August 5, 2016
These big banks have every reason to try keeping Italian banks afloat.
Europe has plenty of reasons to be worried these days, but none more so than the seemingly terminal decline of the old continent's banking system. So fragile are Europe's banks that they can't even get through an ECB stress test — whose primary purpose is to restore confidence in Europe's banking system, by ignoring two of the most insolvent national banking sectors (Greece and Portugal) as well as the main source of stress (negative interest rates) — without sparking a panicked sell-off.
Before the test, UK-based Barclays predicted that any bank found to have a core capital ratio of less than 7.5% would come under pressure. There was no shortage of candidates, including, ironically, Barclays itself, which made it through the stress scenario with a core capital ratio of just 7.3%. The bank's shares have fallen by about 5% since Monday.
Barclays is no small-time institution; it is the UK's second largest bank by assets and a member of the select club of global systemically important financial institutions: it's too big to fail. So, too, is Deutsche Bank, which in the test was the 10th riskiest out of 51 on core capital and whose shares have tumbled 60% since May. Credit Suisse, another systemically important institution, has lost close to two-thirds of its market value in the last year while Italy's Unicredit, another too-big-to-failer, has shed roughly the same amount since the start of 2016.
The market capitalization of Deutsche and Credit Suisse has shrunk so much that they just suffered the ignominy of being ejected from the Euro Stoxx 50, a stock index designed by Deutsche Börse Group that comprises Europe's 50 largest and most liquid stocks.
Meanwhile, things have gotten so bad at Italy's third biggest bank, Monte dei Paschi, that it was just removed from the Euro Stoxx 600 after getting top honors in the ECB's stress test. Under a stress scenario its Common Equity Tier 1 (CET1) slumps to negative 2.44%. In other words, the world's oldest bank is not just insolvent in an adverse scenario; it's insolvent right now.
This realization prompted yet another stampede out of Italy's banking equities. On Thursday, Italy's government responded by issuing blanket denials in an almost slapstick attempt at damage control.
Italy's banks are "not in crisis" and pose "no systemic threat", the country's EconMin, Pier Carlo Padoan, breezily informed the country's parliament.
In an interview with Politico, Bank of Italy Governor Ignazio Visco asserted that most of Italy's largest financial institutions are "robust" and able to withstand economic shocks:
"Overall, the results (of the stress test) provide a fair picture of the current state of affairs of Italian banks: many institutions with robust fundamentals, and a few, well identified cases of serious but manageable weakness, which must be tackled and solved, as required by bank supervisors."
Today, Visco told the Italian media that it is "wise to be prepared" to use taxpayers (state aid, as it's called) to bail out Italian banks, "regardless of Monte dei Paschi," for which state aid is already in the works, "though it does not mean it will be necessary." So state aid for other Italian banks too, not just Monte dei Paschi?
martedì 9 agosto 2016
Satyajit Das Slams Policymaker Ignorance: "QE-Forever Cycle" Means Catastrophe Is Inevitable
Aug 1, 2016 9:48 AM
"Policymakers have chosen to ignore the central issue of debt as they try to resuscitate activity," warns Satyajit Das in a shocking Op-Ed in today's FT, and with global central banks now printing $180 billion a month (and growing), "the global economy may now be trapped in a QE-forever cycle," confirming von Mises prescription that "there is no means of avoiding the final collapse..."
The European Central Bank and Bank of Japan are buying around $180 billion of assets a month, according to Deutsche Bank, a larger global total than at any point since 2009, even when the Federal Reserve's QE programme was in full flow.
And if market consensus proves accurate, that total is about to rise by billions more
But as Das details, a combination of QE and the prospect of fresh fiscal stimulus won't generate a recovery.
Since 2008, total public and private debt in major economies has increased by over $60tn to more than $200tn, about 300 per cent of global gross domestic product ("GDP"), an increase of more than 20 percentage points.
Over the past eight years, total debt growth has slowed but remains well above the corresponding rate of economic growth.Higher public borrowing to support demand and the financial system has offset modest debt reductions by businesses and households.
