his dog) revising forecasts upwards in the past three months as the US economy recovered from a mini-slowdown in Q3 of last year. Now the growth is stabilising – and we get disappointing news in comparison to the new, more optimistic expectations. Following the time honoured practice of economists and other pundits, it could lead to 2-3 months of disappointment. Even if there really isn’t anything to be disappointed about.

No comments: