EBF
There is now less than three months until
the European banks have to meet EBA’s strict demands for a Tier 1 Capital of 9
per cent. I have repeatedly been highly critical of the decision to force the
banks into a rapid deleveraging at a point in time when the European economies
are being hit left right and centre by austerity programs. Not surprisingly Christian
Clausen, President of the European Banking Federation (EBF) is also highly
critical. In his criticism, he adds a couple of points that are worth noting.
His first point is that the new standards
are often so weakly formulated that the banks tend to be more careful, rather
than aggressive, when implementing the standards. Another point is that in
order to meet new demands for net stable funding, the interbank market need to
provide funding to the tune of 1.9 tn EUR, which is frankly impossible.
While I agree with some of Clausen’s
views, it is worth remembering that the banks themselves created the mess that
politicians are now trying to get them out of. Shame that the same politicians managed to make a mess out of
the rescue mission.
Spain
I continue to be surprised about the lack
of precision in the financial press when it comes to “bailouts”. Reading the most recent batch of comments about
Spain’s economic problems, the reader would
be excused for believing that Spain faced bankruptcy. It could also seem that
the European bailout funds are not sufficiently large as their total volume
more or less corresponds to Spain’s government debt. It is nonsense.
Greece got a debt restructuring. It means
that a large proportion of the country’s government bonds were declared null
and void, and new ones with a lower nominal value were issued instead.
Portugal and Ireland got what is now
popularly referred to as a “bailout”. It is a credit line, established for a limited
period in time, allowing the countries to cover their financing needs from
other EU countries. Such credit facilities allow the countries to bypass the
market, and the idea is to reduce the financing costs temporarily while the
countries try to get their economic house in order,
Such a credit facility is not related to
the overall outstanding debt, but to the financing and refinancing needs for
the term of the facility. If it is e.g. a three year period, it is assumed that
10-year bonds will be dealt with on market terms later.
Spain may opt for such a facility if the
short term yields continue to climb. But it has nothing to do with 10-year bond
yield climbing past 7 per cent, as the press has had it.
In order for a country’s debt/GDP ratio not
to increase, the average yield on the outstanding debt cannot exceed the
nominal growth of the GDP. That is exactly the purpose of “bail-out packages”,
and explains why the interest paid on the credits are lower than market rates.
Seasonality
The most recent job numbers from the US
came out a bit worse than expected after a number of months with better than
expected numbers. While being highly interesting from a political point of
view, the data are probably simply a result of the milder than normal winter in
the US.
Job data are always seasonally corrected,
as everybody knows that bad winter weather leads to short term layoffs. When
the winter is milder than expected, fewer people are laid off. Seasonal
correction mechanisms are based on several years of data and adds some jobs. The result is an overshoot. Unless you are
familiar with this mechanism, you will have a tendency to adjust your forecasts
upwards.
But around March, the effect of the warm
winter disappears out of the statistics as the seasonal correction does not add
those extra jobs in the spring. So suddenly your fresh optimistic forecasts
collide with the seasonal correction mechanism. And the data disappoint.
Interesting to see if we are in for more disappointments.
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