If the average interest rate is 2 per cent, then a 300 per cent debt-to-GDP ratio means that the economy needs to grow at a nominal rate of 6 per cent to cover interest.
Financial markets are now haunted by high debt levels which constrain demand, as heavily indebted borrowers and nations are limited in their ability to increase spending. Debt service payments transfer income to investors with a lower marginal propensity to consume. Low interest rates are required to prevent defaults, lowering income of savers, forcing additional savings to meet future needs and affecting the solvency of pension funds and insurance companies.
Policy normalisation is difficult because higher interest rates would create problems for over-extended borrowers and inflict losses on bond holders. Debt also decreases flexibility and resilience, making economies vulnerable to shocks.
Attempts to increase growth and inflation to manage borrowing levels have had limited success. The recovery has been muted.
Sluggish demand, slowing global trade and capital flows, demographics, lower productivity gains and political uncertainty are all affecting activity. Low commodity, especially energy, prices, overcapacity in many industries, lack of pricing power and currency devaluations have kept inflation low.
In the absence of growth and inflation, the only real alternative is debt forgiveness or default. Savings designed to finance future needs, such as retirement, are lost.
Additional claims on the state to cover the shortfall or reduced future expenditure affect economic activity. Losses to savers trigger a sharp contraction of economic activity. Significant writedowns create crises for banks and pension funds. Governments need to step in to inject capital into banks to maintain the payment and financial system's integrity.
Unable to grow, inflate, default or restructure their way out of debt, policymakers are trying to reduce borrowings by stealth. Official rates are below the true inflation rate to allow over-indebted borrowers to maintain unsustainably high levels of debt. In Europe and Japan, disinflation requires implementation of negative interest rate policy, entailing an explicit reduction in the nominal face value of debt.
Debt monetisation and artificially suppressed or negative interest rates are a de facto tax on holders of money and sovereign debt. It redistributes wealth over time from savers to borrowers and to the issuer of the currency, feeding social and political discontent as the Great Depression highlights.
The global economy may now be trapped in a QE-forever cycle. A weak economy forces policymakers to implement expansionary fiscal measures and QE.
If the economy responds, then increased economic activity and the side-effects of QE encourage a withdrawal of the stimulus. Higher interest rates slow the economy and trigger financial crises, setting off a new round of the cycle.
If the economy does not respond or external shocks occur, then there is pressure for additional stimuli, as policymakers seek to maintain control. All the while, debt levels continue to increase, making the position ever more intractable as the Japanese experience illustrates.
Economist Ludwig von Mises was pessimistic on the denouement. "There is no means of avoiding the final collapse of a boom brought about by credit expansion," he wrote. "The alternative is only whether the crisis should come sooner as a result of a voluntary abandonment of further credit expansion, or later as a final and total catastrophe of the currency system involved"
The global economy may now be trapped in a QE-forever cycle. A weak economy forces policymakers to implement expansionary fiscal measures and QE.
If the economy responds, then increased economic activity and the side-effects of QE encourage a withdrawal of the stimulus. Higher interest rates slow the economy and trigger financial crises, setting off a new round of the cycle.
If the economy does not respond or external shocks occur, then there is pressure for additional stimuli, as policymakers seek to maintain control. All the while, debt levels continue to increase, making the position ever more intractable as the Japanese experience illustrates.
Economist Ludwig von Mises was pessimistic on the denouement. "There is no means of avoiding the final collapse of a boom brought about by credit expansion," he wrote. "The alternative is only whether the crisis should come sooner as a result of a voluntary abandonment of further credit expansion, or later as a final and total catastrophe of the currency system.
Fabrizio
"Policymakers have chosen to ignore the central issue of debt as they try to resuscitate activity," warns Satyajit Das in a shocking Op-Ed in today's FT, and with global central banks now printing $180 billion a month (and growing), "the global economy may now be trapped in a QE-forever cycle," confirming von Mises prescription that "there is no means of avoiding the final collapse..."
The European Central Bank and Bank of Japan are buying around $180 billion of assets a month, according to Deutsche Bank, a larger global total than at any point since 2009, even when the Federal Reserve's QE programme was in full flow.
