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Saving the euro via acupuncture
Feb. 22nd, 2011 02:57 pmThere's an old Peter Cook and Dudley Moore sketch where Peter Cook explains the principles of acupuncture. Basically, if you have a pain in your side, you stab yourself in the foot. That hurts so much that you forget the pain in your side. But now you have a pain in your foot, so you stab yourself in the hand. You continue this process until you have run out of places that are not hurting. Since all of them are hurting equally badly, it's the equivalent of no pain at all.
The current revolutions in the Middle East are a kind of acupuncture for the global economy. Spain in pain? Just get greater pain in Tunisia. Move on from their to Egypt and then to Libya.
Unfortunately, this just makes you FEEL better about Spain; it doesn't solve the underlying illness. What's happening there is that the central bank on Monday classified 46% of the exposure that the country’s savings banks (Cajas/Caixas) have to the construction and property sectors to be “problematic.” The solution? Well, it's one that I predicted a couple of years ago. When there's no chance of a financial institution remaining solvent under the rules, you change the rules. Bank of Spain governor Fernández Ordóñez described the new rules on capital requirements as “essential and necessary” to avoid a collapse in Spanish banks’ access to external financing.
The current view seems to be that a state rescue of the cajas will cost somewhere between €12bn and €20bn, which is somewhat less than I anticipated. The property building market made up a huge wedge of the Spanish economy and I thought that we could be looking at a triple-digit billions of euros hole. Of course, much of that hole will be in the commercial sector, and much of that will devolve outside Spain. The total exposure is about €217bn, of which €100bn is described as "bad". How this translates into a maximum probable loss of €20bn, I can't understand.
But Santander is taking no chances. It's raised $1.67bn through the sale of half its insurance interests in Latin America.
What worries me is that the banks, not just in Spain, are still targeting annual returns on equity of about 15%. For years insurers were lambasted by the institutional investors for not making as much RoE as the banks, to which the insurers replied that the banks' RoE levels were not sustainable. But there appear to be people at the banks who think that the past couple of years have been an aberration and that the RoEs of the early 2000s can be ragained. This is nonsense. These high RoEs were what were unsustainable. At the moment there are artificially high margins (courtesy of various governments who won't let the banks fail) but eventually the banks (and their investors) will have to start looking at 10% to 11% as the "new mean".
Meanwhile in Portugal the ECB had to step in to help at the latest bond auction. The time is coming and the media is now looking elsewhere.
_____________________
The current revolutions in the Middle East are a kind of acupuncture for the global economy. Spain in pain? Just get greater pain in Tunisia. Move on from their to Egypt and then to Libya.
Unfortunately, this just makes you FEEL better about Spain; it doesn't solve the underlying illness. What's happening there is that the central bank on Monday classified 46% of the exposure that the country’s savings banks (Cajas/Caixas) have to the construction and property sectors to be “problematic.” The solution? Well, it's one that I predicted a couple of years ago. When there's no chance of a financial institution remaining solvent under the rules, you change the rules. Bank of Spain governor Fernández Ordóñez described the new rules on capital requirements as “essential and necessary” to avoid a collapse in Spanish banks’ access to external financing.
The current view seems to be that a state rescue of the cajas will cost somewhere between €12bn and €20bn, which is somewhat less than I anticipated. The property building market made up a huge wedge of the Spanish economy and I thought that we could be looking at a triple-digit billions of euros hole. Of course, much of that hole will be in the commercial sector, and much of that will devolve outside Spain. The total exposure is about €217bn, of which €100bn is described as "bad". How this translates into a maximum probable loss of €20bn, I can't understand.
But Santander is taking no chances. It's raised $1.67bn through the sale of half its insurance interests in Latin America.
What worries me is that the banks, not just in Spain, are still targeting annual returns on equity of about 15%. For years insurers were lambasted by the institutional investors for not making as much RoE as the banks, to which the insurers replied that the banks' RoE levels were not sustainable. But there appear to be people at the banks who think that the past couple of years have been an aberration and that the RoEs of the early 2000s can be ragained. This is nonsense. These high RoEs were what were unsustainable. At the moment there are artificially high margins (courtesy of various governments who won't let the banks fail) but eventually the banks (and their investors) will have to start looking at 10% to 11% as the "new mean".
Meanwhile in Portugal the ECB had to step in to help at the latest bond auction. The time is coming and the media is now looking elsewhere.
_____________________
