Crisis is back with a vengeance as ECB’s sterilisation auction flops

 

After a brief lull, during which the crisis seemed almost forgotten, the financial market reverted to crisis from, with what FT Alphaville called a generalised bloodbath across major equity markets. Overnight, Asian markets continue to lose.

One of the reasons for the panic was concern about the state of the European banking system, and the surprising news was that the ECB’s €55bn fixed-term deposit flopped spectacularly, as it managed to managed to raise only €31.866bn at an average interest rate of 0.54%. This means that financial institutions continue to hog liquidity.

Another reason was an unexpected decline in the Conference Board consumer confidence indicator, the latest indicator to suggest that the global recovery is running out of steam. There is a lot of gloom in the US at the moment. We have no time today to go in detail, but here some pointers. Robert Shiller says another housing recession is possible, and Paul Krugman is getting really, really gloomy and angry. US 10-year bond yields were down to below 3% last night.

 

The  FT reports on new turbulences in financial markets, as the ECB’s decision not to renew one-year loans to financial institutions spooked investors and prompted concerns about the ability of some eurozone banks to access interbank borrowing markets for funding.  Financial shares dropped 4.5%, European interbank borrowing rates jumped to the highest level for nine months and the euro reached lowest exchange rate level against the yen for the last eight years.

 

The cost of insuring Greek government debt is now second only to that of Venezuela, Bloomberg reports. Credit swaps signal there’s a more than 67 percent chance Greece won’t meet its commitments within the next five years. Greek government bonds have now overtaken Argentina. Greek debt was 115% of GDP last year, compared to 60% for Argentina when it defaulted.

 

 

Europe widens stress tests

The Wall Street Journal’s Brussels blog reports that some more details on the stress tests for European banks have now been settled. The scope of the tests will be widened from 26 banks to 60-120 banks, including Landesbanken and Cajas. The tests will incorporate banks in all countries. The results will be released on a bank-by-bank basis. The banks will be tested for sovereign default. All tests to be completed by mid-July. Last year’s forecast mistakes will be taken into account.

Quite specific information, so this is probably based on a real leak.

 

Stressed by the stress tests

It had to happen. Germany’s Landesbanken, along with some other private and co-operative banks, say they are unhappy about the stress tests, and want to refuse the request of complete publication of the stress tests, according to FT Deutschland. Bafin and the Bundesbank will today discuss the details of the stress tests with 16 of the German banks. The two controversial issues are which of the scenarios are to be published and the conditions for a haircut of sovereign bonds. The final decision is with the CEBS, the committee of European bank supervisors. Bankers argue that such haircut tests might lead to more speculation and instability in the European bond market. In Germany there is no obligation to participate in the stress tests, though the German finance ministry expects the banks to cooperate.

 

Oh and by the way, three German banks all passed the stress tests. Naked Capitalism’s headline – “Deutsche Bank, Commerzbank Rumoured to Pass Meaningless Stress Test” says it all. FT Alphaville made the point that the interest part is not that they passed, but that the test did not include any sovereign stress, in contrast to a draft EU document, according to which sovereign stress should be explicitly included. FT Alphaville points out that if the three German banks have passed the passed with a sovereign component, then the other 23 banks will also have been stressed without a sovereign component, in contrast to the draft document.

 

FT Deutschland carries a whole range of stories on the subject, including one which quotes lawyers as saying that a failed stress test would entitle the government to recapitalise the bank against its will. The lawyers make the point, however, than banks cannot be forced to agree to a publication of the tests, and that a change in the legislation might after all be required.

 

 

Royal Bank of Scotland warns that we should prepare for much, much more QE in the US and the UK

The expectations are getting more alarming. Royal Bank of Scotlands warns of a ”monster QME” (quantitative monetary easing) with the intention to bring down the yields of 10-year US government bonds to below 2%. The note also refers to an article in the Daily Telegraph, according to which the Fed is pondering whether to double its QE programme to take its balance sheet to $5 trillion.

 

 

 

 

Wolfgang Munchau on the BIS annual report

In his FT Deutschland column, Wolfgang Munchau says the Bank for International Settlements had a disturbing good track record during the crisis, and that one should listen when it says that persistently low interest rates would cause a rerun of the crisis. He says such a recommendation is not rooted in any macroeconomic models currently in use, but he suspects that the BIS might be right nevertheless, that ultra-low nominal interest rates play a significant role during the built-up of bubbles – a role that may not yet be sufficiently understood.

 

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