Getting desperate about banks

 

Now we know what happens when countries fail to sort out their banking systems, by leaving their banks permanently undercapitalised. They panic, make threats, and mess with accounting rules.

Yesterday, Germany decided that it could use an accounting rule change to give Commerzbank, which is now effectively state-dependent, some further breathing space. The idea is to relax the rules regarding “revaluation surpluses”, an accounting item that registers potential losses on securities banks have earmarked as for sale. Under the rules it is up to the banking regulator to decide how to apply the revaluation surplus rules. FT Deutschland writes that the German banking regulator Bafin is currently consulting with the banks, but a rule change now looks certain. Commerzbank would benefit the most, but Deutsche Bank would also enjoy some more leeway. In the UK and France the rules have already changed, so the issue does not conflict with European rules, but the article quotes an analyst as saying the rule change reduces transparency, which is about the last thing you want to do now. As German politicians are getting scared about a credit crunch two months before election date, they are exploring all possibilities of rule change to force banks to lend.

 

EU plans long term cyclical stabilisers

The FT reports that EU finance ministers have backed a plan to make banking a touch less cyclical, to make it easier for banks to build up provisions in good times without having to assign the money to specific impaired assets. These funds could then be used to weather future economic storms. The principle idea is to cushion the procyclicality of the Basle II capital adequacy requirements. The article also gives a nice rendition of Germany’s position, which is generally supportive, but it is clear that the Peer Steinbruck sole interest at the moment is to sort out the current problem of a credit crunch.

 

Juncker warns on social crisis ahead

Il sole 24 ore reports from Brussels that Jean-Claude Juncker warned that unemployment is likely to rise dramatically in the euro area, which could lead to a dramatic social crisis. Juncker was speaking ahead of tonight’s eurogroup meeting, and tomorrow’s Ecofin, which among others will discuss the question of the fall in euro area potential growth, according to the report. The article also quotes Joaquin Almunia, economics commissioner, as flatly rejecting any notion of another stimulus.

 

Spain’s social dialogue runs into trouble

El Pais reports on the increasingly difficult negotiations between employers, trade unions and the governments, whose latest social and employment agreement runs out in August. Several meetings have ended in gridlock and suspension, over employers’ demands to introduce more flexibility on social quotas and dismissal costs and procedures. Spain is the European country with the highest dismissal costs, and employers (and the Bank of Spain) urge deregulation to ensure that Spanish unemployment does not skyrocket during (and after) this crisis.

 

Ireland not doing too badly

The Irish Times (hat tip Irish Economy Blog) has a nice piece about a recently high-profile presentation by economist Alan Ahearne on the country’s economic situation.  Ahearne argued against any stimulus plan or injection of cash into the economy, as this would only leave the country with higher imports, unlike in the US or Japan where stimulus money is mostly spent on home-produced goods and services. Ahearne said the only stimulus possible in a small country like Ireland is to reduce costs, both in government and in the private sector. He said one positive development had been the 4% fall in unit labour costs in the past year, partly attributed to pay cuts, voluntary and imposed. Ireland is the only State in the EU which has shown a decline (there has been a 6 per cent increase in the Netherlands). That swing of about 7 per cent has helped eat into the 25 per cent loss of competitiveness experienced over the previous decade. Ahearne said it demonstrated an impressive “agility” in the Irish work force.

  

Return of risk appetite in European capital markets

The FT has the story that two European companies – telecoms operator Wind of Italy, and Germany electricity company EnBW – managed to issue corporate bonds that were oversubscribed in the markets. The article suggests that there may a cautious return of risk appetite in Europe, as companies are now seeking alternatives to bank finance. The returns for investors are very high, with yields on triple-B rated companies close to 10%. The companies can at present not obtain finance from banks at those conditions, both in terms of interest rates, and in terms of maturity.

 

 

 

 

 

Stefan Collignon on the German constitutional court

Writing in FT Deutschland, Stefan Collignon launches a sharp attack on the German constitutional court, whose judgement on the Lisbon Treaty he considers simplistic and a reflection of an anachronistic view of the European Union and supranational co-operation in general. He said the world had become too complex to make simple once-and-for-all separations between national and supranational levels. He quotes the euro as an example of externalities, over which Europe’s citizens should be able to exercise some direct control – the kind of which the court denies them through its insistence on a shopping list of policies area that define national political identity. His conclusion is that this verdict will stop democratisation in Europe beyond the improvements envisaged in the Lisbon Treaty.

 

Setser on the dollar

Brad Setser offers very good discussion on the dollar’s exchange rate. He says that both economists and traders seem to get this one wrong persistently. His own perspective is that the dollar is headed for a secular decline because of an overhang.

“Mexicans no longer have to keep as many dollars under the mattress. Brazilian companies no longer need to keep a war chest of dollars hidden in the Cayman Islands in order to ensure access to imported inputs. Sovereign wealth funds have realized that it is neither wise nor prudent to keep so much of its stock of wealth in one currency. Investment management firms are starting to offer more non-dollar share classes for their products. And Italians, Poles, and Turks — peoples closely linked in one way or another to the euro — are thinking less and less in dollars (it is amazing that they still do at all). The transactional demand for dollars is also declining. This too puts downward pressure on the dollar.”

 

 

---