And if market consensus proves accurate, that total is about to rise by billions more
But as Das details, a combination of QE and the prospect of fresh fiscal stimulus won't generate a recovery.
Since 2008, total public and private debt in major economies has increased by over $60tn to more than $200tn, about 300 per cent of global gross domestic product ("GDP"), an increase of more than 20 percentage points.
Over the past eight years, total debt growth has slowed but remains well above the corresponding rate of economic growth.Higher public borrowing to support demand and the financial system has offset modest debt reductions by businesses and households.
If the average interest rate is 2 per cent, then a 300 per cent debt-to-GDP ratio means that the economy needs to grow at a nominal rate of 6 per cent to cover interest.
Financial markets are now haunted by high debt levels which constrain demand, as heavily indebted borrowers and nations are limited in their ability to increase spending. Debt service payments transfer income to investors with a lower marginal propensity to consume. Low interest rates are required to prevent defaults, lowering income of savers, forcing additional savings to meet future needs and affecting the solvency of pension funds and insurance companies.
Policy normalisation is difficult because higher interest rates would create problems for over-extended borrowers and inflict losses on bond holders. Debt also decreases flexibility and resilience, making economies vulnerable to shocks.
Attempts to increase growth and inflation to manage borrowing levels have had limited success. The recovery has been muted.
Sluggish demand, slowing global trade and capital flows, demographics, lower productivity gains and political uncertainty are all affecting activity. Low commodity, especially energy, prices, overcapacity in many industries, lack of pricing power and currency devaluations have kept inflation low.
In the absence of growth and inflation, the only real alternative is debt forgiveness or default. Savings designed to finance future needs, such as retirement, are lost.
Additional claims on the state to cover the shortfall or reduced future expenditure affect economic activity. Losses to savers trigger a sharp contraction of economic activity. Significant writedowns create crises for banks and pension funds. Governments need to step in to inject capital into banks to maintain the payment and financial system's integrity.
Unable to grow, inflate, default or restructure their way out of debt, policymakers are trying to reduce borrowings by stealth. Official rates are below the true inflation rate to allow over-indebted borrowers to maintain unsustainably high levels of debt. In Europe and Japan, disinflation requires implementation of negative interest rate policy, entailing an explicit reduction in the nominal face value of debt.
Debt monetisation and artificially suppressed or negative interest rates are a de facto tax on holders of money and sovereign debt. It redistributes wealth over time from savers to borrowers and to the issuer of the currency, feeding social and political discontent as the Great Depression highlights.
The global economy may now be trapped in a QE-forever cycle. A weak economy forces policymakers to implement expansionary fiscal measures and QE.
If the economy responds, then increased economic activity and the side-effects of QE encourage a withdrawal of the stimulus. Higher interest rates slow the economy and trigger financial crises, setting off a new round of the cycle.
If the economy does not respond or external shocks occur, then there is pressure for additional stimuli, as policymakers seek to maintain control. All the while, debt levels continue to increase, making the position ever more intractable as the Japanese experience illustrates.
Economist Ludwig von Mises was pessimistic on the denouement. "There is no means of avoiding the final collapse of a boom brought about by credit expansion," he wrote. "The alternative is only whether the crisis should come sooner as a result of a voluntary abandonment of further credit expansion, or later as a final and total catastrophe of the currency system involved"
The global economy may now be trapped in a QE-forever cycle. A weak economy forces policymakers to implement expansionary fiscal measures and QE.
If the economy responds, then increased economic activity and the side-effects of QE encourage a withdrawal of the stimulus. Higher interest rates slow the economy and trigger financial crises, setting off a new round of the cycle.
If the economy does not respond or external shocks occur, then there is pressure for additional stimuli, as policymakers seek to maintain control. All the while, debt levels continue to increase, making the position ever more intractable as the Japanese experience illustrates.
Economist Ludwig von Mises was pessimistic on the denouement. "There is no means of avoiding the final collapse of a boom brought about by credit expansion," he wrote. "The alternative is only whether the crisis should come sooner as a result of a voluntary abandonment of further credit expansion, or later as a final and total catastrophe of the currency system.
Fabrizio
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