Skip to main content

Euro 7,000 billion

A few weeks ago, I wrote that the European bond market for banks was frozen since June.  The consequence of this Euro 30,000 billion funding machine grinding to a halt was that financial institutions had to replace around $ 1,000 billion per month in funding.  First to go was new lending activity; lines of credit and loan facilities were made more difficult to obtain. Second, the Euro/USD curve went ballistic (1.39:1) as European financial institutions liquidated foreign assets  and streaming the cash "back to the mother ship".  Third stage is securitize and dump on the ECB their "less than prime" assets.

European banks are now packaging their "non-core" assets and by over-collateralizing are trying to selling these portfolios to the ECB.  Rumors are that Europe's banks have "agreed" to reduce their combined assets by Euro 7,000 billion, so to improve their capital ratio. Again rumors are that things are not going well because the ECB is market the assets to market (as of today);  these lovely 10y Italian bonds acquired 8 months ago with their 4.5% coupon, are marked down to reflect their current Italian yield of 7.4%.  The resultant massive "hair cut" right now is apparently more than what the banks can stomach... so we are back at a stalemate. 

The EFSF died yesterday, when it was announced that the maximum leveraged the fund "can" sustain will be 100% -- reducing the size of the facility from Euro 1,700 billion to Euro 800 billion -- just the perfect size to absorb the Greek losses (an nothing else).  BTW so that no one is confused -- this was a market decision. No one is ready to provide the EFSF with the leverage the politicians were seeking -- BTW the 50% Greek hair cut that was "agreed to" a few weeks ago is still no closer to occurring, private lenders have not agreed to anything yet.

In my opinion, at stake now is not the survival of the Euro -- that's a done deal, its the survival of the European community and the risk that the countries that leave the Euro will engage in competitive devaluations and raise trade barriers.  


Popular posts from this blog

Trucker shortage? No a plan to allow driverless rigs

There are still articles on how America is running out of truckers -- and that its a huge problem, except its not a problem, if it was a problem salaries would rise to so that demand would clear. Trucking is one of those industry where the vast majority of participants are owner/operators and therefore free agents.

Salaries and cost are extremely well know, "industry" complains that there are not enough truckers, yet wages continue to fall... Therefore there are still too many truckers around, for if there was a shortage of supply prices would rise, and they don't.

What there is though is something different; there is a push to allow automatic rigs to "operate across the US", so to encourage the various authorities to allow self driving rigs you talk shortage and hope that politicians decided that "Well if people don't want to work, lets get robots to do the work" or words to that effect.

This has nothing to do with shortage of drivers, but every…

Every punter says oil prices are on the rise: Oil hits $48/bbl -- lowest since September 2016

What the hell?

How could this be, punters, advisors, investment bankers all agreed commodity prices  in general and oil prices in particular are on the rise...its a brave new era for producers and exporters -- finally the world is back and demand is going through the roof, except not so much!

What happened?  Well energy is complicated, the world operates in a balance -- 30 days of physical reserves is about all we've got (seriously) this is a just in time business.  So the long term trend always gets hit by short term variations.

Global production over the past 12 months has risen by somewhat less than 1.5% per annum.  As the world market changes production becomes less energy intensive (maybe), but the reality is that the world is growing more slowly -- America Q4 GDP growth was around 1.9% (annualized) Europe is going nowhere fast (the GDP growth in Germany is overshadowed by the lack of growth in France, Italy, Spain (lets say 27 Euro members generated a total GDP growth of 1.2…

Paying for research

This morning I was reading that CLSA -- since 2013 proudly owned by CITIC -- was shutting down its American equity research department -- 90 people will be affected!

Now the value of a lot of research is limited, that is not to say that all research is bad. In fact, I remember that GS's Asia Aerospace research was considered the bible for the sector.  Granted, there was little you could do with the research since the "buy" was for Chinese airlines...that were state owned.  Still it was a vey valuable tool in understanding the local dynamics.  It seems that the US has introduced new legislation that forces brokers to "sell" their research services!  Figures of $10,000 an hour have been mentioned...

Now, research can be sold many times; if GS has 5000/6000 clients they may sell the same research 300x or 400x (I exaggerate) but this is the key -- Those who buy the research are, I presume, prohibited from giving it away or selling it, at the same time the same rese…