On a light-hearted side of the blog:As they say in one famous commercial: for serious press, there's Mastercard, for BJs, there's Mayo Advertiser. (Hat tip: JH)
As the Bank of New York Mellon, one of the world’s largest and, in my view lowest counterparty risk custodian banks says the markets are now seriously disenchanted with European financials.
Per FT report today, concerns about the European banking sector are at their highest level since March. Euro might be sliding.BoNYM said its data showed net outflows from German bunds for the first time since mid-March. This is at the time when our own clowns are claiming that there is now a clarity in the borrowing markets for Irish debt. Hmmm... Clarity about what? An impeding disaster that is named NAMA?
BoNY Mellon also tracks outflows from Italian, Spanish, Portuguese, Belgian and Greek bonds. Emerging European markets lead, with APIIGS, plus France, Belgium, Germany and Sweden are at the forefront of the new pressure. By the end of this round - the acronym of 'troubled' or 'exposed' states will have 27 letters in it. Per FT report, Austria, Italy, France, Belgium, Germany and Sweden, which together accounted for 84% of the exposure to Eastern Europe. FT quotes BoNYM head of currency research saying that the euro area has lost its safe haven status, and is increasingly seen as a high-risk region among international investors. Thank god someone is being realistic...
But not in the marbled halls of the ECB. Those guys are simply out to lunch. Per their latest assessment (here): "Despite the financial turmoil, the global landscape of international currencies and - within that - the share of the euro remained steady. Specifically, between end-2007 and end-2008, the share of euro-denominated instruments increased by around 1 percentage point for outstanding debt securities, around 2 percentage points for outstanding cross-border loans and deposits, and around 1 percentage point for global foreign exchange reserve holdings... The review also shows that the international role of the euro maintains a strong regional pattern. Its international use continues to be most pronounced in countries with close geographical and institutional links with the euro area."
But the ECB's rosy take on the Euro is only half a problem. ECB's Monthly Bulletin (see here: scroll to 09/07/2009) is already on the path of plotting 'exit strategies' from the current active support policies - despite giving a rather gloomy outlook for the Euro zone for 2009-2010... Go figure. A companion paper to the bulletin has another re-print of the already trite table that was first floated by the OECD back in January 2009 and then slightly updated by the Article IV paper by the IMF last month. This is:
Enjoy - our Government's contingent liabilities relating to the banking crisis are ten times greater than those of the second most-screwed up banking sector in the euro area - Belgium. Oh, we are having some fun...
But not enough, I hear you say? Here is another good one from the ECB:
Now, California is considered to be bunkrupt, given its state deficit is only $24bn through next 12-18 months (depending on the budgetary framework taken), relative to a GDP of $1.8trillion a year - less than 0.008-0.013% of GDP. Ireland? Well - depends on whether you count NAMA or not, we are pushing for some 12-30% of GDP... Spot the difference? Ok, another chart then:We are facing worse deficit than Greece, but our spreads are lower... What gives? The market is not pricing in NAMA as a state liability. Not yet.
Here is what ECB used to assess the bond spreads:
"The following empirical model is used to explain the ten-year government bond yield spreads of
ten euro area countries (inc Ireland) over Germany (spread):
spreadit=α+ρ spreadit-1+β1 ANNit+β2FISCit+β3IntlRiskt+β4LIQit+εit
In this model, ANN denotes the announcements of bank rescue packages made by individual euro area governments (this variable takes the value 1 after the date of the announcement and the value 0 before); FISC denotes the expected general government budget balance and/or gross debt as a share of GDP, relative to Germany, over the next two years, as released biannually by the European Commission; IntlRisk is a proxy for international investor risk aversion, as measured by the difference between the ten-year AAA-rated corporate bond yield in the United States and the US ten-year Treasury bond yield; LIQ is a proxy for the degree of liquidity of euro area government bond markets, measured by the size of a government’s gross debt issuance relative to Germany; εit is the unexplained residual."
For the lack of time right now, I can't re-parameterize the model to derive the values of the fundamentals-justified spread for Ireland. I shall do this over the weekend, but here are the main results for the group of 10 countries: