Blain's Morning Porridge 27th June 2017 - European Banks trade tighter than corporate debt, but
Blain’s Morning Porridge - June 27th 2017
“Call it morning driving through the sound and in and out the valley…”
Go Kiwis! Congratulations to New Zealand wining the America’s Cup from Larry Ellison’s Team Oracle USA! It was a 7-1 hammering. Even sweeter for the Kiwis as most team “USA” sailors are actually Australians! Roll on the next cup, and here’s hoping the UK’s Team BAR is still in the game!
Back in the bond markets, and credit is shrugging off the recent banking unpleasantness across Europe. The Itraxx Financials index, a key measure of senior bank debt value, is now trading tighter than Investment Grade corporate credit! The obvious read is European bank investors believe the quietus delivered to Banco Popular in Spain two weeks ago, and the two Italian banks over the weekend, means the bad banks are successfully being taken out the equation, thus improving the prospects for the sector as a whole.
Whoa. That may be a dangerous fallacy. Still plenty of dodgy European financials out there…
The factors that have driven the ongoing financial crisis across Europe aren’t entirely solved: First, the Italian solution to the Veneto banks demonstrates the European banking rule book is advisory rather than proscriptive. That is not necessarily a good thing – national self interest will prevail. Does it open up the prospect of further bail-outs (rather than bail-ins) for “national interest” across Europe, and will it slow the much needed rationalisation of banking across the Eurozone?
Many articles yesterday took the view the Italian bailout crushed hopes for European Banking Union – a single set of rules, authority and deposit protection across Europe. The Germans are screaming the Italians have just nationalised banking losses across Europe!
Second, although growth estimates are being raised across Europe, (and even Italy is now expected to post decent growth this year), the economic recovery – which in turn will improve bank metrics – is by no means a done deal. It’s still highly vulnerable to the vaguires of the global economy. (Take a quick look at the flashing red lights across the Global Threat Board!)
Third is the fact European banks are by no means fixed. Last year my “Bad Bank List” looked at only the top 30 systemically important European names. Banco Popular was only 2nd worst name on my list – Caixa came below it. It seems to have been rehabilitated - just days ahead of the Popular crisis Caixa successfully garnered a €3.4 bln book for an AT1 deal!
Other banks hovering at the top of my worst systemic bank list were Intesa, Unicredito and Commerz. I didn’t look at 60 other “important” European banking names – the regional players; including the savings banks, the post banks, entities such as the Landesbanks and local bank names. I hear we’re likely to hear more about Portugal’s Nova Banco next week – its unlikely to be jolly.
European secondary banks are going to be my next hobby – bear in mind the two Veneto Italian banks that just failed accounted for less than 2% of Italy’s bad loan problem! Over the summer, assuming I get some time, my intern and I will be pouring over Europe’s smaller banks looking for clues on just how bust they are!
Of course, rules are rules are rules, but should sometimes be broken. In both the Spanish and Italian cases, the bail-in of senior bank debt was avoided. In the case of Spain, understandably so. In the case of the Italian banks, by some possibly pragmatic fudging. An excellent Bloomberg Gadfly piece by Marcus Ashworth describes the Italians as having delivered a bailout that “nationalises losses and privatizes gains: exactly what banking union rules were meant to stop”. But the alternative – instability across the richest part of Italy might have been worse. Mind you, is anyone asking why banks active in the wealthiest part of Italy have such appalling loan books?
Meanwhile, as mentioned above, the renaissance in the Outlook for Europe continues apace. More and more market participants believe the Euro and Europe are the best games in town. Are they?
Remember Mantra No 1: “The market has but one objective: the inflict the maximum amount of pain on the maximum amount of participants!”
So…. If anyone can explain rationally why Greek spreads are so tight – I’d like to know. Moody’s upgrade late last week is just changing some letters, but apparently convincing enough to persuade the market Greece is somehow fixed. Sure, it got another wedge of dosh.. but the debt burden and the reticence to address it leaves Greece an economic basket case. Some reports say a new era of debt forgiveness is coming, and that makes Greece a screaming buy! Anyone for some Greek banking NPLs?
Meanwhile, yet further excitement in Yoorp as yesterday’s German IFO business confidence numbers hit a 25 year record at 115.1!
Wowser!
Economists are awfully excited. Some, including my tame Macro Man, Martin Malone, tell me this means there is a prospect of the German growth rate hitting a most Un-European 4%! If you’d told me that a year ago…
The Bundesbank was already crowing about rising consumer confidence, a construction uptick, the improving investment climate and solid employment metrics. Yesterday’s data suggests they are right? What’s not to like about Germany? (That’s a rhetorical question. Don’t answer it.)
Looking at a chart of the IFO - it is what I call “spikey”. It’s probably in overly optimistic territory now! It leads expectations and can often over-estimate the actuality. Confidence reflects and is magnified by optimism and can easily be dashed by events. In fact, such strong German data makes me wonder if we’ve just headed through the Peak European Confidence zone.
Last year it was the US and the UK that were in soar-away take-off mode. For all the wrong reasons the UK has utterly stalled, the US is myred in political gloop, while suddenly Europe looks to be the 33/1 outsider leading the race. I mean.. even Italy is apparently doing better than Blighty!
The laws of financial gravity are immutable. What goes up, comes crashing back down.
Out of time…
Bill Blain
