Monday, November 16, 2009

Economics 16/11/2009: Notes on Banks post-Nama & Eurozone recovery

There is an excellent issue on Financial Sector Regulation published tonight by The Economists' Voice of BE Press (free link here), it also contains a superb article by Rob Schiller of Yale on housing bubble.

Oh, and per today's Bloxham note: " speculation is suggesting that Anglo needs a €5.7bn capital injection if it is to continue lending. Finance Minister Lenihan said on November 13th that a second capital injection won't be needed, but reports now suggest that if Anglo is to form part of a new banking force in Ireland the eventual cost will be in the region of 5.7bn to meet international capital adequacy levels. Finally the report suggests that a wind down option is now believed to be gathering support in the Dept of Finance."

Hmmm, see my blogpost here. Two weeks ago I predicted this same exactly number - 5.7bn as the upper envelope of the capital demand from Anglo... Glad to see media now catching up...

Watch tomorrow's Mail for my comment on why Anglo can be wound up at a lower cost than continuing the sorry saga of the bank...

Now to news:

You all heard the news: five consecutive quarters of economic contraction later, and the euro area's economy finally grew by 0.4% in Q3 2009. Anemic (as in expectations were for 0.5%) but this does mark the region's exit from its worst recession since World War II.

Eurostat has yet to release a breakdown of the third quarter, but it looks like exports were the drivers for growth. Of course, the other side of the economic equation - European consumers - is still stalled in the quick sands and is now gearing up for higher taxes, lower incomes and permanently higher unemployment in years to come. All of this as the Euro area's debt to GDP ratio is now heading for 100% by 2014. For comparison, US National Debt today stands at around $11,996bn or 96.5% of GDP.

Back to Europe: France expanded by 0.3% (0.6% growth was expected by the markets), Germany grew by 0.7%, (against 0.8% expectation).

Now, Ireland's GDP was stagnant per Q2 2009, while GNP fell another 0.5%. Technicality might be that Ireland will post a positive growth in Q3 2009, but that would mean preciously little: Irish GDP is extremely volatile and another negative correction might be easily coming in Q4 2009 / Q1 2010. This volatility is driven by exports' mammoth share of the country GDP.

Lastly, there is a problem of European fiscal and monetary stimuli - both covered by me before. Once unwinding begins, even the stronger economies of Europe are not immune from a sudden growth reversal. what's there to say about Ireland, Spain and Greece?..

And on a separate note couple of thoughts concerning Nama's passage:

There is an excellent article in the October issue of the US version of Vanity Fair magazine about the legacy of TARP. To remind you - TARP is a US programme to help struggling banks that:

  • started its life with an idea of purchasing distressed assets off the banks' balancesheets (just like Nama),
  • ended up purchasing common and preferred equity in the banks;
  • overpaid grossly (to the tune of 30%) for the equity bought (even though unlike in the case of Nama there was a ready and functioning market for these banks' shares); and
  • like Nama promised to deliver easing of the credit crunch conditions.

Now, a year from its inception, we know that TARP:

  • resulted in banks taking Government cash and parking it in Government bonds, lending out virtually nothing;
  • was immediately followed by a severe tightening of existent lending contracts and revisions of performing loans to squeeze more cash out of households;
  • has led to multiple defaults by cash-strapped students, homeowners and credit card holders as banks are going on with their business rebuilding profit margins.

Any idea now what we can expect from post-Nama Irish Banking sector? Or with that ESRI estimate of 300,000 households at risk of negative equity?

1 comment:

patrick1978 said...

Irish banks are using the money they are getting at 1 per cent from the European Central Bank (ECB) to buy government bonds which are yielding 5.7 per cent in Ireland and 3 per cent elsewhere, in order to rebuild their balance sheets and give the money back to shareholders